FITLIFE BRANDS, INC. - Quarter Report: 2020 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2020
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT
For
the transition period from N/A to N/A
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Commission
File No. 000-52369
FITLIFE BRANDS, INC.
(Name
of small business issuer as specified in its charter)
Nevada
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20-3464383
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(State
or other jurisdiction of incorporation)
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(IRS
Employer Identification No.)
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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)
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 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
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☐
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Accelerated
filer
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☐
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Non–Accelerated
filer
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☒
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Small
reporting company
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☒
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Emerging
growth company
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☐
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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 ☒
Indicate
the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable
date.
As
of May 14, 2020, a total of 1,060,033 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 MARCH 31, 2020
TABLE OF CONTENTS
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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.
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CONDENSED
CONSOLIDATED BALANCE SHEETS
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ASSETS:
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March
31,
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December
31,
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2020
|
2019
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(Unaudited)
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CURRENT
ASSETS
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Cash
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$2,666,000
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$265,000
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Accounts
receivable, net of allowance of doubtful accounts, $33,000 and
$27,000 respectively
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4,692,000
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2,366,000
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Inventories,
net of allowance for obsolescence of $130,000 and $130,000,
respectively
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3,023,000
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2,998,000
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Prepaid
expenses and other current assets
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25,000
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72,000
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Total
current assets
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10,406,000
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5,701,000
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Property and
equipment, net
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124,000
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136,000
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Right of use asset,
net of amortization, $241,000 and $226,000
respectively
|
239,000
|
254,000
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Goodwill
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225,000
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225,000
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Security
deposits
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10,000
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10,000
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TOTAL
ASSETS
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$11,004,000
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$6,326,000
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LIABILITIES AND
STOCKHOLDERS' EQUITY:
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CURRENT
LIABILITIES:
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Accounts
payable
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$2,747,000
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$2,010,000
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Accrued
expense and other liabilities
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543,000
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464,000
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Product
returns
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276,000
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256,000
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Lease
liability - current portion
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44,000
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46,000
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Line
of credit
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2,500,000
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-
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Total
current liabilities
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6,110,000
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2,776,000
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LONG-TERM LEASE
LIABILITY, net of current portion
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196,000
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208,000
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TOTAL
LIABILITIES
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6,306,000
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2,984,000
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STOCKHOLDERS'
EQUITY:
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Preferred
stock, $0.01 par value, 10,000,000 shares authorized, none
outstanding
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as
of March 31, 2020 and December 31, 2019
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Common
stock, $.01 par value, 15,000,000 shares authorized; 1,060,033 and
1,054,516
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issued
and outstanding as of March 31, 2020 and December 31, 2019
respectively
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12,000
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12,000
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Treasury
stock, 210,631 and 198,731 shares, respectively
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(1,790,000)
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(1,619,000)
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Additional
paid-in capital
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32,154,000
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32,055,000
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Accumulated
deficit
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(25,678,000)
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(27,106,000)
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Total
stockholders' equity
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$4,698,000
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$3,342,000
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
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$11,004,000
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$6,326,000
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The
accompanying notes are an integral part of these condensed
consolidated financial statements
FITLIFE BRANDS, INC.
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CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
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FOR
THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
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Three months
ended
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March
31
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2020
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2019
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(Unaudited)
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Revenue
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$6,151,000
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$5,878,000
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Cost of goods
sold
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3,414,000
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3,337,000
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Gross
profit
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2,737,000
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2,541,000
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OPERATING
EXPENSES:
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General
and administrative
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733,000
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774,000
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Selling
and marketing
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671,000
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550,000
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Depreciation
and amortization
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12,000
|
15,000
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Total
operating expenses
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1,416,000
|
1,339,000
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OPERATING
INCOME
|
1,321,000
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1,202,000
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OTHER EXPENSES
(INCOME)
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Interest
expense
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4,000
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15,000
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Gain
on settlement
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(70,000)
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-
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Total
other expenses (income)
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(66,000)
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15,000
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NET
INCOME
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1,387,000
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1,187,000
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PROVISION FOR
INCOME TAXES
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(41,000)
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-
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NET
INCOME
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1,428,000
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1,187,000
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NET INCOME
AVAILABLE TO COMMON SHAREHOLDERS
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$1,428,000
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$1,187,000
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NET INCOME PER
SHARE AVAILABLE TO COMMON SHAREHOLDERS:
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Basic
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$1.36
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$1.07
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Diluted
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$1.27
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$0.94
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Basic
weighted average common shares
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1,051,752
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1,111,943
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Diluted
weighted average common shares
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1,126,303
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1,268,526
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The
accompanying notes are an integral part of these condensed
consolidated financial statements.
FITLIFE BRANDS, INC.
