Blueprint
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
OR
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission
File Number: 000-52369
FITLIFE BRANDS, INC.
(Exact
name of Registrant as specified in its charter)
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Nevada
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20-3464383
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(State
of Incorporation)
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(IRS
Employer Identification No.)
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5214 S. 136th Street, Omaha, NE 68137
(Address
of principal executive offices)
(402)
991-5618
(Registrant’s
telephone number)
Securities registered under Section 12(b) of the Exchange
Act:
None
Securities registered under Section 12(g) of the Exchange
Act:
Common Stock, $0.01 par value per share
(Title of Class)
Common Stock, $0.01 Par Value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes
[ ] No [X]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the
Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended,
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such a shorter period that the
registrant was required to submit such files). Yes [X]
No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company or emerging growth company. See definitions of “large
accelerated filer,” “accelerated filer,”
“smaller reporting company” and "emerging growth
company" in Rule 12b-2 of the Exchange Act.:
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Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non–Accelerated
filer
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☒
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Small
reporting company
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☒
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Emerging
growth company
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☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
State
the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked
price of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal
quarter: $2,999,790.
State
the number of shares outstanding of each of the registrant’s
classes of common stock, as of the latest practicable date: As of
March 21, 2019, there were 11,119,430 shares of common stock, $0.01
par value per share, issued and outstanding.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018 and 2017
TABLE OF CONTENTS
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CERTIFICATIONS
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Exhibit
31 – Certification pursuant to Rule 13a-14(a) and
15d-14(a)
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Exhibit
32 – Certification pursuant to 18 U.S.C 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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Forward Looking Statements — Cautionary Language
This Annual Report on Form 10-K (the “Annual Report”)
contains various “forward looking statements” within
the meaning of Section 21E of the Securities Exchange Act of 1934,
as amended, regarding future events or the future financial
performance of the Company that involve risks and uncertainties.
Certain statements included herein, including, without limitation,
statements related to anticipated cash flow sources and uses, and
words including but not limited to “anticipates,”
“believes,” “plans,” “expects,”
“future” and similar statements or expressions,
identify forward looking statements. Any forward-looking statements
herein are subject to certain risks and uncertainties in the
Company’s business, including but not limited to, reliance on
key customers and competition in its markets, market demand,
product performance, technological developments, maintenance of
relationships with key suppliers, difficulties of hiring or
retaining key personnel and any changes in current accounting
rules, all of which may be beyond the control of the Company. The
Company adopted, at management’s discretion, the most
conservative recognition of revenue based on the most astringent
guidelines of the SEC. Management will elect additional changes to
revenue recognition to comply with the most conservative SEC
recognition on a forward going accrual basis as the model is
replicated with other similar markets. The Company’s actual
results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors,
including those set forth herein.
This Annual Report, quarterly reports on Form 10-Q, current reports
on Form 8-K and other documents filed with the SEC include
additional factors, which could impact FitLife Brands, Inc.’s
business and financial performance. Moreover, FitLife Brands, Inc.
operates in a rapidly changing and competitive environment. New
risks emerge from time to time and it is not possible for
management to predict all such risks. Further, it is not possible
to assess the impact of all risks on FitLife Brands, Inc.’s
business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those
contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results. In
addition, FitLife Brands, Inc. disclaims any obligation to update
any forward-looking statements to reflect events or circumstances
that occur after the date of the report.
ITEM 1. BUSINESS
As used
in this Annual Report, “we,” “us,” “our,” “FitLife,” “FitLife Brands”
“Company” or
“our company”
refers to FitLife Brands, Inc. and all of its
subsidiaries.
Overview
FitLife Brands, Inc. is a national provider of
innovative and proprietary nutritional supplements for
health-conscious consumers marketed under the brand names NDS
Nutrition Products™ (www.ndsnutrition.com),
PMD™ (www.pmdsports.com),
SirenLabs™ (www.sirenlabs.com),
CoreActive™ (www.coreactivenutrition.com),
and Metis Nutrition™ (www.metisnutrition.com)
(together, “NDS
Products”). With the
consummation of the merger with iSatori, Inc.
(“iSatori”) on September 30, 2015, which became
effective on October 1, 2015, described below (the
“Merger”), the Company added three brands to its
product portfolio, including iSatori (www.isatori.com),
BioGenetic Laboratories, and Energize (together,
“iSatori
Products”). The NDS
Products are distributed 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 25,000 retail locations, which
include specialty, mass, and
online.
The Company was incorporated in the State of
Nevada on July 26, 2005. In October 2008, the Company acquired the
assets of NDS Nutritional Products, Inc., a Nebraska corporation,
and moved those assets into its wholly owned subsidiary NDS
Nutrition Products, Inc., a Florida corporation
(“NDS”). The Company’s NDS Products are
sold through NDS and the iSatori Products are sold through iSatori,
Inc., a Delaware corporation and a wholly owned subsidiary of the
Company.
On
September 30, 2015, the Company consummated the Merger contemplated
by the Agreement and Plan of Merger, dated May 18, 2015 (the
“Merger
Agreement”), among the Company, ISFL Merger Sub, Inc.,
a Delaware corporation and a wholly-owned subsidiary of the Company
(“Merger Sub”),
and iSatori, pursuant to which iSatori merged with and into Merger
Sub, with iSatori surviving as a wholly-owned subsidiary of the
Company. The Merger was approved by iSatori shareholders at a
special meeting held on September 29, 2015 and became effective on
October 1, 2015.
FitLife Brands is headquartered in Omaha,
Nebraska. For more information on the Company, please go to
http://www.fitlifebrands.com.
The Company’s common stock currently trades under the symbol
“FTLF” on the OTC:PINK market.
Recent Developments
Withdrawal of Former Series A Preferred, Series B Preferred and
Series C Preferred
On November 13, 2018, the Company filed Certificates of Withdrawal
with the Secretary of State of the State of Nevada for its (i)
Series A Convertible Preferred Stock, (ii) 10% Cumulative Perpetual
Series B Preferred Stock, and (iii) Series C Convertible Preferred
Stock, none of which were issued and outstanding, thereby
withdrawing each of the series of preferred stock and returning all
previously designated shares to their status as authorized
preferred stock available for issuance.
Creation of a New Series A Convertible Preferred Stock
On
November 13, 2018, the Company filed a new Certificate of
Designations, Preferences and Rights of the Series A Convertible
Preferred Stock (the “Certificate of Designations”)
with the Secretary of State of the State of Nevada, designating
1,000 shares of the Company’s authorized preferred stock as Series A
Convertible Preferred Stock, $0.01 par value (the
“Series A
Preferred”). Shares of the Series A Preferred have a
stated value of $1,000 per share (“Stated Value”), subject to
certain adjustments, and accrue dividends annually at a rate of
12%, which dividends compound monthly and shall be paid quarterly,
at the Company’s election, in either cash or shall accrue and
increase the Stated Value of the Series A Preferred. Shares of the
Series A Preferred rank senior to the Company’s common
stock.
Each
share of the Series A Preferred has a liquidation preference equal
to the Stated Value plus all accrued and unpaid dividends (the
“Liquidation
Preference”), and is convertible into that number of
shares of the Company’s common stock equal to the Liquidation
Preference divided by $0.46 (the “Conversion Shares”). Holders of
Series A Preferred may elect to convert shares of Series A
Preferred into Conversion Shares at any time. The Company, at its
sole option, may choose to redeem all or a portion of Series A
Preferred at any time for 115% of the
Liquidation Preference per share (the “Redemption
Price”);
provided,
however, in the event of a
Change of Control (as such term is defined in the Certificate of
Designations), the Company shall be required to redeem all issued
and outstanding shares of Series A Preferred for the Redemption
Price.
Holders of Series A Preferred have the right to
vote, on an as-converted basis, with the holders of the
Company’s common stock on any matter presented to the
Company’s stockholders for their action or consideration. So
long as any shares of Series A Preferred remain outstanding,
holders of the Series A Preferred have the right to elect one
director to the Company’s Board of Directors
(“Board”) (the “Series A
Director”);
provided,
however, so long as Dayton Judd
remains on the Company’s Board, he shall be deemed to be the
Series A Director. Furthermore, so long as any shares of Series A
Preferred remain outstanding, the Company may not, without the
affirmative vote or consent of at least 50% of the shares of issued
and outstanding Series A Preferred on such date, voting as a
separate class, (i) authorize, create, issue or alter any class of
debt or equity securities ranking pari passu or senior to the
Series A Preferred; (ii) amend provisions of the Series A
Preferred; (iii) repurchase, redeem or pay dividends on any class
of junior securities, subject to certain exceptions; (iv) amend the
Company’s Articles of Incorporation or Bylaws in any way that
will have a material adverse effect on the rights of the Series A
Preferred; (v) after February 16, 2019, increase the size of the
Board to more than five members; (vi) take any action that would
constitute a Fundamental Transaction (as such term is defined in
the Certificate of Designations); or (vii) incur any additional
indebtedness other than through the Company’s Merchant
Agreement, any other line of credit with Compass or under any
similar replacement facility.
In
addition, holders of the Series A Preferred shall have certain
piggyback registration rights for the first two years following
November 13, 2018, and certain demand registration rights
thereafter, as more specifically set forth in the Certificate of
Designations.
Series A Preferred Financing
On
November 13, 2018, the Company entered into subscription agreements
(the “Subscription
Agreements”) with certain accredited investors (each,
a “Purchaser”
and together, the “Purchasers”), pursuant to which
the Company offered and sold to the Purchasers an aggregate of 600
units (“Units”)
for $1,000 per Unit, with each Unit consisting of one share of
Series A Preferred and a warrant to purchase that number of shares
of Company common stock equal to 30% of the shares of Company
common stock issuable upon conversion of the Series A Preferred
purchased by the Purchaser (“Warrant”) (the
“Offering”).
The Warrants shall expire five years from the date of issuance, and
are exercisable at a price of $0.46 per share. Warrants to purchase
an aggregate of 391,304 shares of Company common stock were issued
in the Offering.
The Offering resulted in gross proceeds to the Company of $600,000.
Purchasers in the Offering included Dayton Judd, the
Company’s Chairman and Chief Executive Officer, and Grant
Dawson, a director. A portion of the Offering was also sold to an
unaffiliated third party.
Termination of Merchant Agreement
In
December 2017, the Company, through its wholly-owned subsidiaries,
NDS and iSatori (together, the “Subsidiaries”), entered into a
Merchant Agreement (the “Merchant Agreement”) with Compass
Bank, d/b/a Commercial Billing Service (“Compass”). Under the terms of the
Merchant Agreement, subject to the satisfaction of certain
conditions to funding, the Subsidiaries agreed to sell to Compass,
and Compass agreed to purchase from the Subsidiaries, certain
accounts owing from customers of such Subsidiaries, including
GNC.
On
December 4, 2018, the Company received a notice of termination (the
“Termination
Notice”) of the Merchant Agreement. Pursuant to the
Termination Notice, Compass indicated it would discontinue
purchasing accounts from the Subsidiaries as of February 26, 2019.
Under the terms of the Termination Notice, the Merchant Agreement
would remain in full effect for all transactions occurring on or
prior to February 26, 2019, and pursuant to terms in the Merchant
Agreement, all security interests would continue until all
obligations to Compass under the Merchant Agreement were paid in
full.
Subsequent to the
receipt of the notice of termination and as of December 31, 2018,
the Company has settled all outstanding obligations to Compass.
Furthermore, no additional transactions occurred with Compass under
this agreement subsequent to December 31, 2018 and up to the
termination of the agreement on February 26, 2019.
Entry into New Line of Credit
On
December 26, 2018, the Company issued a line of credit promissory
note to Sudbury Capital Fund, LP (“Sudbury”) in the principal amount
of $600,000 (the “Sudbury
Note”), with an initial advance to the Company in the
amount of $300,000. In addition, on December 26, 2018, the Company
also issued a promissory note to Dayton Judd, in the principal
amount of $200,000 (the “Judd Note”) (together with the
Sudbury Note, the “Notes”). All amounts due and payable
under the terms of the Notes are guaranteed by the
Subsidiaries.
The
Notes mature on the earlier to occur of a Change in Control of the
Company, as defined in the Notes, or December 31, 2019, and require
monthly principal and interest payments beginning April 1, 2019,
with a final payment of unpaid principal and interest due December
31, 2019. The Notes bear interest at a rate of 9.0% per annum.
Interest due under the terms of the Notes may be paid in cash or,
up to and including March 31, 2019, can be accrued and added to the
outstanding principal and accrued interest due and payable under
the terms of the Notes.
Proceeds from the
sale of the Notes, along with existing cash balances, were used to
retire all outstanding indebtedness under the terms of the Merchant
Agreement, totaling approximately $590,000 at December 26,
2018.
Dayton
Judd, the Company’s Chief Executive Officer and Chairman of
the Board of Directors of the Company, is affiliated with Sudbury.
The Notes were approved by the independent members of the Board of
Directors.
Industry Overview
We compete principally in the nutrition industry. The Nutrition
Business Journal categorizes the industry in the following
segments:
●
Natural
& Organic Foods (products such as cereals, milk, non-dairy
beverages and frozen meals);
●
Functional
Foods (products with added ingredients or fortification
specifically for health or performance purposes);
●
Natural
& Organic Personal Care and Household Products;
and
●
Supplements
(products focused on sports nutrition and weight
management).
Management believes that the following factors drive growth in the
nutrition industry:
●
The
general public’s awareness and understanding of the
connection between diet and health;
●
The
aging population in the Company’s markets who tend to use
more nutritional supplements as they age;
●
Increasing
healthcare costs and the consequential trend toward preventative
medicine and non-traditional medicines; and
●
Product
introductions in response to new scientific studies.
Our Products
The
Company currently focuses its sales and marketing efforts on its
full line of sports, weight loss and general nutrition products
that are currently marketed and sold both nationally and
internationally. The Company currently markets approximately
67 different NDS Products to more than 1,000 GNC franchise
locations located in the United States, as well as to over 1,000
additional franchise locations in more than 26 countries, both of
which are distributed primarily through GNC’s distribution
system. In addition, as a result of the launch of Metis Nutrition,
we distribute products through more than 3,000 corporate GNC stores
in the United States, and with the completion of the Merger, we
sell iSatori Products through more than 25,000 specialty, mass, and
online retail locations. A complete product list is available on
our websites at fitlifebrands.com, ndsnutrition.com, pmdsports.com, sirenlabs.com, coreactivenutrition.com,
metisnutrition.com,
and isatori.com.
NDS Products
The
Company’s NDS Products include:
●
NDS
– Innovative weight loss, general health and sports nutrition
supplements – examples include Censor, Cardio Cuts and
LipoRUSH XT;
●
PMD
– Precision sports nutrition formulations for professional
muscular development – examples include Amplify XL, Pump Fuel
and Flex Stack;
●
Siren
Labs – Weight loss and sports nutrition performance enhancing
supplements for fitness enthusiasts – examples include
Isolate, Ultrakarbs and NeuroLean; and Vaso-Vol;
●
Metis
Nutrition – Multifaceted men’s health and weight loss
formulations, including JXT5 and PyroStim.
NDS
Products also include innovative diet, health and sports nutrition
supplements and related products marketed through its Core Active
Nutrition product line (“Core Active Nutrition
Products”). Core Active Nutrition Products
provide essential support for accelerated fitness and nutrition
goals, and are sold directly to athletic facilities, gyms, and
independent retailers nationwide.
iSatori
Products
iSatori
Products include scientifically engineered nutritional products
that are sold online as well as through multiple retail partners.
iSatori Products
include:
●
Sports
Nutritionals: Products including Bio-Active Peptides
(Bio-GroTM), advanced creatine
powder (Creatine A5X), and a natural testosterone booster
(Isa-TestGFTM);
●
Energy
& Sports Drink Products: iSatori’s energy supplement,
Energize, whose primary purpose is to safely “boost
energy” through a combination of time-released caffeine,
vitamins, and herbal formulations;
●
Meal
Replacements: protein-based products related to health nutrition
and performance, including iSatori’s 100% Bio-Active Whey, a
premium protein blend with Bio-Active Peptides; and
●
Weight
Loss Products: iSatori’s weight loss products are principally
sold under the BioGenetic Laboratories brand, and include
Forskohlin Lean & ToneTM and hCG
Alternative, as well as iSatori’s newest thermogenic,
LIPO-DREXTM with C3G nutrient
partitioning technology.
Manufacturing, Sources and Availability of Raw
Materials
All of
the Company’s products are manufactured by FDA-regulated
contract manufacturers within the United States and Canada. Each
contract manufacturer is required by the Company to abide by
current Good Manufacturing Practices (“cGMPs”) to ensure quality and
consistency, and to manufacture its products according to the
Company’s strict specifications, and nearly all our contract
manufacturers are certified through a governing body such as the
NPA (“Natural Products
Association”) or NSF International. In most cases,
contract manufacturers purchase the raw materials based on the
Company’s specifications; however, from time to time, the
Company will license particular raw material ingredients and supply
its own source to the manufacturer. Once produced, in addition
to in-house testing performed by the contract manufacturer, the
Company may also perform independent analysis and testing. The
contract manufacturer either ships the finished product to one of
our fulfillment centers, or directly to our distributors. The
Company has implemented vendor qualification programs for all of
its suppliers and manufacturers, including analytical testing of
purchased products. As part of the vendor program, the Company also
periodically inspects vendors’ facilities to monitor quality
control and assurance procedures.
Product
Reformulations and New Product Identification
From
time to time we reformulate existing products to address market
developments and trends, and to respond to customer
requests. We also continually expand our product line through
the development of new products. New product ideas are derived from
a number of sources, including trade publications, scientific and
health journals, consultants, distributors, and other third
parties. Prior to reformulating existing products or introducing
new products, we investigate product formulations as they relate to
regulatory compliance and other issues. We introduced a total of 18
new products during the year ended December 31, 2018, which
included 6 completely new products, and 12 product reformulations
and flavor extensions. We anticipate launching a similar number of
new and reformulated products during 2019 across all
brands.
Management
continually assesses and analyzes developing market trends to
detect and proactively address what they believe are areas of unmet
or growing demand that represent an opportunity for the Company
and, where deemed appropriate, attempt to introduce new products
and/or packaging solutions in direct response to meet that
demand.
Sales, Marketing and Distribution
NDS Products
NDS Products are
sold through more than 1,000 GNC franchise locations located
throughout the United States. The Company also currently
distributes NDS Products to over 1,000 GNC international franchise
locations in more than 26 foreign countries. On May 1, 2014, the
Company transitioned the majority of its distribution of NDS
Products to GNC’s centralized distribution platform for all
NDS Products, excluding protein products, which transitioned in
mid-September 2014. Prior to the change, the majority of the
Company’s revenue was realized upon direct shipment of NDS
Products to individual franchise locations. For the year ended
December 31, 2018, the vast majority of NDS Product sales were
through GNC’s centralized distribution
platform.
Our
sales and marketing efforts are designed to expand sales of NDS
Products to additional GNC franchise locations both domestically
and internationally. In addition, we are in the process of
relaunching our Core Active brand as a new online-exclusive brand.
The GNC domestic franchise market remains a strong business and the
core of our operations. Management is committed to continue to work
collaboratively with the franchisees to build on our established
track records of growth and innovation.
iSatori Products
iSatori
Products are distributed directly to consumers through its
websites, as well as through wholesalers, specialty, online-only,
grocery, convenience, drug and mass-market distribution channels.
iSatori products are currently sold in over 25,000 retail
locations.
In some
cases, iSatori utilizes independent brokers, who work in
conjunction with iSatori’s experienced sales employees and
management to oversee the grocery, drug and mass market channels.
iSatori sells its products to mass-market merchandisers either
directly or through distributors of nutritional supplement
products. In addition to the Company’s own online
distribution direct to consumers, major iSatori customers include
BodyBuilding.com, CVS, Europa Sports, GNC, Rite Aid, Vitamin
Shoppe, Vitamin World, Walgreens and Wal-Mart.
iSatori’s
core strategy is to build and strengthen brands among consumers
seeking nutritional supplement products with a reputation for
quality and innovation. iSatori utilizes social media campaigns,
coupons, radio, and online advertising, plus cooperative and other
incentive programs, to build consumer awareness and generate trial
and repeat purchases to drive sales revenue. Our marketing team
regularly reviews the media mix for its effectiveness in creating
consumer demand and the highest return on investment
dollars.
