FitLife Brands, Inc.

Okay, good afternoon, everyone. Welcome back to the second day of Sedoti's May microcap conference. My name is Daniel Harriman, and I'm an analyst here at Sedoti. This afternoon, we're going to get to hear from FitLife Brands. That's ticker FTLF. We're going to hear from the company's CEO and chairman, Dayton Judd, the company's executive vice president, Ryan Hansen, and also the company's CFO, Jacob York. We're going to give them about 20 minutes to go through their presentation, after which time I'm going to open it up for Q&A. If you do have questions at any time during the presentation or afterwards, please feel free to type those into the Q&A box. And time permitting, I'll get to as many as I can. Please join me in welcoming FitLife Brands. And with that, Dayton, I'll hand it over to you. Thank you for being here.

Thank you, Daniel. We appreciate the invitation to be here and participate in this conference. wanted to give you a bit of an overview about FitLife Brands and talk about the investment thesis. FitLife Brands is the owner of 13 different health and wellness brands, primarily supplements. We've listed on this page the different brands that we own, and I'll point out a few different things about the brands and how we sell them. In our business, we refer to the brands towards the top of the page as legacy FitLife. Those are brands that we have owned for 10 or more years that constitute the core of our business prior to embarking on some acquisitions more recently. In total, across all of these brands, we sell more than 250 products and we sell them in multiple channels, wholesale and online. In particular, the first five brands on this page are exclusive to GNC and more specifically to the GNC franchise community. In addition, all of our products across all 13 brands we sell online on multiple platforms, on our own websites, on Amazon.com, which is the bulk of or where we generate the bulk of our online sales, but also on Walmart.com and eBay.com. In 2023, we added to our portfolio through two acquisitions. The first was a company called Mimi's Rock. They were publicly traded in Canada. And that transaction closed on February the 28th of 2023. And that gave us the Dr. Tobias, the ANA, or All Natural Advice, and the Maritime Naturals brands. Those last two brands are skincare. They're the only skincare brands that we have. The other brands are nutritional supplements. And then we acquired MusclePharm in October of last year. And so that is the most recent addition to our portfolio. So with that introduction, let me talk to you a bit about how we would characterize or summarize the investment thesis for our company. And we've broken this up into three parts. First, we'll talk a bit about the management team and our alignment with shareholders. We'll then talk about our financial performance and just the intricacies and the economics of our business and how it's structured. And then we'll wrap up by talking about the growth potential, including some examples, some case studies of the acquisitions that we've completed. So I won't spend much time talking about the management team. We filed this presentation on an 8K yesterday with the SEC and we've uploaded it to the Sedoti portal as well. So you should all have access. I'll let you read through this on your own, but the short summary of this page is we have a team that consists of industry veterans, people who have been in the supplement industry for decades, as well as some more recent additions, people that bring some expertise outside of supplements. In particular, my background, I've been the CEO of the company since February of 2018. I am an investor by training or for my primary occupation. I started with McKinsey, spent nine or 10 years with them. I moved over into investing in 2007, started my own hedge fund in 2012. And that is what got me initially involved with FitLife as an investor, ultimately then as a member of the board and then as the CEO. So this next page is somewhat of a busy page, but it's an important page that outlines our story, where we've been, what we've been doing, and what we're planning to do going forward. This shows the performance of the business over the past several years, and you can see it's indicated on the left when the management transition happened, which was in February of 2018. At the time, the company was experiencing declining growth and EBITDA losses. We were in a difficult position in terms of cash flow and balance sheet. And at that point, GNC represented probably close to 90% of our total revenue. So we had a customer concentration issue. GNC is still our largest customer and a very valuable customer and partner for us. But 90%, you know, is a lot to have with one customer. And so as a result, we embarked upon a transformation plan with the intent to transform the business from being predominantly a wholesaler of a small number of brands to being an omni-channel provider of multiple brands to customers in different channels. And we started doing that primarily by selling on Amazon. We also sold on our own websites, and we also sell on Walmart.com and eBay.com. And at the time the transformation began, probably more than 99% of our revenue was wholesale. Fast forward to today, following the recent acquisitions that we've completed, approximately two thirds of our revenue is now coming from online sales direct to the end consumer. And the reason that's important is, well, A, it helped solve our concentration problem. And B, being a retailer is much preferable to being a wholesaler in terms of margins and the economics of the business. As the company continued to sell more online and was able to get back to growing and to generating cash, we were able to pay off all of our debt. In 2019, we bought back more than 20% of the outstanding shares. As we continued to grow, we built cash and started looking for acquisitions. We did complete one small acquisition in April of 2021. But the two bigger transformative acquisitions that we did happened in 2023. The first being Mimi's Rock, like I mentioned, in February, and the second being Muscle Farm that happened in October of 2023. So you can see from the chart, right, we've been able to move from a declining business that's losing money to a business that's growing for both organically and inorganically and generating strong EBITDA with very high free cash conversions. So we'll go on to the next page. The impact of this transformation has been apparent in our stock chart. I won't spend again much time on this, but you can see from the time the management transition happened until the beginning of May, what the returns