FITLIFE BRANDS, INC. 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 theSecurities 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. -16-
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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.
Recent Developments
Entry into Arrangement Agreement
OnDecember 4, 2022 , FitLife entered into an Arrangement Agreement (the "Arrangement Agreement") with 1000374984Ontario Inc. ("Subsidiary", and collectively with FitLife, the "Company"), and Mimi'sRock Corp. ("MRC"), pursuant to which the Company agreed to acquire MRC for a total cash purchase price of approximately CAD$23.2 million , of which approximately CAD$14.2 million would be used to retire all of MRC's outstanding indebtedness, and approximately CAD$9.0 million , or CAD$0.17 per share, would be used to purchase all issued and outstanding shares of MRC from its current shareholders (collectively, the "Purchase Price") (the "Acquisition"). The Arrangement Agreement was subject to the terms and conditions of the Plan of Arrangement, attached to the Arrangement Agreement as Schedule A ("Plan"), which Plan was made in accordance with Section 182 of the Ontario Business Corporations Act and required a court order approving the Plan. Further, to finance the acquisition of MRC, which amount was paid in all cash, the Company's principal bank,First Citizens Bank , agreed to provide up to$12.5 million in debt financing. The obligations of the Company and MRC to consummate the Acquisition were subject to certain closing conditions, including, but not limited to, (i) the taking of all steps set forth in the Interim Order (as defined in the Arrangement Agreement) and Final Order (as defined in the Arrangement Agreement); (ii) the approval of MRC's shareholders, and (iii) receipt of any necessary regulatory approvals.
Subsequent to the end of the fiscal year, the Acquisition was consummated on
Critical Accounting Policies
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States ("GAAP") requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net sales and expense recognized during the periods presented. Those estimates and assumptions include estimates for reserves of uncollectible accounts receivable, allowance for product returns, sales returns and incentive programs, allowance for inventory obsolescence, depreciable lives of property and equipment, analysis of impairment of goodwill, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates. -17-
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Accounts Receivable and Allowance for Doubtful Accounts
The Company's accounts receivable balance is related to trade receivables and are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in its existing accounts receivable. The Company will maintain allowances for doubtful accounts, estimating losses resulting from the inability of its customers to make required payments for products. Account balances are charged off against the allowance when it is probable the receivable will not be recovered. The determination of collectability of the Company's accounts receivable requires management to make frequent judgments and estimates in order to determine the appropriate amount of allowance needed for doubtful accounts. The Company's allowance for doubtful accounts is estimated to cover the risk of loss related to accounts receivable. This allowance is maintained at a level we consider appropriate based on historical and other factors that affect collectability. These factors include historical trends of write-offs, recoveries and credit losses; the careful monitoring of customer credit quality; and projected economic and market conditions. Different assumptions or changes in economic circumstances could result in changes to the allowance.
Total allowance for doubtful accounts as of
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 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 operations. As of
December 31, 2022 , and 2021, 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.
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We currently have a 30-day product return policy for NDS Products, which allows for a 100% sales price refund for the return of unopened and undamaged products purchased from us online through one of our websites or e-commerce platforms. Product sold to GNC may be returned from store shelves or the distribution center in the event product is damaged, short dated, expired or recalled. GNC maintains a customer satisfaction program which allows customers to return product to the store for credit or refund. Subject to certain terms and restrictions, GNC may require reimbursement from vendors for unsaleable returned product through either direct payment or credit against a future invoice. We also support a product return policy for iSatori Products, whereby customers can return product for credit or refund. Product returns can and do occur from time to time and can be material. For the sale of goods with a right of return, the Company estimates variable consideration using the most likely amount method and recognizes revenue for the consideration it expects to be entitled to when control of the related product is transferred to the customers and records a product returns liability for the amount it expects to credit back its customers. Under this method, certain forms of variable consideration are based on expected sell-through results, which requires subjective estimates. These estimates are supported by historical results as well as specific facts and circumstances related to the current period. 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 regular basis and adjusted for accordingly. Adjustments for returns are based on factual information and historical trends for both NDS products and iSatori products and are specific to each distribution channel. We monitor, among other things, remaining shelf life and sell-through data on a weekly basis. If we determine there are any risks or issues with any specific products, we accrue sales return allowances based on management's assessment of the overall risk and likelihood of returns in light of all information available.
