FITLIFE BRANDS, INC. - Quarter Report: 2019 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934   For the quarterly period ended September 30, 2019

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT   For the transition period from N/A to N/A

Commission File No. 000-52369

 

FITLIFE BRANDS, INC.

(Name of small business issuer as specified in its charter)

 

Nevada		20-3464383
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

                                                                                                         

  5214 S. 136th Street, Omaha, NE 68137

(Address of principal executive offices)

 

 (402) 991-5618

(Issuer’s telephone number)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 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 is a shell company (as defined in Rule 12b–2 of the Exchange Act).  Yes ☐    No ☒

Securities registered under Section 12(b) of the Exchange Act: None

 

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $0.01 per share

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of November 7, 2019, a total of 933,305 shares of the Registrant’s Common Stock, par value $0.01 per share, were issued and outstanding.

 

 

 

FITLIFE BRANDS, INC.

 INDEX TO FORM 10-Q FILING

FOR THE QUARTER ENDED SEPTEMBER 30, 2019

 

TABLE OF CONTENTS

 

			PAGE
PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets (unaudited)		1
	Condensed Consolidated Statements of Operations (unaudited)		2
	Condensed Consolidated Statements of Stockholders’ Equity (unaudited)		3
	Condensed Consolidated Statements of Cash Flows (unaudited)		4
	Notes to Condensed Consolidated Financial Statements (unaudited)		5
Item 2.	Management’s Discussion & Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19
Item 4.	Controls and Procedures		19
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings		21
Item 1A.	Risk Factors		21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		21
Item 3.	Defaults Upon Senior Securities		21
Item 5.	Other Information		21
Item 6.	Exhibits		21

 

 

 

 

 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (“Quarterly Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report, includes forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by forward-looking statements.

 

In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “proposed”, “intended”, or “continue” or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other “forward-looking” information. There may be events in the future that we are not able to accurately predict or control. Before you invest in our securities, you should be aware that the occurrence of any of the events described in this Quarterly Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline and you could lose all or part of your investment. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report to conform these statements to actual results.

 

 

 

 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1.  Financial Statements

  

FITLIFE BRANDS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

	(Unaudited)
	September 30,	December 31,
	2019	2018
ASSETS:   CURRENT ASSETS
Cash	$557,000	$259,000
Accounts receivable, net of allowance of doubtful accounts, product returns,
sales returns and incentive programs of $290,000 and $455,000, respectively	3,170,000	1,433,000
Inventories, net of allowance for obsolescence of $143,000 and $107,000, respectively	2,482,000	3,523,000
Prepaid expenses and other current assets	63,000	223,000
Total current assets	6,272,000	5,438,000
Property and equipment, net	148,000	189,000
Right of use asset, net of amortization of $203,000	277,000	-
Goodwill	225,000	225,000
Security deposits	10,000	10,000
TOTAL ASSETS	$6,932,000	$5,862,000
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable	$2,033,000	$2,628,000
Accrued expenses and other liabilities	957,000	420,000
Lease liability - current portion	58,000	-
Notes payable - related parties	-	500,000
Total current liabilities	3,048,000	3,548,000
LONG-TERM LEASE LIABILITY, net of current portion	219,000	-
TOTAL LIABILITIES	3,267,000	3,548,000
CONTINGENCIES AND COMMITMENTS	-	-
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; none outstanding
as of September 30, 2019 and December 31, 2018
Preferred stock Series A Preferred, $0.01 par value 1,000 shares authorized; 600
and 600 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	-	-
Common stock, $.01 par value, 15,000,000 shares authorized; 933,305 and 1,111,943
issued and outstanding as of September 30, 2019 and December 31, 2018 respectively	11,000	11,000
Treasury stock, 181,454 shares	(1,385,000)	-
Additional paid-in capital	32,218,000	32,107,000
Accumulated deficit	(27,179,000)	(29,804,000)
Total stockholders' equity	$3,665,000	$2,314,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$6,932,000	$5,862,000

 

 

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

 

 

 

	FITLIFE BRANDS, INC.
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
	FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

 