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CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
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FOR
THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
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(Unaudited)
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Additional
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Series
A Preferred
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Common
Stock
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Treasury
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Paid-in
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Accumulated
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Shares
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Amount
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Shares
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Amount
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Stock
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Capital
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Deficit
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Total
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THREE MONTHS ENDED
MARCH 31, 2020
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DECEMBER 31,
2019
|
-
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$-
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1,054,516
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$12,000
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$(1,619,000)
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$32,055,000
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$(27,106,000)
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$3,342,000
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Fair value of
common stock issued for services
|
-
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-
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417
|
-
|
-
|
16,000
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-
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16,000
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Repurchase of common
stock
|
-
|
-
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(11,900)
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-
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(171,000)
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-
|
-
|
(171,000)
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Exercise of stock
options
|
-
|
-
|
17,000
|
-
|
-
|
71,000
|
-
|
71,000
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Fair value of
vested common shares and options issued for services
|
-
|
-
|
-
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-
|
-
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12,000
|
-
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12,000
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Net
income
|
-
|
-
|
-
|
-
|
-
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-
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1,428,000
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1,428,000
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MARCH 31,
2020
|
-
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$-
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1,060,033
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$12,000
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$(1,790,000)
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$32,154,000
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$(25,678,000)
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$4,698,000
|
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THREE MONTHS ENDED
MARCH 31, 2019
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DECEMBER 31,
2018
|
600
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$-
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1,111,943
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$11,000
|
$-
|
$32,107,000
|
$(29,804,000)
|
$2,314,000
|
Fair value of
common stock issued for services
|
-
|
-
|
2,009
|
-
|
-
|
23,000
|
-
|
23,000
|
Fair value of
vested common shares and options issued for services
|
-
|
-
|
-
|
-
|
-
|
26,000
|
-
|
26,000
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
1,187,000
|
1,187,000
|
|
|
|
|
|
|
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|
MARCH 31,
2019
|
600
|
$-
|
1,113,952
|
$11,000
|
$-
|
$32,156,000
|
$(28,617,000)
|
$3,550,000
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
FITLIFE
BRANDS, INC.
|
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CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
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FOR
THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
|
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|
Three
months ended
March
31
|
|
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2020
|
2019
|
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(Unaudited)
|
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CASH FLOWS FROM
OPERATING ACTIVITIES:
|
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Net
income
|
$1,428,000
|
$1,187,000
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
Depreciation
and amortization
|
12,000
|
15,000
|
Allowance
for doubtful accounts
|
6,000
|
(4,000)
|
Allowance
for inventory obsolescence
|
-
|
12,000
|
Common
stock issued for services
|
16,000
|
23,000
|
Fair
value of options issued for services
|
12,000
|
26,000
|
Right
of use asset net of amortization and lease liability
|
2,000
|
3,000
|
Changes
in operating assets and liabilities:
|
|
|
Accounts
receivable - trade
|
(2,332,000)
|
(2,244,000)
|
Inventories
|
(25,000)
|
1,173,000
|
Prepaid
expense
|
46,000
|
110,000
|
Accounts
payable
|
737,000
|
(321,000)
|
Accrued
interest
|
4,000
|
15,000
|
Accrued
liabilities and other liabilities
|
75,000
|
20,000
|
Product
returns
|
20,000
|
(136,000)
|
Net
cash provided by (used in) operating activities
|
1,000
|
(121,000)
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
Net
cash provided by investing activities
|
-
|
-
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
Proceeds
from issuance of notes payable
|
-
|
300,000
|
Proceeds
from exercise of stock options
|
71,000
|
-
|
Proceeds
from line of credit
|
2,500,000
|
-
|
Repurchases
of common stock
|
(171,000)
|
-
|
Net
cash provided by financing activities
|
2,400,000
|
300,000
|
|
|
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CHANGE IN
CASH
|
2,401,000
|
179,000
|
CASH, BEGINNING OF
PERIOD
|
265,000
|
259,000
|
CASH, END OF
PERIOD
|
$2,666,000
|
$438,000
|
|
|
|
Supplemental
disclosure operating activities
|
|
|
Cash paid for
interest
|
$-
|
$15,000
|
|
|
|
Non-cash
investing and financing activities
|
|
|
Recording of lease
asset and liability upon adoption of ASU-2016-02
|
$-
|
$343,000
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
FITLIFE BRANDS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(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 Sports,
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, par value $0.01 per share
(“Common
Stock”), currently 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.
On March 20, 2020, the Company drew on the
Line of Credit in an amount equal to $2.5 million (the
"Advance"), which Advance
was repaid on April 29, 2020.
The Company elected to borrow such amounts to ensure it maintained
ample financial flexibility in light of the spread of the novel
coronavirus ("COVID-19").
The Advance was intended to provide the Company with additional
liquidity given the uncertainty
regarding the timing of collection of certain accounts receivable,
most of which have been collected, and in anticipation of an
expected negative impact on sales to GNC and our other wholesale
customers resulting from the COVID-19 outbreak.
