Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☒
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT
For the transition period from N/A to N/A
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Commission File No. 000-52369
FITLIFE BRANDS, INC.
(Name of small business issuer as specified in its
charter)
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Nevada
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20-3464383
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(State or other jurisdiction of incorporation)
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(IRS Employer Identification No.)
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5214 S.
136th Street, Omaha, NE 68137
(Address of principal executive offices)
(402) 884-1894
(Issuer’s telephone number)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed
all reports required by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements
for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ☒ No
☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company or emerging growth company. See
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company” and "emerging growth company" in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non–Accelerated filer
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☐
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Small reporting company
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☒
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Emerging growth company
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☐
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b–2 of the Exchange
Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at May 14, 2018
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Common stock, $0.01 par value
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10,955,099
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FITLIFE BRANDS, INC.
INDEX TO FORM 10-Q FILING
FOR THE QUARTER ENDED MARCH 31, 2018
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PAGE
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PART I - FINANCIAL INFORMATION
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Item 1.
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Condensed
Consolidated Financial Statements (unaudited)
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Condensed
Consolidated Balance Sheets as of March 31, 2018 (unaudited) and
December 31, 2017
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2
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Condensed
Consolidated Statement of Operations for the three months ended
March 31, 2018 and 2017 (unaudited)
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3
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Condensed
Consolidated Statement of Stockholders’ Equity as of and for
the three months ended March 31, 2018 (unaudited)
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4
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Condensed
Consolidated Statement of Cash Flows for the three months ended
March 31, 2018 and 2017 (unaudited)
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5
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Notes to
Condensed Consolidated Financial Statements
(unaudited)
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6
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Item 2.
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Management
Discussion & Analysis of Financial Condition and Results of
Operations
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13
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Item 3.
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Quantitative and
Qualitative Disclosures About Market Risk
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18
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Item 4.
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Controls and
Procedures
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19
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PART II - OTHER INFORMATION
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Item 1.
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Legal
Proceedings
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20
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Item 1A.
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Risk
Factors
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20
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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20
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Item 3.
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Defaults Upon
Senior Securities
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20
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Item 5.
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Other
Information
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20
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Item 6.
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Exhibits
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21
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CERTIFICATIONS
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31.1
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Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act.
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31.2
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Certification
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act.
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32.1
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Certification
of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act.
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32.2
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Certification
of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act.
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Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Item 2 of Part I of
this report include forward-looking statements. These statements
involve known and unknown risks, uncertainties and other factors
that may cause our actual results, levels of activity, performance
or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or
implied by forward-looking statements.
In some cases, you can identify forward-looking statements by
terminology such as “may,” “should,”
“expects,” “plans,”
“anticipates,” “believes,”
“estimates,” “predicts,”
“potential,” “proposed,”
“intended,” or “continue” or the negative
of these terms or other comparable terminology. You should read
statements that contain these words carefully, because they discuss
our expectations about our future operating results or our future
financial condition or state other “forward-looking”
information. There may be events in the future that we are not able
to accurately predict or control. Before you invest in our
securities, you should be aware that the occurrence of any of the
events described in this Quarterly Report could substantially harm
our business, results of operations and financial condition, and
that upon the occurrence of any of these events, the trading price
of our securities could decline and you could lose all or part of
your investment. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, growth rates, levels of activity,
performance or achievements. We are under no duty to update any of
the forward-looking statements after the date of this Quarterly
Report to conform these statements to actual results.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
FITLIFE BRANDS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31,
2018
(unaudited)
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CURRENT
ASSETS
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Cash
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$564,772
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$1,261,933
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Accounts
receivable, net of allowance for sales returns and doubtful
accounts of $1,177,157 and $1,263,674, respectively
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- Trade
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261,733
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1,958,128
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- Factored
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2,209,964
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-
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Inventories,
net of allowance for obsolescence of $81,524 and $48,730,
respectively
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2,384,942
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2,873,831
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Customer
note receivable
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-
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5,000
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Prepaid
expenses and other current assets
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82,001
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221,200
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Total
current assets
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5,503,412
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6,320,092
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PROPERTY
AND EQUIPMENT, net
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274,848
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295,187
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Goodwill
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225,000
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225,000
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Security
deposits
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21,908
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21,908
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TOTAL
ASSETS
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$6,025,168
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$6,862,187
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LIABILITIES
AND STOCKHOLDERS' EQUITY:
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CURRENT
LIABILITIES:
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Accounts
payable
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$2,708,221
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$2,974,165
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Accrued
expenses and other liabilities
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379,565
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611,548
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Secured
payable to factor
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1,715,434
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-
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Line
of credit
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1,950,000
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Term
loan
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-
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414,877
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Total
current liabilities
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4,803,220
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5,950,590
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CONTINGENCIES
AND COMMITMENTS
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-
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-
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STOCKHOLDERS'
EQUITY:
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Preferred stock, $0.01 par value, 10,000,000
shares authorized as of
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March
31, 2018 and December 31, 2017:
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Preferred
stock Series A; 10,000,000 shares authorized; none
issued
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and
outstanding as of March 31, 2018 and December 31, 2017
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-
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-
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Preferred stock Series B; 1,000 shares authorized;
none issued
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and
outstanding as of March 31, 2018 and December 31, 2017
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-
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Preferred stock Series C; 500 shares authorized;
none issued
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and
outstanding as of March 31, 2018 and December 31, 2017
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Common stock, $0.01 par value, 150,000,000 shares
authorized;
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10,955,099
and 10,681,710 issued and outstanding
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as
of March 31, 2018 and December 31, 2017, respectively
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109,551
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106,819
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Additional
paid-in capital
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31,103,272
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31,013,043
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Accumulated
deficit
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(29,990,875)
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(30,208,265)
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Total
stockholders' equity
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$1,221,948
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$911,597
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
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$6,025,168
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$6,862,187
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
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FITLIFE BRANDS, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
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(Unaudited)
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Revenue
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$4,614,286
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$5,589,354
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2,698,618
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3,668,790
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1,915,668
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1,920,564
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OPERATING
EXPENSES:
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General
and administrative
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870,382
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1,160,069
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Selling
and marketing
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806,109
