# Fitlife Brands, Inc.: Form 10-Q for the period ended Mar 31, 2024

- Company: [Fitlife Brands, Inc.](/companies/ftlf.md) (CIK 1374328)
- Form: 10-Q
- Filed: 2024-05-14
- Accepted by EDGAR: May 14, 2024, 07:30 ET
- Period: 2024-03-31
- Accession: 0001437749-24-016353
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1374328/000143774924016353/ftlf20240331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1374328/000143774924016353/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $16.5m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2024-01-01 to 2024-03-31 | $9.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2024-01-01 to 2024-03-31 | $7.3m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2024-01-01 to 2024-03-31 | $3.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | $3.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-01-01 to 2024-03-31 | $414.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $807.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | $2.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.43 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.47 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 5,030,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | $5.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-01-01 to 2024-03-31 | $10.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2024-03-31 | $2.5m | us-gaap:Cash |
| Current assets | at 2024-03-31 | $15.0m | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-31 | $55.5m | us-gaap:Assets |
| Current liabilities | at 2024-03-31 | $11.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-03-31 | $26.1m | us-gaap:Liabilities |
| Long-term debt | at 2024-03-31 | $11.9m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2024-03-31 | $29.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 27,486 characters.

*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 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, Core Active, Nutrology, and Metis Nutrition (together, “*NDS Products”*); (ii) iSatori, BioGenetic Laboratories, and Energize (together, the "*iSatori Products*"); (iii) Dr. Tobias, All Natural Advice, and Maritime Naturals (together, the “*MRC Products*"); and (iv) MusclePharm.

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 approximately 16,000 retail locations, which include specialty, mass, and online. The Company distributes the MRC Products primarily online. MusclePharm’s products are sold to wholesale customers as well as online directly to the end consumer.

FitLife Brands is headquartered in Omaha, Nebraska. For more information on the Company, please go to 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. Total consideration for the acquisition of MRC was $17,099, of which $12,500 was funded using proceeds from a new term loan and $4,599 from the Company’s available cash. See Note 8 to the financial statements for additional disclosure regarding the acquisition of MRC.

#### Acquisition of MusclePharm Assets

On October 10, 2023, the Company acquired substantially all of the assets of MusclePharm Corporation (“*MusclePharm”*) through an asset purchase transaction under Section 363 of the U.S. 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 $18,500. Of this amount, $10,000 was funded using proceeds from a new term loan provided by First Citizens Bank, with the remainder funded from the Company’s available cash balances. See Note 9 for additional disclosure regarding the acquisition of MusclePharm.

### Results of Operations

### Comparison of the three months ended March 31, 2024 to the three months ended March 31, 2023

*(Unaudited)*

|  | Three months ended March 31, 2024 | March 31, 2023 | Change ($) | Change (%) |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $16,549 | $10,738 | $5,811 | 54% |
| Cost of goods sold | 9,262 | 6,330 | 2,932 | 46% |
| Gross profit | 7,287 | 4,408 | 2,879 | 65% |
| Selling, general and administrative expenses | 3,736 | 2,344 | 1,392 | 59% |
| Merger and acquisition-related costs | 134 | 1,372 | (1,238) | (90)% |
| Depreciation and amortization | 36 | 19 | 17 | 89% |
| Total operating expenses | 3,906 | 3,735 | 171 | 5% |
| Operating income | 3,381 | 673 | 2,708 | 402% |
| Other expense, net | 414 | 96 | 318 | 331% |
| Provision for income tax | 807 | 421 | 386 | 92% |
| **Net income** | $2,160 | $156 | $2,004 | 1,258% |

-16-

*Revenue.* Revenue for the three months ended March 31, 2024 increased 54% to $16,549 as compared to $10,738 for the three months ended March 31, 2023. The increase in revenue for the three months ended March 31, 2024 compared to the prior period is due to the acquisition of MRC and the MusclePharm assets, partially offset by a decline in legacy FitLife revenue. MRC was acquired February 28, 2023, and as such only one month of revenue was included in the Company’s financial statements for the three months ended March 31, 2023.

Legacy FitLife revenue for the three months ended March 31, 2024 was $6,961, a 14% decrease compared to the previous year, driven by a 21% decline in wholesale revenue partially offset by a 3% increase in online revenue.

MRC revenue for the three months ended March 31, 2024 was $7,493. MRC revenue for the period from February 28, 2023 to March 31, 2023 was $2,639.

During the three months ended March 31, 2024, MusclePharm generated revenue of $2.1 million, of which approximately half was generated from wholesale customers and half from online sales.

Online revenue and wholesale revenue for the quarter ended March 31, 2024 were approximately 65% and 35% of total net revenue, respectively. Online revenue and wholesale revenue for the quarter ended March 31, 2023 were approximately 47% and 53% of net revenue, respectively. 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 acquisitions of MRC and the MusclePharm assets, which were consummated in the first and fourth quarters of fiscal 2023, respectively.