	(Unaudited)		(Unaudited)
	Three Months Ended		Nine Months Ended
	September 30		September 30
	2019	2018	2019	2018
Revenue	$5,316,000	$4,583,000	$15,812,000	$13,576,000
Cost of goods sold	3,063,000	2,831,000	9,163,000	8,102,000
Gross profit	2,253,000	1,752,000	6,649,000	5,474,000
OPERATING EXPENSES:
General and administrative	782,000	784,000	2,352,000	2,493,000
Selling and marketing	583,000	547,000	1,749,000	2,070,000
Depreciation and amortization	12,000	16,000	40,000	54,000
Total operating expenses	1,377,000	1,347,000	4,141,000	4,617,000
OPERATING INCOME	876,000	405,000	2,508,000	857,000
OTHER EXPENSES (INCOME)
Interest expense	14,000	39,000	47,000	104,000
Other income	-	1,000	-	-
Gain on settlement	(29,000)	-	(171,000)	-
Total other expense (income)	(15,000)	40,000	(124,000)	104,000
NET INCOME BEFORE INCOME TAXES	891,000	365,000	2,632,000	753,000
INCOME TAXES	-	-	7,000	-
NET INCOME	891,000	365,000	2,625,000	753,000
PREFERRED STOCK DIVIDEND	(19,000)	-	(37,000)	-
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$ 872,000	$365,000	$2,588,000	$753,000
NET INCOME PER SHARE AVAILABLE TO COMMON SHAREHOLDERS:
Basic	$0.87	$0.33	$2.46	$0.69
Diluted	$0.72	$0.31	$2.08	$0.65
Basic weighted average common shares	1,001,715	1,100,786	1,053,292	1,089,659
Diluted weighted average common shares	1,207,024	1,173,642	1,241,875	1,166,602

 

 

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

 

 

 

 

FITLIFE BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (Unaudited)

 

						Additional
	Series A Preferred		Common Stock		Treasury	Paid-in	Accumulated
	Shares	Amount	Shares	Amount	Stock	Capital	Deficit	Total
THREE MONTHS ENDED SEPTEMBER 30, 2019
JUNE 30, 2019	600	$-	1,015,120	$11,000	$(566,000)	$32,199,000	$(28,070,000)	$3,574,000
Fair value of common stock issued for services			401			4,000		4,000
Repurchase of common stock	-	-	(82,216)	-	(819,000)	-		(819,000)
Dividends payments on preferred stock				-		(19,000)	-	(19,000)
Fair value of vested common shares and options issued for services						34,000		34,000
Net income						-	891,000	891,000
SEPTEMBER 30, 2019	600	-	933,305	$11,000	$(1,385,000)	$32,218,000	$(27,179,000)	$3,665,000
THREE MONTHS ENDED SEPTEMBER 30, 2018
JUNE 30, 2018	-	$-	1,099,796	$11,000	$-	$31,227,000	$(29,820,000)	$1,418,000
Fair value of common stock issued for services			8,659	-		37,000		37,000
Fair value of vested common shares and options issued for services						66,000		66,000
Net income						-	365,000	365,000
SEPTEMBER 30, 2018	-	-	1,108,455	$11,000	-	$31,330,000	$(29,455,000)	$1,886,000
NINE MONTHS ENDED SEPTEMBER 30, 2019
DECEMBER 31, 2018	600	$-	1,111,943	$11,000	$-	$32,107,000	$(29,804,000)	$2,314,000
Fair value of common stock issued for services			2,816	-		43,000		43,000
Repurchase of common stock	-	-	(181,454)	-	(1,385,000)	-		(1,385,000)
Dividends payments on preferred stock				-		(37,000)		(37,000)
Fair value of vested common shares and options issued for services						105,000		105,000
Net income						-	2,625,000	2,625,000
SEPTEMBER 30, 2019	600	-	933,305	$11,000	(1,385,000)	$32,218,000	$(27,179,000)	$3,665,000
NINE MONTHS ENDED SEPTEMBER 30, 2018
DECEMBER 31, 2017		$-	1,068,171	$11,000	$-	$31,113,000	$(30,208,000)	$913,000
Fair value of common stock issued for services			40,284	-		132,000		135,000
Fair value of vested common shares and options issued for services						85,000		85,000
Net income						-	753,000	753,000
SEPTEMBER 30, 2018	-	-	1,108,455	$11,000	-	$31,330,000	$(29,455,000)	$1,886,000

 

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

 

 

FITLIFE BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

 

