10-K 1 ftlf20231231_10k.htm FORM 10-K ftlf20231231_10k.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2023

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number:  000-52369

 

FITLIFE BRANDS, INC.

(Exact name of Registrant as specified in its charter)

 

Nevada

20-3464383

(State of Incorporation)

(IRS Employer Identification No.)

 

5214 S. 136th Street, Omaha, NE 68137

(Address of principal executive offices)

 

(402) 991-5618

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which

registered

Common Stock, par value $0.01 per share

FTLF

The Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Exchange Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐  No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐  No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such a shorter period that the registrant was required to submit such files).  Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer

Accelerated filer

Non–Accelerated filer 

Small reporting company

  

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Yes ☒ No  

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☒ No  

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, was $32,319,000.

 

As of March 28, 2024, there were 4,598,241 shares of common stock, $0.01 par value per share, issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

 

 

FITLIFE BRANDS, INC.

FORM 10-K ANNUAL REPORT

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2023 AND 2022

TABLE OF CONTENTS

 

 

PAGE

PART I

1
   

ITEM 1.

Business

1

ITEM 1A.

Risk Factors

7

ITEM 1B.

Unresolved Staff Comments

13

ITEM 1C.

Cybersecurity

13

ITEM 2.

Properties

13

ITEM 3.

Legal Proceedings

13

ITEM 4.

Mine Safety Disclosures

13
     

PART II

 
   

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

14

ITEM 6.

Selected Financial Data

15

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

24

ITEM 8.

Consolidated Financial Statements and Supplementary Data

24

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

24

ITEM 9A.

Controls and Procedures

24

ITEM 9B.

Other Information

25
     

PART III

 
   

ITEM 10.

Directors, Executive Officers, and Corporate Governance

26

ITEM 11.

Executive Compensation

26

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

26

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

26

ITEM 14.

Principal Accountant Fees and Services

26
     

PART IV

 
   

ITEM 15.

Exhibits and Financial Statement Schedules

26

ITEM 16.

Form 10-K Summary

28
     

SIGNATURES

29
   

CERTIFICATIONS

 

Exhibit 31 – Certification pursuant to Rule 13a-14(a) and 15d-14(a)

 

Exhibit 32 – Certification pursuant to 18 U.S.C 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

Forward Looking Statements Cautionary Language

 

This Annual Report on Form 10-K (the Annual Report) contains various forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included herein, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to anticipates, believes, plans, expects, future and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Companys business, including but not limited to, reliance on key customers and competition in its markets, market demand, product performance, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel and any changes in current accounting rules, all of which may be beyond the control of the Company. The Companys actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth herein.

 

This Annual Report, quarterly reports on Form 10-Q, current reports on Form 8-K and other documents filed with the SEC include additional factors, which could impact FitLife Brands, Inc.s business and financial performance. Moreover, FitLife Brands, Inc. operates in a rapidly changing and competitive environment. New risks emerge from time to time and it is not possible for management to predict all such risks. Further, it is not possible to assess the impact of all risks on FitLife Brands, Inc.s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, FitLife Brands, Inc. disclaims any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of the report.

 

Use of Market and Industry Data 

 

This Annual Report includes market and industry data that we have obtained from third-party sources, including industry publications, as well as industry data prepared by our management on the basis of its knowledge of and experience in the industries in which we operate (including our management’s estimates and assumptions relating to such industries based on that knowledge). Management has developed its knowledge of such industries through its experience and participation in these industries. While our management believes the third-party sources referred to in this Annual Report are reliable, neither we nor our management have independently verified any of the data from such sources referred to in this Annual Report or ascertained the underlying economic assumptions relied upon by such sources. Furthermore, references in this Annual Report to any publications, reports, surveys or articles prepared by third parties should not be construed as depicting the complete findings of the entire publication, report, survey or article. The information in any such publication, report, survey or article is not incorporated by reference in this Annual Report. 

 

Forecasts and other forward-looking information obtained from these sources involve risks and uncertainties and are subject to change based on various factors, including those discussed in sections entitled “Forward-Looking Statements,” “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.

 

 

 
 

PART I

 

ITEM 1.  BUSINESS

 

FitLife Brands, Inc. (the “Company”) is a national provider of innovative and proprietary nutritional supplements and wellness products for health-conscious consumers marketed under the following brand names: (i) NDS Nutrition, PMD Sports, SirenLabs, Core Active, Nutrology, and Metis Nutrition (together, “NDS Products”); (ii) iSatori, BioGenetic Laboratories, and Energize (together, the "iSatori Products"); (iii) Dr. Tobias, All Natural Advice, and Maritime Naturals (together, the “MRC Products"); and (iv) MusclePharm.

 

Overview

 

FitLife Brands, Inc. (the “Company”) is a national provider of innovative and proprietary nutritional supplements and wellness products for health-conscious consumers marketed under the following brand names: (i) NDS Nutrition, PMD Sports, SirenLabs, CoreActive, Nutrology, and Metis Nutrition (together, “NDS Products”); (ii) iSatori, BioGenetic Laboratories, and Energize (together, the "iSatori Products"); (iii) Dr. Tobias, All Natural Advice, and Maritime Naturals (together, the “MRC Products"); and (iv) MusclePharm.

 

The Company distributes the NDS Products principally through franchised General Nutrition Centers, Inc. (“GNC”) stores located both domestically and internationally, and, with the launch of Metis Nutrition, through corporate GNC stores in the United States. The iSatori Products are sold through more than 17,000 retail locations, which include specialty, mass, and online.  The Company distributes the MRC Products primarily online.  MusclePharm’s products are sold to wholesale customers as well as online directly to the end consumer.

 

FitLife Brands is headquartered in Omaha, Nebraska. For more information on the Company, please go to www.fitlifebrands.com. The Company’s common stock, par value $0.01 per share (“Common Stock”), trades under the symbol “FTLF” on the Nasdaq Capital Market.

 

Recent Developments

 

Acquisition of Mimis Rock Corp

 

On December 4, 2022, the Company entered into an Arrangement Agreement with Mimi’s Rock Corp. (“MRC”), pursuant to which the Company agreed to acquire MRC. On February 28, 2023, the Company completed the acquisition of MRC. Total consideration for the acquisition of MRC was $17,099, of which $12,500 was funded using proceeds from a new term loan, and $4,599 from the Company’s available cash. See Note 8 to the financial statements for additional disclosure regarding the acquisition of MRC.

 

Acquisition of MusclePharm Assets

 

On October 10, 2023, the Company acquired substantially all of the assets of MusclePharm Corporation (“MusclePharm”) through an asset purchase transaction under Section 363 of the U.S. Bankruptcy Code. The Company acquired substantially all of the assets and assumed none of the liabilities of MusclePharm other than de minimus cure costs relating to certain assumed contracts.  Total consideration for the acquisition was approximately $18,500 cash.  Of this amount, $10,000 was funded using proceeds from a new term loan provided by First Citizens Bank, with the remainder funded from the Company’s available cash balances. See Note 9 for additional disclosure regarding the acquisition of MusclePharm.

 

Industry Overview

 

We compete principally in the nutrition industry. The nutrition industry is generally categorized into the following segments:

 

 

Natural & Organic Foods (products such as cereals, milk, non-dairy beverages and frozen meals);

   

 

 

Functional Foods (products with added ingredients or fortification specifically for health or performance purposes);

   

 

 

Natural & Organic Personal Care and Household Products; and

   

 

 

Supplements.

 

-1-

 

Management believes that the following factors drive growth in the nutrition industry:

 

 

The general public’s awareness and understanding of the connection between diet and health;

   

 

 

The aging population in the Company’s markets who tend to use more nutritional supplements as they age;

   

 

 

Increasing healthcare costs and the consequential trend toward preventative medicine and non-traditional medicines; and

   

 

 

Product introductions in response to new scientific studies.

 

Our Products

 

The Company currently focuses its sales and marketing efforts on its full line of sports, weight loss and general nutrition products that are currently marketed and sold both domestically and internationally. The Company currently markets more than 100 different NDS Products to more than 700 GNC franchise locations located in the United States, as well as to additional franchise locations in other countries, all of which are distributed through GNC’s distribution system. In addition, following the launch of Metis Nutrition, we distribute products through more than 1,500 corporate GNC stores in the United States. We sell iSatori Products through more than 17,000 specialty, mass, and online retail locations. We sell the MRC Products primarily on Amazon.com (“Amazon”).  We sell MusclePharm products online directly to the end consumer as well as to wholesale partners.

 

A complete product list is available on our website at fitlifebrands.com.

 

NDS Products

 

The Company’s NDS Products consist of the following brands:

 

 

NDS – Premium weight loss, sports nutrition, and general health products;

   

 

 

PMD – Premium sports nutrition products;

   

 

 

SirenLabs – Premium weight loss and sports nutrition products;

   

 

 

Nutrology – Sports nutrition and general wellness products with an emphasis on natural, vegan, and organic ingredients;

   

 

 

Metis Nutrition – Premium male health and weight loss products; and

     
  Core Active Nutrition – Value-oriented sports nutrition and weight loss products.

 

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iSatori Products

 

The Company’s iSatori Products consist of the following brands:

 

 

Energize – Energy products designed to boost energy through a combination of time-released caffeine, vitamins, and herbal formulations;

     
 

iSatori – High-quality weight loss and sports nutrition products; and

     
 

BioGenetic Laboratories – Value-oriented weight loss and general health products.

 

MRC Products

 

The Company acquired MRC on February 28, 2023. MRC is a dietary supplement and wellness company which markets and sells its products primarily on Amazon.  The MRC products include the following brands:

 

 

Dr. Tobias – General health supplements;

     
 

All Natural Advice – Natural skincare and beauty products; and

     
 

Maritime Naturals – Natural skincare and beauty products.

 

Products sold under the All Natural Advice and Maritime Naturals brand names are registered with Health Canada and under the EU Cosmetics Act.

 

MusclePharm Products

 

The MusclePharm assets were acquired by the Company on October 10, 2023. MusclePharm is a scientifically driven, performance lifestyle brand that develops, markets and distributes 33 branded sports nutrition and general health products. MusclePharm products are sold to wholesale customers as well as online directly to the end consumer. We believe MusclePharm’s brand recognition attracts a large and engaged customer base consisting of athletes and other active individuals.

 

Manufacturing, Sourcing and Availability of Raw Materials

 

All of the Company’s products are manufactured by FDA-regulated contract manufacturers within the United States. Each contract manufacturer is required by the Company to abide by current Good Manufacturing Practices (“cGMPs”) to ensure quality and consistency, and to manufacture its products according to the Company’s strict specifications. Nearly all our contract manufacturers are certified through a governing body such as the Natural Products Association or NSF International. In most cases, contract manufacturers purchase the raw materials based on the Company’s specifications; however, from time to time, the Company will license particular raw material ingredients and supply its own source to the manufacturer. Once produced, in addition to in-house testing performed by the contract manufacturer, the Company may also perform independent analysis and testing. The contract manufacturer either ships the finished product to one of our fulfillment centers or directly to our customers. The Company has implemented vendor qualification programs for all of its suppliers and manufacturers, including analytical testing of purchased products. As part of the vendor program, the Company also periodically inspects vendors’ facilities to monitor quality control and assurance procedures.

 

Product Reformulations and New Product Identification

 

From time to time, we reformulate existing products to address market developments and trends, and to respond to customer requests. We also continually expand our product line through the development of new products. New product ideas are derived from a number of sources including trade publications, scientific and health journals, consultants, distributors, and other third parties. Prior to reformulating existing products or introducing new products, we investigate product formulations as they relate to regulatory compliance and other issues. We introduced a total of 18 new products during the year ended December 31, 2023, which included 6 completely new products and 12 product reformulations and flavor extensions, and we introduced a total of 10 new products during the year ended December 31, 2022, which included 3 completely new products and 7 product reformulations and flavor extensions.

 

Management continually assesses and analyzes developing market trends to detect and proactively address what they believe are areas of unmet or growing demand that represent an opportunity for the Company and, where deemed appropriate, attempts to introduce new products and/or packaging solutions in direct response to meet that demand.

 

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Sales, Marketing and Distribution

 

NDS Products

 

NDS Products are sold through more than 700 GNC franchise locations located throughout the United States. The Company also distributes NDS Products to additional franchise locations in other countries. In 2014, the Company transitioned distribution of NDS Products to GNC’s centralized distribution platform. For the years ended December 31, 2023 and 2022, the majority of NDS Product sales were through GNC’s centralized distribution platform.

 

Our sales and marketing efforts are designed to expand sales of NDS Products to additional GNC franchise locations both domestically and internationally. In addition, we relaunched our Core Active brand as an online-exclusive brand. The GNC domestic franchise market remains a strong business and a critical component of our operations. Management is committed to continue to work collaboratively with GNC and its franchisees to build on our established track record of innovation and operational performance.

