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Good day, and welcome to the FitLife Brands’ First Quarter 2024 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 quarter 2024 earnings call. We appreciate you taking the time to join us this afternoon. Joining me on the call is FitLife CFO, Jakob York. And also, FitLife's Executive Vice President Ryan Hansen. For this call, we'll plan to follow a similar pattern to our previous earnings call. I'll provide some opening commentary about the different parts of our business and then we'll open the call up for Q&A. As I mentioned in the last call, we don't intend to provide specific profitability metrics for the different parts of our business going forward. The reason for this is that our operations are largely integrated, which means, for example, that employees of Mimi's Rock or MRC are doing work in support of legacy FitLife and MusclePharm and employees of legacy FitLife are doing work in support of MRC and MusclePharm. And we don't allocate costs to try and come up with a precise P&L, but we do intend to provide revenue figures and other commentary just to give you all a sense for how the different parts of our business are performing. I'll begin with what we call legacy FitLife. Total legacy FitLife revenue for the first quarter of 2024 was approximately $7 million of which 65% came from wholesale customers and 35% from online customers. On the wholesale side, we continue to see declining foot traffic in many of our bricks-and-mortar retail partners. Wholesale revenue was down about 21% during the quarter, but as a reminder, wholesale revenue is very lumpy quarter-to-quarter. The best way to look at that part of our business is to look at periods of two or more quarters. For example, wholesale revenue was up 18% year-over-year during the fourth quarter of 2023, followed by the 21% decline in the first quarter. On the wholesale side, GNC is our largest customer, but we also sell to Vitamin Shoppe, Walgreens, Rite Aid, CVS, Coupang and others. With regard to online revenue, legacy FitLife grew its online revenue 3% during the first quarter of 2024. This was obviously lower than the 9% growth we experienced in the fourth quarter of 2023 and certainly lower than our expectations. However, the good news is that online growth has picked up significantly with online revenue for legacy FitLife being up approximately 13% year-over-year in the month of April. We also continue to experience strong subscriber growth online with subscriber count for our legacy FitLife products increasing approximately 10% since December 31, 2023. Moving on now to Mimi's Rock or what we call MRC. Just as a reminder, this is a company that we purchased a little more than a year ago, closing the transaction on February 28, 2023. Almost all of MRC's revenue comes from online sales predominantly on amazon.com. MRC consists of three brands, a supplement brand called Dr. Tobias, which represents the bulk of the business, and then two smaller skin care brands. With Dr. Tobias being the largest brand in the MRC portfolio that has been our primary focus as we have worked on optimizing this business. We've previously talked about how one of the key opportunities for MRC was to rationalize and optimize advertising spend. And so, I'll talk a little bit more about that. As previously reported, subsequent to the acquisition, we experimented with various levels of reduced advertising spend with year-over-year monthly reductions ranging between 20% and 50%. I should also point out that this was a bottoms-up effort, looking at the hundreds of campaigns across the product portfolio and focusing spend on the high-performing campaigns, while reducing or eliminating spend on less effective campaigns. In other words, this wasn't just an exercise to cut the budget and see what happened. I think it's also worth pointing out that advertising is just one of the levers to drive growth and performance on Amazon. There are a lot of other tools at our disposal, including listing optimization, coupons, virtual bundles and others. While we were working to optimize advertising, we were simultaneously taking other steps to try and improve the performance of the business. The result of these efforts has been dramatically improved profitability and cash flow for MRC. In the first quarter of 2024, Dr. Tobias revenue was higher than it was during the first quarter of 2023 despite a 39% year-over-year reduction in advertising spend. In addition, we are pleased to see our Dr. Tobias