Sales to customers in the United States were approximately 96% and 97% during the quarters ended March 31, 2024 and 2023, respectively, with the balance of sales to customers primarily in Canada.

*Cost of Goods Sold.* Cost of goods sold for the three months ended March 31, 2024 increased to $9,262 as compared to $6,330 for the three months ended March 31, 2023. This 46% increase is primarily due to an increase in revenue attributable to the acquisition of MRC.

*Gross Profit.* Gross profit for the three months ended March 31, 2024 increased to $7,287 as compared to $4,408 for the three months ended March 31, 2023. The increase in gross profit is principally attributable to higher MRC gross profit as well as incremental gross profit from MusclePharm.

*Gross Margin*. Gross margin for the three months ended March 31, 2024 increased to 44.0% from 41.1% for the comparable prior period. The increase in gross margin is primarily attributable to higher margins from MRC due to sales mix as well as the amortization of the fair value step-up to MRC inventory acquired in the first quarter of 2023. Excluding the $110 impact of the step-up amortization, gross margin would have been 42.1% during the quarter ended March 31, 2023.

*Selling, General and Administrative Expense.* SG&A expense for the three months ended March 31, 2024 increased to $3,736 as compared to $2,344 for the three months ended March 31, 2023. The increase was primarily due to the full-quarter impact of MRC SG&A expense.

*Merger and Acquisition-Related Costs.* Merger and acquisition-related costs decreased to $134 during the quarter ended March 31, 2024 compared to $1,372 for the same period of 2023, driven primarily by transaction costs related to the MRC acquisition in the first quarter of 2023.

*Net Income.* We generated net income of $2,160 for the three-month period ended March 31, 2024 as compared to net income of $156 for the three months ended March 31, 2023. The increase in net income for the three-month period ended March 31, 2024 compared to the same period in 2023 was primarily attributable to higher revenue and gross profit for MRC, as well as the reduction in acquisition-related costs due to the MRC acquisition that closed during the first three months of 2023.

### 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 earnings before interest, taxes, depreciation, and amortization (“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, merger and acquisition related expense and non-recurring expense. 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)*

|  | For the three months ended March 31, 2024 | 2023 |
| --- | ---: | ---: |
| Net income | $2,160 | $156 |
| Interest expense | 414 | 98 |
| Interest income | (5) | (84) |
| Provision for income taxes | 807 | 421 |
| Depreciation and amortization | 36 | 19 |
| **EBITDA** | 3,412 | 610 |
| Non-cash and non-recurring adjustments |  |  |
| Stock compensation expense | 102 | 42 |
| Merger and acquisition related expense | 134 | 1,372 |
| Amortization of inventory step-up | - | 110 |
| Non-recurring loss on foreign currency forward | - | 112 |
| **Adjusted EBITDA** | $3,648 | $2,246 |

### Liquidity and Capital Resources

As of March 31, 2024, the Company had positive working capital of $3,164, compared to $4,356 at December 31, 2023. Our principal sources of liquidity at March 31, 2024 consisted of $3,290 of cash and $2,269 of accounts receivable. The decrease in working capital is principally attributable to a voluntary paydown of $2,500 on the Term Loans as well as the scheduled amortization payment of $1,125, offset by positive operating cash flows during the three months ended March 31, 2024.

On September 24, 2019, the Company entered into a 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 (the “*Credit Agreement”*) providing the Company with a term loan for the principal amount of $12.5 million (“*Term Loan A”*). All other terms of the Credit Agreement remain unchanged. All of the proceeds from Term Loan A were used for the acquisition of MRC.

On October 10, 2023, the Company entered into a Second Amended and Restated Credit Agreement (the “*Amended Credit Agreement”*) with the Bank, amending and restating the Credit Agreement between the Company and the Bank. Pursuant to the Amended Credit Agreement, the Bank provided the Company with an additional term loan (“*Term Loan B”*, and together with Term Loan A, the “*Term Loans”*) for the principal amount of $10,000 and extended the Line of Credit of $3.5 million to December 15, 2024. The Company used the proceeds from Term Loan B to fund the acquisition of the MusclePharm assets.

The Term Loans accrue 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 Loans through February 28, 2028 in the case of Term Loan A and through October 10, 2028 in the case of Term Loan B. The Company may prepay amounts borrowed under the Term Loans, 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 Amended Credit Agreement contains customary events of default (each an “*Event of Default”*), which upon the occurrence of an Event of Default, as defined in the Amended Credit Agreement, among other things, interest will accrue at the applicable rate plus 2% per annum, and the Bank may declare all Obligations, with interest thereon, immediately due and payable. The Amended Credit Agreement further contains customary representations and warranties of the Company; customary indemnification provisions whereby the Company will indemnify Bank for certain losses arising out of inaccuracies in, or breaches of, the representations, warranties and covenants of the Company, and certain other matters; and customary affirmative and negative covenants, including covenants to maintain a Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) of not less than 1.25 to 1.00 as tested quarterly on a trailing twelve-month basis, starting with the fiscal quarter ending December 31, 2023, a Funded Debt to EBITDA Ratio (as defined in the Amended 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 Loans still have a balance as of June 30, 2025 and a Cash Flow Leverage threshold (as defined in the Amended Credit Agreement) of at least 1.15 is not met, the Company will be required to make a prepayment on the Term Loans equal to 50% of the Excess Cash Flow (as defined in the Amended Credit Agreement). The Company was in compliance with all covenants as of March 31, 2024.

