FITLIFE BRANDS, INC. (FTLF) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OR PLAN OF OPERATION
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes”, “anticipates”, “may”, “will”, “should”, “expect”, “intend”, “estimate”, “continue”, and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Annual Report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Annual Report.
Restatement of Previously Issued Unaudited Interim Condensed Consolidated Financial Statements
We have restated our previously issued unaudited interim condensed consolidated Financial Statements as of and for the three months ended March 31, 2021, and as of and for the three and six months ended June 30, 2021. Refer to the section entitled “Explanatory Note” preceding Item 1 hereof for background on the restatement, the fiscal periods impacted, control considerations, and other information.
Within this MD&A, we have restated our previously issued unaudited interim condensed consolidated statements of operations for the three months ended March 31, 2021 and for the three and six months ended June 30, 2021; and unaudited interim condensed consolidated statements of cash flows for the three months ended March 31, 2021 and for the six months ended June 30, 2021 (the “Prior Quarterly Financial Statements”), to reflect the restatement more fully described in Note 11 to the notes of the audited consolidated financial statements in this Annual Report.
See Note 11, Quarterly Financial Data (Unaudited), in Item 8, Consolidated Financial Statements and Supplementary Data, for such restated information, and see Supplemental Unaudited Quarterly Financial Information, in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for additional interim financial information.
In connection with the Restatement, the Company restated the financial information as of and for the fiscal year December 31, 2020 and December 31, 2019, as well as the relevant unaudited interim financial information for the quarterly periods ended September 30, 2020, June 30, 2020, March 31, 2020, September 30, 2019, June 30, 2019, and March 31, 2019 in a separate filing in the 2020 Annual Report, as amended, on Form 10-K/A.
Critical Accounting Policies
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net sales and expense recognized during the periods presented.
Those estimates and assumptions include estimates for reserves of uncollectible accounts receivable, allowance for product returns, sales returns and incentive programs, allowance for inventory obsolescence, depreciable lives of property and equipment, analysis of impairment of goodwill, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates.
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Accounts Receivable and Allowance for Doubtful Accounts
The Company’s accounts receivable balance is related to trade receivables and are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company will maintain allowances for doubtful accounts, estimating losses resulting from the inability of its customers to make required payments for products. Accounts with known financial issues are first reviewed and specific estimates are recorded. The remaining accounts receivable balances are then grouped in categories by the amount of days the balance is past due, and the estimated loss is calculated as a percentage of the total category based upon past history. Account balances are charged off against the allowance when it is probable the receivable will not be recovered.
The determination of collectability of the Company’s accounts receivable requires management to make frequent judgments and estimates in order to determine the appropriate amount of allowance needed for doubtful accounts. The Company’s allowance for doubtful accounts is estimated to cover the risk of loss related to accounts receivable. This allowance is maintained at a level we consider appropriate based on historical and other factors that affect collectability. These factors include historical trends of write-offs, recoveries and credit losses; the careful monitoring of customer credit quality; and projected economic and market conditions. Different assumptions or changes in economic circumstances could result in changes to the allowance.
Total allowance for doubtful accounts as of December 31, 2021 and 2020 amounted to $55,000 and $51,000, respectively.
Product Returns, Sales Incentives and Other Forms of Variable Consideration
In measuring revenue and determining the consideration the Company is entitled to as part of a contract with a customer, the Company takes into account the related elements of variable consideration. Such elements of variable consideration include, but are not limited to, product returns and sales incentives, such as markdowns and margin adjustments. For these types of arrangements, the adjustments to revenue are recorded at the later of when (i) the Company recognizes revenue for the transfer of the related products to the customers, or (ii) the Company pays, or promises to pay, the consideration.
We currently have a 30-day product return policy for NDS Products, which allows for a 100% sales price refund for the return of unopened and undamaged products purchased from us online through one of our websites or e-commerce platforms. Product sold to GNC may be returned from store shelves or the distribution center in the event product is damaged, short dated, expired or recalled.
GNC maintains a customer satisfaction program which allows customers to return product to the store for credit or refund. Subject to certain terms and restrictions, GNC may require reimbursement from vendors for unsaleable returned product through either direct payment or credit against a future invoice. We also support a product return policy for iSatori Products, whereby customers can return product for credit or refund. Product returns can and do occur from time to time and can be material.