	(Unaudited)
	2019	2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$2,625,000	$753,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	40,000	54,000
Decrease in allowance for sales returns and doubtful accounts	(166,000)	(557,000)
Increase (decrease) in allowance for inventory obsolescence	36,000	(42,000)
Common stock issued for services	55,000	136,000
Fair value of options issued for services	94,000	85,000
Gain on disposal of assets	-	34,000
Right of use asset - amortization	66,000	-
Changes in operating assets and liabilities:
Accounts receivable - trade	(1,572,000)	1,829,000
Accounts receivable - factored	-	(2,458,000)
Inventories	1,005,000	(33,000)
Prepaid expenses	160,000	(14,000)
Customer note receivable	-	5,000
Security deposits	-	12,000
Accounts payable	(595,000)	(103,000)
Accrued liabilities and other liabilities	41,000	(19,000)
Right of use asset - lease liability	(65,000)	-
Net cash provided by (used in) operating activities	1,724,000	(318,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets	-	4,000
Net cash provided by investing activities	-	4,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable, related party	300,000	-
Dividend payments on preferred stock	(37,000)	-
Secured payable to factor	-	1,950,000
Repurchases of common stock	(889,000)	-
Repayment of line of credit	-	(1,950,000)
Repayments of term loan	-	(415,000)
Repayments of notes payable	(800,000)	-
Net cash used in financing activities	(1,426,000)	(415,000)
INCREASE IN CASH	298,000	(729,000)
CASH, BEGINNING OF PERIOD	259,000	1,262,000
CASH, END OF PERIOD	$557,000	$533,000
Supplemental disclosure operating activities
Cash paid for interest	$47,000	$104,000
Non-cash investing and financing activities
Recording of lease asset and liability upon adoption of ASU-2016-02	$343,000	$-
Accrued liability for stock buyback	$496,000	$-

 

 

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

 

 

 

FITLIFE BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

Summary

 

FitLife Brands, Inc. (the “Company”) is a national provider of innovative and proprietary nutritional supplements for health-conscious consumers marketed under the brand names NDS Nutrition, PMD, SirenLabs, CoreActive, and Metis Nutrition (together, “NDS Products”). In September 2015, the Company acquired iSatori, Inc. (“iSatori”) and as a result, the Company added three brands to its product portfolio, including iSatori, BioGenetic Laboratories, and Energize (together, “iSatori Products”). The NDS Products are distributed 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 25,000 retail locations, which include specialty, mass, and online.

 

The Company was incorporated in the State of Nevada on July 26, 2005. In October 2008, the Company acquired the assets of NDS Nutritional Products, Inc., a Nebraska corporation, and moved those assets into its wholly owned subsidiary NDS Nutrition Products, Inc., a Florida corporation (“NDS”). The Company’s NDS Products are sold through NDS and the iSatori Products are sold through iSatori, Inc., a Delaware corporation and a wholly owned subsidiary of the Company.

 

FitLife Brands is headquartered in Omaha, Nebraska. For more information on the Company, please go to www.fitlifebrands.com. The Company’s common stock trades under the symbol “FTLF” on the OTC: PINK market.

 

Recent Developments

 

Line of Credit Agreement

 

 On September 24, 2019, the Company entered into a Revolving Line of Credit Agreement (the "Line of Credit Agreement") with Mutual of Omaha Bank (the "Lender") 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 September 23, 2020 (the “Maturity Date”), unless renewed at maturity upon approval by the Company’s Board of Directors and the Lender. The Line of Credit is secured by all assets of the Company.

 

Advances drawn under the Line of Credit bear interest at an annual rate of the one-month LIBOR rate plus 2.75%, and each advance will be payable on the Maturity Date with the interest on outstanding advances payable monthly. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to the Maturity Date, without premium or penalty.

 

The Line of Credit Agreement includes customary events of default. If any such event of default occurs, the Lender may declare all outstanding loans under the Line of Credit to be due and payable immediately.

 

Repayment of Outstanding Notes

 

On September 24, 2019, the Company repaid all outstanding balances due on certain promissory notes issued to Sudbury Capital Fund, LP ("Sudbury") and Dayton Judd, the Company’s Chairman and Chief Executive Officer (the “Notes”), in the aggregate principal amount, including accrued but unpaid interest thereon, of $615,000. Mr. Judd is the managing partner of Sudbury. As a result of the repayment of the Notes, the Company terminated its line of credit entered into between the Company and Sudbury on December 26, 2018 providing for maximum borrowings of up to $600,000.

