SEC Connect
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☒
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT
For the transition period from N/A to N/A
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Commission File No. 000-52369
FITLIFE BRANDS,
INC.
(Name of small business issuer as specified in its
charter)
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Nevada
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20-3464383
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(State or other jurisdiction of incorporation)
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(IRS Employer Identification No.)
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4509 S. 143rd Street, Suite 1, Omaha, NE 68137
(Address of principal executive offices)
(402) 884-1894
(Issuer’s telephone number)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed
all reports required by Section 13 or 15(d) of the Securities
Exchange Act of 1934 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ☒ No
☐
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non–accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b–2 of the Exchange Act.
(Check one):
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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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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b–2 of the Exchange
Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at November 14, 2016
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Common stock, $0.01 par value
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10,450,965
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FITLIFE BRANDS,
INC.
INDEX TO FORM 10-Q FILING
FOR THE QUARTER ENDED SEPTEMBER 30, 2016
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CERTIFICATIONS
PART I
Item 1. Financial Statements
The
accompanying reviewed interim consolidated financial statements
have been prepared in accordance with the instructions to Form
10-Q. Therefore, they do not include all information and
footnotes necessary for a complete presentation of financial
position, results of operations, cash flows, and stockholders'
equity in conformity with generally accepted accounting
principles. Except as disclosed herein, there has been
no material change in the information disclosed in the notes to the
consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31,
2015. In the opinion of management, all adjustments
considered necessary for a fair presentation of the results of
operations and financial position have been included and all such
adjustments are of a normal recurring nature. Operating
results for the three and nine months ended September30, 2016 are
not necessarily indicative of the results that can be expected for
the year ending December 31, 2016.
FITLIFE BRANDS, INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
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ASSETS:
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CURRENT
ASSETS
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Cash
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$1,986,362
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$1,532,550
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Accounts
receivable, net
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4,054,240
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2,684,567
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Security
deposits
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24,956
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26,077
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Inventory
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4,432,975
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4,790,301
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Note
receivable, current portion
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6,532
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16,517
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Prepaid
income tax
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1,000
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152,000
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Prepaid
expenses and other current assets
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189,316
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334,483
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Total
current assets
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10,695,380
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9,536,494
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PROPERTY
AND EQUIPMENT, net
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187,514
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226,804
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Note
receivable, net of current portion
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52,695
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52,695
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Deferred
Taxes
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689,000
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812,879
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Intangibles
assets, net
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6,613,005
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6,929,505
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TOTAL ASSETS
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$18,237,595
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$17,558,378
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LIABILITIES
AND STOCKHOLDERS' EQUITY:
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CURRENT
LIABILITIES:
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Accounts
payable
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$2,697,100
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$3,363,906
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Accrued
expenses and other liabilities
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633,891
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1,003,832
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Litigation
Reserve
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-
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95,775
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Income
tax payable
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13,000
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-
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Line
of credit
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2,010,305
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1,490,305
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Term
loan agreement, current portion
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539,951
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525,589
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Notes
payable
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42,211
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54,036
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Total
current liabilities
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5,936,457
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6,533,443
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LONG-TERM
DEBT, net of current portion
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507,340
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914,138
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TOTAL
LIABILITIES
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6,443,797
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7,447,581
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CONTINGENCIES
AND COMMITMENTS
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-
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-
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STOCKHOLDERS'
EQUITY:
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Common
stock, $.01 par value, 150,000,000 shares authorized;
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10,413,621 and 10,444,357 issued and
outstanding
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as of September 30, 2016 and December 31, 2015,
respectively
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104,136
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104,443
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Subscribed
common stock
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373
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97
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Treasury
stock
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-
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(142,228)
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Additional
paid-in capital
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30,971,453
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30,963,122
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Accumulated
deficit
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(19,282,165)
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(20,814,637)
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Total stockholders' equity
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$11,793,798
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$10,110,797
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
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$18,237,595
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$17,558,378
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The
accompanying notes are an integral part of these consolidated
financial statements
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FITLIFE BRANDS, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND
2015
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Revenue
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$5,340,616
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$6,270,524
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$21,615,605
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$15,139,949
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Total
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5,340,616
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6,270,524
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21,615,605
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15,139,949
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Cost
of Goods Sold
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3,353,224
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3,658,541
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12,469,081
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9,015,846
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Gross
Profit
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1,987,391
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2,611,983
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9,146,523
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6,124,103
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OPERATING
EXPENSES:
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General
and administrative
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1,131,692
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854,729
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3,854,128
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2,469,866
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Selling
and marketing
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1,088,400
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1,258,537
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3,138,323
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2,773,293
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Depreciation
and amortization
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125,751
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55,472
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376,502
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166,137
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Total
operating expenses
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2,345,844
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2,168,738
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7,368,952
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5,409,296
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OPERATING
INCOME (LOSS)
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(358,452)
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443,245
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1,777,571
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714,807
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OTHER
(INCOME) AND EXPENSES
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Interest
expense
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27,415
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18,745
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84,016
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59,273
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Other
expense (income)
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(150)
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-
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(2,917)
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-
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Total
other (income) expense
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27,266
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18,745
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81,099
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59,273