Repayment of Outstanding Notes
On December
26, 2018, the Company issued a line of credit promissory note to
Sudbury Capital Fund, LP
("Sudbury") in the principal amount of $600,000 (the
“Sudbury
Note”), with an initial advance to the Company in the
amount of $300,000. In addition, on December 26, 2018, the Company
also issued a promissory note to Dayton Judd, the Company’s Chair of the Board and Chief
Executive Officer, in the principal amount of $200,000 (the
“Judd Note”)
(together with the Sudbury Note, the “Notes”).
The
Notes matured on the earlier to occur of a Change in Control of the
Company, as defined in the Notes, or December 31, 2019, and
required monthly principal and interest payments beginning April 1,
2019, with a final payment of unpaid principal and interest due
December 31, 2019. Proceeds from the sale of the Notes, along with
existing cash balances, were used to retire all outstanding
indebtedness under the terms of a previous credit agreement
totaling approximately $590,000 at December 26, 2018.
On
September 24, 2019, the Company repaid all outstanding balances due
on 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 August 16, 2019, the Company's
Board of Directors (the "Board")
authorized management to repurchase up to $500,000 of the Company's
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. On September 23, 2019, the Board
approved an amendment to the Company’s 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.
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.
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 March 31, 2020, the Company repurchased 11,900
shares of Common Stock, or approximately 1% of the issued and
outstanding shares of the Company, through 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
|
January
2020
|
11,900
|
$14.35
|
11,900
|
$1,110,917
|
February
2020
|
-
|
-
|
-
|
$1,110,917
|
March
2020
|
-
|
-
|
-
|
$1,110,917
|
Subtotal
|
11,900
|
$14.35
|
11,900
|
|
Conversion of Series A Preferred Stock
On December 23, 2019, Sudbury voluntarily converted its 550 shares
of Series A Preferred into Common Stock in accordance with the
terms of the Series A Preferred Stock Certificate of Designations.
In conjunction with the conversion, the Company issued to Sudbury a
total of 123,222 shares of Common Stock and paid accrued dividends
of $7,454. Following such conversion, no shares of Series A
Preferred remain outstanding, and the Company has no further
obligations under the Certificate of Designations, including the
obligation to pay preferred dividends.
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
three-month period ended March 31, 2020 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2020. 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, 2019, as filed with the
Securities and Exchange Commission on March 30, 2020.
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
March 31,
|
|
|
2020
|
2019
|
|
(unaudited)
|
|
Net
income available to common shareholders
|
$1,428,000
|
$1,187,000
|
Weighted
average common shares - basic
|
1,051,752
|
1,111,943
|
Dilutive
effect of outstanding warrants and stock options
|
74,551
|
156,583
|
Weighted
average common shares - diluted
|
1,126,303
|
1,268,526
|
|
|
|
Net
income per common share:
|
|
|
Basic
|
$1.36
|
$1.07
|
Diluted
|
$1.27
|
$0.94
|
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 consolidated financial
statements.
Goodwill
In
January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill
and Other (Topic 350): Simplifying the Accounting for Goodwill
Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment
test, which required a hypothetical purchase price allocation. A
goodwill impairment will now be the amount by which a reporting
unit’s carrying value exceeds its fair value, not to exceed
the carrying amount of goodwill. This update also eliminated the
requirements for any reporting unit with a zero or negative
carrying amount to perform a qualitative assessment and, if it
fails that qualitative test, to perform Step 2 of the goodwill
impairment test. The Company adopted ASU 2017-04 on January 1, 2020
and applied the requirements prospectively. While we have concluded
that a triggering event did not occur during the quarter ended
March 31, 2020, the prolonged duration and severity of the COVID-19
pandemic could result in future goodwill impairment charges.
We will continue to monitor the effects of the COVID-19
pandemic’s impact on our business, and review for impairment
indicators as necessary in the upcoming months.
Customer Concentration
Net sales to GNC during the three-month periods ended March 31,
2020 and 2019 were $4,697,000 and $4,864,000, respectively,
representing 76% and 82% of total net revenue,
respectively.
Gross accounts receivable attributable
to GNC as of March 31, 2020 and 2019 were $4,186,000 and
$3,692,000, respectively, representing 91% and 91% of the Company’s total
accounts receivable balance, respectively.
For the quarters ended March 31, 2020 and 2019, online sales
accounted for 14% and 10% 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.
For
direct-to-consumer sales, the Company allows for returns within 30
days of purchase. Our wholesale customers, such as GNC, may return
purchased products to the Company under certain circumstances,
which include expired or soon-to-be-expired products located in GNC
corporate stores or at any of its distribution centers, and
products that are subject to a recall or that contain an ingredient
or ingredients that are subject to a recall by the U.S. Food and
Drug Administration.
A
right of return does not represent a separate performance
obligation, but because customers are allowed to return products,
the consideration to which the Company expects to be entitled is
variable. Upon evaluation of returns, the Company determined that
less than 5% of products are returned, and therefore believes it is
probable that such returns will not cause a significant reversal of
revenue in the future. We assess our contracts and the
reasonableness of our conclusions on a quarterly
basis.