have been on the stock. Moving along, one other, I think, critical aspect of our investment thesis is the management team at FitLife is very aligned with the shareholders. I mentioned that I run a fund between myself as the CEO and the fund that I manage. We own 56 percent of the outstanding shares. Other insiders own three percent. So we are we are in for the long haul and we are very aligned with the public shareholders in this case. So now spend a bit of time talking about more about our business, the economics of our business and how we go to market. This chart shows here on the left hand side, you can see our basic economic profile. We generate margins that are typically in the low 40 percent range, gross margins, and we generally can generate EBITDA margins close to 20 percent, sometimes a little lower, sometimes a little higher. The way we go to market and the strategies for some of our brands differ somewhat. I'll start on the top right and talk about our business model with GNC and how that is a competitive advantage for us. Our products, like I mentioned, the first five brands on the page that I started with are exclusive to GNC, meaning we don't sell them to any other brick and mortar retailer, although we do sell them ourselves online. And within GNC, they are primarily exclusive to the franchise community. And these brands are something that because they sell them exclusively and because of the business model that we have, they will favor and they will sell our products over competing products. And let me kind of walk you through why that's the case. We don't spend any money or very, very little money marketing these products. We make high quality products. We get them into the hands of the GNC franchisees at a price That means that when they sell these products, they will make more selling these products in terms of their gross profit than they will selling any other competitor's products. It's very typical in the supplement industry for companies to spend well upwards of 10% and sometimes upwards of 20%. marketing their products on advertising and other marketing efforts. We don't spend that money when it comes to these brands, which allows us to sell the products to the franchisees more cheaply. and gives them the incentive to maximize their gross profit. And they do that by selling these products to the customers that come into the store. We believe that these brands are among the top selling brands in the GNC franchise network with the exception of GNC's own store brand. Now, customers have been moving away from brick and mortar retail for years. As a result, if there's a customer that's been trained on our products over the last 20 years in the GNC ecosystem, there will invariably be some who choose to buy the product online. And when they're ready to do that, we are out as the only seller online and are happy to continue selling them the product and shipping it to them. either through Amazon or our own websites or Walmart or any of the other platforms we sell on. So that's one example of the business model that we use to sell within GNC. Let me talk a little bit about some of the brands that are more Amazon-centric. In particular, the example at the bottom right of this page is the Dr. Tobias brand, as well as the skincare brands that we acquired as part of the Mimi's Rock acquisition. And I liken this a bit to almost like a geographic strategy. Many of these products have been sold on Amazon for a decade or more. Dr. Tobias is one of the largest sellers of fish oil on Amazon. And it's the largest seller of colon cleanse products on Amazon. So as a result, when someone goes to shop for these products on Amazon, even if they're not searching for our product by name, if they're searching for a generic search term, such as colon cleanse or fish oil, our brands, our products will be among the first products organically displayed in the search results by Amazon. And the advantage that gives us is it's right in front of the customer when they search. Research shows that over 90% of the time that customers buy on Amazon, they're buying one of the products in the first three organic placements. So they don't tend to scroll to page two and three and four and five and six. You'll also note from the chart that many of these products, because they've been around for a long time, have a very large number of reviews, right? 80,000 plus reviews in some cases, very positive, four and a half star reviews. So A customer searching for the products, some of the first search results that they see are our products. They see that the price is compelling. They see that 85,000 people can't be wrong, and they tend to add it to the cart and buy. So in many ways, this is defensible as well because of the position that these products have attained on Amazon. And it's very difficult and would require a significant amount of spending for people, for other competitors to try and displace these. So that just gives you a bit of an overview of the business model that we follow, which varies, again, by brand and by channel. In terms of the financial performance of the business, I mentioned we tend to operate around a 20% EBITDA margin, and I mentioned that we have high free cash conversion. Let me just explain a bit why that's the case. On the left-hand side, you can see we employ very little CapEx in our business. We outsource all manufacturing. So DNA and CapEx is not really something we need to worry about. We also have very low leverage, which we tend to employ only for acquisitions. And when we do employee leverage for an acquisition, we then try and delever as quickly as we can through voluntary paydowns. So we have very little debt relative to the size of our market cap, as well as our EBITDA. We have low leverage. And so as a result of that, we don't have a lot of interest, which helps with free cash conversion. We've also had the benefit of having a lot of NOLs. The unfortunate news with that is that in 2024, we should be utilizing the last of our U.S. NOLs. We do still have more than 15 million of NOLs in Canada that we can utilize going forward. So the last comment I'll make here in this section and before turning it over to Ryan is you can see here from this chart the transformation of our business from almost entirely wholesale to now roughly two-thirds being online. Online is where consumers want to shop. We get better margins when they do buy online, and so that has been a critical part of our strategy. And we also note on here that we get over 20% of our online sales as a result of customer subscriptions. So with that, I'll turn it over to Ryan to talk a bit about our growth potential.