 

iSatori Products

 

iSatori Products are distributed directly to consumers through the Company's own websites and through other e-commerce platforms such as Amazon, as well as through the specialty, drug and mass-market distribution channels. iSatori products are currently sold in over 17,000 retail locations.

 

In some cases, iSatori utilizes independent brokers, who work in conjunction with iSatori’s sales employees and management to oversee the drug and mass-market channels. iSatori sells its products to mass-market merchandisers either directly or through distributors of nutritional supplement products. In addition to the Company’s online distribution channels for direct-to-consumer sales, major iSatori customers include CVS, Rite Aid, Vitamin Shoppe and Walgreens.

 

iSatori’s core strategy is to build and strengthen brands among consumers seeking nutritional supplement products with a reputation for quality and innovation. iSatori utilizes social media campaigns, coupons, and online advertising, plus cooperative and other incentive programs, to build consumer awareness and generate trial and repeat purchases. Our marketing team regularly reviews the media mix for its effectiveness in creating consumer demand and the highest return on investment dollars.

 

MRC Products and MusclePharm

 

MRC Products are distributed primarily on Amazon. MusclePharm’s products are distributed via wholesale customers as well as directly to end consumers through the Company’s own websites and through other e-commerce platforms, including Amazon.

 

Product Returns

 

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. Product sold to GNC may be returned from corporate store shelves or the distribution center in the event the product is damaged, short dated, expired or recalled. GNC maintains a customer satisfaction program that 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, MRC Products and MusclePharm whereby customers can return product for credit or refund. Product returns can and do occur from time to time and can be material.

 

Competition

 

The nutrition industry is highly competitive, and the Company has many competitors that sell products similar to the Company’s products. Many of the Company’s competitors have significantly greater financial and human resources than our own. The Company seeks to differentiate its products and marketing from its competitors based on product quality, benefits, and functional ingredients. Patent and trademark applications that protect brands, product names, and new technologies are pursued whenever possible. While we cannot assure that such measures will block competitive products, we believe our continued emphasis on innovation and new product development targeted at the needs of the consumer will enable the Company to effectively compete in the marketplace.

 

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Regulatory Matters

 

Our business is subject to varying degrees of regulation by a number of government authorities in the U.S., including the Federal Drug Administration (“FDA”), the Federal Trade Commission (“FTC”), the Consumer Product Safety Commission, the U.S. Department of Agriculture, and the Environmental Protection Agency. Various agencies of the states and localities in which we operate and in which our products are sold also regulate our business, such as the California Department of Health Services, Food and Drug Branch. The areas of our business that these and other authorities regulate include, among others:

 

 

product claims and advertising;

   

 

 

product labels;

   

 

 

product ingredients; and

   

 

 

how we manufacture, package, distribute, import, export, sell, and store our products.

 

The FDA, in particular, regulates the formulation, manufacturing, packaging, storage, labeling, promotion, distribution and sale of vitamins and other nutritional supplements in the U.S., while the FTC regulates marketing and advertising claims. In August 2007, a new rule issued by the FDA went into effect requiring companies that manufacture, package, label, distribute or hold nutritional supplements to meet cGMPs to ensure such products are of the quality specified and are properly packaged and labeled. We are committed to meeting or exceeding the standards set by the FDA and believe we are currently operating within the FDA mandated cGMPs.

 

The FDA also regulates the labeling and marketing of dietary supplements and nutritional products, including the following:

 

 

the identification of dietary supplements or nutritional products and their nutrition and ingredient labeling;

   

 

 

requirements related to the wording used for claims about nutrients, health claims, and statements of nutritional support;

   

 

 

labeling requirements for dietary supplements or nutritional products for which “high potency” and “antioxidant” claims are made;

   

 

 

notification procedures for statements on dietary supplements or nutritional products; and

   

 

 

premarket notification procedures for new dietary ingredients in nutritional supplements.

 

The Dietary Supplement Health and Education Act of 1994 (“DSHEA”) revised the provisions of the Federal Food, Drug and Cosmetic Act (“FDCA”) concerning the composition and labeling of dietary supplements, and defined dietary supplements to include vitamins, minerals, herbs, amino acids and other dietary substances used to supplement diets. DSHEA generally provides a regulatory framework to help ensure safe, quality dietary supplements and the dissemination of accurate information about such products. The FDA is generally prohibited from regulating active ingredients in dietary supplements as drugs unless product claims, such as claims that a product may heal, mitigate, cure or prevent an illness, disease or malady, trigger drug status.

 

DSHEA also permits statements of nutritional support to be included in labeling for nutritional supplements without FDA premarket approval. These statements must be submitted to the FDA within 30 days of marketing and must bear a label disclosure that includes the following: “This statement has not been evaluated by the FDA. This product is not intended to diagnose, treat, cure, or prevent any disease.” These statements may describe a benefit related to a nutrient deficiency disease, the role of a nutrient or nutritional ingredient intended to affect the structure or function in humans, the documented mechanism by which a nutrient or dietary ingredient acts to maintain such structure or function, or the general well-being from consumption of a nutrient or dietary ingredient, but may not expressly or implicitly represent that a nutritional supplement will diagnose, cure, mitigate, treat or prevent a disease. An entity that uses a statement of nutritional support in labeling must possess scientific evidence substantiating that the statement is truthful and not misleading. If the FDA determines that a particular statement of nutritional support is an unacceptable drug claim or an unauthorized version of a disease claim for a food product, or if the FDA determines that a particular claim is not adequately supported by existing scientific data or is false or misleading, we will be prevented from using the claim. 

 

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In addition, DSHEA provides that so-called “third-party literature”, for example a reprint of a peer-reviewed scientific publication linking a particular nutritional ingredient with health benefits, may be used in connection with the sale of a nutritional supplement to consumers without the literature being subject to regulation as labeling. Such literature must not be false or misleading; the literature may not promote a particular manufacturer or brand of nutritional supplement; the literature must present a balanced view of the available scientific information on the nutritional supplement; if displayed in an establishment, the literature must be physically separate from the nutritional supplement; and the literature may not have appended to it any information by sticker or any other method. If the literature fails to satisfy each of these requirements, we may be prevented from disseminating it with our products, and any dissemination could subject our products to regulatory action as an illegal drug. Moreover, any written or verbal representation by us that would associate a nutrient in a product that we sell with an effect on a disease will be deemed evidence of intent to sell the product as an unapproved new drug, a violation of the FDCA. 

 

In December 2006, the Dietary Supplement and Nonprescription Drug Consumer Protection Act (“DSNDCPA”) was passed, which further revised the provisions of the FDCA. Under the act, manufacturers, packers or distributors whose name appears on the product label of a dietary supplement or nonprescription drug are required to include contact information on the product label for consumers to use in reporting adverse events associated with the product’s use and are required to notify the FDA of any serious adverse event report within 15 business days of receiving such report. Events reported to the FDA would not be considered an admission from a company that its product caused or contributed to the reported event. We are committed to meeting or exceeding the requirements of the DSNDCPA.

 

We are also subject to a variety of other regulations in the U.S., including those relating to bioterrorism, taxes, labor and employment, import and export, the environment, and intellectual property. All of these regulations require significant financial and operational resources to ensure compliance, and we cannot assure that we will always be in compliance despite our best efforts to do so.

 

Our operations outside the U.S. are similarly regulated by various agencies and entities in the countries in which we operate and in which our products are sold. The regulations of these countries may conflict with those in the U.S. and may vary from country to country. The sale of our products in certain European countries is subject to the rules and regulations of the European Union, which may be interpreted differently among the countries within the European Union. In other markets outside the U.S., we may be required to obtain approvals, licenses or certifications from a country’s ministry of health or comparable agency before we begin operations or the marketing of products in that country. Approvals or licenses may be conditioned on the reformulation of our products for a particular market or may be unavailable for certain products or product ingredients. These regulations may limit our ability to enter certain markets outside the U.S. Similar to the costs of regulatory compliance in the U.S., foreign regulations require significant financial and operational resources to ensure compliance, and we cannot assure that we will always be in compliance despite our best efforts to do so. Our failure to maintain regulatory compliance within and outside the U.S. could impact our ability to sell our products, and thus, materially impact our financial position and results of operations.

 

Patents, Trademarks and Proprietary Rights

 

The Company regards intellectual property, including its trademarks, service marks, website URLs (domains) and other proprietary rights, as valuable assets and part of its brand equity. The Company believes that protecting such intellectual property is crucial to its business strategy. The Company pursues registration of the registrable trademarks, service marks and patents, associated with its key products in the United States, Canada, Europe and other places it distributes its products.

 

The Company formulates its products using proprietary ingredient formulations, flavorings and delivery systems. To further protect its product formulations and flavors, the Company may enter into agreements with manufacturers that provide exclusivity to certain products formulations and delivery technologies. When appropriate, the Company will seek to protect its research and development efforts by filing patent applications for proprietary product technologies or ingredient combinations. We have abandoned or not pursued efforts to register certain other patents and marks identifying other items in our product line for various reasons, including the inability of some names to qualify for registration or patent applications to qualify for patent protection, and due to our abandonment of certain such products. All trademark registrations are protected for a period of ten years and then are renewable thereafter if still in use.

 

Employees

 

We had 37 and 27 full-time employees as of December 31, 2023 and 2022, respectively. In addition, the Company utilizes consultants and temporary or part-time employees for certain services on an as-needed basis. We consider our employee relations to be good.

 

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Cost of Compliance with Environmental Laws

 

We have not incurred any costs associated with compliance with environmental regulations, nor do we anticipate any future costs associated with environmental compliance; however, no assurances can be given that we will not incur such costs in the future.

 

Available Information

 

As a public company, we are required to file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A and other information (including any amendments) with the Securities and Exchange Commission (the “SEC”). The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. You can find our SEC filings at the SEC’s website at www.sec.gov.

 

Our Internet address is www.fitlifebrands.com. Information contained on our website is not part of this Annual Report. Our SEC filings (including any amendments) will be made available free of charge on www.fitlifebrands.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

 

ITEM 1A - Risk Factors

 

An investment in our securities involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Annual Report, before investing in our securities. If any of the events anticipated by the risks described below occur, our results of operations and financial condition could be adversely affected, which could result in a decline in the market price of our securities, causing you to lose all or part of your investment.

 

Risk Factors Relating to our Business and Industry

 

The Company was profitable during the years ended December 31, 2023 and 2022. However, we may not be able to achieve sustained profitability. Our failure to sustain profitability or effectively manage growth could result in net losses, and therefore negatively affect our financial condition.

 

In the event of any decrease in sales, if we are not able to maintain growth, or if we are unable to effectively manage our growth, we may not be able to sustain profitability, and may incur net losses in the future, and those net losses could be material.  In the event we incur net losses, our financial condition could be negatively affected, and such effect could be material.

 

We are currently dependent on sales to GNC for a substantial portion of our total sales.

 

Sales to GNC’s centralized distribution platform, including indirect distribution of product to domestic and international franchisees, accounted for approximately 33% and 67% of our total sales for the years ended December 31, 2023 and 2022, respectively. GNC’s franchisees are not required to carry our products. In the event GNC ceases purchasing products from us, or otherwise reduces its purchases, our total revenue will be negatively impacted, and such impact could be material. Moreover, the transition to GNC’s centralized distribution system had the effect of concentrating a significant portion of our accounts receivable with a single payor. Prior to the transition, we collected receivables from numerous franchisees. We anticipate that GNC will continue to represent a substantial portion of all accounts receivable for the foreseeable future. In the event that our sales to GNC decrease, our results from operations will be negatively affected, and such effect may be material. 

 

Our ability to materially increase sales is largely dependent on the ability to increase sales of product to our wholesale partners as well as directly to the end consumer. We may invest significant amounts in these expansions with little success, and if we are unable to maintain good relationships with our existing customers and e-commerce platforms, our business could suffer.

 

We currently are focusing our marketing efforts on increasing the sale of products to GNC, both domestically and internationally, as well as increasing the number of retailers selling MusclePharm products. In addition, we are focused on increasing our direct-to-consumer revenue through e-commerce platforms such as Amazon. We may not be able to successfully increase sales through these channels.  Moreover, unilateral decisions could be taken by our distributors, customers, or third-party e-commerce platforms such as Amazon, to discontinue all or any of our products that they are carrying or selling at any time, which would cause our business to suffer. The inability to sell our products through e-commerce platforms, including Amazon, would materially impact our sales and operating results.

