Good day. And welcome to the FitLife Brands’ Fourth Quarter and Full Year 2023 Financial Results Conference Call. At this time, all participants have been placed on listen-only mode. The floor will be open for questions-and-comments following the presentation. It is now my pleasure to turn the floor over to your host, Dayton Judd, CEO of FitLife Brands. Sir, the floor is yours.

Thank you, Paul. Welcome everyone to FitLife’s first earnings call. I appreciate you taking the time to join us this afternoon. Joining me on the call is FitLife CFO, Jakob York. Rather than have Jakob read you the press release, like often happens on earnings calls, I thought instead I’ll just give an introduction, talking about the different parts of our business and our priorities going forward and then open it up for Q&A. We tend to talk about our business in three parts, legacy FitLife, Mimi’s Rock or what we now call MRC, and MusclePharm. As a side note, we’ll continue to do that for the near future, because we understand that investors want to evaluate the success of our transactions. But the businesses are largely integrated and we don’t run them separately. For example, with MusclePharm, we only hired two of their former employees. One benefit of that is that much of the gross profit translates into incremental EBITDA for FitLife. But it does make it hard for us to produce and communicate specific financial statements for each company or each brand. So I’ll start with what we call legacy FitLife. On the wholesale side, GNC is our largest and most important customer. Like many specialty retailers, GNC has been struggling with foot traffic for some time. As a result, we continue to see low double-digit decline in wholesale revenue for this part of our business. So that’s the bad news. The good news is that within wholesale for legacy FitLife, we aren’t losing share. We’re just losing customers at the same pace as other participants. We’re also exploring some international wholesale opportunities for some of our legacy FitLife brands. The online side of our business is a positive for legacy FitLife, where we continue to see positive revenue and subscriber growth. We also continue to innovate within these brands and plan to launch several new products in 2024. In summary, then, even though online is growing for legacy FitLife, we don’t expect to see much topline growth as a whole in the near-term, although we expect it to continue to generate strong cash flow. With regard to Mimi’s Rock or what we now call MRC, this is a transaction that we closed a little more than a year ago on February 28, 2023. We paid just over $17 million for the business and post-closing invested a couple million more in working capital. MRC’s primary brand is Dr. Tobias, which is one of the largest sellers of fish oil and colon cleanse products on Amazon. The primary opportunity for us with MRC was cutting costs, but there was a lot to do commercially as well, since unit sales were declining. I can’t remember exactly what we’ve specifically disclosed previously, but within a few months after the transaction, monthly EBITDA was pretty consistently at or exceeding $500,000 per month. So using the $500,000 monthly EBITDA number, we were able to pretty quickly achieve synergies that bring the acquisition multiple to less than three times EBITDA. MRC also owns a couple of smaller skincare brands that haven’t been our primary focus and are struggling somewhat, but the good news is that Dr. Tobias continues to do well. Going forward, we hope to generate some top line growth with MRC and we also expect it to generate strong free cash flow. And now moving on to MusclePharm, as was our expectation, MusclePharm had a very minimal impact on Q4 due to; first, the deal closing in October; second, the fact that we needed to acquire inventory, we only bought, I think, about $200,000 worth of inventory through the asset purchase in bankruptcy; and third, the need to negotiate new agreements with all of the MusclePharm customers that were buying their product at that point. We could have assumed those contracts in bankruptcy, but that would have cost us a lot of money in terms of cure payments and other liabilities that we would have had to assume. So we set out to renegotiate those agreements. Some of them took a couple of weeks, others took three months, but the good news is that’s largely behind us. So for us, the MusclePharm business really didn’t begin ramping up in terms of both wholesale and online sales until the first quarter. And I’ll start with the online business for MusclePharm. With regard to Amazon, which is the primary online sales outlet, MusclePharm previously had an agreement with a third-party reseller to be the exclusive Amazon seller of MusclePharm products. Since the transaction where we acquired the MusclePharm assets, we have not sold any product to that reseller, although we have allowed them to sell through their inventory without price competition from us. So what that looks like is, during that time, you would see us out there on Amazon as a seller, but we keep our price above their price, allowing them to win the buy box and move through the inventory. As they sell out of their inventory, we then step in as the primary seller and lower our price to the MSRP. So they largely began selling out of their product in