FITLIFE BRANDS, INC. - Annual Report: 2022 (Form 10-K)

Forward Looking Statements — Cautionary Language

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

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

Use of Market and Industry Data 

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

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

PART I

ITEM 1.  BUSINESS

As used in this Annual Report, “we”, “us”, “our”, “FitLife”, “FitLife Brands”, the “Company” or “our company” refers to FitLife Brands, Inc. and all of its subsidiaries.

Overview

FitLife Brands, Inc. (the “Company”) is a national provider of innovative and proprietary nutritional supplements for health-conscious consumers marketed under the following brand names: (i) NDS Nutrition, PMD Sports, SirenLabs, CoreActive, Nutrology, and Metis Nutrition (together, “NDS Products”); and (ii) iSatori, BioGenetic Laboratories, and Energize (together, the "iSatori Products"). The Company distributes the NDS Products principally through franchised General Nutrition Centers, Inc. (“GNC”) stores located both domestically and internationally, and, with the launch of Metis Nutrition, through corporate GNC stores in the United States. The iSatori Products are sold through more than 17,000 retail locations, which include specialty, mass, and online.

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

Recent Developments

Entry into Arrangement Agreement

On December 4, 2022, FitLife entered into an Arrangement Agreement (the “Arrangement Agreement”) with 1000374984 Ontario Inc. (“Subsidiary”, and collectively with FitLife, the “Company”), and Mimi’s Rock Corp. (“MRC”), pursuant to which the Company agreed to acquire MRC for a total cash purchase price of approximately $17.0 million (CAD $23.2 million), of which approximately $10.4 million (CAD $14.2 million) would be used to retire all of MRC’s outstanding indebtedness, and approximately $6.6 million (CAD $9.0 million) would be used to purchase all issued and outstanding shares of MRC from its current shareholders (collectively, the “Purchase Price”) (the “Acquisition”).

The Arrangement Agreement was subject to the terms and conditions of the Plan of Arrangement, attached to the Arrangement Agreement as Schedule A (“Plan”), which Plan was made in accordance with Section 182 of the Ontario Business Corporations Act and required a court order approving the Plan.  Further, to finance the acquisition of MRC, which amount was paid in all cash, the Company’s principal bank, First Citizens Bank (the “Bank”), agreed to provide up to $12.5 million in debt financing. The obligations of the Company and MRC to consummate the Acquisition were subject to certain closing conditions, including, but not limited to, (i) the taking of all steps set forth in the Interim Order (as defined in the Arrangement Agreement) and Final Order (as defined in the Arrangement Agreement); (ii) the approval of MRC’s shareholders, and (iii) receipt of any necessary regulatory approvals.

Subsequent to the end of the fiscal year, the Acquisition was consummated on February 28, 2023.

Entry into Amended and Restated Credit Agreement

On February 23, 2023 (the “Loan Closing Date”), the Company entered into an Amended and Restated Credit Agreement with the Bank (the “Credit Agreement”), amending and restating that certain Credit Agreement, dated September 24, 2019, between the Company and the Bank. Pursuant to the Credit Agreement, the Bank provided the Company with a term loan for the principal amount of $12.5 million (“Term Loan”), and a revolving line of credit of $3.5 million (the “Credit Line”, and collectively with the Term Loan, the “Loan”). The Company used the proceeds from the Loan to fund the consummation of the Acquisition (as defined below), and for general working capital purposes, including those of MRC (as defined below).

Pursuant to the Credit Agreement: (A) the Term Loan (i) accrues interest at a per annum rate equal to 2.75% above the one-month forward-looking term rate (the “Applicable Rate”), based on the secured overnight financing rate published for such day by the Federal Reserve Bank of New York (“Term SOFR Rate”), as in effect two banking days, subject to certain limitations, prior to (a) the Loan Closing Date, in the case of the initial Term SOFR Rate, and, (b) thereafter, the applicable first day of each calendar month (“Rate Adjustment Date”), adjusted for any reserve requirement and any subsequent costs arising from a change in government regulation; and (ii) and the Company shall make payments on March 10^th, June 10^th, September 10^th, and December 10^th of each calendar year, commencing on June 10, 2023, of principal plus accrued interest on the Term Loan in amounts sufficient to fully amortize the Term Loan through February 28, 2028 (the “Term Loan Maturity Date”), with all principal and accrued interest on the Term Loan being due and payable in full on the Term Loan Maturity Date; and (B) outstanding advances under the Line of Credit (“Advances”) will accrue interest at the Applicable Rate, and commencing on April 1, 2023, and continuing on the 1^st day of each calendar month thereafter until December 23, 2023, or the date of the termination in whole of the Line of Credit as otherwise set forth in the Amended and Restated Agreement (the “LOC Termination Date”), the Company shall make payments of accrued interest on Advances, and all principal and accrued interest on outstanding Advances shall be due and payable in full on the LOC Termination Date. The Company may prepay amounts borrowed under the Loan, in whole or in part with accrued interest to the date of such prepayment on the amount prepaid, by written notice to Bank at least one business day prior to the proposed prepayment.

The Agreement contains customary events of default (each an “Event of Default”), which upon the occurrence of an Event of Default, among other things, interest will accrue at the Applicable Rate plus 2% per annum, and the Bank may declare all Obligations, with interest thereon, immediately due and payable. The Credit Agreement further contains: (X) customary representations and warranties of the Company; (Y) customary indemnification provisions whereby the Company will indemnify Bank for certain losses arising out of inaccuracies in, or breaches of, the representations, warranties and covenants of the Company, and certain other matters; and (Z) customary affirmative and negative covenants, including, without limitation, covenants: (i) to maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than 1.25 to 1.00 as tested quarterly on a trailing twelve-month basis, starting with the fiscal quarter ending March 31, 2023; (ii) to maintain a Funded Debt to EBITDA Ratio (as defined in the Credit Agreement) of not more than 2.50 to 1.00 as tested quarterly on a trailing twelve-month basis, starting with the fiscal quarter ending March 31, 2024; (iii) not to incur any indebtedness, except indebtedness already incurred on the date of the Credit Agreement, incurred for capital leases and purchase money obligations for fixed assets less than $100,000 without the Bank’s prior approval, and payable to trade creditors in the ordinary course of business; (iv) not to undertake certain fundamental or corporate changes; and (v) not to make certain Dispositions (as defined in the Credit Agreement).

Also on the Loan Closing Date, in connection with the Credit Agreement, the Company: (A) entered into a term note evidencing the Term Loan (the “Term Note”); (B) entered into a Security Agreement, by and between the Company, NDS Nutrition Products, Inc. (“NDS”), iSatori, Inc. (“IS”), Subsidiary (Subsidiary is collectively with the Company, NDS, and IS, the “Debtors”), and the Bank (the “Security Agreement”), pursuant to which all of the Company’s obligations arising from or related to the Loan (the “Obligations”) will be secured by the following assets of each of the Debtors: (i) accounts, contract rights, documents, documents of title, payment intangibles, investment property, chattel paper, instruments, deposit accounts and letter of credit right; (ii) inventory; (iii) equipment; (iv) general intangibles, including any intellectual property, consisting of any licenses, patents, copyrights, trademarks, proprietary source code or domain names; (v) accessions, attachments and other additions to the collateral; (vi) substitutes or replacements for any collateral, all proceeds, products, rents and profits of any collateral, all rights under warranties and insurance contracts covering the collateral, and any causes of action relating to the collateral; and (vii) books and records pertaining to any Collateral, including but not limited to any computer-readable memory and any computer hardware or software necessary to process such memory; and (C) approved that NDS, IS, and Ontario (collectively, the “Subsidiaries”) entered into a Guaranty Agreement with the Bank (the “Guaranty Agreement”), pursuant to which satisfaction of the Obligations by the Company are guaranteed by each of the Subsidiaries.

COVID-19 Pandemic

The COVID-19 pandemic has had an effect on the Company’s employees, business and operations and those of its customers, vendors and business partners. In this respect, the temporary or permanent closure of some of our retail partners’ store locations and the stay-at-home orders that occurred early in the pandemic negatively affected our results from operations, although much of the impact has been offset by an increase in revenue attributable to online sales, and increased sales during the more recent quarters. Our future financial position and operating results could be materially and adversely affected in the event that a resurgence of COVID-19 cases leads to new stay-at-home orders and/or further disruptions in both our supply chain and manufacturing lead-times, which could lower demand for the Company’s products and/or prevent the Company from producing and delivering its products in a timely manner, although the extent of these effects 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 business and operations accordingly. 

Inflation

The Company has experienced inflationary pressure with regard to the procurement of many of its products.  Thus far, the Company has been able to offset the impact of inflation through price increases to its customers.  In the future, however, further inflationary pressure could adversely affect the Company's operating performance if market conditions no longer permit the Company to pass through price increases to its customers.

Industry Overview

We compete principally in the nutrition industry. The Nutrition Business Journal categorizes the industry in the following segments:

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

Our Products

The Company currently focuses its sales and marketing efforts on its full line of sports, weight loss and general nutrition products that are currently marketed and sold both nationally and internationally. The Company currently markets more than 90 different NDS Products to more than 770 GNC franchise locations located in the United States, as well as to additional franchise locations in other countries, all of which are distributed through GNC’s distribution system. In addition, following the launch of Metis Nutrition, we distribute products through more than 1,575 corporate GNC stores in the United States. We sell iSatori Products through more than 17,000 specialty, mass, and online retail locations. A complete product list is available on our website at fitlifebrands.com.

NDS Products

The Company’s NDS Products include:

NDS Products also include innovative diet, health and sports nutrition supplements and related products marketed through its Core Active Nutrition product line (“Core Active”). Core Active products, which are sold exclusively online, provide essential support for accelerated fitness and nutrition goals.

iSatori Products

iSatori Products include scientifically engineered nutritional products that are sold online as well as through multiple retail partners. iSatori Products include:

Manufacturing, Sources and Availability of Raw Materials

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

Product Reformulations and New Product Identification

From time to time we reformulate existing products to address market developments and trends, and to respond to customer requests. We also continually expand our product line through the development of new products. New product ideas are derived from a number of sources including trade publications, scientific and health journals, consultants, distributors, and other third parties. Prior to reformulating existing products or introducing new products, we investigate product formulations as they relate to regulatory compliance and other issues. We introduced a total of 10 new products during the year ended December 31, 2022, which included 3 completely new products and 7 product reformulations and flavor extensions, and we introduced a total of 15 new products during the year ended December 31, 2021, which included 4 completely new products and 11 product reformulations and flavor extensions.

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

Sales, Marketing and Distribution

NDS Products

NDS Products are sold through more than 770 GNC franchise locations located throughout the United States. The Company also distributes NDS Products to additional franchise locations in other countries. In 2014, the Company transitioned distribution of NDS Products to GNC’s centralized distribution platform. Prior to the change, the majority of the Company’s revenue was realized upon direct shipment of NDS Products to individual franchise locations. For the years ended December 31, 2022 and 2021, the majority of NDS Product sales were through GNC’s centralized distribution platform.

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

iSatori Products

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

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

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

Product Returns

We currently have a 30-day product return policy for NDS Products, which allows for a 100% sales price refund for the return of unopened and undamaged products purchased from us online through one of our websites. Product sold to GNC may be returned from store shelves or the distribution center in the event the product is damaged, short dated, expired or recalled. GNC maintains a customer satisfaction program that allows customers to return product to the store for credit or refund. Subject to certain terms and restrictions, GNC may require reimbursement from vendors for unsaleable returned product through either direct payment or credit against a future invoice. We also support a product return policy for iSatori Products, whereby customers can return product for credit or refund. Product returns can and do occur from time to time and can be material.

Competition

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

Regulatory Matters

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

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

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

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

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

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

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

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

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

Patents, Trademarks and Proprietary Rights

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

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

Employees

We had 27 and 25 full-time employees as of December 31, 2022 and 2021, respectively. In addition, the Company retains consultants for certain services on an as-needed basis. We consider our employee relations to be good.

Cost of Compliance with Environmental Laws

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

Available Information

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

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

ITEM 1A - Risk Factors

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

Risk Factors Relating to our Business and Industry

The Company was profitable during the years ended December 31, 2022 and 2021. However, we may not be able to achieve sustained profitability. Our failure to sustain profitability or effectively manage growth could result in net losses, and therefore negatively affect our financial condition.

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

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

Sales to GNC’s centralized distribution platform, including indirect distribution of product to domestic and international franchisees, accounted for approximately 67% and 71% of our total sales for the years ended December 31, 2022 and 2021, respectively. GNC’s franchisees are not required to carry our products. In the event GNC ceases purchasing products from us, or otherwise reduces its purchases, our total revenue will be negatively impacted, and such impact could be material. Moreover, the transition to GNC’s centralized distribution system has had the effect of concentrating the majority of our accounts receivable with a single payor. Prior to the transition, we collected receivables from numerous franchisees. We anticipate that GNC will continue to represent a substantial portion of all accounts receivable for the foreseeable future. In the event that our sales to GNC decrease, our results from operations will be negatively affected, and such effect may be material. 

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

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

In addition, although we continued efforts to expand international distribution for our products in the years ended December 31, 2022 and 2021, we cannot assure that any further efforts to sell our products outside the United States will result in material increased revenue. We may need to overcome significant regulatory and legal barriers in order to continue to sell our products internationally, and we cannot give assurances as to whether we will be able to comply with such regulatory or legal requirements.

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

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

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

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

COVID-19 has impacted global supply chains and such impacts have impacted us and our third-party suppliers and could have a material adverse impact on us in the future.

The coronavirus (COVID-19) pandemic has had a material impact on global supply chains, including for certain raw materials imported from China, among other countries, that have had an impact on our third-party suppliers and our wholesale partners.  As a result, we have had to increase purchases in certain raw materials and build finished goods inventory, especially in our best-selling products, to avoid, in addition to other consequences, stockouts.  The extent to which the ongoing supply chain challenges continue to impact our operations, those of our third-party suppliers or our wholesale partners will depend on future developments, which are highly uncertain and cannot be predicted. If the public continues to avoid public spaces, including retail stores, or if we, or any of our third-party suppliers continue to encounter challenges in the supply chain for certain raw materials, or incur disruptions to our or their respective operations, facilities or stores, or if our wholesale partners’ retail stores were to partially or fully close due to the coronavirus, which has previously occurred in the case of certain GNC locations, then the manufacture, supply, distribution and sale of our products and our financial results could be adversely affected.

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

The willingness of consumers to purchase our products depends in part on general or local economic conditions and consumers’ discretionary spending habits. For instance in 2022, the U.S. experienced significantly heightened inflationary pressures which have continued into 2023. In periods of adverse or uncertain economic conditions, including during periods of high inflation or recession concerns, or as a result of the COVID-19 pandemic, consumers may purchase less of our products, purchase more value or private label products or may forgo certain purchases altogether. In addition, our customers may seek to reduce their inventories in response to those economic conditions. In those circumstances, we could experience a reduction in sales. Further, during economic downturns, it may be more difficult to convince consumers to switch to, or continue to use, our brands or convince new users to choose our brands without expensive sampling programs and price promotions. Also, as a result of economic conditions, we may be unable to raise our prices sufficiently to protect profit margins. We experienced inflationary headwinds across our business during 2022, and we expect inflationary pressures to continue into 2023. This trend could have a materially adverse impact in the future if inflation rates were to significantly exceed our ability to achieve price increases or cost savings. Further, uncertain or unfavorable economic conditions, has and could continue to negatively impact the financial stability of our customers or suppliers, which could lead to increased uncollectible receivables or non-performance. Current global geopolitical tensions, including related to Ukraine, may exacerbate any economic downturn and inflation. Any of these events could have an adverse effect on our business, financial condition, results of operations and cash flows.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A slower growth rate in the nutritional supplement industry could lessen our sales and make it more difficult for us to sustain consistent growth.

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

Our U.S. Net Operating Loss ("NOL") carryforwards may expire or could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code (“IRC”) or if changes are made to the IRC. 

Under federal tax laws, we can carry forward and use our NOLs to reduce our future U.S. taxable income and tax liabilities until such NOL carryforwards expire in accordance with the IRC of 1986, as amended. Our NOL carryforwards provide a benefit to us, if fully utilized, of significant future tax savings. However, our ability to use these tax benefits in future years will depend upon the amount of our federal and state taxable income. If we do not have sufficient federal and state taxable income in future years to use the benefits before they expire, we will permanently lose the benefit of the NOL carryforwards.

Additionally, Section 382 and Section 383 of the IRC provide an annual limitation on our ability to utilize our NOL carryforwards, as well as certain built-in losses, against the future U.S. taxable income in the event of a change in ownership, as defined under the IRC. There is no assurance that we will not experience a change in ownership in the future as a result of changes in our stock ownership, and any such subsequent changes in ownership for purposes of the IRC could further limit our ability to use our NOL carryforwards.

If other changes are made to the IRC, they could impact our ability to utilize our NOLs. Accordingly, any such occurrences could adversely affect our financial condition, operating results and cash flows.

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

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

Loss of key personnel could impair our ability to operate.

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

Risk Factors Relating to Our Common Stock

A limited trading market currently exists for our Common Stock, and we cannot assure you that an active market will ever develop, or if developed, will be sustained.

There is currently a limited trading market for our Common Stock on the OTC Pink marketplace, and an active trading market may not develop. Consequently, we cannot assure you when and if an active trading market in our Common Stock will be established, or whether any such market will be sustained or sufficiently liquid to enable holders of shares of our Common Stock to liquidate their investment in the Company.

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

The market price of the securities of a company such as ours with little name recognition in the financial community and without significant revenue can be subject to wide price swings. For example, the closing price of our Common Stock has ranged from a high of $17.00 to a low of $9.50 during the year ending December 31, 2022. The market price of our securities may be subject to wide changes in response to quarterly variations in operating results, announcements of new products by us or our competitors, reports by securities analysts, volume trading, or other events or factors. In addition, the financial markets have experienced significant price and volume fluctuations for a number of reasons, including the failure of certain companies to meet market expectations. These broad market price swings, or any industry-specific market fluctuations, may adversely affect the market price of our securities.

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

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

Our Articles of Incorporation authorize the issuance of up to 10.0 million shares of preferred stock, par value $0.01 per share ("Preferred Stock") in the aggregate. Currently, we have the following classes of Preferred Stock authorized, and therefore could be issued without shareholder approval: (i) 1,000 shares of Series A Preferred Stock, par value $0.01 per share, are authorized (the “Series A Preferred”); and (ii) 2,000 shares of Series B Junior Participating Preferred Stock, par value $0.01. However, the rights and preferences of any class or series of preferred stock, were we to designate or issue additional shares of Preferred Stock, would be established by our Board of Directors in its sole discretion and may have dividend, voting, liquidation and other rights and preferences that are senior to the rights of our Common Stock.

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

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

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

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

Risk Factors Related to the Acquisition and the Arrangement Agreement

We may experience difficulties in integrating the operations of MRC into our business and in realizing the expected benefits of the Acquisition.

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

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

The Acquisition will present challenges associated with integrating operations, personnel, and other aspects of the companies and assumption of liabilities that may exist at MRC and which may be known or unknown by the Company.

The results of the combined company following the Acquisition will depend in part upon the Company’s ability to integrate MRC’s business with the Company’s business in an efficient and effective manner. The Company’s attempt to integrate two companies that have previously operated independently may result in significant challenges, and the Company may be unable to accomplish the integration smoothly or successfully. In particular, the necessity of coordinating geographically dispersed organizations and addressing possible differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration may require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the businesses of the combined company. In addition, the combined company may adjust the way in which MRC or the Company has conducted its operations and utilized its assets, which may require retraining and development of new procedures and methodologies. The process of integrating operations and making such adjustments after the Acquisition could cause an interruption of, or loss of momentum in, the activities of one or more of the combined company’s businesses and the loss of key personnel. Employee uncertainty, lack of focus, or turnover during the integration process may also disrupt the businesses of the combined company. Any inability of management to integrate the operations of the Company and MRC successfully could have a material adverse effect on the business and financial condition of the combined company.

In addition, the Acquisition will subject the Company to contractual or other obligations and liabilities of MRC, some of which may be material and unknown. Although the Company and its legal and financial advisors have conducted due diligence on MRC and its business, there can be no assurance that the Company is aware of all obligations and liabilities of MRC. These liabilities, and any additional risks and uncertainties related to MRC’s business and to the Acquisition not currently known to the Company or that the Company may currently be aware of, but that prove to be more significant than assessed or estimated by the Company, could negatively impact the business, financial condition, and results of operations of the combined company following consummation of the Acquisition.

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

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

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

ITEM 3.    LEGAL PROCEEDINGS

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

ITEM 4.    MINE SAFETY DISCLOSURES

None.

PART II

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

Our Common Stock is traded in the over-the-counter market, and quoted on the OTC Pink market under the symbol “FTLF”.

As of December 31, 2022, there were 4,507,361 shares of Common Stock outstanding, and there were 24 shareholders of record of the Company’s Common Stock in addition to an undetermined number of holders whose shares are held in “street name.”

The following table sets forth the high and low closing prices for our Common Stock for the periods indicated. The following stock prices reflect the Forward Split that became effective on December 2, 2021.

On March 21, 2023, the closing price of our Common Stock was $17.75 per share.

Recent Sales of Unregistered Securities

No unregistered securities were issued during the fiscal year.

Share Repurchase Program

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

During the year ended December 31, 2022, the Company repurchased 48,596 shares of the Company’s Common Stock under the Share Repurchase Program through multiple private transactions. 

As of December 31, 2022, the Company may purchase up to $2,399,000 of Securities under the Share Repurchase Program.

Common Stock repurchase activity under our publicly announced Share Repurchase Program during each quarter of 2022 and 2021 was as follows:

Transfer Agent

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

Securities Authorized for Issuance under Equity Compensation Plans

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

ITEM 6.    SELECTED FINANCIAL DATA

Not a required disclosure for Smaller Reporting Companies.

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OR PLAN OF OPERATION

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes”, “anticipates”, “may”, “will”, “should”, “expect”, “intend”, “estimate”, “continue”, and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Annual Report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Annual Report.

Recent Developments

Entry into Arrangement Agreement

On December 4, 2022, FitLife entered into an Arrangement Agreement (the “Arrangement Agreement”) with 1000374984 Ontario Inc. (“Subsidiary”, and collectively with FitLife, the “Company”), and Mimi’s Rock Corp. (“MRC”), pursuant to which the Company agreed to acquire MRC for a total cash purchase price of approximately CAD $23.2 million, of which approximately CAD $14.2 million would be used to retire all of MRC’s outstanding indebtedness, and approximately CAD $9.0 million, or CAD $0.17 per share, would be used to purchase all issued and outstanding shares of MRC from its current shareholders (collectively, the “Purchase Price”) (the “Acquisition”).

The Arrangement Agreement was subject to the terms and conditions of the Plan of Arrangement, attached to the Arrangement Agreement as Schedule A (“Plan”), which Plan was made in accordance with Section 182 of the Ontario Business Corporations Act and required a court order approving the Plan.  Further, to finance the acquisition of MRC, which amount was paid in all cash, the Company’s principal bank, First Citizens Bank, agreed to provide up to $12.5 million in debt financing. The obligations of the Company and MRC to consummate the Acquisition were subject to certain closing conditions, including, but not limited to, (i) the taking of all steps set forth in the Interim Order (as defined in the Arrangement Agreement) and Final Order (as defined in the Arrangement Agreement); (ii) the approval of MRC’s shareholders, and (iii) receipt of any necessary regulatory approvals.

Subsequent to the end of the fiscal year, the Acquisition was consummated on February 28, 2023.

Critical Accounting Policies

Use of Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net sales and expense recognized during the periods presented.

Those estimates and assumptions include estimates for reserves of uncollectible accounts receivable, allowance for product returns, sales returns and incentive programs, allowance for inventory obsolescence, depreciable lives of property and equipment, analysis of impairment of goodwill, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates.

Accounts Receivable and Allowance for Doubtful Accounts

The Company’s accounts receivable balance is related to trade receivables and are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company will maintain allowances for doubtful accounts, estimating losses resulting from the inability of its customers to make required payments for products. Account balances are charged off against the allowance when it is probable the receivable will not be recovered.

The determination of collectability of the Company’s accounts receivable requires management to make frequent judgments and estimates in order to determine the appropriate amount of allowance needed for doubtful accounts. The Company’s allowance for doubtful accounts is estimated to cover the risk of loss related to accounts receivable. This allowance is maintained at a level we consider appropriate based on historical and other factors that affect collectability. These factors include historical trends of write-offs, recoveries and credit losses; the careful monitoring of customer credit quality; and projected economic and market conditions. Different assumptions or changes in economic circumstances could result in changes to the allowance.  

Total allowance for doubtful accounts as of December 31, 2022 and 2021 amounted to $50,000 and $55,000, respectively.

Income Taxes

The Company accounts for income taxes under FASB ASC Topic 740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The deferred tax assets of the Company relate primarily to operating loss carryforwards for federal income tax purposes.

The Company periodically evaluates its tax positions to determine whether it is more likely than not that such positions would be sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations, based on their technical merits. The Company accrues interest and penalties, if incurred, on unrecognized tax benefits as components of the income tax provision in the accompanying consolidated statements of operations. As of December 31, 2022, and 2021, the Company has not established a liability for uncertain tax positions.

Product Returns, Sales Incentives and Other Forms of Variable Consideration

In measuring revenue and determining the consideration the Company is entitled to as part of a contract with a customer, the Company takes into account the related elements of variable consideration. Such elements of variable consideration include, but are not limited to, product returns and sales incentives, such as markdowns and margin adjustments. For these types of arrangements, the adjustments to revenue are recorded at the later of when (i) the Company recognizes revenue for the transfer of the related products to the customers, or (ii) the Company pays, or promises to pay, the consideration.

We currently have a 30-day product return policy for NDS Products, which allows for a 100% sales price refund for the return of unopened and undamaged products purchased from us online through one of our websites or e-commerce platforms. Product sold to GNC may be returned from store shelves or the distribution center in the event product is damaged, short dated, expired or recalled.

GNC maintains a customer satisfaction program which allows customers to return product to the store for credit or refund. Subject to certain terms and restrictions, GNC may require reimbursement from vendors for unsaleable returned product through either direct payment or credit against a future invoice. We also support a product return policy for iSatori Products, whereby customers can return product for credit or refund. Product returns can and do occur from time to time and can be material.

For the sale of goods with a right of return, the Company estimates variable consideration using the most likely amount method and recognizes revenue for the consideration it expects to be entitled to when control of the related product is transferred to the customers and records a product returns liability for the amount it expects to credit back its customers. Under this method, certain forms of variable consideration are based on expected sell-through results, which requires subjective estimates. These estimates are supported by historical results as well as specific facts and circumstances related to the current period. The product returns liability includes estimates that directly impact reported revenue. These estimates are calculated based on a history of actual returns, estimated future returns and information provided by customers regarding their inventory levels. Consideration of these factors results in an estimate for anticipated sales returns that reflects increases or decreases related to seasonal fluctuations. In addition, as necessary, product returns liability may be established for significant future known or anticipated events. The types of known or anticipated events that are considered, and will continue to be considered, include, but are not limited to, changes in the retail environment and the Company's decision to continue to support new and existing products.

Information for product returns is received on regular basis and adjusted for accordingly. Adjustments for returns are based on factual information and historical trends for both NDS products and iSatori products and are specific to each distribution channel. We monitor, among other things, remaining shelf life and sell-through data on a weekly basis. If we determine there are any risks or issues with any specific products, we accrue sales return allowances based on management’s assessment of the overall risk and likelihood of returns in light of all information available.

Total allowance for product returns, sales returns and incentive programs as of December 31, 2022 and 2021 amounted to $590,000 and $632,000, respectively.

Inventory

The Company’s inventory is carried at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method. The Company evaluates the need to record adjustments for inventory on a regular basis. Company policy is to evaluate all inventories including components and finished goods for all of its product offerings across all of the Company’s operating subsidiaries.

The Company recognizes an allowance for obsolescence for expiring, excess, and slow-moving inventory. To calculate the allowance, the Company analyzes sales projections for each SKU relative to the remaining shelf life of the product. In addition, the allowance includes the value of longer-dated finished good inventory that, based on projections, will remain unsold at the time of its expiration.

Total allowance for expiring, excess and slow-moving inventory items as of December 31, 2022 and 2021 amounted to $107,000 and $56,000, respectively.

Goodwill

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The Company adopted ASU 2017-04 on January 1, 2020 and applied the requirements prospectively.

There were no impairment charges incurred during the year ended December 31, 2022.

Revenue Recognition

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

The Company accounts for revenues in accordance with FASB Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. Under ASC 606, revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for the Company upon shipment or delivery of products to our customers based on written sales terms, which is also when control is transferred. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products or services to a customer.

All products sold by the Company are distinct individual products and consist of nutritional supplements and related supplies. The products are offered for sale solely as finished goods, and there are no performance obligations required post-shipment for customers to derive the expected value from them.

Control of products we sell transfers to customers upon shipment from our facilities or delivery to our customers, and the Company’s performance obligations are satisfied at that time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than promised goods to the customer. Payment for sales are generally made by check, credit card, or wire transfer. Historically the Company has not experienced any significant payment delays from customers.

For direct-to-consumer sales, the Company allows for returns within 30 days of purchase. Our wholesale customers, such as GNC, may return purchased products to the Company under certain circumstances, which include expired or soon-to-be-expired products located in GNC corporate stores or at any of its distribution centers, and products that are subject to a recall or that contain an ingredient or ingredients that are subject to a recall by the U.S. Food and Drug Administration.

A right of return does not represent a separate performance obligation, but because customers are allowed to return products, the consideration to which the Company expects to be entitled is variable. The Company determined that product returns are immaterial, and therefore believes it is probable that such returns will not cause a significant reversal of revenue in the future. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.

Stock-Based Compensation.

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

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

Recent Accounting Pronouncements

See Note 2 of the Notes to the Consolidated Financial Statements included in this Annual Report for a description of recent accounting pronouncements believed by management to have a material impact on our present or future financial statements.

Results of Operations

Fiscal Year Ended December 31, 2022 Compared to Fiscal Year Ended December 31, 2021

Net Sales. Revenue for the year ended December 31, 2022 increased 3% to $28,803,000 as compared to $27,913,000 for the year ended December 31, 2021. Revenue for the year ended December 31, 2022 compared to the prior year reflects increased sales through our online channels largely offset by lower sales through wholesale channels. 

Online revenue during the year ended December 31, 2022 was approximately 28% of total revenue, compared to roughly 24% of total revenue during the same twelve-month period in 2021. Although no assurances can be given, management believes that online revenue will continue to increase in subsequent periods relative to prior comparable periods given management’s focus on higher margin online sales.

The Company continually reformulates and introduces new products, as well as seeks to increase both the number of stores and number of approved products that can be sold within the GNC franchise system that comprise its domestic and international distribution footprint. Management also believes that its focus on developing its e-commerce capabilities will drive additional incremental sales in the short-term, while yielding substantial benefits in the longer-term. 

Cost of Goods Sold. Cost of goods sold for the year ended December 31, 2022 increased 9% to $16,769,000 as compared to $15,409,000 for the year ended December 31, 2021. The increase of $1,360,000 is primarily due to increased product costs due to inflationary pressures, as well as higher distribution costs resulting from increased sales through online channels.

Gross Profit Margin. Gross profit for the year ended December 31, 2022 decreased to $12,034,000 as compared to $12,504,000 for the year ended December 31, 2021. Gross margin for the year ended December 31, 2022 decreased to 41.8% from 44.8% for the year ended December 31, 2021. The decrease in gross margin is primarily attributable to higher product costs associated with disruptions in the supply chain. Product costs have largely stabilized in recent months and, for certain ingredients, have begun to decline. We expect that the recent margin pressure will be temporary as production costs decline and as higher-margin online sales become a larger percentage of the Company’s total revenue. 

Selling, General and Administrative Expense. Selling, general and administrative (“SG&A”) expense for the year ended December 31, 2022 increased by $52,000 to $6,267,000 as compared to $6,215,000 for the year ended December 31, 2021. The increase in SG&A expense was primarily due to higher consulting fees due to Restatement and Merger and Acquisition (“M&A”) related expense, partially offset by lower stock compensation expense and general SG&A expense.

Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2022 increased to $66,000 from $59,000 during the year ended December 31, 2021. The increase is primarily attributable to the amortization of intangibles acquired in the Nutrology business combination.

Net Income. We generated a net income of $4,429,000 for the year ended December 31, 2022, as compared to a net income of $5,410,000 for the year ended December 31, 2021. The decrease in net income for the year ended December 31, 2022 compared to the same period in 2021 was primarily attributable to increased SG&A expense resulting from M&A activities and Restatement-related costs during the year ended December 31, 2022, as well as forgiveness of the PPP Loan (as defined in "Liquidity and Capital Resources" below), that occurred during the year ended December 31, 2021. 

Non-GAAP Measures

The financial presentation below contains certain financial measures not in accordance with accounting principles generally accepted in the United States (“GAAP”), defined by the SEC as “non-GAAP financial measures”, including non-GAAP EBITDA and adjusted non-GAAP EBITDA. These measures may be different from non-GAAP financial measures used by other companies. The presentation of this financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in this Quarterly Report in accordance with GAAP.

As presented below, non-GAAP EBITDA excludes interest, income taxes, and depreciation and amortization. Adjusted non-GAAP EBITDA excludes, in addition to interest, taxes, depreciation and amortization, stock-based compensation, M&A/integration expense, Restatement-related costs and non-recurring gains or losses. The Company believes the non-GAAP measures provide useful information to both management and investors by excluding certain expense and other items that may not be indicative of its core operating results and business outlook. The Company believes that the inclusion of non-GAAP measures in the financial presentation below allows investors to compare the Company’s financial results with the Company’s historical financial results and is an important measure of the Company’s comparative financial performance.

Liquidity and Capital Resources

As of December 31, 2022, the Company had working capital of $18,932,000, compared to working capital of $13,626,000 at December 31, 2021. Our principal sources of liquidity at December 31, 2022 consisted of $13,277,000 of cash and $705,000 of accounts receivable. The increase in working capital is principally attributable to cash flows from operating activities during fiscal 2022, partially offset by cash used in financing activities as the Company spent $779,000 to repurchase shares of Common Stock of the Company. 

On September 24, 2019, the Company entered into a Revolving Line of Credit Agreement (the “Line of Credit Agreement”) with Mutual of Omaha Bank (the “Lender”), subsequently acquired by CIT Bank N.A., providing the Company with a $2.5 million revolving line of credit (the “Line of Credit”). The Line of Credit allows the Company to request advances thereunder and to use the proceeds of such advances for working capital purposes until the Maturity Date, or unless renewed at maturity upon approval by the Company’s Board and the Lender. The Line of Credit is secured by all assets of the Company.

Advances drawn under the Line of Credit bear interest at an annual rate of the one-month SOFR rate plus 2.75%, and each advance will be payable on the Maturity Date with the interest on outstanding advances payable monthly. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to the Maturity Date, without premium or penalty. No borrowings are outstanding as of December 31, 2022.

On September 20, 2022, the Company and the Lender amended the Line of Credit Agreement to extend the Maturity Date to December 23, 2022. On December 19, 2022, the Company and the Lender amended the Line of Credit Agreement to increase the Line of Credit to $3.5 million and extend the Maturity Date to December 23, 2023. All other terms of the Line of Credit Agreement remain unchanged.

On April 27, 2020, the Company received proceeds from a loan in the amount of $449,700 from its lender, CIT Bank, N.A. (the “PPP Lender”), pursuant to approval by the U.S. Small Business Administration (the “SBA”) for the PPP Lender to fund the Company’s request for a loan under the SBA’s Paycheck Protection Program (“PPP Loan”) created as part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the SBA (the “Loan Agreement”). In accordance with the requirements of the CARES Act, the Company used the proceeds from the PPP Loan primarily for payroll costs, covered rent payments, and covered utilities during the eight-week period commencing on the date of loan approval. The PPP Loan was scheduled to mature on April 27, 2022, had a 1.0% interest rate, and was subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act. The Company was informed by the PPP Lender and the SBA that the full balance of the PPP Loan, including accrued interest, was forgiven on January 15, 2021.

The Company has historically financed its operations primarily through cash flow from operations and equity and debt financings. The Company has also provided for its cash needs by issuing Common Stock, options and warrants for certain operating costs, including consulting and professional fees. The Company currently anticipates that cash derived from operations and existing cash resources, along with available borrowings under the Line of Credit, will be sufficient to provide for the Company’s liquidity for the next twelve months.

The Company is dependent on cash flow from operations and amounts available under the Line of Credit to satisfy its working capital requirements. No assurances can be given that cash flow from operations and/or the Line of Credit will be sufficient to provide for the Company’s liquidity for the next twelve months. Should the Company be unable to generate sufficient revenue in the future to achieve positive cash flow from operations, and/or should capital be unavailable under the terms of the Line of Credit, additional working capital will be required. Management currently has no intention to raise additional working capital through the sale of equity or debt securities and believes that the cash flow from operations and available borrowings under the Line of Credit will provide sufficient capital necessary to operate the business over the next twelve months. In the event the Company fails to achieve positive cash flow from operations, additional capital is unavailable under the terms of the Line of Credit, and management is otherwise unable to secure additional working capital through the issuance of equity or debt securities, the Company’s business would be materially and adversely harmed.

Cash Provided by Operating Activities

Net cash provided by operating activities was $4,130,000 during the year ended December 31, 2022, compared to net cash provided by operating activities of $4,480,000 for the year ended December 31, 2021. The decrease in cash provided by operating activities is primarily attributable to the forgiveness of the PPP loan that provided to the Company in 2021. In 2022, the Company continues to maintain elevated inventory levels to ensure availability of products due to global supply chain constraints resulting from the COVID-19 pandemic.

Cash Used in Investing Activities

Cash used in investing activities for the fiscal year ended December 31, 2022 was $0 and $529,000 during the year ended December 31, 2022 and 2021, respectively. The Company used $529,000 during the year ended December 31, 2021 for the acquisition of Nutrology. 

Cash Used in Financing Activities

Cash used in financing activities for the year ended December 31, 2022 was $750,000 as compared to cash used of $390,000 during the year ended December 31, 2021. The main reason for the increase in cash used for financing activities relates to increased share repurchases.

Off-Balance Sheet Arrangements

Other than contractual obligations incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity.

ITEM 7A.  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.

Foreign Currency

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

Interest Rates

Our exposure to risk for changes in interest rates related primarily to any borrowings under our existing Line of Credit, and our investments in short-term financial instruments. As of December 31, 2022, the Company had a zero balance under its existing Line of Credit.

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

ITEM 8.  FINANCIAL STATEMENTS

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

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

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

ITEM 9A.  CONTROLS AND PROCEDURES

(a)   Evaluation of Disclosure Controls and Procedures.

In connection with the filing of this Annual Report on Form 10-K for the period ended December 31, 2022, our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  As a result of this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective for the year ended December 31, 2022.

Due to the material weaknesses described below, which resulted in reporting errors requiring a restatement of our financial statements for the years ended December 31, 2020 and 2019 and our interim financial information for the quarterly periods ended June 30, 2021, March 31, 2021, September 30, 2020, June 30, 2020, March 31, 2020, September 30, 2019, June 30, 2019 and March 31, 2019, our CEO and CFO concluded that our disclosure controls and procedures were not effective for the years ended December 31, 2020 and 2019 and our interim financial information for the quarterly periods ended June 30, 2021, March 31, 2021, September 30, 2020, June 30, 2020, March 31, 2020, September 30, 2019, June 30, 2019 and March 31, 2019.

Notwithstanding the material weaknesses described in Management's Report on Internal Control Over Financial Reporting, our management has concluded that our consolidated financial statements for the periods covered by and included in this Annual Report are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and fairly present, in all material respects, our financial position, results of operations and cash flows for each of the periods presented herein.

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

Our management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  Management’s establishing and maintaining adequate internal control over financial reporting is based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”).  A system of internal control over financial reporting should be designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud, and therefore can provide only reasonable assurance with respect to reliable financial reporting.  Because of its inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements.

A material weakness is defined as a deficiency, or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  Based on this definition, our management, with the participation of our CEO and CFO, evaluated the effectiveness and design of our internal control over financial reporting against the COSO Framework and concluded that our internal control over financial reporting was not effective at December 31, 2022, and as of December 31, 2019, 2020, and 2021 due to material weaknesses arising from flaws in our control environment, risk oversight measures, control activities, information processing and communication and our monitoring systems, each of which is described in more detail below.  The material weaknesses resulted in reporting errors requiring a restatement of our financial statements for Annual Reports on Form 10-K for the years ended December 31, 2019 and 2020, and each of the interim financial statements for the quarterly periods in 2019, 2020 and 2021 included in our Quarterly Reports on Form 10-Q for the periods ending March 31, 2019, June 30, 2019, September 30, 2019, March 31, 2020, June 30, 2020, September 30, 2020, March 31, 2021, and June 30, 2021 (collectively, the "Restated Periods"), in our Amended Annual Report on Form 10-K for the period ending December 31, 2020 and in our Annual Report on Form 10-K for the period ending December 31, 2021, as filed with the SEC on October 14, 2022.

Control environment.  We concluded that we did not maintain effective controls in the following areas: (i) managerial functions, procedures and oversight; (ii) organizational structure, delegation of authority and responsibilities; (iii) segregation of duties; (iv) adequacy of trained accounting and financial reporting personnel to ensure that internal control responsibilities were performed effectively and material accounting errors were detected; and (v) maintenance and enforcement of internal control responsibilities, including holding individuals accountable for their internal control responsibilities.

Risk oversight environment.  We did not maintain adequate risk oversight measures related to the (i) identification and assessment of risks that could impact achieving our objectives and (ii) identification and analysis of the potential changes that could affect our internal controls environment.

Control activities.  We concluded that we did not have effective control activities in the following areas: (i) selecting and developing control policies, procedures and activities to mitigate risks, including with respect to the methodologies used to calculate and report financial information and results; and (ii) selecting and implementing information technology and related systems supportive to our internal control over financial reporting.

Information processing and communication.  We identified deficiencies associated with information processing and communication within our internal control framework.  Specifically, we did not effectively communicate objectives and internal control responsibilities throughout the organization which contributed to inadequate documentation of processes and methodologies used to recognize revenue, costs of goods sold, inventory and accounts receivable, hindering clear communication with management, the Board of Directors and our independent auditor.

Monitoring activities.  We concluded that we did not design and implement effective monitoring activities related to (i) selecting, developing, and performing separate evaluations of our internal control over financial reporting; and (ii) evaluating and communicating internal control deficiencies in a timely manner to parties responsible for taking corrective actions.

The issues described above resulted in the following errors in our financial statements previously filed with the SEC: improper recognition of revenue, cost of sales, accounts receivable, inventory and the provision for income taxes.

Remediation Efforts to Address Material Weaknesses

Our management, including our CFO, has worked with expert accounting consultants and the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) to design and implement both a short-term and a long-term remediation plan to correct the material weaknesses in our disclosure controls and procedures and our internal control over financial reporting, as follows:

Since March 2022 and through the filing date of this Annual Report on Form 10-K, we have hired expert accounting consultants to assess our control environment and recommend improvements.  In addition, we hired a new highly qualified CFO in August 2022 with extensive public-company experience.

In addition to the items noted above, as we continue to evaluate, remediate, and improve our internal control over financial reporting, our management expects to continue to implement additional measures to address control deficiencies and further refine and improve the remediation efforts described above.  Specifically, we are developing a checklist of activities based on the criteria established in the COSO Framework against which we will assess the design of entity-level and activity-level controls, and the operational effectiveness of such controls.  Deficiencies identified in this process will be addressed by management, including our CEO and CFO.  This assessment, any deficiencies, and any remedial actions will be shared and discussed with our Audit Committee and our independent auditors on a quarterly basis.

(c)   Changes in Internal Controls over Financial Reporting.

We are still in the process of implementing our remedial actions.  Also, during August 2022, we hired a new CFO, a highly qualified individual with public company experience.  We hired another manager to the accounting team, and we continue to implement additional controls that will strengthen our internal control environment. Management will continue to evaluate and monitor our internal controls as each of the affected areas evolves.

All of the changes above were implemented during the year ended December 31, 2022.

ITEM 9B.  OTHER INFORMATION

None.

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS

In accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2023 annual meeting of stockholders to be filed with the SEC.

ITEM 11.  EXECUTIVE COMPENSATION

In accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2023 annual meeting of stockholders to be filed with the SEC.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

In accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2023 annual meeting of stockholders to be filed with the SEC.

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

In accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2023 annual meeting of stockholders to be filed with the SEC.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

In accordance with General Instruction G(3) to Form 10-K, certain information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2023 annual meeting of stockholders to be filed with the SEC.

PART IV

ITEM 15.  EXHIBITS AND REPORTS

Exhibits

ITEM 16.  FORM 10-K SUMMARY    

None.

SIGNATURES

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

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

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

FitLife Brands, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of FitLife Brands, Inc. and Subsidiaries (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Restatement to Correct Previously Issued Consolidated Financial Statements

As discussed in Note 11 to the financial statements, the 2020 financial statements have been restated to correct misstatements discovered during the current year.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Product Returns – Management’s Estimate of Product Returns including Discontinued or Expired Product. Refer to Note 2 to the Financial Statements

Critical Accounting Matter Description

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 related elements of variable consideration, including, but not limited to, product returns.  The allowance for product returns is based on specific terms and conditions included in the customer agreements, historical experience and management’s expectation of future returns.

We identified management’s estimate of product returns, including discontinued or expired product as a critical audit matter because of the judgments necessary for management to estimate and monitor, among other things, remaining shelf life, sell-through data, history of actual and estimated future returns, and information provided by customers regarding their inventory levels. The types of arrangements and complexity of information required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to audit management’s estimates and evaluating the results of those procedures. 

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to management’s estimate of product returns included the following:

Income taxes - Realizability of Deferred Tax Assets – Refer to Note 9 to the Financial Statements

Critical Accounting Matter Description

For the years ended December 31, 2021 and 2020, the Company recorded a provision (benefit) for income taxes of $1,298,000 and ($4,415,000), respectively, driven primarily by an income tax benefit of ($3,045,000) and ($4,339,000), respectively resulting from the elimination of the valuation reserve against the Company’s net operating losses and other deferred tax assets in 2020. The carrying amount of deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that all or part of the deferred tax assets will be utilized, based on positive and negative evidence, including that sufficient future taxable income will be available.

Management’s analysis of the realizability of its deferred tax assets, including the recognition, measurement, and disclosure of deferred tax assets was significant to our audit because the amounts are material to the consolidated financial statements. Auditing management’s assessment is complex and involves significant judgment as the Company’s ability to generate taxable income sufficient to utilize the assets may be impacted by various economic and industry conditions.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to management’s realizability of deferred tax assets included the following:

/s/ WEAVER AND TIDWELL, L.L.P.

We have served as the Company’s auditor since 2019.

Fort Worth, Texas

October 13, 2022

FITLIFE BRANDS, INC.

CONSOLIDATED BALANCE SHEETS

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

FITLIFE BRANDS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

FITLIFE BRANDS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

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

FITLIFE BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

FITLIFE BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2022 AND 2021

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 following brand names: (i) NDS Nutrition, PMD Sports, SirenLabs, CoreActive, Nutrology, and Metis Nutrition (together, “NDS Products”); and (ii) iSatori, BioGenetic Laboratories, and Energize (together, the "iSatori Products"). The Company distributes the NDS Products principally through franchised General Nutrition Centers, Inc. (“GNC”) stores located both domestically and internationally, and, with the launch of Metis Nutrition, through corporate GNC stores in the United States. The iSatori Products are sold through more than 17,000 retail locations, which include specialty, mass, and online.

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

Recent Developments

Forward Stock Split

The Board of Directors of the Company (the “Board”) approved a forward stock split of the Company’s authorized, issued and outstanding shares of common stock, par value $0.01 per share (the “Common Stock”), at a ratio of 4-for-1 (the “Forward Split”). The Forward Split was effective as of December 2, 2021 and began trading on such basis on December 8, 2021. Prior to the Forward Split, the Company was authorized to issue 15.0 million shares of Common Stock. As a result of the Forward Split, the Company is now authorized to issue 60.0 million shares of Common Stock. The Forward Split did have any effect on the stated par value of the Common Stock and did not affect the Company’s authorized preferred stock.

All references in this Annual Report to number of common shares, price per share and weighted average number of shares outstanding have been adjusted to reflect the Forward Split on a retroactive basis as of the earliest period presented, unless otherwise noted.

COVID-19 Pandemic

The COVID-19 pandemic has had an effect on the Company’s employees, business and operations and those of its customers, vendors and business partners. In this respect, the temporary or permanent closure of some of our retail partners’ store locations and the stay-at-home orders that occurred early in the pandemic negatively affected our results from operations, although much of the impact has been offset by an increase in revenue attributable to online sales, and increased sales during the more recent quarters. Our future financial position and operating results could be materially and adversely affected in the event that a resurgence of COVID-19 cases leads to new stay-at-home orders and/or further disruptions in both our supply chain and manufacturing lead-times, which could lower demand for the Company’s products and/or prevent the Company from producing and delivering its products in a timely manner, although the extent of these effects 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 business and operations accordingly. 

Inflation

The Company has experienced inflationary pressure with regard to the procurement of many of its products.  Thus far, the Company has been able to partially offset the impact of inflation through price increases to its customers.  In the future, however, further inflationary pressure could adversely affect the Company’s operating performance if market conditions no longer permit the Company to pass through price increases to its customers.

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of Consolidation

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

Use of Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net sales and expense recognized during the periods presented.

Those estimates and assumptions include estimates for reserves of uncollectible accounts receivable, allowance for inventory obsolescence, depreciable lives of property and equipment, analysis of impairment of goodwill, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates.

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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. Under ASC 606, revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for the Company upon shipment or delivery of products to our customers based on written sales terms. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products to a customer.

All products sold by the Company are distinct individual products and consist of nutritional supplements and related supplies. The products are offered for sale solely as finished goods, and there are no performance obligations required post-shipment for customers to derive the expected value from them.

Control of products we sell transfers to customers upon shipment or delivery from our facilities to our customers, and the Company’s performance obligations are satisfied at that time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than promised goods to the customer. Payments for sales are generally made by check, credit card, or wire transfer. Historically the Company has not experienced any significant payment delays from customers.

For direct-to-consumer sales, the Company allows for returns within 30 days of purchase. Our wholesale customers, such as GNC, may return purchased products to the Company under certain circumstances, which include expired or soon-to-be-expired products located in GNC corporate stores or at any of its distribution centers, and products that are subject to a recall or that contain an ingredient or ingredients that are subject to a recall by the U.S. Food and Drug Administration.

A right of return does not represent a separate performance obligation, but because customers are allowed to return products, the consideration to which the Company expects to be entitled is variable. The Company determined that product returns are immaterial, and therefore believes it is probable that such returns will not cause a significant reversal of revenue in the future. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.

Online revenue during the year ended December 31, 2022 was approximately 28% of total revenue, compared to 72% for wholesale channels for the same period.  Online revenue during the year ended December 31, 2021 was 24% of total revenue compared to 76% for wholesale channels during the same twelve-month period in 2021.

Customer Concentration

Total net sales to GNC during 2022 and 2021 were 67 % and 71% of total revenue for the years ended December 31, 2022 and 2021, respectively. Accounts receivable attributable to GNC as of December 31, 2022 and 2021 represented 43% and 85% of the Company’s total accounts receivable balance, respectively.

Accounts Receivable and Allowance for Doubtful Accounts

All of the Company’s accounts receivable balance is related to trade receivables. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company will maintain allowances for doubtful accounts, estimating losses resulting from the inability of its customers to make required payments for products. Accounts with known financial issues are first reviewed and specific estimates are recorded. The remaining accounts receivable balances are then grouped into categories by the number of days the balance is past due, and the estimated loss is recorded based upon management’s assessment of collectability. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered.

As of December 31, 2022 and 2021, the Company had provided a reserve for doubtful accounts of $50,000 and $55,000, respectively.

Product Returns, Sales Incentives and Other Forms of Variable Consideration 

In measuring revenue and determining the consideration the Company is entitled to as part of a contract with a customer, the Company takes into account the related elements of variable consideration. Such elements of variable consideration include, but are not limited to, product returns and sales incentives, such as markdowns and margin adjustments. For these types of arrangements, the adjustments to revenue are recorded at the later of when (i) the Company recognizes revenue for the transfer of the related products to the customers, or (ii) the Company pays, or promises to pay, the consideration.

We currently have a 30-day product return policy for NDS Products, which allows for a 100% sales price refund for the return of unopened and undamaged products purchased from us online through one of our websites. Product sold to GNC may be returned from store shelves or the distribution center in the event product is damaged, short dated, expired or recalled. Information for product returns is received on regular basis and adjusted for accordingly. Adjustments for returns are based on factual information and historical trends for both NDS products and iSatori products and are specific to each distribution channel. We monitor, among other things, remaining shelf life and sell through data on a weekly basis. If we determine there are any risks or issues with any specific products, we accrue sales return allowances based on management’s assessment of the overall risk and likelihood of returns in light of all information available.

GNC maintains a customer satisfaction program that allows customers to return product to the store for credit or refund. Subject to certain terms and restrictions, GNC may require reimbursement from vendors for unsaleable returned product through either direct payment or credit against a future invoice. We also support a product return policy for iSatori Products, whereby customers can return product for credit or refund. Product returns can and do occur from time to time and can be material.

For the sale of goods with a right of return, the Company estimates variable consideration using the most likely amount method and recognizes revenue for the consideration it expects to be entitled to when control of the related product is transferred to the customers and records a product returns liability for the amount it expects to credit back its customers. Under this method, certain forms of variable consideration are based on expected sell-through results, which requires subjective estimates. These estimates are supported by historical results as well as specific facts and circumstances related to the current period. The product returns liability and corresponding asset include estimates that directly impact reported revenue. These estimates are calculated based on a history of actual returns, estimated future returns and information provided by customers regarding their inventory levels. Consideration of these factors results in an estimate for anticipated sales returns that reflects increases or decreases related to seasonal fluctuations. In addition, as necessary, product returns liability and the related assets may be established for significant future known or anticipated events. The types of known or anticipated events that are considered, and will continue to be considered, include, but are not limited to, changes in the retail environment and the Company’s decision to continue to support new and existing products.

Information for product returns is received on regular basis and adjusted for accordingly. Adjustments for returns are based on factual information and historical trends for both NDS products and iSatori products and are specific to each distribution channel. We monitor, among other things, remaining shelf life and sell-through data on a weekly basis. If we determine there are any risks or issues with any specific products, we accrue sales return allowances based on management’s assessment of the overall risk and likelihood of returns in light of all information available.

Total allowance for product returns, sales returns and incentive programs as of December 31, 2022 and 2021 amounted to $590,000 and $632,000, respectively.

Cost of Goods Sold

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

Cash and Cash Equivalents

The Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation up to $250,000 at December 31, 2022. The Company may be exposed to risk for the amounts of funds held in bank accounts more than the insurance limit. In assessing the risk, the Company’s policy is to maintain cash balances with high-quality financial institutions. The Company had cash balances more than the guarantee during the years ended December 31, 2022 and 2021. Management believes that the financial institutions that hold the Company’s cash are financially sound and, accordingly, minimal credit risk exists.

Inventory

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

As of December 31, 2022 and 2021, the aggregate allowance for expiring, slow moving and excess inventory amounted to $107,000 and $56,000, respectively.

Leases

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

Property and Equipment

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

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

Management regularly reviews property, equipment and other long-lived assets for possible impairment. This review occurs annually or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Based upon management’s annual assessment, there were no indicators of impairment of the Company’s property and equipment and other long-lived assets as of December 31, 2022 and 2021.

Intangible and Long-lived Assets

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

There were no impairment charges incurred during the years ended December 31, 2022 and 2021.

Goodwill

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

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

There were no impairment charges incurred during the years ended December 31, 2022 and 2021.

Income Taxes

The Company accounts for income taxes under FASB ASC Topic 740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The deferred tax assets of the Company relate primarily to operating loss carryforwards for federal income tax purposes.

The Company periodically evaluates its tax positions to determine whether it is more likely than not that such positions would be sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations, based on their technical merits. The Company accrues interest and penalties, if incurred, on unrecognized tax benefits as components of the income tax provision in the accompanying consolidated statements of operations. As of December 31, 2022, and 2021, the Company has not established a liability for uncertain tax positions.

Net Income Per Share

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

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

Fair Value Measurements

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

The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable and accounts payable, approximate their fair values because of the short maturity of these instruments.

Stock Compensation Expense

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

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

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

Segments

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

Recently Adopted Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04. ASU 2017-04 removes Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The Company adopted ASU 2017-04 on January 1, 2021, and applied the requirements prospectively.

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

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The amendments included in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Although the new standard, known as the current expected credit loss (“CECL”) model, has a greater impact on financial institutions, most other organizations with financial instruments or other assets (trade receivables, contract assets, lease receivables, financial guarantees, loans and loan commitments, and held-to-maturity debt securities) are subject to the CECL model and will need to use forward-looking information to better evaluate their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was originally effective for public companies for fiscal years beginning after December 15, 2019. In November of 2019, the FASB issued ASU 2019-10, which delayed the implementation of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

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

NOTE 3. BUSINESS COMBINATION

On April 7, 2021, the Company closed on the purchase of substantially all of the assets of Triple Impact Nutrition (the “Acquisition”), a New Jersey corporation doing business as Nutrology, a nutritional supplement company catering to consumers who prioritize all-natural and plant-based nutritional supplements. Under the terms of the Asset Purchase Agreement (the “APA”), the Company agreed to pay cash consideration of $500,000, subject to certain working capital adjustments set forth in the APA. Total consideration paid, including the effects of the working capital adjustment, was $529,000.

The Acquisition was accounted for as a business combination under the acquisition method of accounting. The purchase price of $529,000 was allocated to the tangible and intangible assets acquired based on their fair values on the acquisition date of April 7, 2021. The Company assumed no liabilities as part of the Acquisition, and no employees of Nutrology became employees of the Company. The excess of the purchase price over the net assets acquired is recorded as goodwill.  The goodwill is attributable to synergies from leveraging Nutrology’s strong all-natural and plant-based nutritional supplements, customer relationships and website domain name to enter into new sales with consumers for future growth and expansion. The Company incurred transaction costs of approximately $49,000 related to the Acquisition, of which $30,000 was expensed as incurred during the second quarter of 2021 as part of general and administrative expense on the Consolidated Statement of Operations. The remaining $19,000 of transaction costs was expensed as incurred during the third quarter of 2021.

Included in the Company’s Consolidated Statement of Operations from the acquisition date of April 7, 2021 are revenue of $1,186,000 and $897,000 and gross profit of $463,000 $346,000, for the periods ended December 31, 2022 and 2021, respectively.

Below is a summary of the fair value of assets assumed as of the date of acquisition.

The fair values of acquired assets assumed represent management’s estimate of fair value utilizing a third-party appraiser and are subject to change if additional information becomes available.  Goodwill will not be amortized but instead will be tested for impairment at least annually (or more frequently if indicators of impairment arise).  In the event management determines that the goodwill has become impaired, the Company will incur an accounting charge for the amount of the impairment during the fiscal quarter in which the determination is made.  The goodwill arising from the Acquisition is deductible for tax purposes.

Our estimate of intangible assets related to the Acquisition consists of non-contractual customer relationships, trademarks, formulations, and a website domain name.  The value of the customer relationships was determined using the income approach, trademarks and formulations was determine using the relief from royalty method, and the website domain name was based on the replacement method cost approach.  All methods are considered Level 3 fair value measurements.

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

Amortization expense was $42,000 for the year ended December 31, 2022 compared to $31,000 for the year ended December 31, 2021.

NOTE 4.  INVENTORIES

The Company’s inventories as of December 31, 2022 and 2021 were as follows:

NOTE 5.  PROPERTY AND EQUIPMENT

The Company's property and equipment balances as of December 31, 2022 and 2021 were as follows:

Depreciation expense was $24,000 for the year ended December 31, 2022 compared to $28,000 for the year ended December 31, 2021.

NOTE 6.  NOTES PAYABLE

Line of Credit – CIT 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”), subsequently acquired by CIT Bank N.A., providing the Company with a $2.5 million line of credit (the “Line of Credit”). The Line of Credit allows the Company to request advances thereunder and to use the proceeds of such advances for working capital purposes until the Maturity Date, 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 SOFR rate plus 2.75%, and each advance will be payable on the Maturity Date with the interest on outstanding advances payable monthly. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to the Maturity Date, without premium or penalty. There were no advances on this line outstanding as of December 31, 2022 or 2021.

On September 20, 2022, the Company and the Lender amended the Line of Credit Agreement to extend the Maturity Date to December 23, 2022. On December 19, 2022, the Company and the Lender amended the Line of Credit Agreement to increase the Line of Credit to $3.5 million and extend the Maturity Date to December 23, 2023. All other terms of the Line of Credit Agreement remain unchanged. No borrowings are outstanding as of December 31, 2022.

Paycheck Protection Program Loan

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on  March 27, 2020 in the United States. On  April 27, 2020, the Company received proceeds from a loan in the amount of $449,700 from its lender, CIT Bank, N.A. (the “PPP Lender”), pursuant to approval by the U.S. Small Business Administration (the “SBA”) for the PPP Lender to fund the Company’s request for a loan under the SBA’s Paycheck Protection Program (“PPP Loan”) created as part of the CARES ACT administered by the SBA (the “Loan Agreement”). In accordance with the requirements of the CARES Act, the Company used the proceeds from the PPP Loan primarily for payroll costs, covered rent payments, and covered utilities during the eight-week period commencing on the date of loan approval. The PPP Loan was scheduled to mature on  April 27, 2022, had a 1.0% interest rate, and was subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act. The Company was informed by the PPP Lender and the SBA that the full balance of the PPP Loan, including accrued interest, was forgiven on  January 15, 2021. 

In January 2021, the Company received a notice that the SBA approved the forgiveness of the PPP loan payable.  Accordingly, for the year ended December 31, 2021, the Company recognized the forgiveness of the PPP loan and accrued interest totaling $453,000 as a “Gain on debt forgiveness” in the accompanying statements of operations. 

NOTE 7 – RIGHT OF USE ASSETS AND LIABILITIES

The Company has operating lease agreements for its warehouse and office space with an average remaining lease terms at December 31, 2022, of 1.8 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Rent expense is recognized on a straight-line basis over the lease term.

Operating lease right-of-use (“ROU”) assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments.

The components of rent expense and supplemental cash flow information related to leases for the period are as follows:

The supplemental balance sheet information related to leases for the period is as follows:

Maturities of the Company’s lease liabilities are as follows:

NOTE 8.  EQUITY

The Board approved a forward stock split of the Company’s Common Stock at a ratio of 4-for-1 (the “Forward Split”), effective as of December 2, 2021. Prior to the Forward Split, the Company was authorized to issue 15.0 million shares of Common Stock. As a result of the Forward Split, the Company is now authorized to issue 60.0 million shares of Common Stock, $0.01 par value per share, of which 4,507,361 and 4,552,485 shares of Common Stock were issued and outstanding as of December 31, 2022 and 2021, respectively. The Forward Split did not have any effect on the stated par value of the Common Stock and did not affect the Company’s authorized preferred stock.

Common Stock Issued for Services

In February 2021, the Company granted Mr. Dayton Judd, Chief Executive Officer, an aggregate of 160,000 restricted share units (“RSUs”). Each RSU converted into one share of the Company’s Common Stock upon vesting. The RSUs vested as follows: (1) 40,000 shares at such date that the 30-day volume-weighted average price of Common Stock meets or exceeds $7.50, (ii) 40,000 shares at such date that the 30-day volume-weighted average price of Common Stock meets or exceeds $9.00, (iii) 40,000 shares at such date that the 30-day volume-weighted average price of Common Stock meets or exceeds $10.50, and (iv) 40,000 shares at such date that the 30-day volume-weighted average price of Common Stock meets or exceeds $12.00. The RSUs were subject to forfeiture in the event Mr. Judd resigned from his position or was terminated by the Company. As the vesting of the RSUs was subject to certain market conditions, pursuant to current accounting guidelines, the Company determined the fair value to be $666,000, computed using Monte Carlo simulations on a binomial model with the assistance of a valuation specialist.  The assumptions used to estimate the fair value of the performance-based RSUs granted in 2021 under the Monte Carlo Simulation model are maturity of 10 years, annualized volatility of 73%, and risk-free interest rate of 1.19%. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the maturity period of the RSU; the maturity period represents the period of time that the RSUs granted were modeled into the future; the expected volatility is based upon historical volatility of the Company’s Common Stock.

The Company recorded $287,000 and $352,000 of stock compensation expense related to RSUs during the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, there was $31,000 and $317,000 of unamortized compensation expense associated with the grant of the RSUs.

Share Repurchase Program

On February 1, 2021, the Board of the Company approved an amendment the Company’s share repurchase program as approved on August 16, 2019, and as amended on September 23, 2019, and further amended on November 6, 2019, pursuant to which the Board authorized management to repurchase of up to $2,500,000 of the Company’s Common Stock over the next 24 months (the “Share Repurchase Program”). The Board approved an amendment to the Share Repurchase Program to increase the repurchase of up to $5,000,000 of the Company’s Common Stock, its Series A Convertible Preferred Stock, par value $0.01 per share (“Series A Preferred”), warrants to purchase shares of the Company’s Common Stock (“Warrants”), and other securities issued by the Company (“Securities”), 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, Warrants, and Securities, at a purchase price determined by management, with the exact date and amount of such purchases to be determined by management.

The Company repurchased 48,596 and 36,092 shares of Common Stock under the Share Repurchase Program during the years ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2021, the Company also purchased 50,840 dilutive in-the-money options from employees at a discount to their intrinsic value for total consideration of $184,000.

As of December 31, 2022, the Company may purchase up to $2,399,000 of Securities under the Share Repurchase Program.

Treasury Shares

In January 2022, the Company retired all treasury shares. All shares repurchased by the Company subsequent to January 2022 were retired immediately upon acquisition.  As of December 31, 2022, there are no shares held in treasury.

Options 

Information regarding options outstanding as of December 31, 2022 is as follows:

The closing stock price for the Company’s stock on December 31, 2022 was $15.95, resulting in an intrinsic value of outstanding options of $4,930,000. 

During the year ended December 31, 2022, the Company granted stock options to employees to purchase 10,000 shares of Company Common Stock. The stock options are exercisable at an average price of $15.65 per share, expire in five years and vest as follows: one-fourth vested immediately upon issuance, and the remainder vest equally in equal annual installments over a period of three years from grant date. The total fair value of these options at grant date was approximately $89,000, which was determined using the Black-Scholes option pricing model with the following average assumption: stock price of $15.65 per share, expected term of 5 years, volatility of 67%, dividend rate of 0% and risk-free interest rate of 2.7%. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the share option award; the expected term represents the weighted-average period of time that share option awards granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the Company’s Common Stock; and the expected dividend yield is based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future.

During the year ended December 31, 2021, the Company granted stock options to employees to purchase 128,000 shares of Company Common Stock. The stock options are exercisable at an average price of $5.03 per share, expire in five or ten years and vest as follows: one-fourth vested immediately upon issuance, and the remainder vest equally in equal annual installments over a period of three years from grant date. The total fair value of these options at grant date was approximately $185,000, which was determined using the Black-Scholes option pricing model with the following average assumption: stock price of $5.01 per share, expected term of four years, volatility of 40%, dividend rate of 0% and risk-free interest rate of 1.19%.