 

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In addition, although we continued efforts to expand international distribution for our products in the years ended December 31, 2023 and 2022, we cannot assure that any further efforts to sell our products outside the United States will result in material increased revenue. We may need to overcome significant regulatory and legal barriers in order to continue to sell our products internationally, and we cannot give assurances as to whether we will be able to comply with such regulatory or legal requirements.

 

We are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints, which can make compliance costly and subject us to enforcement actions by governmental agencies.

 

The formulation, manufacturing, packaging, labeling, holding, storage, distribution, advertising and sale of our products are affected by extensive laws, governmental regulations and policies, administrative determinations, court decisions and similar constraints at the federal, state and local levels, both within the United States and in any country where we conduct business. There can be no assurance that we or our wholesale partners will be in compliance with all of these regulations. A failure by us or our wholesale partners to comply with these laws and regulations could lead to governmental investigations, civil and criminal prosecutions, administrative hearings and court proceedings, civil and criminal penalties, injunctions against product sales or advertising, civil and criminal liability for the Company and/or its principals, bad publicity, and tort claims arising out of governmental or judicial findings of fact or conclusions of law adverse to the Company or its principals. In addition, the adoption of new regulations and policies or changes in the interpretations of existing regulations and policies may result in significant new compliance costs or discontinuation of product sales, and may adversely affect the marketing of our products, resulting in decreases in revenue.

 

We are currently dependent on a limited number of independent suppliers and manufacturers of our products, which may affect our ability to deliver our products in a timely manner. If we are not able to ensure timely product deliveries, potential distributors and customers may not order our products, and our revenue may decrease.

 

We rely on a limited number of third parties to supply and manufacture our products. Our products are manufactured on a purchase order basis only, and manufacturers can terminate their relationships with us at will. These third-party manufacturers may be unable to satisfy our supply requirements, manufacture our products on a timely basis, fill and ship our orders promptly, provide services at competitive costs, or offer reliable products and services. The failure to meet any of these critical needs would delay or reduce product shipment and adversely affect our revenue, as well as jeopardize our relationships with our distributors and customers. In the event any of our third-party manufacturers were to become unable or unwilling to continue to provide us with products in required volumes and at suitable quality levels, we would be required to identify and obtain acceptable replacement manufacturing sources. There is no assurance that we would be able to obtain alternative manufacturing sources on a timely basis. Additionally, our third-party manufacturers source the majority of the raw materials for our products and, if we were to use alternative manufacturers, we may not be able to duplicate the exact taste and consistency profile of the product from the original manufacturer. An extended interruption in the supply of our products would likely result in decreased product sales and a corresponding decline in revenue. We believe that we can meet our current supply and manufacturing requirements with our current suppliers and manufacturers or with available substitute suppliers and manufacturers.

 

COVID-19 impacted global supply chains and such impacts have impacted us and our third-party suppliers. Future outbreaks of COVID-19 or other illnesses could have a material adverse impact on us in the future.

 

The coronavirus (COVID-19) pandemic had a material impact on global supply chains, including for certain raw materials imported from China, among other countries, and this impacted our third-party suppliers and our wholesale partners.  As a result, we had to increase purchases of certain raw materials and build additional finished goods inventory, especially in our best-selling products, to avoid, in addition to other consequences, stockouts.  Although COVID-19 has largely abated, as well as the concomitant supply change challenges resulting from the pandemic, in the event of future outbreaks of COVID-19 or other illnesses, our operations and those of our third-party suppliers or our wholesale partners could be adversely affected.

 

Uncertain or unfavorable economic conditions, including during periods of high inflation, recessions or other economic disruption, or as a result of the COVID-19 pandemic, could limit consumer and customer demand for our products, increase our costs or otherwise adversely affect us. 

 

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The willingness of consumers to purchase our products depends in part on general or local economic conditions and consumers’ discretionary spending habits. For instance, in 2022, the U.S. experienced significantly heightened inflationary pressures which continued into 2023. In periods of adverse or uncertain economic conditions, including during periods of high inflation or recession concerns, or as a result of the COVID-19 pandemic, consumers may purchase less of our products, purchase more value or private label products or may forgo certain purchases altogether. In addition, our customers may seek to reduce their inventories in response to those economic conditions. In those circumstances, we could experience a reduction in sales. Further, during economic downturns, it may be more difficult to convince consumers to switch to, or continue to use, our brands or convince new users to choose our brands without expensive sampling programs and price promotions. Also, as a result of economic conditions, we may be unable to raise our prices sufficiently to protect profit margins. We experienced inflationary headwinds across our business during 2022 and 2023, and such inflationary pressures may not abate in 2024. This trend could have a materially adverse impact in the future if inflation rates were to significantly exceed our ability to achieve price increases or cost savings. Further, uncertain or unfavorable economic conditions have and could continue to negatively impact the financial stability of our customers or suppliers, which could lead to increased uncollectible receivables or non-performance. Current global geopolitical tensions, including related to Ukraine and Israel, may exacerbate any economic downturn and inflation. Any of these events could have an adverse effect on our business, financial condition, results of operations and cash flows.

 

We are dependent on our third-party manufacturers to supply our products in the compositions we require, and we do not independently analyze each production lot of our products. Any errors in our product manufacturing could result in product recalls, significant legal exposure, and reduced revenue.

 

Although we require that our manufacturers verify the accuracy of the contents of our products, we do not have the expertise or personnel to monitor the production of products by these third parties. We rely primarily, with limited independent verification, on certificates of analysis regarding product content provided by our third-party suppliers and limited safety testing by them. We cannot be assured that these outside manufacturers will continue to reliably supply products to us in the compositions we require. Errors in the manufacture of our products could result in product recalls, significant legal exposure, adverse publicity, and decreased revenue.

 

We face significant competition from existing suppliers of products similar to ours. If we are not able to compete with these companies effectively, we may not be able to maintain profitability.

 

We face intense competition from numerous resellers, manufacturers and wholesalers of nutritional supplements similar to ours, including retail, online and mail-order providers. Many of our competitors have longer operating histories, more-established brands in the marketplace, greater financial resources and better access to capital than we have. We anticipate that these competitors may use their resources to engage in various business activities that could result in reduced sales of our products. Companies with greater capital and research capabilities could re-formulate existing products or formulate new products that could gain wide marketplace acceptance, which could have a negative effect on our future sales. In addition, aggressive advertising and promotion by our competitors may require us to compete by lowering prices or by increasing our marketing expenditures, and the economic viability of our operations likely would be diminished.

 

Adverse publicity associated with our products, ingredients, or those of similar companies, could adversely affect our sales and revenue.

 

Our customers’ perception of the safety and quality of our products or similar products distributed by others can be significantly influenced by national media attention, publicized scientific research or findings, product liability claims, and other publicity concerning our products or similar products distributed by others. Adverse publicity, whether or not accurate, that associates consumption of our products or any similar products with illness or other adverse effects will likely diminish the public’s perception of our products. Claims that any products are ineffective, inappropriately labeled or have inaccurate instructions as to their use, could have a material adverse effect on the market demand for our products, including reducing our revenue.

 

The efficacy of nutritional supplement products is supported by limited conclusive clinical studies, which could result in reduced market acceptance of these products and lower revenue or lower revenue growth rates.

 

Our nutritional supplement products are made from various ingredients, including vitamins, minerals, amino acids, herbs, botanicals, fruits, berries, and other substances for which there is a long history of human consumption. However, there is little long-term experience with human consumption of certain product ingredients or combinations of ingredients in concentrated form. Although we believe that all of our products fall within the generally known safe limits for daily doses of each ingredient contained within them, nutrition science is imperfect. Moreover, some people have peculiar sensitivities or reactions to nutrients commonly found in certain foods and may have similar sensitivities or reactions to nutrients contained in our products. Furthermore, nutrition science is subject to change based on new research. New scientific evidence may disprove the efficacy of our products or prove our products to have effects not previously known. We could be adversely affected by studies that may assert that our products are ineffective or harmful to consumers, or if adverse effects are associated with a competitor’s similar products.

 

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Our products may not meet health and safety standards or could become contaminated.

 

We do not have control over the third parties involved in the manufacturing of our products and their compliance with government health and safety standards. Even if our products meet these standards, they could otherwise become contaminated. A failure to meet these standards or contamination could occur in our operations or those of our distributors or suppliers. This could result in expensive production interruptions, recalls and liability claims. Moreover, negative publicity could be generated from false, unfounded or nominal liability claims or limited recalls. Any of these failures or occurrences could negatively affect our business and financial performance.

 

The sale of our products involves product liability and related risks that could expose us to significant insurance and loss expense.

 

We face an inherent risk of exposure to product liability claims if the use of our products results in, or is believed to have resulted in, illness or injury. Most of our products contain combinations of ingredients, and there is little long-term experience with the effect of these combinations. In addition, interactions of these products with other products, prescription medicines and over-the-counter drugs have not been fully explored or understood and may have unintended consequences. Although our third-party manufacturers perform tests in connection with the formulations of our products, these tests are not designed to evaluate the inherent safety of our products.

 

Although we maintain product liability insurance, it may not be sufficient to cover all product liability claims, and any claims that may arise could have a material adverse effect on our business. The successful assertion or settlement of an uninsured claim, a significant number of insured claims or a claim exceeding the limits of our insurance coverage would harm us by adding further costs to our business and by diverting the attention of our senior management from the operation of our business. Even if we successfully defend a liability claim, the uninsured litigation costs and adverse publicity may be harmful to our business.

 

Any product liability claim may increase our costs and adversely affect our revenue and operating income. Moreover, liability claims arising from a serious adverse event may increase our costs through higher insurance premiums and deductibles and may make it more difficult to secure adequate insurance coverage in the future. In addition, our product liability insurance may fail to cover future product liability claims, which, if adversely determined, could subject us to substantial monetary damages.

 

If the products we sell do not have the healthful effects intended, our business may suffer.

 

In general, our products sold consist of nutritional supplements that are classified in the United States as “dietary supplements”, which do not currently require approval from the FDA or other regulatory agencies prior to sale. Although many of the ingredients in such products are vitamins, minerals, herbs and other substances for which there is a long history of human consumption, our products often contain innovative ingredients or combinations of ingredients. Although we believe such products and the combinations of ingredients in them are safe when taken as directed by us, there is little long-term experience with human or other animal consumption of certain of these ingredients or combinations thereof in concentrated form. The products could have certain side effects if not taken as directed or if taken by a consumer that has certain medical conditions. Furthermore, there can be no assurance that any of the products, even when used as directed, will have the effects intended or will not have harmful side effects.  

 

A slower growth rate in the nutritional supplement industry could lead to reduced revenue or make it more difficult for us to sustain consistent revenue growth.

 

The nutritional supplement industry has been growing at a strong pace over the past ten years. However, any reported medical concerns with respect to ingredients commonly used in nutritional supplements could negatively impact the demand for our products. Additionally, low-carbohydrate products, liquid meal replacements and similar competing products addressing changing consumer tastes and preferences could affect the market for certain categories of supplements. All these factors could have a negative impact on our sales growth.

 

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Compliance with changing corporate governance regulations and public disclosures may result in additional risks and exposures.

 

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new regulations from the SEC, have created uncertainty for public companies such as ours. These laws, regulations, and standards are subject to varying interpretations in many cases and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations, and standards have resulted in, and are likely to continue to result in, increased expense and significant management time and attention.

 

Loss of key personnel could impair our ability to operate.

 

Our success depends on hiring, retaining and integrating senior management and skilled employees. We are currently dependent on certain current key employees who are vital to our ability to grow our business and maintain profitability. As with all employees, our officers can terminate their relationship with us at will. Our inability to retain these individuals may result in a reduced ability to operate our business.

 

Risk Factors Relating to our Common Stock

 

If we fail to comply with the continued listing requirements of the Nasdaq Capital Market, our Common Stock may be delisted and the price of our Common Stock and our ability to access the capital markets could be negatively impacted.

 

On September 18, 2023, our Common Stock began trading on the Nasdaq Stock Market, LLC (“Nasdaq”). Although we are currently in compliance with Nasdaq’s continued listing standards, no assurance can be given that we will continue to meet applicable Nasdaq continued listing standards. Failure to meet applicable Nasdaq continued listing standards could result in a delisting of our Common Stock, which could materially reduce the liquidity of our Common Stock and result in a corresponding material reduction in the price of our Common Stock.

 

The price of our securities could be subject to wide fluctuations and your investment could decline in value.

 

The market price of the securities of a company such as ours with little name recognition in the financial community and without significant revenue can be subject to wide price swings. For example, the closing price of our Common Stock has ranged from a high of $22.45 to a low of $15.28 during the year ending December 31, 2023. The market price of our securities may be subject to wide changes in response to quarterly variations in operating results, announcements of new products by us or our competitors, reports by securities analysts, volume trading, or other events or factors. In addition, the financial markets have experienced significant price and volume fluctuations for a number of reasons, including the failure of certain companies to meet market expectations. These broad market price swings, or any industry-specific market fluctuations, may adversely affect the market price of our securities.