As of March 31, 2024, the borrowings outstanding on the Term Loans and the Line of Credit were $16,500 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 reserves, 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.

*Cash Provided by Operating Activities.* Cash provided by operating activities for the three months ended March 31, 2024 was $5,036 compared to cash provided by operations of $232 for the three months ended March 31, 2023. The increase in cash provided by operating activities was driven primarily by the acquisition of MRC, which was largely offset by transaction-related costs and other payables and expenses that were accrued at MRC at the time of the acquisition.

*Cash Used in Investing Activities.* Cash used in investing activities for the three months ended March 31, 2024 and 2023 was $10 and $17,099, respectively. The Company used $10 for purchases of property and equipment in the three months ended March 31, 2024. During the three-month period ended March 31, 2023, the Company paid $17,099 to acquire MRC.

*Cash Provided by (Used in) Financing Activities.* Cash used in financing activities for the three months ended March 31, 2024 was $3,625 compared to cash provided by financing activities of $12,500 during the three months ended March 31, 2023.

### Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed 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 condensed 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.

Those estimates and assumptions include estimates for reserves of uncollectible accounts receivable, allowance for inventory obsolescence, product returns, depreciable lives of property and equipment, allocation of purchase price from business combinations, analysis of impairment of goodwill, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates.

#### Goodwill

In accordance with FASB *ASC 350, Intangibles-Goodwill and Other*, we review goodwill and indefinite lived intangible assets for impairment at least annually or whenever events or circumstances indicate a potential impairment. Our impairment testing is performed annually at December 31 (our fiscal year end). Impairment of goodwill and indefinite lived intangible assets is determined by comparing the fair value of our reporting units to the carrying value of the underlying net assets in the reporting units. If the fair value of a reporting unit is determined to be less than the carrying value of its net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent that the carrying value of goodwill exceeds the difference between the fair value of the reporting unit and the fair value of its other assets and liabilities.

Management concluded that a triggering event did not occur during the three months ended March 31, 2024. 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’s products are also sold on e-commerce platforms including Amazon. For these transactions, 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 March 31, 2024 was approximately 65% of net revenue, compared to 35% for the wholesale channel for the same period. Online revenue during the quarter ended March 31, 2023 was 47% of net revenue compared to 53% for the wholesale channel during the same period in 2023.

Sales to customers in the United States were approximately 96% and 97% during the quarters ended March 31, 2024 and 2023, respectively, with the balance of sales being to customers primarily in Canada.

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.

## Market risk

As filed, 2,045 characters.

Our business is conducted principally in the United States. However, due to the MRC acquisition in 2023, the Company now has more exposure to fluctuations in foreign currencies. As a result, our financial results may be materially affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets.

#### Foreign Currency

In January 2023, the Company entered into a foreign currency hedging transaction to mitigate the risk of adverse changes in the USD/CAD exchange rate with respect to the pending acquisition of MRC. The Company entered into a forward contract to purchase CAD $25.0 million, as the Company anticipated providing additional working capital funding beyond the CAD $23.2 million purchase price for MRC. As the geographical scope of our business broadens, we may engage in additional foreign currency hedging transactions in the future.

#### Interest Rates

Our exposure to risk for changes in interest rates relates primarily to borrowings under the Amended Credit Agreement (which includes the Term Loans as well as our Line of Credit), and our investments in short-term financial instruments. As of March 31, 2024, the Company had $16,500 outstanding on the Term Loans and $0 under its Line of Credit.

Investments of our 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.

## Controls and procedures

As filed, 3,183 characters.

a. **Evaluation of disclosure controls and procedures.**

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "*Exchange Act*"), as of March 31, 2024 was completed. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer believe that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, including to ensure that information required to be disclosed by the Company is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

b. **Changes in Internal Control Over Financial Reporting**

There were no additional changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

c. **Inherent Limitations on the Effectiveness of Controls**

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

### PART II

### OTHER INFORMATION

## Risk factors

As filed, 659 characters.

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, 2023, filed with the SEC on March 29, 2024. 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, 2023. 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.

Filed May 14, 2024.
Source: SEC EDGAR, the filing index for accession 0001437749-24-016353. Last ingested by Listed: Oct 24, 2026, 15:09 ET. No prices; not investment advice.