The Company reported $76,000 and $100,000 of stock compensation expense related to options during the years ended December 31, 2022 and 2021, respectively.  As of December 31, 2022, there was $160,000 of unvested stock compensation that will be recognized as an expense in future periods as the options vest.

During the year ended December 31, 2021, the Company recognized compensation expense of $100,000 based upon the vesting of outstanding options. As of December 31, 2021, there was $146,000 of unvested stock compensation that will be recognized as an expense in future periods as the options vest.

Warrants

Total outstanding warrants to purchase shares of Common Stock as of December 31, 2022 and 2021 amounted to 143,480. Total intrinsic value as of December 31, 2022 amounted to $2,124,000.

During the years ended December 31, 2022 and 2021, no warrants were granted and no warrants expired.

NOTE 9.  INCOME TAXES

The Company had available federal net operating loss carryforwards (“NOLs”) of approximately $9.7 and $15.3 million as of December 31, 2022 and 2021, respectively, to reduce future taxable income. The federal carryforward expires between 2030 through 2037. Due to the restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carryforwards, the utilization of the Company’s NOLs may be limited to statutory limits as a result of change in stock ownership. NOLs incurred subsequent to the latest change in control are not subject to the limitations.

Given the Company’s improving profitability over the past three fiscal years, management has concluded that it is more likely than not that the Company will be able to utilize the majority of its NOLs. However, the Company projects that roughly $2,557,000 of iSatori NOLs will not be able to be utilized prior to their expiration due to the ownership change limitations, which amount remains fully reserved.

The Company recorded a provision for income taxes of $1,393,000 and $1,298,000 for the years ended December 31, 2022 and 2021, respectively

Components of the total income tax provision are as follows:

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2022 and December 31, 2021, the Company did not have a liability for unrecognized tax benefits.

The Company recognizes, as income tax expense, interest and penalties on uncertain tax provisions. As of December 31, 2022, and 2021, the Company has not accrued interest or penalties related to uncertain tax positions. Tax years 2018 through 2022 remain open to examination by the major taxing jurisdictions to which the Company is subject. 

Significant components of the Company’s deferred income tax assets are as follows:

Reconciliation of the effective income tax rate to the U.S. statutory rate is as follows:

NOTE 10. COMMITMENTS AND CONTINGENCIES

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 11.  SUBSEQUENT EVENTS

Acquisition of Mimi’s Rock Corp

On December 4, 2022, FitLife entered into an Arrangement Agreement with Mimi’s Rock Corp. (“MRC”), pursuant to which the Company agreed to acquire MRC for a total cash purchase price of approximately $17.0 million ($23.2 million Canadian dollars (“CAD”)), of which approximately $10.4 million (CAD $14.2 million) would be used to retire all of MRC’s outstanding indebtedness, and approximately $6.6 million (CAD $9.0 million), would be used to purchase all issued and outstanding shares of MRC from its current shareholders (collectively, the “Purchase Price”) (the “Acquisition”).

The Arrangement Agreement was subject to the terms and conditions of the Plan of Arrangement, which Plan was made in accordance with Section 182 of the Ontario Business Corporations Act and required a court order approving the Plan.  Further, to finance the acquisition of MRC, which amount was paid in all cash, the Company’s principal bank, First Citizens Bank (the “Bank”), agreed to provide up to $12.5 million in debt financing. The obligations of the Company and MRC to consummate the Acquisition were subject to certain closing conditions, including, but not limited to, (i) the taking of all steps set forth in the Interim Order (as defined in the Arrangement Agreement) and Final Order (as defined in the Arrangement Agreement); (ii) the approval of MRC shareholders, and (iii) receipt of any necessary regulatory approvals.

On February 28, 2023, the Company completed the Acquisition of MRC for $17.0 million (CAD $23.2 million). The Acquisition will be accounted for as a business combination under ASC 805, Business Combinations. The Company is in the process of determining the fair value of the tangible and intangible assets of MRC.  The purchase price of $17.0 million will be allocated to the tangible and intangible assets acquired based on their fair values on the acquisition date of February 28, 2023.  The Company expects to determine the appropriate balances at the date of acquisition during the quarter ended June 30, 2023.

Foreign Currency Forward Contract

Subsequent to December 31, 2022, the Company entered into a foreign currency forward contract to purchase CAD $25.0 million during the quarter ended March 31, 2023. The forward contract was settled in conjunction with the closing of the acquisition of MRC.

Entry into Amended and Restated Credit Agreement

On February 23, 2023 (the “Loan Closing Date”), the Company entered into an Amended and Restated Credit Agreement with the Bank (the “Credit Agreement”), amending and restating that certain Credit Agreement, dated September 24, 2019, between the Company and the Bank. Pursuant to the Credit Agreement, the Bank provided the Company with a term loan for the principal amount of $12.5 million (“Term Loan”), and a revolving line of credit of $3.5 million (the “Credit Line”, and collectively with the Term Loan, the “Loan”). The Company used the proceeds from the Loan to fund the consummation of the Acquisition (as defined below), and for general working capital purposes, including those of MRC (as defined below).

Pursuant to the Credit Agreement: (A) the Term Loan (i) accrues interest at a per annum rate equal to 2.75% above the one-month forward-looking term rate (the “Applicable Rate”), based on the secured overnight financing rate published for such day by the Federal Reserve Bank of New York (“Term SOFR Rate”), as in effect two banking days, subject to certain limitations, prior to (a) the Loan Closing Date, in the case of the initial Term SOFR Rate, and, (b) thereafter, the applicable first day of each calendar month (“Rate Adjustment Date”), adjusted for any reserve requirement and any subsequent costs arising from a change in government regulation; and (ii) and the Company shall make payments on March 10^th, June 10^th, September 10^th, and December 10^th of each calendar year, commencing on June 10, 2023, of principal plus accrued interest on the Term Loan in amounts sufficient to fully amortize the Term Loan through  February 28, 2028 (the “Term Loan Maturity Date”), with all principal and accrued interest on the Term Loan being due and payable in full on the Term Loan Maturity Date; and (B) outstanding advances under the Line of Credit (“Advances”) will accrue interest at the Applicable Rate, and commencing on April 1, 2023, and continuing on the 1^st day of each calendar month thereafter until  December 23, 2023, or the date of the termination in whole of the Line of Credit as otherwise set forth in the Amended and Restated Agreement (the “LOC Termination Date”), the Company shall make payments of accrued interest on Advances, and all principal and accrued interest on outstanding Advances shall be due and payable in full on the LOC Termination Date. The Company may prepay amounts borrowed under the Loan, in whole or in part with accrued interest to the date of such prepayment on the amount prepaid, by written notice to Bank at least one business day prior to the proposed prepayment.

The Agreement contains customary events of default (each an “Event of Default”), which upon the occurrence of an Event of Default, among other things, interest will accrue at the Applicable Rate plus 2% per annum, and the Bank may declare all Obligations, with interest thereon, immediately due and payable. The Credit Agreement further contains: (X) customary representations and warranties of the Company; (Y) customary indemnification provisions whereby the Company will indemnify Bank for certain losses arising out of inaccuracies in, or breaches of, the representations, warranties and covenants of the Company, and certain other matters; and (Z) customary affirmative and negative covenants, including, without limitation, covenants: (i) to maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of net less than 1.25 to 1.00 as tested quarterly on a trailing twelve-month basis, starting with the fiscal quarter ending March 31, 2023; (ii) to maintain a Funded Debt to EBITDA Ratio (as defined in the Credit Agreement) of not more than 2.50 to 1.00 as tested quarterly on a trailing twelve-month basis, starting with the fiscal quarter ending March 31, 2024; (iii) not to incur any indebtedness, except indebtedness already incurred on the date of the Credit Agreement, incurred for capital leases and purchase money obligations for fixed assets less than $100,000 without the Bank’s prior approval, and payable to trade creditors in the ordinary course of business; (iv) not to undertake certain fundamental or corporate changes; and (v) not to make certain Dispositions (as defined in the Credit Agreement).

Also on the Loan Closing Date, in connection with the Credit Agreement, the Company: (A) entered into a term note evidencing the Term Loan (the “Term Note”); (B) entered into a Security Agreement, by and between the Company, NDS Nutrition Products, Inc. (“NDS”), iSatori, Inc. (“IS”), Subsidiary (Subsidiary is collectively with the Company, NDS, and IS, the “Debtors”), and the Bank (the “Security Agreement”), pursuant to which all of the Company’s obligations arising from or related to the Loan (the “Obligations”) will be secured by the following assets of each of the Debtors: (i) accounts, contract rights, documents, documents of title, payment intangibles, investment property, chattel paper, instruments, deposit accounts and letter of credit right; (ii) inventory; (iii) equipment; (iv) general intangibles, including any intellectual property, consisting of any licenses, patents, copyrights, trademarks, proprietary source code or domain names; (v) accessions, attachments and other additions to the collateral; (vi) substitutes or replacements for any collateral, all proceeds, products, rents and profits of any collateral, all rights under warranties and insurance contracts covering the collateral, and any causes of action relating to the collateral; and (vii) books and records pertaining to any Collateral, including but not limited to any computer-readable memory and any computer hardware or software necessary to process such memory; and (C) approved that NDS, IS, and Ontario (collectively, the “Subsidiaries”) entered into a Guaranty Agreement with the Bank (the “Guaranty Agreement”), pursuant to which satisfaction of the Obligations by the Company are guaranteed by each of the Subsidiaries.

Other

Subsequent to the end of the fiscal year, the Company settled a dispute with a former employee.  As a result of the settlement, the former employee forfeited 61,200 shares of Common Stock to the Company for no consideration, which shares were then immediately cancelled.