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INCOME
TAXES (BENEFIT)
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(25,000)
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41,242
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164,000
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71,000
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NET
INCOME (LOSS)
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$(360,718)
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$383,259
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$1,532,472
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$584,535
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NET
INCOME (LOSS) PER SHARE:
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Basic
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$(0.03)
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$0.05
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$0.15
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$0.07
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Diluted
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$(0.03)
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$0.04
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$0.13
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$0.07
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Basic
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10,446,954
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8,069,900
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10,413,703
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8,115,436
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Diluted
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10,446,954
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8,721,259
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11,515,169
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8,728,959
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The
accompanying notes are an integral part of these consolidated
financial statements
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CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND
2015
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Net
income
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$1,532,472
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$584,533
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Adjustments
to reconcile net income to net cash used
in operating activities:
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Depreciation
and amortization
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376,502
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166,137
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Capitalization
of select merger costs
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-
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(57,507)
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Common
stock issued (cancelled) for services
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105,501
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405,741
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Warrants
and options issued (cancelled) for services
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45,028
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-
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Gain
on write-up of investment
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-
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-
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Intercompany
transfer
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-
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-
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Changes
in operating assets and liabilities:
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Accounts receivable
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(1,369,673)
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(3,153,711)
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Inventory
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357,326
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614,659
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Deferred tax asset
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123,879
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-
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Prepaid income tax
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151,000
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-
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Prepaid expenses
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145,167
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(184,250)
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Note receivable
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9,985
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(750,000)
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Deposits
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-
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-
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Accounts payable
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(666,806)
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1,720,559
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Accrued liabilities
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(369,941)
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172,681
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Litigation reserve
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(95,775)
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-
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Income tax payable
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13,000
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(37,000)
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Net
cash provided by (used in) operating activities
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357,665
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(518,158)
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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Purchase
of property and equipment
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(21,619)
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(4,106)
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Long-term
investment
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2,027
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-
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Repurchases
of common stock
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-
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(398,209)
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Net
cash provided by (used in) investing activities
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(19,592)
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(402,316)
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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Proceeds
from draw down on credit line
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520,000
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-
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Payments
for redemption of preferred stock
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-
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-
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Repayments
of note payable
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(404,261)
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(378,561)
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Net
cash provided by (used in) financing activities
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115,739
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(378,561)
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INCREASE
(DECREASE) IN CASH
|
453,811
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(1,299,035)
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CASH,
BEGINNING OF PERIOD
|
1,532,550
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4,353,699
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CASH,
END OF PERIOD
|
$1,986,362
|
$3,054,663
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|
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Supplemental disclosure operating activities
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Cash
paid for interest
|
$84,016
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$18,745
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The
accompanying notes are an integral part of these consolidated
financial statements
FITLIFE BRANDS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND
2015
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
ProductsTM
(“NDS”) (www.ndsnutrition.com),
PMDTM (www.pmdsports.com),
SirenLabsTM
(www.sirenlabs.com),
CoreActiveTM
(www.coreactivenutrition.com),
and Metis NutritionTM
(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 several brands to its
product portfolio, including iSatori (www.isatori.com),
CT Fletcher, 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 addition 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
and maintains an office in Golden, Colorado, which it acquired in
connection with the Merger. 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.
iSatori Merger
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 (the
“Closing
Date“).
In connection with the closing of the
Merger, each share of iSatori
common stock outstanding on the Closing Date became exchangeable
for 0.1732 shares of the Company's common stock (the
“Exchange
Ratio“). In the event
any iSatori shareholder would otherwise be entitled to a fractional
share of the Company's common stock, the Company agreed to pay the
value of those fractional interests in cash. The
Company issued a total of 2,315,644 shares of common stock and
paid a total of $239 for remaining fractional interests to former
iSatori shareholders in connection with the
Merger.
Pursuant to the terms
and conditions of the Merger Agreement, the Company increased the
size of its Board of Directors (the “Board“)
from five to seven members, appointed Stephen Adele, Chief
Executive Officer of iSatori, to serve on the Board, and appointed
two independent directors, Messrs. Seth Yakatan and Todd Ordal,
each of whom were designated by iSatori, to the Board. Concurrently
with these appointments, Dr. Fadi Aramouni resigned from the
Board.
In
addition to the foregoing, the Company secured an option to
purchase, on or before December 31, 2015, approximately 600,000
shares of the Company’s common stock, otherwise issuable to
the two largest shareholders of iSatori, and secured a right of
first refusal to purchase approximately 460,000 shares of the
Company’s common stock issuable to a certain iSatori
shareholder in the connection with the Merger. After careful
consideration of many factors, including available cash resources,
the Company’s Board of Directors elected not to exercise the
purchase option prior to its expiration. The right of first
refusal, however, remains outstanding.
On September 11, 2015, the Company loaned iSatori
$750,000 pursuant to a Demand Promissory Note ("Note"), due and payable on demand after October 15,
2015 in the event the Merger was not consummated on or before such
date. The proceeds from the Note were to be used by iSatori for the
payment, in the ordinary course of business, of payroll and
accounts payable of iSatori pending consummation of the Merger. The
Note was deemed satisfied in full in connection with the Closing
Date of the Merger and was included as an element of the total
purchase price, which also included the assumption of outstanding
debt of approximately $1.1 million and the issuance of
approximately 2.3 million shares of Company common stock. In
connection with the Merger, the Company also converted all issued
and outstanding options and warrants of iSatori into options and
warrants of FitLife in an amount equal to the number of iSatori
options and warrants issued and outstanding multiplied by the
Exchange Ratio, at an exercise equal to the original exercise price
divided by the Exchange Ratio. The treasury stock net equivalent of
all issued and outstanding options and warrants were factored into
the calculation of the final Exchange Ratio, the vast majority of
which were and remain significantly out of the
money.
At
closing, in connection with adjustment provisions outlined in the
Merger Agreement, iSatori established certain reserves and
write-offs totaling approximately $1.8 million, which write-offs,
together with the issuance of the Note and other variances of
certain working capital accounts, resulted in a reduction of the
Exchange Ratio under the terms of the Merger Agreement from 0.3000
to 0.1732 shares of common stock of the Company for each share of
iSatori common stock issued and outstanding.
NOTE 2 - BASIS OF PRESENTATION
Interim Financial Statements
The
accompanying interim condensed unaudited consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 8 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In our opinion, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation are included. Operating results for the three
and nine-month period ended September 30, 2016 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2016. While management of the Company
believes the disclosures presented herein are adequate and not
misleading, these interim condensed consolidated financial
statements should be read in conjunction with the audited condensed
consolidated financial statements and the footnotes thereto for the
fiscal year ended December 31, 2015 as filed with the Securities
and Exchange Commission as an exhibit to our Annual Report on Form
10-K.