subscriber count start to grow. It had been largely stagnant for more than two years, but we've added 7.5% to our subscriber base, since December 31st, 2023. For the first quarter of 2024, total MRC revenue was $7.5 million with very high free cash flow generation. And now on to MusclePharm, as a reminder, we purchased the MusclePharm assets out of bankruptcy in October of last year, so we own this brand only a few months. MusclePharm revenue was approximately $2.1 million for the first quarter of 2024, of which roughly half was from online sales and half was from wholesale customers. We are seeing nice trends across the business with online sales growing sequentially each month and orders from many of our wholesale partners also growing each month. Our subscriber growth on Amazon continues to be very strong. I mentioned last earnings call that, we grew from five subscribers as of December 31st, 2023 to over 1600 on March 31st, 2024. Just a few weeks later, we're now over 2,700 subscribers. Also, with regard to the combat sport protein bars that we have recently relaunched, we are definitely seeing interest. Demand is growing on Amazon and there is interest from wholesale customers as well. Of note, we expect the bars to be available through some of our online wholesale partners very soon. Bricks-and-mortar retailers are more limited in their ability to bring in new products as many of them revise their assortment only one to two times per year. But that said, we expect to receive our first POs for the bars from a bricks-and-mortar wholesale partner in the next few weeks. Now I'll just provide a few more high-level comments about the company and where we are and where we're headed and then we can move into Q&A. For this quarter, the majority of our revenue, actually approximately two-thirds of our revenue now comes from online sales. We like this, right? We pursued this strategic shift because the online business is more profitable than the wholesale business and it helps to reduce the risk of concentration with large wholesale accounts. Going forward, we expect to continue to grow online with all of our brands, but for MusclePharm, the biggest opportunities are on the wholesale side. So, success with that brand may mean a higher percentage of our total revenue coming from wholesale than the current 65/35 split. With regard to gross margins, gross margins were quite a bit higher in the first quarter of 2024 at 44%, compared to 42.1% for the first quarter of 2023 and that's adjusting for the step-up amortization associated with the acquisition of MRC. We tend to get questions a lot about gross margins, so I'll just comment about them now. We've previously commented that, we typically expect gross margins to be in the low 40s. I think between 41% and 44% is probably a realistic range. Q1 is typically one of our strongest margin quarters and we had a very favorable product mix during Q1 as well. I'm definitely not saying you should expect them to plummet going forward, but 44% is toward the high end of the expected range. Our balance sheet remains strong with $16.5 million of term loan outstanding and that's at a rate of SOFR+275 and no outstanding balance on our $3.5 million revolver. We ended the quarter with $3.3 million of cash bringing net debt $13.2 million or just a little bit more than 1 times LTM adjusted EBITDA. As previously reported, we made a scheduled $1.1 million amortization payment and a voluntary $2.5 million principal pay-down during the first quarter of 2024. I spent some time talking about the Combat Sport Protein Bars for MusclePharm, but let me also comment on product development for some of our other brands. We expect to launch several new products under the Dr. Tobias brand in the next two to three months. In addition, we're also launching a number of new legacy FitLife products through the GNC channel over the next two to three months, with the first of these products launching late next month at GNC's global convention. I note also that we continue as a company to evaluate additional acquisition opportunities. And last, I don't want to provide too many specifics in terms of performance of the business thus far during the second quarter, but I'll just end my remarks by saying that, we are very pleased the performance of the business in the early weeks of the second quarter with revenue, gross margin, net income and EBITDA all nicely up in April of 2024 compared to April of 2023. With that, Paul, let's go ahead and open up the line to questions.