For the sale of goods with a right of return, the Company estimates variable consideration using the most likely amount method and recognizes revenue for the consideration it expects to be entitled to when control of the related product is transferred to the customers and records a product returns liability for the amount it expects to credit back its customers. Under this method, certain forms of variable consideration are based on expected sell-through results, which requires subjective estimates. These estimates are supported by historical results as well as specific facts and circumstances related to the current period. In addition, the Company recognizes an asset included in Inventories, net and a corresponding adjustment to Cost of Goods Sold for the right to recover goods from customers associated with the estimated returns. The product returns liability and corresponding asset include estimates that directly impact reported revenue. These estimates are calculated based on a history of actual returns, estimated future returns and information provided by customers regarding their inventory levels. Consideration of these factors results in an estimate for anticipated sales returns that reflects increases or decreases related to seasonal fluctuations. In addition, as necessary, product returns liability and the related assets may be established for significant future known or anticipated events. The types of known or anticipated events that are considered, and will continue to be considered, include, but are not limited to, changes in the retail environment and the Company's decision to continue to support new and existing products.
Information for product returns is received on regular basis and adjusted for accordingly. Adjustments for returns are based on factual information and historical trends for both NDS products and iSatori products and are specific to each distribution channel. We monitor, among other things, remaining shelf life and sell-through data on a weekly basis. If we determine there are any risks or issues with any specific products, we accrue sales return allowances based on management’s assessment of the overall risk and likelihood of returns in light of all information available.
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Total allowance for product returns, sales returns and incentive programs as of December 31, 2021 and 2020 amounted to $632,000 and $345,000, respectively.
Inventory
The Company’s inventory is carried at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method. The Company evaluates the need to record adjustments for inventory on a regular basis. Company policy is to evaluate all inventories including components and finished goods for all of its product offerings across all of the Company’s operating subsidiaries.
The Company recognizes an allowance for obsolescence for expiring, excess, and slow-moving inventory. To calculate the allowance, the Company analyzes sales projections for each SKU relative to the remaining shelf life of the product. The value of any finished goods inventory that expires within six months of the date of assessment is included in the allowance, even if the Company anticipates selling some or all of the inventory. In addition, the allowance includes the value of longer-dated finished good inventory that, based on projections, will remain unsold at the time of its expiration.
Total allowance for expiring, excess and slow-moving inventory items as of December 31, 2021 and 2020 amounted to $56,000 and $56,000, respectively.
Goodwill
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This update also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The Company adopted ASU 2017-04 on January 1, 2020 and applied the requirements prospectively.
There were no impairment charges incurred during the year ended December 31, 2021.
Revenue Recognition
The Company’s revenue is comprised of sales of nutritional supplements, primarily to GNC.
The Company accounts for revenues in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. Under ASC 606, revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for the Company upon shipment or delivery of products to our customers based on written sales terms, which is also when control is transferred. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products or services to a customer.
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All products sold by the Company are distinct individual products and consist of nutritional supplements and related supplies. The products are offered for sale solely as finished goods, and there are no performance obligations required post-shipment for customers to derive the expected value from them.
Control of products we sell transfers to customers upon shipment from our facilities or delivery to our customers, and the Company’s performance obligations are satisfied at that time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than promised goods to the customer. Payment for sales are generally made by check, credit card, or wire transfer. Historically the Company has not experienced any significant payment delays from customers.
For direct-to-consumer sales, the Company allows for returns within 30 days of purchase. Our wholesale customers, such as GNC, may return purchased products to the Company under certain circumstances, which include expired or soon-to-be-expired products located in GNC corporate stores or at any of its distribution centers, and products that are subject to a recall or that contain an ingredient or ingredients that are subject to a recall by the U.S. Food and Drug Administration.
A right of return does not represent a separate performance obligation, but because customers are allowed to return products, the consideration to which the Company expects to be entitled is variable. Upon evaluation of returns, the Company determined that less than 5% of products are returned, and therefore believes it is probable that such returns will not cause a significant reversal of revenue in the future. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.
Stock-Based Compensation.
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services rendered. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) where the value of the award is measured on the date of grant and recognized as compensation on the straight-line basis over the vesting period.
From prior periods until December 31, 2018, the Company accounted for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50, Equity-Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received or (b) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the performance completion date.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The guidance was issued to simplify the accounting for share-based transactions by expanding the scope of ASU 2018-07 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions are measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions. We adopted ASU 2018-07 on January 1, 2019. The adoption of the standard did not have a material impact on our financial statements for the year ended December 31, 2019 or the previously reported financial statements.
The fair value of the Company’s stock option and warrant grants are estimated using the Black-Scholes option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model and based on actual experience. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.
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Recent Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial Statements included in this Annual Report for a description of recent accounting pronouncements believed by management to have a material impact on our present or future financial statements.