January and into February. At this point, there’s, I think, three products where they’re continuing to sell their inventory, but we are the primary seller of MusclePharm products for approximately 95% of the MusclePharm units currently being transacted on Amazon. On the three remaining SKUs that the reseller has, two of those we estimate they’ll sell through during the second quarter. So far, the Amazon business is scaling nicely for us, but I’m sure the question that you all have in your mind is what to expect for 2024 in terms of online revenue for MusclePharm. My short answer is I don’t know, so I don’t want to give any specific guidance, but conservatively, the previous seller was doing about $5 million annually, so we would expect at least that much. It’s still early days, but I’m encouraged by the trends. I’ll provide a couple of additional data points that we hadn’t previously provided. First, our subscriber count for MusclePharm products on Amazon as of the end of the fourth quarter, so December 31, 2023, was five. We had five subscribers. As of the end of the first quarter, it was over 1,600, so we’re seeing some nice growth in subscribers on Amazon. Second, I think we reported MusclePharm online revenue for February in our press release that it was about $330,000. We don’t have March numbers finalized yet, but we expect the number to come in quite a bit higher, probably between $400,000 and $450,000 for the month of March. So now, moving on to wholesale for MusclePharm, I have even less of a perspective about exactly what’s going to happen on that side, but let me walk you through what’s going on and how we view the opportunity here. During February, we were able to get the full MusclePharm product line back onto iHerb. Sales were initially low to start, but have been increasing at a very encouraging pace. We have a number of other wholesale customers. Coupang, in particular, has been a very big and loyal customer for MusclePharm and our proteins continue to do very well in South Korea. We’ve also had a number of encouraging meetings with other potential wholesale and distribution partners and hope to reach formal agreements with some of them during the second quarter. In addition, as we rebuild the MusclePharm brand, we’re launching some new MusclePharm products, as well as bringing back some discontinued MusclePharm products that previously were quite successful. For example, we’ll be launching three flavors of the Combat Sports Bar in the next couple of weeks, so watch for that on the website, as well as on Amazon. We also expect that many, if not all, of our wholesale partners will also bring in the bars. So maybe in conclusion, with regard to MusclePharm, the number one question I get from investors is how big do you expect it to be? My answer is always I don’t know, but I do want to tell you how I think about the transaction. We paid $18.5 million for the assets or about $18.8 million if you include the capitalized transaction expenses. I believe that is a fair price for the business, even if we aren’t successful at driving much growth. Said another way, I would hope that with minimal effort and basic blocking and tackling, we can generate between $3 million and $4 million of EBITDA from the baseline MusclePharm business. So if I’m right, in the worst case, we paid between 5 times and 6 times for the business, but the deal also comes with a massive call option on the upside if we’re able to restore MusclePharm distribution to even a fraction of what it used to be. When we did this transaction, my hope was that the outcome for all shareholders was that heads, we win some, tails, we win a lot, and I still think that’s the case. So to summarize, while we certainly expect MusclePharm to generate cash, we are even more excited about the revenue growth opportunity, but that is going to take some time to develop. I’ll provide a few more high-level comments before moving into Q&A. Our balance sheet remains strong. We have about $16.5 million of term loan outstanding. The interest rate on that is SOFR+275, which works out to be a little bit more than 8%. We have no balance outstanding on our $3.5 million revolver and the term loan balance of $16.5 that I provided was after our scheduled $1.1 million amortization payment and a voluntary $2.5 million principal pay down during the first quarter. As we reported in our press release, our net debt as of March 28th was approximately $13.5 million, which represents a reduction of about $4.7 million during the first quarter. We intend to continue using our free cash flow to pay down debt. In addition, now that we’re on NASDAQ, we’re taking steps to raise the visibility of the company among potential investors. We participated in the Roth Conference last month and we currently intend to participate in the Sidoti Micro-Cap Conference next month. And if you all find these investor conferences to be helpful, we’re happy to continue doing these quarterly. To wrap it up, we don’t intend to provide any specific guidance for 2024, other than to say that when we’re having this call a year from now, we expect revenue and profitability to be higher and net debt to be quite a bit lower. So with that somewhat long introduction, I’ll stop talking and we’ll go ahead and open it up for your questions. So, Paul, if you’d like to poll for questions.

