FITLIFE BRANDS, INC.
10-Ks and 10-Qs
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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, 2019
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 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.:
|
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.
☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act).
☐
Yes
☒
No
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,
was $6,174,542.
As of
March 26, 2020, there were 1,059,616 shares of common stock, $0.01
par value per share, issued and outstanding.
FIT
L
IFE BR
ANDS, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019 and 2018
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’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.
P
A
RT I
ITEM 1. BUSINESS
As used
in this Annual Report, “
we
”, “
us
”, “
our
”, “
FitLife
”, “
FitLife Brands
”, the
“
Company
” or
“
our company
”
refers to FitLife Brands, Inc. and all of its
subsidiaries.
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, PMD Sports,
SirenLabs, CoreActive, and Metis Nutrition (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, 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
www.fitlifebrands.com
.
The Company’s common stock currently trades under the symbol
“FTLF” on the OTC: PINK market.
Recent Developments
Reverse/Forward Split
On April 11, 2019, the Company filed two
Certificates of Change with the Secretary of State of the State of
Nevada, the first to effect a reverse stock split of both the
Company’s issued and outstanding and authorized common stock,
par value $0.01 per share (“
Common
Stock
”), at a ratio of
1-for-8,000 (the “
Reverse
Split
”), and the second
to effect a forward stock split of both the Company’s issued
and outstanding and authorized Common Stock at a ratio of 800-for-1
(the “
Forward
Split
”, and together with
the Reverse Split, the “
Reverse/Forward
Split
”). The
Reverse/Forward Split became effective, and the Company’s
Common Stock began trading on a post-split basis, on Tuesday, April
16, 2019.
The
Company did not issue any fractional shares as a result of the
Reverse/Forward Split. Holders of fewer than 8,000 shares of the
Common Stock immediately prior to the Reverse/Forward Split
received cash in lieu of fractional shares based on the 5-day
volume weighted average price of the Company’s Common Stock
immediately prior to the Reverse/Forward Split, which was $0.57 per
pre-split share. As a result, such holders ceased to be
stockholders of the Company. Holders of more than 8,000 shares of
Common Stock immediately prior to the Reverse/Forward Split did not
receive fractional shares; instead any fractional shares resulting
from the Reverse/Forward Split were rounded up to the next whole
share.
As
a result of the Reverse/Forward Split, the number of shares of
Company Common Stock authorized for issuance under the
Company’s Articles of Incorporation, as amended, was
decreased from 150,000,000 shares to 15,000,000 shares. The
Reverse/Forward Split did not affect the Company’s preferred
stock, nor did it affect the par value of the Company’s
Common Stock.
The
share and per share amounts included in these unaudited interim
condensed consolidated financial statements and footnotes have been
retroactively adjusted to reflect the 1-for-10 aspect of the
Reverse/Forward Split as if it occurred as of the earliest period
presented.
Line of Credit Agreement
On September 24, 2019, the Company entered into a
Revolving Line of Credit Agreement (the "
Line of Credit
Agreement
") with Mutual of
Omaha Bank (the "
Lender
") providing the Company with a $2.5 million
revolving line of credit (the "
Line of
Credit
"). The Line of Credit
allows the Company to request advances thereunder and to use the
proceeds of such advances for working capital purposes until
September 23, 2020 (the “
Maturity
Date
”), unless renewed at
maturity upon approval by the Company’s Board of Directors
and the Lender. The Line of Credit is secured by all assets of the
Company.
Advances
drawn under the Line of Credit bear interest at an annual rate of
the one-month LIBOR rate plus 2.75%, and each advance will be
payable on the Maturity Date with the interest on outstanding
advances payable monthly. The Company may, at its option, prepay
any borrowings under the Line of Credit, in whole or in part at any
time prior to the Maturity Date, without premium or
penalty.
The
Line of Credit Agreement includes customary events of default. If
any such event of default occurs, the Lender may declare all
outstanding loans under the Line of Credit to be due and payable
immediately.
Subsequent to the year ended December 31, 2019,
the Company borrowed $2.5 million under the Line of Credit.
The advance was intended to provide the Company with additional
liquidity in anticipation of an expected negative impact on sales
to GNC and our other wholesale customers resulting from the
COVID-19 outbreak.
Repayment of Outstanding Notes
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,
the Company’s Chair of the Board and Chief
Executive Officer,
in the principal amount of $200,000 (the
“
Judd Note
”)
(together with the Sudbury Note, the “
Notes
”).
The
Notes matured on the earlier to occur of a Change in Control of the
Company, as defined in the Notes, or December 31, 2019, and
required monthly principal and interest payments beginning April 1,
2019, with a final payment of unpaid principal and interest due
December 31, 2019. Proceeds from the sale of the Notes, along with
existing cash balances, were used to retire all outstanding
indebtedness under the terms of a previous credit agreement,
totaling approximately $590,000 at December 26, 2018.
On
September 24, 2019, the Company repaid all outstanding balances due
on the Notes in the aggregate principal amount, including accrued
but unpaid interest thereon, of $615,000. Mr. Judd is the managing
partner of Sudbury. As a result of the repayment of the Notes, the
Company terminated its line of credit entered into between the
Company and Sudbury on December 26, 2018 providing for maximum
borrowings of up to $600,000.
Amendment of Share Repurchase Plan
On September 23, 2019, the Company's Board of
Directors (the "
Board
") approved an amendment to the Company’s
share repurchase program as approved on August 16, 2019, pursuant
to which the Board authorized management to repurchase up to
$500,000 of the Company's Common Stock, over the next 24 months
(the "
Share
Repurchase Program
"), which
Share Repurchase Program was previously reported on the Company's
Current Report on Form 8-K filed August 20, 2019. The Board
approved an amendment to the Share Repurchase Program to increase
the repurchase of up to $1,000,000 of the Company's Common Stock,
its Series A Convertible Preferred Stock, par value $0.01 per share
("
Series A
Preferred
"), and warrants to
purchase shares of the Company's Common Stock ("
Warrants
"), over the next 24 months, at a purchase price,
in the case of Common Stock, equal to the fair market value of the
Company's Common Stock on the date of purchase, and in the case of
Series A Preferred and Warrants, at a purchase price determined by
management, with the exact date and amount of such purchases to be
determined by management.
On
November 6, 2019, the Company’s Board of Directors amended
the previously approved Share Repurchase Program to increase the
amount of authorized repurchases to $2.5 million. All other
terms of the Share Repurchase Program remain
unchanged.
The
Company intends to conduct its Share Repurchase Program in
accordance with all applicable securities laws and regulations,
including Rule 10b-18 of the Securities Exchange Act of 1934, as
amended. Repurchases may be made at management's discretion from
time to time in the open market or through privately negotiated
transactions. The Company may suspend or discontinue the Share
Repurchase Program at any time, and may thereafter reinstitute
purchases, all without prior announcement.
During
the year ended December 31, 2019, excluding the 99,238 shares
repurchased for total consideration of $569,000 as a result of the
Reverse/Forward Split, the Company repurchased 99,493 shares of
Common Stock, or approximately 9% of the issued and outstanding
shares of the Company, through both open market and private
transactions, as follows:
|
Trade date
|
Total number of shares purchased
|
Average price paid per share
|
Total number of shares purchased as part of publicly announced
programs
|
Dollar value of shares that may yet be purchased
|
|
August
2019
|
-
|
$
-
|
-
|
$
500,000
|
|
September
2019
|
82,216
|
$
9.96
|
82,216
|
$
180,937
|
|
October
2019
|
-
|
$
-
|
-
|
$
180,937
|
|
November
2019
|
7,000
|
$
13.35
|
7,000
|
$
1,419,487
|
|
December
2019
|
10,277
|
$
13.41
|
10,277
|
$
1,281,717
|
|
Subtotal
|
99,493
|
$
10.56
|
99,493
|
|
In addition, during the year ended December 31, 2019, the Company
repurchased and retired 50 shares of Series A Preferred Stock as
well as a warrant to acquire 3,260 shares of Common
Stock.
Conversion of Series A Preferred Stock
On December 23, 2019, Sudbury voluntarily converted its 550 shares
of Series A Preferred into Common Stock in accordance with the
terms of the Series A Preferred Stock Certificate of Designations.
In conjunction with the conversion, the Company issued to Sudbury a
total of 123,222 shares of Common Stock and paid accrued dividends
of $7,454. Following such conversion, no shares of Series A
Preferred remain outstanding, and the Company has no further
obligations under the Certificate of Designations, including the
obligation to pay preferred dividends.
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
70 different NDS Products to more than 900 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, following the launch of Metis Nutrition, we distribute
products through more than 2,800 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, 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
”). Core Active
products, which are sold exclusively online, provide essential
support for accelerated fitness and nutrition goals.