Results of Operations
| As Restated | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2021 | December 31, 2020 | Change | % | |||||||||||||
| Revenue | $ | 27,913,000 | $ | 22,111,000 | $ | 5,802,000 | 26 | % | ||||||||
| Cost of goods sold | (15,409,000 | ) | (12,574,000 | ) | (2,835,000 | ) | 23 | % | ||||||||
| Gross profit | 12,504,000 | 9,537,000 | 2,967,000 | 31 | % | |||||||||||
| General and administrative expense | (3,651,000 | ) | (3,047,000 | ) | (604,000 | ) | 20 | % | ||||||||
| Selling and marketing expense | (2,564,000 | ) | (2,106,000 | ) | (458,000 | ) | 22 | % | ||||||||
| Depreciation and amortization | (59,000 | ) | (38,000 | ) | (21,000 | ) | 55 | % | ||||||||
| Total operating expenses | (6,274,000 | ) | (5,191,000 | ) | (1,083,000 | ) | 21 | % | ||||||||
| Income from operations | 6,230,000 | 4,346,000 | 1,884,000 | 43 | % | |||||||||||
| Other income (expense) | 478,000 | 64,000 | 414,000 | n/a | ||||||||||||
| (Provision) benefit for income tax | (1,298,000 | ) | 4,415,000 | (5,713,000 | ) | n/a | ||||||||||
| Net income | $ | 5,410,000 | $ | 8,825,000 | $ | (3,415,000 | ) | (39 | )% |
Fiscal Year Ended December 31, 2021 Compared to Fiscal Year Ended December 31, 2020
Net Sales. Revenue for the year ended December 31, 2021 increased 26% to $27,913,000 as compared to $22,111,000 for the year ended December 31, 2020. Revenue for the year ended December 31, 2021 compared to the prior year reflects continued growth in our wholesale business and in our online direct-to-consumer offering.
Online revenue during the year ended December 31, 2021 was approximately 24% of total revenue, compared to roughly 20% of total revenue during the same twelve-month period in 2020. Due to the ongoing shift to online purchasing by consumers, including additional growth arising from the effects of the COVID-19 pandemic as a result of the shutdown of various retail outlets, e-commerce sales have accounted for a growing percentage of our domestic revenue. Although no assurances can be given, management believes that online revenue will continue to increase in subsequent periods relative to prior comparable periods given management’s focus on higher margin online sales.
The Company continually reformulates and introduces new products, as well as seeks to increase both the number of stores and number of approved products that can be sold within the GNC franchise system that comprise its domestic and international distribution footprint. Management also believes that its focus on developing its e-commerce capabilities will drive additional incremental sales in the short-term, while yielding substantial benefits in the longer-term.
Cost of Goods Sold. Cost of goods sold for the year ended December 31, 2021 increased 23% to $15,409,000 as compared to $12,574,000 for the year ended December 31, 2020. This increase is principally attributable to higher revenue.
Gross Profit Margin. Gross profit for the year ended December 31, 2021 increased to $12,504,000 as compared to $9,537,000 for the year ended December 31, 2020. Gross margin for the year ended December 31, 2021 increased to 44.8% from 43.1% for the comparable period last year. The increase in gross profit during the year ended December 31, 2021 is principally attributable to higher revenue and a larger percentage of higher-margin direct-to-consumer sales.
General and Administrative Expense. General and administrative expense for the year ended December 31, 2021 increased by $604,000 to $3,651,000 as compared to $3,047,000 for the year ended December 31, 2020. The increase in general and administrative expense was primarily due to an increase of $374,000 in stock compensation expense as well as $253,000 of expenses related to M&A activity.
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Selling and Marketing Expense. Selling and marketing expense for the year ended December 31, 2021 increased to $2,564,000 as compared to $2,106,000 for the year ended December 31, 2020. This increase is primarily attributable to higher co-operative marketing expenses paid to one of our wholesale partners. The Company anticipates that this higher level of marketing expense which was fully funded by wholesale price increases will continue for the foreseeable future.
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2021 increased to $59,000 from $38,000 during the same period in 2020. The increase is primarily attributable to the amortization of intangibles acquired in the Nutrology business combination.
Net Income. We generated a net income of $5,410,000 for the year ended December 31, 2021, as compared to a net income of $8,825,000 for the year ended December 31, 2020. The decrease in net income for the year ended December 31, 2021 compared to the same period in 2020 was primarily attributable to an income tax benefit of $4,415,000 during 2020 resulting from removing a substantial portion of the reserve against our deferred tax assets.
Non-GAAP Measures
The financial presentation below contains certain financial measures defined as “non-GAAP financial measures” by the SEC, including non-GAAP EBITDA and adjusted non-GAAP EBITDA. These measures may be different from non-GAAP financial measures used by other companies. The presentation of this financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in this Annual Report in accordance with GAAP.
As presented below, non-GAAP EBITDA excludes interest, income taxes, and depreciation and amortization. Adjusted non-GAAP EBITDA excludes—in addition to interest, taxes, depreciation and amortization—stock-based compensation, acquisition related expenses, and gains or losses of a non-recurring nature. The Company believes the non-GAAP measures provide useful information to both management and investors by excluding certain expense and other items that may not be indicative of its core operating results and business outlook. The Company believes that the inclusion of non-GAAP measures in the financial presentation below allows investors to compare the Company’s financial results with the Company’s historical financial results and is an important measure of the Company’s comparative financial performance.