 

Companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation. If we were to become the subject of securities class action litigation, it could result in substantial costs and a significant diversion of our management’s attention and resources.

 

-11-

 

We may issue Preferred Stock with rights senior to the Common Stock.

 

Our Articles of Incorporation authorize the issuance of up to 10 million shares of preferred stock, par value $0.01 per share ("Preferred Stock"), in the aggregate. Currently, we have the following classes of Preferred Stock authorized, which could be issued without shareholder approval: (i) 1,000 shares of Series A Preferred Stock, par value $0.01 per share, are authorized (the “Series A Preferred”); and (ii) 2,000 shares of Series B Junior Participating Preferred Stock, par value $0.01. However, the rights and preferences of any class or series of Preferred Stock, were we to designate or issue additional shares of Preferred Stock, would be established by our Board of Directors in its sole discretion and may have dividend, voting, liquidation and other rights and preferences that are senior to the rights of our Common Stock.

 

You should not rely on an investment in our Common Stock for the payment of cash dividends.

 

We have never paid cash dividends on our Common Stock and do not anticipate paying any cash dividends in the foreseeable future. You should not make an investment in our Common Stock if you require dividend income. Any return on investment in our Common Stock would only come from an increase in the market price of our stock, which is uncertain and unpredictable.

 

Our Chair of the Board of Directors, Chief Executive Officer and significant shareholder may have certain personal interests that may affect the Company.

 

Due to the securities held by Sudbury Capital Fund, LP ("Sudbury") and Dayton Judd, the Company’s Chair of the Board and Chief Executive Officer, Mr. Judd may be deemed to be the beneficial owner of a majority of the Company’s outstanding voting securities. Consequently, Mr. Judd individually, and together with Sudbury as stockholders acting together, can significantly influence all matters requiring approval by our stockholders, including the election of directors and significant corporate transactions, such as mergers or other business transactions requiring shareholder approval. This concentration of ownership may have effects such as delaying or preventing a change in control of the Company that may be favored by other shareholders or preventing transactions in which shareholders might otherwise recover a premium for their shares over current market prices. In addition, as a result of Mr. Judd’s position as Chair of the Board and Chief Executive Officer, he and/or Sudbury may have the ability to exert influence over both the actions of the Board of Directors, as well as the execution of management’s plans.

 

Risk Factors Related to Recent Acquisitions

 

We may experience difficulties in integrating the operations of MRC and/or MusclePharm into our business and in realizing the expected benefits of the acquisitions.

 

The success of the acquisition of MRC and/or MusclePharm (the “Acquisitions”) will depend in part on our ability to realize the anticipated business opportunities from integrating the operations of MRC and MusclePharm with our business in an efficient and effective manner. The integration process could take longer than anticipated and could result in the loss of key employees, the disruption of each company’s ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, employees or other third parties, or our ability to achieve the anticipated benefits of the Acquisitions, and could harm our financial performance. If we are unable to successfully or timely integrate the operations of MRC and/or MusclePharm with our business, we may incur unanticipated liabilities and be unable to realize the revenue growth, synergies and other anticipated benefits resulting from the Acquisitions, and our business, results of operations and financial condition could be materially and adversely affected.

 

We have incurred, and will continue to incur, significant costs in connection with the Acquisitions. The substantial majority of these costs are non-recurring expenses related to the Acquisitions. We may incur additional costs in the integration of MRC’s and/or MusclePharm’s business and may not achieve cost synergies and other benefits sufficient to offset the incremental costs of the Acquisitions.

 

-12-

 

The Acquisitions will present challenges associated with integrating operations, personnel, and other aspects of the companies.

 

The Company’s ability to integrate MRC’s and MusclePharm’s business with the Company’s business in an efficient and effective manner will determine the success of the Acquisitions. The Company’s attempt to integrate MRC and MusclePharm may result in significant challenges, and the Company may be unable to accomplish the integrations smoothly or successfully. In particular, the necessity of coordinating geographically dispersed organizations and addressing possible differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration may require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the businesses of the combined company. The process of integrating operations and making such adjustments after the Acquisitions could cause an interruption of, or loss of momentum in, the activities of one or more of the combined companies’ businesses and the loss of key personnel. Employee uncertainty, lack of focus, or turnover during the integration process may also disrupt the businesses of the combined companies. Any inability of management to integrate the operations of the Company, MRC and/or MusclePharm successfully could have a material adverse effect on the business and financial condition of the combined company.

 

SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 1C.  CYBERSECURITY

 

Risk Management and Strategy

 

We recognize the critical importance of developing, implementing, and maintaining cybersecurity measures to maintain the security, confidentiality, integrity, and availability of our business systems and confidential information, including personal information and intellectual property. To this end, our processes are designed to assess, identify, and manage risks from potential unauthorized occurrences on or through our information technology systems (including such risks associated with the use of any third-party service providers) that may result in adverse effects on the confidentiality, integrity, and availability of these systems and the data residing therein. These processes are managed and monitored by third-party experts under supervision of management, and, where necessary or desired, include mechanisms, controls, technologies, systems, and other processes designed to prevent or mitigate data loss, theft, misuse, or other security incidents or vulnerabilities affecting the data. We may also consult with outside advisors and experts to assist with assessing, identifying, and managing cybersecurity risks, including to anticipate future threats and trends, and their impact on our risk environment.

 

We consider cybersecurity, along with other significant risks that we face, within our overall enterprise risk management framework.  Our processes and resources are also designed to help enable us to actively identify, protect, detect, respond to, and recover from risks and threats. Nevertheless, we face certain ongoing cybersecurity risk threats that, if realized, are reasonably likely to materially affect us. As of the date of this report, we have not identified cybersecurity threats that have materially affected, or are reasonably likely to materially affect, our business, results of operations, or financial condition.

 

Governance

 

Third-party experts assist our senior management team in assessing and managing material risks from cybersecurity threats.  All employees and consultants are directed to report to our senior management any irregular or suspicious activity that could indicate a cybersecurity threat or incident. The Audit Committee of our Board of Directors evaluates our cybersecurity assessment and management policies, including quarterly discussions with our senior officers and independent registered accounting firm.

 

 

ITEM 2.    PROPERTIES

 

The Company, including its subsidiaries, leases its headquarters in Omaha, Nebraska, as well as office space in Oakville, Ontario, Canada.   Management believes that the Company's site is adequate to support the business and suitable for present purposes, and the property and equipment have been well maintained.

 

ITEM 3.    LEGAL PROCEEDINGS

 

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of its subsidiaries, threatened against or affecting the Company, our Common Stock, any of our subsidiaries or of the Company’s or our subsidiaries’ directors or officers in their capacities as such, in which an adverse decision could have a material adverse effect.

 

ITEM 4.    MINE SAFETY DISCLOSURES

 

None.

 

-13-

 

 

PART II

 

ITEM 5.    MARKET FOR REGISTRANTS COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUERS PURCHASES OF EQUITY SECURITIES

 

Our Common Stock was approved for listing and has traded since September 18, 2023 on the Nasdaq Capital Market under the symbol “FTLF”. Prior to September 18, 2023, our Common Stock traded in the over-the-counter market.

 

As of December 31, 2023, there were 4,598,241 shares of Common Stock outstanding and 22 shareholders of record of the Company’s Common Stock, in addition to an undetermined number of holders whose shares are held in “street name.”

 

The following table sets forth the high and low closing prices for our Common Stock for the periods indicated:

 

   

High

   

Low

 

Fiscal Year 2023

               

First Quarter (January - March 2023)

  $ 19.19     $ 15.50  

Second Quarter (April - June 2023)

  $ 17.25     $ 15.50  

Third Quarter (July - September 2023)

  $ 19.32     $ 15.28  

Fourth Quarter (October - December 2023)

  $ 22.45     $ 18.62  
                 
                 

Fiscal Year 2022

               

First Quarter (January - March 2022)

  $ 16.70     $ 11.80  

Second Quarter (April - June 2022)

  $ 11.10     $ 9.50  

Third Quarter (July - September 2022)

  $ 16.80     $ 10.25  

Fourth Quarter (October - December 2022)

  $ 17.00     $ 14.05  

 

On March 28, 2024, the closing price of our Common Stock was $23.81 per share.

 

Recent Sales of Unregistered Securities

 

No unregistered securities were issued during the fiscal year.

 

Share Repurchase Program

 

On August 16, 2019, the Company approved a share repurchase program, pursuant to which the Board authorized management to repurchase up to $500,000 of the Company's Common Stock over the subsequent 24 months (the "Share Repurchase Program"), as amended September 23, 2019 to increase the repurchase amount to $1,000,000, and include shares of the Company's Common Stock, its Series A Convertible Preferred Stock, par value $0.01 per share ("Series A Preferred"), and warrants to purchase shares of the Company's Common Stock ("Warrants") in the Share Repurchase Program, to be repurchased over the next 24 months, at a purchase price, in the case of Common Stock, equal to the fair market value of the Company's Common Stock on the date of purchase, and in the case of Series A Preferred and Warrants, at a purchase price determined by management, with the exact date and amount of such purchases to be determined by management; further amended on November 6, 2019 to increase the repurchase amount to $2,500,000 over the subsequent 24 months, and further amended on February 1, 2021 to increase the repurchase amount to up to $5,000,000 over the subsequent 24 months.

 

On March 17, 2023, the Board approved an extension of the Share Repurchase Program. Under the extended and amended Share Repurchase Program, the Board authorized management to repurchase up to $5,000,000 of the Company's Common Stock over the subsequent 24 months, at a purchase price equal to the fair market value of the Company's Common Stock on the date of purchase, with the exact date and amount of such purchases to be determined by management. All other terms of the Share Repurchase Program remain unchanged.

 

During the year ended December 31, 2023, the Company did not repurchase any shares of the Company’s Common Stock under the Share Repurchase Program. As of December 31, 2023, the Company may purchase up to $5,000,000 of additional shares of Common Stock under the Share Repurchase Program.

 

-14-

 

Common Stock repurchase activity under our publicly announced Share Repurchase Program during each quarter of 2023 and 2022 was as follows:

 

Trade date

 

Total

number of

shares

purchased

   

Average

price paid

per share

   

Total

number of

shares

purchased

as part of

publicly

announced

programs

   

Dollar

value of

shares that

may yet be

purchased

 
                                 

First quarter ended March 31, 2022

    -       -       -     $ 3,169,917  

Second quarter ended June 30, 2022

    -       -       -     $ 3,169,917  

Third quarter ended September 30, 2022

    -       -       -     $ 3,169,917  

Fourth quarter ended December 31, 2022

    48,596     $ 15.86       48,596     $ 2,398,979  

Subtotal

    48,596               48,596     $ 2,398,979  
                                 

First quarter ended March 31, 2023

    -       -       -     $ 5,000,000  

Second quarter ended June 30, 2023

    -       -       -     $ 5,000,000  

Third quarter ended September 30, 2023

    -       -       -     $ 5,000,000  

Fourth quarter ended December 31, 2023

    -       -       -     $ 5,000,000  

Subtotal

    -       -       -     $ 5,000,000  

 

Transfer Agent

 

Our transfer agent and registrar for the Common Stock is Colonial Stock Transfer located in Sandy, Utah.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

For a discussion of our equity compensation plans, please see Item 11 of this Annual Report.

 

ITEM 6.    SELECTED FINANCIAL DATA

 

Not a required disclosure for Smaller Reporting Companies.

 

-15-

 

 

ITEM 7.    MANAGEMENTS 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. Unless otherwise stated, all dollar amounts are in thousands, except per share data.

 

Recent Developments

 

Acquisition of Mimis Rock Corp

 

On December 4, 2022, the Company entered into an Arrangement Agreement with Mimi’s Rock Corp. (“MRC”), pursuant to which the Company agreed to acquire MRC. On February 28, 2023, the Company completed the acquisition of MRC for $17,099. Of this amount, $12,500 was funded using proceeds from a term loan provided by First Citizens Bank, with the remainder funded from the Company’s available cash balances.  See Note 8 to the financial statements for additional disclosure regarding the acquisition.

 

Acquisition of MusclePharm Assets

 

On October 10, 2023, the Company acquired substantially all of the assets of MusclePharm Corporation (“MusclePharm”) through an asset purchase transaction under Section 363 of the U.S. Bankruptcy Code. The Company acquired substantially all of the assets and assumed none of the liabilities of MusclePharm other than de minimus cure costs relating to certain assumed contracts.  Total consideration for the acquisition was approximately $18,500.  Of this amount, $10,000 was funded using proceeds from a new term loan provided by First Citizens Bank, with the remainder funded from the Company’s available cash balances. See Note 9 to the financial statements for additional disclosure regarding the acquisition.