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947,386
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Depreciation
and amortization
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18,840
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119,338
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1,695,331
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2,226,793
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OPERATING
INCOME (LOSS)
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220,337
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(306,229)
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OTHER
(INCOME) AND EXPENSES
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Interest
expense
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3,473
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26,661
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Gain
on sale of assets
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(526)
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-
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Total
other expenses
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2,947
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26,661
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NET
INCOME (LOSS)
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$217,390
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$(332,890)
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NET
INCOME (LOSS) PER SHARE:
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Net
income (loss) per common share - basic and diluted
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$0.02
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$(0.03)
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Weighted
average common shares outstanding - basic and diluted
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10,726,710
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10,385,890
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The accompanying notes are an integral part of these condensed
consolidated financial statements
FITLIFE BRANDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2018
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Total
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DECEMBER
31, 2017
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10,681,710
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$106,819
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$31,013,043
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$(30,208,265)
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$911,597
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Common
stock issued for services
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273,389
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2,734
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79,767
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82,501
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Fair value of
options issued for services
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-
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-
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10,460
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-
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10,460
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Net
loss
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-
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-
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-
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217,390
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217,390
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10,955,099
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$109,551
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$31,103,272
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$(29,990,875)
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$1,221,948
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The accompanying notes are an integral part of these condensed
consolidated financial statements
FITLIFE BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
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Net
income (loss)
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$217,390
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$(332,890)
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Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
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Depreciation
and amortization
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18,840
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119,338
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Allowance
for sales returns and doubtful accounts
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(86,517)
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717,706
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Allowance
for inventory obsolescence
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32,794
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-
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Common
stock issued for services
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82,501
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17,500
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Fair
value of options issued for services
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10,460
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11,584
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Gain
on sale of assets
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(526)
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-
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Changes
in operating assets and liabilities:
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Accounts
receivable
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(427,052)
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(2,477,923)
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Inventories
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456,095
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861,046
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Prepaid
expenses and other current assets
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139,199
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87,465
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Customer
note receivable
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5,000
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2,251
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Accounts
payable
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(265,944)
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849,445
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Accrued
expenses and other liabilities
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(231,983)
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121,905
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Net
cash used in operating activities
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(49,743)
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(22,573)
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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Proceeds
from sale of assets
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2,025
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-
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Net
cash provided by investing activities
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2,025
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-
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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Repayment
of line of credit
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(1,950,000)
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-
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Repayment
of term loan
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(414,877)
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(137,320)
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Secured
payable to factor
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1,715,434
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-
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Net
cash used in financing activities
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(649,443)
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(137,320)
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DECREASE
IN CASH
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(697,162)
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(159,893)
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CASH,
BEGINNING OF PERIOD
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1,261,933
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1,293,041
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CASH,
END OF PERIOD
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$564,772
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$1,133,148
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Supplemental disclosure operating activities
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Cash
paid for interest
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$3,473
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$26,661
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The accompanying notes are an integral part of these condensed
consolidated financial statements
FITLIFE BRANDS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
(Unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS
Summary
FitLife Brands, Inc. (the
“Company”) is a national provider of innovative and
proprietary nutritional supplements for health-conscious consumers
marketed under the brand names NDS Nutrition Products™
(“NDS”) (www.ndsnutrition.com),
PMD™ (www.pmdsports.com),
SirenLabs™ (www.sirenlabs.com),
CoreActive™ (www.coreactivenutrition.com),
and Metis Nutrition™ (www.metisnutrition.com) (together,
“NDS
Products”). With the
consummation of the acquisition of iSatori, Inc.
(“iSatori”) on October 1, 2015, the Company added several brands to its product
portfolio, including iSatori (www.isatori.com),
BioGenetic Laboratories, and Energize (together,
“iSatori
Products”). The NDS
Products are distributed principally through franchised General
Nutrition Centers, Inc. (“GNC”) stores located both domestically and
internationally, and, with the addition of Metis Nutrition, through
corporate GNC stores in the United States. The iSatori
Products are sold through more than 25,000 retail locations, which
include specialty, mass, and online.
The Company was incorporated in the State of
Nevada on July 26, 2005. In October 2008, the Company acquired the
assets of NDS Nutritional Products, Inc., a Nebraska corporation,
and moved those assets into its wholly owned subsidiary NDS
Nutrition Products, Inc., a Florida corporation
(“NDS”). The Company’s NDS Products
are sold through NDS and the iSatori Products are sold through
iSatori, Inc., a Delaware corporation and a wholly owned subsidiary
of the Company, which the Company acquired in October
2015.
The Company is headquartered in Omaha, Nebraska.
For more information on the Company, please go
to http://www.fitlifebrands.com.
The Company’s common stock currently trades under the symbol
FTLF on the OTC:PINK market.
NOTE 2 - BASIS OF PRESENTATION
The
accompanying interim condensed unaudited consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 8 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In our opinion, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation are included. Operating results for the
three-month period ended March 31, 2018 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2018. While management of the Company believes the
disclosures presented herein are adequate and not misleading, these
interim condensed consolidated financial statements should be read
in conjunction with the audited condensed consolidated financial
statements and the footnotes thereto for the fiscal year ended
December 31, 2017, as filed with the Securities and Exchange
Commission as an exhibit to our Annual Report on Form
10-K.
NOTE 3 - 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 wholly owned subsidiaries. Intercompany accounts
and transactions have been eliminated in the consolidated condensed
financial statements.
Use of Estimates
The preparation of financial statements in
conformity with 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
expenses recognized during the periods presented. Adjustments made
with respect to the use of estimates often relate to improved
information not previously available. Uncertainties with respect to
such estimates and assumptions are inherent in the preparation of
financial statements; accordingly, actual results could differ from
these estimates.
These estimates and assumptions also affect the
reported amounts of accounts receivable, inventories, goodwill
revenues, costs and expenses and valuations of long term assets,
allowance for deferred tax assets and fair value of equity
instruments issued for services during the reporting
period. Management evaluates these estimates and assumptions
on a regular basis. Actual results could differ from those
estimates.
Basic and Diluted Income (loss) per share
Our
computation of earnings per share (“EPS”) includes
basic and diluted EPS. Basic EPS is measured as the income (loss)
available to common stockholders divided by the weighted average
common shares outstanding for the period. Diluted income (loss) per
share reflects the potential dilution, using the treasury stock
method, that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
income (loss) of the Company as if they had been converted at the
beginning of the periods presented, or issuance date, if later. In
computing diluted income (loss) per share, the treasury stock
method assumes that outstanding options and warrants are exercised
and the proceeds are used to purchase common stock at the average
market price during the period. Options and warrants may have a
dilutive effect under the treasury stock method only when the
average market price of the common stock during the period exceeds
the exercise price of the options and warrants. Potential common
shares that have an antidilutive effect (i.e., those that increase
income per share or decrease loss per share) are excluded from the
calculation of diluted EPS.
Income
(loss) per common share is computed by dividing net income (loss)
by the weighted average number of shares of common stock
outstanding during the respective periods. Basic and diluted (loss)
per common share is the same for periods because all warrants and
stock options outstanding are anti-dilutive. At March 31, 2018 and
2017, we excluded the outstanding securities summarized below,
which entitle the holders thereof to acquire shares of common stock
as their effect would have been anti-dilutive.