 

 

 

 

Amendment of Share Repurchase Plan

 

On September 23, 2019, the Company's Board of Directors (the "Board") approved an amendment the Company’s share repurchase program as approved on August 16, 2019, pursuant to which the Board authorized management to repurchase up to $500,000 of the Company's common stock, par value $0.01 per share ("Common Stock"), over the next 24 months (the "Share Repurchase Program"), which Share Repurchase Program was previously reported on the Company's Current Report on Form 8-K filed August 20, 2019. The Board approved an amendment to the Share Repurchase Program to increase the repurchase of up to $1,000,000 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"), 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.

 

The Company intends to conduct its Share Repurchase Program in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. Repurchases may be made at management's discretion from time to time in the open market or through privately negotiated transactions. The Company may suspend or discontinue the Share Repurchase Program at any time, and may thereafter reinstitute purchases, all without prior announcement.

 

During the quarter ended September 30, 2019, the Company repurchased 82,216 shares of Common Stock, or approximately 8% of the issued and outstanding shares of the Company, through both open market and private transactions, 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
July 2019	-	-	-	-
August 2019	-	-	-	$500,000
September 2019	82,216	$9.96	82,216	$181,000
Subtotal	82,216	$9.96	82,216

 

NOTE 2 - BASIS OF PRESENTATION

 

The accompanying interim condensed unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation are included. Operating results for the nine-month period ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. Although management of the Company believes the disclosures presented herein are adequate and not misleading, these interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the Securities and Exchange Commission on March 22, 2019.

  

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

Principles of Consolidation

 

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

  

 

 

Use of Estimates

 

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. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates.

  

These estimates and assumptions also affect the reported amounts of accounts receivable, inventories, goodwill, revenue, costs and expense and valuations of long-term assets, realization of deferred tax assets and fair value of equity instruments issued for services during the reporting period. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates. 

 

Basic and Diluted Income (loss) Per Share

 

Our computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income (loss) available to common stockholders divided by the weighted average common shares outstanding for the period. Diluted income (loss) per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income (loss) of the Company as if they had been converted at the beginning of the periods presented, or issuance date, if later. In computing diluted income (loss) per share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options and warrants may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants. Potential common shares that have an antidilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

 

 

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Net income available to common shareholders	$872,000	$365,000	$2,588,000	$753,000
Weighted average common shares - basic	1,001,715	1,100,786	1,053,292	1,089,659
Dilutive effect of outstanding warrants and stock options	205,309	72,856	188,583	76,943
Weighted average common shares - diluted	1,207,024	1,173,642	1,241,875	1,166,602
Net income per common share:
Basic	$0.87	$0.33	$2.46	$0.69
Diluted	$0.72	$0.31	$2.08	$0.65

 

Lease

         

We lease certain corporate office space and office equipment under lease agreements with monthly payments over a period of 36 to 84 months.  We determine if an arrangement is a lease at inception.  Lease assets are presented as operating lease right-of-use assets and the related liabilities are presented as lease liabilities in our consolidated balance sheets.

 

Prior to January 1, 2019, the Company accounted for leases under ASC 840, Accounting for Leases.   Effective January 1, 2019, the Company adopted the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. The adoption of ASC 842 on January 1, 2019 resulted in the recognition of operating lease right-of-use assets of and, lease liabilities for operating leases of $480,000 and $480,000, respectively. There was no cumulative-effect adjustment to accumulated deficit. See Note 7 for further information regarding the adoption of ASC 842 on the Company’s condensed financial statements.

 

Goodwill

 

The Company had goodwill of $225,000 as of September 30, 2019 and December 31, 2018, respectively, as a result of the acquisition of NDS in October 2008. The Company adopted ASC Topic 350 – Goodwill and Other Intangible Assets. In accordance with ASC Topic 350, goodwill, which represents the excess of purchase price and related costs over the value assigned to net tangible and identifiable intangible assets of businesses acquired and accounted for under the purchase method, acquired in business combinations is assigned to reporting units that are expected to benefit from the synergies of the combination as of the acquisition date. Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized. The Company assesses goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter, or more frequently if events and circumstances indicate impairment may have occurred in accordance with ASC Topic 350. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference. ASC Topic 350 also requires that the fair value of indefinite-lived purchased intangible assets be estimated and compared to the carrying value. The Company recognizes an impairment loss when the estimated fair value of the indefinite-lived purchased intangible assets is less than the carrying value.

 

As of September 30, 2019 and December 31, 2018, there were no indicators of impairment for the recorded goodwill of $225,000, respectively. 