Great. Thanks, David. I'll jump in first commenting just on the growth potential of the industry in which we participate. You can see on the left-hand side here, even in the U.S., supplements are kind of a $50, $60 billion business. A lot of opportunity for a lot of brands to participate and fairly strong tailwinds here with mid-plus single-digit growth rates. Each of our brands is, you know, the categories that Dayton described at the beginning, Legacy FitLife, Dr. Tobias and MusclePharm. We're actively pursuing organic growth opportunities across each of those brands. Admittedly, we have some headwinds as foot traffic continues to decline in some brick and mortar retail. But even on the Legacy FitLife side, we're currently pursuing some expansion opportunities. additional channels. Dr. Tobias, as was commented, is a very mature brand on Amazon, has a great reputation advocacy among consumers, will continue to pursue growth there, and are also looking to expand into additional channels. MusclePharm, our most recently acquired brand, was one acquired out of bankruptcy. I'll comment more on that in just one minute. but feel like we have a lot of runway. It's perhaps the brand that has the greatest growth potential within our portfolio today. Regarding inorganic growth and what we see here within the industry, there's quite a bit of fragmentation. We are a relatively small company still and yet are a relatively large player amongst a sea of many, many smaller players in the supplement industry. As we look at a number of deals as we have over the years, It is very common to be able to purchase brands that have strong consumer advocacy, but smaller than us, of course, for maybe three to six times EBITDA. We, of course, as a platform and a publicly traded vehicle traded a much higher premium. And so we're always looking for opportunities to add brands to our portfolio where we see arbitrage opportunity. As we are an acquirer of choice and have gained a reputation in the space, tend to get some pretty good deal flow. We'll continue to look at deals. We're always active on that front, but we tend to be fairly picky. So you can see we've closed three out of the 50 plus deals that have been looked at here over the last several years. And then as Dayton mentioned, we have a really strong balance sheet. We're always trying to ensure we have sufficient capacity to make sure we can do deals without being dilutive to equity holders. Let me share just briefly the synopsis of our two larger, most recent deals in 2023. First, starting with the meanies rock companies. And I'll be fairly brief as I know we're almost at time. We paid just over 17 million for this business since acquisition have made two primary changes. One was, there was a lot of GNA infrastructure that frankly we did not need. This was previously a publicly traded company on the Toronto exchange. And so you can imagine duplicative board members, auditors, executives, et cetera, that we were able to absorb without needing to bring on those incremental costs. We've also significantly reduced advertising costs without a huge impact to top line, significantly improving the profitability of this business. This business within seven months of ownership started generating in excess of 500,000 of EBITDA on a monthly basis. So even if you annualize that conservatively at six or so synergy adjusted, we would have paid less than three times even down for that asset. So feel really great about that. On the MusclePharm side, this was a company purchased out of bankruptcy in its heyday was obviously doing much, much more revenue than it was at that point. But we feel privileged to own a brand that others have chosen to invest tens of millions into over the years. where there's significant brand awareness. And so we are on a mission right now to help resurrect this brand and bring it back to maybe even be a portion of what it was in its former glory. With what it's been doing, even through bankruptcy, it is cash accretive. It will begin and has begun to contribute to our results at FitLife Brands. There's a number of levers that we're working to pull, working both wholesale and online to look to grow to come in this domain. I'll comment just briefly on a couple kind of specific things here. One is we relaunched the Combat Sport protein bars. It was a product that MusclePharm had previously had that they had actually stopped making due to some financial straits that they were encountering previously. So that product is now available online and we're working to work that into wholesale distribution as well. So as we think about priorities, MusclePharm is certainly at the top of the list as it pertains to growth, but we're really excited to cross the portfolio with what we anticipate going forward. And Daniel, with that, we can turn it over to you for Q&A.