Certainly. The first question is coming from Igor Novgorodtsev from Lares Capital. Igor, your line is live.

Hello, Dayton, and very encouraging results indeed. However, we already had a conversation about the results, and I think you provided a lot of details. I want to concentrate on something which is obviously struggling, FitLife legacy business. So we all know that FitLife legacy online gross margin is much higher than the store wholesale gross margin. So how much effort is to convert giving reduced foot traffic, the people who come to the stores into basically online, for at least you can capture a much higher gross margin? And I guess the same question would be for the future of MusclePharm, because again, if they buy directly from you, obviously, you capture a much higher gross margin.

Thank you for your question. It’s a bit complex, but I’ll try to clarify. We have several brands under the legacy FitLife umbrella, including those exclusive to GNC as well as iSatori, BioGenetic Labs, Energize, and others. There are about eight or nine brands in total, each with different marketing channels. Specifically for GNC, we need to tread carefully because we don’t want to undermine our GNC franchisee partners. While foot traffic may be declining, if customers aren’t purchasing from GNC locations, they’re coming to us instead. They can get our products through Amazon, Walmart.com, eBay, or our own websites, which helps us capture that lost volume. Some of the decline in store purchases is simply customers opting to buy where they prefer, rather than always going to a store. It would be risky for us to promote or discount on Amazon to compete with our franchisees, which we want to avoid since the franchise business is crucial to our strategy. If customers prefer not to shop in-store, we want to make sure they can purchase from us instead. As for other products like iSatori and Energize, these are typically available in food, drug, and mass retailers like Walmart, Walgreens, Rite Aid, and CVS. We do advertise these products as well, aiming to attract customers who choose to shop outside of physical stores, especially as more consumers turn to online shopping.

Yes. Thank you. And a more quick follow-up question. In terms of FitLife franchisees, since GNC is no longer public, do you know if their number is shrinking or do you have any idea or they’re just buying less or have fewer revenue per location?

I’m not aware of their financial details, so I can't say for certain. However, I mentioned earlier that we believe we aren’t losing market share. If I’m showing a decline in low double digits, it suggests that some of our sales locations are experiencing similar declines. I do know their store count isn't dropping quickly; in fact, they've even opened new corporate stores this past year. Regarding GNC and the supplement wholesale sector in brick-and-mortar stores, it's worth noting that 2020 marked the start of COVID and was also the year GNC went bankrupt. Despite this, the period from 2020 through the first half of 2022 was among the strongest for GNC and many retailers, and we benefited from that growth in our wholesale revenue. What we’re observing in the latter part of 2022 and into 2023 may just be a return to pre-COVID levels. While our current wholesale performance with GNC is below the figures from 2021, 2022, and 2023, we are still above 2019 and 2020 levels. The surge from COVID has introduced changes, and it will be interesting to see how things develop in 2024. We might find that by the latter half of 2024, we are no longer in decline, but rather have returned to stable levels. It’s uncertain right now, but GNC franchisees had exceptional years in 2021 and 2022, with some achieving their best performance in two decades. This growth might have been influenced by the pandemic, and only time will reveal whether it stabilizes or continues to decline.

Thank you, Dayton. I’ll get on the back of the queue and I’ll ask questions afterwards if there is time permits.

Thanks, Igor.

Thank you. The next question is coming from George Marema from Pareto Ventures. George, your line is live.

Thank you. Good afternoon, Dayton.

Hi, George.

Yeah. First of all, I want to vote yes on conference calls. I appreciate you very much you’re doing it and thank you very much for not reading the press release to me. But I appreciate your format. My first question is on your operating expenses. The last couple of quarters or so is sort of in the $3.5 million per quarter range. In 2024, assuming no further acquisitions as you stand today, is the OpEx going to be somewhat level or is it going to change much?

Yeah. And I don’t have the financials in front of me. Is that when you’re looking at OpEx, you’re looking at excluding the merger and acquisition related expenses?

Correct. Yeah. Just SG&A.