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.
Income Taxes
As
of December 31, 2019, the Company had federal net operating loss
(“NOL”) carryforwards available to offset future
taxable income of approximately $26.6 million, subject to Internal
Revenue Service (“IRS”) statutory limitations. To the
extent the Company reports federal taxable income for 2020, such
income will be eliminated by net operating losses. This
reduction in deferred tax assets would be offset by a corresponding
reduction in the deferred tax asset valuation allowance resulting
in no federal income tax expense. Accordingly, no federal
income tax expense is recorded for the quarter ended March 31, 2020
based on anticipated utilization of net operating loss
carryforwards.
During
the quarter ended March 31, 2020, the Company received a tax refund
of $41,000 relating to a portion of the Company’s alternative
minimum tax carryforward, which became refundable as a result of
the 2017 Tax Cuts and Jobs Act.
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 March 31, 2020
and December 31, 2019.
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 March 31, 2020 and December 31,
2019 were as follows:
|
|
|
|
March 31,
2020
|
December 31,
|
|
(unaudited)
|
2019
|
Finished
goods
|
$2,669,000
|
$2,688,000
|
Components
|
484,000
|
440,000
|
Allowance
for obsolescence
|
(130,000)
|
(130,000)
|
Total
|
$3,023,000
|
$2,998,000
|
NOTE 5 - PROPERTY AND EQUIPMENT
The
Company’s fixed assets as of March 31, 2020 and December 31,
2019 were as follows:
|
|
|
|
March 31,
2020
|
December 31,
|
|
(unaudited)
|
2019
|
Equipment
|
$902,000
|
$902,000
|
Accumulated
depreciation
|
(778,000)
|
(766,000)
|
Total
|
$124,000
|
$136,000
|
Depreciation
expense for the three months ended March 31, 2020 and 2019 was
$12,000 and $15,000, 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 Chief
Executive Officer and Chair of the Board, 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 three months ended
March 31, 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. 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.
Line of Credit – Mutual of Omaha Bank
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.
On
March 20, 2020, the Lender advanced the Company $2.5 million under
the Line of Credit, which amount was repaid on April 29, 2020. The
advance was intended to provide the Company with additional
liquidity given the uncertainty regarding the timing of collection
of certain accounts receivable, most of which have been collected,
and in anticipation of an expected negative impact on sales to GNC
and our other wholesale customers resulting from the COVID-19
outbreak.
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 Topic 842,
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 three months ended March 31, 2020, the Company made payments of
$20,000 towards the lease liability. As of March 31, 2020,
lease liability amounted to $240,000. Topic 842 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 three months ended March 31, 2020 was
$22,000. The right-of-use asset at March 31, 2020 was
$239,000, net of amortization of $241,000.
|
Three months ended
|
Lease
Cost
|
March 31, 2020
|
|
(unaudited)
|
Operating
lease cost (included in general and administrative in the Company's
unaudited
|
|
and
condensed consolidated statement of operations)
|
$22,000
|
|
|
Other
information
|
|
Cash
paid for amounts included in the measurement of lease liabilities
for the first quarter 2020
|
$-
|
Weighted
average remaining lease term - operating leases (in
years)
|
4.56
|
Average
discount rate - operating leases
|
9%
|
Operating
leases
|
At
March 31, 2020
|
Long-term
right-of-use assets
|
$239,000
|
Short-term
operating lease liabilities
|
$44,000
|
Long-term
operating lease liabilities
|
196,000
|
Total
operating lease liabilities
|
$240,000
|
Year ending
|
Operating leases
|
2020
(remaining 9 months)
|
47,000
|
2021
|
67,000
|
2022
|
67,000
|
2023
|
61,000
|
2024
|
51,000
|
Less:
Imputed interest/present value discount
|
(53,000)
|
Present
value of lease liabilities
|
$240,000
|
NOTE 8 - EQUITY
Common Stock
a.
|
Common
Stock Issued for Services
|
The
Company is authorized to issue 15.0 million shares of Common Stock
of which 1,060,033 shares of Common Stock were issued and
outstanding as of March 31, 2020.
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 Monte Carlo
simulations on a binomial model with the assistance of a valuation
specialist using a derived service period of nine years. During the
three months ended March 31, 2020, the Company recorded
compensation expense of $12,000 to amortize the fair value of these
shares of restricted Common Stock based upon the prorated derived
service period.
During
the three-month period ended March 31, 2019, the Company issued
2,009 shares of Common Stock
with a fair value of $11,000 to
employees and directors for services rendered. The shares were
valued at their respective dates of issuance.
During the three-month period ended March 31,
2020, the Company issued 417 shares of
Common Stock with a fair value of $4,000 to directors for services
rendered. The shares were valued at their respective date of
issuance.
b.
|
Share
Repurchase Program
|
On August 16, 2019, the Company's
Board authorized management to repurchase up to $500,000 of the
Company's Common Stock over the next 24 months, which Share
Repurchase Program was previously reported on the Company's Current
Report on Form 8-K filed August 20, 2019. On September 23, 2019,
the Board approved an amendment to the Company’s share
repurchase program to increase the repurchase of up to $1,000,000
of the Company's Common Stock, its Series A Preferred, and
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. 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.