NOTE 3 - 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
condensed financial statements.
Use of Estimates
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
expenses recognized during the periods presented. Adjustments made
with respect to the use of estimates often relate to improved
information not previously available. Uncertainties with respect to
such estimates and assumptions are inherent in the preparation of
financial statements; accordingly, actual results could differ from
these estimates.
These
estimates and assumptions also affect the reported amounts of
revenues, costs and expenses during the reporting
period. Management evaluates these estimates and
assumptions on a regular basis. Actual results could
differ from those estimates.
Revenue Recognition
Revenue is derived from product sales. The Company
recognizes revenue from product sales in accordance with Accounting
Standards Codification (“ASC”) Topic 605 “Revenue Recognition in
Financial Statements”
which assesses revenue upon: (i) the time customers are invoiced at
shipping point provided title and risk of loss has passed to the
customer, (ii) evidence of an arrangement exists, (iii) fees are
contractually fixed or determinable, (iv) collection is reasonably
assured through historical collection results and regular credit
evaluations, and (v) there are no uncertainties regarding customer
acceptance.
The Company offers discounts on sales to GNC
franchises on many of its products. Discounts are
updated monthly and made available to all
franchisees. Revenue is recorded net of all discounts
taken at the time of sale for all direct sales. Indirect
sales involve sales through GNC’s centralized distribution
platform. Fulfillment to franchisees from GNC’s
distribution centers often spans several months and accounting
periods after the initial indirect sale. Given that the
discount programs change monthly, it is impossible to predict with
any certainty what discounts will be taken on which products and at
what time. As a result, the Company has historically
booked gross revenue through the indirect channel upon shipment to
GNC. Discounts taken by franchisees upon fulfillment
from GNC’s distribution center are billed back to the Company
as a credit to a future invoice. The Company accounted
for these deductions (“Vendor Funded
Discounts”) as a selling
and marketing expense in the period that the deduction was taken by
GNC. Management believes this approach was the best way
to match the expense to the timing of actual product fulfillment at
the store level when the discounts are actually
taken. In an effort to ensure consistent accounting
policies across all operating divisions after the acquisition of
iSatori, the Company elected to modify its accounting policy for
Vendor Funded Discounts. Going forward, for all indirect
distribution, the Company will estimate anticipated discounts at
the time product is shipped to GNC’s distribution center(s)
and recognize that estimate as a deduction from gross revenue at
the time of shipment to GNC. Actual discounts will be
compared to the estimate each accounting period and adjusted as
necessary. Total revenue and selling and marketing expense will be
reduced by the amount of the estimate, and the new policy will have
no effect on operating or net income. Results of
operations for the year ended December 31, 2014, and the nine month
periods ended September 30, 2015 and 2014 were reported using the
previous gross revenue approach, while results from operations for
the year ended December 31, 2015 and quarter ended September 30,
2016 were reported using the new accounting policy for Vendor
Funded Discounts.
Accounts Receivable
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 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 Company recorded an expense
of $0 related to bad debt and doubtful accounts during the quarter
ended September 30, 2016.
Allowance for Doubtful Accounts
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 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.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. At
September 30, 2016, cash and cash equivalents include cash on hand
and cash in the bank.
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 raw material and finished
goods for all of its product offerings across all of the
Company’s operating subsidiaries. At September 30, 2016 and
December 31, 2015, the value of the Company’s inventory was
$4,432,975 and $4,790,301, 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. 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 fixtures
|
3 Years
|
|
Office equipment
|
3 Years
|
|
Leasehold improvements
|
5 Years
|
The Company adopted Statement of Financial
Accounting Standard (“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.
Impairment of Long-Lived Assets
In accordance with ASC Topic 3605,
“Long-Lived
Assets,” such as
property, plants, equipment, and purchased intangibles are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Goodwill and other intangible assets are tested for impairment.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount
in which the carrying amount of the asset exceeds the fair value of
the asset. There were no events or changes in circumstances that
necessitated an impairment of long-lived
assets.
Income Taxes
Deferred income taxes are provided based on the
provisions of ASC Topic 740, “Accounting for Income
Taxes,” to reflect the
tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting
amounts based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to
be realized.
The Company adopted the provisions of FASB
Interpretation No. 48 – “Accounting for
Uncertainty In Income Taxes”–an interpretation of ASC Topic 740
(“FIN
48”). FIN 48 contains a
two-step approach to recognizing and measuring uncertain tax
positions. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence
indicates it is more likely than not, that the position will be
sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax
benefit as the largest amount, which is more than 50% likely of
being realized upon ultimate settlement. The Company considers many
factors when evaluating and estimating the Company's tax positions
and tax benefits, which may require periodic adjustments. At
September 30, 2016, the Company did not record any liabilities for
uncertain tax positions.
Concentration of Credit Risk
The Company maintains its operating cash balances
at a large, commercial bank with offices across the country. The
Federal Depository Insurance Corporation
(“FDIC”)
insures accounts up to $250,000.
Earnings Per Share
Basic
income (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of
common shares outstanding during the reporting period. Diluted
earnings per share reflects the potential dilution that could occur
if stock options, warrants, and other commitments to issue common
stock were exercised or equity awards vest resulting in the
issuance of common stock that could share in the earnings of the
Company. In the event of a loss, diluted loss per share is the same
as basic loss per share, because of the effect of the additional
securities, a net loss would be anti-dilutive.
Fair Value of Financial Instruments
The
fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between
willing parties other than in a forced sale or
liquidation.
The
carrying amounts of the Company’s financial instruments,
including cash, accounts payable and accrued liabilities, income
tax payable and related party payable, if any, approximate fair
value.
