Fitlife Brands, Inc.: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q (this "Quarterly Report"). This discussion and analysis may contain forward-looking statements based on assumptions about our future business. Unless otherwise stated, all dollar amounts are in thousands, except per share data.

Overview

FitLife Brands, Inc. (the “Company”) is a national provider of innovative and proprietary nutritional supplements and wellness products for health-conscious consumers marketed under the following brand names: (i) NDS Nutrition, PMD Sports, SirenLabs, CoreActive, Nutrology, and Metis Nutrition (together, “NDS Products”); (ii) iSatori, BioGenetic Laboratories, and Energize (together, the "iSatori Products"); and (iii) Dr. Tobias, All Natural Advice, and Maritime Naturals (together, the “MRC Products”). The Company distributes the NDS Products principally through franchised General Nutrition Centers, Inc. (“GNC”) stores located both domestically and internationally and, with the launch of Metis Nutrition, through corporate GNC stores in the United States. The iSatori Products are sold through more than 17,000 retail locations, which include specialty, mass, and online. The Company distributes the MRC Products primarily on Amazon.com.

FitLife Brands is headquartered in Omaha, Nebraska. For more information on the Company, please go to www.fitlifebrands.com (http://www.fitlifebrands.com). The Company’s Common Stock, par value $0.01 per share (“Common Stock”), trades under the symbol “FTLF” on the Nasdaq Capital Market.

Recent Developments

Acquisition of Mimi’s Rock Corp

On December 4, 2022, the Company entered into an Arrangement Agreement with Mimi’s Rock Corp. (“MRC”), pursuant to which the Company agreed to acquire MRC. On February 28, 2023, the Company completed the acquisition of MRC. See Note 8 for additional disclosure regarding the acquisition.

Acquisition of MusclePharm Assets

On October 10, 2023 (“the Closing Date”), the Company acquired substantially all of the assets of MusclePharm Corporation (“MusclePharm”) through an asset purchase transaction under Section 363 of the US Bankruptcy Code. The Company acquired substantially all of the assets and assumed none of the liabilities of MusclePharm other than de minimus cure costs relating to certain assumed contracts. Total consideration for the acquisition was approximately $18.5 million cash. Of this amount, $10.0 million was funded using proceeds from a new term loan provided by the Bank, with the remainder funded from the Company’s available cash balances.

Share Repurchase Plan

On March 17, 2023, the Board approved the extension of the Company’s previously authorized share repurchase program, initially approved by the Board on August 16, 2019, as amended on September 23, 2019, November 6, 2019 and February 1, 2021 (“Share Repurchase Program”). Under the extended and amended Share Repurchase Program, the Board authorized management to repurchase up to $5,000 of the Company's Common Stock over the next 24 months, at a purchase price equal to the fair market value of the Company's Common Stock on the date of purchase, with the exact date and amount of such purchases to be determined by management (the “2023 Share Repurchase Program”).

During the three and nine months ended September 30, 2023, the Company did not repurchase any Common Stock under the 2023 Share Repurchase Program. As of September 30, 2023, the Company may purchase $5,000 of Common Stock under the 2023 Share Repurchase Program.

Inflation

The Company has experienced inflationary pressure with regard to the procurement of many of its products. Thus far, the Company has been able to offset much of the impact of inflation through price increases to its customers. In the future, however, further inflationary pressure could adversely affect the Company's operating performance if market conditions no longer permit the Company to pass through price increases to its customers.

Results of Operations

Comparison of the three months ended September 30, 2023 to the three months ended September 30, 2022 (in thousands)

(Unaudited)

Revenue. Revenue for the three months ended September 30, 2023 increased 67% to $13,902 as compared to $8,314 for the three months ended September 30, 2022. The increase in revenue for the three months ended September 30, 2023 compared to the prior period principally reflects revenue generated from the acquisition of MRC, which was consummated on February 28, 2023. Without giving effect to the Company’s acquisition of MRC (“Legacy FitLife”), revenue for the third quarter of 2023 was $6.7 million, a decrease of 19% compared to the same period last year, driven by a 29% decrease in wholesale revenue, partially offset by an 8% increase in online revenue. Retail movement of the Company’s products through the wholesale channel declined approximately 14% during the quarter ended September 30, 2023.