Product Returns
We
currently have a 30-day product return policy for NDS Products,
which allows for a 100% sales price refund, less a 20% restocking
fee, for the return of unopened and undamaged products purchased
from us online through one of our websites. Product sold to
GNC may be returned from store shelves or the distribution center
in the event the product is damaged, short dated, expired or
recalled. GNC maintains a customer satisfaction program that
allows customers to return product to the store for credit or
refund. Subject to certain terms and restrictions, GNC may require
reimbursement from vendors for unsaleable returned product through
either direct payment or credit against a future invoice. We also
support a product return policy for iSatori Products, whereby
customers can return product for credit or refund. Product returns
can and do occur from time to time, and can be
material.
Competition
The
nutrition industry is highly competitive, and the Company has many
competitors that sell products similar to the Company’s
products. Many of the Company’s competitors have
significantly greater financial and human resources than our
own. The Company seeks to differentiate its products and
marketing from its competitors based on product quality, benefits,
and functional ingredients. Patent and trademark applications that
cover new formulas and embody new technologies are, and will be,
pursued whenever possible. While we cannot assure that such
measures will block competitive products, we believe our continued
emphasis on innovation and new product development targeted at the
needs of the consumer will enable the Company to effectively
compete in the marketplace.
Regulatory Matters
Our
business is subject to varying degrees of regulation by a number of
government authorities in the U.S., including the Federal Drug
Administration (“FDA”), the Federal Trade
Commission (“FTC”), the Consumer Product
Safety Commission, the U.S. Department of Agriculture, and the
Environmental Protection Agency. Various agencies of the states and
localities in which we operate and in which our products are sold
also regulate our business, such as the California Department of
Health Services, Food and Drug Branch. The areas of our business
that these and other authorities regulate include, among
others:
●
product
claims and advertising;
●
product
ingredients; and
●
how we
manufacture, package, distribute, import, export, sell, and store
our products.
The
FDA, in particular, regulates the formulation, manufacturing,
packaging, storage, labeling, promotion, distribution and sale of
vitamins and other nutritional supplements in the U.S., while the
FTC regulates marketing and advertising claims. In August 2007, a
new rule issued by the FDA went into effect requiring companies
that manufacture, package, label, distribute or hold nutritional
supplements to meet cGMPs to ensure such products are of the
quality specified and are properly packaged and labeled. We are
committed to meeting or exceeding the standards set by the FDA and
believe we are currently operating within the FDA mandated
cGMPs.
The FDA
also regulates the labeling and marketing of dietary supplements
and nutritional products, including the following:
●
the
identification of dietary supplements or nutritional products and
their nutrition and ingredient labeling;
●
requirements
related to the wording used for claims about nutrients, health
claims, and statements of nutritional support;
●
labeling
requirements for dietary supplements or nutritional products for
which “high potency” and “antioxidant”
claims are made;
●
notification
procedures for statements on dietary supplements or nutritional
products; and
●
premarket
notification procedures for new dietary ingredients in nutritional
supplements.
The
Dietary Supplement Health and Education Act of 1994
(“DSHEA”)
revised the provisions of the Federal Food, Drug and Cosmetic Act
(“FDCA”)
concerning the composition and labeling of dietary supplements, and
defined dietary supplements to include vitamins, minerals, herbs,
amino acids and other dietary substances used to supplement diets.
DSHEA generally provides a regulatory framework to help ensure
safe, quality dietary supplements and the dissemination of accurate
information about such products. The FDA is generally prohibited
from regulating active ingredients in dietary supplements as drugs
unless product claims, such as claims that a product may heal,
mitigate, cure or prevent an illness, disease or malady, trigger
drug status.
DSHEA
also permits statements of nutritional support to be included in
labeling for nutritional supplements without FDA premarket
approval. These statements must be submitted to the FDA within 30
days of marketing and must bear a label disclosure that includes
the following: “This statement has not been evaluated by the
FDA. This product is not intended to diagnose, treat, cure, or
prevent any disease.” These statements may describe a benefit
related to a nutrient deficiency disease, the role of a nutrient or
nutritional ingredient intended to affect the structure or function
in humans, the documented mechanism by which a nutrient or dietary
ingredient acts to maintain such structure or function, or the
general well-being from consumption of a nutrient or dietary
ingredient, but may not expressly or implicitly represent that a
nutritional supplement will diagnose, cure, mitigate, treat or
prevent a disease. An entity that uses a statement of nutritional
support in labeling must possess scientific evidence substantiating
that the statement is truthful and not misleading. If the FDA
determines that a particular statement of nutritional support is an
unacceptable drug claim or an unauthorized version of a disease
claim for a food product, or if the FDA determines that a
particular claim is not adequately supported by existing scientific
data or is false or misleading, we will be prevented from using the
claim.
In
addition, DSHEA provides that so-called “third-party
literature,” for example a reprint of a peer-reviewed
scientific publication linking a particular nutritional ingredient
with health benefits, may be used in connection with the sale of a
nutritional supplement to consumers without the literature being
subject to regulation as labeling. Such literature must not be
false or misleading; the literature may not promote a particular
manufacturer or brand of nutritional supplement; the literature
must present a balanced view of the available scientific
information on the nutritional supplement; if displayed in an
establishment, the literature must be physically separate from the
nutritional supplement; and the literature may not have appended to
it any information by sticker or any other method. If the
literature fails to satisfy each of these requirements, we may be
prevented from disseminating it with our products, and any
dissemination could subject our products to regulatory action as an
illegal drug. Moreover, any written or verbal representation by us
that would associate a nutrient in a product that we sell with an
effect on a disease will be deemed evidence of intent to sell the
product as an unapproved new drug, a violation of the
FDCA.
In December 2006,
the Dietary Supplement and Nonprescription Drug Consumer Protection
Act (“DSNDCPA”)
was passed, which further revised the provisions of the FDCA. Under
the act, manufacturers, packers or distributors whose
name appears on the product label of a dietary
supplement or nonprescription drug are required to include
contact information on the product label for consumers to use in
reporting adverse events associated with the product’s use
and are required to notify the FDA of any serious adverse
event report within 15 business days of receiving such
report. Events reported to the FDA would not be considered an
admission from a company that its product caused or contributed to
the reported event. We are committed to meeting or exceeding the
requirements of the DSNDCPA.
We are
also subject to a variety of other regulations in the U.S.,
including those relating to bioterrorism, taxes, labor and
employment, import and export, the environment, and intellectual
property. All of these regulations require significant financial
and operational resources to ensure compliance, and we cannot
assure that we will always be in compliance despite our best
efforts to do so.
Our
operations outside the U.S. are similarly regulated by various
agencies and entities in the countries in which we operate and in
which our products are sold. The regulations of these countries may
conflict with those in the U.S. and may vary from country to
country. The sale of our products in certain European countries is
subject to the rules and regulations of the European Union, which
may be interpreted differently among the countries within the
European Union. In other markets outside the U.S., we may be
required to obtain approvals, licenses or certifications from a
country’s ministry of health or comparable agency before we
begin operations or the marketing of products in that country.
Approvals or licenses may be conditioned on the reformulation of
our products for a particular market or may be unavailable for
certain products or product ingredients. These regulations may
limit our ability to enter certain markets outside the U.S. Similar
to the costs of regulatory compliance in the U.S., foreign
regulations require significant financial and operational resources
to ensure compliance, and we cannot assure that we will always be
in compliance despite our best efforts to do so. Our failure to
maintain regulatory compliance within and outside the U.S. could
impact our ability to sell our products, and thus, materially
impact our financial position and results of
operations.
Patents, Trademarks and Proprietary Rights
The
Company regards intellectual property, including its trademarks,
service marks, website URLs (domains) and other
proprietary rights, as valuable assets and part of its revered
brand equity. The Company believes that protecting such
intellectual property is crucial to its business strategy. The
Company pursues registration of the registrable trademarks, service
marks and patents, associated with its key products in the United
States, Canada, Europe and other places it distributes its
products.
The
Company formulates its products using proprietary ingredient
formulations, flavorings and delivery systems. To further protect
its product formulations and flavors, the Company enters into
agreements with manufacturers that provide exclusivity to certain
products formulations and delivery technologies. When appropriate,
the Company will seek to protect its research and development
efforts by filing patent applications for proprietary product
technologies or ingredient combinations. We have abandoned or
not pursued efforts to register certain other patents and marks
identifying other items in our product line for various reasons,
including the inability of some names to qualify for registration
or patent applications to qualify for patent protection, and due to
our abandonment of certain of such products. All trademark
registrations are protected for a period of ten years and then are
renewable thereafter if still in use.
Employees
We had 26 full-time
employees as of December 31, 2018. In addition, the Company retains
consultants for certain services on an as needed basis. We consider
our employee relations to be good.
Environmental Regulation
Our
business does not require us to comply with any particular
environmental regulations.
Available Information
As a public company, we are required to file our
annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements on Schedule 14A and
other information (including any amendments) with the Securities
and Exchange Commission (the “SEC”). The SEC maintains an Internet site that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC. You can find our SEC filings at the SEC’s website
at http://www.sec.gov.
Our Internet address is http://www.fitlifebrands.com.
Information contained on our website is not part of this Annual
Report. Our SEC filings (including any amendments) will be made
available free of charge on http://www.fitlifebrands.com,
as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
An investment in our securities involves a high degree of risk. You
should carefully consider the following information about these
risks, together with the other information contained in this Annual
Report, before investing in our securities. If any of the events
anticipated by the risks described below occur, our results of
operations and financial condition could be adversely affected,
which could result in a decline in the market price of our
securities, causing you to lose all or part of your
investment.
The Company was profitable during the year ended December 31, 2018.
However, we may not be able to achieve sustained
profitability. Our failure to sustain profitability or
effectively manage growth could result in continued net losses, and
therefore negatively affect our financial condition.
To achieve continual and consistent profitable operations, we must
maintain growth in revenue from our products. In the event of
any decrease in sales, if we are not able to maintain growth, or if
we are unable to effectively manage our growth, we may not be able
to sustain profitability, and may incur net losses in the future,
and those net losses could be material. In the event we
achieves net losses, our financial condition could be negatively
affected, and such affect could be material.
We are currently dependent on sales to GNC for a substantial
portion of our total sales.
Sales
to GNC’s centralized distribution platform, including
indirect distribution of product to domestic and international
franchisees, accounted for approximately 77% of our total sales for
the year ended December 31, 2018. GNC’s franchisees are
not required to purchase product from us. In the event GNC
ceases purchasing products from us, or otherwise reduces their
purchases, our total revenue will be negatively impacted, and such
impact will be material. Moreover, the transition to GNC’s
centralized distribution system has had the effect of concentrating
the majority of our accounts receivable with a single
payor. Prior to the transition, we collected receivables
directly from over 300 franchisees on an annual basis representing
more than 1,000 store locations. Although the acquisition of
iSatori has reduced the percentage of total accounts receivable
attributable to GNC, we anticipate that GNC will continue to
represent a substantial portion of all accounts receivable for the
foreseeable future. In the event that GNC stops paying or
there are other issues affecting our relationship with GNC, our
inability to collect on our outstanding accounts receivable or
generate adequate revenue would have a material adverse impact on
our financial position and ability to support continued
operations.
Our ability to materially increase sales is largely dependent on
the ability to increase sales of product to GNC, as well as to
increase sales of our iSatori Products. We may invest
significant amounts in these expansions with little
success.
We
currently are focusing our marketing efforts on increasing the sale
of products to GNC, both domestically and internationally, as well
as increasing the number of retailers selling iSatori
Products. We may not be able to successfully increase sales to
GNC or to contract with additional distributors or retailers to
market and sell iSatori Products. In addition, although we
continued efforts to expand international distribution for our
products in the year ended December 31, 2018, we cannot assure that
any further efforts to sell our products outside the United States
will result in material increased revenue. We may need to overcome
significant regulatory and legal barriers in order to continue to
sell our products internationally, and we cannot give assurances as
to whether we will be able to comply with such regulatory or legal
requirements.
We are affected by extensive laws, governmental regulations,
administrative determinations, court decisions and similar
constraints, which can make compliance costly and subject us to
enforcement actions by governmental agencies.
The
formulation, manufacturing, packaging, labeling, holding, storage,
distribution, advertising and sale of our products are affected by
extensive laws, governmental regulations and policies,
administrative determinations, court decisions and similar
constraints at the federal, state and local levels, both within the
United States and in any country where we conduct business. There
can be no assurance that we or our independent distributors will be
in compliance with all of these regulations. A failure by us or our
distributors to comply with these laws and regulations could lead
to governmental investigations, civil and criminal prosecutions,
administrative hearings and court proceedings, civil and criminal
penalties, injunctions against product sales or advertising, civil
and criminal liability for the Company and/or its principals, bad
publicity, and tort claims arising out of governmental or judicial
findings of fact or conclusions of law adverse to the Company or
its principals. In addition, the adoption of new regulations and
policies or changes in the interpretations of existing regulations
and policies may result in significant new compliance costs or
discontinuation of product sales, and may adversely affect the
marketing of our products, resulting in decreases in
revenue.
We are currently dependent on a limited number of independent
suppliers and manufacturers of our products, which may affect
our ability to deliver our products in a timely manner. If we are
not able to ensure timely product deliveries, potential
distributors and customers may not order our products, and our
revenue may decrease.
We rely
on a limited number of third parties to supply and manufacture our
products. Our products are manufactured on a purchase order basis
only, and manufacturers can terminate their relationships with us
at will. These third-party manufacturers may be unable to
satisfy our supply requirements, manufacture our products on a
timely basis, fill and ship our orders promptly, provide services
at competitive costs, or offer reliable products and services. The
failure to meet any of these critical needs would delay or reduce
product shipment and adversely affect our revenue, as well as
jeopardize our relationships with our distributors and customers.
In the event any of our third-party manufacturers were to become
unable or unwilling to continue to provide us with products in
required volumes and at suitable quality levels, we would be
required to identify and obtain acceptable replacement
manufacturing sources. There is no assurance that we would be able
to obtain alternative manufacturing sources on a timely basis.
Additionally, our third-party manufacturers source the majority of
the raw materials for our products, and if we were to use
alternative manufacturers we may not be able to duplicate the exact
taste and consistency profile of the product from the original
manufacturer. An extended interruption in the supply of our
products would likely result in decreased product sales and our
revenue would likely decline. We believe that we can meet our
current supply and manufacturing requirements with our current
suppliers and manufacturers or with available substitute suppliers
and manufacturers. Historically, we have not experienced any
material delays or disruptions to our business caused by
difficulties in obtaining our products from
manufacturers.
We are dependent on our third-party manufacturers to supply our
products in the compositions we require, and we do not
independently analyze our products. Any errors in our product
manufacturing could result in product recalls, significant legal
exposure, and reduced revenue and the loss of
distributors.
Although we require
that our manufacturers verify the accuracy of the contents of our
products, we do not have the expertise or personnel to monitor the
production of products by these third parties. We rely exclusively,
without independent verification, on certificates of analysis
regarding product content provided by our third-party suppliers and
limited safety testing by them. We cannot be assured that these
outside manufacturers will continue to reliably supply products to
us in the compositions we require. Errors in the manufacture of our
products could result in product recalls, significant legal
exposure, adverse publicity, decreased revenue, and loss of
distributors and endorsers.
We face significant competition from existing suppliers of products
similar to ours. If we are not able to compete with these companies
effectively, we may not be able to maintain
profitability.
We face
intense competition from numerous resellers, manufacturers and
wholesalers of protein shakes and nutritional supplements similar
to ours, including retail, online and mail-order
providers. Many of our competitors have longer operating
histories, more-established brands in the marketplace, revenue
significantly greater than ours and better access to capital than
we have. We expect that these competitors may use their
resources to engage in various business activities that could
result in reduced sales of our products. Companies with greater
capital and research capabilities could re-formulate existing
products or formulate new products that could gain wide marketplace
acceptance, which could have a negative effect on our future sales.
In addition, aggressive advertising and promotion by our
competitors may require us to compete by lowering prices
because we do not have the resources to engage in marketing
campaigns against these competitors, and the economic viability of
our operations likely would be diminished.
Adverse publicity associated with our products, ingredients, or
those of similar companies, could adversely affect our sales and
revenue.
Our
customers’ perception of the safety and quality of our
products or even similar products distributed by others can be
significantly influenced by national media attention, publicized
scientific research or findings, product liability claims, and
other publicity concerning our products or similar products
distributed by others. Adverse publicity, whether or not accurate,
that associates consumption of our products or any similar products
with illness or other adverse effects, will likely diminish the
public’s perception of our products. Claims that any products
are ineffective, inappropriately labeled or have inaccurate
instructions as to their use, could have a material adverse effect
on the market demand for our products, including reducing our sales
and revenue.
The efficiency of nutritional supplement products is supported by
limited conclusive clinical studies, which could result in less
market acceptance of these products and lower revenue or lower
growth rates in revenue.
Our
nutritional supplement products are made from various ingredients,
including vitamins, minerals, amino acids, herbs, botanicals,
fruits, berries, and other substances for which there is a long
history of human consumption. However, there is little long-term
experience with human consumption of certain product ingredients or
combinations of ingredients in concentrated form. Although we
believe all of our products fall within the generally known safe
limits for daily doses of each ingredient contained within them,
nutrition science is imperfect. Moreover, some people have peculiar
sensitivities or reactions to nutrients commonly found in certain
foods, and may have similar sensitivities or reactions to
nutrients contained in our products. Furthermore, nutrition science
is subject to change based on new research. New scientific evidence
may disprove the efficacy of our products or prove our
products to have effects not previously known. We could be
adversely affected by studies that may assert that our products are
ineffective or harmful to consumers, or if adverse effects are
associated with a competitor’s similar products.
Our products may not meet health and safety standards or could
become contaminated.
We do
not have control over all of the third parties involved in the
manufacturing of our products and their compliance
with government health and safety standards. Even if
our products meet these standards, they could otherwise become
contaminated. A failure to meet these standards or contamination
could occur in our operations or those of our distributors or
suppliers. This could result in expensive production interruptions,
recalls and liability claims. Moreover, negative publicity could be
generated from false, unfounded or nominal liability claims or
limited recalls. Any of these failures or occurrences could
negatively affect our business and financial
performance.
The sale of our products involves product liability and related
risks that could expose us to significant insurance and loss
expense.
We face
an inherent risk of exposure to product liability claims if the use
of our products results in, or is believed to have resulted in,
illness or injury. Most of our products contain combinations of
ingredients, and there is little long-term experience with the
effect of these combinations. In addition, interactions of these
products with other products, prescription medicines and
over-the-counter drugs have not been fully explored or understood
and may have unintended consequences. Although our third-party
manufacturers perform tests in connection with the
formulations of our products, these tests are not designed to
evaluate the inherent safety of our products.
Although we
maintain product liability insurance, it may not be sufficient
to cover all product liability claims, and such claims that may
arise could have a material adverse effect on our business. The
successful assertion or settlement of an uninsured claim, a
significant number of insured claims or a claim exceeding the
limits of our insurance coverage would harm us by adding further
costs to our business and by diverting the attention of our senior
management from the operation of our business. Even if we
successfully defend a liability claim, the uninsured litigation
costs and adverse publicity may be harmful to our
business.
Any
product liability claim may increase our costs and adversely
affect our revenue and operating income. Moreover, liability claims
arising from a serious adverse event may increase our costs
through higher insurance premiums and deductibles, and
may make it more difficult to secure adequate insurance
coverage in the future. In addition, our product liability
insurance may fail to cover future product liability claims,
which, if adversely determined, could subject us to substantial
monetary damages.
If the products we sell do not have the healthful effects intended,
our business may suffer.
In
general, our products sold consist of nutritional supplements that
are classified in the United States as “dietary
supplements,” which do not currently require approval from
the FDA or other regulatory agencies prior to sale. Although
many of the ingredients in such products are vitamins, minerals,
herbs and other substances for which there is a long history of
human consumption, they contain innovative ingredients or
combinations of ingredients. Although we believe all of such
products and the combinations of ingredients in them are safe when
taken as directed by us, there is little long-term experience with
human or other animal consumption of certain of these ingredients
or combinations thereof in concentrated form. The products
could have certain side effects if not taken as directed or if
taken by a consumer that has certain medical
conditions. Furthermore, there can be no assurance that any of
the products, even when used as directed, will have the effects
intended or will not have harmful side
effects.