Recent Accounting Pronouncements
None.
NOTE 4 – INVENTORIES
The
Company’s inventories as of September 30, 2016 and December
31, 2015 are as follows:
|
|
|
|
|
Finished
goods
|
$3,698,836
|
$3,381,973
|
|
Components
|
734,139
|
1,408,328
|
|
Total
|
$4,432,975
|
$4,790,301
|
NOTE 5 - PROPERTY AND EQUIPMENT
The
Company’s fixed assets as of September 30, 2016 and December
31, 2015 are as follows:
|
|
|
|
|
Equipment
|
$827,916
|
$808,324
|
|
Accumulated
depreciation
|
(640,402)
|
(581,520)
|
|
Total
|
$187,514
|
$226,804
|
Depreciation
and amortization expense for the nine months ended September 30,
2016 was $376,502 as compared to $166,137 for the nine month period
ended September 30, 2015.
NOTE 6 - INTELLECTUAL PROPERTY
The Company actively pursues intellectual property through both
patent applications and trade secrets in an effort to differentiate
its products. While no assurances can be given, the Company will
continue to pursue the protections afforded by intellectual
property going forward as a core element of its product development
initiatives. The Company received a notice of allowance related to
the extraction of protein from kaniwa from the USPTO on April 19,
2016 and maintains a patent pending application related to the
methods and use of bioactive peptides.
NOTE 7 – NOTE PAYABLES
Notes
payable consist of the following as of September 30, 2016 and
December 31, 2015:
|
|
|
|
|
Revolving line of credit of $3,000,000 from U.S.
Bank, dated April 9, 2009, as amended July 15, 2010, May 25, 2011,
August 22, 2012, April 29, 2013, May 22, 2014, June 25, 2014, May
15, 2015 and August 15, 2016 at an interest rate of 3.0% plus the
one-month LIBOR quoted by U.S. Bank from Reuters Screen
LIBOR. The line of credit matures on June 15, 2017, and is secured by 80% of the
eligible receivables and 50% of the eligible inventory (such
inventory amount not to exceed 50% of the borrowing base) of
FitLife Brands, Inc. The Company pays interest only on this line of
credit.
|
$2,010,305
|
$1,490,305
|
|
Term
loan of $2,600,000 from U.S. Bank, dated September 4, 2013, at a
fixed interest rate of 3.6%. The term loan amortizes evenly on a
monthly basis and matures August 15, 2018.
|
1,047,291
|
1,439,727
|
|
Notes
payable for warehouse equipment
|
42,211
|
54,036
|
|
Total
of notes payable and advances
|
3,099,806
|
2,984,068
|
|
Less
current portion
|
(2,592,466)
|
(2,069,930)
|
|
|
|
|
|
Long-term
portion
|
$507,340
|
$914,138
|
As of September 30,
2016, NDS, the Company’s wholly owned subsidiary, was not in
compliance with certain financial covenants with a four quarter
look-back period in its existing term loan and revolving line of
credit with U.S. Bank (the “Bank”),
principally due to decreased revenue received during the third
quarter of fiscal 2016, as well as increased operating expenses as
a result of the Merger incurred in the third quarter of fiscal
2015. As disclosed in Note
13 – Subsequent Events in the notes to
the financial statements included herein, the Company received a
waiver for all covenant defaults on both the existing five-year
term loan and revolving line of credit with the Bank for the
quarter ended September 30, 2016. No consideration was paid or
payable in connection with such waiver. Receipt of the
waiver for the current period notwithstanding, no assurances can be
given with respect to either the Company’s ability to secure
and maintain compliance with the covenants in future periods, or,
in the event the Company is not compliant, that the Bank with
provide a waiver of compliance for such covenants in future
periods. In the event the Company is not in compliance with the
covenants in future periods and the Bank fails to provide a waiver,
declares the term loan or revolving line of credit to be in
default, and terminates the term loan or the revolving line of
credit, any amounts due the Bank at such time would become
immediately due and payable. In such event, our
financial condition will be negatively affected, and such affect
could be material.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The
Company does not have a commitment and contingency liability
associated with any third party consulting agreements.
NOTE 9 - RELATED PARTY TRANSACTIONS
None.
NOTE 10 - NET INCOME / (LOSS) PER SHARE
Basic
net income per share is calculated by dividing the net income
attributable to common stockholders by the weighted average number
of shares of common stock outstanding during the period. Diluted
net income per share also includes the weighted average number of
outstanding warrants and options in the denominator. In the event
of a loss, the diluted loss per share is the same as basic loss per
share. Because of the net loss, the weighted average number of
diluted shares of common stock outstanding for the three months
ended September 30, 2016 included 10,446,954 shares of common
stock, 0 shares of common stock issuable upon the exercise of
outstanding common stock purchase warrants, and 0 shares of common
stock issuable upon the exercise of outstanding options to purchase
common stock. The following table represents the computation of
basic and diluted income and (losses) per share for the three
months ended September 30, 2016 and 2015.
|
|
|
|
|
Income
/ (Losses) available for common shareholders
|
$(360,718)
|
$383,258
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
10,446,954
|
8,069,900
|
|
Basic
income / (loss) per share
|
$(0.03)
|
$0.05
|
|
|
|
|
|
Diluted
weighted average common shares outstanding
|
10,446,954
|
8,721,259
|
|
Diluted
income / (loss) per share
|
$(0.03)
|
$0.04
|
Net income / (loss) per share is based upon the weighted average
shares of common stock outstanding. Had the Company posted positive
net income for the three months ended September 30, 2016, diluted
weighted average common shares outstanding would have included
110,620 shares of common stock issuable upon the exercise of
outstanding common stock purchase warrants and 1,068,677 shares of
common stock issuable upon the exercise of outstanding options to
purchase common stock.