Perfect. Well, thank you guys for that overview and your willingness to go through the Q&A. I'm sorry, your willingness to share your presentation and your story. As a reminder, if you do have questions, please feel free to type it into the box and I'll get to it, time permitting. We do have a decent amount of time left. Dayton, just kind of to kick things off, since you coming on board, the outperformance of the stock has been pretty incredible. And I'm just curious to know what you see as the, obviously maintaining that outperformance is going to be relatively difficult, but what's your outlook for that? And what do you see as the biggest risk moving forward?

Yeah, I think, look, we think we have a repeatable process here. The, you know, the initial turnaround at FitLife was is largely in the rear of your mirror, right? We cut the costs, we transitioned to online, but over the last two years, what we've done is now take the cashflow from our existing brands and use that to acquire new brands. And MusclePharm is the third transaction that we've done. I think the previous transactions have all been successful. Ryan talked a bit about the fragmentation in the industry. So we feel like we have a phenomenal team that as we absorb these brands, as we buy them and bring them into the fold and help them to become more efficient and get back on track. we have the balance sheet and we have the team to continue to repeat that process. So we certainly think there's additional upside to think that we're a 60-ish million revenue company in a $60 billion industry in the U.S. And we're on the bigger side of companies, kind of gives you a sense for the fragmentation and the opportunity for consolidation. So it's been a great ride. I think it's 40X plus since the new management team took over in 2018. I can't promise 40X over the next six years, but I do think there's a path for continued growth and cash flow and value creation.

Perfect. Kind of going back to what Ryan was talking about with M&A, but we just had a question come in about, and I know you touched on this, but What's your bandwidth for further M&A while integrating your already existing assets? And how high would you be prepared to take leverage for a large acquisition? Also asking for you to comment on the current M&A pipeline that you see.