[Operator Instructions]. The first question is coming from Igor Novgorodtsev from Lares Capital. Igor, your line is live.

Hi, Dayton. Overall, obviously, an excellent quarter, but I'd like to ask you about the part which is obviously struggling is your legacy business, especially on the wholesale side. How is GNC doing, especially the franchisors? Is there a number declining? Or what do you attribute the struggles, because we've been struggling already for a couple of quarters now?

Thanks, Igor, for the question. It's probably not my place to talk about how someone else's business is performing. I'll be very limited on my comments there. All I can talk about is what our business is experiencing. We've talked previously about how we're seeing kind of low double-digit declines in terms of sell through of the products in the GNC channel and our exposure is primarily to the GNC franchise channel. We've been told by franchisees and by others that are very familiar with the company that we're not losing share. In other words, this isn't a FitLife problem. It's a traffic problem, a foot traffic problem. And so, we'll continue to do what we can there, but I can't -- it's not entirely within our control, like, there's not a lot of buttons I can push to make it grow. I'll comment that, when I took over the business in 2018, it was fully my expectation that, this part of our business would be declining every year from then on out. In reality that wasn't the case. It was actually boosted quite a bit by COVID. GNC had some of their best years I think in 2021 and 2022 probably better than they'd had in 15 years to 20 years. We got a bit of a reprieve right with the COVID surge and I think, I don't know for sure, but I think that part of what we're seeing in these declines is a pullback from again what I call the COVID surge. We track on a weekly basis our sales through that channel. We've got visibility into sales to the end consumer. When we track that, we are seeing double-digit declines, but the rates that we're at right now are now back inline with where we were in 2019 and 2020 prior to COVID hitting. Initially when COVID hit, their sales got hurt pretty bad because our stores got closed. We're kind of back down to pre-COVID levels. I don't know, but I'm hopeful that, that means that further declines will be somewhat mitigated going forward, but I just don't know. We'll continue to do what we can in that channel. I talked about some new products. We still have a phenomenal relationship with the franchisees. They love us. We love them. We'll continue to provide products for them and we hope that, some of our new products will help to provide some additional growth. Now the other thing I should point out, I mean, GNC is our biggest wholesale customer. As I mentioned in the prepared remarks, we sell legacy FitLife is also in Vitamin Shoppe and in Walgreens and CVS and Rite Aid and Coupang and others. Certainly, I provide some commentary about GNC, but when we provide our numbers, we're looking at our wholesale business in totality, if that makes sense. The other thing I would say is, like I said, we have visibility for most of our wholesale partners, not all of them. We have visibility into the kind of retail movement, number of units that are sold right each day, each week, each month. We had a 21% decline in our wholesale revenue during the quarter, but that's nowhere, I mean, that's dramatically higher than what we're seeing in terms of sell through. The sell through is still, call it, low double digits, right, but it's not down 21%. It's somewhat encouraging that if I look at the numbers in April and May, they're better. The declines aren't as pronounced as they were in the Q1. Does that answer your question? Again, I can't probably provide commentary about GNC's business and how they're doing, but I know how my business is doing.

Right. Unfortunately, they're no longer public, so we kind of have to guess now how their business is doing versus knowing it. My other hopefully much shorter question, but not necessarily simple about your tax rate. I know that MRC was losing money, but it's a tricky situation because of the structure of the company. I saw that, it seems to be that this quarter, your actual tax rate was $180,000 less than the nominal tax rate, which you booked. How should we look at the tax rate going forward? In other words, how much of NOLs maybe not so quantitative that you will be able to use in the following years? Because right now, you're already running out of your FitLife legacy NOLs, but you have an MRC NOLs.

Yes. Another very good question that's going to be hard for me to answer, at least in any amount of detail. But, let me comment first on the tax side as opposed to the GAAP side. You're right. As of the first quarter, in the first quarter, with the taxable income that we generated, we are effectively have depleted our FitLife NOLs with one exception. When the company bought iSatori in 2015, they had a bunch of NOLs, but that was obviously a change of control for iSatori. And so, we're limited in how much of those NOLs we can use each year going forward. I think the number is around $130,000 or $140,000 a year right is all that we can shield in our U.S. operations using U.S. NOLs. Canadian NOLs, we've got more than $15 million of those. But again, that's only helps us to the extent we generate profits in Canada and we hope to generate profits in Canada and we will take steps and have taken steps and are taking steps to through transfer pricing and other means to have profits in Canada that we can use to offset some of those NOLs. The other thing I would say and this gets to the GAAP tax expense, but it's also relevant for the cash tax expense. Dr. Tobias as an operating company is a German entity. We were a cash taxpayer. If you look at our financials in 2023. We had cash taxes that we paid. That's because we can't use our U.S. NOLs or our Canadian NOLs to offset profits in Germany. We've been a cash taxpayer in Germany and will continue to be a cash tax payer Germany to keep all those things wrap together in is what is driving kind of both the GAAP reported expense and now with us depleting the U.S. NOLs, we'll become a cash taxpayer during 2024 here in the U.S. as well. Hopefully that gives you enough detail, but that's kind of where we are in taxes right now.

[Operator Instructions]. Thank The next question is coming from George Marema from Pareto Ventures. George, your line is live.

Thank you, Dayton for taking our call. A couple of questions. Could you illustrate a little bit more on these new products you're developing? Is this like you and your customers sort of co-develop like your customer calls you and says, hey, can you produce a new flavor of protein powder and you guys make that for them or how does this work?

It's usually not. I mean, sometimes we might get input from GNC franchisees, for example, about what customers are asking for, but we're pretty in touch. I mean, we sell more than 250 different products across 13 brands. We're pretty in touch with the market and the consumers what they're looking for. The new products on the GNC side are largely sports nutrition. There's always a kind of one-upmanship that happens particularly with pre-workouts. Everyone's always trying to come out with the next kind of newest and greatest and the best packaging and the one that's got the most ingredients in all of that. We continue to play that game. The number one selling pre-workout in the GNC franchise channel is pre-workout called pump fuel, which is our pre-workout product. We're launching kind of a new high-end. It's got all the ingredients in it type of thing. And so, that will be launching soon. We also upgraded another one of our pre-workouts, it's called ACG3. A lot of it is sometimes new ingredients come along or again new flavoring, new packaging. That's largely what's happening on the GNC side. The other thing I would say on the GNC side is we have been historically largely focused on sports nutrition and diet. GNC has historically wanted to keep a lot of the general health stuff for themselves. For example, their fish oil, their multivitamin stuff like that, they've historically not wanted to bring in a lot of people to compete with their store brand when it comes to that, but they're being much more open now to different brands. And so, we're able to launch a multivitamin here this summer in GNC and that again allows us to reach a different kind of consumer that we weren't otherwise reaching on the sports nutrition side. Those are the new products or some of the new products, but they tend to be sports nutrition related and general health related on the GNC side. On the Dr. Tobias side, there's a number of new products coming that, I would say, they fit kind of one of two different categories. One category is similar to some of our existing hero products. I'll give you an example like we're the number one seller of colon cleanse products on Amazon. What we don't have is like a traditional daily use type almost just like a powder that you can add to your water that has fiber and whatnot that can help people on a more daily basis, as opposed to something you take occasionally. We are hoping that, launching a product like that where we already have a lot of awareness and reputation when it comes to our colon cleanse product that some ancillary products might be successful as well. The other things we're doing is, there's a trend again that we have noticed in the supplement space, where more and more consumers are actually looking for single-ingredient supplements. They are doing their own research and they're researching individual ingredients and wanting to kind of build their own supplement regimen. Whereas if you go into you look at many of our products in GNC and look many of our products on Amazon as well, they're blends. They might have 6 or 8 or 10 different ingredients that are combined to provide certain benefits and effects. We are seeing decent growth as we look at a lot of single-ingredient supplements and so many of the products that we are launching under Dr. Tobias in the coming months will be kind of single-ingredient supplements, where people can buy it, decide exactly what they want to take and just buy the individual supplements, as opposed to a blend. Those are some of the themes that we see, but we don't get a lot of inbound inquiries saying, hey, can you build a product like this or build a product like that?

Yes, that makes sense. My second question is, I know last quarter, prior couple of quarters or so on MusclePharm, you guys were sort of transitioning from, you had some other providers providing online sales with existing inventory. As we're looking at Q2 now, what's the status of the transition? Is it fully transitioned yet, or is it still some material amounts in the channels or how is that in Q2 the transition?

Yes. Definitely not a material amount in the channel. We're roughly where we were the last time we had a call. I think on the last earnings call, we did, I mentioned that, we're selling a little over 95% of the products on Amazon that are being sold under the MusclePharm brand. This previous reseller, there's two of our products and they're not big movers, but they just have a lot of inventory of these two products. And so, they're still selling that, but we are between 95% and 96% right now of all units moved on Amazon are being sold by us. That hasn't really changed since our last call, but it's a good sign that, despite the fact that it hasn't changed, our revenue is growing still on Amazon. It's not just taking it back from them, it's we're selling more.

On MusclePharm brand, I'm familiar with they have several flavors of powders and like three flavors of the combat protein bars. Did MusclePharm legacy have a lot of other SKUs that you plan to introduce or just primarily those two main SKUs or what sort of product set do they have and are you planning on rolling with?

Yes. We've already brought back many. For example, there's EAAs, central amino acids that those were underway when we acquired the assets, but they launched right under our ownership. We've launched a fish oil. We've launched a multivitamin. They had probably 10 flavors to 12 flavors of the bars. We launched three, and we'll probably be launching more of those as we get traction with the three that we already have. Probably at their peak, they probably had around 100 different SKUs and we're nowhere near that even with the different flavors of the bars and whatnot, maybe we're at 25 or 30 or something like that. There are others that we can bring back. I don't know, one that we're evaluating is there's a lot of trends toward ready-to-drink, whether that's an energy drink or ready-to-drink protein. We are not close to pulling the trigger on either one of those, and I think energy drink is maybe like one of the last horizons we would look at. That's ironically, I think the investment that put MusclePharm into bankruptcy when they did file was they made an attempt to launch an energy drink and it didn't pan out. We'd be more likely to do a protein ready-to-drink right or something like that. But we continue to look at all of the options in front of us and we look rather than launching 15 new products, we're focused on making the ones that we've already launched successful and we'll continue to evaluate other opportunities as they come up.

[Operator Instructions]. We did have a couple more come in. We have a question coming from David Drury [ph] from Option Opportunities. David, your line is live.

Thank you. I'd like to go back to the question regarding the NOLs with MusclePharm. My question is MusclePharm had over $100 million in NOLs. When you purchased it out of bankruptcy, were you able to capture any of those?

The short answer is no. We bought their assets, which are simply the intellectual property like the brands and their inventory. The NOLs remain with the bankruptcy estate. And as far as I know, that's still being fought over in court. Their plan has not yet been confirmed. No, we had nothing to do with their NOLs.

You simply bought the intellectual property?

Correct.

In regard to the Mimi's Rock.

Dayton, it's Colleague Hunter here. Looking at the SG&A after the Meanings Rock Corporation increase, you mentioned at the beginning of the call how your teammates are now working across brands, something that wasn't immediately true after the acquisition. Does that open up opportunities to be more efficient on the SG&A side?

I think it does, but I think you'll start to see that we've started to see that already. That's not new that we started doing that. I'll give you some examples. The look at like within the day of closing the acquisition, we don't need -- we didn't need two Board of Directors, we didn't need two CEOs, we didn't need two COOs. There were some immediate savings. And then, over time, for example, Mimi's Rock had an operations team based up in Canada. And over time, that was transitioned to the operations team in Omaha, part of legacy FitLife. We didn't have to hire anyone in Omaha to do it. The current team was able to just absorb it and then we didn't need the operations team up in Canada. I would say those benefits were largely captured in the few months after the acquisition, but it's not -- there's not a lot more opportunity on that front. The opportunities going forward there are more on the revenue side. We'll continue to optimize advertising, et cetera.

Thank you. We did have a follow-up question come from Igor Novgorodtsev from Lares Capital. Igor, your line is live.

One follow-up question which you probably talked about, acquisition pipeline, you have three successful acquisitions and obviously you have quite a track record here and the interest rates are still staying up. I assume some smaller players may be in financial distress, some take some more to -- What is your acquisition pipeline now? Are you evaluating new opportunities? How much would you be willing to acquire? How do you think about this? And what are you doing kind of day-to-day on this front?