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Net income | $ | 5,410,000 | $ | 8,825,000 | ||||
| Interest expense (income), net | (25,000 | ) | 6,000 | |||||
| Provision (benefit) for income taxes | 1,298,000 | (4,415,000 | ) | |||||
| Depreciation and amortization | 59,000 | 38,000 | ||||||
| EBITDA | 6,742,000 | 4,454,000 | ||||||
| Non-cash and non-recurring adjustments | ||||||||
| Stock-based compensation expense | 452,000 | 78,000 | ||||||
| Acquisition related expenses | 253,000 | - | ||||||
| Non-recurring gains | (453,000 | ) | (70,000 | ) | ||||
| Adjusted EBITDA | $ | 6,994,000 | $ | 4,462,000 |
Liquidity and Capital Resources
As of December 31, 2021, the Company had working capital of $13,626,000, compared to working capital of $7,615,000 at December 31, 2020. Our principal sources of liquidity at December 31, 2021 consisted of $9,897,000 of cash and $945,000 of accounts receivable. The increase in working capital is principally attributable to cash flows from operating activities during fiscal 2021, partially offset by the acquisition of Nutrology and share repurchases.
On September 24, 2019, the Company entered into a Revolving Line of Credit Agreement (the “Line of Credit Agreement”) with Mutual of Omaha Bank (the “Lender”), subsequently acquired by CIT Bank N.A., providing the Company with a $2.5 million revolving line of credit (the “Line of Credit”). The Line of Credit allows the Company to request advances thereunder and to use the proceeds of such advances for working capital purposes until the Maturity Date, or unless renewed at maturity upon approval by the Company’s Board and the Lender. The Line of Credit is secured by all assets of the Company.
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Advances drawn under the Line of Credit bear interest at an annual rate of the one-month LIBOR rate plus 2.75%, and each advance will be payable on the Maturity Date with the interest on outstanding advances payable monthly. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to the Maturity Date, without premium or penalty.
On March 20, 2020, the Lender advanced the Company $2.5 million under the Line of Credit, which amount was repaid on April 29, 2020. The advance was intended to provide the Company with additional liquidity given the uncertainty regarding the timing of collection of certain accounts receivable and in anticipation of an expected negative impact on sales to GNC and our other wholesale customers resulting from the COVID-19 outbreak.
On September 20, 2022, the Company and the Lender amended the Line of Credit Agreement to extend the Maturity Date to December 23, 2022. All other terms of the Line of Credit Agreement remain unchanged.
On April 27, 2020, the Company received proceeds from a loan in the amount of $449,700 from the PPP Lender, pursuant to approval by the SBA for the Lender to fund the Company’s request for the PPP Loan created as part of the recently enacted CARES Act administered by the SBA. In accordance with the requirements of the CARES Act, the Company used the proceeds from the PPP Loan primarily for payroll costs, covered rent payments, and covered utilities during the eight-week period commencing on the date of loan approval. The PPP Loan was scheduled to mature on April 27, 2022, had a 1.0% interest rate, and was subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act. The Company did not provide any collateral or guarantees for the PPP Loan, nor did the Company pay any fees to obtain the PPP Loan. The Company was informed by the PPP Lender and the SBA that the full amount balance of the PPP Loan, including accrued interest, was forgiven on January 15, 2021. See Note 1 to the Consolidated Financial Statements contained within this Annual Report.
The Company has historically financed its operations primarily through cash flow from operations and equity and debt financings. The Company has also provided for its cash needs by issuing Common Stock, options and warrants for certain operating costs, including consulting and professional fees. The Company currently anticipates that cash derived from operations and existing cash resources, along with available borrowings under the Line of Credit, will be sufficient to provide for the Company’s liquidity for the next twelve months.
The Company is dependent on cash flow from operations and amounts available under the Line of Credit to satisfy its working capital requirements. No assurances can be given that cash flow from operations and/or the Line of Credit will be sufficient to provide for the Company’s liquidity for the next twelve months. Should the Company be unable to generate sufficient revenue in the future to achieve positive cash flow from operations, and/or should capital be unavailable under the terms of the Line of Credit, additional working capital will be required. Management currently has no intention to raise additional working capital through the sale of equity or debt securities and believes that the cash flow from operations and available borrowings under the Line of Credit will provide sufficient capital necessary to operate the business over the next twelve months. In the event the Company fails to achieve positive cash flow from operations, additional capital is unavailable under the terms of the Line of Credit, and management is otherwise unable to secure additional working capital through the issuance of equity or debt securities, the Company’s business would be materially and adversely harmed.