Yeah, no, very good question. Thanks for that. There's kind of three things, three constraints that affect our ability to execute this strategy. So number one is deal flow. Number two is balance sheet. And number three is team. Let me walk you through each of those just to give you a sense for kind of where things are. On the deal flow, we have not seen any decline whatsoever in the number of deals that we're having an opportunity to look at. We even since doing the muscle farm transaction just a few months ago, we've seen several have said have had several deals come our way. We're currently looking at several deals. Right. So so the deal flow is definitely there. And I don't think that's going to be our gaining factor. With regard to balance sheet, we have what I would consider to be a very clean balance sheet, little over one times leverage right now on a trailing 12 basis. Lower than that, if you think about kind of the potential that we have in the near future. You know, our bank is willing to loan us quite a bit more and would be delighted to and is sometimes not happy when we pay it down. But they've kind of, I don't want to say blank check, but I think they'll loan us at least two and a half times EBITDA, if not more, without much thinking. And I don't mean that in a bad way. I mean, we've kind of demonstrated to them what we do, and they're very, very supportive. They're more like a partner than someone we just do business with. So we can borrow a lot more. We certainly have a preference to not use equity for transactions just for the dilution reasons. For the right transaction, if it were necessary, we might employ some equity, but our first choice is always cash and debt. And final comment on that as it relates to the balance sheet, our bank, one thing they don't want to do is fully fund any acquisition. So they want us to put up around 30% or roughly a third of any consideration. And that can be equity, by the way, but for us, it's always been cash. So they don't ever want to loan the full amount of the deal. But if we put in 30%, they'll kick in 70% in terms of debt and we can move forward. So again, I don't view balance sheet as a constraint. I think we could handle another fairly significant deal right now. But bringing us to the third item, which I think really is the gating factor, right, is the team. We have an amazing team. We have absorbed a lot in the last year. 12, 14 months with these two pretty significant acquisitions. I don't think we could handle closing another acquisition today, but I certainly think if the right deal comes along now that we would be closing in three to six months, I think we would be in a position to handle that. So hopefully that answers your question. I think balance sheet, we're in good shape. Deal flow, we're in good shape. And the team, we've got a phenomenal team. We just need to digest a little bit what we've recently done and then we'll continue.

Perfect. Well, the questions keep coming in and we're kind of running short on time. So I'm going to try to combine a few if that's okay. Just kind of dealing with concentration and the competitive environment. Can you talk a little bit about how your margin profile compares to peers? And then looking at the Amazon sales channel, how much of a risk for the business is concentration within that channel? And then another question about would Amazon have the ability to launch its own brand or raise fees to eat into your profits?

Yeah, a lot of questions there. I'll try and remember them. Let me go backwards. So Amazon launching its own brand. Not worried about that. They already did that. They already tried that and they've stopped. You'll also you can go read journal articles, Wall Street Journal articles from a few months ago. There are some lawsuits in place right now challenging Amazon, some of Amazon's actions in that regard. So I think they're going to be pretty cautious about that. That said, Amazon is not without risks. We do have quite a bit of concentration with Amazon. The good news is it is diversified across a number of selling accounts. So the death knell if you're selling on Amazon is Amazon shutting down your account. If that were to happen with one of our accounts, the good news is we have, again, multiple accounts. So raising fees, they do raise their fulfillment fees. That said, their fulfillment fees are still probably half of what we would pay when we fulfill product on our own and sell it on our own website. So they're still very efficient in that regard. They've not raised their referral fee, they call it, essentially the commission that they charge to sell on their platform, which for supplements is 15%. So I think that was two of the three. What was the first question, Daniela?

It was about how your margin profile compares.

Yeah, so that's really hard for me to know. Again, many, many companies out there are private, right? So I don't know, other than the companies that I'm looking at as potential acquisitions, it's hard for me to know for sure. Just generally speaking, though, in the supplement space, wholesale margins in the kind of mid to upper 30s are pretty typical, right? And online margins in the 40s are also typical. That said, we tend not to talk about our online margins Holistically, meaning that there is one number that is our online margins. But because our strategy varies by brand and our pricing varies by brand, I would say some of our lowest online margins are around 40 percent. But we have some brands and products that are comfortably north of 50 percent. So that just gives you a sense for why online is more attractive in terms of margin. The ability to make a lot more gross profit by capturing a higher retail price and then a higher gross margin percentage applied to that.

Perfect. Well, you did a really good job of answering and unpacking all of that. So thank you. We've just come up on time, but Dayton, Ryan, Jacob, on behalf of Sedoti, thank you so much for sharing your story and being willing to go through the presentation today. For those of you in the audience, I appreciate the questions and thank you for joining us. And Dayton, it's really impressive what you guys have done with this company and we wish you all the best moving forward. Thank you. Thank you for being here. Thank you very much.