  

 Customer Concentration

 

Gross sales prior to reduction for vendor funded discounts and coupons to GNC during the nine-month periods ended September 30, 2019 and 2018 were $13,599,000 and $12,732,000, respectively, representing 77% and 79% of total gross revenue, respectively.

 

Gross accounts receivable attributable to GNC as of September 30, 2019 and September 30, 2018 were $2,992,000 and $3,359,000, respectively, representing 88% and 88% of the Company’s total accounts receivable balance, respectively.

 

For the quarters ended September 30, 2019 and 2018, online sales accounted for 12% and 6% of the Company’s net revenue, respectively.

 

 

 

Revenue Recognition

 

The Company’s revenue is comprised of sales of nutritional supplements to consumers, primarily through GNC stores. 

 

The Company accounts for revenues in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. Under ASC 606, revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for the Company upon shipment or delivery of products or services 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. Other than promotional activities, which can vary from time to time but nevertheless are entirely within the Company’s control, contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time.

 

Control of products we sell transfers to customers upon shipment from our facilities, 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.

 

We provide a 30-day right of return for our products. 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 substantially less than 5% of products are returned, and therefore believes it is probable that such returns will not cause a significant reversal of revenue in the future. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.

  

Income Taxes

 

As of September 30, 2019, the Company had Federal net operating loss (“NOL”) carry forwards available to offset future taxable income of approximately $26.6 million, subject to Internal Revenue Service  (“IRS”) statutory limitations.

 

As a result of the Company’s significant NOL, with projected $2.6 million utilized as of September 30, 2019, there was no provision for income tax recorded during the period ended September 30, 2019.

 

The Company accounts for income taxes using the asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized before the Company is able to realize their benefits, or that future deductibility is uncertain. Authoritative guidance issued by the ASC Topic 740 – Income Taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. As a result of the limitations related to Internal Revenue Code and the Company’s lack of a prolonged history of profitable operations, the Company recorded a 100% valuation allowance against its net deferred tax assets as of September 30, 2019 and December 31, 2018.

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

 

Recent Accounting Pronouncements

 

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 are not believed by management to have a material impact on the Company’s present or future financial statements.

 

 

 

NOTE 4 – INVENTORIES

 

The Company’s inventories as of September 30, 2019 and December 31, 2018 were as follows:

 

	September 30,
	2019	December 31,
	(unaudited)	2018
Finished goods	$2,106,000	$3,168,000
Components	519,000	462,000
Allowance for obsolescence	(143,000)	(107,000)
Total	$2,482,000	$3,523,000

 

NOTE 5 - PROPERTY AND EQUIPMENT

 

The Company’s fixed assets as of September 30, 2019 and December 31, 2018 were as follows:

 

	September 30,
	2019	December 31,
	(unaudited)	2018
Equipment	$902,000	$902,000
Accumulated depreciation	(754,000)	(713,000)
Total	$148,000	$189,000

 

Depreciation expense for the nine months ended September 30, 2019 and 2018 was $40,000 and $54,000, respectively.

 

NOTE 6 – NOTES PAYABLE

 

Notes Payable – Related Parties

 

On December 26, 2018, the Company issued a line of credit promissory note to Sudbury Capital Fund, LP, an entity controlled by Dayton Judd, the Company’s CEO, in the principal amount of $600,000, with an initial advance to the Company in the amount of $300,000 which was outstanding at December 31, 2018. During the nine months ended September 30, 2019, an additional $300,000 was advanced to the Company, resulting in aggregate borrowings of $600,000. In addition, on December 26, 2018, the Company also issued a promissory note to Mr. Judd in the principal amount of $200,000 (collectively, the “Notes”). On September 24, 2019, the Company repaid all outstanding balances due under the terms of the Notes in the aggregate principal amount, including accrued but unpaid interest thereon, of $615,000. As a result of the repayment of the Notes, the Company terminated its line of credit entered into between the Company and Sudbury on December 26, 2018 providing for maximum borrowings of up to $600,000.

 

As of September 30, 2019 and December 31, 2018, the aggregate balance of the Notes amounted to $0 and $501,000, respectively, including accrued interest of $0 and $1,000, respectively.