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Options
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810,284
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969,924
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Warrants
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43,300
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60,620
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Total
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853,584
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1,030,544
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Goodwill
The Company had goodwill of $225,000,
as of March 31, 2018 and December 31, 2017, respectively. The
Company adopted ASC Topic 350 – Goodwill and Other
Intangible Assets.
In accordance with ASC Topic 350, goodwill, which represents the
excess of purchase price and related costs over the value assigned
to net tangible and identifiable intangible assets of businesses
acquired and accounted for under the purchase method, acquired in
business combinations is assigned to reporting units that are
expected to benefit from the synergies of the combination as of the
acquisition date. Under this standard, goodwill and intangibles
with indefinite useful lives are no longer amortized. The Company
assesses goodwill and indefinite-lived intangible assets for
impairment annually during the fourth quarter, or more frequently
if events and circumstances indicate impairment may have occurred
in accordance with ASC Topic 350. If the carrying value of a
reporting unit’s goodwill exceeds its implied fair value, the
Company records an impairment loss equal to the difference. ASC
Topic 350 also requires that the fair value of indefinite-lived
purchased intangible assets be estimated and compared to the
carrying value. The Company recognizes an impairment loss when the
estimated fair value of the indefinite-lived purchased intangible
assets is less than the carrying value.
As of
March 31, 2018 and December 31, 2017, there were no indicators of
impairment for the recorded goodwill of $225,000,
respectively.
Customer Concentration
Gross sales prior to reduction for
vendor funded discounts and coupons to GNC during the period ended
March 31, 2018 and 2017 were $4,389,177 and $6,726,554,
respectively, representing 82% and 85% of total revenue,
respectively. Gross accounts receivable attributable to GNC as of
March 31, 2018 and March 31, 2017 were $3,128,286 and $4,557,806,
respectively, representing 86% and 89% of the Company’s total
accounts receivable balance, respectively.
Revenue
Recognition
The
Company’s revenue is comprised of sales of nutritional
supplements to consumers, primarily through GNC
stores.
In
September 2014, the Financial Accounting Standards Board issued
Accounting Standards Update No. 2014-09 (ASU No. 2014-09) regarding
revenue recognition. The new standard provides authoritative
guidance clarifying the principles for recognizing revenue and
developing a common revenue standard for U.S. generally accepted
accounting principles. The core principle of the guidance is that
an entity should recognize revenue to depict the transfer of
promised goods to customers in an amount that reflects the
consideration to which the entity expects to be entitled in the
exchange for those goods. The ASU became effective January 1,
2018.
Due to
the nature of the products sold by the Company, the adoption of the
new standard has had no quantitative effect on the financial
statements. However, the guidance requires additional
disclosures to help users of financial statements better understand
the nature, amount, timing, and uncertainty of revenue that is
recognized.
The
Company previously recognized revenue when risk of loss transferred
to our customers and collection of the receivable was reasonably
assured, which generally occurs when the product is shipped. A
product is not shipped without an order from the customer and
credit acceptance procedures performed. The Company allows for
returns within 30 days of purchase from end-users. 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
FDA.
Under
the new guidance, revenue is recognized when control of promised
goods is transferred to our customers, in an amount that reflects
the consideration we expect to be entitled to in exchange for those
goods. The Company reviews its sales transactions to identify
contractual rights, performance obligations, and transaction
prices, including the allocation of prices to separate performance
obligations, if applicable. Revenue and costs of sales are
recognized once products are delivered to the customer’s
control and performance obligations are satisfied.
All
products sold by the Company are distinct individual products and
consist of nutritional supplements and related supplies. The
products are offered for sale solely as finished goods, and there
are no performance obligations required post-shipment for customers
to derive the expected value from them. Other than promotional
activities, which can vary from time to time but nevertheless are
entirely within the Company’s control, contracts with
customers contain no incentives or discounts that could cause
revenue to be allocated or adjusted over time.
Control
of products we sell transfers to customers upon shipment from our
facilities, and the Company’s performance obligations are
satisfied at that time. Shipping and handling activities are
performed before the customer obtains control of the goods and
therefore represent a fulfillment activity rather than promised
goods to the customer. Payment for sales are generally made by
check, credit card, or wire transfer. Historically the Company has
not experienced any significant payment delays from
customers.
We
provide a 30-day right of return for our products. A right of
return does not represent a separate performance obligation, but
because customers are allowed to return products, the consideration
to which the Company expects to be entitled is variable. Upon
evaluation of returns, the Company determined that substantially
less than 5% of products are returned, and therefore believes it is
probable that such returns will not cause a significant reversal of
revenue in the future. We assess our contracts and the
reasonableness of our conclusions on a quarterly
basis.
Recent Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases. This update will require the
recognition of a right-of-use asset and a corresponding lease
liability, initially measured at the present value of the lease
payments, for all leases with terms longer than 12 months. For
operating leases, the asset and liability will be expensed over the
lease term on a straight-line basis, with all cash flows included
in the operating section of the statement of cash flows. For
finance leases, interest on the lease liability will be recognized
separately from the amortization of the right-of-use asset in the
statement of comprehensive income and the repayment of the
principal portion of the lease liability will be classified as a
financing activity while the interest component will be included in
the operating section of the statement of cash flows. ASU 2016-02
is effective for annual and interim reporting periods beginning
after December 15, 2018. Early adoption is permitted. Upon
adoption, leases will be recognized and measured at the beginning
of the earliest period presented using a modified retrospective
approach. The Company is currently evaluating the impact of the
adoption of ASU 2016-02 on its financial statements and related
disclosures.
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.
NOTE 4 – MERCHANT AGREEMENT
In
December 2017, the Company, through
NDS and iSatori (together, the “Subsidiaries”),
entered into a Merchant Agreement with Compass Bank, d/b/a Commercial Billing Service
(“Compass”)(“Factor”). Under the terms of the Merchant
Agreement, subject to the satisfaction of certain conditions to
funding, the Subsidiaries agreed to sell to Compass, and Compass
agreed to purchase from the Subsidiaries, certain accounts owing
from customers of such Subsidiaries, including GNC. All amounts due
under the terms of the Merchant Agreement, totaling up to $5.0
million, are guaranteed by the Company under the terms of a
Continuing Guarantee. The Company
shall pay a fee of London Interbank Offering Rate (LIBOR) plus 550
basis points calculated based upon the excess of the amount owing
over cash collected from customers. The applicable LIBOR rate as of
March 31, 2018 was 1.8%. Additionally, the Company will be charged
a non-utilization fee by which the average outstanding amount of
obligations is less than $3.0 million. The Subsidiaries and Compass
have agreed in principle to reduce the basis for the
non-utilization fee from the above referenced $3.0 million to $2.0
million. The change is expected to become effective during May
2018. The Company has pledged collateral of all present and future
inventory, accounts, accounts receivable, general intangibles and
returned goods, together with all reserves, balances, deposits, and
property at any time owing to the credit of the Company with
Compass and any and all substitutions, accessions, additions,
parts, accessories, attachments, replacements, proceeds and
products of, for and to inventory, whether now or hereafter owned,
existing, created, arising or acquired. The Merchant Agreement
renews automatically unless either party terminates with a written
notice within thirty days of the anniversary
date.