A slower growth rate in the nutritional supplement industry could
lessen our sales and make it more difficult for us to sustain
consistent growth.
The
nutritional supplement industry has been growing at a strong pace
over the past ten years, despite continued negative impacts of
popular supplements like Echinacea and ephedra on the supplement
market. However, any reported medical concerns with respect to
ingredients commonly used in nutritional supplements could
negatively impact the demand for our products. Additionally,
low-carb products, affected liquid meal replacements and similar
competing products addressing changing consumer tastes and
preferences could affect the market for certain categories of
supplements. All these factors could have a negative impact on
our sales growth.
Compliance with changing corporate governance regulations and
public disclosures may result in additional risks and
exposures.
Changing laws,
regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002 and new
regulations from the SEC, have created uncertainty for public
companies such as ours. These laws, regulations, and standards are
subject to varying interpretations in many cases and as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. As a result, our efforts to comply with
evolving laws, regulations, and standards have resulted in, and are
likely to continue to result in, increased expense and significant
management time and attention.
Loss of key personnel could impair our ability to
operate.
Our
success depends on hiring, retaining and integrating senior
management and skilled employees. We are currently dependent on
certain current key employees, who are vital to our ability to grow
our business and maintain profitability. As with all personal
service providers, our officers can terminate their relationship
with us at will. Our inability to retain these individuals
may result in our reduced ability to operate our
business.
A limited trading market currently exists for our securities, and
we cannot assure you that an active market will ever develop, or if
developed, will be sustained.
There is currently
a limited trading market for our securities on the OTC:PINK
marketplace. An active trading market for our common stock may
not develop. Consequently, we cannot assure you when and if an
active-trading market in our common stock will be established, or
whether any such market will be sustained or sufficiently liquid to
enable holders of shares of our common stock to liquidate their
investment in our company. If an active public market should
develop in the future, the sale of unregistered and restricted
securities by current shareholders may have a substantial impact on
any such market.
The price of our securities could be subject to wide fluctuations
and your investment could decline in value.
The
market price of the securities of a company such as ours with
little name recognition in the financial community and without
significant revenue can be subject to wide price swings. For
example, the adjusted closing price of our common stock has ranged
from a high of $0.55 to a low of $0.23 during the period commencing
January 1, 2018 and ending December 31, 2018. The market price
of our securities may be subject to wide changes in response to
quarterly variations in operating results, announcements of new
products by us or our competitors, reports by securities analysts,
volume trading, or other events or factors. In addition, the
financial markets have experienced significant price and volume
fluctuations for a number of reasons, including the failure of
certain companies to meet market expectations. These broad market
price swings, or any industry-specific market fluctuations, may
adversely affect the market price of our securities.
Companies that have
experienced volatility in the market price of their stock have been
the subject of securities class action litigation. If we were to
become the subject of securities class action litigation, it could
result in substantial costs and a significant diversion of our
management’s attention and resources.
Because
our common stock may be classified as a “penny stock,”
trading may be limited, and the share price could decline because
broker-dealers would be required to provide their customers with
disclosure documents prior to allowing them to participate in
transactions involving the common stock. These disclosure
requirements are burdensome to broker-dealers and may discourage
them from allowing their customers to participate in transactions
involving our common stock.
We may issue preferred stock with rights senior to the common
stock.
Our Articles of
Incorporation authorize the issuance of up to 10.0 million shares
of preferred stock in the aggregate. Currently, 1,000 shares of
Series A Preferred Stock, par value $0.01 per share, are authorized
(the “Series A
Preferred”) and, therefore, could be issued without
shareholder approval. Currently, there are 600 shares of Series A
Preferred issued and outstanding. We have no existing plans to
designate or issue any shares of preferred stock, although no
assurances can be given. However, the rights and preferences of any
class or series of preferred stock, were we to designate or issue
additional shares of preferred stock, would be established by our
Board of Directors in its sole discretion and may have dividend,
voting, liquidation and other rights and preferences that are
senior to the rights of the common stock.
You should not rely on an investment in our common stock for the
payment of cash dividends.
We have
never paid cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. You should not
make an investment in our common stock if you require dividend
income. Any return on investment in our common stock would only
come from an increase in the market price of our stock, which is
uncertain and unpredictable.
SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT,
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED,
BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
The Company is
headquartered in Omaha, Nebraska and maintains a lease at a cost of
approximately $8,000 per month, which lease is currently set to
expire in May 2024. The Omaha facility is a total of 11,088 square
feet inclusive of approximately 6,179 square feet of on-site
warehouse space. iSatori currently leases 4,732 square feet of
space at 15000 W. 6th Avenue, Suite 400, Golden, Colorado 80401, at
a cost of $6,000 per month. The Company subleased its Golden
property as of February 1, 2018 and it expires January 31,
2020.
ITEM 3. LEGAL
PROCEEDINGS
On December 31,
2014, various plaintiffs, individually and on behalf of a purported
nationwide and sub-class of purchasers, filed a lawsuit in the U.S.
District Court for the Northern District of California, captioned
Ryan et al. v. Gencor Nutrients,
Inc. et al., Case No.: 4:14-CV-05682. The lawsuit includes
claims made against the manufacturer and various producers and
sellers of products containing a nutritional supplement known as
Testofen, which is manufactured and sold by Gencor Nutrients, Inc.
(“Gencor”).
Specifically, the Ryan plaintiffs allege that various defendants
have manufactured, marketed and/or sold Testofen, or nutritional
supplements containing Testofen, and in doing so represented to the
public that Testofen had been clinically proven to increase free
testosterone levels. According to the plaintiffs, those claims are
false and/or not statistically proven. Plaintiffs seek relief under
violations of the Racketeering Influenced Corrupt Organizations
Act, breach of express and implied warranties, and violations of
unfair trade practices in violation of California, Pennsylvania,
and Arizona law. NDS utilizes Testofen in a limited number of
nutritional supplements it manufactures and sells pursuant to a
license agreement with Gencor.
On
February 19, 2015 this matter was transferred to the Central
District of California to the Honorable Manuel Real. Judge Real had
previously issued an order dismissing a similar lawsuit that had
been filed by the same lawyer who represents the plaintiffs in the
Ryan matter. The United States Court of Appeals reversed part of
the dismissal issued by Judge Real and remanded the case back down
to the district court for further proceedings. As a result, the
parties in the Ryan matter issued a joint status report and that
matter is again active.
We are
currently not involved in any litigation except noted above that we
believe could have a material adverse effect on our financial
condition or results of operations. Other than described above,
there is no action, suit, proceeding, inquiry or investigation
before or by any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge
of the executive officers of the Company or any of its
subsidiaries, threatened against or affecting the Company, our
common stock, any of our subsidiaries or of the Company’s or
our subsidiaries’ officers or directors in their capacities
as such, in which an adverse decision could have a material adverse
effect.
ITEM 4. MINE
SAFETY DISCLOSURES
None.
ITEM
5. MARKET FOR REGISTRANT’S COMMON STOCK, RELATED
STOCKHOLDER MATTERS AND ISSUERS PURCHASES OF EQUITY
SECURITIES
Our
common stock is traded in the over-the-counter market, and quoted
on the OTC:PINK market under the symbol FTLF.
At
December 31, 2018, there were 11,119,430 shares of common stock
outstanding and there were approximately 226 shareholders of record
of the Company’s common stock in addition to an undetermined
number of holders whose shares are held in “street
name.”
The
following table sets forth for the periods indicated the high and
low closing prices for our common stock. These quotations
represent inter-dealer quotations, without adjustment for retail
markup, markdown or commission and may not necessarily represent
actual transactions.
|
|
|
|
|
Fiscal
Year 2018
|
|
|
|
First Quarter
(January - March 2018)
|
$0.38
|
0.23
|
|
Second Quarter
(April - June 2018)
|
$0.39
|
0.25
|
|
Third Quarter (July
- September 2018)
|
$0.44
|
0.27
|
|
Fourth Quarter
(October - December 2018)
|
$0.55
|
0.27
|
|
|
|
|
|
Fiscal
Year 2017
|
|
|
|
First Quarter
(January - March 2017)
|
$0.90
|
0.59
|
|
Second Quarter
(April - June 2017)
|
$0.70
|
0.46
|
|
Third Quarter (July
- September 2017)
|
$0.51
|
0.30
|
|
Fourth Quarter
(October - December 2017)
|
$0.44
|
0.21
|
On
March 21, 2019, the closing price of our common stock was $0.55
per share.
Recent Sales of Unregistered Securities
No
unregistered securities were issued during the fiscal year that
were not previously reported in a Quarterly Report on Form 10-Q or
Current Report on Form 8-K.
Transfer Agent
Our
transfer agent and registrar for the common stock is Colonial Stock
& Transfer located in Salt Lake City, Utah.
Securities Authorized for Issuance under Equity Compensation
Plans
For a
discussion of our equity compensation plans, please see Item 12 of
this Annual Report.
ITEM 6. SELECTED
FINANCIAL DATA
Not a
required disclosure for Smaller Reporting Companies.
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OR PLAN OF
OPERATION
The
following is management’s discussion and analysis of certain
significant factors that have affected our financial position and
operating results during the periods included in the accompanying
consolidated financial statements, as well as information relating
to the plans of our current management. This report includes
forward-looking statements. Generally, the words
“believes,” “anticipates,”
“may,” “will,” “should,”
“expect,” “intend,” “estimate,”
“continue,” and similar expressions or the negative
thereof or comparable terminology are intended to identify
forward-looking statements. Such statements are subject to certain
risks and uncertainties, including the matters set forth in this
Annual Report or other reports or documents we file with the
Securities and Exchange Commission from time to time, which could
cause actual results or outcomes to differ materially from those
projected. Undue reliance should not be placed on these
forward-looking statements, which speak only as of the date hereof.
We undertake no obligation to update these forward-looking
statements.
The
following discussion and analysis should be read in conjunction
with our consolidated financial statements and the related notes
thereto and other financial information contained elsewhere in this
Annual Report.
Critical Accounting Policies
Use of Estimates and Assumptions
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States
(“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, depreciable lives of property and
equipment, 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.
Accounts Receivable and Allowance for Doubtful
Accounts
The
Company’s accounts receivable balance is related to trade
receivables and are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the
Company’s best estimate of the amount of probable credit
losses in its existing accounts receivable. The Company will
maintain allowances for doubtful accounts, estimating losses
resulting from the inability of its customers to make required
payments for products. Accounts with known financial issues are
first reviewed and specific estimates are recorded. The remaining
accounts receivable balances are then grouped in categories by the
amount of days the balance is past due, and the estimated loss is
calculated as a percentage of the total category based upon past
history. Account balances are charged off against the allowance
when it is probable the receivable will not be
recovered.
The
determination of collectability of the Company’s accounts
receivable requires management to make frequent judgments and
estimates in order to determine the appropriate amount of allowance
needed for doubtful accounts. The Company’s allowance for
doubtful accounts is estimated to cover the risk of loss related to
accounts receivable. This allowance is maintained at a level we
consider appropriate based on historical and other factors that
affect collectability. These factors include historical trends of
write-offs, recoveries and credit losses, the careful monitoring of
customer credit quality, and projected economic and market
conditions. Different assumptions or changes in economic
circumstances could result in changes to the
allowance.
Total
allowance for doubtful accounts as of December 31, 2018 and 2017
amounted to $10,000 and $112,000, respectively.
Allowance for Product Returns, Sales Returns and Incentive
Programs
We
currently have a 30-day product return policy for NDS Products,
which allows for a 100% sales price refund, less a 20% restocking
fee, for the return of unopened and undamaged products purchased
from us online through one of our websites. Product sold to GNC may
be returned from store shelves or the distribution center in the
event product is damaged, short dated, expired or
recalled.
GNC
maintains a customer satisfaction program which allows customers to
return product to the store for credit or refund. Subject to
certain terms and restrictions, GNC may require reimbursement from
vendors for unsaleable returned product through either direct
payment or credit against a future invoice. We also support a
product return policy for iSatori Products, whereby customers can
return product for credit or refund. Historically, with a few noted
exceptions, product returns have been immaterial. Product returns
can and do occur from time to time and can be
material.
Information for
product returns is received on regular basis and adjusted for
accordingly. Adjustments for returns are based on factual
information and historical trends for both NDS products and iSatori
products and are special to each distribution channel. We monitor,
among other things, remaining shelf life and sell through data on a
weekly basis. If we determine there are any risks or issues with
any specific products, we accrue sales return allowances based on
management’s assessment of the overall risk and likelihood of
returns in light of all information available.
Regarding
incentives, the Company accrues an estimate of 8% for promotional
expense it calls “vendor funded discounts” at the time
of sale. The expense is recorded as a contra-revenue account, and
the expected incentive costs are never included in accounts
receivable. As such, an allowance account for incentives is not
required or necessary. Actual incentive costs are reconciled to the
estimate on a regular basis.
Total
allowance for product returns, sales returns and incentive programs
as of December 31, 2018 and 2017 amounted to $446,000 and
$1,152,000, respectively.
Inventory
The Company’s inventory is carried at the
lower of cost or net realizable value using the first-in, first-out
(“FIFO”) method. The Company evaluates the need to
record adjustments for inventory on a regular basis. Company policy
is to evaluate all inventories including components and finished
goods for all of its product offerings across all of the
Company’s operating subsidiaries.
Total
allowance for expiring, excess and slow-moving inventory items as
of December 31, 2018 and 2017 amounted to $107,000 and $49,000,
respectively.
Goodwill
The
Company adopted FASB ASC Topic 350 Goodwill and Other Intangible Assets.
In accordance with ASC Topic 350, goodwill, which represents the
excess of the purchase price and related costs over the value
assigned to net tangible and identifiable intangible assets of
businesses acquired and accounted for under the purchase method,
acquired in business combinations is assigned to reporting units
that are expected to benefit from the synergies of the combination
as of the acquisition date. Under this standard, goodwill and
intangibles with indefinite useful lives are no longer amortized.
The Company assesses goodwill and indefinite-lived intangible
assets for impairment annually during the fourth quarter, or more
frequently if events and circumstances indicate impairment may have
occurred in accordance with ASC Topic 350. If the carrying value of
a reporting unit's goodwill exceeds its implied fair value, the
Company records an impairment loss equal to the difference. ASC
Topic 350 also requires that the fair value of indefinite-lived
purchased intangible assets be estimated and compared to the
carrying value. The Company recognizes an impairment loss when the
estimated fair value of the indefinite-lived purchased intangible
assets is less than the carrying value.
During
the year ended December 31, 2017, the Company recorded an
impairment charge of $5,929,000 related to the recorded goodwill
and intangible assets of iSatori. There were no impairment charges
incurred during the year ended December 31,
2018.
Revenue Recognition
The
Company’s revenue is comprised of sales of nutritional
supplements, primarily to GNC.
Through
December 31, 2017, the Company recognized revenue when risk of loss
transferred to our customers and collection of the receivable was
reasonably assured, which generally occurs when the product is
shipped. A product is not shipped without an order from the
customer and credit acceptance procedures performed.
On
January 1, 2018, the Company adopted Financial Accounting Standards
Update No. 2014-09 (ASU No. 2014-09) regarding revenue recognition.
The new standard provides authoritative guidance clarifying the
principles for recognizing revenue and developing a common revenue
standard for U.S. generally accepted accounting principles. The
core principle of the guidance is that an entity should recognize
revenue to depict the transfer of promised goods to customers in an
amount that reflects the consideration to which the entity expects
to be entitled in the exchange for those
goods.
Due
to the nature of the products sold by the Company, the adoption of
the new standard has had no quantitative effect on the financial
statements. However, the guidance requires additional disclosures
to help users of financial statements better understand the nature,
amount, timing, and uncertainty of revenue that is
recognized.
Under
the new guidance, revenue is recognized when control of promised
goods is transferred to our customers, in an amount that reflects
the consideration we expect to be entitled to in exchange for those
goods. The Company reviews its sales transactions to identify
contractual rights, performance obligations, and transaction
prices, including the allocation of prices to separate performance
obligations, if applicable. Revenue and costs of sales are
recognized once products are delivered to the customer’s
control and performance obligations are satisfied.
All
products sold by the Company are distinct individual products and
consist of nutritional supplements and related supplies. 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. Other than promotional
activities, which can vary from time to time but nevertheless are
entirely within the Company’s control, contracts with
customers contain no incentives or discounts that could cause
revenue to be allocated or adjusted over time.
Control
of products we sell transfers to customers upon shipment from our
facilities, 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. Payment for sales are generally made by
check, credit card, or wire transfer. Historically the Company has
not experienced any significant payment delays from
customers.
The
Company allows for returns within 30 days of purchase from
end-users. Our 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
substantially less than 5% of products are returned, 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.
Stock-Based Compensation.
The Company periodically issues stock options and
warrants to employees and non-employees in non-capital raising
transactions for services rendered. The Company accounts for stock
option and warrant grants issued and vesting to employees based on
the authoritative guidance provided by the Financial Accounting
Standards Board (“FASB”) where the value of the award is measured
on the date of grant and recognized as compensation on the
straight-line basis over the vesting period. The Company accounts
for stock option and warrant grants issued and vesting to
non-employees in accordance with the authoritative guidance of the
FASB where the value of the stock compensation is based upon the
measurement date as determined at either (i) the date at which a
performance commitment is reached, or (ii) at the date at which the
necessary performance to earn the equity instruments are complete.
Options granted to non-employees are revalued each reporting period
to determine the amount to be recorded as an expense in the
respective period. As the options vest, they are valued on each
vesting date and an adjustment is recorded for the difference
between the value already recorded and the then current value on
the date of vesting. In certain circumstances where there are no
future performance requirements by the non-employee, option grants
are immediately vested and the total stock-based compensation
charge is recorded in the period of the measurement
date.
The
fair value of the Company’s stock option and warrant grants
are estimated using the Black-Scholes Option Pricing model, which
uses certain assumptions related to risk-free interest rates,
expected volatility, expected life of the stock options or
warrants, and future dividends. Compensation expense is recorded
based upon the value derived from the Black-Scholes Option Pricing
model, and based on actual experience. The assumptions used in the
Black-Scholes Option Pricing model could materially affect
compensation expense recorded in future periods.
Recent Accounting Pronouncements
See
Note 2 of the Notes to the Consolidated Financial Statements
included in this Annual Report for a description of recent
accounting pronouncements believed by management to have a material
impact on our present or future financial statements.
Results of Operations
|
|
|
|
|
|
|
Revenue
|
17,077,000
|
17,799,000
|
(722,000)
|
-4%
|
|
Cost
of Goods Sold
|
(10,332,000)
|
(12,708,000)
|
2,376,000
|
-19%
|
|
Gross
Profit
|
6,745,000
|
5,091,000
|
1,654,000
|
32%
|
General
and Administrative Expense
|
(3,333,000)
|
(4,180,000)
|
847,000
|
-20%
|
Selling
and Marketing Expense
|
(2,690,000)
|
(3,525,000)
|
835,000
|
-24%
|
|
|
-
|
(5,929,000)
|
5,929,000
|
100%
|
|
Depreciation
and Amortization
|
(69,000)
|
(409,000)
|
340,000
|
-83%
|
|
Total
Operating Expense
|
(6,092,000)
|
(14,043,000)
|
7,951,000
|
-57%
|
|
Income
(Loss) from Operations
|
653,000
|
(8,952,000)
|
9,605,000
|
107%
|
|
Other
Expense
|
(133,000)
|
(120,000)
|
(13,000)
|
11%
|
|
Provision
for Income Tax
|
(11,000)
|
(689,000)
|
678,000
|
-98%
|
|
Net Income (Loss)
|
509,000
|
(9,761,000)
|
10,270,000
|
105%
|
Fiscal Year Ended December 31, 2018 Compared to Fiscal Year Ended
December 31, 2017
Net Sales. Revenue for the year ended December 31, 2018
decreased 4.2% to $17,077,000 as compared to $17,799,000 for the
year ended December 31, 2017. Revenue for the year ended December
31, 2018 compared to the prior year, in part,
reflects declining traffic trends leading to lower unit sales
at retail locations leading to lower same store sales in GNC, our
principal distribution channel, as well as certain inventory level
adjustments by GNC resulting from such trends. Declining sales at retail locations during
the year ended December 31, 2018 were partially offset by an
increase in online sales. As a result of the secular decline of
sales in traditional retail establishments, management is focused
on developing its ecommerce capabilities to drive additional
incremental sales. Although sales derived from such channels were
not material as a percentage of total sales during the year ended
December 31, 2018, management believes that its online channels
will provide growth opportunities in the
long-term.
The
Company continually reformulates and introduces new products, as
well as seeks to increase both the number of stores and number of
approved products that can be sold within the GNC franchise system
that comprise its domestic and international distribution
footprint. Management also believes that its focus on developing
its ecommerce capabilities will drive additional incremental sales
in the short-term, while yielding substantial benefits in the
longer-term.
Cost of Goods Sold. Cost of goods sold
for the year ended December 31, 2018 decreased 19% to $10,332,000
as compared to $12,708,000 for the year ended December 31, 2017.
This decrease is principally attributable to lower sales in the
period.
Gross Profit Margin.
Gross profit for the year ended
December 31, 2018 increased to $6,745,000 as compared to $5,091,000
for the year ended December 31, 2017. Gross margin for the year
ended December 31, 2018 increased to 39.5% from 28.6% for the
comparable period last year. The increase in pross profit and gross
profit margin during the year ended December 31, 2018 is
principally attributable to reduced returns and vendor funded
discounts, which contributed to an increase in gross
margin.
General and Administrative Expense.
General and administrative expense for the year ended December 31,
2018 decreased by $847,000 to $3,333,000 as compared to $4,180,000
for the year ended December 31, 2017. The decrease in general and
administrative expense for the year ended December 31, 2018 is
principally attributable to ongoing cost reduction initiatives,
reduced facility expense and lower total headcount/payroll
expense.
Selling and Marketing Expense. Selling
and marketing expense for the year ended December 31, 2018
decreased to $2,690,000 as compared to $3,525,000 for the year
ended December 31, 2017. This decrease is principally the result of
budgetary controls.
Impairment Loss. In fiscal 2017, the
Company recorded an impairment charge of $5,929,000 related to the
goodwill and intangible assets of Isatori. There were no similar impairment charges in fiscal
2018.
Depreciation and Amortization.
Depreciation and amortization for the years ended December 31, 2018
and 2017 decreased to $69,000 from $409,000, respectively. The
decrease is principally attributable to decrease in amortization
expense due to the write-off of certain intangible assets during
the fourth quarter of 2017.
Net
Income/(Loss). We generated a net income of $509,000 for the year ended December
31, 2018, as compared to a net loss of $9,761,000 for the year
ended December 31, 2017. The
change from a net loss to net income for the year ended December
31, 2018 compared to the year ended December 31, 2017 is
principally attributable to stronger margins and reduced operating
expense, which offset lower sales volumes and the recorded
impairment charges of goodwill and intangible assets in fiscal 2017
of $5,929,000.
Non-GAAP Measures
The financial presentation below contains certain financial
measures defined as “non-GAAP financial measures” by
the SEC, 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 Annual Report in accordance with generally
accepted accounting principles.
As
presented below, non-GAAP EBITDA excludes interest, income taxes
(write off of deferred tax asset) and depreciation and
amortization. Adjusted non-GAAP EBITDA excludes, in addition
to interest, taxes, depreciation and amortization, equity-based
compensation and impairment charges. 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.
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
$509,000
|
$(9,761,000)
|
|
Interest
expense
|
133,000
|
112,000
|
|
Provision
for income taxes
|
11,000
|
689,000
|
|
Depreciation
and amortization
|
68,000
|
409,000
|
|
EBITDA
|
721,000
|
(8,551,000)
|
|
Non-cash
and non-recurring adjustments
|
|
|
|
Common
Stock issued for services
|
163,000
|
96,000
|
|
Fair
value of vested options issued for services
|
130,000
|
44,000
|
|
Impairment
of intangibles and goodwill
|
-
|
5,929,000
|
|
Adjusted EBITDA
|
$1,014,000
|
$(2,482,000)
|
Liquidity and Capital Resources
As of
December 31, 2018, the Company had working capital of $1,890,000,
compared to working capital of $369,000 at December 31, 2017. Our
principal sources of liquidity at December 31, 2018 consisted of
$259,000 of cash and $1,433,000 of accounts receivable. The
increase in working capital is principally attributable to the
payment of the line of credit and term loan in fiscal 2018, both of
which were current liabilities at December 31, 2017.
On November 13, 2018, the Company sold an
aggregate of 600 Units of Company Series A Preferred Stock, with
each Unit consisting of one share of Series A Preferred and a
warrant to purchase that number of shares of Company common stock
equal to 30% of the shares of Company common stock issuable
upon conversion of the Series A Preferred, resulting in gross proceeds to the Company of
$600,000.
In
December 2017, the Company, entered into the Merchant Agreement
with Compass. Under the terms of the Merchant Agreement, the
Company sold to Compass certain accounts owing from customers
including GNC. In December 2018, the agreement was terminated and
the Company paid all outstanding obligations to
Compass.
On December 26,
2018, the Company issued a line of credit promissory note to
Sudbury, an entity controlled by Mr. Dayton Judd, CEO, in the
principal amount of $600,000, with an initial advance to the
Company in the amount of $300,000. In addition, on December 26,
2018, the Company also issued a promissory note to Mr. Judd in the
principal amount of $200,000. Both of the Notes mature on the
earlier to occur of a Change in Control of the Company, as defined
in the Notes, or December 31, 2019, and require monthly principal
and interest payments beginning April 1, 2019, with a final payment
of unpaid principal and interest due December 31, 2019. The Notes
bear interest at a rate of 9.0% per annum. Interest due under the
terms of the Notes may be paid in cash or, up to and including
March 31, 2019, can be accrued and added to the outstanding
principal and accrued interest due and payable under the terms of
the Notes, at the sole discretion of the Company. Proceeds from the
sale of the Notes, including existing cash balances, were used to
settle all outstanding indebtedness under the terms of the Merchant
Agreement.
The Company is
dependent on cash flow from operations to satisfy its working
capital requirements. No assurances can be given that cash flow
from operations will provide sufficient capital necessary 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
Company’s line of credit promissory notes, additional working
capital will be required. Management at present has no intention to
raise additional working capital through the sale of equity or debt
securities, and believes the line of credit promissory notes, along
with the proceeds of our recent capital raise, 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, 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 (Used in) Operating Activities
Net cash provided
by operating activities was $258,000 during the fiscal year ended December 31,
2018, compared to net cash provided by operating activities
of $666,000 for the year ended December 31, 2017. The decrease in
cash provided by operating activities is primarily attributable to
variations in certain working capital accounts consistent with
normal business practices and outcomes.
Cash Provided by (Used in) Investing Activities
Cash
provided by investing activities for the fiscal year ended December
31, 2018 was $4,000 as compared to $(185,000) used in investing
activities during the year ended
December 31, 2017. In fiscal 2017, the Company purchased property
and equipment in the aggregate of $185,000. In fiscal 2018, there
was no similar purchases and the Company sold certain property and
equipment for cash of $4,000.
Cash Provided by (Used in) Financing Activities
Cash used in
financing activities for the year ended December 31, 2018 was
$(1,265,000) as compared to $(512,000) cash used in financing
activities during the year ended December 31, 2017. The primary
difference was that during the year ended December 31, 2018 we
fully settled the line of credit and term loan with U.S. Bank in
the aggregate amount of $2,365,000.
Off-Balance Sheet Arrangements
Other
than contractual obligations incurred in the normal course of
business, we do not have any off-balance sheet financing
arrangements or liabilities, retained or contingent interests in
transferred assets or any obligation arising out of a material
variable interest in an unconsolidated entity.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
business is currently conducted principally in the United States.
As a result, our financial results are not materially affected by
factors such as changes in foreign currency exchange rates or
economic conditions in foreign markets. We do not engage in hedging
transactions to reduce our exposure to changes in currency exchange
rates, although as the geographical scope of our business broadens,
we may do so in the future.
Our
exposure to risk for changes in interest rates relates primarily to
our investments in short-term financial instruments. Investments 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
may fall short of expectations due to changes in interest rates or
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.
We do
not hold any derivative instruments and do not engage in any
hedging activities.
ITEM 8. FINANCIAL
STATEMENTS
The
information required hereunder in this Annual Report is set forth
in the financial statements and the notes thereto beginning on Page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND
PROCEDURES
(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, we
conducted an evaluation of the effectiveness of the design and
operations of our disclosure controls and procedures, as defined in
Rules 13a-15(c) and 15d-15(e) under the Securities Exchange Act of
1934, as amended, as of December 31, 2018. Based on this
evaluation, the Company’s Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information required to be
disclosed in the reports submitted under the Securities Exchange
Act of 1934, as amended, 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) Management’s Annual Report on Internal
Control over Financial Reporting.
We are
responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act). Our internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes of
accounting principles generally accepted in the United
States.
This
Annual Report does not include an attestation report of our
registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by our registered public accounting firm pursuant to an
exemption for smaller reporting companies under Section 989G of the
Dodd-Frank Wall Street Reform and Consumer Protection
Act.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only
reasonable assurance of achieving their control
objectives.
Our
Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of our internal control over financial reporting as
of December 31, 2018. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”) in Internal
Control—Integrated Framework. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that,
as of December 31, 2018, our internal control over financial
reporting was effective.
(c) Changes in Internal Controls over Financial
Reporting.
The
Company’s Chief Executive Officer and Chief Financial Officer
have determined that 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,
Company’s internal control over financial
reporting.
ITEM 9B. OTHER
INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
Directors and Executive Officers
Set
forth below is information regarding each of the Company’s
current directors and executive officers. There are no family
relationships between any of our directors or executive officers.
Stockholders elect the directors annually. The executive officers
serve at the pleasure of the Board of Directors.
|
Name
|
|
Age
|
|
Title
|
|
Dayton Judd(1)
|
|
47
|
|
Chief Executive Officer, Chairman
|
|
Susan Kinnaman(2)
|
|
51
|
|
Chief Financial Officer
|
|
Lewis Jaffe
|
|
62
|
|
Director
|
|
Grant Dawson
|
|
50
|
|
Director
|
|
Seth Yakatan
|
|
48
|
|
Director
|
|
Todd Ordal
|
|
61
|
|
Director
|
|
(1)
|
Dayton Judd was appointed as the Company’s Chief Executive
Officer on February 18, 2018, at which time John Wilson resigned as
the Company’s Chief Executive Officer and as a member of the
Company’s Board of Directors.
|
|
|
|
|
(2)
|
Susan Kinnaman was appointed as the Company’s Chief Financial
Officer on February 18, 2019. Michael Abrams, the Company’s
former Chief Financial Officer and former director, resigned from
his position as the Company’s Chief Financial Officer and as
a director on the Company’s Board effective February 15,
2019.
|
Each
of the Company’s executive officers and directors will hold
office until their successors are duly elected and
qualified. The background and principal occupations of each
officer and director are as follows:
Dayton
Judd has served as a director of the Company since June
2017, is currently the Chairman of the Company’s Board of
Directors, and began serving as the Company’s Chief Executive
Officer on February 18, 2018. Mr. Judd is the Founder and
Managing Partner of Sudbury Capital Management
(“Sudbury”). Prior to founding Sudbury, Mr. Judd
worked from 2007 through 2011 as a Portfolio Manager at Q
Investments, a multi-billion dollar hedge fund in Fort Worth,
Texas. Prior to Q Investments, he worked with McKinsey &
Company from 1996 through 1998, and again from 2000 through 2007.
He graduated from Brigham Young University in 1995 with a
Bachelor’s Degree, summa cum laude, and a Master’s
Degree, both in accounting. He also earned an M.B.A. with high
distinction from Harvard Business School in 2000, where he was a
Baker Scholar. Mr. Judd is a Certified Public
Accountant.
The
Company’s Nominating and Corporate Governance Committee
believes that Mr. Judd’s significant experience in investing
in microcap companies, together with his substantial ownership
position in the Company’s common stock, will assist the Board
of Directors in the management of the executive officers of the
Company, and setting goals and objectives to build shareholder
value.
Susan Kinnaman
has served as the Company’s
Chief Financial Officer since February 15, 2019.
Ms.
Kinnaman was appointed as the Company’s Vice President of
Finance in 2007. Prior to that, she worked as Controller for Fuchs
Machinery, Inc. from 2001 to 2007, for Clarcor (Facet USA) from
2000 to 2001, and for Gaffey Crane from 1998 to 2000. She graduated
from Doane University – Crete, Nebraska in 1989 with a
Bachelor’s Degree in accounting. Ms. Kinnaman is a Certified
Public Accountant.
Lewis Jaffe has served as a director of the Company
since 2010, and served as the Chairman of the Company’s Board
of Directors from July 2011 to October 2017. Mr. Jaffe is a
Clinical Professor in the school of Entrepreneurship at Loyola
Marymount University, a position he has held since the fall of
2014, where he was awarded Professor of the Year in 2016. He was
Chief Executive Officer of Movio, a high speed, mobile movie and
content downloading service and application, prior to its sale. Prior to Movio,
Mr. Jaffe was a principal at Jaffe
& Associates (“J&A”), a consulting and advisory firm that
provides strategic and tactical planning to mid-market companies
and CEO coaching to their executives. Prior to 2009, Mr. Jaffe was
Interim Chief Executive Officer and President of Oxford Media,
Inc., where he served from 2006 to 2008. Mr. Jaffe has also served
in executive management positions with Verso Technologies, Inc.,
Wireone Technologies, Inc., Picturetel Corporation, and was also
previously a Managing Director of Arthur Andersen. Mr. Jaffe is a
graduate of the Stanford Business School Executive Program and
holds a Bachelor of Science from LaSalle University. Mr. Jaffe also
served on the Board of Directors of Benihana, Inc. as its lead
independent director from 2004 to 2012. He is currently on the
Board of Directors of Reed’s Inc. (NYSE: REED) and Yorktel, a
privately held telecommunications company.
The
Company’s Nominating and Corporate Governance Committee
believes that Mr. Jaffe’s experience as a CEO of both public
and private companies, and consultant providing strategic and
tactical planning to public companies, as well as his corporate
governance expertise, provide management and the Board of Directors
with a depth of experience, knowledge, systems and best practices
to guide corporate strategy and business
operations.
Grant
Dawson has served as a
director of the Company since November 2013, and is currently a
Portfolio Manager of Fixed Income Investments for Polar Asset
Management Partners (“Polar”), where he has worked since
2014. Mr. Dawson brings more than
15 years of experience in finance and has significant board-level
experience in corporate governance for public companies. Prior to
Polar, he was Managing Director of Fixed Income Investments for
Manulife Asset Management, a subsidiary of Manulife Financial
Corporation and Vice
President and Lead Analyst responsible for corporate debt ratings
with Dominion Bond Rating Agency. Prior to such time, Mr. Dawson held various
senior management positions in credit management and corporate
finance with Nortel and in equity research with Dain Rauscher Ltd.
Mr. Dawson earned an M.B.A. from the SMU Cox School of Business, a
B.Comm in Finance from the University of Windsor, and holds the
Chartered Financial Analyst designation. Additionally, Mr.
Dawson is a member of the Institute of Corporate Directors and
holds the ICD.D designation.
The
Company’s Nominating and Corporate Governance Committee
believes that Mr. Dawson’s extensive expertise and knowledge
regarding corporate finance and investment banking matters, as well
as corporate governance, provides the Company with valuable
insight and will assist the Company as it builds a long-term,
sustainable capital structure.
Seth
Yakatan has served a
director of the Company since September 2015, as Vice President of
Business Development for Invion, Ltd. (ASX: IVX) since August 2012,
and as a Partner of Katan Associates, Inc., a corporate strategy
and finance advisory group, since April 2001. Prior to joining the
Company’s Board of Directors, Mr. Yakatan served as a
director for iSatori, Inc. from September 2014 until the completion
of the Company’s acquisition of iSatori. Prior to founding
Katan Associates, Inc. in 2001, Mr. Yakatan worked in merchant
banking at the Union Bank of California, N.A., in the Specialized
Lending Media and Telecommunications Group, and as a venture
capital analyst with Ventana Growth Funds and Sureste Venture
Management. Mr. Yakatan holds an M.B.A. in Finance from the
University of California, Irvine, and a Bachelor of Arts in History
and Public Affairs from the University of
Denver.
The Company’s Nominating and Corporate
Governance Committee believes that Mr.
Yakatan’s 25 years of experience as a life sciences business
development and corporate finance professional, including actively
supporting small cap and major companies in achieving corporate,
financing, and asset monetization objectives, provides the Board of
Directors with valuable guidance and expertise based on his
extensive knowledge and understanding of banking
matters.
Todd
Ordal has served a
director of the Company since September 2015, and is the President
and founder of Applied Strategy, LLC, a private consulting company
founded in 2003 that provides consulting and coaching services to
chief executive officers and other executives around the word.
Prior to joining the Company’s Board of Directors, Mr. Ordal
served as a director for iSatori, Inc. from April 2012 until the
completion of the Company’s acquisition of iSatori. Before
founding Applied Strategy, LLC, Mr. Ordal served as Chief Executive
Officer of Dore Achievement Centers from December 2002 until
November 2004, and President and Chief Executive Officer of Classic
Sports Companies from January 2001 until December 2002. Prior to
Classic Sport Companies, Mr. Ordal served as a Division President
for Kinko’s Service Corporation, where he had accountability
for $500 million in revenue, 300 stores and 7,000 people, and as a
member of the Board of Directors for Kinko’s from July 1992
until July 1997. He has also served on several non-profit boards
and boards of advisors. Mr. Ordal received his Bachelor’s
Degree in psychology from Morehead State University and his M.B.A.
from Regis University.
The
Company’s Nominating and Corporate Governance Committee
believes that Mr. Ordal’s considerable experience with
growing successful businesses, as well as his extensive knowledge
and understanding of marketing and finance matters, will provide
the Board of Directors with valuable guidance and
insight.
There
have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the
evaluation of the ability and integrity of any of the
Company’s executive officers or directors during the past ten
years.
CORPORATE GOVERNANCE, BOARD COMPOSITION AND BOARD
COMMITTEES
Term of Office
Pursuant
to our Bylaws, each member of our Board of Directors shall serve
from the time they are duly elected and qualified, until our next
Annual Meeting of Stockholders or until their death, resignation or
removal from office.
Board Member Independence
The
Board believes that a majority of its members are independent
directors. The Board has determined that, other than Mr. Judd, all
of its directors are independent directors as defined by the rules
and regulations of the NASDAQ Capital Market.
Board Structure
The
Board does not have a policy regarding the separation of the roles
of the Chief Executive Officer and Chairman of the Board, as the
Board believes it is in the best interest of the Company and its
stockholders to make that determination based on the position and
direction of the Company and the membership of the Board, from time
to time. Currently, Mr. Judd serves as both our principal executive
officer and as Chairman of our Board of Directors.
Board Risk Oversight
Our
Board administers its oversight function through both regular and
special meetings and by frequent telephonic updates with our senior
management. A key element of these reviews is gathering and
assessing information relating to risks of our business. All
business is exposed to risks, including unanticipated or undesired
events or outcomes that could impact an enterprise’s
strategic objectives, organizational performance and stockholder
value. A fundamental part of risk management is not only
understanding such risks that are specific to our business, but
also understanding what steps management is taking to manage those
risks and what level of risk is appropriate for us. In setting our
business strategy, our Board assesses the various risks being
mitigated by management and determines what constitutes an
appropriate level of risk.
Although
our Board has the ultimate oversight responsibility for our risk
management process, various committees of our Board also have
responsibility for risk management. In particular, the Audit
Committee focuses on financial risk, including internal controls,
and the assessments of risks reflected in audit reports. Legal and
regulatory compliance risks are also reviewed by our Audit
Committee. Risks related to our compensation programs are reviewed
by the Compensation Committee. Our Board is advised by the
committees of significant risks and management’s response via
periodic updates.
Board Meetings
The Board held eight meetings during the year ended December 31,
2018, supplemented by numerous additional discussions by and among
a majority of the Board, and numerous actions effectuated by
unanimous written consent in lieu of a formal motion and vote
during an official meeting. In 2018, incumbent directors attended
100% of the aggregate number of meetings of the
Board.
Board Committees and Charters
The Board has a standing Audit Committee,
Compensation Committee, and Nominating and Corporate Governance
Committee. The Board appoints the members and chairpersons of these
committees. Copies of each committee charter is available by making
a request to the Company’s Corporate Secretary at 5214 S.
136th
Street, Omaha, Nebraska
68137.
Audit Committee
|
|
|
|
|
|
Members:
|
|
Grant
Dawson (Chairman)
|
|
|
|
|
Lewis
Jaffe
|
|
|
|
|
Todd
Ordal
|
|
|
|
|
|
|
|
Number of Meetings in 2018:
|
|
The Audit Committee held four meetings during 2018.
|
|
|
|
|
|
|
|
Functions:
|
|
The
Audit Committee provides assistance to the Board of Directors in
fulfilling its legal and fiduciary obligations in matters involving
our accounting, auditing, financial reporting, internal control and
legal compliance functions by approving the services performed by
our independent accountants and reviewing their reports regarding
our accounting practices and systems of internal accounting
controls. The Audit Committee also oversees the audit efforts of
our independent accountants and takes those actions as it deems
necessary to satisfy it that the accountants are independent of
management.
|
|
|
|
|
|
|
|
Independence
|
|
The
members of the Audit Committee each meet the independence standards
established by the NASDAQ Capital Market and the SEC for audit
committees. In addition, the Board has determined that Messrs.
Dawson, Jaffe and Ordal each satisfy the definition of an
“audit committee financial expert” under SEC rules and
regulations. These designations do not impose any duties,
obligations or liabilities on Messrs. Dawson, Jaffe and Ordal that
are greater than those generally imposed on them as members of the
Audit Committee and the Board, and their designations as audit
committee financial experts does not affect the duties, obligations
or liability of any other member of the Audit Committee or the
Board.
|
|
Compensation Committee
|
|
|
|
|
|
Members:
|
|
Grant Dawson (Chairman)
|
|
|
|
|
Lewis Jaffe
|
|
|
|
|
Seth Yakatan
|
|
|
|
|
|
|
|
Number of Meetings in 2018:
|
|
The Compensation Committee held three meetings during 2018.
|
|
|
|
|
|
|
|
Functions:
|
|
The Compensation Committee determines our general compensation
policies and the compensation provided to our directors and
officers. The Compensation Committee also reviews and determines
bonuses for our officers and other employees. In addition, the
Compensation Committee reviews and determines equity-based
compensation for our directors, officers, employees and consultants
and administers our stock option plans and employee stock purchase
plan.
|
|
|
|
|
|
|
|
Independence
|
|
We believe that the composition of our Compensation Committee meets
the criteria for independence under, and the functioning of our
Compensation Committee complies with, the applicable requirements
of the Sarbanes-Oxley Act of 2002 and current SEC rules and
regulations.
|
|
Nominating and Corporate Governance Committee
|
|
|
|
|
|
Members:
|
|
Lewis Jaffe (Chairman)
|
|
|
|
|
Todd Ordal
|
|
|
|
|
Seth Yakatan
|
|
|
|
|
|
|
|
Number of Meetings in 2018:
|
|
The Nominating
and Corporate Governance Committee held no meetings during 2018,
electing instead to address committee matters by action taken by
the entire Board of Directors.
|
|
|
|
|
|
|
|
Functions:
|
|
The Nominating and Corporate Governance Committee is responsible
for making recommendations to the Board of Directors regarding
candidates for directorships and the size and composition of the
Board. In addition, the Nominating and Corporate Governance
Committee is responsible for overseeing our corporate governance
guidelines and reporting and making recommendations to the Board
concerning corporate governance matters.
|
|
|
|
|
|
|
|
Independence
|
|
We believe that the composition of our Nominating and Corporate
Governance Committee meets the criteria for independence under, and
the functioning of our Nominating and Corporate Governance
Committee complies with, the applicable requirements of the
Sarbanes-Oxley Act of 2002 and current SEC rules and
regulations.
|
|
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of
1934, as amended (“Exchange
Act”), requires the
Company’s directors and executive officers, and persons who
beneficially own more than 10% of a registered class of the
Company’s equity securities, to file reports of beneficial
ownership and changes in beneficial ownership of the
Company’s securities with the SEC on Forms 3 (Initial
Statement of Beneficial Ownership), 4 (Statement of Changes of
Beneficial Ownership of Securities) and 5 (Annual Statement of
Beneficial Ownership of Securities). Directors,
executive officers and beneficial owners of more than 10% of the
Company’s common stock are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms that
they file.
To
our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other
reports were required, during the fiscal year ended December 31,
2018, management believes that all necessary reports were filed in
a timely manner and all filings are current as of the date of this
filing, except the following:
●
Grant
Dawson, a director of the Company, filed four Form 4s reporting an
aggregate of four late transactions;
●
Todd
Ordal, a director of the Company, filed three Form 4s reporting an
aggregate of three late transactions;
●
Lewis
Jaffe, a director of the Company, filed three Form 4s reporting an
aggregate of three late transactions; and
Code of Ethics and Business Conduct
We
have adopted a Code of Ethics that applies to all of our executive
officers, directors and employees, which sets forth the business
and ethical principles that govern all aspects of our business.
This document will be made available in print, free of charge, to
any stockholder requesting a copy in writing from the Company. A
form of the Code of Conduct and ethics was filed as Exhibit 14.1 to
our Annual Report on Form 10-K for December 31, 2008.
Indemnification of Officers and Directors
As
permitted by Nevada law, the Company will indemnify its
directors and officers against expense and liabilities they incur
to defend, settle, or satisfy any civil or criminal action brought
against them on account of their being or having been Company
directors or officers unless, in any such action, they are
adjudged to have acted with gross negligence or willful
misconduct.
Exclusion of Liability
The
Nevada Business Corporation Act excludes personal
liability for directors for monetary damages based upon
any violation of their fiduciary duties as
directors, except as to liability for any breach of the
duty of loyalty, acts or omissions not in good faith or
which involve intentional misconduct or a knowing
violation of law, acts in violation of
the Nevada Business Corporation Act, or any transaction
from which a director receives an improper personal
benefit. This exclusion of liability does not limit any
right that a director may have to be indemnified and does not
affect any director's liability under federal or applicable
state securities laws.
ITEM
11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information
concerning the compensation paid to the Company’s Chief
Executive Officer, and the Company’s two most highly
compensated executive officers other than its Chief Executive
Officer, who were serving as executive officers as of December 31,
2018 and whose annual compensation exceeded $100,000 during such
year (collectively the “Named Executive
Officers”).
|
Name and Principal Position
|
|
|
|
Warrants/ Option Awards ($) (1)
|
All Other
Compensation ($)
|
|
|
|
|
|
|
|
|
|
|
Dayton Judd (2)
|
2018
|
$105,400
|
$172,500
|
$146,651
|
$109,496
|
$534,047
|
|
Chief Executive Officer and Chairman of the Board
|
2017
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
|
|
Michael Abrams (3)
|
2018
|
$240,625
|
-
|
-
|
-
|
240,625
|
|
Former Chief Financial Officer and Director
|
2017
|
$267,193
|
$-
|
$-
|
$50,000
|
$317,193
|
|
|
|
|
|
|
|
|
Patrick
Ryan
|
2018
|
$240,032
|
15,500
|
-
|
-
|
255,532
|
|
Chief Retail Officer
|
2017
|
$246,402
|
$-
|
$-
|
$-
|
$246,838
|
|
|
|
|
|
|
|
|
(1)
|
The amounts in this column represent the grant date fair value of
stock option awards computed in accordance with FASB guidance,
excluding the effect of estimated forfeitures under which the Named
Executive Officer has the right to purchase, subject to vesting,
shares of the Company’s common stock.
|
|
|
|
|
(2)
|
Dayton Judd was appointed as the Company’s Chief Executive
Officer on February 18, 2018, and has served as a member of the
Company’s Board since 2017. Accordingly, he did not receive
any compensation for his role as an officer in the year ended
December 31, 2017.
|
|
|
|
|
(3)
|
Mr. Abrams resigned from his position as Chief Financial Officer
and as a member of the Company’s Board of Directors effective
February 15, 2019.
|
Employment Agreements
Dayton
Judd. Dayton Judd currently
serves as the Company’s Chief Executive Officer. Effective
July 31, 2018, Mr. Judd receives (i) an annual
base salary of $263,500; (ii) an annual cash bonus, the amount of
which, if any, shall be determined at the sole discretion of the
Compensation Committee; (iii) options to purchase 705,000 shares of
the Company’s common stock, which have a term of ten years,
an exercise price equal to the fair market value of a share of
Company common stock as of the date of grant, of which 1/3 vest
immediately, 1/3 vest on the first anniversary of the grant, and
the remaining 1/3 vest on the second anniversary of the grant; and
(iv) 450,000 shares of restricted common stock, which shares vest
(x) 150,000 shares at such date that the 30-day volume weighted
average price (“VWAP”)
for shares of the Company’s common stock exceeds $1.20, (y)
150,000 shares at such date that the 30-day VWAP exceeds $1.80, and
(z) 150,000 shares at such date that the 30-day VWAP exceeds
$2.40.
Michael
Abrams. Mr. Michael Abrams
served as the Company’s Chief Financial Officer up to
February 15, 2019. Pursuant to the terms of his Employment
Agreement he received an annual base salary of $240,625 in fiscal
2018 and $267,193 in fiscal 2017.
Patrick
Ryan. Mr. Patrick Ryan
currently serves as the Company’s Chief Retail Officer
pursuant to the terms of an Employment Agreement dated June 1,
2016. The Employment Agreement provides that Mr. Ryan shall serve
in the capacity of the Company’s Chief Retail Officer
through June 1, 2019,
subject to standard terms and provisions consistent with agreements
of such type. Pursuant to the terms of the Employment Agreement,
Mr. Ryan receives (i) an annual base salary of $125,000 per year;
(ii) commission compensation on a monthly basis in arrears in an
amount equal to 2.0% of the adjusted gross profit from the sale of
franchise exclusive products, less all promotional and advertising
expenses, and the costs of all product samples, related to the sale
of franchise exclusive products to international locations;
(iii) an annual cash
bonus, the amount of which, if any, shall be determined at the sole
discretion of the Compensation Committee; and (iv) up to 25,000
shares of Company common stock and/or related stock options per
year under the Company’s 2010 Equity Incentive Plan, at the
sole discretion of the Compensation Committee. In the event that
there is a Change of Control, as defined in the Employment
Agreement, the surviving corporation shall be required to assume
the Company’s obligations pursuant to the Employment
Agreement, including any stock or stock option agreements with Mr.
Ryan; provided,
however, in the event
that the surviving corporation refuses to do so, then Mr. Ryan
shall be entitled to accelerated vesting of all unvested shares
subject to such agreements, if any.
Outstanding Equity Awards at
Fiscal Year-End
The
following table sets forth information regarding unexercised
options and stock that had not vested and equity incentive awards
held by each of the Named Executive Officers outstanding as of
December 31, 2018:
|
|
|
|
|
Name
|
Number of securities underlying unexercised options (#)
exercisable
|
Number of securities underlying unexercised options (#)
unexercisable
|
Equity incentive plan awards: Number of underlying unexercised
unearned options (#)
|
Option
Exercise price ($)
|
|
Number of shares or units of stock that have not vested
(#)
|
Market value of shares or units of stock that have not vested
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dayton Judd
|
235,000
|
470,000
|
|
$0.28
|
|
450,000
(1)
|
$193,500
(1)
|
|
Chief Executive Officer and Chairman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Abrams
|
50,000
|
|
|
$2.30
|
|
-
|
-
|
|
Chief Financial Officer and
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick Ryan
|
20,000
|
|
|
$2.20
|
|
-
|
-
|
|
Chief Retail Officer
|
30,000
|
|
|
$2.30
|
|
|
|
|
|
26,667
|
3,333
|
|
$1.39
|
|
|
|
(1)
Shares vest as
follows: (i) 150,000 shares at such date that the 30-day volume
weighted average price (“VWAP) for shares of the
Company’s common stock exceeds $1.20, (ii) 150,000 shares at
such date that the 30-day VWAP exceeds $1.80, and (iii) 150,000
shares at such date that the 30-day VWAP exceeds $2.40. The market
value reported for this award was calculated using the closing
price of the Company’s common stock on December 31, 2018, or
$0.43 per share, assuming achievement of the maximum award
amount.
Director Compensation
As
a result of Mr. Abrams’ resignation from the Board on
February 15, 2019, we currently have five directors, four of whom
are considered independent. For the year ended December 31, 2018,
each of our directors were entitled to receive $45,000 per annum
for their services on the Board, which compensation may be paid in
cash, shares of Company common stock or a combination thereof, at
the option of each individual director. Subsequent to the year
ended December 31, 2018, the Board compensation was reduced to
$30,000 per annum effective January 1, 2019.
The
table below summarizes the compensation paid to our independent
directors for the fiscal year ended December 31, 2018:
|
|
Fees earned or paid in
cash (1)
|
|
|
|
|
Name
|
|
|
|
|
|
|
|
|
|
|
|
Lewis
Jaffe
|
$30,000
|
$15,000
|
$-
|
$45,000
|
|
Grant
Dawson
|
$22,500
|
$22,500
|
$-
|
$45,000
|
|
Seth
Yakatan
|
$45,000
|
$-
|
$-
|
$45,000
|
|
Todd
Ordal
|
$22,500
|
$22,500
|
$-
|
$45,000
|
|
Dayton Judd(3)
|
$8,985
|
$-
|
$-
|
$8,985
|
|
|
|
|
|
|
|
(1)
|
In an effort to conserve the Company’s cash, certain Board
members have the option to receive stock awards in lieu of cash
fees earned in respect of their annual retainers for service on the
Board and its committees. The stock awards vested immediately
upon grant and were not subject to any further service by the
directors. The amounts in this column represent the grant date fair
value of the restricted stock awards granted during 2018 and are
computed in accordance with FASB guidance, excluding the effect of
estimated forfeitures.
|
|
|
|
|
(2)
|
Represents the grant date fair value of stock option awards
computed in accordance with FASB guidance, excluding the effect of
estimated forfeitures under which the director has the right to
purchase, subject to vesting, shares of the Company’s common
stock.
|
|
|
|
|
(3)
|
Mr. Judd served as an independent director until his appointment as
the Company’s Interim Chief Executive Officer in February
2018.
|
|
|
|
Compensation Committee Interlocks and Insider
Participation
No
executive officers of the Company serve on the Compensation
Committee (or in a like capacity) for the Company or any other
entity.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following tables set forth information regarding shares of our
Series A Preferred and common stock beneficially owned as of March
21, 2019, by:
|
(i)
|
each of our officers and directors;
|
|
(ii)
|
all officers and directors as a group; and
|
|
(iii)
|
each person known by us to beneficially own five percent or more of
the outstanding shares of our Series A Preferred and common
stock. Percent ownership is calculated based on 600 shares of
our Series A Preferred and 11,119,430 shares of our common stock outstanding at March
21, 2019.
|
Beneficial Ownership of our Series A Preferred
|
Name
|
|
|
|
|
|
|
|
|
|
Dayton
Judd
|
Series
A Preferred
|
525(1)
|
87.5%
|
|
|
|
|
|
Grant
Dawson
|
Series
A Preferred
|
25
|
4.2%
|
|
|
|
|
|
All Officers and Directors as a group (seven persons)
|
Series
A Preferred
|
550
|
91.7%
|
|
(1)
|
Shares of Series A Preferred are held by Sudbury Capital Fund, LP,
Sudbury Holdings, LLC, Sudbury Capital GP, LP, and Sudbury Capital
Management, LLC. Sudbury Holdings, LLC is the parent company of
Sudbury Capital Fund, LP; Sudbury Capital GP, LP is the general
partner of Sudbury Capital Fund, LP; Sudbury Capital Management,
LLC is the investment adviser of Sudbury Capital Fund, LP; and Mr.
Judd as a member of Sudbury Holdings, LLC and Sudbury Capital
Management, LLC, and a limited partner of Sudbury Capital GP, LP.
Mr. Judd may be considered the beneficial owner of the shares held
by Sudbury Capital Fund, LP, as Mr. Judd is the Founder and
Managing Partner of Sudbury Capital Management, LLC.
|
Beneficial Ownership of our Common Stock
|
Name and Address of Owner (1)
|
|
|
|
|
|
|
|
|
|
Dayton Judd
(3)
|
Common
Stock
|
5,080,873
|
39.7
%
|
|
|
|
|
|
Susan Kinnaman
(4)
|
Common
Stock
|
16,483
|
*%
|
|
|
|
|
|
Patrick Ryan
(5)
|
Common
Stock
|
51,057
|
*%
|
|
|
|
|
|
Lewis Jaffe
(6)
|
Common
Stock
|
144,266
|
1.3
%
|
|
|
|
|
|
Todd
Ordal
|
Common
Stock
|
138,335
|
1.2%
|
|
|
|
|
|
Seth
Yakatan
|
Common
Stock
|
-
|
*%
|
|
|
|
|
|
Grant Dawson
(7)
|
Common
Stock
|
248,222
|
2.2%
|
|
|
|
|
|
All
Officers and Directors as a group (seven persons)
|
Common
Stock
|
5,679,236
|
44.4%
|
|
|
|
|
|
(1)
|
The address of each of the officers and directors is c/o FitLife
Brands, Inc., 5214 S. 136th Street, Omaha, NE
68137.
|
|
(2)
|
* Less than 1%
|
|
|
|
|
(3)
|
Consists
of 852,184 shares held by Mr. Judd personally, including in IRA
accounts; 235,000 shares issuable to Mr. Judd upon the exercise of
stock options at $0.28 per share, exercisable within 60 days of
March 21, 2019; 2,509,994 shares held by Sudbury Holdings, LLC;
1,141,304 shares issuable upon the conversion of 525 shares of the
Company’s Series A Convertible Preferred Stock held by
Sudbury Holdings, LLC, and 342,391 shares issuable upon the
exercise of warrants held by Sudbury Holdings, LLC.
|
|
|
|
|
(4)
|
Includes
25,000 shares issuable upon the exercise of stock options of which
10,000, 10,000 and 5,000 are exercisable at $2.30, $2.20 and $1.39
per share, respectively, each of which is exercisable within 60
days of March 21, 2019.
|
|
|
|
|
(5)
|
Includes 77,724 shares issuable upon the exercise of stock options
of which 30,000, 20,000 and 26,667 are exercisable at $2.30, $2.20
and $1.39 per share, respectively, each of which is exercisable
within 60 days of March 21, 2019.
|
|
|
|
|
(6)
|
Includes 15,000 shares issuable upon the exercise of stock options
at $2.30 per share, exercisable within 60 days of March 21,
2019.
|
|
|
|
|
(7)
|
Includes 10,000 shares issuable upon the exercise of stock options
at $2.30 per share, exercisable within 60 days of March 21, 2019;
54,348 shares issuable upon conversion of 25 shares of the
Company’s Series A Convertible Preferred Stock; and 16,304
shares issuable upon the exercise of warrants.
|
|
|
|
Securities Authorized for Issuance Under Equity Compensation
Plans
The
following table provides information as of December 31, 2018,
with respect to the shares of common stock that may be issued upon
the exercise of options and other rights under our existing equity
compensation plans and arrangements. The information includes the
number of shares covered by and the weighted average exercise price
of, outstanding options and other rights and the number of shares
remaining available for future grants, excluding the shares to be
issued upon exercise of outstanding options and other
rights.
|
Plan category
|
Number of
securities to be issued upon exercise of
outstanding options, warrants and rights
|
Weighted-
average exercise
price of
outstanding
options, warrants
and rights
|
Number of
securities
remaining
available
for future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a)
|
|
|
|
|
|
|
Equity compensation plans approved by security
holders:
|
1,435,000
|
$0.98
|
65,000
|
|
|
|
|
|
Description of Equity Compensation Plan
The 2010 Stock Incentive Plan (the
“2010
Plan”) was adopted by the
Company’s Board of Directors on June 30, 2010, and approved
by a majority of the Company’s shareholders on August 26,
2010. The 2010 Plan reserves for issuance 1,500,000 shares of the
Company’s common stock for issuance as one of four types of
equity incentive awards: (i) stock options, (ii) stock appreciation
rights, (iii) restricted stock, and (iv) stock units. The 2010 Plan
permits the qualification of awards under the plan as
“performance-based compensation” within the meaning of
Section 162(m) of the Internal Revenue
Code.
Changes in Control
The
Company is not aware of any arrangements that may result in a
change in control of the Company.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Entry into New Line of Credit
On December 26,
2018, the Company issued a line of credit promissory note to
Sudbury in the principal amount of $600,000, with an initial
advance to the Company in the amount of $300,000. In addition, on
December 26, 2018, the Company also issued a promissory note to Mr.
Judd, in the principal amount of $200,000. Both of the Notes mature
on the earlier to occur of a Change in Control of the Company, as
defined in the Notes, or December 31, 2019, and require monthly
principal and interest payments beginning April 1, 2019, with a
final payment of unpaid principal and interest due December 31,
2019. The Notes bear interest at a rate of 9.0% per annum. Interest
due under the terms of the Notes may be paid in cash or, up to and
including March 31, 2019, can be accrued and added to the
outstanding principal and accrued interest due and payable under
the terms of the Notes. Proceeds from the sale of the notes,
including existing cash balances, were used to retire all
outstanding indebtedness under the terms of the Merchant Agreement,
totaling approximately $590,000 at December 26,
2018.
Dayton
Judd, the Company’s Chief Executive Officer and Chairman of
the Board of Directors of the Company, is affiliated with Sudbury.
The notes were approved by the independent members of the Board of
Directors.
Series A Preferred Financing
On
November 13, 2018, the Company entered into Subscription Agreements
with certain accredited investors, pursuant to which the Company
offered and sold to the Purchasers an aggregate of 600 Units for
$1,000 per Unit, with each Unit consisting of one share of Series A
Preferred and a warrant to purchase that number of shares of
Company common stock equal to 30% of the shares of Company common
stock issuable upon conversion of the Series A Preferred purchased
by the Purchaser. The Warrants shall expire five years from the
date of issuance, and are exercisable at a price of $0.46 per
share. Warrants to purchase an aggregate of 391,304 shares of
Company common stock were issued in the Offering.
The Offering resulted in gross proceeds to the Company of $600,000.
Purchasers in the Offering included Dayton Judd, the
Company’s Chairman and Chief Executive Officer, and Grant
Dawson, a director. A portion of the Offering was also sold to an
unaffiliated third party.
ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The Company first
engaged Weinberg & Company
(“Weinberg”) on April 21, 2017, after it
dismissed
Tarvaran, Askelson & Company, LLP
as its independent registered public accounting firm.
The
following table presents approximate aggregate fees and other
expense for professional services rendered by Weinberg for the
audit of the Company’s annual financial statements for the
years ended December 31, 2018 and December 31, 2017, as well as
other expense for other services rendered during those
periods.
|
|
|
|
|
|
|
|
Audit Fees (1)
|
$78,000
|
$79,000
|
|
Audit-Related Fees (2)
|
-
|
—
|
|
Tax Fees (3)
|
29,000
|
6,000
|
|
All Other Fees (4)
|
13,000
|
4,000
|
|
|
|
|
|
Total
|
$120,000
|
$89,000
|
As
defined by the SEC, (i) “audit fees” are fees for
professional services rendered by our principal accountant for the
audit of our annual financial statements and review of financial
statements included in our Form 10-K, or for services that are
normally provided by the accountant in connection with statutory
and regulatory filings or engagements for those fiscal years; (ii)
“audit-related fees” are fees for assurance and related
services by our principal accountant that are reasonably related to
the performance of the audit or review of our financial statements
and are not reported under “audit fees;” (iii)
“tax fees” are fees for professional services rendered
by our principal accountant for tax compliance, tax advice, and tax
planning; and (iv) “all other fees” are fees for
products and services provided by our principal accountant, other
than the services reported under “audit fees,”
“audit-related fees,” and “tax
fees.”
Audit Fees
Weinberg
provided services for the audits of our financial statements and
limited reviews of the financial statements included in Quarterly
Reports on Form 10-Q.
Audit Related Fees
Weinberg
did not provide any professional services which would be considered
“audit-related fees.”
Tax Fees
Weinberg
prepared our 2017 and 2016 Federal and state income
taxes.
All Other Fees
Services
provided by Weinberg with respect to the filing of various
registration statements made throughout the year including the 2017
shareholder rights offering are considered “all other
fees.”
Audit Committee Pre-Approval Policies and Procedures
Under
the SEC’s rules, the Audit Committee is required to
pre-approve the audit and non-audit services performed by the
independent registered public accounting firm in order to ensure
that they do not impair the auditors’ independence. The
Commission’s rules specify the types of non-audit services
that an independent auditor may not provide to its audit client and
establish the Audit Committee’s responsibility for
administration of the engagement of the independent registered
public accounting firm.
Consistent
with the SEC’s rules, the Audit Committee Charter requires
that the Audit Committee review and pre-approve all audit services
and permitted non-audit services provided by the independent
registered public accounting firm to us or any of our subsidiaries.
The Audit Committee may delegate pre-approval authority to a member
of the Audit Committee and if it does, the decisions of that member
must be presented to the full Audit Committee at its next scheduled
meeting. Accordingly, 100% of audit services and non-audit services
described in this Item 14 were pre-approved by the Audit
Committee.
There
were no hours expended on the principal accountant’s
engagement to audit the registrant’s financial statements for
the most recent fiscal year that were attributed to work performed
by persons other than the principal accountant’s full-time,
permanent employees.
ITEM 15. EXHIBITS AND REPORTS
Exhibits
|
|
|
Agreement
and Plan of Merger, by and among the Company, iSatori, Inc., and
ISFL Merger Sub, Inc., dated May 18, 2015 (incorporated by
reference to Exhibit 2.1 filed with Form 8-K on May 18,
2015).
|
|
|
|
Voting
and Standstill Agreement dated May 18, 2015 (incorporated by
reference to Exhibit 4.1 of Schedule 13D (Commission File No.
005-47773) filed by the Company, Stephen Adelé Enterprises,
Inc., Stephen Adelé, RENN Universal Growth Investment Trust,
PLC, RENN Global Entrepreneurs Fund, Inc. and Russell
Cleveland).
|
|
|
|
Articles
of Incorporation (incorporated by reference to Exhibit 3.1 filed
with Amendment No. 3 to the Company’s Registration Statement
on Form SB2 (Commission File No. 333-137170)).
|
|
|
|
Amendments
to Articles of Incorporation (incorporated by reference to Exhibit
3.2 filed with Amendment No. 3 to the Company’s Registration
Statement on Form SB2 (Commission File No.
333-137170)).
|
|
|
|
Amended
and Restated Bylaws of the Corporation (incorporated by reference
to Exhibit 3.1 filed with Form 8-K on January 25,
2018).
|
|
|
|
Certificate
of Amendment to Articles of Incorporation (incorporated by
reference to Exhibit 3.1 filed with Form 8-K on September 13,
2010).
|
|
|
|
Certificate
of Amendment to Articles of Incorporation to change name to FitLife
Brands, Inc. (incorporated by reference to Exhibit 3.1
filed with Form 8-K on October 1, 2013).
|
|
|
|
Certificate
of Amendment to Articles of Incorporation to effect 1-for-10
reverse split (incorporated by reference to Exhibit 3.1 filed with
Form 8-K on October 1, 2013).
|
|
|
|
Certificate
of Designations of Series A Convertible Preferred Stock
(incorporated by reference to Exhibit 4.2 filed with Form 8-K on
June 30, 2008).
|
|
|
|
Certificate
of Designations of Series B Convertible Preferred Stock
(incorporated by reference to Exhibit 10.1 filed with Form 8-K on
January 23, 2009).
|
|
|
|
Certificate
of Designations of Series C Convertible Preferred Stock.
(incorporated by reference to Exhibit 4.3 filed with Form 10-K on
April 15, 2011).
|
|
|
|
Certificates
of Withdrawal of Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock, and Series C
Convertible Preferred Stock, dated November 13, 2018
(incorporated by reference
to Exhibit 3.1 filed with Form 10-Q on November 14,
2018).
|
|
|
|
Certificate of Designations, Preferences and Rights of the Series A
Convertible Preferred Stock, dated November 13, 2018
(incorporated by reference to Exhibit 3.2 filed with Form 10-Q on
November 14, 2018).
|
|
|
|
Form of Warrant, dated November 13, 2018 (incorporated by reference to Exhibit
4.1 filed with Form 10-Q on November 14, 2018).
|
|
|
|
Asset
Purchase Agreement between the Company and NDS Nutritional
Products, Inc. (incorporated by reference to Exhibit 10.1 filed
with Form 8-K on October 15, 2008).
|
|
|
|
Settlement
Agreement (incorporated by reference to Exhibit 10.1 filed with
Form 8-K on October 6, 2009).
|
|
|
|
Secured
Promissory Note (incorporated by reference to Exhibit 10.2 filed
with Form 8-K on October 6, 2009).
|
|
|
|
Second
Amendment to Asset Purchase Agreement (incorporated by reference to
Exhibit 10.3 filed with Form 8-K on October 6, 2009).
|
|
|
|
Amendment
No. 1 to Security Agreement (incorporated by reference to Exhibit
10.4 filed with Form 8-K on October 6, 2009).
|
|
|
|
Amendment
No. 1 to Supply, License and Transition Agreement (incorporated by
reference to Exhibit 10.5 filed with Form 8-K on October 6,
2009).
|
|
|
|
Assignment
of Name (incorporated by reference to Exhibit 10.6 filed with Form
8-K on October 6, 2009).
|
|
|
|
Employment
Agreement, dated December 31, 2009, between the Company and John
Wilson (incorporated by reference to Exhibit 10.14 filed with Form
10-K on April 15, 2011).
|
|
|
|
2010
Equity Incentive Plan (incorporated by reference to Exhibit 10.18
filed with Form 10-K on April 15, 2011).
|
|
|
|
Employment
Agreement, dated May 1, 2013, by and between the Company and
Michael Abrams (incorporated by reference to Exhibit 10.15 filed
with the Form 10-K on March 28, 2014).
|
|
|
|
Amendment
No. 2 to Employment Agreement, dated July 14, 2014 between the
Company and John Wilson (incorporated by reference to Exhibit 10.1
filed with Form 8-K on July 15, 2014).
|
|
|
|
Demand
Promissory Note (incorporated by reference to Exhibit 10.1 filed
with Form 8-K on September 11, 2015).
|
|
|
|
Security
Agreement by and among the Company, Stephen Adele Enterprises, and
Stephen Adele, dated September 11, 2015 (incorporated by reference
to Exhibit 10.2 filed with Form 8-K on September 11,
2015).
|
|
|
|
Employment
Agreement, by and between FitLife Brands, Inc. and Patrick Ryan,
dated June 7, 2016 (incorporated by reference to Exhibit 10.1 filed
with Form 8-k on June 13, 2016).
|
|
|
|
Amendment
No. 3 to Employment Agreement, dated July 14, 2014 between the
Company and John Wilson (incorporated by reference to Exhibit
10.1 filed with Form 8-K on April 26, 2017).
|
|
|
|
Amendment
No. 1 to Employment Agreement, dated May 1, 2013, by and between
the Company and Michael Abrams (incorporated by reference to
Exhibit 10.2 filed with Form 8-K on April 26, 2017).
|
|
|
|
Loan
Modification Agreement, dated August 28, 2017, by and between the
Company and U.S. National Bank Association Bank (incorporated by
reference to Exhibit 10.1 filed with Form 8-K on August 31,
2017).
|
|
|
|
Merchant
Agreement by and between NDS Nutrition, Inc., iSatori, Inc., and
Compass Bank, d/b/a Commercial Billing Service (incorporated by
reference to Exhibit 3.1 filed with Form 8-K on January 25,
2018).
|
|
|
|
Continuing
Guarantee of FitLife Brands, Inc. (incorporated by reference to
Exhibit 3.1 filed with Form 8-K on January 25, 2018).
|
|
|
|
Consulting
Services Agreement, by and between the Company and Dayton Judd,
dated March 13, 2018 (incorporated by reference to Exhibit 10.26
filed with Form 10-K on April 17, 2018).
|
|
|
|
Abrams
Transition Agreement, dated August 15, 2018 (incorporated by
reference to Exhibit 10.1 filed with Form 8-K on September 12,
2018).
|
|
|
|
Form of
Subscription Agreement, dated November 13, 2018 (incorporated by
reference to Exhibit 10.1 filed with Form 10-Q on November 14,
2018).
|
|
|
|
Promissory
Note issued to Sudbury Capital
Fund, LP dated December 26, 2018 (incorporated by reference
to Exhibit 10.1 filed with Form 8-K on December 26,
2018).
|
|
|
|
Promissory
Note issued to Dayton Judd dated December 26, 2018 (incorporated by
reference to Exhibit 10.2 filed with Form 8-K on December 26,
2018).
|
|
|
|
Code of
Ethics (incorporated by reference to Exhibit 14.1 filed with Form
10-K on March 27, 2009).
|
|
|
|
Letter
from Tarvaran, Askelson & Company, LLP, dated April 25, 2017
(incorporated by reference to Exhibit 16.1 filed with Form 8-K on
April 26, 2017).
|
|
|
|
List of
Subsidiaries.
|
|
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act.
|
|
|
|
Certification
of Principal Financial and Accounting Officer Pursuant to Section
302 of the Sarbanes-Oxley Act.
|
|
|
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act.
|
|
|
|
Certification
of Chief Accounting Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act.
|
ITEM 16. FORM 10-K
SUMMARY
None.
In
accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, there unto duly
authorized.
|
Registrant
Date:
March 22,
2019
|
|
FitLife Brands, Inc.
By: /s/ Dayton
Judd
|
|
|
|
Dayton
Judd
|
|
|
|
Chief
Executive Officer (Principal Executive Officer)
|
|
Date:
March 22,
2019
|
|
By: /s/ Susan
Kinnaman
|
|
|
|
Susan
Kinnaman
|
|
|
|
Chief
Financial Officer (Principal Financial Officer)
|
In
accordance with the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on
behalf of the Company and in the capacities and on the dates
indicated.
|
Date:
March 22,
2019
|
|
By: /s/ Dayton
Judd
|
|
|
|
Dayton
Judd
|
|
|
|
Chief
Executive Officer (Principal Executive Officer), Chairman of the
Board
|
|
Date:
March 22,
2019
|
|
By: /s/ Lewis
Jaffe
|
|
|
|
Lewis
Jaffe
|
|
|
|
Director
|
|
Date:
March
22,
2019
|
|
By: /s/ Grant
Dawson
|
|
|
|
Grant
Dawson
|
|
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Director
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Date:
March
22,
2019
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By: /s/ Seth
Yakatan
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Seth
Yakatan
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Director
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Date:
March 22, 2019
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By: /s/ Todd
Ordal
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Todd
Ordal
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Director
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ITEM 8. FINANCIAL
STATEMENTS
FITLIFE BRANDS, INC.
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TABLE OF CONTENTS
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Page
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F-1
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F-2
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F-3
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F-4
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F-5
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F-6
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
FitLife
Brands, Inc and subsidiaries
Omaha,
Nebraska
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of FitLife
Brands, Inc. and Subsidiaries (the “Company”) as of December 31, 2018
and 2017 and the related consolidated statements of operations,
stockholders’ equity and cash flows for the years ended
December 31, 2018 and 2017, and the related notes (collectively
referred to as the “consolidated financial
statements”). In our opinion,
the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the
Company as of December 31, 2018 and 2017, and the consolidated
results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a
reasonable basis for our opinion.
We have
served as the Company’s auditor since 2017.
Weinberg
& Company, P.A.
Los
Angeles, California
March 22, 2019
CONSOLIDATED BALANCE SHEETS
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ASSETS:
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CURRENT
ASSETS
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Cash
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$259,000
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$1,262,000
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Accounts
receivable, net of allowance for doubtful accounts, product
returns, sales returns and incentive programs of $455,000 and
$1,264,000, respectively
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1,433,000
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1,958,000
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Inventories,
net of allowance for obsolescence of $107,000 and $49,000,
respectively
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3,523,000
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2,874,000
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Note
receivable
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-
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5,000
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Prepaid
expenses and other current assets
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223,000
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221,000
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Total
current assets
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5,438,000
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6,320,000
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Property
and equipment, net
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189,000
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296,000
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Goodwill
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225,000
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225,000
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Security
deposits
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10,000
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22,000
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TOTAL
ASSETS
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$5,862,000
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$6,863,000
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LIABILITIES
AND STOCKHOLDERS' EQUITY:
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CURRENT
LIABILITIES:
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Accounts
payable
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$2,628,000
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$2,974,000
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Accrued
expense and other liabilities
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420,000
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612,000
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Line
of credit
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-
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1,950,000
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Term
loan agreement
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-
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415,000
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Notes
payable – Related Parties
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500,000
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-
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Total
current liabilities
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3,548,000
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5,951,000
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CONTINGENCIES
AND COMMITMENTS
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STOCKHOLDERS’
EQUITY:
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Preferred stock, $0.01 par value 10,000,000 shares
authorized; 600 shares and no
shares issued and outstanding
as of December 31, 2018 and 2017, respectively
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-
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-
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Common stock, $0.01 par value, 150,000,000 shares
authorized; 11,119,430 and
10,681,710 shares issued and outstanding as of December 31, 2018 and 2017,
respectively
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111,000
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107,000
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Additional
paid-in capital
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32,007,000
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31,013,000
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Accumulated
deficit
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(29,804,000)
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(30,208,000)
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Total
stockholders' equity
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2,314,000
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912,000
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
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$5,862,000
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$6,863,000
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The
accompanying notes are an integral part of these consolidated
financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
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Revenue
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$17,077,000
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$17,799,000
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Cost
of Goods Sold
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10,332,000
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12,708,000
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Gross
Profit
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6,745,000
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5,091,000
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OPERATING
EXPENSE:
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General
and administrative
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3,333,000
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4,180,000
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Selling
and marketing
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2,690,000
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3,525,000
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Impairment
of intangible assets and goodwill
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-
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5,929,000
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Depreciation
and amortization
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69,000
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409,000
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Total operating expense
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6,092,000
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14,043,000
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OPERATING
INCOME (LOSS)
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653,000
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(8,952,000)
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OTHER
EXPENSE
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Interest
expense
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133,000
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112,000
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Other
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-
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8,000
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Total other expense
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133,000
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120,000
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INCOME
(LOSS) BEFORE INCOME TAXES
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520,000
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(9,072,000)
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PROVISION
FOR INCOME TAXES
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11,000
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689,000
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NET
INCOME (LOSS)
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509,000
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(9,761,000)
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PREFERRED
STOCK DIVIDEND
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(105,000)
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-
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NET INCOME (LOSS)
AVAILABLE TO COMMON SHAREHOLDERS
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$404,000
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$(9,761,000)
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NET
INCOME (LOSS) PER SHARE AVAILABLE TO COMMON
SHAREHOLDERS:
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Earnings (loss) Per Share - Basic and diluted
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$0.04
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$(0.93)
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Weighted average shares - Basic and diluted
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10,943,578
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10,518,239
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The
accompanying notes are an integral part of these consolidated
financial statements
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018 and 2017
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DECEMBER
31, 2016
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10,483,389
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$105,000
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$(44,000)
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$30,919,000
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$(20,447,000)
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$10,533,000
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Common
stock issued for services
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240,241
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2,000
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94,000
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96,000
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Cancellation
of treasury stock
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(41,920)
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-
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44,000
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(44,000)
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-
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Fair
value of options issued for services
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44,000
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44,000
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Net
loss
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(9,761,000)
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(9,761,000)
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DECEMBER
31, 2017
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-
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-
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10,681,710
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107,000
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-
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31,013,000
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(30,208,001)
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912,000
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Fair
value of common stock issued for services
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437,720
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4,000
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-
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159,000
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163,000
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Proceeds
from Issuance of Series A Preferred Shares
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600
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-
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-
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-
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-
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600,000
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600,000
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Accretion of beneficial conversion feature on Series A Preferred
Shares
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-
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-
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105,000
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(105,000)
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-
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Fair
value of vested options issued for services
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-
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-
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-
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130,000
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130,000
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Net
income
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-
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-
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-
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-
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509,000
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509,000
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DECEMBER
31, 2018
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600
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-
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11,119,430
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$111,000
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$-
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$32,007,000
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$(29,804,000)
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$2,314,000
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The
accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
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CASH FLOWS FROM OPERATING
ACTIVITIES:
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Net
income (loss)
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$509,000
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$(9,761,000)
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Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
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Depreciation
and amortization
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69,000
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409,000
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Allowance
for doubtful accounts, product returns, sales returns and incentive
programs
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(809,000)
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1,097,000
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Allowance
for inventory obsolescence
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58,000
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(90,000)
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Loss
on disposal of assets
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34,000
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5,000
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Fair
value of common stock issued for services
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163,000
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96,000
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Fair
value of options issued for services
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130,000
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44,000
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Impairment
of intangible assets and goodwill
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-
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5,929,000
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Loss
on write-off of note receivable
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-
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44,000
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Changes
in operating assets and liabilities:
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Accounts
receivable
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1,334,000
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(429,000)
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Inventories
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(707,000)
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973,000
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Deferred
taxes
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-
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689,000
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Prepaid
expenses
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(2,000)
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35,000
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Customer
note receivable
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5,000
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7,000
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Security
deposits
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12,000
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3,000
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Accounts
payable
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(346,000)
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1,377,000
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Accrued
expense and other liabilities
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(192,000)
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238,000
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Net
cash provided by operating activities
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258,000
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666,000
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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Purchase
of property and equipment
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-
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(185,000)
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Proceeds
from the sale of property and equipment
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4,000
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-
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Net
cash provided (used) in investing activities
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4,000
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(185,000)
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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Proceeds
from issuance of Notes Payable – Related Parties
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500,000
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-
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Proceeds
from issuance of Series A Preferred Stock
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600,000
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-
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Repayment
of line of credit
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(1,950,000)
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-
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Repayments
of term loan
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(415,000)
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(512,000)
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Net
cash used in financing activities
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(1,265,000)
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(512,000)
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CHANGE
IN CASH
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(1,003,000)
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(31,000)
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CASH,
BEGINNING OF PERIOD
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1,262,000
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1,293,000
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CASH,
END OF PERIOD
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$259,000
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$1,262,000
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Supplemental disclosure operating activities
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Cash
paid for interest
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$133,000
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$112,000
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Non-cash investing and financing activities
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Cancellation of
Treasury Stock
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-
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$44,000
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Accretion of
beneficial conversion feature on Series A Preferred
stock
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$105,000
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-
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The
accompanying notes are an integral part of these consolidated
financial statements
FITLIFE BRANDS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2018 AND 2017
NOTE 1. DESCRIPTION OF BUSINESS
Summary
FitLife Brands, Inc. (the
“Company”) is a national provider of innovative and
proprietary nutritional supplements for health-conscious consumers
marketed under the brand names NDS Nutrition Products™
(www.ndsnutrition.com),
PMD™ (www.pmdsports.com),
SirenLabs™ (www.sirenlabs.com),
CoreActive™ (www.coreactivenutrition.com),
and Metis Nutrition™ (www.metisnutrition.com)
(together, “NDS
Products”). In September
2015, the Company acquired iSatori, Inc.
(“iSatori”)
and as a result, the Company added three brands to its product
portfolio, including iSatori (www.isatori.com),
BioGenetic Laboratories, and Energize (together,
“iSatori
Products”). The NDS
Products are distributed 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 25,000 retail locations, which
include specialty, mass, and online.
The Company was incorporated in the State of
Nevada on July 26, 2005. In October 2008, the Company acquired the
assets of NDS Nutritional Products, Inc., a Nebraska corporation,
and moved those assets into its wholly owned subsidiary NDS
Nutrition Products, Inc., a Florida corporation
(“NDS”). The Company’s NDS Products are
sold through NDS and the iSatori Products are sold through iSatori,
Inc., a Delaware corporation and a wholly owned subsidiary of the
Company.
FitLife Brands is headquartered in Omaha,
Nebraska. For more information on the Company, please go to
http://www.fitlifebrands.com.
The Company’s common stock currently trades under the symbol
“FTLF” on the OTC:PINK market.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The
Company prepares its financial statements in accordance with
accounting principles generally accepted in the United States of
America. Significant accounting policies are as
follows:
Principle of Consolidation
The
consolidated financial statements include the accounts of the
Company and NDS Nutrition Products, Inc. Intercompany accounts
and transactions have been eliminated in the consolidated financial
statements.
Use of Estimates and Assumptions
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States
(“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, depreciable lives of property
and equipment, 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.
Revenue Recognition
The
Company’s revenue is comprised of sales of nutritional
supplements, primarily to GNC.
Through
December 31, 2017, the Company recognized revenue when risk of loss
transferred to our customers and collection of the receivable was
reasonably assured, which generally occurs when the product is
shipped. A product is not shipped without an order from the
customer and credit acceptance procedures performed.
On
January 1, 2018, the Company adopted Financial Accounting Standards
Update No. 2014-09 (ASU No. 2014-09) regarding revenue recognition.
The new standard provides authoritative guidance clarifying the
principles for recognizing revenue and developing a common revenue
standard for U.S. generally accepted accounting principles. The
core principle of the guidance is that an entity should recognize
revenue to depict the transfer of promised goods to customers in an
amount that reflects the consideration to which the entity expects
to be entitled in the exchange for those goods. Due to the nature
of the products sold by the Company, the adoption of the new
standard has had no quantitative effect on the financial
statements. However, the guidance requires additional disclosures
to help users of financial statements better understand the nature,
amount, timing, and uncertainty of revenue that is
recognized.
Under
the new guidance, revenue is recognized when control of promised
goods is transferred to our customers, in an amount that reflects
the consideration we expect to be entitled to in exchange for those
goods. The Company reviews its sales transactions to identify
contractual rights, performance obligations, and transaction
prices, including the allocation of prices to separate performance
obligations, if applicable. Revenue and costs of sales are
recognized once products are delivered to the customer’s
control and performance obligations are satisfied.
All
products sold by the Company are distinct individual products and
consist of nutritional supplements and related supplies. 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. Other than promotional
activities, which can vary from time to time but nevertheless are
entirely within the Company’s control, contracts with
customers contain no incentives or discounts that could cause
revenue to be allocated or adjusted over time.
Control
of products we sell transfers to customers upon shipment from our
facilities, 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. Payment for sales are generally made by
check, credit card, or wire transfer. Historically the Company has
not experienced any significant payment delays from
customers.
The
Company allows for returns within 30 days of purchase from
end-users. Our 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
substantially less than 5% of products are returned, 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.
Customer Concentration
Total
net sales to GNC during 2018 and 2017 were $13,102,000, and
$13,943,000, respectively, representing 77% and 78% of total
revenue, respectively. Accounts receivable attributable to GNC
before adjusting for product return reserves as of December 31,
2018 and 2017 were $1,543,000 and $2,625,000, respectively,
representing 82% and 82% of the Company’s total accounts
receivable balance, respectively. The loss of this customer would have a
material adverse effect on the Company’s business, financial
condition, and results of operation.
Accounts Receivable and Allowance for Doubtful
Accounts
All of
the Company’s accounts receivable balance is related to trade
receivables. Trade accounts receivable are recorded at the invoiced
amount and do not bear interest. The allowance for doubtful
accounts is the Company’s best estimate of the amount of
probable credit losses in its existing accounts receivable. The
Company will maintain allowances for doubtful accounts, estimating
losses resulting from the inability of its customers to make
required payments for products. Accounts with known financial
issues are first reviewed and specific estimates are recorded. The
remaining accounts receivable balances are then grouped into
categories by the amount of days the balance is past due, and the
estimated loss is calculated as a percentage of the total category
based upon past history. Account balances are charged off against
the allowance when it is probable that the receivable will not be
recovered. We maintain an insurance policy for iSatori Products for
international shipments, which protects the Company in the event
the international distributor does not or cannot remit
payment.
As of
December 31, 2018 and 2017, the Company had provided a reserve for
doubtful accounts of $10,000 and $112,000,
respectively.
Allowance for Product Returns, Sales Returns and Incentive
Programs
We
currently have a 30-day product return policy for NDS Products,
which allows for a 100% sales price refund, less a 20% restocking
fee, for the return of unopened and undamaged products purchased
from us online through one of our websites. Product sold to GNC may
be returned from store shelves or the distribution center in the
event product is damaged, short dated, expired or recalled.
Information for product returns is received on regular basis and
adjusted for accordingly. Adjustments for returns are based on
factual information and historical trends for both NDS products and
iSatori products and are special to each distribution channel. We
monitor, among other things, remaining shelf life and sell through
data on a weekly basis. If we determine there are any risks or
issues with any specific products, we accrue sales return
allowances based on management’s assessment of the overall
risk and likelihood of returns in light of all information
available.
GNC
maintains a customer satisfaction program that allows customers to
return product to the store for credit or refund. Subject to
certain terms and restrictions, GNC may require reimbursement from
vendors for unsaleable returned product through either direct
payment or credit against a future invoice. We also support a
product return policy for iSatori Products, whereby customers can
return product for credit or refund. Historically, with a few noted
exceptions, product returns have been immaterial. However, despite
the best efforts of management, product returns can and do occur
from time to time and can be material. The Company currently does
not establish reserve allowances against accounts receivable
related to sales returns or incentive programs. Sales returns are
captured on a weekly basis and accounts receivable are updated
accordingly.
The
Company also grants incentive programs it calls “vendor
funded discounts” at the time of sale. The expense is
recorded as a contra-revenue account.
As of
December 31, 2018 and 2017, the aggregate allowance for product
returns, sales returns and incentive programs amounted to $445,000
and $1,152,000, respectively.
Cost of Goods Sold
Cost
of goods sold is comprised of the costs of products, repacking
fees, in-bound freight charges, as well as certain internal
transfer costs. Expense not related to the production of our
products is classified as operating expense.
Delivery and Handling Expense
Shipping
and handling costs are comprised of purchasing and receiving costs,
inspection costs, warehousing costs, transfer freight costs, and
other costs associated with product distribution and are included
as part of operating expense.
Cash
and Cash Equivalents
The
Company’s cash balances on deposit with banks are guaranteed
by the Federal Deposit Insurance Corporation up to $250,000 at
December 31, 2018. The Company may be exposed to risk for the
amounts of funds held in bank accounts more than the insurance
limit. In assessing the risk, the Company’s policy is to
maintain cash balances with high quality financial institutions.
The Company had cash balances more than the guarantee during the
years ended December 31, 2018 and 2017.
Inventory
Inventory is stated at the lower of cost to
purchase and/or manufacture the inventory or the current estimated
market value of the inventory. We regularly review our inventory
quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product
demand and/or our ability to sell the product(s) concerned and
production requirements. Demand for our products can fluctuate
significantly. Factors that could affect demand for our products
include unanticipated changes in consumer preferences, general
market conditions or other factors, which may result in
cancellations of advance orders or a reduction in the rate of
reorders placed by customers. Additionally, our management’s
estimates of future product demand may be inaccurate, which could
result in an understated or overstated provision required for
excess and obsolete inventory.
As of
December 31, 2018 and 2017, the aggregate allowance for expiring,
slow moving and excess inventory amounted to $107,000 and $49,000,
respectively.
Property and Equipment
Property and
equipment is recorded at cost and depreciated over the estimated
useful lives of the assets using the straight-line method. The
Company amortizes leasehold improvements over the estimated life of
these assets or the term of the lease, whichever is shorter. When
items are retired or otherwise disposed of, income is charged or
credited for the difference between net book value and proceeds
realized. Ordinary maintenance and repairs are charged to
expense as incurred, and replacements and betterments are
capitalized.
The
range of estimated useful lives used to calculate depreciation for
principal items of property and equipment are as
follows:
|
Asset
Category
|
|
Depreciation
/ Amortization Period
|
|
Furniture
and Fixture
|
|
3
Years
|
|
Office
equipment
|
|
3
Years
|
|
Leasehold
improvements
|
|
5
Years
|
Management
regularly reviews property, equipment and other long-lived assets
for possible impairment. This review occurs annually or more
frequently if events or changes in circumstances indicate the
carrying amount of the asset may not be recoverable. Based upon
management’s annual assessment, there were no indicators of
impairment of the Company’s property and equipment and other
long-lived assets as of December 31, 2018 and 2017.
Goodwill and Intangible Assets
The
Company adopted FASB ASC Topic 350 Goodwill and Other Intangible Assets.
In accordance with ASC Topic 350, goodwill, which represents the
excess of the purchase price and related costs over the value
assigned to net tangible and identifiable intangible assets of
businesses acquired and accounted for under the purchase method,
acquired in business combinations is assigned to reporting units
that are expected to benefit from the synergies of the combination
as of the acquisition date. Under this standard, goodwill and
intangibles with indefinite useful lives are no longer amortized.
The Company assesses goodwill and indefinite-lived intangible
assets for impairment annually during the fourth quarter, or more
frequently if events and circumstances indicate impairment may have
occurred in accordance with ASC Topic 350. If the carrying value of
a reporting unit's goodwill exceeds its implied fair value, the
Company records an impairment loss equal to the difference. ASC
Topic 350 also requires that the fair value of indefinite-lived
purchased intangible assets be estimated and compared to the
carrying value. The Company recognizes an impairment loss when the
estimated fair value of the indefinite-lived purchased intangible
assets is less than the carrying value.
Identifiable
intangible assets are stated at cost and accounted for based on
whether the useful life of the asset is finite or indefinite.
Identified intangible assets with finite useful lives are amortized
using the straight-line methods over their estimated useful lives,
which was originally ten years. Intangible assets with indefinite
lives are not amortized to operations, but instead are reviewed for
impairment at least annually, or more frequently if there is an
indicator of impairment, the Company does not own any indefinite
lived intangible assets.
During
the year ended December 31, 2017, the Company recorded an
impairment charge of $5,929,000 related to the recorded goodwill
and intangible assets of iSatori. There were no impairment charges
incurred during the year ended December 31, 2018.
Income Taxes
The
Company accounts for income taxes under Financial Accounting
Standards Board’s (“FASB”) ASC 740
“Income Taxes.” Under the asset and liability method of
ASC 740, deferred tax assets and liabilities are recognized for the
expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets
and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. The deferred tax
assets of the Company relate primarily to operating loss
carry-forwards for federal income tax purposes. A full valuation
allowance for deferred tax assets has been provided because the
Company believes it is not more likely than not that the deferred
tax asset will be realized. Realization of deferred tax assets is
dependent on the Company generating sufficient taxable income in
future periods.
The
Company periodically evaluates its tax positions to determine
whether it is more likely than not that such positions would be
sustained upon examination by a tax authority for all open tax
years, as defined by the statute of limitations, based on their
technical merits. The Company accrues interest and penalties, if
incurred, on unrecognized tax benefits as components of the income
tax provision in the accompanying consolidated statements of
operations. As of December 31, 2018, and 2017, the Company has not
established a liability for uncertain tax positions.
Net Income (Loss) Per Share
Basic
net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed by dividing
the net income applicable to common stock holders by the weighted
average number of common shares outstanding plus the number of
additional common shares that would have been outstanding if all
dilutive potential common shares had been issued using the treasury
stock method. Potential common shares are excluded from the
computation when their effect is antidilutive. The dilutive effect
of potentially dilutive securities is reflected in diluted net
income per share if the exercise prices were lower than the average
fair market value of common shares during the reporting
period.
The
following potentially dilutive shares were excluded from the shares
used to calculate diluted earnings per share as their inclusion
would be anti-dilutive:
|
|
|
|
|
|
|
|
Series A Preferred
Stock
|
1,304,348
|
-
|
|
Warrants
|
391,304
|
60,620
|
|
Options
|
1,562,087
|
870,284
|
|
Total
|
3,257,739
|
930,904
|
Fair Value Measurements
The Company uses various inputs in determining the
fair value of its investments and measures these assets on a
recurring basis. Financial assets recorded at fair value in the
balance sheets are categorized by the level of objectivity
associated with the inputs used to measure their fair value.
ASC 820 establishes a three-level valuation hierarchy for the use
of fair value measurements based upon the transparency of inputs to
the valuation of an asset or liability as of the measurement
date:
●
Level 1
- Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets or
liabilities.
●
Level 2
- Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly, including quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or
similar assets or liabilities in markets that are not active;
inputs other than quoted prices that are observable for the asset
or liability (e.g., interest rates); and inputs that are derived
principally from or corroborated by observable market data by
correlation or other means.
●
Level 3
- Inputs that are both significant to the fair value measurement
and unobservable. These inputs rely on management's own assumptions
about the assumptions that market participants would use in pricing
the asset or liability. The unobservable inputs are developed based
on the best information available in the circumstances and may
include the Company’s own data.
The
carrying amounts of financial assets and liabilities, such as cash
and cash equivalents, accounts receivable and accounts payable,
approximate their fair values because of the short maturity of
these instruments. The carrying values of the line of credit, notes
payable and long-term financing obligations approximate their fair
values due to the fact that the interest rates on these obligations
are based on prevailing market interest rates.
Stock Compensation Expense
The Company periodically issues stock options and
warrants to employees and non-employees in non-capital raising
transactions for services rendered. The Company accounts for stock
option and warrant grants issued and vesting to employees based on
the authoritative guidance provided by the Financial Accounting
Standards Board (“FASB”) where the value of the award is measured
on the date of grant and recognized as compensation on the
straight-line basis over the vesting period. The Company accounts
for stock option and warrant grants issued and vesting to
non-employees in accordance with the authoritative guidance of the
FASB where the value of the stock compensation is based upon the
measurement date as determined at either (i) the date at which a
performance commitment is reached, or (ii) at the date at which the
necessary performance to earn the equity instruments are complete.
Options granted to non-employees are revalued each reporting period
to determine the amount to be recorded as an expense in the
respective period. As the options vest, they are valued on each
vesting date and an adjustment is recorded for the difference
between the value already recorded and the then current value on
the date of vesting. In certain circumstances where there are no
future performance requirements by the non-employee, option grants
are immediately vested and the total stock-based compensation
charge is recorded in the period of the measurement
date.
The
fair value of the Company’s stock option and warrant grants
are estimated using the Black-Scholes Option Pricing model, which
uses certain assumptions related to risk-free interest rates,
expected volatility, expected life of the stock options or
warrants, and future dividends. Compensation expense is recorded
based upon the value derived from the Black-Scholes Option Pricing
model, and based on actual experience. The assumptions used in the
Black-Scholes Option Pricing model could materially affect
compensation expense recorded in future periods.
Segments
The
Company operates in one segment for the distribution of our
products. In accordance with the “Segment
Reporting” Topic of the ASC, the Company’s chief
operating decision maker has been identified as the Chief Executive
Officer and President, who reviews operating results to make
decisions about allocating resources and assessing performance for
the entire Company. Existing guidance, which is based on a
management approach to segment reporting, establishes requirements
to report selected segment information quarterly and to report
annually entity-wide disclosures about products and services, major
customers, and the countries in which the entity holds material
assets and reports revenue. All material operating units
qualify for aggregation under “Segment Reporting” due
to their similar customer base and similarities in: economic
characteristics; nature of products and services; and procurement,
manufacturing and distribution processes. Since the Company
operates in one segment, all financial information required by
“Segment Reporting” can be found in the accompanying
consolidated financial statements.
Recent Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases. This update will require the
recognition of a right-of-use asset and a corresponding lease
liability, initially measured at the present value of the lease
payments, for all leases with terms longer than 12 months. For
operating leases, the asset and liability will be expensed over the
lease term on a straight-line basis, with all cash flows included
in the operating section of the statement of cash flows. For
finance leases, interest on the lease liability will be recognized
separately from the amortization of the right-of-use asset in the
statement of comprehensive income and the repayment of the
principal portion of the lease liability will be classified as a
financing activity while the interest component will be included in
the operating section of the statement of cash flows. ASU 2016-02
is effective for annual and interim reporting periods beginning
after December 15, 2018. Early adoption is permitted. Upon
adoption, leases will be recognized and measured at the beginning
of the earliest period presented using a modified retrospective
approach. The Company is currently evaluating the impact of the
adoption of ASU 2016-02 on its financial statements and related
disclosures.
Other
recent accounting pronouncements issued by the FASB, including its
Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did
not or are not believed by management to have a material impact on
the Company’s present or future financial
statements.