Yeah. So, what I would say is, with the acquisition of MRC, we do spend quite a bit on advertising, although we spend a lot less now than they did when we purchased them. So there will be a similar, yeah, I think, what you’re seeing in Q3 and Q4 is probably fairly similar, should be consistent going forward. That said, again, we bought MusclePharm. We did no advertising to speak of in Q4 and we have started doing that on Amazon in Q1. So, to the extent it goes up, it will be investments in advertising, right, which we would hope to generate a return from as opposed to just kind of overhead that we’re adding, like, we’re not adding a bunch of people and we’re hiring somebody here and there, but nothing material. So, I don’t think that the number is going to be too much higher, again, with the caveat that to the extent we choose to invest in marketing, it may be, but that’s what the expectation of generating a return on the spend.

No. That’s perfect. I was just trying to get a general feel for the operating leverage of the model here. So, and then in terms of gross margins, year-over-year, it’s really more or less flat around 41%-ish. Since your online went up quite a bit, I would have thought that your online margins are significantly higher than wholesale margins, I would assume. Do you expect the gross margins to start, like, what would be your target gross margin as you look out over the next year or two?

Yeah. I think it will be something in the low 40%s, let’s say 41% to 43% if I had to put a number on it. Online is a lot higher, but it’s very different by brand, right? And so I’ll give you an example, again, the GNC products are the products that we sell in GNC where we’re not trying to compete with the franchisees. We price very high on Amazon. We price above them, right, because we’re not trying to pull traffic away from them. We just want people that, if they want the convenience of having it show up at their doorstep instead of going to a store, they’ll pay a premium. Those margins are quite a bit higher, right? You can also, though…

Yeah.

…go and look, you’d have to do some mathematical gymnastics because of the way that Mimi’s Rock was reporting their numbers. They previously included their Amazon fees in SG&A as opposed to in COGS, which is how we do it under GAAP as opposed to, I guess, IFRS. But their margins are, especially for the Dr. Tobias line, are generally in the, again, low 40%s, call it 42%, 43%, maybe 44%. So, as we layer in that, again, we’re not out there pricing at a premium, right, to other channels there. We’re being more competitive. We’re advertising. We’re trying to get customers. And so as you average those, right, you end up, that’s why you end up in the kind of call it 42%, 43%. If we didn’t have the other product lines, right, then, online for legacy FitLife, you should expect significantly higher gross margins. But again, that’s not the entirety of our business anymore.

Okay. And do you know approximately how many years it’s been since those Combat Sports Bars have been on the market...?

It’s been less than two years since they exited the market. It's quite interesting that a company with a successful product would stop selling it. However, it was due to financial difficulties and failure to pay some manufacturers, including the one that produces their bars, which led to their inability to get anyone to make them. We have received the products, which were completed recently. I’ve been traveling and taking samples to various customers, and we are confident that there will be interest in bringing it back. While I can’t predict the scale of its success, they previously performed well on Amazon and other platforms. The positive news is that we can likely reactivate their old listing on Amazon, which had a significant number of reviews, and start selling it again.

Sure. This is my first time speaking with you, and I look forward to connecting offline in the coming days. I want to express my admiration for your capital allocation strategy over the past several years, which I think has been exceptionally well executed. I'm curious about your strategic vision for the company over the next three years.

Good question. As we mentioned in the press release and my prepared remarks, we intend to maintain a clean balance sheet. We are quickly paying down debt, which gives us the flexibility to pursue additional opportunities, including more transactions. I noted in our earnings press release that we are actively exploring other transactions, and we will be selective. We have been careful with the three acquisitions we made since I took over as CEO and will continue to be cautious moving forward. I'm not looking to risk the company; I have a significant ownership stake and obviously don't want to lose money, just like all investors. We will be strategic in our decisions. For instance, the acquisitions we've made, like Nutrology, were small, but the gross profit generated in the first year was enough to cover the acquisition cost. Regarding Mimi's Rock, we ended up paying less than three times for it. We will see what the final multiple for MusclePharm turns out to be. It’s worth noting that I have an affinity for strong brands, and when a solid brand has a poor balance sheet, it can present an opportunity. Mimi's Rock was in financial trouble and defaulted on its debt, which allowed us to acquire it. MusclePharm was in bankruptcy. We will continue to look for transactions, but we won’t pursue a deal just for the sake of making one.

Okay. I really appreciate. Thank you, Dayton.

Yeah. Thank you, George.

Thank you. The next question is coming from Daniel Smoak from Smoak Capital. Daniel, your line is live.