Cash Provided by Operating Activities
Net cash provided by operating activities was $4,480,000 during the fiscal year ended December 31, 2021, compared to net cash provided by operating activities of $5,721,000 for the year ended December 31, 2020. The decrease in cash provided by operating activities is primarily attributable to increased investments in working capital, particularly inventory.
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Cash Used in Investing Activities
Cash used in investing activities for the fiscal year ended December 31, 2021 was $529,000 related to the Nutrology acquisition, as compared to $0 used in investing activities during the year ended December 31, 2020.
Cash Provided by (Used in) Financing Activities
Cash used in financing activities for the year ended December 31, 2021 was $390,000 as compared to cash provided by financing of $350,000 during the year ended December 31, 2020. Receipt of funds from the PPP loan during 2020 and increased share repurchases during 2021 account for the primary difference.
Supplemental Unaudited Quarterly Financial Information
The following unaudited quarterly financial information is presented to illustrate the effects of the corrections of misstatements to previously reported quarterly unaudited financial information as a result of the restatement. Such corrections of misstatements are described in more detail in Note 11, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data. This unaudited quarterly financial information should be read in conjunction with the other sections of this Comprehensive Annual Report, including the consolidated financial statements and related notes contained in Item 8, Financial Statements and Supplementary Data.
Management's Discussion and Analysis of the Unaudited Financial Condition and Results of Operations - June 30, 2021
Restated
Comparison of the three and six months ended June 30, 2021 to the three and six months ended June 30, 2020
| Three months ended | Six months ended | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As Restated | As Restated | As Restated | As Restated | |||||||||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | Change | June 30, 2021 | June 30, 2020 | Change | |||||||||||||||||||||||||||
| Revenue | $ | 8,406,000 | $ | 2,990,000 | $ | 5,416,000 | 181 | % | $ | 14,005,000 | $ | 9,532,000 | $ | 4,473,000 | 47 | % | ||||||||||||||||
| Cost of goods sold | (4,725,000 | ) | (1,554,000 | ) | (3,171,000 | ) | 204 | % | (7,529,000 | ) | (5,186,000 | ) | (2,343,000 | ) | 45 | % | ||||||||||||||||
| Gross profit | 3,681,000 | 1,436,000 | 2,245,000 | 156 | % | 6,476,000 | 4,346,000 | 2,130,000 | 49 | % | ||||||||||||||||||||||
| Operating expenses | (1,648,000 | ) | (1,446,000 | ) | (202,000 | ) | 14 | % | (3,182,000 | ) | (2,862,000 | ) | (320,000 | ) | 11 | % | ||||||||||||||||
| Income (loss) from operations | 2,033,000 | (10,000 | ) | 2,043,000 | n/a | 3,294,000 | 1,484,000 | 1,810,000 | 122 | % | ||||||||||||||||||||||
| Other income (expense) | 5,000 | (5,000 | ) | 10,000 | n/a | 464,000 | 61,000 | 403,000 | n/a | |||||||||||||||||||||||
| (Provision) Benefit for income tax | (406,000 | ) | 40,000 | (446,000 | ) | n/a | (721,000 | ) | 81,000 | (802,000 | ) | n/a | ||||||||||||||||||||
| Net income (loss) | $ | 1,632,000 | $ | 25,000 | $ | 1,607,000 | n/a | $ | 3,037,000 | $ | 1,626,000 | $ | 1,411,000 | 87 | % |
Net Sales. Revenue for the three months ended June 30, 2021 increased to $8,406,000 as compared to $2,990,000 for the three months ended June 30, 2020. Revenue for the six months ended June 30, 2021 increased 47% to $14,005,000 as compared to $9,532,000 for the six months ended June 30, 2020. The increase in revenue for the three- and six-month periods ended June 30, 2021 compared to the prior three- and six-month period is principally due to the closure of some of our retail partners’ store locations and the stay-at-home orders during 2020 caused by the COVID-19 pandemic and continued organic growth in our online and wholesale businesses.
Online revenue during the three and six months ended June 30, 2021 was approximately 21% and 24% of total revenue, respectively, compared to approximately 38% and 21% of total revenue during the three and six months ended June 30, 2020.
Cost of Goods Sold. Cost of goods sold for the three months ended June 30, 2021 increased to $4,725,000 as compared to $1,554,000 for the three months ended June 30, 2020. Cost of goods sold for the six months ended June 30, 2021 increased to $7,529,000 as compared to $5,186,000 for the six months ended June 30, 2020. The increase during the three- and six-month period is principally attributable to higher revenue.
Gross Profit. Gross profit for the three months ended June 30, 2021 increased to $3,681,000 as compared to $1,436,000 for the three months ended June 30, 2020. Gross profit for the six months ended June 30, 2021 increased to $6,476,000 as compared to $4,346,000 for the six months ended June 30, 2020. The increase during the three- and six- month period is principally attributable to higher revenue.