  

NOTE 7 - RIGHT OF USE ASSETS AND LIABILITIES

 

In prior years, the Company entered into several non-cancellable leases for its office facilities and equipment. The lease agreements range from 36 months to 84 months, and require monthly payments ranging between $200 and $7,000 through October 2024. On January 1, 2019, the Company adopted ASU 2016-02, Leases which requires a lessee to record a right-of-use asset and a corresponding lease liability at the inception of the lease initially measured at the present value of the lease payments. The Company classified the leases as operating leases and determined that the fair value of the lease assets and liability at the inception of the leases was $480,000 using a discount rate of 9%.

 

 

 

During the nine months ended September 30, 2019, the Company made payments of $71,000 towards the lease liability. As of September 30, 2019, lease liability amounted to $277,000. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. Rent expense, including real estate taxes, for the nine months ended September 30, 2019 was $71,000. The right-of-use asset at September 30, 2019 was $277,000, net of amortization of $203,000.

 

	Nine Months Ended
Lease Cost	September 30, 2019
Operating lease cost (included in general and administrative in the Company's unaudited
condensed and consolidated statements of operations)	$66,000
Other Information:
Cash paid for amounts included in the measurement of lease liabilities for the third quarter 2019	$-
Weighted average remaining lease term - operating leases (in years)	5.1
Average discount rate - operating leases	9%

 

Operating Leases	At September 30, 2019
Long-term right-of-use assets	$277,000
Short-term operating lease liabilities	$58,000
Long-term operating lease liabilities	219,000
Total operating lease liabilities	$277,000

 

Maturities of the Company's lease liabilities are as follows:
Year Ending	Operating Leases
2019 (remaining 3 months)	$29,000
2020	67,000
2021	67,000
2022	67,000
2023	61,000
Less: Imputed interest/present value discount	(14,000)
Present value of lease liabilities	$277,000

 

NOTE 8 - EQUITY

 

     

Common Stock

 

a.	Common Stock Issued for Services

 

The Company is authorized to issue 15.0 million shares of Common Stock, par value $0.01 per share, of which 933,305 shares of Common Stock were issued and outstanding as of September 30, 2019.

 

During the nine-month period ended September 30, 2019, the Company issued 2,816 shares of Common Stock with a fair value of $43,000 to directors for services rendered. The shares were valued at their respective dates of issuance.

 

 

 

In July 2018, in connection with the appointment of Mr. Dayton Judd as Chief Executive Officer, the Company granted Mr. Judd an aggregate of 45,000 shares of restricted Common Stock, which include vesting conditions subject to the achievement of certain market prices of the Company’s Common Stock. Such shares are also subject to forfeiture in the event Mr. Judd resigns from his position or is terminated by the Company. As the vesting of the 45,000 shares of restricted Common Stock is subject to certain market conditions, pursuant to current accounting guidelines, the Company determined the fair value to be $105,000, computed using the Monte Carlo simulations on a binomial model with the assistance of a valuation specialist with a derived service period of nine years. During the nine months ended September 30, 2019, the Company recorded compensation expense of $36,000 to amortize the fair value of these shares of restricted Common Stock based upon the prorated derived service period.

 

During the nine-month period ended September 30, 2018, the Company issued 40,284 shares of Common Stock with a fair value of $128,000 to employees and directors for services rendered. The shares were valued at their respective dates of issuance. 

 

b.	Repurchase of Common Stock

 

During the nine-month period ended September 30, 2019, including the effect of the Reverse/Forward split implemented in April 2019, the Company purchased 181,454 shares of Common Stock for the aggregate purchase price of $1,385,000, of which $889,000 was paid as of September 30, 2019 and the remaining $496,000 was unpaid and was recorded as part of accrued expenses and other liabilities in the accompanying balance sheet. The Company is accounting for these shares as treasury stock.

 

c.	Share Repurchase Program

 

On August 16, 2019, the Company’s Board of Directors approved the repurchase of up to $500,000 of the Company’s Common Stock over the next 24 months (the “Share Repurchase Program”). The Board approved an amendment to the Share Repurchase Program on September 23, 2019 to increase the repurchase of up to $1,000,000 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"), 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.

 

During the quarter ended September 30, 2019, the Company repurchased 82,216 shares of Common Stock, or approximately 8% of the issued and outstanding shares of the Company, through both open market and private transactions for the aggregate purchase price of $819,000. 