NOTE 11 - EQUITY
Common and Preferred Stock
The
Company is authorized to issue 150.0 million shares of common
stock, $0.01 par value, of which 10,413,621 common shares were
issued and outstanding as of September 30, 2016. The Company is
authorized to issue 10,000,000 shares of Series A Convertible
Preferred Stock, $0.01 par value, 1,000 shares of its 10%
Cumulative Perpetual Series B Preferred Stock, $0.01 par value, and
500 shares of its Series C Convertible Preferred Stock, par value
$0.01, none of which were issued and outstanding as of September
30, 2016.
As
of September 30, 2016, 37,344 shares of common stock were
subscribed, and zero shares were held in treasury and reserved for
cancellation.
Options
As
of September 30, 2016, 1,059,988 options to purchase common stock
of the Company were issued and outstanding, additional information
about which is included in the following table.
|
|
|
|
|
|
|
34,640
|
$0.06
|
04/03/15
|
04/03/25
|
No
|
|
55,424
|
$0.06
|
09/29/15
|
09/29/25
|
No
|
|
70,000
|
$0.90
|
04/13/12
|
04/13/17
|
No
|
|
50,000
|
$0.90
|
01/16/13
|
01/16/18
|
No
|
|
10,000
|
$1.00
|
03/04/13
|
03/04/18
|
No
|
|
218,163
|
$1.39
|
05/09/16
|
05/09/21
|
Yes
|
|
4,330
|
$1.44
|
09/29/15
|
09/29/25
|
No
|
|
40,000
|
$2.20
|
04/11/14
|
04/11/19
|
No
|
|
370,000
|
$2.30
|
02/23/15
|
02/23/20
|
No
|
|
93,503
|
$3.31
|
02/16/12
|
02/16/22
|
No
|
|
19,424
|
$4.62
|
05/13/15
|
05/13/25
|
Yes
|
|
4,330
|
$5.49
|
04/08/15
|
04/08/25
|
No
|
|
1,732
|
$5.81
|
03/05/15
|
03/05/25
|
No
|
|
33,774
|
$5.89
|
03/23/15
|
03/23/25
|
Yes
|
|
8,660
|
$12.13
|
09/17/13
|
09/17/23
|
Yes
|
|
21,650
|
$12.99
|
09/06/12
|
09/05/17
|
No
|
|
7,038
|
$12.99
|
11/14/12
|
09/27/22
|
No
|
|
17,320
|
$14.43
|
01/16/13
|
11/30/22
|
No
|
|
1,059,988
|
|
|
|
|
Warrants
The Company values all warrants using the
Black-Scholes option-pricing model. Critical assumptions
for the Black-Scholes option-pricing model include the market value
of the stock price at the time of issuance, the risk-free interest
rate corresponding to the term of the warrant, the volatility of
the Company’s stock price, dividend yield on the common
stock, as well as the exercise price and term of the
warrant. The Black Scholes option-pricing model was the
best determinable value of the warrants that the Company
“knew up front” when issuing the warrants in accordance
with Topic 505. Other than as expressly noted below, the warrants
are not subject to any form of vesting schedule and, therefore, are
exercisable by the holders anytime at their discretion during the
life of the warrant. No discounts were applied to the
valuation determined by the Black-Scholes option-pricing
model; provided, however,
that in determining volatility the
Company utilized the lesser of the 90-day volatility as reported by
Bloomberg or other such nationally recognized provider of financial
markets data and 40.0%.
As
of September 30, 2016, 110,620 warrants to purchase common stock of
the Company were issued and outstanding, additional information
about which is included in the following table:
|
|
|
|
|
|
|
17,320
|
$12.99
|
10/01/13
|
01/01/18
|
No
|
|
43,300
|
$12.99
|
07/16/13
|
07/16/18
|
No
|
|
25,000
|
$3.000
|
11/01/13
|
11/01/16
|
No
|
|
25,000
|
$2.000
|
11/01/13
|
11/01/16
|
No
|
|
110,620
|
|
|
|
|
Private Placements, Other Issuances and Cancellations
The
Company periodically issues shares of its common stock, as well as
options and warrants to purchase shares of common stock to
investors in connection with private placement transactions, and to
advisors, consultants and employees for the fair value of services
rendered. Absent an arm’s length transaction with an
independent third-party, the value of any such issued shares is
based on the trading value of the stock at the date on which such
transactions or agreements are consummated. The Company expenses
the fair value of all such issuances in the period incurred, with
the exception of options that are subject to vesting which are
expensed ratably on a monthly basis over the life of the vesting
period. During the quarter ended September 30, 2016, the Company
issued (i) 4,011 shares of common stock subscribed for services
rendered by directors that elected to take their board fees in
shares of common stock in lieu of cash payment and recorded an
expense of $7,501 for the fair value of services rendered, and (ii)
33,333 shares of common stock to a single executive in connection
with the partial vesting of a previously authorized equity grant
for which the Company recorded a net expense of
$46,670.