Online revenue during the quarter ended September 30, 2023 was approximately 68% of net revenue, compared to 32% for wholesale channels for the same period. Online revenue during the quarter ended September 30, 2022 was 26% of net revenue compared to 74% for wholesale channels for the same period. Although no assurances can be given, management believes that online revenue will continue to increase in subsequent periods relative to prior comparable periods given management’s focus on higher margin online sales and the acquisition of MusclePharm consummated subsequent to September 30, 2023. Management also believes that its focus on developing its e-commerce capabilities will drive additional incremental sales in the short-term, while yielding substantial benefits in the longer-term.

Sales to customers in the U.S. were approximately 92% and 99% during the quarters ended September 30, 2023 and 2022, respectively, with the balance of sales to customers primarily in Canada and Europe.

Cost of Goods Sold. Cost of goods sold for the three months ended September 30, 2023 increased to $8,206 as compared to $5,070 for the three months ended September 30, 2022. This 62% increase is primarily due to an increase in sales attributable to the acquisition of MRC, as well as higher online sales for Legacy FitLife.

Gross Profit. Gross profit for the three months ended September 30, 2023 increased to $5,696 as compared to $3,244 for the three months ended September 30, 2022. The increase in gross profit is principally due to higher revenue attributable to the acquisition of MRC.

Gross margin for the three months ended September 30, 2023 increased to 41% from 39% for the comparable period last year. The increase in gross margin is due to higher margins on a larger portion of online sales partially offset by lower margins realized through wholesale channels.

Selling, General and Administrative Expense. Selling, general and administrative expense for the three months ended September 30, 2023 increased to $3,172 as compared to $1,680 for the three months ended September 30, 2022. The increase was primarily due to the inclusion of MRC SG&A expense in the Company’s consolidated financial statements.

Merger and Acquisition-Related Costs. Merger and acquisition related costs increased to $32 during the quarter ended September 30, 2023 compared to $6 for the same period of 2022.

Net Income. We generated net income of $1,696 for the three-month period ended September 30, 2023 as compared to net income of $1,220 for the three months ended September 30, 2022. The 39% increase in net income for the three-month period ended September 30, 2023 compared to the same period in 2022 was primarily attributable to the inclusion of MRC results.

Comparison of the nine months ended September 30, 2023 to the nine months ended September 30, 2022 (in thousands)

(Unaudited)

Revenue. Revenue for the nine months ended September 30, 2023 increased 68% to $39,401 as compared to $23,433 for the nine months ended September 30, 2022. The increase in revenue for the nine months ended September 30, 2023 compared to the prior period principally reflects revenue generated from the acquisition of MRC, which was consummated on February 28, 2023. Legacy FitLife revenue for the nine months ended September 30, 2023 was $21.9 million, a 6% decrease compared to the same period last year, driven by a 14% decline in wholesale revenue, partially offset by a 15% increase in online revenue.

Online revenue during the nine months ended September 30, 2023 was approximately 62% of net revenue, compared to 38% for wholesale channels for the same period. Online revenue during the nine months ended September 30, 2022 was 26% of net revenue compared to 74% for wholesale channels for the same nine-month period. Although no assurances can be given, management believes that online revenue will continue to increase in subsequent periods relative to prior comparable periods given management’s focus on higher margin online sales and the acquisition of MusclePharm consummated subsequent to September 30, 2023. Management also believes that its focus on developing its e-commerce capabilities will drive additional incremental sales in the short-term, while yielding substantial benefits in the longer-term.

Sales to customers in the U.S. were approximately 94% and 99% for the nine months ended September 30, 2023 and 2022, respectively, with the balance of sales to customers primarily in Canada and Europe.

Cost of Goods Sold. Cost of goods sold for the nine months ended September 30, 2023 increased to $23,332 as compared to $13,587 for the nine months ended September 30, 2022. This 72% increase is primarily due to an increase in sales attributable to the acquisition of MRC and increased product costs due to inflationary pressures, as well as higher online sales for Legacy FitLife.