 

    

Options

  

Information regarding options outstanding as of September 30, 2019 is as follows: 

 

		Weighted	Weighted
		Average	Average
	Number of	Exercise	Remaining
	Options	Price	Life (Years)
Outstanding, December 31, 2018	154,521	$13.10	5.69
Issued	8,000	6.85	4.26
Exercised	-
Forfeited	(13,236)	26.26
Outstanding, September 30, 2019	149,285	$11.76	5.29

 

		Outstanding			Exercisable
Exercise Price Per share		Total Number of Options	Weighted Average Remaining Life (Years)	Weighted Average Exercise Price	Number of Vested Options	Weighted Average Exercise Price
$	$2.80- 23.00	143,710	5.33	$8.72	83,372	$12.66
$	$23.10 - 144.34	5,575	4.02	$90.20	5,575	$90.20
		149,285	$5.29	$11.76	$88,947	$17.52

  

 

 

During the nine-month periods ended September 30, 2019 and 2018, the Company recognized compensation expense of $94,000 and $33,000, respectively, to account for the fair value of stock options that vested during the period.

 

Total intrinsic value of outstanding stock options as of September 30, 2019 amounted to $651,000. Future unamortized compensation expense on the unvested outstanding options at September 30, 2019 amounted to $69,000, which will be recognized through October 2020.

 

Warrants

 

Total outstanding warrants to purchase shares of Company Common Stock as of September 30, 2019 and December 31, 2018 amounted to 39,130 shares. Total intrinsic value as of September 30, 2019 amounted to $219,000.

 

During the period ended September 30, 2019, no warrants were granted and no warrants expired unexercised.

 

Outstanding		Exercise Price		Issuance Date		Expiration Date		Vesting
39,130		$ 4.60		11/13/18		11/13/23		Yes

 

NOTE 9 – COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

On December 31, 2014, various plaintiffs, individually and on behalf of a purported nationwide and sub-class of purchasers, filed a lawsuit in the U.S. District Court for the Northern District of California, captioned Ryan et al. v. Gencor Nutrients, Inc. et al., Case No.: 4:14-CV-05682. The lawsuit includes claims made against the manufacturer and various producers and sellers of products containing a nutritional supplement known as Testofen, which is manufactured and sold by Gencor Nutrients, Inc. (“Gencor”). Specifically, the Ryan plaintiffs allege that various defendants have manufactured, marketed and/or sold Testofen, or nutritional supplements containing Testofen, and in doing so represented to the public that Testofen had been clinically proven to increase free testosterone levels. According to the plaintiffs, those claims are false and/or not statistically proven. Plaintiffs seek relief under violations of the Racketeering Influenced Corrupt Organizations Act, breach of express and implied warranties, and violations of unfair trade practices in violation of California, Pennsylvania, and Arizona law. NDS utilizes Testofen in a limited number of nutritional supplements it manufactures and sells pursuant to a license agreement with Gencor.

 

On February 19, 2015, this matter was transferred to the Central District of California to the Honorable Manuel Real. Judge Real had previously issued an order dismissing a similar lawsuit that had been filed by the same lawyer who represents the plaintiffs in the Ryan matter. The United States Court of Appeals reversed part of the dismissal issued by Judge Real and remanded the case back down to the district court for further proceedings. As a result, the parties in the Ryan matter issued a joint status report and that matter is again active. However, on June 14, 2019, the Central District of California issued an order staying the Ryan matter pending the second appeal of a previously filed related case captioned O’Toole, et al., v. Gencor Nutrients Inc. et al., Case No.:2:12-cv-03754.

 

On September 27, 2019 the parties entered into a confidential settlement agreement whereby Plaintiffs agreed to dismiss their claims against NDS, with prejudice.  On October 4, 2019 this matter was dismissed, with prejudice.

 

During the nine months ended September 30, 2019, the aggregate impact of all legal settlements was a gain of $171,000.

 

 

On November 6, 2019, the Company’s Board of Directors amended the previously approved Share Repurchase Program to increase the amount of authorized repurchases to $2.5 million.  All other terms of the Share Repurchase Program remain unchanged.

 

 

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes appearing elsewhere in this Quarterly Report. This discussion and analysis may contain forward-looking statements based on assumptions about our future business.

 

Overview

 

FitLife Brands, Inc. (the “Company”) is a national provider of innovative and proprietary nutritional supplements for health-conscious consumers marketed under the brand names NDS Nutrition, PMD, SirenLabs, Core Active, and Metis Nutrition (together, “NDS Products”). In September 2015, the Company acquired iSatori, Inc. (“iSatori”) and as a result, the Company added three brands to its product portfolio, including iSatori, BioGenetic Laboratories, and Energize (together, “iSatori Products”). The NDS Products are distributed 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 25,000 retail locations, which include specialty, mass, and online.