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-Gro
TM
), advanced
creatine powder (Creatine A5X), and a natural testosterone booster
(Isa-TestGF
TM
);
●
Energy
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 Forskolin
Lean & Tone
TM
and hCG
Alternative, as well as iSatori’s newest thermogenic,
LIPO-DREX
TM
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 11
new products during the year ended December 31, 2019, which
included 6 completely new products, and 5 product reformulations
and flavor extensions, and 18 new products during the year ended
December 31, 2018, which included 6 completely new products, and 12
product reformulations and flavor extensions.
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 900 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 years ended
December 31, 2019 and 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 have recently relaunched 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 GNC and its 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 the specialty, 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 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, 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 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
labels;
●
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 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
28 and 26 full-time employees as of December 31, 2019 and 2018,
respectively. 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
www.sec.gov
.
Our Internet address is
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
www.fitlifebrands.com
,
as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
IT
EM
1A - R
i
sk
Factors
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 years ended December 31, 2019
and 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
incur 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 75% and 77% of our total
sales for the years ended December 31, 2019 and 2018,
respectively. GNC’s franchisees are not required to
carry our products. In the event GNC ceases purchasing
products from us, or otherwise reduces its purchases, our total
revenue will be negatively impacted, and such impact could 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 our sales to GNC decrease, our
results from operations will be negatively affected, and such
effect may be material.
Total sales to GNC as well as our ability to collect on our
outstanding accounts receivable from GNC may be impacted by GNC's
current liquidity concerns.
GNC
recently disclosed that there is substantial doubt regarding GNC's
ability to continue as a going concern within one year from the
expected issuance date of GNC's consolidated financial statements
for the year ended December 31, 2019. In the event 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 our wholesale partners
as well as directly to the end consumer. 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. In addition, we are focused on increasing our
direct-to-consumer revenue. We may not be able to successfully
increase sales through these channels. In addition, although
we continued efforts to expand international distribution for our
products in the years ended December 31, 2019 and 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 wholesale partners will be in
compliance with all of these regulations. A failure by us or our
wholesale partners 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 a
corresponding decline in revenue. 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.
COVID-19 could affect our sales and disrupt our operations and
could have a material adverse impact on us.
The
coronavirus (COVID-19) that was reported to have surfaced in Wuhan,
China in December 2019 and that has now spread to other countries,
including the U.S., could adversely impact our operations or those
of our third-party suppliers, as well as our sales to wholesale
partners. In addition, we rely on raw material suppliers located
within and outside the U.S. who source their materials from China,
among other countries. The extent to which the coronavirus impacts
our operations, those of our third-party suppliers or our wholesale
partners will depend on future developments, which are highly
uncertain and cannot be predicted with confidence. If the public
avoids public spaces, including retail stores, or if we, or any of
our third-party suppliers encounter any disruptions to our or their
respective operations, facilities or stores, or if our wholesale
partners
’
retail stores were to partially or fully close due to the
coronavirus, which has already occurred in the case of certain GNC
locations, then we or they may be prevented or delayed from
effectively operating our or their business, respectively, and the
manufacture, supply, distribution and sale of our products and our
financial results could be adversely affected.
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 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 anticipate 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 or by increasing our marketing expenditures, 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 that 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 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 any 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, our products often contain innovative
ingredients or combinations of ingredients. Although we
believe 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 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, 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 a reduced ability to operate our
business.
A limited trading market currently exists for our Common Stock, 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 Common Stock on the
OTC: PINK marketplace, and an active trading market 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 the 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 split-adjusted closing price of our Common Stock has
ranged from a high of $14.10 to a low of $4.00 during the year
ending December 31, 2019. 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.
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. 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 our 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.
Our Chair of the Board of Directors, Chief Executive Officer and
significant shareholder may have certain personal interests that
may affect the Company.
Due to
the securities held by Sudbury Capital Fund, LP ("
Sudbury
") and Dayton Judd, the
Company’s Chair of the Board and Chief Executive Officer, Mr.
Judd may be deemed to be the beneficial owner of, in the aggregate,
approximately 50.4% of the Company’s outstanding voting
securities. Consequently, Mr. Judd individually, and together with
Sudbury, as stockholders acting together, can significantly
influence all matters requiring approval by our stockholders,
including the election of directors and significant corporate
transactions, such as mergers or other business transactions
requiring shareholder approval. This concentration of ownership may
have effects such as delaying or preventing a change in control of
the Company that may be favored by other shareholders or preventing
transactions in which shareholders might otherwise recover a
premium for their shares over current market prices. In addition,
as a result of Mr. Judd’s position as Chair of the Board and
Chief Executive Officer, he and/or Sudbury may have the ability to
exert influence over both the actions of the Board of Directors, as
well as the execution of management’s plans.
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. U
N
RESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
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
We
are currently not involved in any litigation that we believe could
have a material adverse effect on our financial condition or
results of operations. 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’ directors or officers in their capacities
as such, in which an adverse decision could have a material adverse
effect.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PA
R
T II
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, 2019, there were 1,054,516 shares of Common Stock
outstanding, and there were 37 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.
|
|
High
|
Low
|
|
Fiscal
Year 2019
|
|
|
|
First Quarter
(January - March 2019)
|
$
5.65
|
4.00
|
|
Second Quarter
(April - June 2019)
|
$
10.00
|
5.40
|
|
Third Quarter (July
- September 2019)
|
$
11.05
|
8.50
|
|
Fourth Quarter
(October - December 2019)
|
$
14.10
|
9.69
|
|
|
|
|
|
Fiscal
Year 2018
|
|
|
|
First Quarter
(January - March 2018)
|
$
3.80
|
2.30
|
|
Second Quarter
(April - June 2018)
|
$
3.90
|
2.50
|
|
Third Quarter (July
- September 2018)
|
$
4.40
|
2.70
|
|
Fourth Quarter
(October - December 2018)
|
$
5.50
|
2.70
|
On
March 26, 2020, the closing
price of our Common Stock was $10.00
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.
During
the fourth quarter of the fiscal year ended December 31, 2019, the
Company repurchased 17,277 shares of Common Stock, or approximately
1.5% of the issued and outstanding shares of the Company, through
both open market and private transactions, as follows:
|
Trade date
|
Total number of shares purchased
|
Average price paid per share
|
Total number of shares purchased as part of publicly
announced programs
|
Dollar value of shares that may yet be purchased
|
|
October
2019
|
-
|
$
-
|
-
|
$
180,937
|
|
November
2019
|
7,000
|
$
13.35
|
7,000
|
$
1,419,487
|
|
December
2019
|
10,277
|
$
13.41
|
10,277
|
$
1,281,717
|
|
Subtotal
|
17,277
|
$
13.38
|
17,277
|
|
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. S
E
LECTED 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
product returns, sales returns and incentive programs, 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, 2019 and 2018
amounted to $27,000 and $10,000, respectively.
Product Returns, Sales Incentives and Other Forms of Variable
Consideration
In
measuring revenue and determining the consideration the Company is
entitled to as part of a contract with a customer, the Company
takes into account the related elements of variable consideration.
Such elements of variable consideration include, but are not
limited to, product returns and sales incentives, such as markdowns
and margin adjustments. For these types of arrangements, the
adjustments to revenue are recorded at the later of when (i) the
Company recognizes revenue for the transfer of the related products
to the customers, or (ii) the Company pays, or promises to pay, the
consideration.
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. Product returns can and do
occur from time to time and can be material.
For
the sale of goods with a right of return, the Company estimates
variable consideration using the most likely amount method and
recognizes revenue for the consideration it expects to be entitled
to when control of the related product is transferred to the
customers and records a sales return accrual within Accrued expense
and other liabilities for the amount it expects to credit back its
customers. Under this method, certain forms of variable
consideration are based on expected sell-through results, which
requires subjective estimates. These estimates are supported by
historical results as well as specific facts and circumstances
related to the current period. In addition, the Company recognizes
an asset included in Inventories, net and a corresponding
adjustment to Cost of Goods Sold for the right to recover goods
from customers associated with the estimated returns. The sales
return accrual and corresponding asset include estimates that
directly impact reported revenue. These estimates are calculated
based on a history of actual returns, estimated future returns and
information provided by customers regarding their inventory levels.
Consideration of these factors results in an estimate for
anticipated sales returns that reflects increases or decreases
related to seasonal fluctuations. In addition, as necessary, sales
return accruals and the related assets may be established for
significant future known or anticipated events. The types of known
or anticipated events that are considered, and will continue to be
considered, include, but are not limited to, changes in the retail
environment and the Company's decision to continue to support new
and existing products.