Gross Profit. Gross profit for the nine months ended September 30, 2023 increased to $16,069 as compared to $9,846 for the nine months ended September 30, 2022. The increase in gross profit is attributable to higher revenue driven primarily by the acquisition of MRC.

Gross margin for the nine months ended September 30, 2023 decreased to 40.8% from 42.0% for the comparable period last year. The decrease in gross margin is due to higher product costs due to inflationary pressure, as well as amortization of the fair value step-up to MRC inventory acquired. Excluding the $323 impact of the step-up amortization, gross margin would have been 41.6% during the nine months ended September 30, 2023.

Selling, General and Administrative Expense. SG&A expense for the nine months ended September 30, 2023 increased to $8,758 as compared to $4,620 for the nine months ended September 30, 2022. The increase was primarily due to the inclusion of MRC SG&A expense in the Company’s consolidated financial statements.

Merger and Acquisition-Related Costs. Merger and acquisition related costs increased to $1,519 during the nine months ended September 30, 2023 compared to $214 for the same period of 2022, driven by costs related to the acquisition of MRC.

Net Income. We generated net income of $3,816 for the nine months ended September 30, 2023 as compared to net income of $3,956 for the nine months ended September 30, 2022. The decrease in net income for the nine-month period ended September 30, 2023 compared to the same period in 2022 was primarily attributable to non-recurring costs related to the acquisition of MRC including transaction-related expense of $1,519, amortization of the inventory step-up valuation of $323, and a loss on a currency hedge of $112.

Non-GAAP Measures

The financial presentation below contains certain financial measures not in accordance with GAAP, defined by the SEC as “non-GAAP financial measures”, including non-GAAP EBITDA and adjusted non-GAAP EBITDA. These measures may be different from non-GAAP financial measures used by other companies. The presentation of this financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in this Quarterly Report in accordance with GAAP.

As presented below, non-GAAP EBITDA excludes interest, foreign exchange gains and losses, income taxes, and depreciation and amortization. Adjusted non-GAAP EBITDA excludes, in addition to interest, taxes, depreciation and amortization, stock-based compensation, M&A/integration expense and non-recurring costs. The Company believes the non-GAAP measures provide useful information to both management and investors by excluding certain expense and other items that may not be indicative of its core operating results and business outlook. The Company believes that the inclusion of non-GAAP measures in the financial presentation below allows investors to compare the Company’s financial results with the Company’s historical financial results and is an important measure of the Company’s comparative financial performance.

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

-18-

Liquidity and Capital Resources

At September 30, 2023, we had positive working capital of approximately $12,139, compared to $18,933 at December 31, 2022. Our principal sources of liquidity at September 30, 2023 consisted of $7,343 of cash and $1,428 of accounts receivable.

On September 24, 2019, the Company entered into the Line of Credit agreement with Mutual of Omaha Bank (the “Lender”), subsequently acquired by CIT Bank N.A., then acquired by First Citizens Bank & Trust Company, providing the Company with a $2.5 million revolving line of credit (the “Line of Credit”). The Line of Credit allows the Company to request advances thereunder and to use the proceeds of such advances for working capital purposes until the Maturity Date, or unless renewed at maturity upon approval by the Company’s Board and the Lender. The Line of Credit is secured by all assets of the Company.

Advances drawn under the Line of Credit bear interest at an annual rate of the one-month SOFR rate plus 2.75%, and each advance will be payable on the Maturity Date with the interest on outstanding advances payable monthly. The Company may, at its option, prepay any borrowings under the Line of Credit, in whole or in part at any time prior to the Maturity Date, without premium or penalty. On September 20, 2022, the Company and the Lender amended the Line of Credit Agreement to extend the Maturity Date to December 23, 2022. On December 19, 2022, the Company and the Lender amended the Line of Credit Agreement to increase the Line of Credit to $3.5 million and extend the Maturity Date to December 23, 2023.

On February 23, 2023, the Company and the Lender amended the Line of Credit Agreement (“Amended and Restated Credit Agreement” or “Credit Agreement”) providing the Company with a Term Loan for the principal amount of $12.5 million (“Term Loan”) and increasing the Line of Credit to $3.5 million. All other terms of the Credit Agreement remain unchanged. All of the proceeds from the Term Loan were used for the acquisition of MRC.