Gross margin for the three months ended June 30, 2021 decreased to 43.8% compared to 48.0% during the same period last year. The decrease during the three-month period is principally attributable to a lower percentage of online sales during 2021 compared to the same period in 2020. Gross margin for the six months ended June 30, 2021 increased to 46.2% compared to 45.6% for the same period last year. The increase was primarily attributable to a greater proportion of higher margin online revenue during 2021 compared to the same period in 2020.
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General and Administrative Expense. General and administrative expense for the three months ended June 30, 2021 decreased to $917,000 as compared to $1,001,000 for the three months ended June 30, 2020. The decrease in the three-month period ended June 30, 2021 primarily reflects a decrease in bad debt expense, partially offset by higher stock compensation expense and higher consulting expense. For the six-month period ended June 30, 2021, general and administrative expense increased to $1,774,000 from $1,734,000 during the same period in the prior year.
Selling and Marketing Expense. Selling and marketing expense for the three months ended June 30, 2021 increased to $716,000 as compared to $435,000 for the three months ended June 30, 2020. Selling and marketing expense for the six months ended June 30, 2021 increased to $1,385,000 as compared to $1,106,000 for the six months ended June 30, 2020. The increases in both the three- and six-month periods ended June 30, 2021 reflect higher co-operative marketing expense paid to one of our wholesale partners. The Company anticipates that this higher level of marketing expense, which is fully funded by wholesale price increases, will continue for the foreseeable future.
Depreciation and Amortization Expense. Depreciation and amortization expense for the three months ended June 30, 2021 increased to $15,000 as compared to $10,000 for the three months ended June 30, 2020. The increase was due to amortization of intangibles acquired in the Nutrology business combination. Depreciation and amortization expense for the six months ended June 30, 2021 was flat at $23,000 as compared to $23,000 for the six months ended June 30, 2020, with the increase in amortization associated with the Nutrology intangibles being offset by other assets becoming fully depreciated.
Net Income. We generated net income of $1,632,000 for the three-month period ended June 30, 2021 as compared to net income of $25,000 for the three months ended June 30, 2020. We generated a net income of $3,037,000 for the six-month period ended June 30, 2021 as compared to a net income of $1,626,000 for the six months ended June 30, 2020. The increase in net income for the three- and six-month periods ended June 30, 2021 was primarily due to higher revenues resulting from the increase in wholesale and online sales as compared to the impact of COVID-19 on sales during the same periods in 2020.
Non-GAAP Measures
The financial presentation below contains certain financial measures defined as “non-GAAP financial measures” by the SEC, including non-GAAP EBITDA and adjusted non-GAAP EBITDA. These measures may be different from non-GAAP financial measures used by other companies. The presentation of this financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in this Quarterly Report in accordance with GAAP.
As presented below, non-GAAP EBITDA excludes interest, income taxes, and depreciation and amortization. Adjusted non-GAAP EBITDA excludes, in addition to interest, taxes, depreciation and amortization, equity-based compensation and non-recurring gains or losses. The Company believes the non-GAAP measures provide useful information to both management and investors by excluding certain expense and other items that may not be indicative of its core operating results and business outlook. The Company believes that the inclusion of non-GAAP measures in the financial presentation below allows investors to compare the Company’s financial results with the Company’s historical financial results and is an important measure of the Company’s comparative financial performance.
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 (unaudited) | 2020 (unaudited) | 2021 (unaudited) | 2020 (unaudited) | |||||||||||||
| Net income | $ | 1,632,000 | $ | 25,000 | $ | 3,037,000 | $ | 1,626,000 | ||||||||
| Interest (income) expense, net | (5,000 | ) | 5,000 | (11,000 | ) | 9,000 | ||||||||||
| Provision for income taxes | 406,000 | (40,000 | ) | 721,000 | (81,000 | ) | ||||||||||
| Depreciation and amortization | 15,000 | 10,000 | 23,000 | 22,000 | ||||||||||||
| EBITDA | 2,048,000 | - | 3,770,000 | 1,576,000 | ||||||||||||
| Non-cash and non-recurring adjustments | ||||||||||||||||
| Stock compensation expense | 107,000 | 26,000 | 238,000 | 54,000 | ||||||||||||
| Acquisition related expenses | 71,000 | - | 95,000 | - | ||||||||||||
| Non-recurring gains | - | - | (453,000 | ) | (70,000 | ) | ||||||||||
| Adjusted EBITDA | $ | 2,226,000 | $ | 26,000 | $ | 3,650,000 | $ | 1,560,000 |
Off-Balance Sheet Arrangements
Other than contractual obligations incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity.