NOTE 12 - INCOME TAXES
The
provision (benefit) for income taxes from continued operations for
the period ended September 30, 2016 and the year ended December 31,
2015 consist of the following:
|
|
September 30,
|
December
31,
|
|
|
|
|
|
Current:
|
|
|
|
Federal
AMT
|
$32,110
|
$-
|
|
State
|
132,000
|
-
|
|
|
164,110
|
-
|
|
Deferred:
|
|
|
|
Federal
|
$(659,000)
|
$5,074
|
|
State
|
(13,000)
|
5,510
|
|
|
(672,000)
|
10,584
|
|
Change
in valuation allowance
|
672,00
|
(10,584)
|
|
Provision
(benefit) for income taxes, net
|
$164,110
|
$-
|
Deferred
income taxes result from temporary differences in the recognition
of income and expenses for the financial reporting purposes and for
tax purposes. The components of deferred tax assets consist
principally from the following:
|
|
|
|
|
Inventory
|
$20,000
|
$41,401
|
|
Allowance
for Doubtful Accounts
|
66,000
|
162,849
|
|
Foreign
tax credits
|
30,000
|
30,086
|
|
Share
Based Compensation
|
39,000
|
39,485
|
|
Other
|
-
|
24,100
|
|
Property
and equipment
|
45,000
|
16,712
|
|
Net
operating loss carryforwards
|
7,134,000
|
7,666,946
|
|
Valuation
allowance
|
(6,645,000)
|
(7,168,700)
|
|
|
|
|
|
Deferred
income tax asset
|
689,000
|
812,879
|
|
|
|
|
|
Deferred
expenses
|
-
|
(71,482)
|
|
Other
|
-
|
(52,397)
|
|
|
|
|
|
Deferred
income tax liability
|
-
|
(123,879)
|
|
|
|
|
|
Net
deferred tax asset
|
$689,000
|
$689,000
|
|
|
|
|
The
Company has net operating loss carryforwards of approximately
$21,000,000 for federal purposes available to offset future taxable
income through 2035 and 2.298,000 for State of Colorado purposes
which expire in various years through 2035, The Company has
provided a valuation reserve against the full amount of the net
operating loss benefit, because in the opinion of management the
benefits from net operating losses carried forward may be impaired
or limited on certain circumstances. Events which may cause
limitations in the amount of net operating losses that the Company
may utilize in any one year include, but are not limited to,
limitations imposed under Section 382 of the Internal
Revenue Code, as amended, from change of more than 50% over a
three-year period. The impact of any limitations that may be
imposed for future issuances of equity securities, including
issuances with respect to acquisitions have not been
determined.
ASC
740 requires the consideration of a valuation allowance to reflect
the likelihood of realization of deferred tax assets. Significant
management judgment is required in determining any valuation
allowance recorded against deferred tax assets. In evaluating the
ability to recover deferred tax assets, the Company considered
available positive and negative evidence, giving greater weight to
its recent cumulative losses and its ability to carry-back losses
against prior taxable income and lesser weight to its projected
financial results due to the challenges of forecasting future
periods. The Company also considered, commensurate with its
objective verifiability, the forecast of future taxable income
including the reversal of temporary differences. At that time the
Company continued to have sufficient positive evidence, including
recent cumulative profits, a reduction in operating expenses, the
ability to carry-back losses against prior taxable income and an
expectation of improving operating results, showing a valuation
allowance was not required. At the end of the year ended of quarter
ended September 30, 2016 and year ended December 31, 2015,
expectations of taxable income necessitated a reduction in the
valuation allowance and a restoration of $689,000 of deferred tax
assets related to net operating losses expected to be utilized in
the next 12 months. At September 30, 2016, the Company
continues to maintain the deferred tax asset of
$689,000.
NOTE 13 – SUBSEQUENT EVENTS
Waiver of Term-Loan Covenants
On
or around November 11, 2016, the Company received a waiver of
compliance for certain financial covenants in its existing
five-year term loan and revolving line of credit with the Bank for
the current period ended September 30, 2016.
Management
has reviewed and evaluated subsequent events and transactions
occurring after the balance sheet date through the filing of this
Quarterly Report on Form 10-Q and determined that no additional
subsequent events occurred.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking Statements
Management’s
Discussion and Analysis 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 in
this Form 10-Q, 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
therein.
Forward-looking statements involve risks,
uncertainties and other factors, which may cause our actual
results, performance or achievements to be materially different
from those expressed or implied by such forward-looking statements.
Factors and risks that could affect our results and achievements
and cause them to materially differ from those contained in the
forward-looking statements include those identified in the section
titled “Risk
Factors” in the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2015, as well as other factors that we are currently
unable to identify or quantify, but that may exist in the
future.
In
addition, the foregoing factors may affect generally our business,
results of operations and financial position. Forward-looking
statements speak only as of the date the statement was made. We do
not undertake and specifically decline any obligation to update any
forward-looking statements.
Overview
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
ProductsTM
(“NDS”) (www.ndsnutrition.com),
PMDTM (www.pmdsports.com),
SirenLabsTM
(www.sirenlabs.com),
CoreActiveTM
(www.coreactivenutrition.com),
and Metis NutritionTM
(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 several brands to its
product portfolio, including iSatori (www.isatori.com),
CT Fletcher, 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 addition 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
and maintains an office in Golden, Colorado, which it acquired in
connection with the Merger. 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.
Results of Operations
Comparison of Three and Nine Months Ended September 30, 2016 to the
Three and Nine Months Ended September 30, 2015
Net
Sales. Revenue for
the three months ended September 30, 2016 decreased 14.8% to
$5,340,616 as compared to $6,270,524 for the three months ended September 30,
2015. Revenue for the three months ended September 30, 2016 for the
Company’s NDS Nutrition division decreased 32.9% to
$4,206,557 as compared to $6,270,524 for the three months ended
September 30, 2015, as originally reported. Revenue for the three
months ended September 30, 2015 included $567,462 in vendor funded
discounts originally reported as a selling and marketing expense,
but subsequently reclassed to a reduction in revenue for the full
year financial results for 2015 as reported on the Company’s
Form 10-K for the year ended December 31, 2015. As adjusted for the
accounting treatment change, revenue the NDS Nutrition division for
the three months ended September 30, 2016 decreased $1,496,505 to
$4,206,557 as compared to $5,703,062 for the three months ended
September 30, 2015.
Revenue attributable to the Company’s
iSatori operating division, which had no impact on the three months
ended September 30, 2015, was $1,134,058. The decrease in total
revenue in the three months ended September 30, 2016 compared to
the comparable period last year is principally attributable to both
lower revenue at the Company’s iSatori division as well as
the timing of GNC’s 2016 annual franchise convention, which
resulted in increased sales in the quarter ended June 30, 2016 that
would have historically been recognized in the third quarter.
Management estimates that it shipped approximately $1.3
million the second quarter
related to the annual convention that otherwise would have
historically been recognized during the third
quarter.