Under
the terms of the Merchant Agreement, all factored receivables are
sold with recourse, which requires the Company to repurchase any
receivables, if demanded, not paid on time causing such receivables
to be accounted for as a secured financing arrangement and not as a
sale of financial assets. Receivables are presented net of
allowance for doubtful accounts with the recourse amount
potentially due Compass in the event of untimely payment presented
under current liabilities as a secured financing obligation. There
were no invoices factored under this agreement during the year
ended December 31, 2017.
During
the period ended March 31, 2018, the Company factored gross
invoices totaling $5,037,146 for cash proceeds of $4,012,129, net
of credit memos of $514,487 and the 20% factor hold back or due
from factor of $510,530. In addition, the Company also incurred
fees and interest of $17,400 as a result of this
agreement.
As of
March 31, 2018, a total of $2,209,964 of the factored invoices have
not yet been collected by the factor as these invoices were not yet
due. As such, pursuant to current accounting guidelines, the
Company reported the $2,209,964 as Accounts Receivable, Factored,
the corresponding proceeds received from the factor of $1,715,434
as Secured Payable to Factor and the difference of $494,530 as an
adjustment to due from factor.
NOTE 5 – INVENTORIES
The
Company’s inventories as of March 31, 2018 and December 31,
2017 were as follows:
|
|
March
31,
2018 (unaudited)
|
|
|
Finished
goods
|
$1,959,811
|
$2,511,260
|
|
Components
|
506,655
|
411,301
|
|
Allowance for
obsolescence
|
(81,524)
|
(48,730)
|
|
Total
|
$2,384,942
|
$2,873,831
|
NOTE 6 - PROPERTY AND EQUIPMENT
The
Company’s fixed assets as of March 31, 2018 and December 31,
2017 were as follows:
|
|
March
31,
2018 (unaudited)
|
|
|
Equipment
|
$967,321,
|
$971,820
|
|
Accumulated
depreciation
|
(692,473)
|
(676,633)
|
|
Total
|
$274,848
|
$295,187
|
Depreciation
expense for the three months ended March 31, 2018 was $18,840 as
compared to $13,389 for the three-month period ended March 31,
2017.
NOTE 7 – NOTES PAYABLE
The
Company had previously obtained a line of credit (LOC) of $3
million and a separate term loan of $2.6 million with a financial
institution, US Bank. Both loans were secured by the
Company’s tangible and intangible assets, and had an average
interest rate of 5% per annum. The LOC matured in December 2017, as
amended, while the term loan did not mature until August 2018. As
of December 31, 2017, outstanding balance of these notes payable
totaled $2,364,877 and was deemed in default due to non-compliance
with certain financial covenants.
In
January 2018, the Company paid US Bank a total of $2,364,877 to
settle the outstanding balance of LOC and the term note payable. As
of March 31, 2018, the LOC and Term Note payable had been fully
paid.
NOTE 8 - EQUITY
Common Stock
The
Company is authorized to issue 150.0 million shares of common
stock, $0.01 par value, of which 10,955,099 common shares were
issued and outstanding as of March 31, 2018.
During
the period ended March 31, 2018, the Company issued 273,389 shares
of common stock with a fair value of $82,501 to employees and
directors for services rendered. The shares were valued at their
respective date of issuance.
Preferred Stock
The
Company is authorized to issue 10.0 million shares of Series A
Convertible Preferred Stock, $0.01 par value, 1,000 shares of its
10% Cumulative Perpetual Series B Preferred Stock, $0.01 par value,
and 500 shares of its Series C Convertible Preferred Stock, par
value $0.01, none of which were issued and outstanding as of March
31, 2018 and December 31, 2017.
Options
As of March 31, 2018 and December 31, 2017,
810,284 and 870,284 options to
purchase shares of common stock of the Company were issued and
outstanding, respectively. Additional information regarding the
March 31, 2018 options is as follows:
|
|
|
|
|
|
212,074
|
$1.39
|
05/09/16
|
05/09/21
|
|
4,330
|
$1.44
|
09/29/15
|
09/29/25
|
|
40,000
|
$2.20
|
04/11/14
|
04/11/19
|
|
370,000
|
$2.30
|
02/23/15
|
02/23/20
|
|
93,503
|
$3.31
|
02/16/12
|
02/16/22
|
|
18,966
|
$4.62
|
05/13/15
|
05/13/25
|
|
4,330
|
$5.49
|
04/08/15
|
04/08/25
|
|
1,732
|
$5.81
|
03/05/15
|
03/05/25
|
|
32,331
|
$5.89
|
03/23/15
|
03/23/25
|
|
8,660
|
$12.13
|
09/17/13
|
09/17/23
|
|
7,038
|
$12.99
|
11/14/12
|
09/27/22
|
|
17,320
|
$14.43
|
01/16/13
|
11/30/22
|
|
810,284
|
|
|
|
During
the three-month period ended March 31, 2018 and 2017, the Company
recognized compensation expense of $10,460 and $11,584,
respectively, to account the fair value of stock options that
vested during the period.
There
was no intrinsic value for all the outstanding options at March 31,
2018, since the exercise prices of these options were greater than
the March 31, 2018 closing stock price of $0.31 per share.
Future unamortized compensation
expense on the unvested outstanding options at March 31, 2018
amounted to $71,676, which will be recognized through April
2020.
Warrants
As
of March 31, 2018 and December 31, 2017, warrants to purchase
43,300 shares of common stock and 60,620 shares of common stock of
the Company were issued and outstanding, respectively, all of which
were assumed by the Company in connection with the acquisition of
iSatori. Additional information about the outstanding warrants as
of March 31, 2018 is as follows:
|
|
|
|
|
|
43,300
|
$12.99
|
07/16/13
|
07/16/18
|
|
43,300
|
|
|
|
There
was no intrinsic value for all the outstanding warrants at March
31, 2018 since the exercise price of these warrants was greater
than the March 31, 2018 closing stock price of $0.31 per
share.