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 specific 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 7% 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, 2019 and 2018 amounted to $256,000 and $446,000,
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, 2019 and 2018 amounted to $130,000 and $107,000,
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.
There
were no impairment charges incurred during the year ended December
31, 2019.
Revenue Recognition
The
Company’s revenue is comprised of sales of nutritional
supplements, primarily to GNC.
The
Company accounts for revenues in accordance with Accounting
Standards Codification (“
ASC
”) 606, Revenue from Contracts
with Customers. The underlying principle of ASC 606 is to recognize
revenue to depict the transfer of goods or services to customers at
the amount expected to be collected. ASC 606 creates a five-step
model that requires entities to exercise judgment when considering
the terms of contract(s), which includes (1) identifying the
contract(s) or agreement(s) with a customer, (2) identifying our
performance obligations in the contract or agreement, (3)
determining the transaction price, (4) allocating the transaction
price to the separate performance obligations, and (5) recognizing
revenue as each performance obligation is satisfied. Under ASC 606,
revenue is recognized when performance obligations under the terms
of a contract are satisfied, which occurs for the Company upon
shipment or delivery of products or services to our customers based
on written sales terms, which is also when control is transferred.
Revenue is measured as the amount of consideration we expect to
receive in exchange for transferring the products or services to a
customer.
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.
Control
of products we sell transfers to customers upon shipment from our
facilities or delivery to our customers, and the Company’s
performance obligations are satisfied at that time. Shipping and
handling activities are performed before the customer obtains
control of the goods and therefore represent a fulfillment activity
rather than promised goods to the customer. 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.
For
direct-to-consumer sales, the Company allows for returns within 30
days of purchase. Our wholesale customers, such as GNC, may return
purchased products to the Company under certain circumstances,
which include expired or soon-to-be-expired products located in GNC
corporate stores or at any of its distribution centers, and
products that are subject to a recall or that contain an ingredient
or ingredients that are subject to a recall by the U.S. Food and
Drug Administration.
A
right of return does not represent a separate performance
obligation, but because customers are allowed to return products,
the consideration to which the Company expects to be entitled is
variable. Upon evaluation of returns, the Company determined that
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.
From prior periods until December 31, 2018, the
Company accounted for share-based compensation issued to
non-employees and consultants in accordance with the provisions of
FASB ASC 505-50, Equity-Based Payments to
Non-Employees
.
Measurement of share-based payment transactions
with non-employees is based on the fair value of whichever is more
reliably measurable: (a) the goods or services received or (b) the
equity instruments issued. The final fair value of the share-based
payment transaction is determined at the performance completion
date.
In
June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting (“ASU 2018-07”). The guidance was
issued to simplify the accounting for share-based transactions by
expanding the scope of ASU 2018-07 from only being applicable to
share-based payments to employees to also include share-based
payment transactions for acquiring goods and services from
nonemployees. As a result, nonemployee share-based transactions
will be measured by estimating the fair value of the equity
instruments at the grant date, taking into consideration the
probability of satisfying performance conditions. We adopted ASU
2018-07 on January 1, 2019. The adoption of the standard did not
have a material impact on our financial statements for the year
ended December 31, 2019 or the previously reported financial
statements.
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
|
|
December
31, 2019
|
December
31, 2018
|
Change
|
%
|
|
Revenue
|
$
19,497,000
|
$
17,077,000
|
$
2,420,000
|
$
14
%
|
|
Cost
of goods sold
|
(11,436,000
)
|
(10,332,000
)
|
(1,104,000
)
|
11
%
|
|
Gross
profit
|
8,061,000
|
6,745,000
|
1,316,000
|
20
%
|
|
General
and administrative expense
|
(3,049,000
)
|
(3,333,000
)
|
284,000
|
-9
%
|
|
Selling
and marketing expense
|
(2,379,000
)
|
(2,690,000
)
|
311,000
|
-12
%
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
(52,000
)
|
(69,000
)
|
17,000
|
-25
%
|
|
Total
operating expense
|
(5,480,000
)
|
(6,092,000
)
|
612,000
|
-10
%
|
|
Income
(Loss) from operations
|
2,581,000
|
653,000
|
1,928,000
|
295
%
|
|
Other
income (expense)
|
124,000
|
(133,000
)
|
257,000
|
n/m
|
|
Provision
for income tax
|
(7,000
)
|
(11,000
)
|
4,000
|
-36
%
|
|
Net Income
|
$
2,698,000
|
$
509,000
|
$
2,189,000
|
430
%
|
Fiscal Year Ended December 31, 2019 Compared to Fiscal Year Ended
December 31, 2018
Net Sales.
Revenue for the year ended December 31, 2019
increased 14% to $19,497,000 as compared to $17,077,000 for the
year ended December 31, 2018. Revenue for the year ended December
31, 2019 compared to the prior year reflects improvements in
our wholesale business and growth in our online direct-to-consumer
offering.
Online
revenue during the year ended December 31, 2019 was approximately
12% of total revenue, compared to roughly 5% of total revenue
during the same twelve-month period in 2018. Although no assurances
can be given, management believes that online revenue will continue
to increase in subsequent periods relative to prior comparable
periods given management’s focus on higher margin online
sales.
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.
The
anticipated
increase in incremental sales attributable to ecommerce is
anticipated to be offset by a projected short-term decrease in
sales through the GNC franchise and company-owned system, as well
as through other wholesale and retail distribution channels,
principally due to the recent COVID-19 outbreak, which the Company
anticipates affecting sales beginning in the quarter ended March
31, 2020 through at least the quarter ending June 30, 2020.
Management cannot predict the magnitude of the anticipated impact
of COVID-19 on its sales in the short-term or whether sales through
traditional retail channels will be negatively impacted in the
long-term; however, management currently expects such impact in the
short-term to be material, and will likely accelerate the shift
toward more sales through the Company’s ecommerce
channels.
Cost of Goods Sold.
Cost of goods sold
for the year ended December 31, 2019 increased 11% to $11,436,000
as compared to $10,332,000 for the year ended December 31, 2018.
This increase is principally attributable to higher
revenue.
Gross Profit Margin.
Gross profit for the year ended
December 31, 2019 increased to $8,061,000 as compared to $6,745,000
for the year ended December 31, 2018. Gross margin for the year
ended December 31, 2019 increased to 41.3% from 39.5% for the
comparable period last year. The increase in pross profit during
the year ended December 31, 2019 is principally attributable to
higher revenue and a larger percentage of higher-margin
direct-to-consumer sales.
General and Administrative Expense.
General and administrative expense for the year ended December 31,
2019 decreased by $284,000 to $3,049,000 as compared to
$
3,333,000
for the year ended
December 31, 2018. The decrease in general and administrative
expense for the year ended December 31, 2019 is principally
attributable to
initiatives the
Company put into place during 2018 to reduce operating
expense.
Selling and Marketing Expense.
Selling
and marketing expense for the year ended December 31, 2019
decreased to $2,379,000 as compared to $2,690,000 for the year
ended December 31, 2018. This decrease
reflects management's efforts to optimize our
sales and marketing expense and reduce spending on activities that
fail to generate an acceptable amount of incremental
revenue.
Depreciation and Amortization.
Depreciation and amortization for the year ended December 31, 2019
decreased to $52,000 from $69,000 during the same period in 2018.
The decrease is principally attributable to a reduction in
depreciation expense due to certain assets becoming fully
depreciated.
Net Income.
We generated a net income
of $2,698,000 for the year ended
December 31, 2019, as compared to a net income of $509,000 for the
year ended December 31, 2018
.
The increase in net income for the year ended December 31, 2019
compared to the same period in 2018 was primarily attributable to a
combination of higher revenue, lower operating expense, reduced
interest expense, and legal
settlements.
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.
|
|
Year Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
(Unaudited)
|
(Unaudited)
|
|
Net
income
|
$
2,698,000
|
$
509,000
|
|
Interest
expense
|
47,000
|
133,000
|
|
Provision
for income taxes
|
7,000
|
11,000
|
|
Depreciation
and amortization
|
52,000
|
69,000
|
|
EBITDA
|
2,804,000
|
722,000
|
|
Non-cash
and non-recurring adjustments
|
|
|
|
Common
stock issued for services
|
71,000
|
163,000
|
|
Fair
value of vested options issued for services
|
111,000
|
130,000
|
|
|
|
|
|
Adjusted EBITDA
|
$
2,986,000
|
$
1,015,000
|
Liquidity and Capital Resources
As of
December 31, 2019, the Company had working capital of $2,925,000,
compared to working capital of $1,890,000 at December 31, 2018. Our
principal sources of liquidity at December 31, 2019 consisted of
$265,000 of cash and $2,366,000 of accounts receivable. The
increase in working capital is principally attributable to higher
accounts receivable and the payment of the notes payable in fiscal
2019.