All right. Thanks, Dayton, for your helpful comments at the start of the call. My first question relates to your last answer. Regarding the pipeline you are currently examining, are you observing a higher level of opportunities due to prolonged elevated interest rates, or what trends are you noticing in that pipeline recently compared to 2021 and 2022?

Yes, I may not see every deal out there, but we definitely observe a substantial number. I wouldn't say we're seeing more deals, but there's always a steady stream of supplement companies available for sale. The market is highly fragmented. What does change is the expected transaction multiple. When I began my search, companies could be purchased for about three to four times cash flow, and during COVID, that rose to six to seven times cash flow as businesses thrived. Now, with rising interest rates, that multiple has decreased somewhat. The deal flow remains consistent, but it’s the expected multiples that fluctuate. There are many opportunities to explore, but it’s a matter of what sellers expect to be paid or what they might have to settle for. I hope that addresses your question.

Yeah. Yeah. That does. That’s very helpful. And one other question I had on the Canadian NOLs, which is kind of interesting. I know that’s fully valued against right now, but do you anticipate being able to use a material amount of those Canadian NOLs?

I can't precisely quantify the value of the material we have, but it's a significant asset. When I started at FitLife, we had around $35 million in net operating losses in the U.S., which has been very beneficial. However, we expect to see that opportunity diminish this year. While we still have several million available, most will be used up in the first quarter of 2024. The remaining amount originates from our acquisition of iSatori in 2015, which triggered a limitation on usage, allowing us to utilize only about $130,000 annually. We are committed to being tax efficient and have implemented various strategies to achieve this. One challenge we faced when acquiring Mimi's Rock was its complex legal structure, which involved multiple Canadian entities and a financing entity in Barbados, along with the Dr. Tobias operations based in Germany. We are working on simplifying this structure to facilitate the transfer of cash from overseas to the U.S. more efficiently. Additionally, our businesses are increasingly integrated; for instance, our Canadian team manages advertising for all of FitLife, enhancing cash flow to Canada. We aim to address those net operating losses as effectively as possible, though I cannot predict how quickly that will happen.

Great. Thanks. And then last question for me. Congratulations on sounds like you’ve got the Combat Crunch Bar close to launch here coming in Q2. So that’s a great accomplishment. Do you think that helps your case with new potential wholesale relationships given that you have that Combat Crunch Bar and it was pretty successful historically? I’d like to hear your thoughts on that?

Yeah. I mean, I do. It’s something we heard from customers. So it wasn’t like we had to push it on them.

Right.

So I think a lot of people are excited to see it come back. We have presented it to some new clients as well. For example, some drugstore chains. Again, I don’t know if they’re going to take it, and just as a reminder for the way brick-and-mortar retail generally works, they don’t have multiple planogram resets every year, right? Sometimes it’s once a year. Sometimes it’s a couple of times a year, right? So you can kind of present it, but they may not decide until August, right? So it is an entree into some stores that have never sold it, but there are customers that used to carry it that were not carrying MusclePharm products or hadn’t carried MusclePharm products for a couple of years that are taking steps right now to bring it in. So, we know we’ll sell some. Again, I can’t put a number on it, but there definitely is interest, and like I said, it was popular online as well and so we’ll take advantage of that and put it out there in our online channels.

Okay. Thanks. That’s all for me.

Thank you. The first question is from George Marema. George, your line is now open.

Hi again. I want to clarify something. In your remarks, you mentioned that the vendors selling the MusclePharm products for the last year or two online had a business that was roughly $5 million annually. Was that figure for online sales only, or did it include wholesale as well? Also, how much of that was from powders, and did they sell bars too?

Yeah. Good question. So, yeah, the $5 million was just online. So there was additional wholesale business that they were doing at least during bankruptcy. I think, I’m pretty sure we have continued with all of those customers or if not all of them, almost all of them. Again, it took some time, though, to kind of negotiate new agreements with them. But I’m pretty sure that all of them are still customers. We just had to go through that process and no, there were no bars, right? So the bars have been out of market for about two years. So the bars is a new opportunity or new after a couple of years.

And do I understand correct the bars are primarily going to be sold through wholesale distributors rather than directly online from you?