 

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 inventory obsolescence, product returns, depreciable lives of property and equipment, allocation of purchase price from business combinations, 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.

 

Foreign Currency Translation

 

The functional currency of the Company is the U.S. dollar.  The functional currency of the Company’s Canadian subsidiaries is the Canadian dollar.  The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using end-of-period exchange rates. Changes in reported amounts of assets and liabilities of foreign subsidiaries that occur as a result of changes in exchange rates between foreign subsidiaries’ functional currencies and the U.S. dollar are included in foreign currency translation adjustment. Foreign currency translation adjustment is included as a component of stockholders’ equity in the accompanying consolidated balance sheets. Revenue and expense transactions use an average rate prevailing during the period of the related transaction. Transaction gains and losses that arise from exchange rate fluctuations denominated in a currency other than the functional currency of each subsidiary are included in the results of operations as incurred.

 

-16-

 

Accounts Receivable and Allowance for Doubtful Accounts

 

All of the Company’s accounts receivable balance is related to trade receivables. Trade accounts receivable 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 into categories by the number of days the balance is past due, and the estimated loss is recorded based upon management’s assessment of collectability. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered.

 

As of December 31, 2023 and 2022, the Company had provided a reserve for doubtful accounts of $17 and $50, respectively.

 

Income Taxes

 

The Company accounts for income taxes under FASB ASC Topic 740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The deferred tax liabilities of the Company relate primarily to intangible assets that are not deductible for tax purposes in the jurisdictions to which they relate.

 

The Company periodically evaluates its tax positions to determine whether it is more likely than not that such positions would be sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations, based on their technical merits. The Company accrues interest and penalties, if incurred, on unrecognized tax benefits as components of the income tax provision in the accompanying consolidated statements of income and comprehensive income. As of December 31, 2023, and 2022, the Company has not established a liability for uncertain tax positions.

 

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 direct-to-consumer sales, 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 certain wholesale customers 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.

 

-17-

 

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. The product returns liability includes 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 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 a regular basis and adjusted for accordingly. Adjustments for returns are based on factual information and historical trends for all Company 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.

 

Total allowance for product returns, sales returns and incentive programs as of December 31, 2023 and 2022 amounted to $571 and $590, respectively.

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value, with costs determined on a first-in, first-out (FIFO) basis. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and/or our ability to sell the product(s) concerned and production requirements. Demand for our products can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes in consumer preferences, general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by customers. Additionally, our management’s estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory. 

 

Total allowance for expiring, excess and slow-moving inventory items as of December 31, 2023 and 2022 amounted to $162 and $107, respectively.

 

Goodwill

 

The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test.  The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform an impairment test. If the qualitative assessment warrants further analysis, the Company compares the fair value of the reporting unit to its carrying value. The fair value of the reporting unit is determined using the market approach.  The Company determines the amount of a potential goodwill impairment by comparing the fair value of the reporting unit with its carrying amount. To the extent the carrying value of a reporting unit exceeds its fair value, a goodwill impairment charge is recognized.

 

As the Company uses the market approach to determine fair value of the reporting unit, the price of its common stock is an important component of the fair value calculation. If the Company’s stock price experiences significant price and volume fluctuations, this will impact the fair value of the reporting unit, which can lead to potential impairment in future periods.

 

There were no impairment charges incurred during the year ended December 31, 2023.

 

Revenue Recognition

 

The Company’s revenue is comprised of sales of nutritional supplements and wellness products to consumers.

 

The Company accounts for revenue in accordance with FASB ASC 606. 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. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products to a customer. 

 

-18-

 

All products sold by the Company are distinct individual products and consist of nutritional supplements and wellness products. 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.

 

The Company’s products are also sold on e-commerce platforms including Amazon.  For these transactions, the Company evaluated principal versus agent considerations to determine appropriateness of recording distribution and platform fees paid to third-party e-commerce companies as an expense or as a reduction of revenue. The Company records distribution and platform fees to cost of goods sold in the consolidated statements of income and comprehensive income. Distribution and platform fees are not recorded as a reduction of revenue because the Company: 1) owns the goods before they are transferred to the customer,   2) can direct Amazon, similar to other third-party logistics providers (“Logistic Providers”), to return the Company’s inventory to any location specified by the Company, 3) has the responsibility to make customers whole following any returns made by customers directly to Logistic Providers and the Company retains the back-end inventory risk, 4) is subject to credit risk (i.e., credit card chargebacks), 5) establishes prices of its products, 6) can determine who fulfills the goods to the customer (Amazon or the Company) and 7) can limit quantities or stop selling the goods at any time. Based on these considerations, the Company is the principal in this arrangement. Advertising fees paid to Amazon are recorded in selling, general and administrative expense in the consolidated statements of income and comprehensive income.

 

The Company disaggregates revenue into geographical regions and distribution channels.  The Company determines that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. 

 

Online revenue, which consists of revenue generated from sales on the Company’s own websites as well as third-party e-commerce platforms such as Amazon, for the year ended December 31, 2023 was approximately 63% of total revenue, compared to roughly 28% of total revenue during the same twelve-month period in 2022.

 

Sales to customers in the U.S. were approximately 93% and 99% for the year ended December 31, 2023 and 2022, respectively, with the balance of sales to customers primarily in Canada.

 

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. Payments 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 product returns are immaterial, 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 Compensation.Expense

 

The Company periodically issues restricted share units (“RSUs”), stock options and warrants to employees and non-employees in non-capital raising transactions for services rendered. Such issuances vest and expire according to the terms established at the issuance date.

 

Stock-based payments to officers, directors, employees and consultants for acquiring goods and services from nonemployees, which include grants of employee stock options, are recognized in the financial statements based on their grant date fair values in accordance with ASC 718, Compensation-Stock Compensation. Stock-based payments to officers, directors, and employees that are time vested are measured at the grant date fair value and compensation cost is recognized on a straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The fair value of stock-based payments is estimated using the Black-Scholes option-pricing model or other applicable valuation model such as the Monte Carlo valuation pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life, and future dividends. The assumptions used could materially affect compensation expense recorded in future periods.

 

-19-

 

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

 

   

Year ended

December

31, 2023

   

Year ended

December

31, 2022

   

 $ Change

   

% Change

 

Revenue

  $ 52,700     $ 28,803     $ 23,897       83 %

Cost of goods sold

    31,268       16,769       14,499       86 %

Gross profit

    21,432       12,034       9,398       78 %

Gross margin percentage

    40.7 %     41.8 %                

Operating expense:

                               

Selling, general and administrative expense

    12,161       6,010       6,151       102 %

Merger and acquisition related expense

    1,627       257       1,370       533 %

Depreciation and amortization

    94       66       28       42 %

Total operating expense

    13,882       6,333       7,549       119 %

Income from operations

    7,550       5,701       1,849       32 %

Other expense (income)

    547       (121 )     668    

n/m

%

Provision for income tax

    1,707       1,393       314       23 %

Net income

  $ 5,296     $ 4,429     $ 867       20 %

 

Fiscal Year Ended December 31, 2023 Compared to Fiscal Year Ended December 31, 2022

 

Revenue. Revenue for the year ended December 31, 2023 increased 83% to $52,700 as compared to $28,803 for the year ended December 31, 2022. The increased revenue for the year ended December 31, 2023 compared to the prior year is primarily due to revenue generated from MRC, which was acquired in the first quarter of 2023. Legacy FitLife revenue for the year ended December 31, 2023 was $28,100, a 3% decrease compared to the previous year, driven by a 9% decline in wholesale revenue, partially offset by a 14% increase in online revenue.

 

The acquisition of MusclePharm had minimal impact on revenue due to (1) the transaction closing during the fourth quarter, (2) the need to procure inventory since only $195 of inventory was acquired in the asset purchase, and (3) the need to negotiate new commercial agreements with MusclePharm’s existing customers.

 

Online revenue during the year ended December 31, 2023 was approximately 63% of total revenue, compared to roughly 28% of total revenue during the same twelve-month period in 2022. 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 and the acquisition of both MRC and MusclePharm, which were consummated in the first and fourth quarters of fiscal 2023, respectively.

 

Sales to customers in the U.S. were approximately 93% and 99% for the year ended December 31, 2023 and 2022, respectively, with the balance of sales primarily to customers in Canada.

 

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, 2023 increased 86% to $31,268 as compared to $16,769 for the year ended December 31, 2022. The increase of $14,499 is primarily due to an increase in revenue attributable to the acquisition of MRC as well as higher distribution costs resulting from increased sales through online channels.

 

-20-

 

Gross Profit. Gross profit for the year ended December 31, 2023 increased to $21,432 as compared to $12,034 for the year ended December 31, 2022. This 78% increase in gross profit is attributable to higher revenue driven primarily by the acquisition of MRC.

 

Gross Margin. Gross margin for the year ended December 31, 2023 decreased to 40.7% from 41.8% for the year ended December 31, 2022. The decrease in gross margin is primarily attributable to the amortization of the fair value step-up to MRC inventory acquired as well as higher product costs due to inflationary pressure. Excluding the $323 impact of the step-up amortization, gross margin would have been 41.3% during the year ended December 31, 2023.

 

Selling, General and Administrative Expense. Selling, general and administrative (“SG&A”) expense for the year ended December 31, 2023 increased by $6,151 to $12,161 as compared to $6,010 for the year ended December 31, 2022. The increase was primarily due to the inclusion of SG&A expense in the Company’s consolidated financial statements attributable to MRC.

 

Merger and Acquisition Related Expense. Merger and acquisition related expense increased to $1,627 for the year ended December 31, 2023 compared to $257 for the same period of 2022, driven primarily by acquisition costs related to MRC.

 

Net Income. We generated a net income of $5,296 for the year ended December 31, 2023, an increase of 20% compared to net income of $4,429 for the year ended December 31, 2022. The increase in net income for the year ended December 31, 2023 compared to the same period in 2022 was primarily attributable to the acquisition of MRC, partially offset by approximately $2.1 million of non-recurring items associated with the transaction.

 

Non-GAAP Measures

 

The financial presentation below contains certain financial measures not in accordance with GAAP, defined by the SEC as “non-GAAP financial measures”, including EBITDA and adjusted 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, EBITDA excludes interest, foreign exchange gains and losses, income taxes, and depreciation and amortization. Adjusted EBITDA excludes—in addition to interest, taxes, depreciation and amortization—stock-based  compensation, merger and acquisition related expense and other non-recurring costs. 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,

 
   

2023

   

2022

 
   

(Unaudited)

   

(Unaudited)

 

Net income

  $ 5,296     $ 4,429  

Interest expense

    1,025       -  

Interest income

    (289 )     (121 )

Foreign exchange (gain) loss

    (189 )     -  

Provision for income taxes

    1,707       1,393  

Depreciation and amortization

    94       66  

EBITDA

    7,644       5,767  

Non-cash and non-recurring adjustments

               

Stock compensation expense

    473       363  

Merger and acquisition related expense

    1,627       257  

Amortization of inventory step-up

    323       -  

Non-recurring loss on foreign currency forward contract

    112       -  

Restatement-related costs

    -       318  

Adjusted EBITDA

  $ 10,179     $ 6,705  

 

-21-

 

Liquidity and Capital Resources

 

As of December 31, 2023, the Company had positive working capital of $4,356, compared to $18,933 at December 31, 2022. Our principal sources of liquidity at December 31, 2023 consisted of $1,139 of cash and $2,046 of accounts receivable. The decrease in working capital is principally attributable to (i) the acquisition of MusclePharm for $18,788, of which $10,000 was funded from proceeds of the Amended Credit Agreement, defined below, and $8,788 from the Company’s available cash, and (ii) the acquisition of MRC for $17,099, of which $12,500 was funded from proceeds of the Credit Agreement, defined below, and $4,599 from the Company’s available cash, partially offset by cash flows from operating activities during fiscal 2023. 