NOTE 9 – COMMITMENTS
AND CONTINGENCIES
Legal Proceedings
On December 31, 2014, various plaintiffs,
individually and on behalf of a purported nationwide and sub-class
of purchasers, filed a lawsuit in the U.S. District Court for the
Northern District of California, captioned Ryan et al. v. Gencor
Nutrients, Inc. et al., Case
No.: 4:14-CV-05682. The lawsuit includes claims made against the
manufacturer and various producers and sellers of products
containing a nutritional supplement known as Testofen, which is
manufactured and sold by Gencor Nutrients, Inc.
(“Gencor”). Specifically, the Ryan plaintiffs allege
that various defendants have manufactured, marketed and/or sold
Testofen, or nutritional supplements containing Testofen, and in
doing so represented to the public that Testofen had been
clinically proven to increase free testosterone levels. According
to the plaintiffs, those claims are false and/or not statistically
proven. Plaintiffs seek relief under violations of the Racketeering
Influenced Corrupt Organizations Act, breach of express and implied
warranties, and violations of unfair trade practices in violation
of California, Pennsylvania, and Arizona law. NDS utilizes Testofen
in a limited number of nutritional supplements it manufactures and
sells pursuant to a license agreement with
Gencor.
On
February 19, 2015, this matter was transferred to the Central
District of California to the Honorable Manuel Real. Judge Real had
previously issued an order dismissing a similar lawsuit that had
been filed by the same lawyer who represents the plaintiffs in the
Ryan matter. The United States Court of Appeals reversed part of
the dismissal issued by Judge Real and remanded the case back down
to the district court for further proceedings. As a result, the
parties in the Ryan matter issued a joint status report and that
matter is again active.
We
are currently not involved in any litigation except noted above
that we believe could have a material adverse effect on our
financial condition or results of operations. Other than described
above, 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.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following
discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial
statements and the related notes appearing elsewhere in this
report. This discussion and analysis may contain forward-looking
statements based on assumptions about our future
business.
Overview
FitLife Brands, Inc. (the
“Company”) is a national provider of innovative and
proprietary nutritional supplements for health-conscious consumers
marketed under the brand names NDS Nutrition Products™
(“NDS”) (www.ndsnutrition.com),
PMD™ (www.pmdsports.com),
SirenLabs™ (www.sirenlabs.com),
CoreActive™ (www.coreactivenutrition.com),
and Metis Nutrition™ (www.metisnutrition.com) (together,
“NDS
Products”). With the
consummation of the merger with iSatori, Inc.
(“iSatori”) on September 30, 2015, which became
effective on October 1, 2015, described below (the
“Merger”), the Company added several brands to its
product portfolio, including iSatori (www.isatori.com),
BioGenetic Laboratories, and Energize (together,
“iSatori
Products”). The NDS
Products are distributed principally through franchised General
Nutrition Centers, Inc. (“GNC”) stores located both domestically and
internationally, and, with the addition of Metis Nutrition, through
corporate GNC stores in the United States. The iSatori
Products are sold through more than 25,000 retail locations, which
include specialty, mass, and online.
The Company was incorporated in the State of
Nevada on July 26, 2005. In October 2008, the Company acquired the
assets of NDS Nutritional Products, Inc., a Nebraska corporation,
and moved those assets into its wholly owned subsidiary NDS
Nutrition Products, Inc., a Florida corporation
(“NDS”). The Company’s NDS Products are
sold through NDS and the iSatori Products are sold through iSatori,
Inc., a Delaware corporation and a wholly owned subsidiary of the
Company.
FitLife Brands is headquartered in Omaha,
Nebraska. For more information on the Company, please go to
http://www.fitlifebrands.com.
The Company’s common stock currently trades under the symbol
FTLF on the OTC:PINK market.
Recent Developments
In
December 2017, the Company, through
NDS and iSatori (together, the “Subsidiaries”),
entered into a Merchant Agreement with Compass Bank, d/b/a Commercial Billing Service
(“Compass”). Under the terms of the Merchant
Agreement, subject to the satisfaction of certain conditions to
funding, the Subsidiaries agreed to sell to Compass, and Compass
agreed to purchase from the Subsidiaries, certain accounts owing
from customers of such Subsidiaries, including GNC. All amounts due
under the terms of the Merchant Agreement, totaling up to $5.0
million, are guaranteed by the Company under the terms of a
Continuing Guarantee. The Company
shall pay a fee of LIBOR plus 550 basis points calculated based
upon the excess of the amount owing over cash collected from
customers. The applicable LIBOR rate as of March 31, 2018 was
1.8%. Additionally, the Company will be charged a
non-utilization fee by which the average outstanding amount of
obligations is less than $3.0 million. The Subsidiaries and Compass
have agreed in principal to reduce the basis for the
non-utilization fee from $3.0 million to $2.0 million. The change
is expected to become effective during May 2018. The Company has
pledged collateral of all present and future inventory, accounts,
accounts receivable, general intangibles and returned goods,
together with all reserves, balances, deposits, and property at any
time owing to the credit of the Company with Compass and any and
all substitutions, accessions, additions, parts, accessories,
attachments, replacements, proceeds and products of, for and to
inventory, whether now or hereafter owned, existing, created,
arising or acquired. The Merchant Agreement renews automatically
unless either party terminates by providing written notice within
thirty days of the anniversary date.
On
January 22, 2018, the Subsidiaries sold to Compass accounts
receivable under the Merchant Agreement aggregating approximately
$2.0 million, the proceeds from which were used to pay U.S. Bank
all principal and accrued interest due and owing U.S. Bank under
the terms of the Notes previously issued to U.S. Bank. As a result
of such payment, together with a payment of approximately $360,000
from existing cash resources, the Notes, together with all other
instruments and agreements executed by the Company and U.S. Bank
providing for the extension of credit by U.S. Bank to the Company
and the Subsidiaries, or otherwise, have terminated, and are of no
further force and effect.
Results of Operations
Comparison of Three Months Ended March 31, 2018 to the Three Months
Ended March 31, 2017
Net
Sales. Revenue for
the three months ended March 31, 2018 decreased 17.4% to $4,614,286
as compared to $5,589,354 for the three months ended March 31,
2017. Revenue for the three-month period ended March 31, 2018
compared to the prior three-month period, in part,
reflects declining traffic trends and lower unit sales at
retail leading to lower same store sales in GNC, our principal
distribution channel, as well as certain inventory level
adjustments by GNC resulting from such trends. While no
assurances can be given, management believes the negative trends
affecting GNC and the overall retail segment have begun to
stabilize.