Revenue
for the nine months ended September 30, 2016 increased 42.8% to
$21,615,605 as compared to $15,139,949 for the nine months ended
September 30, 2015. Revenue for the nine months ended September 30,
2016 for the Company’s NDS Nutrition division increased 2.1%
to $15,463,141 as compared to $15,139,949 for the nine month period
ended September 30, 2015. Revenue for the Company’s NDS
Nutrition division for the nine month period ended September 30,
2015, included $1,063,312 in vendor funded discounts originally
recorded as a selling and marketing expense but reclassed as an
offset to revenue for the full year financial results as reported
on the Company’s Form 10-K for the year ended December 31,
2015. As adjusted for the accounting treatment change, revenue for
the NDS Nutrition division for the nine months ended September 30,
2016 increased 9.8% to $15,463,141 as compared to $14,076,637 for
the nine month period ended September 30, 2015. Revenue for the
Company’s iSatori division for the nine month period ended
September 30, 2016 was $6,152,464. The increase in total revenue
for the nine month period ended September 30, 2016 was driven by
continued improvement in sales of product through GNC, and the
addition of revenue attributable to iSatori Products.
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
and, while no assurances can be given, anticipates that such
efforts together with anticipated sales growth attributable to
iSatori Products will continue to drive future revenue
growth. In addition, management believes that GNC’s
initiative to sell corporate owned stores to franchisees will also
drive revenue growth. While currently not a material component of
revenue, management anticipates that continued international
expansion within the GNC franchise system, as well as the
introduction of new NDS Products and iSatori Products will also
contribute to future growth.
Cost of Goods
Sold. Cost of goods
sold for the three months ended September 30, 2016 decreased to
$3,353,224 as compared to $3,658,541 for the three months ended
September 30, 2015, and increased to $12,469,081 during the nine
months ended September 30, 2016 as compared to $9,015,846 for the
nine months ended September 30, 2015. The decrease
during the three-month period is principally attributable to lower
sales in the period, and the increase in cost of goods sold for the
nine-month period was primarily attributable to increased sales
volumes including sales of iSatori Products during such nine-month
period.
General and Administrative
Expense. General and administrative expense for the
three months ended September 30, 2016 increased to $1,131,692 as
compared to $854,729 for the three months ended September 30,
2015. General and administrative expense for the nine months
ended September 30, 2016 increased to $3,854,128 as compared to
$2,469,866 for the nine months ended September 30,
2015. The increase in general and administrative expense
for the three and nine months ended September 30, 2016 and 2015 is
principally attributable to the continued integration of iSatori
operations following completion of the Merger.
Selling and Marketing
Expense. Selling and
marketing expense for the three months ended September 30, 2016
decreased to $1,088,400 as compared to $1,258,537 for the three
months ended September 30, 2015, and increased to $3,138,323 during
the nine months ended September 30, 2016 as compared to $2,773,293
for the nine months ended September 30, 2015. Selling and
marketing expense for the three and nine month periods ended
September 30, 2015 included $567,462 and $1,063,312 in vendor
funded discounts not recorded as an offset to revenue. The change
in selling and marketing expense for the three- and nine-month
period ended September 30, 2016 is principally attributable to the
addition of iSatori, which was offset by the accounting policy
change for vendor funded discounts. As net sales increase, selling
and marketing expense is anticipated to simultaneously increase,
although management anticipates that selling and marketing expense
will increase at a slower rate.
Depreciation and
Amortization. Depreciation and amortization for the
three months ended September 30, 2016 increased to $125,751 as
compared to $55,472 for the three months ended September 30,
2015. Depreciation and amortization for the nine months
ended September 30, 2016 increased to $376,502 as compared to
$166,137 for the nine months ended September 30,
2015. The increase is principally attributable to the
addition of iSatori.
Net
Income/(Loss). We
generated a net loss of $360,718 for the three-month period ended
September 30, 2016, and net income of $1,532,472 for the nine
months ended September 30, 2016, as compared to a profit of
$383,258 for the three months ended September 30, 2015 and a profit
of $584,533 for the nine months ended September 30, 2015. The
decrease in net income for the three-month period ended September
30, 2016 compared to the comparable period last year is principally
attributable to lower revenue in the current period compared to the
quarter ended September 30, 2015, while the increase in net income
in the nine month period ended September 30, 2016 compared to the
comparable period last year is principally attributable to
increased sales volume of NDS Products, sales of iSatori Products
and continued strong gross margins.
Liquidity and Capital Resources
The Company has historically financed its
operations primarily through equity and debt financings, and more
recently, cash flow from operations. The Company has also provided
for its cash needs by issuing common stock, options and
warrants for certain operating costs, including consulting and
professional fees. The Company did not engage in any
financing activities during the quarter ended September 30, 2016. The anticipated
cash derived from operations and existing cash resources are
expected to provide for the Company’s liquidity for the next
12 months.
Cash Provided by/(Used in)
Operations. Our cash
provided by operating activities for the nine months ended
September 30, 2016 was $357,665, as compared to cash used in
operating activities of ($518,159) for the nine months ended
September 30, 2015. The increase is attributable to increased
revenue, including increased accounts receivables and
inventories balances due, in part, to the addition of iSatori
operations and sales, as well as variations in certain working
capital accounts consistent with normal business practices and
outcomes. Net working capital decreased to $4,758,923 as of the
quarter ended September 30, 2016 compared to $7,414,162 as of
September 30, 2015.
Cash Provided by/(Used in)
Investing Activities. Cash used in investing activities for the
nine months ended September 30, 2016 was $(19,592) as compared to
$(402,315) used in investing activities for the nine months ended
September 30, 2015. The primary difference was related
to a temporary reduction in activity related to the Company’s
stock buyback program.