Total allowance for product returns, sales returns and incentive programs as of
Inventory
The Company's inventory is carried at the lower of cost or net realizable value
using the first-in, first-out ("FIFO") method. The Company evaluates the need to
record adjustments for inventory on a regular basis. Company policy is to
evaluate all inventories including components and finished goods for all of its
product offerings across all of the Company's operating subsidiaries.
The Company recognizes an allowance for obsolescence for expiring, excess, and
slow-moving inventory. To calculate the allowance, the Company analyzes sales
projections for each SKU relative to the remaining shelf life of the product. In
addition, the allowance includes the value of longer-dated finished good
inventory that, based on projections, will remain unsold at the time of its
expiration.
Total allowance for expiring, excess and slow-moving inventory items as of
Goodwill InJanuary 2017 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04, Intangibles -Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 removes Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The Company adopted ASU 2017-04 onJanuary 1, 2020 and applied the requirements prospectively. -19-
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There were no impairment charges incurred during the year ended
Revenue Recognition
The Company's revenue is comprised of sales of nutritional supplements, primarily to GNC.
The Company accounts for revenues in accordance with FASB Accounting Standards
Codification ("ASC") 606, Revenue from Contracts with Customers ("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, which is also when
control is transferred. Revenue is measured as the amount of consideration we
expect to receive in exchange for transferring the products or services to a
customer.
All products sold by the Company are distinct individual products and consist of
nutritional supplements and related supplies. The products are offered for sale
solely as finished goods, and there are no performance obligations required
post-shipment for customers to derive the expected value from them.
Control of products we sell transfers to customers upon shipment from our
facilities or delivery to our customers, and the Company's performance
obligations are satisfied at that time. Shipping and handling activities are
performed before the customer obtains control of the goods and therefore
represent a fulfillment activity rather than promised goods to the customer.
Payment for sales are generally made by check, credit card, or wire transfer.
Historically the Company has not experienced any significant payment delays from
customers.
For direct-to-consumer sales, the Company allows for returns within 30 days of
purchase. Our wholesale customers, such as GNC, may return purchased products to
the Company under certain circumstances, which include expired or
soon-to-be-expired products located in GNC corporate stores or at any of its
distribution centers, and products that are subject to a recall or that contain
an ingredient or ingredients that are subject to a recall by the U.S. Food and
Drug Administration .
A right of return does not represent a separate performance obligation, but
because customers are allowed to return products, the consideration to which the
Company expects to be entitled is variable. 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-Based Compensation.
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
appliable 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.
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Recent Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial Statements included in this Annual Report for a description of recent accounting pronouncements believed by management to have a material impact on our present or future financial statements.
Results of Operations
December December
31, 2022 31, 2021 Change %
Revenue $ 28,803,000 $ 27,913,000 $ 890,000 3 %
Cost of goods sold 16,769,000 15,409,000 1,360,000 9 %
Gross profit 12,034,000 12,504,000 (470,000 ) (4 )%
Gross margin percentage 41.8 % 44.8 %
Operating expense:
Selling, general and administrative expense 6,267,000 6,215,000 52,000 1 %
Depreciation and amortization 66,000 59,000 7,000 1 %
Total operating expense 6,333,000 6,274,000 59,000 2 %
Income from operations 5,701,000 6,230,000 (529,000 ) (8 )%
Other income 121,000 478,000 (357,000 ) (75 )%
Provision for income tax (1,393,000 ) (1,298,000 ) 95,000 (7 )%
Net income $ 4,429,000 $ 5,410,000 $ (981,000 ) (18 )%
Fiscal Year Ended
Net Sales . Revenue for the year endedDecember 31, 2022 increased 3% to$28,803,000 as compared to$27,913,000 for the year endedDecember 31, 2021 . Revenue for the year endedDecember 31, 2022 compared to the prior year reflects increased sales through our online channels largely offset by lower sales through wholesale channels. Online revenue during the year endedDecember 31, 2022 was approximately 28% of total revenue, compared to roughly 24% of total revenue during the same twelve-month period in 2021. Although no assurances can be given, management believes that online revenue will continue to increase in subsequent periods relative to prior comparable periods given management's focus on higher margin online sales. The Company continually reformulates and introduces new products, as well as seeks to increase both the number of stores and number of approved products that can be sold within the GNC franchise system that comprise its domestic and international distribution footprint. Management also believes that its focus on developing its e-commerce capabilities will drive additional incremental sales in the short-term, while yielding substantial benefits in the longer-term.