On December 26, 2018, the Company issued a line of
credit promissory note to Sudbury Capital Fund, LP, an entity
controlled by Dayton Judd, the Company’s Chair of the Board
and Chief Executive Officer, 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
. On September 24,
2019, the Company repaid all outstanding balances due on the Notes
including accrued but unpaid interest thereon, of
$615,000.
On
September 24, 2019, the Company entered into entered into a Line of
Credit Agreement with the Lender providing the Company with a $2.5
million revolving Line of Credit. The Line of Credit allows the
Company to request advances thereunder and to use the proceeds of
such advances for working capital purposes until the Maturity Date,
or unless renewed at maturity upon approval by the Company’s
Board and the Lender. The Line of Credit is secured by all assets
of the Company.
Advances
drawn under the Line of Credit bear interest at an annual rate of
the one-month LIBOR rate plus 2.75%, and each advance will be
payable on the Maturity Date with the interest on outstanding
advances payable monthly. The Company may, at its option, prepay
any borrowings under the Line of Credit, in whole or in part at any
time prior to the Maturity Date, without premium or
penalty.
Subsequent to the
year ended December 31, 2019, the Lender advanced the Company $2.5
million under the Line of Credit. The advance was intended to
provide the Company with additional liquidity in anticipation of an
expected negative impact on sales to GNC and our other wholesale
customers resulting from the COVID-19 outbreak.
The Company has historically financed its
operations primarily through cash flow from operations and equity
and debt financings. 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 currently anticipates that cash derived
from operations and existing cash resources, along with available
borrowings under the new Line of Credit, will be sufficient to
provide for the Company’s liquidity for the next twelve
months.
The
Company is dependent on cash flow from operations and amounts
available under the Line of Credit to satisfy its working capital
requirements. No assurances can be given that cash flow from
operations and/or the Line of Credit will be sufficient to provide
for the Company’s liquidity for the next twelve months.
Should the Company be unable to generate sufficient revenue in the
future to achieve positive cash flow from operations, and/or should
capital be unavailable under the terms of the Line of Credit,
additional working capital will be required. Management currently
has no intention to raise additional working capital through the
sale of equity or debt securities and believes that the cash flow
from operations and available borrowings under the Line of Credit
will provide sufficient capital necessary to operate the business
over the next twelve months. In the event the Company fails to
achieve positive cash flow from operations, additional capital is
unavailable under the terms of the Line of Credit, and management
is otherwise unable to secure additional working capital through
the issuance of equity or debt securities, the Company’s
business would be materially and adversely
harmed.
Cash Provided by Operating Activities
Net
cash provided by operating activities was $2,261,000 during
the fiscal year ended
December 31, 2019, compared to
net cash provided by
operating activities of $258,000 for the year ended December 31,
2018. The increase in cash provided by operating activities is
primarily attributable to an increase in net income.
Cash Provided by Investing Activities
Cash
provided by investing activities for the fiscal year ended December
31, 2019 was $0 as compared to $4,000 provided by investing
activities
during the year ended
December 31, 2018. In fiscal 2018, the Company disposed of property
and equipment in the aggregate of $4,000. In fiscal 2019, there was
no similar disposition.
Cash Used in Financing Activities
Cash
used in financing activities for the year ended December 31,
2019 was ($2,255,000) as compared to ($1,265,000) during the
year ended December 31, 2018. The primary difference was that
during the year ended December 31, 2019 the Company repaid the
Notes and repurchased Common Stock.
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. Q
U
ANTITATIVE
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 related primarily to
any borrowings under our existing Line of Credit, and our
investments in short-term financial instruments. As of December 31,
2019, the Company had a zero balance under its existing Line of
Credit.
Investments of our
existing cash balances in both fixed-rate and floating-rate
interest-earning instruments carry some interest rate risk. The
fair value of fixed-rate securities may fall due to a rise in
interest rates, while floating-rate securities may produce less
income than expected if interest rates fall. Partly as a result of
this, our future interest income will vary due to changes in
interest rated and we may suffer losses in principal if we are
forced to sell securities that have fallen in estimated fair value
due to changes in interest rates. However, as substantially all of
our cash equivalents consist of bank deposits and short-term money
market instruments, we do not expect any material change with
respect to our net income as a result of an interest rate
change.
We do
not hold any derivative instruments and do not engage in any
hedging activities.
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
On September 11, 2019,
the Audit Committee of the Board of the Company (the
“
Audit
Committee
”) concluded a
review process of independent registered public accounting firms.
As a result of this process and following careful deliberation, the
Audit Committee recommended, and the Board approved, the dismissal
of Weinberg & Company (“
Weinberg
”)
as the Company’s independent registered public accounting
firm for the year ending December 31, 2019.
The reports of Weinberg regarding the Company’s financial
statements for the fiscal years ended December 31, 2017 and 2018
did not contain an adverse opinion or disclaimer of opinion and
were not modified as to uncertainty, scope, or accounting
principles. During the Company’s fiscal years ended December
31, 2017 and 2018, and the subsequent interim period through June
30, 2019, there were (i) no disagreements with Weinberg on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Weinberg would have caused
Weinberg to make reference to the subject matter of disagreements
in connection with its report; and (ii) no “reportable
events” as such term is defined in Item 304(a)(1)(v) on
Regulation S-K.
The Company provided Weinberg with a copy of the foregoing
disclosures and requested that Weinberg furnish the Company with a
letter addressed to the Securities and Exchange Commission
indicating whether Weinberg agrees with such disclosures.
Weinberg's letter, and the announcement of the change in auditors,
was included in the Form 8-K filed on September 17,
2019.
Effective September 13,
2019, the Company engaged Weaver and Tidwell, L.L.P.
(“
Weaver
”)
as its independent registered public accounting firm for the fiscal
year ended December 31, 2019.
During the years ended December 31, 2017 and 2018 through to the
effective date of Weaver’s appointment on September 13, 2019,
the Company did not consult Weaver with respect to the application
of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be
rendered on the Company’s Consolidated Financial Statements,
or any other matters or reportable events as defined in Item
304(a)(2)(i) and (ii) of Regulation S-K.
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, 2019. 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, 2019. 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, 2019, 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.
O
THER
INFORMATION
None.
P
A
R
T
III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
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 by appointment of the Board of
Directors (the “
Board
”).
|
Name
|
|
Age
|
|
Title
|
|
Dayton Judd
|
|
48
|
|
Chair of the Board and Chief Executive Officer
|
|
Grant Dawson
|
|
51
|
|
Director
|
|
Lewis Jaffe
|
|
63
|
|
Director
|
|
Todd Ordal
|
|
62
|
|
Director
|
|
Seth Yakatan
|
|
49
|
|
Director
|
|
Susan Kinnaman
(1)
|
|
52
|
|
Chief Financial Officer
|
|
Patrick Ryan
|
|
41
|
|
Chief Retail Officer
|
|
(1)
|
Ms, Kinnaman was appointed as the Company’s Chief Financial
Officer on February 18, 2019. Michael Abrams previously served as
the Company’s Chief Financial Officer and a director until
his resignation from such positions effective February 15,
2019.
|
Each
of the Company’s directors and executive officers will hold
office until their successors are duly elected and
qualified. The background and principal occupations of each
director and executive officer are as follows:
Dayton Judd
has served as a director of the Company since June
2017, is currently the Chair of the Board, 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
Board believes that Mr. Judd’s significant experience in
investing in microcap companies, together with his substantial
ownership position in the Company as one of its largest
stockholders, makes him a valuable asset to the Board in the daily
management of the Company, and in the development and
implementation of goals and objectives to build shareholder
value.
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
”), since
2014. Mr. Dawson brings more than 20 years of
experience in finance and has significant board-level experience in
corporate governance for public companies. Prior to joining 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 that, 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
Board 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 to assist the Company and the Board as it
builds a long-term, sustainable capital structure.
Lewis Jaffe
has served as a director of the Company
since 2010, and previously served as Chair of the Board 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 2014, for which he was awarded Professor
of the Year in 2016. From 2011 to 2015
, he served as Chief Executive Officer of Movio, a
high speed, mobile movie and content downloading service and
application,
prior to its
acquisition. Prior to Movio,
Mr. Jaffe was a principal at Jaffe &
Associates, 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., 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
Board believes that Mr. Jaffe’s experience as a Chief
Executive Officer of both public and private companies, and
consultant providing strategic and tactical planning to public
companies, as well as his corporate governance expertise, provides
management and the Board with a depth of experience, knowledge,
systems and best practices to guide corporate strategy and business
operations.
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 worldwide. Prior to
joining the Company, Mr. Ordal served as a director for iSatori,
Inc. from April 2012 until the completion of the Company’s
acquisition of iSatori in 2015. 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 Moorhead State University and his M.B.A.
from Regis University.