The Term Loan accrues interest at an annual rate of the one-month SOFR rate plus 2.75%, and principal plus accrued interest will be payable quarterly beginning June 10, 2023 in amounts sufficient to fully amortize the Term Loan through February 28, 2028 (the “Term Loan Maturity Date”), with all principal and accrued interest on the Term Loan being due and payable in full on the Term Loan Maturity Date. The Company may prepay amounts borrowed under the Term Loan, in whole or in part with accrued interest to the date of such prepayment on the amount prepaid, by written notice to Bank at least one business day prior to the proposed prepayment.

The Credit Agreement also contains certain customary affirmative and negative covenants, including covenants to maintain: a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of not less than 1.25 to 1.00 as tested quarterly on a trailing twelve-month basis, starting in the fiscal quarter ending March 31, 2023, a Funded Debt to EBITDA Ratio (as defined in the Credit Agreement) of not more than 2.50 to 1.00 as tested quarterly on a trailing twelve-month basis, starting with the fiscal quarter ending March 31, 2024, and to the extent the Term Loan still has a balance as of June 30, 2024, and if a Cash Flow Leverage threshold (as defined in the Credit Agreement) of 1.15 is not met, the Company will be required to make a prepayment on the Term Loan equal to 50% of the Excess Cash Flow (as defined in the Credit Agreement). The Company was in compliance with all covenants as of September 30, 2023.

As of September 30, 2023, the borrowings outstanding on the Term Loan and the Line of Credit were $11,250 and $0, respectively.

The Company has historically financed its operations primarily through cash flow from operations and equity and debt financings. The Company currently anticipates that cash derived from operations and existing cash resources, along with available borrowings under the Line of Credit, will be sufficient to provide for the Company’s liquidity for the next twelve months.

The Company is dependent on cash flow from operations and amounts available under the Line of Credit to satisfy its working capital requirements. No assurances can be given that cash flow from operations and/or the Line of Credit will be sufficient to provide for the Company’s liquidity for the next twelve months. Should the Company be unable to generate sufficient revenue in the future to achieve positive cash flow from operations, and/or should capital be unavailable under the terms of the Line of Credit, additional working capital will be required. Management currently has no intention to raise additional working capital through the sale of equity or debt securities and believes that the cash flow from operations and available borrowings under the Line of Credit will provide sufficient capital necessary to operate the business over the next twelve months. In the event the Company fails to achieve positive cash flow from operations, additional capital is unavailable under the terms of the Line of Credit, and management is otherwise unable to secure additional working capital through the issuance of equity or debt securities, the Company’s business would be materially and adversely harmed.

Second Amended and Restated Credit Agreement – First Citizens Bank

On October 10, 2023 (the “Closing Date”), the Company entered into a Second Amended and Restated Credit Agreement (“Amended Credit Agreement”), with the Bank. Pursuant to the Amended Credit Agreement, the Bank provided the Company with a Term Loan B for the principal amount of $10.0 million (the “Term B Loan”), in exchange for the Company issuing a Term B Promissory Note (the “Term B Note”).

Under the Amended Credit Agreement: (i) the Term B Loan accrues interest at a per annum rate equal to the Applicable rate, based on the Term SOFR Rate, as in effect two banking days, subject to certain limitations, prior to (a) the Loan Closing Date, in the case of the initial Term SOFR Rate, and, (b) thereafter, the applicable Rate Adjustment Date, adjusted for any reserve requirement and any subsequent costs arising from a change in government regulation; and (ii) the Company will make payments on the Term B Loan on March 10th, June 10th, September 10th, and December 10th, of each calendar year, commencing on December 10th, 2023, in amounts sufficient to fully amortize the Term B Loan through October 10, 2028, on which date all principal and accrued interest on the Term B Loan shall be due and payable.

Also on the Closing Date: (i) the Company entered into the Term B Note evidencing the Term B Loan; and (ii) each of the Company and its subsidiaries, NDS Nutrition Products, Inc., iSatori, Inc., 1000374984 Ontario, Inc., and MRC (collectively, the “Guarantors”), entered into a Reaffirmation of Guaranty (the “Reaffirmation Agreement”), pursuant to which each of the Guarantors agreed and confirmed that the guaranty issued under that certain Guaranty Agreement, dated February 23, 2023, by and between the Bank and the Guarantors (the “Guaranty Agreement”), remains in full force and effect and includes the obligations arising from the Term B Loan.