During the three-month period ended March 31,
2020, the Company repurchased 11,900 shares of Common Stock, or
approximately 1% of the issued and outstanding shares of the
Company, through private transactions for the aggregate purchase
price of $171,000. The
Company is accounting for these shares as treasury
stock.
c.
|
Reverse/Forward
Split
|
On April 11, 2019, the Company filed two
Certificates of Change with the Secretary of State of the State of
Nevada, the first to effect a reverse stock split of both the
Company’s issued and outstanding and authorized
Common Stock, at a ratio of 1-for-8,000, and the second
to effect a forward stock split of both the Company’s issued
and outstanding and authorized Common Stock at a ratio of
800-for-1. The Reverse/Forward Split became effective, and the
Company’s Common Stock began trading on a post-split basis,
on Tuesday, April 16, 2019.
The
Company did not issue any fractional shares as a result of the
Reverse/Forward Split. Holders of fewer than 8,000 shares of the
Common Stock immediately prior to the Reverse/Forward Split
received cash in lieu of fractional shares based on the 5-day
volume weighted average price of the Company’s Common Stock
immediately prior to the Reverse/Forward Split, which was $0.57 per
pre-split share. As a result, such holders ceased to be
stockholders of the Company. Holders of more than 8,000 shares of
Common Stock immediately prior to the Reverse/Forward Split did not
receive fractional shares; instead any fractional shares resulting
from the Reverse/Forward Split were rounded up to the next whole
share.
As
a result of the Reverse/Forward Split, the number of shares of
Company Common Stock authorized for issuance under the
Company’s Articles of Incorporation, as amended, was
decreased from 150,000,000 shares to 15,000,000 shares. The
Reverse/Forward Split did not affect the Company’s preferred
stock, nor did it affect the par value of the Company’s
Common Stock.
The
share and per share amounts included in these unaudited interim
condensed consolidated financial statements and footnotes have been
retroactively adjusted to reflect the 1-for-10 aspect of the
Reverse/Forward Split as if it occurred as of the earliest period
presented.
Options
Information regarding options outstanding as of
March 31, 2020 is as follows:
|
|
|
Weighted
|
|
|
Weighted
|
Average
|
|
Number
of
|
Average
Exercise
|
Remaining
Life
|
|
Options
|
Price
|
(Years)
|
Outstanding,
December 31, 2018
|
154,521
|
$13.10
|
5.7
|
Issued
|
8,000
|
6.85
|
|
Exercised
|
-
|
|
|
Forfeited
|
(13,236)
|
24.45
|
|
Outstanding,
December 31, 2019
|
149,285
|
$11.76
|
5.0
|
Issued
|
-
|
|
|
Exercised
|
(17,000)
|
4.20
|
|
Forfeited
|
(36,500)
|
19.46
|
|
Outstanding,
March 31, 2020
|
95,785
|
$10.17
|
6.6
|
|
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
|
90,210
|
6.76
|
$5.23
|
66,710
|
$6.08
|
$23.10 - $144.34
|
5,575
|
3.52
|
$90.20
|
5,575
|
$90.20
|
|
95,785
|
6.57
|
$10.17
|
72,285
|
$11.20
|
During
the three-month periods ended March 31, 2020 and 2019, the Company
recognized compensation expense of $12,000 and $26,000,
respectively, to account for the fair value of stock options that
vested during the period.
Total
intrinsic value of outstanding stock options as of March 31, 2020
amounted to $437,000. Future
unamortized compensation expense on the unvested outstanding
options at March 31, 2020 amounted to $11,750, which will be
recognized through October 2020.
Warrants
Total outstanding
warrants to purchase shares of Company Common Stock as of March 31,
2020 and December 31, 2019 amounted to 35,870 shares. Total intrinsic
value as of March 31, 2020 amounted to $157,828.
During
the period ended March 31, 2020, no warrants were granted and no
warrants expired unexercised.
Outstanding
|
|
Exercise
Price
|
|
Issuance
Date
|
|
Expiration
Date
|
|
Vesting
|
35,870
|
|
$
4.60
|
|
11/13/18
|
|
11/13/23
|
|
Yes
|
NOTE 9 – COMMITMENTS AND
CONTINGENCIES
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’ officers or directors in their capacities
as such, in which an adverse decision could have a material adverse
effect.
NOTE 10 – SUBSEQUENT EVENTS
There are many uncertainties regarding the current
coronavirus ("COVID-19") pandemic, and the Company is closely monitoring
the impact of the pandemic on all aspects of its business,
including how it will impact its services, customers, employees,
vendors, and business partners. While the pandemic did not
materially adversely affect the Company’s financial results
and business operations in the Company’s first fiscal quarter
ended March 31, 2020, our future financial position and operating
results will likely be materially and adversely affected, although
the extent of such affects cannot be determined at this time. The
Company expects to continue to assess the evolving impact of the
COVID-19 pandemic and intends to make adjustments to its responses
accordingly.
The Coronavirus Aid, Relief, and Economic Security
Act ("CARES
Act") was enacted on March 27,
2020 in the United States. As previously disclosed in the
Company’s Form 8-K filed with the SEC on May 1, 2020, on
April 27, 2020, the Company received proceeds from a loan in the
amount of approximately $449,700 from its lender, CIT Bank, N.A.
(the “Lender”), pursuant to approval by the U.S. Small
Business Administration (the “SBA”) for the Lender to fund the
Company’s request for a loan under the SBA’s Paycheck
Protection Program (“PPP Loan”) created as part of the recently enacted
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
intends to use 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 is scheduled to mature on April 27, 2022, has a 1.00% interest
rate, and is 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.
In accordance with the Subsequent Events Topic of the FASB ASC 855,
we have evaluated subsequent events, through the filing date
and noted no further subsequent events that are reasonably
likely to impact the Company’s financial
statements.
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 Sports,
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, par value $0.01 per share
(“Common
Stock”), currently 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.
On March 20, 2020, the Company drew on the
Line of Credit in an amount equal to $2.5 million (the
"Advance"), which Advance
was repaid on April 29, 2020.
The Company elected to borrow such amounts to ensure it maintains
ample financial flexibility in light of the spread of the novel
coronavirus ("COVID-19").
The advance was intended to provide
the Company with additional liquidity given the uncertainty
regarding the timing of collection of certain accounts receivable,
most of which have been collected, and in anticipation of an
expected negative impact on sales to GNC and our other wholesale
customers resulting from the COVID-19 outbreak.
Share Repurchase Plan
On August 16, 2019, the Company's
Board of Directors (the "Board")
authorized management to repurchase up to $500,000 of the Company's
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. On September 23, 2019, the Board
approved an amendment to the Company’s 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. 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.
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 March 31, 2020, the Company repurchased 11,900
shares of Common Stock, or approximately 1% of the issued and
outstanding shares of the Company, through 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
|
January
2020
|
11,900
|
$14.35
|
11,900
|
$1,110,917
|
February
2020
|
-
|
-
|
-
|
$1,110,917
|
March
2020
|
-
|
-
|
-
|
$1,110,917
|
Subtotal
|
11,900
|
$14.35
|
11,900
|
|
Results of Operations
Comparison of the three months ended March 31, 2020 to the three
months ended March 31, 2019:
|
Three months ended
|
|
|
|
|
March 31, 2020
|
March 31, 2019
|
Change
|
%
|
|
(unaudited)
|
|
|
|
Revenue
|
$6,151,000
|
$5,878,000
|
$273,000
|
5%
|
Cost of goods
sold
|
(3,414,000)
|
(3,337,000)
|
(77,000)
|
2%
|
Gross
profit
|
2,737,000
|
2,541,000
|
196,000
|
8%
|
Operating
expenses
|
(1,416,000)
|
(1,339,000)
|
(77,000)
|
6%
|
Income from
operations
|
1,321,000
|
1,202,000
|
119,000
|
10%
|
Other income
(expense)
|
66,000
|
(15,000)
|
81,000
|
n/a
|
Provision for
income tax
|
41,000
|
-
|
41,000
|
n/a
|
Net
income
|
$1,428,000
|
$1,187,000
|
$241,000
|
20%
|
Net
Sales. Revenue for
the three months ended March 31, 2020 increased
5% to $6,151,000 as compared
to $5,878,000
for the three months ended March 31,
2019. Revenue for the three-month period ended March 31, 2020
compared to the prior three-month period, in part, reflects
improvements in our wholesale business and growth in our online
direct-to-consumer offering.
Online revenue during the three months ended March
31, 2020 was approximately 14% of total revenue, compared to
roughly 10% of total revenue during the same three-month period in
2019. 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 recent COVID-19 outbreak has created
significant economic uncertainty and volatility, which has impacted
our business and operations, including those of our third-party
suppliers and our wholesale partners. In this regard, the duration
and impact of such outbreak on our operating results and financial
condition cannot be determined at this time, although management
currently anticipates that shelter in place restrictions and the
impact of those restrictions on our retail and wholesale partners,
including effects on their liquidity and ability to maintain
current store counts, will have a material adverse effect on our
results from operations beginning in the quarter ending June 30,
2020.
Cost of Goods
Sold. Cost of goods
sold for the three months ended March 31, 2020 increased
to $3,414,000 as compared to
$3,337,000 for the three months ended March 31, 2019. The increase
during the three-month period is principally attributable to higher
revenue.
Gross
Profit. Gross profit for
the three months ended March 31, 2020 increased to $2,737,000 as
compared to $2,541,000 for the three months ended March 31, 2019.
The increase during the three-month period is principally
attributable to higher revenue.
Gross margin for the three months ended March 31,
2020 increased to 44% compared to 43% during the same period
last year. The increase was
primarily attributable to product mix and higher online sales
volumes.
General and Administrative
Expense. General and
administrative expense for the three months ended March 31,
2020 decreased to $733,000 as
compared to $774,000 for the
three months ended March 31, 2019. The decrease in the three-month
period ended March 31, 2020 reflects initiatives the Company put in
place during 2019 to reduce operating expense.
Selling and Marketing
Expense. Selling and
marketing expense for the three months ended March 31, 2020
increased to $671,000 as compared to
$550,000 for the three months ended March 31, 2019. The change in
the three-month period ended March 31, 2020 reflects management's
efforts to make calculated investments in marketing activities in
an effort to drive incremental revenue.
Depreciation and Amortization
Expense. Depreciation and amortization expense
for the three months ended March 31, 2020 decreased
to $12,000 as compared to
$15,000 for the three months ended
March 31, 2019. The decrease was primarily attributable to a reduction
in depreciation expense due to certain assets becoming fully
depreciated.
Liquidity and Capital
Resources
At
March 31, 2020, we had positive working capital of approximately
$4,296,000, compared to $2,925,000 at December 31, 2019. Our
principal sources of liquidity at March 31, 2020 consisted of
$2,666,000 of cash and $4,692,000 of accounts
receivable.
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 new 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.
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 Chair of the Board and Chief Executive
Officer, in the principal amount of $600,000, with an initial
advance to the Company in the amount of $300,000. In addition, on
December 26, 2018, the Company also issued a promissory note to Mr.
Judd in the principal amount of $200,000. On September 24, 2019,
the Company repaid all outstanding balances due on the Notes
including accrued but unpaid interest thereon, of
$615,000.
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.
On
March 20, 2020, our Lender advanced the Company $2.5 million under
the Line of Credit, which amounts were repaid on April 29, 2020.
The advance was intended to provide the Company with additional
liquidity given the uncertainty regarding the timing of collection
of certain accounts receivable, most of which have been collected,
and in anticipation of an expected negative impact on sales to GNC
and our other wholesale customers resulting from the COVID-19
outbreak.
Cash Provided by (Used in)
Operations. Our cash
provided by operating activities for the three months ended March
31, 2020 was $1,000, as compared to cash used in operations of
$(121,000) for the three months ended March 31,
2019.
Cash Provided by Investing
Activities. There was no cash
provided by or used in investing activities for the three-month
periods ended March 31, 2020 and 2019.
Cash Provided by Financing
Activities. Cash provided by
financing activities for the three months ended March 31,
2020 was $2,400,000 as compared to cash provided by financing
activities of $300,000 during the three months ended March 31,
2019.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation
of these consolidated financial statements and related disclosures
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, expense, and related
disclosure of contingent assets and liabilities. We evaluate, on an
on-going basis, our estimates and judgments, including those
related to the useful life of the assets. We base our estimates on
historical experience and assumptions that we believe to be
reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
The
methods, estimates and judgments we use in applying our most
critical accounting policies have a significant impact on the
results that we report in our consolidated financial statements.
The SEC considers an entity’s most critical accounting
policies to be those policies that are both most important to the
portrayal of a company’s financial condition and results of
operations and those that require management’s most
difficult, subjective or complex judgments, often as a result of
the need to make estimates about matters that are inherently
uncertain at the time of estimation. For a more detailed discussion
of the accounting policies of the Company, see Note 3 of the Notes
to the Condensed Consolidated Financial Statements included in this
Quarterly Report, “Summary
of Significant Accounting Policies”.
We
believe the following critical accounting policies, among others,
require significant judgments and estimates used in the preparation
of our consolidated financial statements.
Use of Estimates
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. 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,
allowance for deferred tax assets and 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.
Goodwill
In
January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill
and Other (Topic 350): Simplifying the Accounting for Goodwill
Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment
test, which required a hypothetical purchase price allocation. A
goodwill impairment will now be the amount by which a reporting
unit’s carrying value exceeds its fair value, not to exceed
the carrying amount of goodwill. This update also eliminated the
requirements for any reporting unit with a zero or negative
carrying amount to perform a qualitative assessment and, if it
fails that qualitative test, to perform Step 2 of the goodwill
impairment test. The Company adopted ASU 2017-04 on January 1, 2020
and applied the requirements prospectively. While we have concluded
that a triggering event did not occur during the quarter ended
March 31, 2020, the prolonged duration and severity of the COVID-19
pandemic could result in future goodwill impairment charges.
We will continue to monitor the effects of the COVID-19
pandemic’s impact on our business, and review for impairment
indicators as necessary in the upcoming
months.
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.
For
direct-to-consumer sales, the Company allows for returns within 30
days of purchase. Our wholesale customers, such as GNC, may return
purchased products to the Company under certain circumstances,
which include expired or soon-to-be-expired products located in GNC
corporate stores or at any of its distribution centers, and
products that are subject to a recall or that contain an ingredient
or ingredients that are subject to a recall by the U.S. Food and
Drug Administration.
A
right of return does not represent a separate performance
obligation, but because customers are allowed to return products,
the consideration to which the Company expects to be entitled is
variable. Upon evaluation of returns, the Company determined that
less than 5% of products are returned, and therefore believes it is
probable that such returns will not cause a significant reversal of
revenue in the future. We assess our contracts and the
reasonableness of our conclusions on a quarterly
basis.
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.
Recent Accounting Pronouncements
See
Note 3 of the Condensed Consolidated Financial Statements included
in this Quarterly Report for a description of recent accounting
pronouncements believed by management to have a material impact on
our present or future financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Our
business is currently conducted principally in the United States.
As a result, our financial results are not materially affected by
factors such as changes in foreign currency exchange rates or
economic conditions in foreign markets. We do not engage in hedging
transactions to reduce our exposure to changes in currency exchange
rates although, as the geographical scope of our business broadens,
we may do so in the future.
Our
exposure to risk for changes in interest rates relates primarily to
any borrowings under our existing Line of Credit, and our
investments in short-term financial instruments. As of March 31,
2020, the Company owed $2.5 million 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.
We
do not hold any derivative instruments and do not engage in any
hedging activities.
ITEM
4. CONTROLS AND
PROCEDURES
(a) Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange
Commission’s rules and forms and that such information is
accumulated and communicated to our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Our disclosure
controls and procedures were designed to provide reasonable
assurance that the controls and procedures would meet their
objectives. As required by SEC Rule 13a-15(b), our Chief Executive
Officer and Chief Financial Officer carried out an evaluation of
the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this
report. Based on the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance
level.
Our Chief Executive Officer and Chief Financial
Officer are responsible for establishing and maintaining adequate
internal control over our financial reporting. In order to evaluate
the effectiveness of internal control over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act, management has
conducted an assessment, including testing, using the criteria in
Internal Control — Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Our system of internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Management has
used the framework set forth in the report entitled Internal
Control-Integrated Framework published by the COSO to evaluate the
effectiveness of our internal control over financial reporting.
Based on this assessment, our Chief Executive Officer and Chief
Financial Officer have concluded that our internal control over
financial reporting was effective as of March 31, 2020. This
Quarterly Report does not include an attestation report of the
Company's independent registered public accounting firm regarding
internal control over financial reporting. Management's report was
not subject to attestation by the Company's independent registered
public accounting firm pursuant to rules of the SEC that permit the
Company to provide only management's report in this annual report.
There has been no change in our internal controls over financial
reporting during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our
internal controls over financial reporting.
(b) Changes
in Internal Controls Over Financial Reporting
There
have been no changes in our internal controls over financial
reporting or in other factors that could materially affect, or are
reasonably likely to affect, our internal controls over financial
reporting during the quarter ended March 31, 2020. There have not
been any significant changes in the Company’s critical
accounting policies identified since the Company filed its Annual
Report on Form 10-K for the year ended December 31,
2019.
PART II
OTHER INFORMATION
ITEM 1. 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 1A. RISK FACTORS
Our
results of operations and financial condition are subject to
numerous risks and uncertainties described in our Annual Report on
Form 10-K for our fiscal year ended December 31, 2019, filed on
March 30, 2020. You should carefully consider these risk factors in
conjunction with the other information contained in this Quarterly
Report. Should any of these risks materialize, our business,
financial condition and future prospects could be negatively
impacted.
ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES
During
the quarter ended March 31, 2020, the Company repurchased 11,900
shares of Common Stock, or approximately 1% of the issued and
outstanding shares of the Company, through 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
|
January
2020
|
11,900
|
$14.35
|
11,900
|
$1,110,917
|
February
2020
|
-
|
-
|
-
|
$1,110,917
|
March
2020
|
-
|
-
|
-
|
$1,110,917
|
Subtotal
|
11,900
|
$14.35
|
11,900
|
|
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
There
were no defaults upon senior securities during the three-month
period ended March 31, 2020.
ITEM 5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
|
Certification of
Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act.
|
|
|
Certification of
Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act.
|
|
|
Certification of
Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act.
|
|
|
Certification of
Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act.
|
|
101.INS
|
|
XBRL
Instance Document
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase
|
SIGNATURES
Pursuant
to the requirements of 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, thereunto duly
authorized.
Registrant
Date:
May 15, 2020
|
FitLife Brands, Inc.
By: /s/ Dayton
Judd
|
|
|
Dayton
Judd
|
|
|
Chief
Executive Officer and Chair
(Principal
Executive Officer)
|
Registrant
Date:
May 15, 2020
|
FitLife Brands, Inc.
By: /s/ Susan
Kinnaman
|
|
|
Susan
Kinnaman
|
|
|
Chief
Financial Officer
(Principal
Financial Officer)
|
-22-