 

The Amended Credit Agreement contains customary events of default (each an “Event of Default”), which upon the occurrence of an Event of Default, as defined in the Amended Credit Agreement, among other things, interest will accrue at the Applicable Rate plus 2% per annum, and the Bank may declare all Obligations, with interest thereon, immediately due and payable. The Amended Credit Agreement further contains customary representations and warranties of the Company; customary indemnification provisions whereby the Company will indemnify Bank for certain losses arising out of inaccuracies in, or breaches of, the representations, warranties and covenants of the Company, and certain other matters; and customary affirmative and negative covenants, including covenants to maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than 1.25 to 1.00 as tested quarterly on a trailing twelve-month basis, starting with the fiscal quarter ending December 31, 2023, a Funded Debt to EBITDA Ratio (as defined in the Credit Agreement) of not more than 2.50 to 1.00 as tested quarterly on a trailing twelve-month basis, starting with the fiscal quarter ending March 31, 2024, and to the extent the Term Loans still have a balance as of June 30, 2025 and a Cash Flow Leverage threshold (as defined in the Credit Agreement) of at least 1.15 is not met, the Company will be required to make a prepayment on the Term Loan equal to 50% of the Excess Cash Flow (as defined in the Credit Agreement). The Company was in compliance with all covenants as of December 31, 2023.

 

As of December 31, 2023 and 2022, no borrowings were outstanding on the Company’s $3,500 Line of Credit.

 

The Company has historically financed its operations primarily through cash flow from operations and equity and debt financings. 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.

 

-22-

 

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 $4,220 during the year ended December 31, 2023, compared to net cash provided by operating activities of $4,130 for the year ended December 31, 2022. The increase in cash provided by operating activities was driven primarily by the acquisition of MRC, which was largely offset by transaction-related costs as well as payment of a number of payables and other expenses that were accrued at MRC at the time of the acquisition.

 

Cash Used in Investing Activities

 

Cash used in investing activities for the fiscal year ended December 31, 2023 was $35,993 and $0 during the years ended December 31, 2023 and 2022, respectively. The Company used $17,099 for the acquisition of MRC and $18,788 for the acquisition of MusclePharm assets during the year ended December 31, 2023.

 

Cash Provided by (Used in) Financing Activities

 

Cash provided by financing activities for the year ended December 31, 2023 was $20,296 as compared to cash used of $750 during the year ended December 31, 2022. The increase in cash provided by financing activities is primarily attributable to the funding of the Term Loans during the first and fourth quarters of fiscal 2023.

 

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.

 

-23-

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our business is conducted principally in the United States.  However, due to the MRC acquisition in 2023, the Company now has more exposure to fluctuations in foreign currencies.  As a result, our financial results may be materially affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets.

 

Foreign Currency

 

In January 2023, the Company entered into a foreign currency hedging transaction to mitigate the risk of adverse changes in the USD/CAD exchange rate with respect to the pending acquisition of MRC. The Company entered into a forward contract to purchase CAD $25.0 million, as the Company anticipated providing additional working capital funding beyond the CAD $23.2 million purchase price for MRC. As the geographical scope of our business broadens, we may engage in additional foreign currency hedging transactions in the future.

 

Interest Rates

 

Our exposure to risk for changes in interest rates relates primarily to borrowings under the Amended Credit Agreement (which includes Term Loans A and B as well as our existing Line of Credit), and our investments in short-term financial instruments. As of December 31, 2023, the Company had $20,125 outstanding on the Term Loans and $0 under its existing Line of Credit.

 

Investments of our existing cash balances in both fixed-rate and floating-rate interest-earning instruments carry some interest rate risk. The fair value of fixed-rate securities may fall due to a rise in interest rates, while floating-rate securities may produce less income than expected if interest rates fall. Partly as a result of this, our future interest income will vary due to changes in interest rates and we may suffer losses in principal if we are forced to sell securities that have fallen in estimated fair value due to changes in interest rates. However, as substantially all of our cash equivalents consist of bank deposits and short-term money market instruments, we do not expect any material change with respect to our net income as a result of an interest rate change.

 

ITEM 8.  FINANCIAL STATEMENTS

 

The information required hereunder in this Annual Report is set forth in the financial statements and the notes thereto beginning on Page F-1.

 

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

As described in the Company’s Current Reports on Form 8-K filed with the SEC on October 7, 2022 and October 18, 2022, on October 6, 2022, the Audit Committee of the Board of the Company recommended, and the Board approved Weinberg & Company P.A. (“Weinberg”) as its independent registered public accounting firm for the fiscal year ended December 31, 2022. On October 14, 2022, the Audit Committee of the Board of the Company recommended, and the Board approved, the dismissal of Weaver and Tidwell, LLP (“Weaver”) as the Company’s independent registered public accounting firm.

 

ITEM 9A.  CONTROLS AND PROCEDURES

 

(a)   Evaluation of Disclosure Controls and Procedures.

 

In connection with the filing of this Annual Report on Form 10-K for the period ended December 31, 2023, our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 

 

Management previously determined that our disclosure controls and procedures were ineffective due to certain material weaknesses, as disclosed in our Annual Reports on Form 10-K for the years ended December 31, 2021 and 2022, and in our quarterly reports through the quarter ended March 31, 2023. Management has implemented measures designed to improve our controls and procedures to remediate the identified material weaknesses (the “Remediation Plan”). As of the year ended December 31, 2023, the Remediation Plan had been implemented and the applicable controls had operated for a sufficient period of time, and therefore management concluded that the newly implemented and enhanced controls were operating effectively. We will continue to test such controls over time to ensure the adequacy of our controls and procedures.

 

-24-

 

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. 

 

Based on management’s evaluation of our disclosure controls and procedures, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2023.

 

(b)   Management's Annual Report on Internal Control over Financial Reporting.

 

We are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.

 

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

 

Our CEO and CFO evaluated the effectiveness of our internal control over financial reporting as of December 31, 2023. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework. Based on this evaluation, our CEO and CFO concluded that, as of December 31, 2023, our internal control over financial reporting was effective.

 

(c)   Changes in Internal Controls over Financial Reporting.

 

Our CEO and CFO have determined that, other than the Remediation Plan described above, there have been no changes in the Company’s internal control over financial reporting during the period covered by this Report identified in connection with the evaluation described in the above paragraph that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 

 

 

ITEM 9B.  OTHER INFORMATION

 

None.

 

- 25-

 
 

PART III

 

 

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS

 

In accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2024 annual meeting of stockholders to be filed with the SEC.

 

ITEM 11.  EXECUTIVE COMPENSATION

 

In accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2024 annual meeting of stockholders to be filed with the SEC.

 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

In accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2024 annual meeting of stockholders to be filed with the SEC.

 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

In accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2024 annual meeting of stockholders to be filed with the SEC.

 

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

In accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2024 annual meeting of stockholders to be filed with the SEC.

 

PART IV

 

ITEM 15.  EXHIBITS AND REPORTS

 

Exhibits

 

 

3.1

Articles of Incorporation (incorporated by reference to Exhibit 3.1 filed with Amendment No. 3 to the Company’s Registration Statement on Form SB2 (Commission File No. 333-137170)).

3.2

Amendments to Articles of Incorporation (incorporated by reference to Exhibit 3.2 filed with Amendment No. 3 to the Company’s Registration Statement on Form SB2 (Commission File No. 333-137170)).

3.3

Amended and Restated Bylaws of the Corporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 25, 2018).

3.4

Certificate of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 13, 2010).

3.5

Certificate of Amendment to Articles of Incorporation to change name to FitLife Brands, Inc.  (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 1, 2013).

3.6

Certificate of Amendment to Articles of Incorporation to effect 1-for-10 reverse split (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 1, 2013).

3.7

Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock, dated November 13, 2018 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2018).

3.8

Certificates of Change, dated April 11, 2019 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 15, 2019).

3.9

Certificate of Designations, Preferences and Rights of the Series B Junior Preferred Stock, dated March 3, 2021 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 4, 2021).

3.10

Certificate of Change for FitLife Brands, Inc., effective as of December 2, 2021 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 7, 2021).

4.1

Form of Warrant, dated November 13, 2018 (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2018).

 

-26-

 

4.2

Tax Benefit Preservation Plan, dated February 26, 2021 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 4, 2021).

10.1

Assignment of Name (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on October 6, 2009).

10.2

Form of Subscription Agreement, dated November 13, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2018).

10.3

Employment Agreement, by and between FitLife Brands, Inc. and Patrick Ryan, dated June 13, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 18, 2019).

10.4

2019 Omnibus Incentive Plan (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A filed on July 12, 2019).

10.5

Revolving Line of Credit Agreement, dated as of September 24, 2019, between the Company and Mutual of Omaha Bank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 26, 2019).

10.6

Note Payable Agreement by and between FitLife Brands, Inc. and CIT Bank, N.A. dated April 27, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 1, 2020).

10.7

Amended and Restated Credit Agreement, dated February 23, 2023, between FitLife Brands Inc., and First Citizens Bank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 1, 2023).

10.8

Term Note, dated February 23, 2023, issued by FitLife Brands, Inc., to First Citizens Bank (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed March 1, 2023).

10.9

Security Agreement, dated February 23, 2023, among FitLife Brands, Inc., NDS Nutrition Products, Inc., iSatori, Inc., 1000374984 Ontario, Inc., and First Citizens Bank (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed March 1, 2023).

10.10

Guaranty Agreement, dated February 23, 2023, among NDS Nutrition Products, Inc., iSatori, Inc., 1000374984 Ontario, Inc., and First Citizens Bank (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed March 1, 2023).

10.11

Asset Purchase and Sale Agreement by and between MusclePharm Corporation and FitLife Brands, Inc., dated September 7, 2023 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 27, 2023).

10.12

Second Amended and Restated Credit Agreement, dated October 10, 2023, by and between FitLife Brands, Inc., and First Citizens Bank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 13, 2023).

10.13

Term B Note, dated October 10, 2023, issued by FitLife Brands, Inc., to First Citizens Bank (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 13, 2023).

10.14

Reaffirmation of Guaranty, dated October 10, 2023, by NDS Nutrition Products, Inc., iSatori, Inc., 1000374984 Ontario Inc., and Mimi’s Rock Corp., to and in favor of First Citizens Bank & Trust Company (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 13, 2023).

10.15

Arrangement Agreement among FitLife Brands Inc., 1000374984 Ontario Inc., and Mimi’s Rock Corp, dated December 4, 2022 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on December 8, 2022).

14.1

Code of Ethics (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K filed on March 27, 2009).

16.3

Letter from Weaver and Tidwell, LLP dated October 17, 2022 (incorporated by reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K filed October 18, 2022).

21

List of Subsidiaries.

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.

31.2

Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.

32.1

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.  

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (embedded within the Inline XBRL Document and included in Exhibit 101)

 

-27-

 

ITEM 16.  FORM 10-K SUMMARY    

 

None.

 

-28-

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

 

Registrant

FitLife Brands, Inc.

 
     

Date: March 29, 2024

By: /s/ Dayton Judd

 
 

Dayton Judd

 
 

Chief Executive Officer (Principal Executive Officer)

 
     

Date: March 29, 2024

By: /s/ Jakob York

 
 

Jakob York

 
 

Chief Financial Officer (Principal Financial Officer)

 

 

In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

 

Date: March 29, 2024

By: /s/ Dayton Judd

 
 

Dayton Judd

 
 

Chief Executive Officer and Chair of the Board

 
     

Date: March 29, 2024

By: /s/ Grant Dawson

 
 

Grant Dawson

 
 

Director

 
     

Date: March 29, 2024

By: /s/ Lewis Jaffe

 
 

Lewis Jaffe

 
 

Director

 
     

Date: March 29, 2024

By: /s/ Todd Ordal

 
 

Todd Ordal

 
 

Director

 
     

Date: March 29, 2024

By: /s/ Seth Yakatan

 
 

Seth Yakatan

 
 

Director

 

 

-29-

 
 

FITLIFE BRANDS, INC.

TABLE OF CONTENTS

 

 

Page

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Weinberg & Company, PA, PCAOB ID:572

F-1

CONSOLIDATED FINANCIAL STATEMENTS:

 

Consolidated Balance Sheets at December 31, 2023 and 2022

F-2

Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2023 and 2022

F-3

Consolidated Statement of Stockholders’ Equity for the years ended December 31, 2023 and 2022

F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022

F-5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-6

 

 

 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Stockholders and the Board of Directors of FitLife Brands, Inc.
Omaha, NE
 
Opinion on the Financial Statements
 
We have audited the accompanying consolidated balance sheets of FitLife Brands, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
Basis for Opinion
 
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
 
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
Critical Audit Matter
 

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Acquisition of Mimi’s Rock - Fair Value of Intangible Assets
 
As described in Note 8 to the consolidated financial statements, the Company acquired Mimi’s Rock for net cash consideration of $17.1 million in 2023, which resulted in the recording of a $7.6 million an intangible asset. Management recorded the intangible asset acquired at fair value on the date of acquisition using an income approach. Management applied judgment in estimating the fair value of intangible asset acquired, which included the use of assumptions with respect to future earnings before interest, taxes, depreciation and amortization (EBITDA) margins, revenue growth rates and discount rates.
 