Cash Provided by Operations. Cash provided by operating activities for the nine months ended September 30, 2023 was $2,772 as compared to cash provided by operations of $5,003 for the nine months ended September 30, 2022. The decrease in cash provided by operating activities is attributable to lower net income, driven primarily by $1.5 million of transaction costs related to the acquisition of MRC, as well as payment of a number of payables and other expenses that were accrued at MRC at the time of the acquisition.

Cash Used in Investing Activities. Cash used in investing activities for the nine months ended September 30, 2023 was $18,984, which includes $17,099 paid for the acquisition of MRC and a $1,825 deposit towards the acquisition of MusclePharm assets, compared to $0 for the first nine months of 2022.

Cash Provided by Financing Activities. Cash provided by financing activities for the nine months ended September 30, 2023 was $11,250 compared to cash provided by financing activities of $29 during the nine months ended September 30, 2022. The increase in cash provided by financing activities is primarily attributable to the funding of the Term Loan during the first quarter of fiscal 2023.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expense, and related disclosure of contingent assets and liabilities. We evaluate, on an on-going basis, our estimates and judgments, including those related to the useful life of the assets. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results that we report in our consolidated financial statements. The SEC considers an entity’s most critical accounting policies to be those policies that are both most important to the portrayal of a company’s financial condition and results of operations and those that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain at the time of estimation. For a more detailed discussion of the accounting policies of the Company, see Note 3 of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report, “Summary of Significant Accounting Policies”.

We believe the following critical accounting policies, among others, require significant judgments and estimates used in the preparation of our consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net sales and expense recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates.

These estimates and assumptions also affect the reported amounts of accounts receivable, inventories, goodwill, revenue, costs and expense and valuations of long-term assets, allowance for deferred tax assets and equity instruments issued for services during the reporting period. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates.

Goodwill

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The Company adopted ASU 2017-04 on January 1, 2020 and applied the requirements prospectively.

Management concluded that a triggering event did not occur during the three months ended September 30, 2023. We will continue to review for impairment indicators as necessary in future periods.

Revenue Recognition

The Company’s revenue is comprised of sales of nutritional supplements and wellness products to consumers.

The Company accounts for revenue in accordance with FASB ASC 606. The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. Under ASC 606, revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for the Company upon shipment or delivery of products to our customers based on written sales terms. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products to a customer.

All products sold by the Company are distinct individual products and consist of nutritional supplements and wellness products. The products are offered for sale solely as finished goods, and there are no performance obligations required post-shipment for customers to derive the expected value from them.

The Company evaluated principal versus agent considerations to determine appropriateness of recording platform fees paid to Amazon as an expense or as a reduction of revenue. The Company records platform fees paid to Amazon for distribution of Company products to cost of goods sold in the condensed consolidated statements of income and comprehensive income. Platform fees are not recorded as a reduction of revenue because the Company: 1) owns the goods before they are transferred to the customer, 2) can direct Amazon, similar to other third-party logistics providers (“Logistic Providers”), to return the Company’s inventory to any location specified by the Company, 3) has the responsibility to make customers whole following any returns made by customers directly to Logistic Providers and the Company retains the back-end inventory risk, 4) is subject to credit risk (i.e., credit card chargebacks), 5) establishes prices of its products, 6) can determine who fulfills the goods to the customer (Amazon or the Company) and 7) can limit quantities or stop selling the goods at any time. Based on these considerations, the Company is the principal in this arrangement. Advertising fees for Amazon are recorded in selling, general and administrative expenses in the condensed consolidated statements of income and comprehensive income.

The Company disaggregates revenue into geographical regions and distribution channels. The Company determines that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

Online revenue during the three months ended September 30, 2023 was approximately 68% of net revenue, compared to 32% for the wholesale channel for the same period. Online revenue during the nine months ended September 30, 2023 was approximately 62% of net revenue, compared to 38% for the wholesale channel for the same period. Online revenue during each of the three and nine months ended September 30, 2022 was 26%.