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Management's Discussion and Analysis of the Unaudited Financial Condition and Results of Operations – March 31, 2021
Restated
Comparison of the three months ended March 31, 2021 to the three months ended March 31, 2020
| Three months ended | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As Restated | As Restated | |||||||||||||||
| March 31, 2021 | March 31, 2020 | Change | ||||||||||||||
| (unaudited) | ||||||||||||||||
| Revenue | $ | 5,599,000 | $ | 6,542,000 | $ | (943,000 | ) | (14 | )% | |||||||
| Cost of goods sold | (2,804,000 | ) | (3,632,000 | ) | 828,000 | (23 | )% | |||||||||
| Gross profit | 2,795,000 | 2,910,000 | (115,000 | ) | (4 | )% | ||||||||||
| Operating expenses | (1,534,000 | ) | (1,416,000 | ) | (118,000 | ) | 8 | % | ||||||||
| Income from operations | 1,261,000 | 1,494,000 | (233,000 | ) | (16 | )% | ||||||||||
| Other income (expense) | 459,000 | 66,000 | 393,000 | n/a | ||||||||||||
| (Provision) Benefit for income tax | (315,000 | ) | 41,000 | (356,000 | ) | n/a | ||||||||||
| Net income | $ | 1,405,000 | $ | 1,601,000 | $ | (196,000 | ) | (12 | )% |
Net Sales. Revenue for the three months ended March 31, 2021 decreased 14% to $5,599,000 as compared to $6,542,000 for the three months ended March 31, 2020. Revenue for the three months ended March 31, 2021 compared to the prior period reflects fluctuations in the timing of orders from our wholesale customers.
Online revenue during the three months ended March 31, 2021 and 2020 was approximately 29% of total revenue for the three months ended March 31, 2021 as compared to 13% for the same period of 2020. Due to the ongoing shift to online purchasing by consumers, including additional growth arising from the effects of the COVID-19 pandemic as a result of the shutdown of various retail outlets, e-commerce sales have accounted for a growing percentage of our domestic revenue. Although no assurances can be given, management believes that online revenue will continue to increase in subsequent periods relative to prior comparable periods given management’s focus on higher margin online sales.
Cost of Goods Sold. Cost of goods sold for the three months ended March 31, 2021 decreased to $2,804,000 as compared to $3,632,000 for the three months ended March 31, 2020. This 23% decrease is principally attributable to lower revenue.
Gross Profit. Gross profit for the three months ended March 31, 2021 decreased to $2,795,000 as compared to $2,910,000 for the three months ended March 31, 2020. Gross margin for the three months ended March 31, 2021 increased to 49.9% from 44.5% for the comparable period in 2020. The decrease in gross profit is principally attributable to lower revenue. The increase in gross margin was primarily attributable to a greater proportion of higher margin online revenue during 2021 compared to the same period in 2020.
General and Administrative Expense. General and administrative expense for the three months ended March 31, 2021 increased to $857,000 as compared to $733,000 for the three months ended March 31, 2020. The increase in the three-month period ended March 31, 2021 primarily reflects stock compensation expense of $131,000 related to options and RSUs issued during the quarter.
Selling and Marketing Expense. Selling and marketing expense for the three months ended March 31, 2020 was roughly flat at $669,000 as compared to $671,000 for the three months ended March 31, 2020.
Depreciation and Amortization Expense. Depreciation and amortization expense for the three months ended March 31, 2021 decreased to $8,000 as compared to $12,000 for the three months ended March 31, 2020. The decrease in the three-month period was primarily attributable to a reduction in depreciation expense due to certain assets becoming fully depreciated.
Net Income. We generated net income of $1,405,000 for the three-month period ended March 31, 2021 as compared to net income of $1,601,000 for the three months ended March 31, 2020. The decrease in net income for the three-month period ended March 31, 2021 compared to the same period in 2020 was primarily attributable to lower revenue and increased compensation cost related to options and RSUs.
Non-GAAP Measures
The financial presentation below contains certain financial measures not in accordance with accounting principles generally accepted in the United States (“GAAP”), defined by the SEC as “non-GAAP financial measures”, including non-GAAP EBITDA and adjusted non-GAAP EBITDA. These measures may be different from non-GAAP financial measures used by other companies. The presentation of this financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in this Quarterly Report in accordance with GAAP.
As presented below, non-GAAP EBITDA excludes interest, income taxes, and depreciation and amortization. Adjusted non-GAAP EBITDA excludes, in addition to interest, taxes, depreciation and amortization, equity-based compensation and non-recurring gains or losses. The Company believes the non-GAAP measures provide useful information to both management and investors by excluding certain expense and other items that may not be indicative of its core operating results and business outlook. The Company believes that the inclusion of non-GAAP measures in the financial presentation below allows investors to compare the Company’s financial results with the Company’s historical financial results and is an important measure of the Company’s comparative financial performance.