The
Board believes that Mr. Ordal’s considerable experience with
growing successful businesses, as well as his extensive knowledge
and understanding of marketing and finance matters, continues to
provide the Board with valuable guidance and insight.
Seth
Yakatan
has served a
director of the Company since September 2015 and currently serves a
Partner of Katan Associates, Inc., a corporate strategy and finance
advisory group, since April 2001. Prior to joining the Company, 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 Board 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
with valuable insight and expertise.
Susan
Kinnaman
has served as the
Company’s Chief Financial Officer since her appointment
effective February 18, 2019. Prior to that, Ms. Kinnaman
served as the Company’s Vice President of Finance since
joining the Company in 2007. From 2001 to 2007, Ms. Kinnaman served
as Controller for Fuchs Machinery, Inc., a leading industrial
distributor serving the MRO marketplace. From 2000 to 2001, she
served as Controller for Clarcor (Facet USA), a filtration
solutions company, from 1998 to 2000, as the Controller for
Gaffey Crane, a material handling products company and from 1994 to
1998 as the Regional Controller for Staffmark, a commercial
staffing organization. Ms. Kinnaman received her Bachelor’s
Degree in Accounting from Doane University and is a Certified
Public Accountant.
Patrick Ryan
has served as the Company’s
Chief Retail Officer since his appointment in June 2016. He brings
over 23 years of experience in the retail and wholesale business
both domestically and internationally. Since February 2009, Mr.
Ryan served as the Company’s Vice President of Sales during
which time he oversaw multiple retail and wholesale branches and
worked collaboratively with key members of management to drive
strategic initiatives in sales, employee training and the overall
growth of the Company. Prior to that, he served in various sales
positions of increasing responsibility since joining the Company in
2004. Mr. Ryan received his Bachelor of Science Degree in Public
Relations from Kansas State University.
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 directors or executive officers during the past ten
years.
CORPORATE GOVERNANCE, BOARD COMPOSITION AND BOARD
COMMITTEES
Term of Office
Pursuant
to our Bylaws, each member of our Board serves from the date they
are duly elected and qualified, until the Company’s following
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, with the exception of Mr.
Judd who also serves as the Company’s Chief Executive
Officer, all directors are independent 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 Chair 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 the Chief Executive
Officer and as Chair of the Board. At this time, the Board believes
that these combined roles are beneficial to both the daily
operations of the Company and the strategic perspective of the
Board.
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
businesses are 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. 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 five meetings during the year ended December 31,
2019, 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 2019, incumbent directors attended
100% of the aggregate number of meetings of the Board. The Board
also holds independent executive sessions without members of
management on an as-needed basis.
Board Committees and Charters
The Board has three standing committees which
consists of the Audit Committee, Compensation Committee, and
Nominating and Corporate Governance Committee. The Board appoints
the members and committee chair of each committee (based upon the
recommendation of the Nominating and Corporate Governance
Committee). As previously reported on the Company’s Current
Report on Form 8-K, effective December 20, 2019, the Board
reconstituted its committees upon recommendation by the Nominating
and Corporate Governance Committee, to allow for each independent
director to also serve as a member of the standing committees of
the Board, each committee to be comprised of Messrs. Dawson, Jaffe,
Ordal and Yakatan. Mr. Dawson will continue his service as Chair of
both the Audit Committee and the Compensation Committee and Mr.
Jaffe will continue his service as Chair of the Nominating and
Corporate Governance Committee. Copies of each committee charter
are available upon request to the Company’s Corporate
Secretary at 5214 S. 136th
Street, Omaha, Nebraska 68137.
The
charts below reflect the members and details for the committees
between January 1, 2019 to December 20, 2019.
Audit Committee
|
|
|
|
|
|
Members:
|
|
Grant Dawson (Chair)
|
|
|
|
|
Lewis Jaffe
|
|
|
|
|
Todd Ordal
|
|
|
|
|
|
|
|
Number of Meetings Held:
|
|
The Audit Committee held six meetings during 2019.
|
|
|
|
|
|
|
|
Functions:
|
|
The Audit Committee assists the Board 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 (Chair)
|
|
|
|
|
Lewis Jaffe
|
|
|
|
|
Seth Yakatan
|
|
|
|
|
|
|
|
Number of Meetings Held:
|
|
The Compensation Committee held one meeting during
2019.
|
|
|
|
|
|
|
|
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 (Chair)
|
|
|
|
|
Todd Ordal
|
|
|
|
|
Seth Yakatan
|
|
|
|
|
|
|
|
Number of Meetings in Held
:
|
|
The
Nominating and Corporate
Governance Committee held no meetings during 2019, electing instead
to address committee matters by action taken by the full
Board.
|
|
|
|
|
|
|
|
Functions
:
|
|
The Nominating and Corporate Governance Committee is responsible
for making recommendations to the Board of Directors regarding
director candidates and the size and composition of the Board and
its committees. 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,
2019, management believes that all necessary reports were filed in
a timely manner and all filings are current as of the date of this
filing.
Code of Ethics and Business Conduct
We have adopted a Code of Ethics that applies to
all of our directors, executive officers and employees, which sets
forth the business and ethical principles that govern all aspects
of our business. A form of the Code of Ethics was filed as Exhibit
14.1 to our Annual Report on Form 10-K for December 31,
2008.
A copy of this document
will be provided to any stockholder upon written request to the
Company’s Corporate Secretary at 5214 S. 136th
Street, Omaha, Nebraska
68137.
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.
IT
EM 11. EX
E
CUTIVE COMPENSATION
Summary Compensation Table
The following summary compensation table sets
forth compensation paid for the fiscal years ended December 31,
2019 and 2018 to (a) the Company’s Chief Executive Officer,
(b) the two most highly compensated executive officers other than
the Company’s Chief Executive Officer, who were serving as
executive officers as of December 31, 2019 and whose annual
compensation exceeded $100,000 during such year (collectively the
“
Named Executive
Officers
”), and (c)
additional individuals for whom disclosure would have been provided
under (b) but for the fact that the individual was not serving as
an executive officer at the end of the most recently completed
fiscal year.
|
Name and Principal Position
|
Year
|
Salary and Bonus ($)
|
Stock
Awards ($)
|
Warrants/ Option Awards ($)
(1)
|
All Other
Compensation ($)
|
Total ($)
|
|
|
|
|
|
|
|
|
|
Dayton Judd
(2)
|
2019
|
$
323,500
|
$
-
|
$
-
|
$
-
|
$
323,500
|
|
Chief Executive Officer and Chair of the Board
|
2018
|
$
105,400
|
$
172,500
|
$
146,651
|
$
109,496
|
$
534,047
|
|
|
|
|
|
|
|
|
|
Susan
Kinnaman
(3)
|
2019
|
$
123,369
|
$
-
|
$
-
|
$
-
|
$
123,369
|
|
Chief Financial Officer
|
2018
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
|
Patrick
Ryan
|
2019
|
$
271,280
|
$
-
|
$
-
|
$
-
|
$
271,280
|
|
Chief Retail Officer
|
2018
|
$
240,032
|
$
15,500
|
$
-
|
$
-
|
$
255,532
|
|
(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)
|
Mr. 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.
|
|
|
|
|
(3)
|
N
o
compensation information is provided for Ms. Kinnaman for fiscal
2018 as she was not among the Company’s named executive
officers for that year. Ms. Kinnaman was appointed as the
Company’s Chief Financial Officer on February 18,
2019.
|
Employment Agreements
Dayton
Judd.
Dayton Judd currently
serves as the Company’s Chief Executive Officer. Effective
January 1, 2020, the Board approved an increase of Mr. Judd’s
annual base salary from
$263,500 to $300,000.
All other compensation arrangements in effect as of
July 31, 2018 remain unchanged which,
in addition to his annual base salary, includes
(i) an annual cash
bonus, the amount of which, if any, shall be determined at the sole
discretion of the Compensation Committee; (ii) options to purchase
70,500 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 (iii) 45,000 shares of restricted Common Stock,
which shares vest (x) 15,000 shares at such date that the 30-day
volume weighted average price (“
VWAP
”)
for shares of the Company’s Common Stock exceeds $12.00,
which shares vested and were issued in December, 2019 (y) 15,000
shares at such date that the 30-day VWAP exceeds $18.00, and (z)
15,000 shares at such date that the 30-day VWAP exceeds
$24.00.
Patrick
Ryan.