Cost of Goods Sold. Cost of goods sold for the year ended
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Gross Profit Margin. Gross profit for the year endedDecember 31, 2022 decreased to$12,034,000 as compared to$12,504,000 for the year endedDecember 31, 2021 . Gross margin for the year endedDecember 31, 2022 decreased to 41.8% from 44.8% for the year endedDecember 31, 2021 . The decrease in gross margin is primarily attributable to higher product costs associated with disruptions in the supply chain. Product costs have largely stabilized in recent months and, for certain ingredients, have begun to decline. We expect that the recent margin pressure will be temporary as production costs decline and as higher-margin online sales become a larger percentage of the Company's total revenue. Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expense for the year endedDecember 31, 2022 increased by$52,000 to$6,267,000 as compared to$6,215,000 for the year endedDecember 31, 2021 . The increase in SG&A expense was primarily due to higher consulting fees due to Restatement and Merger and Acquisition ("M&A") related expense, partially offset by lower stock compensation expense and general SG&A expense. Depreciation and Amortization. Depreciation and amortization for the year endedDecember 31, 2022 increased to$66,000 from$59,000 during the year endedDecember 31, 2021 . The increase is primarily attributable to the amortization of intangibles acquired in the Nutrology business combination. Net Income. We generated a net income of$4,429,000 for the year endedDecember 31, 2022 , as compared to a net income of$5,410,000 for the year endedDecember 31, 2021 . The decrease in net income for the year endedDecember 31, 2022 compared to the same period in 2021 was primarily attributable to increased SG&A expense resulting from M&A activities and Restatement-related costs during the year endedDecember 31, 2022 , as well as forgiveness of the PPP Loan (as defined in "Liquidity and Capital Resources" below), that occurred during the year endedDecember 31, 2021 . Non-GAAP Measures The financial presentation below contains certain financial measures not in accordance with accounting principles generally accepted inthe United States ("GAAP"), defined by theSEC as "non-GAAP financial measures", including non-GAAP EBITDA and adjusted non-GAAP EBITDA. These measures may be different from non-GAAP financial measures used by other companies. The presentation of this financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in this Quarterly Report in accordance with GAAP. As presented below, non-GAAP EBITDA excludes interest, income taxes, and depreciation and amortization. Adjusted non-GAAP EBITDA excludes, in addition to interest, taxes, depreciation and amortization, stock-based compensation, M&A/integration expense, Restatement-related costs and non-recurring gains or losses. The Company believes the non-GAAP measures provide useful information to both management and investors by excluding certain expense and other items that may not be indicative of its core operating results and business outlook. The Company believes that the inclusion of non-GAAP measures in the financial presentation below allows investors to compare the Company's financial results with the Company's historical financial results and is an important measure of the Company's comparative financial performance. Year Ended December 31, 2022 2021 (Unaudited) (Unaudited) Net income$ 4,429,000 $ 5,410,000 Interest income, net (121,000 ) (25,000 ) Provision for income taxes 1,393,000 1,298,000 Depreciation and amortization 66,000 59,000 EBITDA 5,767,000 6,742,000 Non-cash and non-recurring adjustments Stock-based compensation expense 363,000 452,000 Acquisition related expense 257,000 253,000 Restatement-related costs 318,000 - Non-recurring gains - (453,000 ) Adjusted EBITDA$ 6,705,000 $ 6,994,000 -22-
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Liquidity and Capital Resources
As ofDecember 31, 2022 , the Company had working capital of$18,932,000 , compared to working capital of$13,626,000 atDecember 31, 2021 . Our principal sources of liquidity atDecember 31, 2022 consisted of$13,277,000 of cash and$705,000 of accounts receivable. The increase in working capital is principally attributable to cash flows from operating activities during fiscal 2022, partially offset by cash used in financing activities as the Company spent$779,000 to repurchase shares of Common Stock of the Company. OnSeptember 24, 2019 , the Company entered into a Revolving Line of Credit Agreement (the "Line of Credit Agreement") withMutual of Omaha Bank (the "Lender"), subsequently acquired byCIT Bank N.A ., providing the Company with a$2.5 million revolving line of credit (the "Line of Credit"). The Line of Credit allows the Company to request advances thereunder and to use the proceeds of such advances for working capital purposes until the Maturity Date, or unless renewed at maturity upon approval by the Company's Board and the Lender. The Line of Credit is secured by all assets of the Company. Advances drawn under the Line of Credit bear interest at an annual rate of the one-month SOFR rate plus 2.75%, and each advance will be payable on the Maturity Date with the interest on outstanding advances payable monthly. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to the Maturity Date, without premium or penalty. No borrowings are outstanding as ofDecember 31, 2022 .