| For the three months ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Net income | $ | 1,405,000 | $ | 1,601,000 | ||||
| Interest expense (income) | (6,000 | ) | 4,000 | |||||
| Provision for income taxes | 315,000 | (41,000 | ) | |||||
| Depreciation and amortization | 8,000 | 12,000 | ||||||
| EBITDA | 1,722,000 | 1,576,000 | ||||||
| Non-cash and non-recurring adjustments | ||||||||
| Stock compensation expense | 131,000 | 28,000 | ||||||
| Acquisition related expenses | 24,000 | - | ||||||
| Non-recurring losses (gains) | (453,000 | ) | (70,000 | ) | ||||
| Adjusted EBITDA | $ | 1,424,000 | $ | 1,534,000 |
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Liquidity and Capital Resources
At March 31, 2021, we had positive working capital of approximately $9,030,000, compared to $7,615,000 at December 31, 2020. Our principal sources of liquidity at March 31, 2021 consisted of $6,625,000 of cash and $1,580,000 of accounts receivable.
On September 24, 2019, the Company entered into a Revolving Line of Credit Agreement (the “Line of Credit Agreement”) with Mutual of Omaha Bank (the “Lender”), subsequently acquired by CIT Bank N.A., providing the Company with a $2.5 million revolving line of credit (the “Line of Credit”). The Line of Credit allows the Company to request advances thereunder and to use the proceeds of such advances for working capital purposes until the Maturity Date, or unless renewed at maturity upon approval by the Company’s Board and the Lender. The Line of Credit is secured by all assets of the Company.
Advances drawn under the Line of Credit bear interest at an annual rate of the one-month LIBOR rate plus 2.75%, and each advance will be payable on the Maturity Date with the interest on outstanding advances payable monthly. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to the Maturity Date, without premium or penalty.
On March 20, 2020, the Lender advanced the Company $2.5 million under the Line of Credit, which amount was repaid on April 29, 2020. The advance was intended to provide the Company with additional liquidity given the uncertainty regarding the timing of collection of certain accounts receivable and in anticipation of an expected negative impact on sales to GNC and our other wholesale customers resulting from the COVID-19 outbreak.
On September 20, 2022, the Company and the Lender amended the Line of Credit Agreement to extend the Maturity Date to December 23, 2022. All other terms of the Line of Credit Agreement remain unchanged.
On April 27, 2020, the Company received proceeds from a loan in the amount of $449,700 from its lender, CIT Bank, N.A. (the “PPP Lender”), pursuant to approval by the U.S. Small Business Administration (the “SBA”) for the PPP Lender to fund the Company’s request for a loan under the SBA’s Paycheck Protection Program (“PPP Loan”) created as part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the SBA (the “Loan Agreement”). In accordance with the requirements of the CARES Act, the Company used the proceeds from the PPP Loan primarily for payroll costs, covered rent payments, and covered utilities during the eight-week period commencing on the date of loan approval. The PPP Loan was scheduled to mature on April 27, 2022, had a 1.0% interest rate, and was subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act. The Company was informed by the PPP Lender and the SBA that the full balance of the PPP Loan, including accrued interest, was forgiven on January 15, 2021.
The Company has historically financed its operations primarily through cash flow from operations and equity and debt financings. The Company has also provided for its cash needs by issuing Common Stock, options and warrants for certain operating costs, including consulting and professional fees. The Company currently anticipates that cash derived from operations and existing cash resources, along with available borrowings under the Line of Credit, will be sufficient to provide for the Company’s liquidity for the next twelve months.
The Company is dependent on cash flow from operations and amounts available under the Line of Credit to satisfy its working capital requirements. No assurances can be given that cash flow from operations and/or the Line of Credit will be sufficient to provide for the Company’s liquidity for the next twelve months. Should the Company be unable to generate sufficient revenue in the future to achieve positive cash flow from operations, and/or should capital be unavailable under the terms of the Line of Credit, additional working capital will be required. Management currently has no intention to raise additional working capital through the sale of equity or debt securities and believes that the cash flow from operations and available borrowings under the Line of Credit will provide sufficient capital necessary to operate the business over the next twelve months. In the event the Company fails to achieve positive cash flow from operations, additional capital is unavailable under the terms of the Line of Credit, and management is otherwise unable to secure additional working capital through the issuance of equity or debt securities, the Company’s business would be materially and adversely harmed.
Cash Provided by Operations. Cash provided by operating activities for the three months ended March 31, 2021 was $289,000, as compared to cash provided by operations of $1,000 for the three months ended March 31, 2020. The increase in cash provided by operating activities is primarily attributable to increased focus on managing working capital.
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Cash Provided by (Used in) Investing Activities. There was no cash provided by or used in investing activities for the three-month periods ended March 31, 2021 or 2020.
Cash Provided by (Used in) Financing Activities. Cash provided by financing activities for the three months ended March 31, 2021 was $0 as compared to cash provided by financing activities of $2,400,000 during the three months ended March 31, 2020.