Mr. Patrick Ryan
currently serves as the Company’s Chief Retail Officer
pursuant to the terms of an Employment Agreement dated June 13,
2019. The Employment Agreement provides that Mr. Ryan shall serve
in the capacity of the Company’s Chief Retail Officer
through
June 7, 2022, 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,
which shall increase to $130,000 per year effective on the first
anniversary of the Employment Agreement, and to $135,000 per year
effective on the second anniversary of the Employment Agreement;
(ii) commissions on a monthly basis in arrears in an amount equal
to 2.5% of the adjusted gross profit from the sale of
franchise-exclusive products, less certain expenses and costs
related to the sale of franchise exclusive products to both
domestic and international locations, as determined in good faith
by Company; (iii) an annual cash bonus, in an amount to be
determined by the compensation committee of the Company’s
Board, in its sole discretion, on an annual basis; and (iv)
reimbursement for any out-of-pocket expenses reasonably incurred by
Mr. Ryan in connection with the performance of his
duties.
. In the event that there is a
Change of Control, as defined in the Employment Agreement, the
surviving corporation shall be required to assume the
Company’s obligations pursuant to the Employment Agreement,
including any stock or stock option agreements with Mr.
Ryan;
provided,
however
, in the event that the
surviving corporation refuses to do so, then Mr. Ryan shall be
entitled to accelerated vesting of all unvested shares subject to
such agreements, if any.
Outstanding Equity Awards at
Fiscal Year-End
The
following table sets forth information regarding unexercised
options and stock that had not vested and equity incentive awards
held by each of the Named Executive Officers outstanding as of
December 31, 2019:
|
|
Option
Awards
|
Stock
Awards
|
|||||
|
Name
|
Number
of securities underlying unexercised options (#)
exercisable
|
Number
of securities underlying unexercised options (#)
unexercisable
|
Equity
incentive plan awards: Number of underlying unexercised unearned
options (#)
|
Option
Exercise
price ($)
|
Option
expiration date
|
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
|
47,000
|
23,500
|
|
$
2.80
|
07/31/28
|
30,000
(1)
|
$
423,000
(1)
|
|
Chief
Executive Officer and Chair of the Board
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Susan
Kinnaman
|
1,000
|
|
|
$
23.00
|
02/23/20
|
|
|
|
Chief Financial
Officer
|
1,000
|
|
|
$
13.90
|
05/09/21
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick
Ryan
|
|
|
|
|
|
|
|
|
Chief
Retail Officer
|
3,000
|
|
|
$
23.00
|
02/23/20
|
|
|
|
|
3,000
|
|
|
$
13.90
|
05/09/21
|
|
|
(1)
Shares
vest as follows: (i) 15,000 shares at such date that the 30-day
volume weighted average price (“
VWAP
”) for shares of the
Company’s Common Stock exceeds $12.00, which shares vested
and were issued in December, 2019 (ii) 15,000 shares at such date
that the 30-day VWAP exceeds $18.00, and (iii) 15,000 shares at
such date that the 30-day VWAP exceeds $24.00. The market value
reported for this award was calculated using the closing price of
the Company’s Common Stock on December 31, 2019, or $14.10
per share, assuming achievement of the maximum award
amount.
Director Compensation
We
currently have five directors, four of whom are considered
independent. Non-independent directors who are also employees of
the Company do not receive compensation for their services as a
director on the Board. For the year ended December 31, 2019, each
of our non-employee directors were entitled to receive $30,000 per
annum for their services on the Board pursuant to the
Company’s current director compensation plan, which
compensation may be paid in cash, shares of Company Common Stock or
a combination thereof, at the option of each individual
director.
The
table below summarizes the compensation paid to our non-employee
directors for the fiscal year ended December 31, 2019:
|
|
Fees earned or paid in
cash
(1)
|
Stock awards
|
Option awards
(2)
|
Total
|
|
Name
|
($)
|
($)
|
($)
|
($)
|
|
|
|
|
|
|
|
Grant
Dawson
|
$
22,500
|
$
7,500
|
$
-
|
$
30,000
|
|
Lewis
Jaffe
|
$
30,000
|
$
-
|
$
-
|
$
30,000
|
|
Todd
Ordal
|
$
15,000
|
$
15,000
|
$
-
|
$
30,000
|
|
Seth
Yakatan
|
$
30,000
|
$
-
|
$
-
|
$
30,000
|
|
(1)
|
Certain board members have elected 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.
|
Compensation Committee Interlocks and Insider
Participation
No
executive officers of the Company serve on the Compensation
Committee (or any other board committees) for the
Company.
ITE
M 12. SEC
U
RITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The
following tables set forth information regarding shares of our
Common Stock beneficially owned as of March 13, 2020,
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 Common Stock. Percent ownership
is calculated based on
1,059,616
shares of our Common Stock outstanding at March
13, 2020.
|
Beneficial Ownership of our Common Stock
|
Name and Address of Owner
(1)
|
Title of Class
|
Number of Shares Owned
|
Percentage of Class
(2)
|
|
|
|
|
|
|
Dayton
Judd, Chair and Chief Executive Officer
(3)
|
Common
Stock
|
627,019
|
53.9
%
|
|
|
|||
|
Grant
Dawson, Director
|
Common
Stock
|
19,107
|
1.8
%
|
|
|
|||
|
Lewis
Jaffe, Director
|
Common
Stock
|
14,431
|
1.4
%
|
|
|
|||
|
Todd Ordal,
Director
|
Common
Stock
|
15,557
|
1.5
%
|
|
|
|
|
|
|
Seth Yakatan,
Director
|
Common
Stock
|
-
|
*
%
|
|
|
|
|
|
|
Susan
Kinnaman, Chief Financial Officer
(4)
|
Common
Stock
|
2,649
|
*
%
|
|
|
|
|
|
|
Patrick
Ryan, Chief Retail Officer
(5)
|
Common
Stock
|
8,105
|
*
%
|
|
|
|
|
|
|
All
Officers and Directors as a group (seven
persons)
|
Common
Stock
|
672,868
|
59.6
%
|
|
(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 77,419 shares held by Mr. Judd personally, including in IRA
accounts; 47,000 shares issuable to Mr. Judd upon the exercise of
stock options at $2.80 per share, exercisable within 60 days of
March 13, 2020; 466,730 shares held by Sudbury Holdings, LLC; and
35,870 shares issuable upon the exercise of warrants held by
Sudbury Holdings, LLC.
|
|
|
|
|
(4)
|
Includes 1,000 shares issuable upon the exercise of stock options
at $13.90 per share, exercisable within 60 days of March 13,
2020.
|
|
|
|
|
(5)
|
Includes 3,000 shares issuable upon the exercise of stock options
at $13.90 per share, exercisable within 60 days of March 13,
2020.
|
|
|
|
Securities Authorized for Issuance Under Equity Compensation
Plans
The
following table provides information as of December 31, 2019,
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
first column)
|
|
Equity compensation plans approved by security
holders:
|
149,285
|
$
11.76
|
100,000
|
|
|
|
|
|
Description of Equity Compensation Plan
The 2019 Omnibus Incentive Plan (the
“
2019
Plan
”) was adopted by the
Board on July 3, 2019, as approved by a majority of the
Company’s stockholders at the annual meeting of stockholders
on August 16, 2019. The 2019 Plan reserves for issuance 100,000
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 2019 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.
Upon becoming effective, the Plan replaced, and no further awards
were made under the Company’s 2010 Incentive
Plan.
Changes in Control
The
Company is not aware of any arrangements that may result in a
change in control of the Company.
ITE
M 13. CERTAI
N
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Sudbury 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 Dayton Judd,
the Company’s Chair of the Board and Chief
Executive Officer,
in the principal amount of
$200,000.
The
Notes matured on the earlier to occur of a Change in Control of the
Company, as defined in the Notes, or December 31, 2019, and
required monthly principal and interest payments beginning April 1,
2019, with a final payment of unpaid principal and interest due
December 31, 2019. Proceeds from the sale of the Notes, along with
existing cash balances, were used to retire all outstanding
indebtedness under the terms of a previous credit agreement,
totaling approximately $590,000 at December 26, 2018.
On
September 24, 2019, the Company repaid all outstanding balances due
on the Notes issued to Sudbury and Mr. Judd, in the aggregate
principal amount, including accrued but unpaid interest thereon, of
$615,000. Mr. Judd is the managing partner of Sudbury. As a result
of the repayment of the Notes, the Company terminated its line of
credit entered into between the Company and Sudbury on December 26,
2018 providing for maximum borrowings of up to
$600,000.
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 $4.60 per share. Warrants to purchase
an aggregate of 39,130 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 Mr. Judd, the Company’s
Chair of the Board and Chief Executive Officer, and Mr. Dawson, a
director. A portion of the Offering was also sold to an
unaffiliated third party.
On December 23, 2019, Sudbury voluntarily converted its 550 shares
of Series A Preferred into Common Stock in accordance with the
terms of the Series A Preferred Stock Certificate of Designations.