On
OnApril 27, 2020 , the Company received proceeds from a loan in the amount of$449,700 from its lender,CIT Bank, N.A . (the "PPP Lender"), pursuant to approval by theU.S. Small Business Administration (the "SBA") for the PPP Lender to fund the Company's request for a loan under the SBA's Paycheck Protection Program ("PPP Loan") created as part of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") administered by the SBA (the "Loan Agreement"). In accordance with the requirements of the CARES Act, the Company used the proceeds from the PPP Loan primarily for payroll costs, covered rent payments, and covered utilities during the eight-week period commencing on the date of loan approval. The PPP Loan was scheduled to mature onApril 27, 2022 , had a 1.0% interest rate, and was subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act. The Company was informed by the PPP Lender and the SBA that the full balance of the PPP Loan, including accrued interest, was forgiven onJanuary 15, 2021 . The Company has historically financed its operations primarily through cash flow from operations and equity and debt financings. The Company has also provided for its cash needs by issuing Common Stock, options and warrants for certain operating costs, including consulting and professional fees. The Company currently anticipates that cash derived from operations and existing cash resources, along with available borrowings under the Line of Credit, will be sufficient to provide for the Company's liquidity for the next twelve months. The Company is dependent on cash flow from operations and amounts available under the Line of Credit to satisfy its working capital requirements. No assurances can be given that cash flow from operations and/or the Line of Credit will be sufficient to provide for the Company's liquidity for the next twelve months. Should the Company be unable to generate sufficient revenue in the future to achieve positive cash flow from operations, and/or should capital be unavailable under the terms of the Line of Credit, additional working capital will be required. Management currently has no intention to raise additional working capital through the sale of equity or debt securities and believes that the cash flow from operations and available borrowings under the Line of Credit will provide sufficient capital necessary to operate the business over the next twelve months. In the event the Company fails to achieve positive cash flow from operations, additional capital is unavailable under the terms of the Line of Credit, and management is otherwise unable to secure additional working capital through the issuance of equity or debt securities, the Company's business would be materially and adversely harmed. -23-
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Cash Provided by Operating Activities
Net cash provided by operating activities was$4,130,000 during the year endedDecember 31, 2022 , compared to net cash provided by operating activities of$4,480,000 for the year endedDecember 31, 2021 . The decrease in cash provided by operating activities is primarily attributable to the forgiveness of the PPP loan that provided to the Company in 2021. In 2022, the Company continues to maintain elevated inventory levels to ensure availability of products due to global supply chain constraints resulting from the COVID-19 pandemic.
Cash Used in Investing Activities
Cash used in investing activities for the fiscal year endedDecember 31, 2022 was$0 and$529,000 during the year endedDecember 31, 2022 and 2021, respectively. The Company used$529,000 during the year endedDecember 31, 2021 for the acquisition of Nutrology.
Cash Used in Financing Activities
Cash used in financing activities for the year endedDecember 31, 2022 was$750,000 as compared to cash used of$390,000 during the year endedDecember 31, 2021 . The main reason for the increase in cash used for financing activities relates to increased share repurchases.
Off-Balance Sheet Arrangements
Other than contractual obligations incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity.
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