NOTE 3 – MERCHANT AGREEMENT
In
December 2017, the Company, through
NDS and iSatori (together, the “Subsidiaries”),
entered into a Merchant Agreement with Compass Bank, d/b/a Commercial Billing Service
(“Compass”) (“Factor”). Under the terms of the Merchant
Agreement, the Company sold to Compass certain accounts owing from
customers of such Subsidiaries, including GNC. All amounts due
under the terms of the Merchant Agreement, totaling up to $5.0
million, was guaranteed by the Company under the terms of a
Continuing Guarantee. The Company paid
a fee calculated based on the London Interbank Offering Rate
(“LIBOR”) plus 550 basis points, which fee
was based on the outstanding gross amount of accounts receivable
factored in excess of total cash collected by Compass from
customers against such amounts. The applicable LIBOR rate for the
year ended December 31, 2018 was 2.2%. Additionally, the Company
was charged a non-utilization fee by which the average outstanding
amount of obligations was less than $2.0 million, as amended. The
Company had pledged collateral of all present and future inventory,
accounts, accounts receivable, general intangibles and returned
goods, together with all reserves, balances, deposits, and property
at any time owing to the credit of the Company with Compass. During
the year ended December 31, 2017, no amounts were factored under
this agreement.
During the year
ended December 31, 2018, total accounts receivable factored under
this agreement amounted to $14.6 million, of which, $14.0 million
were ultimately collected by Compass from the corresponding
customers as of December 31, 2018. In addition, the Company also
incurred various factoring fees in the aggregate of $128,000, which
was reported as part of interest expense.
In
December 2018, Compass informed the Company that the agreement
would not be renewed upon its expiration in February 2019. As a
result, the Company paid Compass $590,000 to settle certain
factored receivables that were not yet collected by Compass at that
time. As of December 31, 2018, the Company had settled all amounts
due to Compass pursuant to this agreement and the agreement was
terminated.
NOTE 4. INVENTORIES
At
December 31, 2018, the value of the Company’s inventory was
$3,523,000. At December 31, 2017, the value of the Company’s
inventory was $2,874,000.
|
|
|
|
|
|
|
|
Finished
goods
|
$3,168,000
|
$2,512,000
|
|
Components
|
462,000
|
411,000
|
|
Allowance for
obsolescence
|
(107,000)
|
(49,000)
|
|
Total
|
$3,523,000
|
$2,874,000
|
NOTE 5. PROPERTY AND EQUIPMENT
The
Company had fixed assets as of December 31, 2018 and 2017 as
follows:
|
|
|
|
|
|
|
|
Equipment
|
$902,000
|
$972,000
|
|
Accumulated
depreciation
|
(713,000)
|
$(677,000)
|
|
Total
|
$189,000
|
$295,000
|
Depreciation
expense was $69,000 for December 31, 2018 compared to $55,000 for
December 31, 2017. During the year ended December 31, 2018, the
Company sold property and equipment with a net book value of
$38,000 for proceeds of $4,000, resulting in a loss on sale of
$34,000 which has been included as an operating expense in the
accompanying statement of operations.
NOTE 6. NOTES PAYABLES
Line of Credit and Term Loan – US Bank
|
|
|
|
|
|
|
|
Line of
Credit
|
$-
|
$1,950,000
|
|
Term
Loan
|
-
|
415,000
|
|
Total
|
$-
|
$2,365,000
|
The Company previously obtained a line of credit
(“LOC”) of $3.0 million and a separate term loan
of $2.6 million (the “Term Note”) with U.S. Bank. Both the LOC and the Term
Note were secured by the Company’s tangible and intangible
assets, and had an average interest rate of 5% per annum. The LOC,
as amended, matured in December 2017, while the Term Note did not
mature until August 2018. As of December 31, 2017, the outstanding
balance of these notes payable totaled $2,365,000 and was deemed in
default due to non-compliance with certain financial
covenants.
In
January 2018, the Company paid U.S. Bank a total of $2,365,000 to
settle the outstanding balance of the LOC and the Term Note. As of
December 31, 2018, the LOC and Term Note had been fully
paid.
Notes Payable – Related Parties
On
December 26, 2018, the Company issued a line of credit promissory
note to Sudbury Capital Fund, LP, an entity controlled by the
Company’s CEO, in the principal amount of $600,000, with an
initial advance to the Company in the amount of $300,000. In
addition, on December 26, 2018, the Company also issued a
promissory note to Dayton Judd, CEO, in the principal amount of
$200,000 (together with the Sudbury Note, the “Notes”). As of December 31, 2018,
the aggregate balance of the notes payable amounted to
$500,000.
The
Notes are unsecured and mature on the earlier to occur of a Change
in Control of the Company, as defined in the Notes, or December 31,
2019, and require monthly principal and interest payments beginning
April 1, 2019, with a final payment of unpaid principal and
interest due December 31, 2019. The Notes bear interest at a rate
of 9.0% per annum. Interest due under the terms of the Notes may be
paid in cash or, up to and including March 31, 2019, can be accrued
and added to the outstanding principal and accrued interest due and
payable under the terms of the Notes. All amounts due and payable
under the terms of the Notes are guaranteed by the NDS and iSatori,
wholly-owned subsidiaries of the Company.
NOTE 7. EQUITY
Common Stock
The
Company is authorized to issue 150 million shares of common stock,
$0.01 par value per share, of which 11,119,430 shares of common
stock were issued and outstanding as of December 31,
2018.
The following were Common Stock transactions during the year ended
December 31, 2018:
During
the year ended December 31, 2018, the Company issued 437,720 shares
of common stock with a fair value of $143,000 to employees and
directors for services rendered. The shares were valued at the
respective date of issuance.
In
July 2018, in connection with the appointment of Mr. Dayton Judd as
the Company’s Chief Executive Officer, the Company granted
Mr. Judd an aggregate of 450,000 shares of restricted common stock,
which include vesting conditions subject to the achievement of
certain market prices of the Company’s common stock. Such
shares are also subject to forfeiture in the event Mr. Judd resigns
from his position or is terminated by the Company. As the vesting
of the 450,000 shares of restricted common stock is subject to
certain market conditions, pursuant to current accounting
guidelines, the Company determined the fair value to be $105,000,
computed using the Monte Carlo simulations on a binomial model with
the assistance of a valuation specialist with a derived service
period of three years. During the period ended December 31, 2018,
the Company recorded compensation expense of $20,000 to amortize
the fair value of these restricted common shares based upon the
prorated derived service period. As of December 31, 2018, there was
unearned compensation of $85,000 that will be amortized as a
compensation cost on a straight-line basis through
2020.
The following were Common Stock transactions during the year ended
December 31, 2017:
During
the year ended December 31, 2017, the Company issued 240,241 shares
of common stock with a fair value of $95,967 to employees and
directors for services rendered.
During
the year ended December 31, 2017, the Company retired 41,920 shares
of treasury stock.
Withdrawal of Former Series A Preferred, Series B Preferred and
Series C Preferred
On
November 13, 2018, the Company filed Certificates of Withdrawal
with the Secretary of State of the State of Nevada for its (i)
Series A Convertible Preferred Stock, (ii) 10% Cumulative Perpetual
Series B Preferred Stock and (iii) Series C Convertible Preferred
Stock, none of which were issued and outstanding, thereby
withdrawing each of the series of preferred stock and returning all
previously designated shares to their status as authorized
preferred stock available for issuance.
Series A Preferred Stock
The
Company is authorized to issue up to 10 million shares of preferred
stock, par value $0.01 per share.
In
November 2018, the Company issued 600 shares of the Company’s
Series A Senior Convertible Preferred Stock in exchange for cash of
$600,000 or $1,000 per share, to three investors, two of whom are
related-party investors. The Series A Preferred shares have the
following rights and privileges:
(i)
Each share of the
Series A Preferred has a liquidation preference equal to the Stated
Value plus all accrued and unpaid dividends (the
“Liquidation
Preference”), and is convertible into that number of
shares of the Company’s common stock equal to the Liquidation
Preference divided by $0.46 (the “Conversion Shares”).
(ii)
Holders of Series A
Preferred may elect to convert shares of Series A Preferred into
Conversion Shares at any time. The Company, at its sole option, may
choose to redeem all or a portion of Series A Preferred at any time
for 115% of the Liquidation Preference
per share (the “Redemption
Price”);
provided,
however, in the event of a
Change of Control (as such term is defined in the Certificate of
Designations), the Company shall be required to redeem all issued
and outstanding shares of Series A Preferred for the Redemption
Price.
(iii)
Holders of Series A Preferred have the right to
vote, on an as-converted basis, with the holders of the
Company’s common stock on any matter presented to the
Company’s stockholders for their action or consideration. So
long as any shares of Series A Preferred remain outstanding,
holders of the Series A Preferred have the right to elect one
director to the Company’s Board of Directors (the
“Series A
Director”);
provided,
however, so long as Dayton Judd
remains on the Company’s Board, he shall be deemed to be the
Series A Director. Furthermore, so long as any shares of Series A
Preferred remain outstanding, the Company may not, without the
affirmative vote or consent of at least 50% of the shares of issued
and outstanding Series A Preferred on such date, voting as a
separate class, (i) authorize, create, issue or alter any class of
debt or equity securities ranking pari passu or senior to the
Series A Preferred; (ii) amend provisions of the Series A
Preferred; (iii) repurchase, redeem or pay dividends on any class
of junior securities, subject to certain exceptions; (iv) amend the
Company’s Articles of Incorporation or Bylaws in any way that
will have a material adverse effect on the rights of the Series A
Preferred; (v) after February 16, 2019, increase the size of the
Board to more than five members; (vi) take any action that would
constitute a Fundamental Transaction (as such term is defined in
the Certificate of Designations); or (vii) incur any additional
indebtedness other than through the Company’s Merchant
Agreement, any other line of credit with Compass or under any
similar replacement facility.
(iv)
Piggyback
registration rights for the first two years following November 13,
2018, and certain demand registration rights, thereafter, as more
specifically set forth in the Certificate of
Designations.
(v)
Accrues
dividends at a rate of 12% per annum.
As part
of the offering, the Company also granted the investors warrants to
purchase 391,304 shares of common stock. The warrants are fully
vested, exercisable at $0.46 per share and will expire five years
after the date of issuance, or November 2023.
The
issuance of the Series A convertible preferred stock gave rise to a
beneficial conversion feature of $105,000 as a result of the
allocation of the value of the warrants granted and proceeds
received based on proportion of its fair value to the sum of the
fair value of the two instruments issued. The Company accounted for
the beneficial conversion features in accordance with ASC 470-20,
Accounting for Debt with Conversion and Other Options, resulting in
a deemed dividend at December 31, 2018.
As
of December 31, 2018, there were $9,000 of outstanding and
undeclared cumulative dividends payable. Pursuant to current
accounting guidelines, the Company will record the accrued
dividends upon declaration of the Company’s Board of
Directors.
Options
The
following table summarizes option activity:
|
|
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Life
(Years)
|
|
Outstanding,
December 31, 2016
|
969,924
|
$2.81
|
5.12
|
|
Issued
|
-
|
-
|
|
|
Exercised
|
-
|
-
|
|
|
Forfeited
|
(99,640)
|
3.65
|
|
|
Outstanding,
December 31, 2017
|
870,284
|
$2.71
|
4.16
|
|
Issued
|
875,000
|
0.35
|
|
|
Exercised
|
-
|
|
|
|
Forfeited
|
(200,070)
|
4.80
|
|
|
Outstanding,
December 31, 2018
|
1,545,214
|
$1.31
|
5.69
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Remaining
Life
(Years)
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Exercise
Price
|
|
$0.28 - $2.30
|
1,480,800
|
5.73
|
$0.99
|
1,019,715
|
$1.22
|
|
$2.31 - $14.43
|
64,414
|
4.97
|
$8.60
|
64,414
|
$8.67
|
|
|
1,545,214
|
5.69
|
$1.31
|
1,084,129
|
$1.65
|
The
closing stock price for the Company’s stock on December 31,
2018 was $0.43, as such, there was an intrinsic value of
outstanding options of $107,000.
During
the year ended December 31, 2018, the
Company granted stock options to employees for services rendered to
purchase 875,000 shares of Company common stock. The stock options
are exercisable at a price of $0.28 per share and $0.42 per share,
expire in five and ten years and vest as follows: one-third vested
immediate upon issuance, and the remainder vest equally in equal
annual installments over a period of two years from grant
date.
Total
fair value of these options at grant date was approximately
$187,000, which was determined using the Black-Scholes Option
Pricing model with the following average assumption: stock price of
$0.28 per share, expected term of six years, volatility of 88%,
dividend rate of 0% and risk-free interest rate of 2.92%. The
risk-free interest rate is based on the U.S. Treasury yield curve
in effect at the time of measurement corresponding with the
expected term of the share option award; the expected term
represents the weighted-average period of time that share option
awards granted are expected to be outstanding giving consideration
to vesting schedules and historical participant exercise behavior;
the expected volatility is based upon historical volatility of the
Company’s common stock; and the expected dividend yield is
based on the fact that the Company has not paid dividends in the
past and does not expect to pay dividends in the
future.
During
the year ended December 31, 2018, the Company recognized
compensation expense of $130,000 based upon the vesting of these
options. As of December 31, 2018, there was $132,000 of unvested
stock compensation that will be recognized as an expense in future
periods as the options vest.
There
were no stock options granted in 2017. During the year ended
December 31, 2017, the Company recognized compensation expense of
$44,000 based upon the vesting of options granted in prior
periods.
Warrants
The
following table summarizes warrant activity:
|
|
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Life (Years)
|
|
Outstanding,
December 31, 2016
|
60,620
|
$12.99
|
1.39
|
|
Issued
|
-
|
|
|
|
Exercised
|
-
|
|
|
|
Forfeited
|
-
|
|
|
|
Outstanding,
December 31, 2017
|
60,620
|
$12.99
|
0.39
|
|
Issued
|
391,304
|
0.46
|
5.00
|
|
Exercised
|
-
|
-
|
|
|
Forfeited
|
(60,620)
|
-
|
|
|
Outstanding,
December 31, 2018, vested and exercisable
|
391,304
|
$0.46
|
4.87
|
The
closing stock price for the Company’s stock on December 31,
2018 was $0.43, as such, there was no intrinsic value.
NOTE 8. INCOME TAXES
The
Company had available Federal net operating loss carryforwards of
approximately $28.0 million and $28.1 million as of December 31,
2018 and 2017, respectively, to reduce future taxable income. The
Federal carryforward expires between 2026 through 2037. Given the
Company’s history of net operating losses, management has
determined that it is more likely than not that the Company will
not be able to realize the tax benefit of the carryforwards.
Accordingly, the Company has not recognized a deferred tax asset
for this benefit.
Due
to the restrictions imposed by Internal Revenue Code Section 382
regarding substantial changes in ownership of companies with loss
carry forwards, the utilization of the Company’s NOL may be
limited to statutory limits as a result of recent change in stock
ownership. NOLs incurred subsequent to the latest change in
control, are not subject to the limitation.
The
Company recognizes tax benefits from uncertain tax positions only
if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. As of
December 31, 2018 and 2017, the Company did not have a liability
for unrecognized tax benefits.
The
Company recognizes as income tax expense, interest and penalties on
uncertain tax provisions. As of December 31, 2018, and 2017, the
Company has not accrued interest or penalties related to uncertain
tax positions. Tax years 2010 through 2018 remain open to
examination by the major taxing jurisdictions to which the Company
is subject.
Upon
the attainment of consistent taxable income by the Company,
management will assess the likelihood of realizing the tax benefit
associated with the use of the carryforwards and will recognize the
appropriate deferred tax asset at that time.
During
the year ended December 31, 2018, the Company recorded a provision
for income of tax of $11,000 pertaining to various state income
taxes. There was no provision for Federal income taxes due to the
utilization of the Company’s NOL.
During
the year ended December 31, 2017, the Company recorded provision
for income tax of $689,000 to account for the allowance recognized
for the deferred tax assets of $689,000.
Significant components
of the Company’s deferred income tax assets are as
follows:
|
|
|
|
|
Net operating loss
carryforward
|
7,262,000
|
7,283,000
|
|
Allowances for
sales returns, bad debt and inventory
|
15,000
|
1,924,000
|
|
Share based
compensation
|
34,000
|
36,000
|
|
Other
|
46,000
|
51,000
|
|
Total deferred
asset
|
7,357,000
|
9,294,000
|
|
Valuation
allowance
|
(7,357,000)
|
(9,294,000)
|
|
|
|
|
|
Net deferred tax
asset
|
$-
|
$-
|
Reconciliation of the effective income tax rate to the U.S.
statutory rate is as follows:
|
|
|
|
|
|
|
|
Federal Statutory
tax rate
|
(21%)
|
(34%)
|
|
State tax, net of
federal benefit
|
(5%)
|
(5%)
|
|
|
(26%)
|
(39%)
|
|
Effect of change in
tax rate
|
-%
|
12%
|
|
Valuation
allowance
|
26%
|
27%
|
|
Effective tax
rate
|
-%
|
-%
|
NOTE 9. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On
December 31, 2014, various plaintiffs, individually and on behalf
of a purported nationwide and sub-class of purchasers, filed a
lawsuit in the U.S. District Court for the Northern District of
California, captioned Ryan et al.
v. Gencor Nutrients, Inc. et al., Case No.: 4:14-CV-05682.
The lawsuit includes claims made against the manufacturer and
various producers and sellers of products containing a nutritional
supplement known as Testofen, which is manufactured and sold by
Gencor Nutrients, Inc. (“Gencor”). Specifically, the Ryan
plaintiffs allege that various defendants have manufactured,
marketed and/or sold Testofen, or nutritional supplements
containing Testofen, and in doing so represented to the public that
Testofen had been clinically proven to increase free testosterone
levels. According to the plaintiffs, those claims are false and/or
not statistically proven. Plaintiffs seek relief under violations
of the Racketeering Influenced Corrupt Organizations Act, breach of
express and implied warranties, and violations of unfair trade
practices in violation of California, Pennsylvania, and Arizona
law. NDS utilizes Testofen in a limited number of nutritional
supplements it manufactures and sells pursuant to a license
agreement with Gencor.
On
February 19, 2015 this matter was transferred to the Central
District of California to the Honorable Manuel Real. Judge Real had
previously issued an order dismissing a similar lawsuit that had
been filed by the same lawyer who represents the plaintiffs in the
Ryan matter. The United States Court of Appeals reversed part of
the dismissal issued by Judge Real and remanded the case back down
to the district court for further proceedings. As a result, the
parties in the Ryan matter issued a joint status report and that
matter is again active.
We are
currently not involved in any litigation except noted above that we
believe could have a material adverse effect on our financial
condition or results of operations. Other than described above,
there is no action, suit, proceeding, inquiry or investigation
before or by any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge
of the executive officers of the Company or any of its
subsidiaries, threatened against or affecting the Company, our
common stock, any of our subsidiaries or of the Company’s or
our subsidiaries’ officers or directors in their capacities
as such, in which an adverse decision could have a material adverse
effect.
Lease Commitments
The
Company is headquartered in Omaha, Nebraska and maintains a lease
at a cost of approximately $8,000 per month, which lease is
currently set to expire in May 2024. The Omaha facility is a total
of 11,088 square feet inclusive of approximately 6,179 square feet
of on-site warehouse space. iSatori currently leases 4,732
square feet of space at 15000 W. 6th Avenue, Suite 400, Golden,
Colorado 80401, at a cost of $6,000 per month. The Company
subleased its Golden property as of February 1, 2018 and it expires
January 31, 2020.
Rent
expense for the year ended December 31, 2018 was $104,000, of which
$50,000 is included in cost of goods sold and $54,000 is included
in operating expense in the accompanying consolidated statement of
operations. Rent expense for the year ended December 31, 2017 was
$264,000 of which $8,400 is included in cost of goods sold and
$255,600 is included in operating expenses.
Minimum
annual rental commitments under non-cancelable leases are as
follows:
|
Years ending
December 31,
|
|
|
|
|
2019
|
$111,000
|
$(56,000)
|
$55,000
|
|
2020
|
62,000
|
(5,000)
|
57,000
|
|
2021
|
61,000
|
0
|
61,000
|
|
2022
|
61,000
|
0
|
61,000
|
|
2023 and
thereafter
|
107,000
|
0
|
107,000
|
|
TOTAL
|
402,000
|
$(61,000)
|
$402,000
|
NOTE 10. SUBSEQUENT EVENTS
Pursuant to the
terms of the line of credit promissory note with Sudbury Capital
Fund, LP that was issued in December 2018, the Company received
$300,000 in February 2019 (see Note 6).