Revenue
attributable to the Company’s NDS Nutrition division for the
three months ended March 31, 2018 was $3,587,918 as compared to
$4,128,392 for the three months ended March 31, 2017. This decrease
was principally attributable to the factors affecting total revenue
for the reported period, specifically lower total sales to GNC, our
principal distribution channel.
Revenue
attributable to the Company’s iSatori operating division for
the three months ended March 31, 2018 was $1,026,368, as compared
to $1,460,962 for the three months ended March 31, 2017. This
decrease was attributable to a number of factors including general
weakness in retail traffic resulting in lower unit sales at retail,
and reduced effectiveness of our distribution partners.
As
a result of the macro issues affecting retail generally, management
is focused on developing an omnichannel product sales capability
through its retail partners and online through its direct response
and ecommerce platform to drive additional incremental sales in the
short-term, and, while no assurances can be given, a material
increase in sales in the longer-term.
Cost of Goods
Sold. Cost of goods
sold for the three months ended March 31, 2018 decreased to
$2,698,618 as compared to $3,668,790 for the three months ended
March 31, 2017. The decrease during the three-month period is
principally attributable to lower total sales
volumes.
Gross Profit Margin.
Gross profit for the three months ended March 31, 2018 decreased to
$1,915,668
as compared to $1,920,564 for the three months ended March 31,
2017. The decrease during the three-month period is
principally attributable to lower sales, but substantially offset
by higher gross margin. Gross margin for the three months
ended March 31, 2018 increased to 41.5% from 34.4% for the
comparable period last year. The increase in gross margin was
primarily attributable to the impact of the $700,000 non-recurring
margin support agreement with GNC. Absent the impact of the
non-recurring charge, gross margin for the three month period ended
March 31, 2017 would have been 41.7%.
General and Administrative
Expense. General and administrative expense for the
three months ended March 31, 2018 decreased to $870,382 as compared
to $ 1,160,069 for the three
months ended March 31, 2017. The decrease in general and
administrative expense for the three months ended March 31, 2018 is
principally attributable to ongoing cost reduction initiatives,
subletting certain facilities and lower
headcount.
Selling and Marketing
Expense. Selling and
marketing expense for the three months ended March 31, 2018
decreased to $806,109 as compared to $ 947,386 for the three months
ended March 31, 2017. The decrease in selling and marketing
expense for the three-month period ended March 31, 2018 is
principally the result of budgetary controls, and certain headcount
reductions.
Depreciation and
Amortization. Depreciation and amortization for the
three months ended March 31, 2018 decreased to $18,840 as compared
to $119,338 for the three months ended March 31,
2017. The decrease was primarily attributable to the
write-off of certain intangible assets during the fourth quarter of
2017.
Net
Income/(Loss). We
generated a net profit of $217,390 for the three-month period ended
March 31, 2018 as compared to a net loss of $(332,890) for the
three months ended March 31, 2017. The change from a net loss to
net profit for the three-month period ended March 31, 2018 compared
to the comparable period last year is principally attributable to
stronger margins and reduced operating expenses, which offset lower
sales volumes.
Liquidity and Capital Resources
At
March 31, 2018, we had positive working capital of approximately
$700,194, compared to $369,502 at December 31, 2017. Our principal
sources of liquidity at March 31, 2018 consisted of $564,772 of
cash and $2,471,697 from accounts receivable. The increase in
working capital is principally attributable to the payment of the
line of credit and term loan, both of which were current
liabilities.
The Company has historically financed its
operations primarily through cash flow from operations and equity
and debt financings, and more recently, the sale of accounts
receivable. 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 will be sufficient to provide for the
Company’s liquidity for the next 12 months.
In
December 2017, the Company, through its Subsidiaries, entered into
the Merchant Agreement with Compass. Under the terms of the
Merchant Agreement, subject to the satisfaction of certain
conditions to funding, the Subsidiaries agreed to sell to Compass,
and Compass agreed to purchase from the Subsidiaries, certain
accounts owing from customers of such Subsidiaries, including GNC.
On January 22, 2018, the Subsidiaries sold to Compass accounts
receivable under the Merchant Agreement aggregating approximately
$2.0 million, the proceeds from which were used to pay U.S. Bank,
inclusive of a payment of approximately $360,000 from the Company,
all principal and accrued interest due and owed U.S. Bank under the
terms of the Notes and revolving line of credit.
The
Company is dependent on cash flow from operations and the
accumulation of additional receivables available to sell to Compass
under the terms of the Merchant Agreement to satisfy its working
capital requirements. No assurances can be given that cash flow
from operations and/or that the Company will have access to
additional capital under the terms of the Merchant Agreement
necessary 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 Merchant Agreement, additional working capital will be
required. Management at present has no intention to raise
additional working capital through the sale of equity or debt
securities and believes the agreement with Compass 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 Merchant Agreement, 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 Used in
Operations. Our cash used
in operating activities for the three months ended March 31, 2018
was $(49,743), as compared to $(22,573) for the three months ended
March 31, 2017. The increase is principally attributable to
variations in certain working capital accounts resulting from our
agreement with Compass. Net working capital increased to $700,192
as of the quarter ended March 31, 2018 compared to $369,502 as of
March 31, 2017.
Cash Provided by Investing
Activities. Cash
provided by investing activities for the three months ended March
31, 2018 was $2,025. There was no investing activities for the
three months ended March 31, 2017.
Cash Used in Financing
Activities. Our cash used in
financing activities for the three months ended March 31,
2018 was $(649,443) as compared to cash used in financing
activities of $(137,320) during the three months ended March 31,
2017. The primary difference was the payoff of all amounts owed to
U.S. Bank under both the line of credit and term loan during the
three months ended March 31, 2018 plus the impact of the factoring
arrangement with Compass.
Critical Accounting Policies and Estimates
Our
discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation
of these consolidated financial statements and related disclosures
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, expenses, and related
disclosure of contingent assets and liabilities. We evaluate, on an
on-going basis, our estimates and judgments, including those
related to the useful life of the assets. We base our estimates on
historical experience and assumptions that we believe to be
reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
The
methods, estimates and judgments we use in applying our most
critical accounting policies have a significant impact on the
results that we report in our consolidated financial statements.
The SEC considers an entity’s most critical accounting
policies to be those policies that are both most important to the
portrayal of a company’s financial condition and results of
operations and those that require management’s most
difficult, subjective or complex judgments, often as a result of
the need to make estimates about matters that are inherently
uncertain at the time of estimation. For a more detailed discussion
of the accounting policies of the Company, see Note 3 of the Notes
to the Condensed Consolidated Financial Statements, “Summary
of Significant Accounting Policies.”