In conjunction with the conversion, the Company issued to Sudbury a
total of 123,222 shares of Common Stock and paid accrued dividends
of $7,454. Following such conversion, no shares of Series A
Preferred remain outstanding, and the Company has no further
obligations under the Certificate of Designations, including the
obligation to pay preferred dividends.
ITE
M
14. PRI
N
CIPAL ACCOUNTANT FEES AND
SERVICES
As previously
disclosed, effective September 13, 2019, the Company engaged
Weaver and Tidwell, L.L.P. (“
Weaver
”) as its independent
registered public accounting firm for the fiscal year ended
December 31, 2019, after the dismissal of its former registered
public accountants,
Weinberg &
Company (“
Weinberg
”), effective that same
date.
The
reports of Weinberg on the consolidated financial statements of the
Company as of and for the fiscal year ended December 31, 2018 and
the subsequent interim period through June 30, 2019 did not contain
any adverse opinion or a disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting
principles.
During
the fiscal year ended December 31, 2018 and the subsequent interim
period through June 30, 2019, there were (i) no disagreements
within the meaning of Item 304(a)(1)(iv) of Regulation S-K between
the Company and Weinberg on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure, any of which, if not resolved to Weinberg’s
satisfaction, would have caused Weinberg to make reference thereto
in their reports, and (ii) no “reportable events”
within the meaning of Item 304(a)(1)(v) of Regulation
S-K.
The following table sets forth the aggregate fees billed by Weaver
with respect to audit and non-audit services for the Company during
the fiscal year ended December 31, 2019, and the aggregate fees
billed by Weinberg with respect to audit and non-audit services for
the Company during the fiscal year ended December 31, 2018, and the
subsequent interim periods in 2019 before the change in auditors
became effective.
|
|
Year Ended
December 31,
|
||
|
|
2019
|
2018
|
|
|
|
Weaver
|
Weinberg
|
Weinberg
|
|
Audit fees
(1)
|
$
17,500
|
$
96,076
|
$
78,000
|
|
Audit-related fees
(2)
|
$
-
|
$
-
|
$
-
|
|
Tax fees
(3)
|
$
-
|
$
26,225
|
$
29,000
|
|
All other fees
|
$
9,750
|
$
3,750
|
$
13,000
|
|
Total
|
$
27,250
|
$
126,051
|
$
120,000
|
|
(1)
|
Audit services in 2019 and 2018 consisted of the audit of our
annual consolidated financial statements, and other services
related to filings and registration statements filed by us and our
subsidiaries, and other pertinent matters.
|
|
(2)
|
Audit-related fees consisted of travel costs related to our annual
audit.
|
|
(3)
|
For
permissible professional services related to income tax return
preparation and compliance.
|
|
|
|
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 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.
P
ART
IV
I
TEM 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).
|
|
|
|
Certificates of Change, dated April 11, 2019 (incorporated by
reference to Exhibit 3.1 filed with Form 8-K filed on April 15,
2019).
|
|
|
|
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).
|
|
|
|
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).
|
|
|
|
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).
|
|
|
|
Employment
Agreement, by and between FitLife Brands, Inc. and Patrick Ryan,
dated June 13, 2019 (incorporated by reference to Exhibit 10.1
filed with Form 8-K on June 18, 2019).
|
|
|
|
2019
Omnibus Incentive Plan (incorporated by reference to Appendix A to
the Definitive Proxy Statement on Schedule 14A filed on July 12,
2019).
|
|
|
|
Revolving
Line of Credit Agreement, dated as of September 24, 2019, between
the Company and Mutual of Omaha Bank (incorporated by reference to
Exhibit 10.1 filed with Form 8-K on September 26,
2019).
|
|
|
|
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).
|
|
|
|
Letter
from Weinberg & Company, P.A., dated September 17, 2019
(incorporated by reference to Exhibit 16.1 filed with Form 8-K on
September 17, 2019).
|
|
|
21
|
|
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.
|
None.
SIGNA
T
URES
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 30, 2020
|
|
FitLife Brands, Inc.
By: /
s/ Dayton
Judd
|
|
|
|
Dayton
Judd
|
|
|
|
Chief
Executive Officer (Principal Executive Officer)
|
|
Date:
March 30, 2020
|
|
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 30, 2020
|
|
By:
/s/ Dayton
Judd
|
|
|
|
Dayton
Judd
|
|
|
|
Chief
Executive Officer and Chair of the Board
|
|
Date:
March 30, 2020
|
|
By:
/s/ Grant
Dawson
|
|
|
|
Grant
Dawson
|
|
|
|
Director
|
|
Date:
March 30, 2020
|
|
By: /
s/ Lewis
Jaffe
|
|
|
|
Lewis
Jaffe
|
|
|
|
Director
|
|
Date:
March 30, 2020
|
|
By:
/s/ Todd
Ordal
|
|
|
|
Todd
Ordal
|
|
|
|
Director
|
|
Date:
March 30, 2020
|
|
By:
/s/ Seth
Yakatan
|
|
|
|
Seth
Yakatan
|
|
|
|
Director
|
|
|
|
|
ITEM 8. FIN
A
NCIAL
STATEMENTS
FITLIFE BRANDS, INC.
|
TABLE OF CONTENTS
|
|
Page
|
|
|
|
|
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
|
F-1
|
|
|
CONSOLIDATED
FINANCIAL STATEMENTS:
|
|
|
|
|
|
Consolidated
Balance Sheets at December 31, 2019 and 2018
|
|
|
F-3
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2019 and
2018
|
|
|
F-4
|
|
|
Consolidated
Statement of Stockholders’ Equity for the years ended
December 31, 2019 and 2018
|
|
|
F-5
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2019 and
2018
|
|
|
F-6
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
F-7
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the Board of Directors and Shareholders
of FitLife Brands, Inc. and Subsidiaries
Opinion on the Financial Statements
We
have audited the accompanying consolidated balance sheet of FitLife
Brands, Inc. and Subsidiaries (the Company) as of December 31,
2019, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the year then ended,
and the related notes (collectively referred to as the financial
statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2019, and the results of its operations
and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America.
Basis for Opinion
These
financial statements are the responsibility of the entity’s
management. Our responsibility is to express an opinion on the
entity’s financial statements based on our audit. 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 audit 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 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 audit 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 entity's
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audit 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
consolidated financial statements. Our audit also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our audit
provides a reasonable basis for our opinion.
/s/ WEAVER AND TIDWELL, L.L.P.
We have served
as the FitLife Brands, Inc. and Subsidiaries auditor since
2019.
Fort Worth,
Texas
March 30,
2020
F-1
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 sheet of
FitLife Brands, Inc. and Subsidiaries (the
“
Company
”) as of December 31, 2018 and the related
consolidated statements of operations, stockholders’ equity
and cash flows for the year ended December 31, 2018, 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 the consolidated results of their operations and their
cash flows for the year 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 audit. 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 audit 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 audit 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 audit 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 audit 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 audit provide a
reasonable basis for our opinion.
Weinberg & Company, P.A.
Los
Angeles, California
March
22, 2019
|
FITLIFE
BRANDS, INC.