Sales to customers in the United States were approximately 92% and 99% during the three months ended September 30, 2023 and 2022, respectively, with the balance of sales for the same respective periods being to customers primarily in Canada and Europe. Sales to customers in the United States were approximately 94% and 99% during the nine months ended September 30, 2023 and 2022, respectively, with the balance of sales for the same respective periods being to customers primarily in Canada and Europe.

Control of products we sell transfers to customers upon shipment from our facilities or delivery to our customers, and the Company’s performance obligations are satisfied at that time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than promised goods to the customer. Payments for sales are generally made by check, credit card, or wire transfer. Historically the Company has not experienced any significant payment delays from customers.

For direct-to-consumer sales, the Company allows for returns within 30 days of purchase. Our wholesale customers, such as GNC, may return purchased products to the Company under certain circumstances, which include expired or soon-to-be-expired products located in GNC corporate stores or at any of its distribution centers, and products that are subject to a recall or that contain an ingredient or ingredients that are subject to a recall by the U.S. Food and Drug Administration.

A right of return does not represent a separate performance obligation, but because customers are allowed to return products, the consideration to which the Company expects to be entitled is variable. Upon evaluation of returns, the Company determined that product returns are immaterial, and therefore believes it is probable that such returns will not cause a significant reversal of revenue in the future. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.

Recent Accounting Pronouncements

See Note 3 of the Condensed Consolidated Financial Statements included in this Quarterly Report for a description of recent accounting pronouncements believed by management to have a material impact on our present or future financial statements.

Our business is currently conducted principally in the United States. As a result of the acquisition of MRC, our financial results can be affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets. We engaged in hedging transactions to reduce our exposure to changes in currency exchange rates that impacted the cash required for the acquisition of MRC. As the geographical scope of our business broadens, we may engage in hedging transactions to reduce our exposure to changes in foreign currency rates.

Our exposure to risk for changes in interest rates relates primarily to any borrowings under our Credit Agreement, and our investments in short-term financial instruments. As of September 30, 2023, the Company had a Term Loan balance of $11.250 million and a zero balance under its Line of Credit.

Investments of our existing cash balances in both fixed rate and floating rate interest-earning instruments carry some interest rate risk. The fair value of fixed rate securities may fall due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Partly as a result of this, our future interest income will vary due to changes in interest rates and we may suffer losses in principal if we are forced to sell securities that have fallen in estimated fair value due to changes in interest rates. However, as substantially all of our cash equivalents consist of bank deposits and short-term money market instruments, we do not expect any material change with respect to our net income as a result of an interest rate change.

(a) Evaluation of Disclosure Controls and Procedures

In connection with the filing of this Form 10-Q for the period ended September 30, 2023, our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as amended, as of September 30, 2023. The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure.

Management previously determined that our disclosure controls and procedures were ineffective due to certain material weaknesses, as disclosed in our Annual Reports on Form 10-K for the years ended December 31, 2021 and 2022, and in our quarterly reports through the quarter ended March 31, 2023. Management has implemented measures designed to improve our controls and procedures to remediate the identified material weaknesses (the “Remediation Plan”). As of the quarter ended June 30, 2023, the Remediation Plan had been implemented and the applicable controls had operated for a sufficient period of time, and therefore had concluded that the newly implemented and enhanced controls were operating effectively. We will continue to test such controls over time to ensure the adequacy of our controls and procedures.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on management’s evaluation of our disclosure controls and procedures as of September 30, 2023, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2023.

(b) Changes in Internal Controls Over Financial Reporting

Our Chief Executive Officer and Chief Financial Officer have determined that, other than the Remediation Plan described above, there have been no changes in the Company’s internal control over financial reporting during the period covered by this report identified in connection with the evaluation described in the above paragraph that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Our results of operations and financial condition are subject to numerous risks and uncertainties described in our comprehensive Annual Report on Form 10-K for our fiscal year ended December 31, 2022, filed with the SEC on March 24, 2023. Management is not aware of any material changes to the risk factors discussed in Part 1, Item 1A, of the Annual Report on Form 10-K for the year ended December 31, 2022. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted.