FitLife Brands, Inc.

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 a 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 ever earnings call. I appreciate you taking the time to join us this afternoon. Joining me on the call is Fitlife CFO, Jacob York. Rather than have Jacob 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 are what we now call MRC and Muscle Farm. 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 Muscle Farm, we only hired two of their former employees. One benefit of that is that much of the gross profit translates into incremental EBITDA for fit life. 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 fit life. 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 top line 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 28th, 2023. We paid just over 17 million dollars 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 U.S. dollars 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 and 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. 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 31st, 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. Kupong 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 transactions. 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 and $4 million of EBITDA from the baseline muscle farm business. So if I'm right, in the worst case, We paid between five and six times for the business, but the deal also comes with a massive call option on the upside if we were 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're 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 plus 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 the 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 Sedoti Microcap Conference next month. And if you all find these investor conferences to be helpful, we're happy to continue doing these on a quarterly basis. 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. At this time, we'll be conducting a question and answer session. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Once again, please press star one on your phone at this time if you wish to ask your question. And please hold while we poll for questions. We did have a few questions come in. The first question is coming from Igor Noburetsev from Laras Capital. Igor, your line is live.