We
believe the following critical accounting policies, among others,
require significant judgments and estimates used in the preparation
of our consolidated financial statements.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States (“GAAP”) requires management to make estimates and
assumptions that affect (i) the reported amounts of assets and
liabilities, (ii) the disclosure of contingent assets and
liabilities known to exist as of the date the financial statements
are published, and (iii) the reported amount of net sales and
expenses recognized during the periods presented. Adjustments made
with respect to the use of estimates often relate to improved
information not previously available. Uncertainties with respect to
such estimates and assumptions are inherent in the preparation of
financial statements; accordingly, actual results could differ from
these estimates.
These estimates and assumptions also
affect the reported amounts of accounts receivable, inventories,
goodwill, revenues, costs and expenses and valuations of long term
assets, allowance for deferred tax assets and equity instruments
issued for services during the reporting period. Management
evaluates these estimates and assumptions on a regular
basis. Actual results could differ from those
estimates.
Goodwill
The Company had goodwill with a
carrying value of $225,000 as of March 31, 2018 and December 31,
2017, respectively. The Company adopted ASC Topic 350
– Goodwill and Other
Intangible Assets.
In accordance with ASC Topic 350, goodwill, which represents the
excess of purchase price and related costs over the value assigned
to net tangible and identifiable intangible assets of businesses
acquired and accounted for under the purchase method, acquired in
business combinations is assigned to reporting units that are
expected to benefit from the synergies of the combination as of the
acquisition date. Under this standard, goodwill and intangibles
with indefinite useful lives are no longer amortized. The Company
assesses goodwill and indefinite-lived intangible assets for
impairment annually during the fourth quarter, or more frequently
if events and circumstances indicate impairment may have occurred
in accordance with ASC Topic 350. If the carrying value of a
reporting unit’s goodwill exceeds its implied fair value, the
Company records an impairment loss equal to the difference. ASC
Topic 350 also requires that the fair value of indefinite-lived
purchased intangible assets be estimated and compared to the
carrying value. The Company recognizes an impairment loss when the
estimated fair value of the indefinite-lived purchased intangible
assets is less than the carrying value.
Identifiable intangible assets are stated at cost and accounted for
based on whether the useful life of the asset is finite or
indefinite. Identified intangible assets with finite useful lives
are amortized using the straight-line methods over their estimated
useful lives, which was originally ten years. Intangible assets
with indefinite lives are not amortized to operations, but instead
are reviewed for impairment at least annually, or more frequently
if there is an indicator of impairment.
As of
March 31, 2018 and December 31, 2017, there were no indicators of
impairment for the recorded goodwill of $225,000,
respectively.
Share Based Payment
The Company issues stock options, warrants and common stock as
share-based compensation to employees and non-employees. The
Company accounts for its share-based compensation to employees in
accordance with FASB ASC718 “Compensation - Stock
Compensation.” Stock-based compensation cost is measured at
the grant date, based on the estimated fair value of the award, and
is recognized as expense over the requisite service
period.
The Company
accounts for share-based compensation issued to non-employees and
consultants in accordance with the provisions of FASB ASC 505-50
“Equity - Based Payment to Non-Employees.” Measurement
of share-based payment transactions with non-employees is based on
the fair value of whichever is more reliably measurable: (a) the
goods or services received, or (b) the equity instruments issued.
The final fair value of the share-based payment transaction is
determined at the performance completion date. For interim periods,
the fair value is estimated and the percentage of completion is
applied to that estimate to determine the cumulative expense
recorded.
The Company
values stock compensation based on the market price on the
measurement date. For employees this is the date of grant, and for
non-employees, this is the date of performance completion. The
Company values stock options and warrants using the Black-Scholes
option pricing model.
Revenue Recognition
The
Company’s revenue is comprised of sales of nutritional
supplements to consumers, primarily through GNC
stores.
In
September 2014, the Financial Accounting Standards Board issued
Accounting Standards Update No. 2014-09 (ASU No. 2014-09) regarding
revenue recognition. The new standard provides authoritative
guidance clarifying the principles for recognizing revenue and
developing a common revenue standard for U.S. generally accepted
accounting principles. The core principle of the guidance is that
an entity should recognize revenue to depict the transfer of
promised goods to customers in an amount that reflects the
consideration to which the entity expects to be entitled in the
exchange for those goods or services. The ASU became effective
January 1, 2018.
Due to
the nature of the products sold by the Company, the adoption of the
new standard has had no quantitative effect on the financial
statements. However, the guidance requires additional
disclosures to help users of financial statements better understand
the nature, amount, timing, and uncertainty of revenue that is
recognized.
The
Company previously recognized revenue when risk of loss transferred
to our customers and collection of the receivable was reasonably
assured, which generally occurs when the product is shipped. A
product is not shipped without an order from the customer and
credit acceptance procedures performed. The Company allows for
returns within 30 days of purchase from end-users. 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
FDA.
Under
the new guidance, revenue is recognized when control of promised
goods is transferred to our customers, in an amount that reflects
the consideration we expect to be entitled to in exchange for those
goods. The Company reviews its sales transactions to identify
contractual rights, performance obligations, and transaction
prices, including the allocation of prices to separate performance
obligations, if applicable. Revenue and costs of sales are
recognized once products are delivered to the customer’s
control and performance obligations are satisfied.
All
products sold by the Company are distinct individual products and
consist of nutritional supplements and related supplies. The
products are offered for sale solely as finished goods, and there
are no performance obligations required post-shipment for customers
to derive the expected value from them. Other than promotional
activities, which can vary from time to time but nevertheless are
entirely within the Company’s control, contracts with
customers contain no incentives or discounts that could cause
revenue to be allocated or adjusted over time.
Control
of products we sell transfers to customers upon shipment from our
facilities, and the Company’s performance obligations are
satisfied at that time. Shipping and handling activities are
performed before the customer obtains control of the goods and
therefore represent a fulfillment activity rather than promised
goods to the customer. Payment for sales are generally made by
check, credit card, or wire transfer. Historically the Company has
not experienced any significant payment delays from
customers.
We
provide a 30-day right of return for our products. A right of
return does not represent a separate performance obligation, but
because customers are allowed to return products, the consideration
to which the Company expects to be entitled is variable. Upon
evaluation of returns, the Company determined that substantially
less than 5% of products are returned, and therefore believes it is
probable that such returns will not cause a significant reversal of
revenue in the future. We assess our contracts and the
reasonableness of our conclusions on a quarterly
basis.
Recent Accounting Polices
See
Note 3 in the accompanying financial statements for a discussion of
recent accounting policies.
WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Quarterly Report on
Form 10-Q in conjunction with other reports and documents that we
file from time to time with the SEC. In particular, please read our
Quarterly Reports on Form 10-Q, Annual Report on Form 10-K, and
Current Reports on Form 8-K that we file from time to time. You may
obtain copies of these reports directly from us or from the SEC at
the SEC’s Public Reference Room at 100 F. Street, N.E.
Washington, D.C. 20549, and you may obtain information about
obtaining access to the Reference Room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains information for
electronic filers at its website http://www.sec.gov.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Our
business is currently conducted principally in the United States.
As a result, our financial results are not affected by factors such
as changes in foreign currency exchange rates or economic
conditions in foreign markets. We do not engage in hedging
transactions to reduce our exposure to changes in currency exchange
rates, although as the geographical scope of our business broadens,
we may do so in the future.
Our
exposure to risk for changes in interest rates relates primarily to
our investments in short-term financial instruments. Investments 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
may fall short of expectations due to changes in interest rates or
we may suffer losses in principal if we are forced to sell
securities that have fallen in estimated fair value due to changes
in interest rates. However, as substantially all of our cash
equivalents consist of bank deposits and short-term money market
instruments, we do not expect any material change with respect to
our net income as a result of an interest rate change.
We
do not hold any derivative instruments and do not engage in any
hedging activities.
ITEM
4. CONTROLS AND
PROCEDURES
(a) Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange
Commission’s rules and forms and that such information is
accumulated and communicated to our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Our disclosure
controls and procedures were designed to provide reasonable
assurance that the controls and procedures would meet their
objectives. As required by SEC Rule 13a-15(b), our Chief Executive
Officer and Chief Financial Officer carried out an evaluation of
the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this
report. Based on the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance
level.
Our Chief Executive Officer and Chief Financial
Officer are responsible for establishing and maintaining adequate
internal control over our financial reporting. In order to evaluate
the effectiveness of internal control over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act, management has
conducted an assessment, including testing, using the criteria in
Internal Control — Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Our system of internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Management has
used the framework set forth in the report entitled Internal
Control-Integrated Framework published by the COSO to evaluate the
effectiveness of our internal control over financial reporting.
Based on this assessment, our Chief Executive Officer and Chief
Financial Officer have concluded that our internal control over
financial reporting was effective as of March 31, 2018. This
Quarterly Report does not include an attestation report of our
independent registered public accounting firm regarding internal
control over financial reporting. Our internal control over
financial reporting was not subject to attestation by our
independent registered public accounting firm pursuant to temporary
rules of the SEC that permit us to provide only management’s
report in this Quarterly Report. There has been no change in our
internal controls over financial reporting during our most recent
fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.
(b) Changes
in Internal Controls Over Financial Reporting
There
have been no changes in our internal controls over financial
reporting or in other factors that could materially affect, or are
reasonably likely to affect, our internal controls over financial
reporting during the quarter ended March 31, 2018. There have not
been any significant changes in the Company’s critical
accounting policies identified since the Company filed its Annual
Report on Form 10-K for the year ended December 31,
2017.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 31, 2014, various plaintiffs,
individually and on behalf of a purported nationwide and sub-class
of purchasers, filed a lawsuit in the U.S. District Court for the
Northern District of California, captioned Ryan et al. v. Gencor
Nutrients, Inc. et al., Case
No.: 4:14-CV-05682. The lawsuit includes claims made against the
manufacturer and various producers and sellers of products
containing a nutritional supplement known as Testofen, which is
manufactured and sold by Gencor Nutrients, Inc.
(“Gencor”). Specifically, the Ryan plaintiffs allege
that various defendants have manufactured, marketed and/or sold
Testofen, or nutritional supplements containing Testofen, and in
doing so represented to the public that Testofen had been
clinically proven to increase free testosterone levels. According
to the plaintiffs, those claims are false and/or not statistically
proven. Plaintiffs seek relief under violations of the Racketeering
Influenced Corrupt Organizations Act, breach of express and implied
warranties, and violations of unfair trade practices in violation
of California, Pennsylvania, and Arizona law. NDS utilizes Testofen
in a limited number of nutritional supplements it manufactures and
sells pursuant to a license agreement with
Gencor.
On
February 19, 2015 this matter was transferred to the Central
District of California to the Honorable Manuel Real. Judge Real had
previously issued an order dismissing a similar lawsuit that had
been filed by the same lawyer who represents the plaintiffs in the
Ryan matter. The United States Court of Appeals reversed part of
the dismissal issued by Judge Real and remanded the case back down
to the district court for further proceedings. As a result, the
parties in the Ryan matter issued a joint status report and that
matter is again active.
We
are currently not involved in any litigation except noted above
that we believe could have a material adverse effect on our
financial condition or results of operations. Other than described
above, 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.
ITEM 1A. RISK FACTORS
Our results of operations and financial condition
are subject to numerous risks and uncertainties described in our
Annual Report on Form 10-K for our fiscal year ended December 31,
2017, filed on April 17, 2018. You should carefully consider these
risk factors in conjunction with the other information contained in
this Quarterly Report. Should any of these risks materialize, our
business, financial condition and future prospects could be
negatively impacted. As of March 31, 2018, there are no risk
factors identified by the Company in addition to the risk factors
previously disclosed in Part I, Item 1A, “Risk
Factors” in our Annual
Report on Form 10-K for the year ended December 31,
2017.
ITEM 2. UNREGISTERED
SALES OF EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON
SENIOR SECURITIES
There
were no defaults upon senior securities during the three-month
period ended March 31, 2018 that were not previously disclosed by
the Company in a Current Report on Form 8-K or its periodic
reports.
ITEM 5. OTHER INFORMATION
There
is no information with respect to which information is not
otherwise called for by this form.
ITEM 6. EXHIBITS
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Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act.
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Certification
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act.
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Certification
of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act.
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Certification
of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act.
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101.INS
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XBRL
Instance Document
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101.SCH
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XBRL
Taxonomy Extension Schema
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101.CAL
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XBRL
Taxonomy Extension Calculation Linkbase
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101.DEF
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XBRL
Taxonomy Extension Definition Linkbase
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101.LAB
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XBRL
Taxonomy Extension Label Linkbase
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase
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SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
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Registrant
Date: May 15, 2018
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FitLife Brands, Inc.
By: /s/
Dayton Judd
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Dayton Judd
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Interim Chief Executive Officer and Director
(Principal Executive Officer)
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Registrant
Date: May 15, 2018
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FitLife Brands, Inc.
By:
/s/ Michael
Abrams
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Michael Abrams
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Chief Financial Officer and Director
(Principal Financial Officer)
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