The first place you'll be able to buy them is online. Within the next two weeks, please go purchase them. I may be biased, but I eat a lot of protein bars, and I really think ours are exceptional. So, they will definitely be available online first, but we are also making them accessible to our wholesale customers.

The wholesale customers. Okay. Okay. Great. Thank you.

Yeah.

Thank you. And we did have another question come from Igor Novgorodtsev. Igor, your line is live.

Hi, Dayton. So, on MusclePharm, I know that you’re working hard to restore the old wholesale channels and that is probably residual bitterness from the previous relationship when MusclePharm went bankrupt. So what would it take to get this channels restored? Would you have to sacrifice a gross margin for a while and basically give them very good pricing to get in or it just takes time? I understand that you don’t have the precise numbers, but I just kind of want to get your thinking of how you want to proceed with basically getting the business back?

We aren’t offering discounts at the moment. Our approach has shifted from the past practices of prioritizing discounting over profit, which led to issues for the company. Currently, our strategy is to enter markets with solid margins and, as needed, promote to drive growth. I’ve mentioned some retailers where we’ve begun selling our product, and as that expands, we may decide to invest further to encourage growth. However, this is distinct from discounting to enter the market. We want to establish ourselves first and then use promotional spending to foster growth for both ourselves and our partners. Regarding timing, it’s unpredictable. Retailers typically have annual resets, so we are somewhat reliant on them. Given our previous distribution levels, there are many retail buyers who have experienced issues in the past, associating us with those. We need to educate them on the changes and that we are a different company now. Some buyers may require compensation for past damages before engaging with us. We’ll navigate these challenges as they arise, but it’s tough to specify when we’ll achieve success. It’s worth noting that Costco, a significant customer for us, usually limits its powdered protein selections. Once a product is replaced, it’s challenging to regain shelf space. To succeed with retailers like Costco, we might need to start with online offerings or in selected regional stores rather than launching nationwide immediately. I wish I could provide specific projections, but we’re committed to doing our best to grow. When I signed the deal, I felt positive about it, viewing it as a valuable opportunity. It may take time—possibly a year or even five—but I believe it will ultimately prove to be a good investment for us.

Okay. No. That’s great. So, basically discounting is what I wanted to hear. So glad to hear that. My other question is about international opportunities. So traditionally, before Mimi’s Rock, it was based in the U.S. and Canada and maybe a little bit abroad. Now you have Mimi’s Rock and now you have MusclePharm. How much do you think can grow international business? I mean, something like Mexico or maybe South America, maybe the Middle East or anything. So just kind of how you think about international growth?

We always receive inquiries from international buyers and distributors. One thing to note is that if we sell to a U.S.-based company or distributor that then sells the products internationally, that sale will appear as U.S. revenue for us, even though the end consumer is outside the U.S. For example, Dr. Tobias products have been available on iHerb for some time, and while they are mostly sold on Amazon, we also sell to iHerb, which then resells them. Approximately 90% of iHerb’s revenue comes from international markets, including places like Saudi Arabia, India, Japan, and Latin America. So, even though our sale to iHerb is counted as U.S. revenue, the product is ultimately consumed internationally. We recognize the demand for these products abroad because we’re selling to companies that are engaged in international sales. Coupang, which is comparable to Amazon in South Korea, is another example. MusclePharm conducts a significant amount of business with Coupang, which means we’ve discussed several of our brands with them. This sale is domestic for us, but it goes to an international customer, as products can't be purchased domestically on Coupang. There is clear demand, and we are exploring ways to take advantage of it. The positive aspect for us is that we prefer selling domestically, as it alleviates currency-related issues. Most of the time when we sell products, we are responsible for shipping costs. I would rather incur the expense of shipping to California and let them handle the logistics worldwide than have to ship products across the ocean.

Yeah. Thank you. I don’t have any more questions. Thank you, Dayton.

Yeah. Thanks, Igor.

Thank you. And there were no other questions at this time. I would now like to hand the call back to Dayton Judd for closing remarks.

All right. Thank you, Paul. And thank you everybody for participating in our conference call this afternoon. We certainly appreciate your interest in FitLife. Happy to speak to you all individually if you would like or if you have additional questions between now and the next time we talk. But again, appreciate your interest and look forward to speaking with you in the future.

Thank you. This does conclude today’s conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.