The principal considerations for our determination that performing procedures relating to the fair value of intangible asset recorded in the acquisition of Mimi’s Rock constituted a critical audit matter are: (i) there was a high degree of auditor judgment and subjectivity in performing procedures relating to the fair value measurement of intangible assets acquired due to the judgment applied by management when developing the estimate; (ii) that significant audit effort was required in evaluating the assumptions relating to the estimated fair value of intangible assets, including future EBITDA margins, revenue growth rates, and discount rates; and (iii) that the audit effort involved the use of professionals with specialized skill and knowledge.
 
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) reading the purchase agreement; (ii) testing management’s process for estimating the fair value of intangible assets; (iii) evaluating the appropriateness of the valuation method given the nature of the asset; (iv) testing the completeness, accuracy, relevance and reliability of the data used in estimating the fair value of intangible assets; and (v) evaluating the reasonableness of the significant assumptions used by management.
 
We have served as the Company’s auditor from 2018 through 2019, and since October 2022.

 

 

Weinberg & Company, P.A.
Los Angeles, California
March 29, 2024

 

F-1

 

 

 

FITLIFE BRANDS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

  

December 31,

2023

  

December 31,

2022

 

ASSETS:

        

CURRENT ASSETS

        

Cash and cash equivalents

 $1,139  $13,277 

Restricted cash

  759   - 

Accounts receivable, net of allowance of doubtful accounts of $17 and $50, respectively

  2,046   705 

Inventories, net of allowance for obsolescence of $162 and $107, respectively

  9,091   9,105 

Sales tax receivable

  1,019   - 

Prepaid expense and other current assets

  639   116 

Total current assets

  14,693   23,203 
         

Property and equipment, net

  137   46 

Right of use asset

  121   103 

Intangibles, net of amortization of $113 and $71, respectively

  26,309   150 

Goodwill

  13,294   358 

Deferred tax asset

  792   1,847 

TOTAL ASSETS

 $55,346  $25,707 
         

LIABILITIES AND STOCKHOLDERS' EQUITY:

        

CURRENT LIABILITIES:

        

Accounts payable

 $3,261  $2,995 

Accrued expense and other liabilities

  1,026   444 

Income taxes payable

  892   187 

Product returns

  571   590 

Term loan – current portion

  4,500   - 

Lease liability - current portion

  87   54 

Total current liabilities

  10,337   4,270 

Term loan, net of current portion and unamortized deferred finance costs

  15,509   - 

Long-term lease liability, net of current portion

  51   49 

Deferred tax liability

  2,413   - 

TOTAL LIABILITIES

  28,310   4,319 
         

STOCKHOLDERS’ EQUITY:

        

Preferred stock, $0.01 par value, 10,000 shares authorized, none outstanding as of December 31, 2023 and 2022

  -   - 

Common stock, $0.01 par value, 60,000 shares authorized; 4,598 and 4,507 issued and outstanding as of December 31, 2023 and 2022, respectively

  46   45 

Additional paid-in capital

  30,699   30,056 

Accumulated deficit

  (3,417)  (8,713)

Foreign currency translation adjustment

  (292)  - 

TOTAL STOCKHOLDERS' EQUITY

  27,036   21,388 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $55,346  $25,707 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-2

 

 

 

FITLIFE BRANDS, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in thousands, except per share amounts)

 

  

Years ended

 
  

December 31,

 
  

2023

  

2022

 
         
         

Revenue

 $52,700  $28,803 

Cost of goods sold

  31,268   16,769 

Gross profit

  21,432   12,034 
         

OPERATING EXPENSE:

        

Selling, general and administrative

  12,161   6,010 

Merger and acquisition related

  1,627   257 

Depreciation and amortization

  94   66 

Total operating expense

  13,882   6,333 

OPERATING INCOME

  7,550   5,701 
         

OTHER EXPENSE (INCOME)

        

Interest income

  (289)  (121)

Interest expense

  1,025   - 

Foreign exchange gain

  (189)  - 

Total other expense (income)

  547   (121)
         

INCOME BEFORE INCOME TAXES

  7,003   5,822 
         

PROVISION FOR INCOME TAXES

  1,707   1,393 
         

NET INCOME

 $5,296  $4,429 
         

NET INCOME PER SHARE

        

Basic

 $1.18  $0.97 

Diluted

 $1.08  $0.89 

Basic weighted average common shares

  4,490   4,553 

Diluted weighted average common shares

  4,905   4,975 
         

COMPREHENSIVE INCOME:

        

NET INCOME

 $5,296  $4,429 

Foreign currency translation adjustment

  (292)  - 

Comprehensive income

 $5,004  $4,429 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3

 

 

 

FITLIFE BRANDS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(in thousands)

 

              

Additional

      

Foreign currency

     
  

Common stock

  

Treasury

  

paid-in

  

Accumulated

  

translation

     
  

Shares

  

Amount

  

stock

  

capital

  

deficit

  

adjustment

  

Total

 
                             

YEAR ENDED DECEMBER 31, 2023

                            
                             

JANUARY 1, 2023

  4,507  $45  $-  $30,056  $(8,713) $-  $21,388 
                             

Shares surrendered by former employee

  (61)  -   -   -   -   -   - 

Exercise of stock options

  9   -   -   6   -   -   6 

Exercise of warrants

  143   1   -   164   -   -   165 

Stock-based compensation

  -   -   -   473   -   -   473 

Comprehensive (loss) income

  -   -   -   -   -   (292)  (292)

Net income

  -   -   -   -   5,296   -   5,296 
                             

DECEMBER 31, 2023

  4,598  $46  $-  $30,699  $(3,417) $(292) $27,036 
                             

YEAR ENDED DECEMBER 31, 2022

                            
                             

JANUARY 1, 2022

  4,552  $46  $(2,087) $32,529  $(13,142) $-  $17,346 
                             

Repurchase of common stock

  (48)  (1)  (771)  -   -   -   (772)

Retirement of treasury shares

  -   -   2,858   (2,865)  -   -   (7)

Exercise of stock options

  3   -   -   29   -   -   29 

Stock-based compensation

  -   -   -   363   -   -   363 

Net income

  -   -   -   -   4,429   -   4,429 
                             

DECEMBER 31, 2022

  4,507  $45  $-  $30,056  $(8,713) $-  $21,388 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4

 

 

 

FITLIFE BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

  

Years ended December 31,

 
  

2023

  

2022

 
         

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net income

 $5,296  $4,429 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

  94   66 

Allowance for doubtful accounts

  (33)  (6)

Allowance for inventory obsolescence

  55   51 

Stock compensation expense

  473   363 

Amortization of deferred finance costs

  15   - 

Amortization of inventory step-up

  323   - 
         

Changes in operating assets and liabilities:

        

Accounts receivable - trade

  (882)  247 

Inventories

  1,026   (2,636)

Deferred taxes

  957   1,199 

Prepaid expense and other assets

  (178)  204 

Right of use asset

  83   55 

Accounts payable

  (2,679)  115 

Income taxes payable

  (356)  184 

Lease liability

  (77)  (55)

Accrued liabilities and other liabilities

  122   (44)

Product returns

  (19)  (42)

Net cash provided by operating activities

  4,220   4,130 
         

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Purchase of property and equipment

  (106)  - 

Cash paid for acquisition of MRC

  (17,099)  - 
Cash paid for acquisition of MusclePharm assets  (18,788)  - 

Net cash used in investing activities

  (35,993)  - 
         

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Proceeds from exercise of stock options and warrants

  171   29 

Repurchases of common stock

  -   (779)

Borrowings on term loan

  22,500   - 

Payments on term loan

  (2,375)  - 

Net cash provided by (used in) financing activities

  20,296   (750)
         

Foreign currency impact on cash

  98   - 
         

CHANGE IN CASH AND RESTRICTED CASH

  (11,379)  3,380 

CASH, BEGINNING OF PERIOD

  13,277   9,897 

CASH AND RESTRICTED CASH, END OF PERIOD

 $1,898  $13,277 
         

Supplemental cash flow disclosure

        

Cash paid for income taxes

 $698  $3 

Cash paid for interest, net of amounts capitalized

 $777  $- 

 

The accompanying notes are an integral part of these consolidated financial statements.

 
F-5

FITLIFE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2023 AND 2022
(in thousands, except per share amounts)

 

 

NOTE 1.  DESCRIPTION OF BUSINESS

 

Summary

 

FitLife Brands, Inc. (the “Company”) is a national provider of innovative and proprietary nutritional supplements and wellness products for health-conscious consumers marketed under the following brand names: (i) NDS Nutrition, PMD Sports, SirenLabs, Core Active, Nutrology, and Metis Nutrition (together, “NDS Products”); (ii) iSatori, BioGenetic Laboratories, and Energize (together, the "iSatori Products"); and (iii) Dr. Tobias, All Natural Advice, and Maritime Naturals (together, the “MRC Products"); and (iv) MusclePharm.

 

The Company distributes the NDS Products principally through franchised General Nutrition Centers, Inc. (“GNC”) stores located both domestically and internationally, and, with the launch of Metis Nutrition, through corporate GNC stores in the United States. The iSatori Products are sold through more than 17,000 retail locations, which include specialty, mass, and online.  The Company distributes the MRC Products primarily online.  MusclePharm’s products are sold to both wholesale customers as well as online directly to the end consumer.

 

FitLife Brands is headquartered in Omaha, Nebraska. For more information on the Company, please go to www.fitlifebrands.com. The Company’s common stock, par value $0.01 per share (“Common Stock”), trades under the symbol “FTLF” on the Nasdaq Capital Market.

 

Recent Developments

 

Acquisition of Mimis Rock Corp

 

On December 4, 2022, the Company entered into an Arrangement Agreement with Mimi’s Rock Corp. (“MRC”), pursuant to which the Company agreed to acquire MRC. On February 28, 2023, the Company completed the acquisition of MRC. Total consideration for the acquisition of MRC was $17,099, of which $12,500 was funded using proceeds from a new term loan, and $4,599 from the Company’s available cash. See Note 8 to the financial statements for additional disclosure regarding the acquisition of MRC.

 

Acquisition of MusclePharm Assets

 

On October 10, 2023, the Company acquired substantially all of the assets of MusclePharm Corporation (“MusclePharm”) through an asset purchase transaction under Section 363 of the U.S. Bankruptcy Code. The Company acquired substantially all of the assets and assumed none of the liabilities of MusclePharm other than de minimus cure costs relating to certain assumed contracts.  Total consideration for the acquisition was approximately $18,500 cash.  Of this amount, $10,000 was funded using proceeds from a new term loan provided by First Citizens Bank, with the remainder funded from the Company’s available cash balances. See Note 9 for additional disclosure regarding the acquisition of MusclePharm.

 

 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Significant accounting policies are as follows:

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated in the consolidated financial statements.

 

F- 6

FITLIFE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2023 AND 2022
(in thousands, except per share amounts)
 

Foreign Currency Translation

 

The functional currency of the Company is the U.S. dollar.  The functional currency of the Company’s Canadian subsidiaries is the Canadian dollar.  The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using end-of-period exchange rates. Changes in reported amounts of assets and liabilities of foreign subsidiaries that occur as a result of changes in exchange rates between foreign subsidiaries’ functional currencies and the U.S. dollar are included in foreign currency translation adjustment. Foreign currency translation adjustment is included as a component of stockholders’ equity in the accompanying consolidated balance sheets. Revenue and expense transactions use an average rate prevailing during the period of the related transaction. Transaction gains and losses that arise from exchange rate fluctuations denominated in a currency other than the functional currency of each subsidiary are included in the results of operations as incurred.

 

Use of Estimates and Assumptions

 

The preparation of financial statements in conformity with 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 inventory obsolescence, product returns, depreciable lives of property and equipment, allocation of purchase price from business combinations, 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.

 

Revenue Recognition

 

The Company’s revenue is comprised of sales of nutritional supplements and wellness products to consumers.

 

The Company accounts for revenue in accordance with FASB ASC 606. 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. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products to a customer. 

 

All products sold by the Company are distinct individual products and consist of nutritional supplements and wellness products. 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.

 

The Company’s products are also sold on e-commerce platforms including Amazon.  For these transactions, the Company evaluated principal versus agent considerations to determine appropriateness of recording distribution and platform fees paid to third-party e-commerce companies as an expense or as a reduction of revenue. The Company records distribution and platform fees to cost of goods sold in the consolidated statements of income and comprehensive income. Distribution and platform fees are not recorded as a reduction of revenue because the Company: 1) owns the goods before they are transferred to the customer,   2) can direct Amazon, similar to other third-party logistics providers (“Logistic Providers”), to return the Company’s inventory to any location specified by the Company, 3) has the responsibility to make customers whole following any returns made by customers directly to Logistic Providers and the Company retains the back-end inventory risk, 4) is subject to credit risk (i.e., credit card chargebacks), 5) establishes prices of its products, 6) can determine who fulfills the goods to the customer (Amazon or the Company) and 7) can limit quantities or stop selling the goods at any time. Based on these considerations, the Company is the principal in this arrangement. Advertising fees paid to Amazon are recorded in selling, general and administrative expense in the consolidated statements of income and comprehensive income.