 

The Company was incorporated in the State of Nevada on July 26, 2005. In October 2008, the Company acquired the assets of NDS Nutritional Products, Inc., a Nebraska corporation, and moved those assets into its wholly owned subsidiary NDS Nutrition Products, Inc., a Florida corporation (“NDS”). The Company’s NDS Products are sold through NDS and the iSatori Products are sold through iSatori, Inc., a Delaware corporation and a wholly owned subsidiary of the Company.

 

FitLife Brands is headquartered in Omaha, Nebraska. For more information on the Company, please go to www.fitlifebrands.com. The Company’s common stock trades under the symbol “FTLF” on the OTC: PINK market.

 

Recent Developments

 

Line of Credit Agreement

 

 On September 24, 2019, the Company entered into a Revolving Line of Credit Agreement (the "Line of Credit Agreement") with Mutual of Omaha Bank (the "Lender") 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 September 23, 2020 (the “Maturity Date”), unless renewed at maturity upon approval by the Company’s Board of Directors and the Lender. The Line of Credit, which remains undrawn to date, is secured by all assets of the Company.

 

Advances drawn under the Line of Credit bear interest at an annual rate of the one-month LIBOR rate plus 2.75%, and each advance will be payable on the Maturity Date with the interest on outstanding advances payable monthly. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to the Maturity Date, without premium or penalty.

 

The Line of Credit Agreement includes customary events of default. If any such event of default occurs, the Lender may declare all outstanding loans under the Line of Credit to be due and payable immediately.

 

Repayment of Outstanding Notes

 

On September 24, 2019, the Company repaid all outstanding balances due on certain promissory notes issued to Sudbury Capital Fund, LP ("Sudbury") and Dayton Judd, the Company’s Chair and Chief Executive Officer (the “Notes”), in the aggregate principal amount, including accrued but unpaid interest thereon, of $615,000. Mr. Judd is the managing partner of Sudbury. As a result of the repayment of the Notes, the Company terminated its line of credit entered into between the Company and Sudbury on December 26, 2018 providing for maximum borrowings of up to $600,000.

 

 

 

 

Amendment of Share Repurchase Plan

 

On September 23, 2019, the Company's Board of Directors (the "Board") approved an amendment the Company’s share repurchase program as approved on August 16, 2019, pursuant to which the Board authorized management to repurchase of up to $500,000 of the Company's common stock, par value $0.01 per share ("Common Stock"), over the next 24 months (the "Share Repurchase Program"), which Share Repurchase Program was previously reported on the Company's Current Report on Form 8-K filed August 20, 2019. The Board approved an amendment to the Share Repurchase Program to increase the repurchase of up to $1,000,000 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"), 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.

 

The Company intends to conduct its Share Repurchase Program in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. Repurchases may be made at management's discretion from time to time in the open market or through privately negotiated transactions. The Company may suspend or discontinue the Share Repurchase Program at any time, and may thereafter reinstitute purchases, all without prior announcement.

 

Results of Operations

 

Comparison of the three and nine months ended September 30, 2019 to the three and nine months ended September 30, 2018

 

 

 

	Three Months Ended				Nine Months Ended
	September 30, 2019	September 30, 2018	Change		September 30, 2019	September 30, 2018	Change
Revenue	$5,316,000	$4,583,000	$733,000	16%	$15,812,000	$13,576,000	$2,236,000	16%
Cost of goods sold	(3,063,000)	(2,831,000)	(232,000)	8%	(9,163,000)	(8,102,000)	(1,061,000)	13%
Gross profit	2,253,000	1,752,000	501,000	29%	6,649,000	5,474,000	1,175,000	21%
Operating expenses	(1,377,000)	(1,347,000)	(30,000)	2%	(4,141,000)	(4,617,000)	476,000	-10%
Income (loss) from operations	876,000	405,000	471,000	116%	2,508,000	857,000	1,651,000	193%
Other expense (income)	(15,000)	40,000	(55,000)		(124,000)	104,000	(228,000)
Provision for income tax	-	-	-		7,000	-	7,000
Net income (loss)	$891,000	$365,000	$526,000	144%	$2,625,000	$753,000	$1,872,000	249%