Yes. Good question and happy to talk about it. Look, we have been very active in looking at acquisitions since 2019, probably early 2019. Obviously, we've only closed three. I think in our investor deck, we've got something that says, we've kind of looked at around 50. The number is probably more like 60 or more at this point. The deal flow is still there. Like, I haven't seen there has been no slowdown whatsoever. There's multiple deals right now, for example, I mean, we've signed an NDA on and we're looking at. There's been no shortage of deals. Some of them are maybe a product of the interest rate environment and a bad balance sheet and there's some level of distress and they're looking to sell whereas others are doing well and growing and just looking to capitalize on an exit. There's no shortage of businesses to look at. We continue to look at them. I think, I've talked in the past about sometimes these things take a long time to play out. Nutrology, which was our first acquisition, started talking to them pre-COVID. Obviously, COVID caused that one to grind to a halt for a period of time and then we closed it in, I think, April of '21. Mimi's Rock, we signed the NDA in November of '21 and we closed the transaction in February of '23. MusclePharm, we signed the NDA in November of '22 and we closed the acquisition in October of '23. It just makes sense to keep in the deal flow, even when you close the deal, because you never know when you're going to find something and how long it's going to take. Very much still looking at a number of different opportunities and we'll continue to do so. We've talked in some of our investor presentations about what are the gating factors to continuing to execute this strategy and grow through M&A. We believe we have a platform, the FitLife Brands platform, the team that we have, we can add more brands to it. We can buy these brands at low to mid-single-digit multiples and we can nurture them and grow them and cut out a lot of SG&A and in many cases help the brands perform better. The benefit of that is, we get more EBITDA out of these businesses and we've got a higher multiple ourselves. There's this multiple arbitrage opportunity that's a part of the strategy that we are employing here. The kind of three gating factors are you got to have deal flow, you got to have a balance sheet to get the deal done and then your team needs to be able to handle the integration or the operations of the new brand. We've got the deal flow and we've got the balance sheet and I think Mimi's Rock is absolutely to the point where we've got things under control and MusclePharm, we're very confident with where we are, but there's just new products and new growth that we're focused on for that brand. Really, I think team has been our gating factor, but it's not out of the question at all that we do another transaction, again assuming we find something we like doing another transaction this year.

What would be the size of transaction, like the maximum size you'd be comfortable with?

Yes. I don't know if I'd put a maximum size on it. I think, again, going back to the gating factors, if you think about the balance sheet side of it, we our lender, I think, will very comfortably lend us 2.5 times to 3 times EBITDA. On an LTM basis, we're at, I think, 11.5 or something like that. Based on my comments, forward-looking comments about April, you can assume we're even higher than that. You snap 2.5 times multiple or a 3times multiple on, let's just say, $12 million to pick a round number. You're talking about $30 million to $35 million of debt. Not that I want to go and do that, but that gives you a sense for the borrowing capacity that we have. And so that would probably be the gating factor in terms of how big of a deal we could do. I don't want to do small, like, I'm not interested buying $1 million brands. We've got decent cash flow and due diligence is the same amount of effort. The lawyers charge the same amount, whether you're buying a company for $1 million or you're buying a company for $15 million or whatever the number is. We are focused on larger companies, as opposed to smaller companies, but we don't have like other than that, we don't have a metric or a guidebook that says that, it has to be this big. If we put the effort in, we want it to have an impact on our business, and I don't think that would happen if it was a $1 million brand.

I assume you are not even thinking about issuing stock to do an acquisition or anything like that. So that would be the step to that?

I think, it certainly not the priority. Obviously, if there was a bigger acquisition and we didn't want to, or if we were maxed out on debt or we didn't want to incur as much debt, we might consider something like that. But most of what we look at, we approach with the perspective that we want to use cash. Where possible, we use our own cash, because the business is pretty cash-generative, as you have seen, but we're willing to borrow money. Look, we borrowed in 2023 $22.5 million to do the two acquisitions that we did, on a net debt basis. Now barely a year after the first loan that we took out, we're down to $13.2 million. So, we're not afraid of borrowing and because we think we have a business that we can that can support the debt and where we can pay it down pretty quickly.

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

Wonderful. Thank you all for your interest in FitLife. We are available to answer any questions you guys may have. Feel free to reach out to us. The best way is probably just through email at [email protected]. But otherwise, we look forward to speaking with you again in three months. Thank you very much.