 

F- 7

FITLIFE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2023 AND 2022
(in thousands, except per share amounts)
 

The Company disaggregates revenue into geographical regions and distribution channels.  The Company determines that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. 

 

Online revenue, which consists of revenue generated from sales on the Company’s own websites as well as third-party e-commerce platforms such as Amazon, for the year ended December 31, 2023 was approximately 63% of total revenue, compared to roughly 28% of total revenue during the same twelve-month period in 2022.

 

Sales to customers in the U.S. were approximately 93% and 99% for the year ended December 31, 2023 and 2022, respectively, with the balance of sales to customers primarily in Canada.

 

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. Payments 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 product returns are immaterial, 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.

 

Customer and Vendor Concentration

 

Total net sales to GNC during 2023 and 2022 were 33% and 67 % of total revenue for the years ended December 31, 2023 and 2022, respectively. Accounts receivable attributable to GNC as of December 31, 2023 and 2022 represented 30% and 43% of the Company’s total accounts receivable balance, respectively.

 

As of December 31, 2023 and 2022, there was one vendor who accounted for 51% and 78% of the Company's consolidated accounts payable, respectively. For the year ended December 31, 2023, there were three vendors who accounted for 37%, 30%, and 10% of the Company's inventory-related purchases. For the year ended December 31, 2022, there were two vendors who accounted for 49% and 18% of the Company's inventory-related purchases, respectively.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

All of the Company’s accounts receivable balance is related to trade receivables. Trade accounts receivable 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 into categories by the number of days the balance is past due, and the estimated loss is recorded based upon management’s assessment of collectability. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered.

 

As of December 31, 2023 and 2022, the Company had provided a reserve for doubtful accounts of $17 and $50, respectively.

 

F- 8

FITLIFE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2023 AND 2022
(in thousands, except per share amounts)
 

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 direct-to-consumer sales, 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 certain wholesale customers 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. The product returns liability includes 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 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 a regular basis and adjusted for accordingly. Adjustments for returns are based on factual information and historical trends for Company 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.

 

Total allowance for product returns, sales returns and incentive programs as of December 31, 2023 and 2022 amounted to $571 and $590, respectively.

 

Cost of Goods Sold

 

Cost of goods sold is comprised of the costs of products, in-bound freight charges, shipping and handling costs, purchase and receiving costs, and commissions paid to Amazon and other online selling platforms. Other expense not related to the production and distribution of our products is classified as operating expense.

 

Cash, Cash Equivalents, and Restricted Cash

 

The Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation up to $250 at December 31, 2023. The Company may be exposed to risk for the amounts of funds held in bank accounts more than the insurance limit. In assessing the risk, the Company’s policy is to maintain cash balances with high-quality financial institutions. The Company had cash balances more than the guarantee during the years ended December 31, 2023 and 2022. Management believes that the financial institutions that hold the Company’s cash are financially sound and, accordingly, minimal credit risk exists.

 

Restricted cash consists of cash on deposit with a financial institution in an interest-bearing account pursuant to a credit card agreement.

 

F- 9

FITLIFE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2023 AND 2022
(in thousands, except per share amounts)
 

Inventory

 

Inventory is stated at the lower of cost or net realizable value, with costs determined on a first-in, first-out (FIFO) basis. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and/or our ability to sell the product(s) concerned and production requirements. Demand for our products can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes in consumer preferences, general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by customers. Additionally, our management’s estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory. 

 

As of December 31, 2023 and 2022, the aggregate allowance for expiring, slow moving and excess inventory amounted to $162 and $107, respectively.

 

Leases

 

The Company accounts for its leases in accordance with the guidance of ASC 842, Leases. The Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at lease commencement in determining the present value of unpaid lease payments.

 

Property and Equipment

 

Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets using the straight-line method. The Company amortizes leasehold improvements over the estimated life of these assets or the term of the lease, whichever is shorter. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value and proceeds realized. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized.

 

The range of estimated useful lives used to calculate depreciation for principal items of property and equipment are as follows:

 

Asset category

 

Depreciation / Amortization period (in years)

 

Furniture and fixtures

  3 

Office equipment

  3 

Leasehold improvements

  5 

 

Management regularly reviews property, equipment and other long-lived assets for possible impairment. This review occurs annually or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Based upon management’s annual assessment, there were no indicators of impairment of the Company’s property and equipment and other long-lived assets as of December 31, 2023 and 2022.

 

Intangible and Long-lived Assets

 

Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives. The Company regularly reviews the carrying value and estimated lives of its long-lived assets and intangible assets to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. The determinants used for this evaluation include management’s estimate of the asset’s ability to generate positive income from operations and positive cash flow in future periods as well as the strategic significance of the assets to the Company’s business objectives. Should an impairment exist, the impairment loss would be measured based on the excess of the carrying amount of the long-lived asset group over the asset’s fair value.

 

F- 10

FITLIFE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2023 AND 2022
(in thousands, except per share amounts)
 

There were no impairment charges incurred during the years ended December 31, 2023 and 2022.

 

Goodwill

 

The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test.  The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform an impairment test. If the qualitative assessment warrants further analysis, the Company compares the fair value of the reporting unit to its carrying value. The fair value of the reporting unit is determined using the market approach.  The Company determines the amount of a potential goodwill impairment by comparing the fair value of the reporting unit with its carrying amount. To the extent the carrying value of a reporting unit exceeds its fair value, a goodwill impairment charge is recognized.

 

As the Company uses the market approach to determine fair value of the reporting unit, the price of its common stock is an important component of the fair value calculation. If the Company’s stock price experiences significant price and volume fluctuations, this will impact the fair value of the reporting unit, which can lead to potential impairment in future periods.

 

There were no impairment charges incurred during the years ended December 31, 2023 and 2022.

 

Acquisitions and Business Combinations

 

The Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and separately identified intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired trademarks and trade names, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is the period needed to gather all information necessary to make the purchase price allocation, not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

 

Income Taxes

 

The Company accounts for income taxes under FASB ASC Topic 740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The deferred tax assets of the Company relate primarily to operating loss carryforwards for federal income tax purposes.  The deferred tax liabilities of the Company relate primarily to intangible assets that are not deductible for tax purposes in the jurisdictions to which they relate.

 

The Company periodically evaluates its tax positions to determine whether it is more likely than not that such positions would be sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations, based on their technical merits. The Company accrues interest and penalties, if incurred, on unrecognized tax benefits as components of the income tax provision in the accompanying consolidated statements of income and comprehensive income. As of December 31, 2023, and 2022, the Company has not established a liability for uncertain tax positions.

 

F- 11

FITLIFE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2023 AND 2022
(in thousands, except per share amounts)
 

Net Income Per Share

 

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive. The dilutive effect of potentially dilutive securities is reflected in diluted net income per share if the exercise prices were lower than the average fair market value of common shares during the reporting period.

 

Basic and diluted weighted-average shares outstanding and antidilutive options that were excluded from diluted weighted average shares outstanding are as follows:

 

  

December 31,

 
  

2023

  

2022

 
         

Basic weighted average shares outstanding

  4,490   4,553 

Dilutive effect of potential common shares

  415   422 

Diluted weighted average shares outstanding

  4,905   4,975 
         

Antidilutive options

  117   29 

 

Fair Value Measurements

 

The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Financial assets recorded at fair value in the balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. FASB ASC Topic 820, Fair Value, establishes a three-level valuation hierarchy for the use of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date:

 

 

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

  

 

 

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

  

 

 

Level 3 – Inputs that are both significant to the fair value measurement and unobservable. These inputs rely on management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. The unobservable inputs are developed based on the best information available in the circumstances and may include the Company’s own data.

 

The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, restricted cash, accounts receivable and accounts payable, approximate their fair values because of the short maturity of these instruments. The carrying value of its notes payable approximate their fair value based on the market interest rates of these notes.

 

F- 12

FITLIFE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2023 AND 2022
(in thousands, except per share amounts)
 

Stock Compensation Expense

 

The Company periodically issues restricted share units (“RSUs”), stock options and warrants to employees and non-employees in non-capital raising transactions for services rendered.

 

Such issuances vest and expire according to the terms established at the issuance date.

 

Stock-based payments to officers, directors, employees and consultants for acquiring goods and services from nonemployees, which include grants of employee stock options, are recognized in the financial statements based on their grant date fair values in accordance with ASC 718, Compensation-Stock Compensation. Stock-based payments to officers, directors, and employees, which are generally time vested, are measured at the grant date fair value and compensation cost is recognized on a straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The fair value of stock-based payments is estimated using the Black-Scholes option-pricing model or other applicable valuation model such as the Monte Carlo valuation pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life, and future dividends. The assumptions used could materially affect compensation expense recorded in future periods.

 

Segments

 

The Company operates in one segment for the distribution of our products.  In accordance with FASB ASC Topic 280, Segment Reporting, the Company’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company.  Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue.  All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes.  Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying consolidated financial statements.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The amendments included in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Although the new standard, known as the current expected credit loss (“CECL”) model, has a greater impact on financial institutions, most other organizations with financial instruments or other assets (trade receivables, contract assets, lease receivables, financial guarantees, loans and loan commitments, and held-to-maturity debt securities) are subject to the CECL model and will need to use forward-looking information to better evaluate their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was originally effective for public companies for fiscal years beginning after December 15, 2019. In November of 2019, the FASB issued ASU 2019-10, which delayed the implementation of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies. The Company has adopted this guidance beginning January 1, 2023. This guidance did not have a significant impact on the Company’s financial statements.

 

In September 2022, the FASB issued ASU 2022-04, Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. The ASU requires buyers to disclose information about their supplier finance programs. Interim and annual requirements include the disclosure of outstanding amounts under the obligations as of the end of the reporting period, and annual requirements include a roll-forward of those obligations for the annual reporting period, as well as a description of payment and other key terms of the programs. This update is effective for annual periods beginning after December 15, 2022, and interim periods within those fiscal years, except for the requirement to disclose roll-forward information, which is effective for fiscal years beginning after December 15, 2023. The Company adopted ASU 2022-04 on January 1, 2023, and there was no material impact on our financial statements.

 

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expense categories that are regularly provided to the chief operating decision maker and included in each reported measure of a segment’s profit or loss. The update also requires all annual disclosures about a reportable segment’s profit or loss and assets to be provided in interim periods and for entities with a single reportable segment to provide all the disclosures required by ASC 280, Segment Reporting, including the significant segment expense disclosures. This standard will be effective for the Company on January 1, 2024 and interim periods beginning in fiscal year 2025, with early adoption permitted. The updates required by this standard should be applied retrospectively to all periods presented in the financial statements. The Company does not expect this standard to have a material impact on its results of operations, financial position or cash flows.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

 

F- 13

FITLIFE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2023 AND 2022
(in thousands, except per share amounts)
 

 

 

NOTE 3. INTANGIBLE ASSETS

 

Intangible assets are amortized on a straight-line basis over their estimated useful lives.  The following table sets forth the components of the identifiable intangible assets acquired and their estimated useful lives as of December 31, 2023 and 2022.

 

  As of December 31, 2023       
  

Gross

amount

  

Accumulated

amortization

  

Net book

value

  

Useful life

(years)

 

Brands

 $26,201  $-  $26,201  Indefinite 

Client relationships

  80   (55)  25   4 

Formulations

  70   (48)  22   4 

Trademarks

  60   -   60  

Indefinite

 

Website

  11   (10)  1   3 

Total identifiable assets

 $26,422  $(113) $26,309     

 

  As of December 31, 2022       
  

Gross

amount

  

Accumulated

amortization

  

Net book

value

  

Useful life

(years)

 

Client relationships

  80   (34)  46   4 

Formulations

  70   (30)  40   4 

Trademarks

  60   -   60  

Indefinite

 

Website

  11   (7)  4   3 

Total identifiable assets

 $221  $(71) $150     

 

Amortization expense was $42 for the years ended December 31, 2023 and 2022.

 

 

NOTE 4.  INVENTORIES

 

The Company’s inventories as of December 31, 2023 and 2022 were as follows:

 

  

December 31,

  

December 31,

 
  

2023

  

2022

 
         

Finished goods

 $8,292  $8,347 

Components

  961   865