FitLife Brands(FTLF) - 2021 Q4 - Annual Report

Explanatory Note The company is restating 2019-2021 financial statements to correct historical revenue recognition errors, specifically recognizing revenue at shipment instead of delivery, impacting key financial accounts Restatement of Financial Statements The company is restating 2019-2021 financial statements to correct historical revenue recognition errors, specifically recognizing revenue at shipment instead of delivery, impacting key financial accounts - The Audit Committee, advised by Weaver and Tidwell, L.L.P., determined that financial statements for fiscal years 2019, 2020, and interim periods within 2019, 2020, and 2021 should be restated and no longer relied upon[18] - The primary reason for the restatement is the correction of revenue recognition timing, as revenue was incorrectly recognized at shipment instead of upon delivery to customers, which is the point at which performance obligations are satisfied under ASC 606[20][21] - This restatement affects several accounts, including revenue, cost of sales, inventory, and accounts receivable[21] PART I Business Overview FitLife Brands, Inc. provides nutritional supplements under various brands, distributed through GNC and other retail channels, and is subject to extensive FDA and FTC regulation - The company provides nutritional supplements under brand families NDS Products (sold via GNC) and iSatori Products (sold via 17,000+ retail and online locations)[27] - A 4-for-1 forward stock split was effective on December 2, 2021, increasing authorized common shares from 15 million to 60 million[29] - On April 7, 2021, the Company acquired the assets of Nutrology, a brand focused on all-natural and plant-based supplements[31] - A share repurchase program was amended to authorize up to $5.0 million in repurchases, with 36,092 shares of common stock and 50,840 in-the-money options repurchased in 2021[35][36] - The company's products are manufactured by third-party, FDA-regulated contract manufacturers in the US and Canada, who are required to follow cGMPs[43] - The business is heavily regulated by government authorities like the FDA and FTC, particularly concerning product formulation, manufacturing, labeling, and advertising claims under acts like DSHEA and DSNDCPA[55][56][59] Risk Factors The company faces significant risks including high dependence on GNC, supply chain vulnerabilities, extensive regulation, and common stock risks like limited trading volume and concentrated ownership - The company is highly dependent on sales to GNC, which represented approximately 71% of total sales for both 2021 and 2020, making it vulnerable to reductions in GNC purchases[75] - The business relies on a limited number of third-party suppliers and manufacturers, making it vulnerable to disruptions, as evidenced by the COVID-19 pandemic's impact on global supply chains for raw materials[80][81] - The company faces risks from extensive laws and regulations, where non-compliance could lead to significant penalties and business interruption[79] - The company has significant U.S. Net Operating Loss (NOL) carryforwards, but their usability could be substantially limited by an "ownership change" as defined under IRC Section 382[93][94] - The Chairman and CEO, Dayton Judd, may be deemed the beneficial owner of a majority of the company's voting securities, allowing significant influence over shareholder matters and corporate transactions[103] Properties The company leases its Omaha, Nebraska headquarters, which management deems adequate for current operations - The Company leases its headquarters in Omaha, Nebraska, which management believes is adequate for its current operations[105] Legal Proceedings The company is not currently involved in any litigation expected to materially impact its financial condition or operations - The Company is not currently involved in any litigation expected to have a material adverse effect on its financial condition or operations[106] PART II Market for Common Stock and Related Matters The company's common stock trades on the OTC Pink market, exhibiting volatility in 2021, and the company continues its share repurchase program - The Company's common stock is traded on the OTC Pink market under the symbol "FTLF"[110] Quarterly Stock Price (2020-2021) | Fiscal Year/Quarter | High ($) | Low ($) | | :--- | :--- | :--- | | 2021 | | | | First Quarter | 8.13 | 4.77 | | Second Quarter | 10.43 | 8.00 | | Third Quarter | 13.75 | 9.71 | | Fourth Quarter | 16.00 | 11.88 | | 2020 | | | | First Quarter | 3.69 | 1.93 | | Second Quarter | 