Cash Provided by/(Used in)
Financing Activities. Our cash provided by financing activities for the
nine months ended September 30, 2016 was $115,739, as compared
to $(378,561) cash used in financing activities during the nine
months ended September 30, 2015. We drew down $520,000 during the
nine months ended September 30, 2016 from our existing
line of credit with U.S. Bank. We expect to pay back all
amounts borrowed under this line of credit, as well as any
outstanding principal under the Company’s existing term loan
with U.S. Bank as soon as
practicable.
WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Quarterly Report on
Form 10-Q in conjunction with other reports and documents that we
file from time to time with the SEC. In particular, please read our
Quarterly Reports on Form 10-Q, Annual Report on Form 10-K, and
Current Reports on Form 8-K that we file from time to time. You may
obtain copies of these reports directly from us or from the SEC at
the SEC’s Public Reference Room at 100 F. Street, N.E.
Washington, D.C. 20549, and you may obtain information about
obtaining access to the Reference Room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains information for
electronic filers at its website http://www.sec.gov.
ITEM 3. 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 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 4. CONTROLS AND
PROCEDURES
(a) Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange
Commission’s rules and forms and that such information is
accumulated and communicated to our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Our disclosure
controls and procedures were designed to provide reasonable
assurance that the controls and procedures would meet their
objectives. As required by SEC Rule 13a-15(b), our Chief Executive
Officer and Chief Financial Officer carried out an evaluation of
the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this
report. Based on the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance
level.
Our Chief Executive Officer and Chief Financial
Officer are responsible for establishing and maintaining adequate
internal control over our financial reporting. In order to evaluate
the effectiveness of internal control over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act, management has
conducted an assessment, including testing, using the criteria in
Internal Control — Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Our system of internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Management has
used the framework set forth in the report entitled Internal
Control-Integrated Framework published by the COSO to evaluate the
effectiveness of our internal control over financial reporting.
Based on this assessment, our Chief Executive Officer and Chief
Financial Officer have concluded that our internal control over
financial reporting was effective as of September 30, 2016. This
Quarterly Report does not include an attestation report of our
independent registered public accounting firm regarding internal
control over financial reporting. Our internal control over
financial reporting was not subject to attestation by our
independent registered public accounting firm pursuant to temporary
rules of the SEC that permit us to provide only management’s
report in this Quarterly Report. There has been no change in our
internal controls over financial reporting during our most recent
fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.
(b) Changes
in Internal Controls Over Financial Reporting
There
have been no changes in our internal controls over financial
reporting or in other factors that could materially affect, or are
reasonably likely to affect, our internal controls over financial
reporting during the quarter ended September 30, 2016. There have
not been any significant changes in the Company's critical
accounting policies identified since the Company filed its Annual
Report on Form 10-K as of December 31, 2015.
OTHER INFORMATION
ITEM 1. 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 previously filed but similar lawsuit that had been
filed by the same lawyer who represents the plaintiffs in the Ryan
matter. That related lawsuit is on appeal to the
U.S. Court of
Appeals for the Ninth Circuit, and in June of 2016, the Ninth
Circuit reversed the District Court's dismissal of the companion
case, specifically as to the plaintiff's false advertising claim.
As of the date hereof, the Ryan case has not yet been reinstated,
but we expect reinstatement of the case in the near
future.
On October 27, 2015, the Company filed a
declaratory judgment in the U.S. District Court for the District of
Nebraska, captioned Fitlife Brands, Inc. v. Met-Rx
Substrate Technology, Inc.,
Case No. 8:15-cv-00388, seeking a declaration that its METIS
NUTRITION trademark was not likely to cause confusion with various
MET-RX trademarks owned by Met-Rx Substrate Technology, Inc.
(“Met-Rx”). This dispute originally began as
an action in front of the U.S. Patent and Trademark Office
(“USPTO”) when the Company first filed for the
METIS NUTRITION trademark, and Met-Rx filed a Notice of Opposition
to the Company’s application, arguing that the METIS
NUTRITION mark was likely to cause confusion with various MET-RX
trademarks owned by Met-Rx. At the Company’s request,
the USPTO stayed the matter, and the Company initiated
the aforementioned
proceeding. On August 29, 2016, the parties entered into a
Settlement Agreement, pursuant to which the case was dismissed, and
the Company is allowed to use the MET-RX trademark in certain
circumstances.
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.
There are no risk factors identified by the
Company in addition to the risk factors previously disclosed in
Part I, Item 1A, “Risk
Factors” in our Annual
Report on Form 10-K for the year ended December 31,
2015.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
During
the quarter ended September 30, 2016, the Company did not
repurchase any shares of its common stock. The Company’s
Repurchase Program authorizes the Company to purchase up to
$600,000 of our common stock per annum, subject to maximum
repurchases of $50,000 per month. Additional purchases under the
Repurchase Program may be made from time to time at the discretion
of management as market conditions warrant and subject to certain
regulatory restrictions and other considerations.
As
of November 14, 2016, the Company had repurchased an aggregate
total of 206,187 shares of our common stock under the Repurchase
Program, at an average purchase price of $1.93 per
share.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
There
were no defaults upon senior securities during the period ended
September 30, 2016.
ITEM 5. OTHER INFORMATION
There
is no information with respect to which information is not
otherwise called for by this form.
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31.1
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Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act.
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31.2
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Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act.
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32.1
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Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act.
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32.2
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Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act.
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase
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101.LAB
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XBRL Taxonomy Extension Label Linkbase
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase
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Pursuant
to the requirements of 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, thereunto duly
authorized.
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Registrant
Date: November 14, 2016
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FitLife Brands, Inc.
By: /s/ John
Wilson
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John Wilson
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Chief Executive Officer and Director
(Principal Executive Officer)
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Registrant
Date: November 14, 2016
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FitLife Brands, Inc.
By: /s/
Michael Abrams
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Michael Abrams
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Chief Financial Officer and Director
(Principal Financial Officer)
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