Business Context and Reporting Period
Bond Laboratories, Inc. (subsequently renamed FitLife Brands, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. Through its subsidiary NDS Nutrition Products, Inc., the company develops, manufactures and markets nutritional supplements, primarily through more than 800 GNC franchise locations in the United States and in eight other countries. The common stock traded under BNLB on the OTCQB market, with 77,753,482 shares outstanding as of August 9, 2013.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $5.055 million | $5.175 million | $11.116 million | $10.131 million |
| Gross profit | $1.866 million | $1.975 million | $4.136 million | $3.723 million |
| Gross margin | 36.9% | 38.2% | 37.2% | 36.7% |
| Operating income | $0.515 million | $0.777 million | $1.118 million | $1.498 million |
| Net income | $0.470 million | $0.773 million | $1.058 million | $1.493 million |
| Basic earnings per share | $0.01 | $0.01 | $0.01 | $0.02 |
For the six months, cash provided by operating activities was $1.527 million versus $0.250 million in the prior-year period. Investing cash flow was negative $0.100 million, reflecting a long-term investment; financing cash flow was zero. Cash increased to $2.364 million at June 30, 2013 from $0.937 million at December 31, 2012.
At June 30, 2013, current assets were $7.950 million and current liabilities were $1.999 million, producing working capital of approximately $5.951 million. Accounts receivable were $1.803 million and inventory was $2.979 million. The company had a $0.437 million revolving line of credit outstanding, bearing interest at 3.0% plus one-month LIBOR and maturing May 15, 2014. The facility is secured by eligible receivables and inventory. No long-term debt was reported.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 2.3%, primarily because the second quarter of 2012 included approximately $0.759 million of non-recurring sales of products containing DMAA. On an adjusted basis excluding those sales, management reported revenue growth of 14.5%.
- Six-month revenue increased 9.7% as reported. Excluding approximately $1.623 million of non-recurring DMAA-related revenue in the prior-year period, management reported adjusted growth of 30.7%.
- Six-month gross profit increased $0.413 million and gross margin improved to approximately 37.2% from 36.7%, despite higher cost of goods sold associated with increased volume.
- Operating income and net income decreased for both the quarter and six months. Six-month general and administrative expense rose substantially, including $349,670 of non-cash expense for common stock and options issued for services. Excluding that charge, management reported six-month net income of $1.407 million versus $1.543 million in the prior-year period.
- Selling and marketing expense increased due principally to greater sampling activity for new and existing products. Depreciation and amortization declined modestly.
- Common shares outstanding increased by 3.0 million from December 31, 2012. Potential dilution included 5.0 million shares issuable upon conversion of Series C preferred stock, approximately 5.994 million warrant shares and 1.8 million option shares.
Guidance, Outlook, Risks and Unusual Items
- Management expected existing cash and anticipated operating cash flow to provide liquidity for the next 12 months and stated that the company had not needed additional working capital since the fourth quarter of 2010.
- Management expected continued expansion of its product and store footprint, particularly internationally, to support future revenue growth. No formal numerical guidance was provided.
- The company voluntarily discontinued products containing DMAA and had not manufactured such products since June 2012 following increased FDA scrutiny.
- The company reported approximately $21.5 million of federal net operating loss carryforwards, with a $6.611 million valuation allowance against deferred tax benefits. Future use may be limited by Section 382 or other changes in ownership.
- The company had paid $39,500 during the quarter to Burnham Hill Advisors LLC, an entity related to the CFO and a greater-than-5% shareholder. The consulting agreement terminated May 1, 2013.
- The former-President employment litigation settlement required total payments of $360,000; installment payments ended in July 2013. A separate CycloBolan product-liability matter had a claimed amount believed to exceed $500,000, but the insurer assumed the defense and the parties reached a settlement in principle in July 2013. Terms were not disclosed.
- Shareholders approved a potential 1-for-10 to 1-for-40 reverse split and a corporate name change to FitLife Brands, Inc., subject to board action and required FINRA notice.
- Management stated that disclosure controls and internal control over financial reporting were effective as of June 30, 2013. The filing contained no additional risk factors beyond those in the 2012 Form 10-K.
Important Facts for Investors to Verify
- Confirm completion, timing and ratio of the approved reverse split and the effectiveness of the name change to FitLife Brands, Inc.
- Assess customer concentration and dependence on GNC franchisees, product acceptance, suppliers and international expansion.
- Review the DMAA reformulation history, regulatory exposure and whether prior-period sales comparisons remain affected by non-recurring revenue.
- Evaluate collectability of the $1.803 million accounts receivable balance and the adequacy of inventory valuation and reserves.
- Monitor the $0.437 million revolving credit facility, its May 2014 maturity, borrowing-base collateral and variable interest rate.
- Consider dilution from preferred-stock conversion, warrants, options and future equity issuances, as well as potential restrictions on net operating loss utilization.
- Obtain the final terms and financial impact of the CycloBolan settlement and verify that the former-President settlement was fully paid.