3.06 | 2.25 | | Third Quarter | 3.74 | 2.48 | | Fourth Quarter | 5.40 | 3.50 | - Under its share repurchase program, the company repurchased 36,092 shares of common stock in Q2 2021 at an average price of $7.13 per share, with approximately $3.2 million remaining available for repurchases as of December 31, 2021[113][114] Management's Discussion and Analysis (MD&A) This section details the company's financial performance, including a 26% revenue increase in FY2021, a net income decrease due to a prior-year tax benefit, and the restatement of prior period financials Results of Operations (FY 2021 vs. FY 2020) Fiscal year 2021 saw a 26% revenue increase to $27.9 million and a 31% gross profit rise, though net income decreased due to a non-recurring 2020 income tax benefit Fiscal Year 2021 vs. 2020 Performance (As Restated) | Metric | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $27,913,000 | $22,111,000 | $5,802,000 | 26% | | Gross Profit | $12,504,000 | $9,537,000 | $2,967,000 | 31% | | Income from Operations | $6,230,000 | $4,346,000 | $1,884,000 | 43% | | Net Income | $5,410,000 | $8,825,000 | $(3,415,000) | (39)% | - The 26% revenue growth in 2021 was driven by continued expansion in the wholesale business and the online direct-to-consumer channel[155] - Online revenue constituted 24% of total revenue in 2021, up from 20% in 2020, reflecting a consumer shift to e-commerce[156] - The decrease in net income for 2021 was primarily due to a one-time income tax benefit of $4,415,000 in 2020 related to the removal of a reserve against deferred tax assets[163] Non-GAAP Measures The company utilizes non-GAAP measures like Adjusted EBITDA, which increased to $7.0 million in 2021, to provide insight into core operating performance Reconciliation of Net Income to Adjusted EBITDA (Unaudited) | | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Net income | $5,410,000 | $8,825,000 | | Interest expense (income), net | $(25,000) | $6,000 | | Provision (benefit) for income taxes | $1,298,000 | $(4,415,000) | | Depreciation and amortization | $59,000 | $38,000 | | EBITDA | $6,742,000 | $4,454,000 | | Stock-based compensation expense | $452,000 | $78,000 | | Acquisition related expenses | $253,000 | - | | Non-recurring gains | $(453,000) | $(70,000) | | Adjusted EBITDA | $6,994,000 | $4,462,000 | Liquidity and Capital Resources Working capital significantly increased to $13.6 million at year-end 2021 due to strong operating cash flow, with management confident in sufficient liquidity for the next twelve months - Working capital increased to $13.6 million at Dec 31, 2021, from $7.6 million at Dec 31, 2020, mainly from operating cash flows[167] - The company has a $2.5 million revolving line of credit with CIT Bank N.A., which was extended to December 23, 2022[168][171] - A PPP loan of $449,700 received in April 2020 was fully forgiven, including accrued interest, on January 15, 2021[172] - Net cash provided by operating activities was $4.5 million in 2021, compared to $5.7 million in 2020, with the decrease mainly due to increased investment in inventory[175] Supplemental Unaudited Quarterly Financial Information (Restated) This section presents restated unaudited quarterly financial results for 2021 and 2020, correcting revenue recognition errors and showing significant year-over-year growth in Q2 2021 Q2 2021 vs Q2 2020 Performance (Restated) | Metric (Three Months Ended June 30) | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $8,406,000 | $2,990,000 | $5,416,000 | 181% | | Gross Profit | $3,681,000 | $1,436,000 | $2,245,000 | 156% | | Net Income | $1,632,000 | $25,000 | $1,607,000 | n/a | Q1 2021 vs Q1 2020 Performance (Restated) | Metric (Three Months Ended March 31) | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $5,599,000 | $6,542,000 | $(943,000) | (14)% | | Gross Profit | $2,795,000 | $2,910,000 | $(115,000) | (4)% | | Net Income | $1,405,000 | $1,601,000 | $(196,000) | (12)% | Consolidated Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2021 and 2020, with the auditor's report highlighting the restatement and critical audit matters like product returns and deferred tax asset realizability - The independent auditor's report explicitly mentions the restatement of the 2020 financial statements to correct misstatements[309] - Critical Audit Matters identified by the auditor include management's estimate of product returns and the realizability of deferred tax assets[313][314][317] Consolidated Balance Sheet Highlights (As of Dec 31) | Metric | 2021 | 2020 (Restated) | | :--- | :--- | :--- | | Total Assets | $21,507,000 | $16,624,000 | | Total Liabilities | $4,161,000 | $4,750,000 | | Total Stockholders' Equity | $17,346,000 | $11,874,000 | | Cash | $9,897,000 | $6,336,000 | | Inventories, net | $6,520,000 | $3,529,000 | - Note 3 details the acquisition of Nutrology on April 7, 2021, for total consideration of $529,000, which resulted in $133,000 of goodwill and $222,000 of intangible assets[391][395] - Note 9 states the company has federal NOL carryforwards of approximately $15.3 million as of Dec 31, 2021, with management believing the majority will be utilizable[425][426] - Note 11 provides a detailed breakdown of the restatement adjustments for the quarterly periods of 2021, correcting the timing of revenue recognition and other related accounts[433][437] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2021, due to material weaknesses across COSO components, leading to financial restatements, with remediation efforts underway - Management, including the CEO and CFO, concluded that disclosure controls and procedures were not effective as of year-end 2021[223] - Material weaknesses were identified across all five components of the COSO framework: control environment, risk oversight, control activities, information processing/communication, and monitoring[227][228][229] - These control failures resulted in improper recognition of revenue, cost of sales, accounts receivable, and inventory, necessitating the financial restatement[233] - Remediation efforts are underway, including hiring expert accounting consultants and appointing a new, highly qualified CFO in August 2022[235][236] PART III Directors, Executive Officers, and Corporate Governance This section outlines the company's leadership, including Chairman and CEO Dayton Judd, the independent board, its three standing committees, and the adopted Code of Ethics - Dayton Judd serves as the Chief Executive Officer and Chairman of the Board[244] - The Board has determined that four of its five directors are independent[258] - The Board has three standing committees: Audit, Compensation, and Nominating and Corporate Governance, with charters available upon request[263] - The company has adopted a Code of Ethics applicable to all employees, officers, and directors[270] Executive Compensation This section details executive compensation, with CEO Dayton Judd's 2021 total compensation at approximately $1.28 million, including significant equity awards, and non-employee directors receiving an annual retainer 2021 Summary Compensation Table | Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | All Other Comp. ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Dayton Judd, CEO | 2021 | 326,539 | 100,000 | 666,344 | 184,620 | - | 1,277,503 | | Patrick Ryan, Chief Retail Officer | 2021 | 132,692 | 5,000 | - | - | 214,448 | 352,140 | | Susan Kinnaman, CFO | 2021 | 131,538 | 8,000 | - | - | - | 154,138 | - In February 2021, CEO Dayton Judd was granted options for 128,000 shares and 160,000 RSUs with performance-based vesting tied to the company's stock price[276] - Non-employee directors received $40,000 each for their services in 2021[284][285] Security Ownership As of October 12, 2022, Chairman and CEO Dayton Judd beneficially owned approximately 57.7% of common stock, giving management significant influence over shareholder matters Beneficial Ownership of Common Stock (as of Oct 12, 2022) | Name of Owner | Shares Owned | Percentage of Class | | :--- | :--- | :--- | | Dayton Judd, Chair and CEO | 2,881,529 | 57.7% | | All Officers and Directors as a group (7 persons) | 3,014,305 | 60.3% | Principal Accountant Fees and Services Weaver and Tidwell, L.L.P. served as the independent accounting firm for 2021 and 2020, with total fees of $121,000 and $121,900 respectively, all pre-approved by the Audit Committee Accountant Fees (Weaver and Tidwell, L.L.P.) | Fee Type | 2021 | 2020 | | :--- | :--- | :--- | | Audit fees | $91,000 | $84,000 | | Tax fees | $30,000 | $33,000 | | All other fees | - | $4,900 | | Total | $121,000 | $121,900 | - The Audit Committee pre-approved 100% of the audit and non-audit services provided by the independent accounting firm[295] PART IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including corporate documents, material contracts, and required CEO and CFO certifications - Lists key corporate documents, including Articles of Incorporation, Bylaws, and the Tax Benefit Preservation Plan[299] - Includes material agreements such as the 2019 Omnibus Incentive Plan and the Revolving Line of Credit Agreement[301] - Contains required CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[301]