|
||
|
CONSOLIDATED
BALANCE SHEETS
|
|
ASSETS:
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash
|
$
265,000
|
$
259,000
|
|
Accounts
receivable, net of allowance of doubtful accounts, $27,000 and
$10,000 respectively
|
2,366,000
|
1,879,000
|
|
Inventories,
net of allowance for obsolescence of $130,000 and $107,000,
respectively
|
2,998,000
|
3,523,000
|
|
Prepaid
expenses and other current assets
|
72,000
|
223,000
|
|
Total
current assets
|
5,701,000
|
5,884,000
|
|
|
|
|
|
Property
and equipment, net
|
136,000
|
189,000
|
|
Right
of use asset, net of amortization of $226,000
|
254,000
|
-
|
|
Goodwill
|
225,000
|
225,000
|
|
Security
deposits
|
10,000
|
10,000
|
|
TOTAL
ASSETS
|
$
6,326,000
|
$
6,308,000
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
Accounts
payable
|
$
2,010,000
|
$
2,628,000
|
|
Accrued
expense and other liabilities
|
464,000
|
420,000
|
|
Product returns
|
256,000
|
446,000
|
|
Lease
liability - current portion
|
46,000
|
-
|
|
Notes
payable - related parties
|
-
|
500,000
|
|
Total
current liabilities
|
2,776,000
|
3,994,000
|
|
|
|
|
|
LONG-TERM
LEASE LIABILITY, net of current portion
|
208,000
|
-
|
|
|
|
|
|
TOTAL
LIABILITIES
|
2,984,000
|
3,994,000
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
Preferred
stock, $0.01 par value, 10,000,000 shares authorized, none
outstanding
|
|
|
|
as
of December 31, 2019 and December 31, 2018
|
|
|
|
Preferred
stock Series A preferred, $0.01 par value 1,000 shares authorized;
0
|
|
|
|
and
600 shares issued and outstanding as of December 31, 2019 and
December 31, 2018, respectively
|
-
|
-
|
|
Common
stock, $0.01 par value, 15,000,000 shares authorized; 1,054,516 and
1,111,943
|
|
|
|
issued
and outstanding as of December 31, 2019 and December 31, 2018
respectively
|
12,000
|
11,000
|
|
Treasury
stock, 198,731 shares
|
(1,619,000
)
|
-
|
|
Additional
paid-in capital
|
32,055,000
|
32,107,000
|
|
Accumulated
deficit
|
(27,106,000
)
|
(29,804,000
)
|
|
Total
stockholders' equity
|
$
3,342,000
|
$
2,314,000
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
6,326,000
|
$
6,308,000
|
The
accompanying notes are an integral part of these consolidated
financial statements
FITLIFE BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Years
ended
|
|
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
19,497,000
|
$
17,077,000
|
|
Cost of goods
sold
|
11,436,000
|
10,332,000
|
|
Gross
profit
|
8,061,000
|
6,745,000
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
General
and administrative
|
3,049,000
|
3,333,000
|
|
Selling
and marketing
|
2,379,000
|
2,690,000
|
|
Depreciation
and amortization
|
52,000
|
69,000
|
|
Total
operating expenses
|
5,480,000
|
6,092,000
|
|
OPERATING
INCOME
|
2,581,000
|
653,000
|
|
|
|
|
|
OTHER EXPENSES
(INCOME)
|
|
|
|
Interest
expense
|
47,000
|
133,000
|
|
Gain on settlement
|
(171,000
)
|
-
|
|
Total
other expenses (income)
|
(124,000
)
|
133,000
|
|
|
|
|
|
INCOME BEFORE
INCOME TAXES
|
2,705,000
|
520,000
|
|
|
|
|
|
PROVISION FOR
INCOME TAXES
|
7,000
|
11,000
|
|
|
|
|
|
NET
INCOME
|
2,698,000
|
509,000
|
|
|
|
|
|
PREFERRED STOCK
DIVIDEND
|
(63,000
)
|
(105,000
)
|
|
|
|
|
|
NET INCOME
AVAILABLE TO COMMON SHAREHOLDERS
|
$
2,635,000
|
$
404,000
|
|
|
|
|
|
NET INCOME PER
SHARE AVAILABLE TO COMMON SHAREHOLDERS:
|
|
|
|
Basic
|
$
2.57
|
$
0.37
|
|
|
|
|
|
Diluted
|
$
2.41
|
$
0.37
|
|
|
|
|
|
Basic
weighted average common shares
|
1,026,204
|
1,094,358
|
|
|
|
|
|
Diluted
weighted average common shares
|
1,092,312
|
1,094,358
|
The
accompanying notes are an integral part of these consolidated
financial statements
FITLIFE BRANDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
Additional
|
|
|
|
|
Series A Preferred
|
Common Stock
|
Treasury
|
Paid-in
|
Accumulated
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Stock
|
Capital
|
Deficit
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
YEAR
ENDED DECEMBER 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER
31, 2018
|
600
|
$
-
|
1,111,943
|
$
11,000
|
$
-
|
$
32,107,000
|
$
(29,804,000
)
|
$
2,314,000
|
|
Fair
value of common stock issued for services
|
-
|
-
|
18,082
|
-
|
-
|
47,000
|
-
|
47,000
|
|
Repurchase
of preferred and common stock
|
(50
)
|
-
|
(198,731
)
|
-
|
(1,619,000
)
|
(168,000
)
|
-
|
(1,787,000
)
|
|
Conversion
of preferred stock to common stock
|
(550
)
|
-
|
123,222
|
1,000
|
-
|
(1,000
)
|
-
|
-
|
|
Dividends
payments on preferred stock
|
-
|
-
|
-
|
-
|
-
|
(63,000
)
|
-
|
(63,000
)
|
|
Fair
value of vested common shares and options issued for
services
|
-
|
-
|
-
|
-
|
-
|
133,000
|
-
|
133,000
|
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
2,698,000
|
2,698,000
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER
31, 2019
|
-
|
$
-
|
1,054,516
|
$
12,000
|
$
(1,619,000
)
|
$
32,055,000
|
$
(27,106,000
)
|
$
3,342,000
|
|
|
|
|
|
|
|
|
|
|
|
YEAR
ENDED DECEMBER 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER
31, 2017
|
-
|
$
-
|
1,068,171
|
$
11,000
|
$
-
|
$
31,109,000
|
$
(30,208,000
)
|
$
912,000
|
|
Fair
value of common stock issued for services
|
-
|
-
|
43,772
|
-
|
-
|
163,000
|
-
|
163,000
|
|
Proceeds
from issuance of Series A preferred shares
|
600
|
-
|
-
|
-
|
-
|
600,000
|
-
|
600,000
|
|
Accretion
of beneficial conversion feature on Series A preferred
shares
|
-
|
-
|
-
|
-
|
-
|
105,000
|
(105,000
)
|
-
|
|
Fair
value of vested common shares and options issued for
services
|
-
|
-
|
-
|
-
|
-
|
130,000
|
-
|
130,000
|
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
509,000
|
509,000
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER
31, 2018
|
600
|
$
-
|
1,111,943
|
$
11,000
|
$
-
|
$
32,107,000
|
$
(29,804,000
)
|
$
2,314,000
|
The
accompanying notes are an integral part of these consolidated
financial statements
|
FITLIFE BRANDS, INC.
|
||||
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
Years
ended December 31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
|
Net
income
|
$
2,698,000
|
$
509,000
|
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
Depreciation
and amortization
|
52,000
|
69,000
|
|
Allowance
for doubtful accounts
|
17,000
|
(103,000
)
|
|
Allowance
for inventory obsolescence
|
23,000
|
58,000
|
|
Common
stock issued for services
|
71,000
|
163,000
|
|
Fair
value of options issued for services
|
111,000
|
130,000
|
|
Loss on
disposal of assets
|
-
|
34,000
|
|
Right
of use asset net of amortization and lease liability
|
(2,000
)
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable - trade
|
(505,000
)
|
1,334,000
|
|
Inventories
|
502,000
|
(707,000
)
|
|
Prepaid
expense
|
151,000
|
(2,000
)
|
|
Customer
note receivable
|
-
|
5,000
|
|
Security
deposit
|
-
|
12,000
|
|
Accounts
payable
|
(618,000
)
|
(346,000
)
|
|
Accrued
liabilities and other liabilities
|
(50,000
)
|
(192,000
)
|
|
Product
returns
|
(189,000
)
|
(706,000
)
|
|
Net
cash provided by operating activities
|
2,261,000
|
258,000
|
|
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
|
Proceeds
from the sale of assets
|
-
|
4,000
|
|
Net
cash provided by investing activities
|
-
|
4,000
|
|
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
|
Proceeds
from issuance of notes payable
|
300,000
|
500,000
|
|
Proceeds
from issuance of Series A preferred stock
|
-
|
600,000
|
|
Dividend
payments on preferred stock
|
(63,000
)
|
-
|
|
Repurchases
of common stock
|
(1,524,000
)
|
-
|
|
Repurchases
of preferred stock
|
(168,000
)
|
-
|
|
Repayment
of line of credit
|
-
|
(1,950,000
)
|
|
Repayments
of term loan
|
-
|
(415,000
)
|
|
Repayments
of note payable
|
(800,000
)
|
-
|
|
Net
cash used in financing activities
|
(2,255,000
)
|
(1,265,000
)
|
|
|
|
|
|
CHANGE IN
CASH
|
6,000
|
(1,003,000
)
|
|
CASH, BEGINNING OF
PERIOD
|
259,000
|
1,262,000
|
|
CASH, END OF
PERIOD
|
$
265,000
|
$
259,000
|
|
|
|
|
|
Supplemental
disclosure operating activities
|
|
|
|
Cash paid for
interest
|
$
47,000
|
$
133,000
|
|
|
|
|
|
Non-cash
investing and financing activities
|
|
|
|
Accretion of
beneficial conversion feature on Series A preferred
stock
|
-
|
$
105,000
|
|
Recording of lease
asset and liability upon adoption of ASU-2016-02
|
$
343,000
|
-
|
|
Conversion of Series A preferred
stock into common stock
|
$
567,000
|
-
|
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements
|
FITLIFE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2019 AND 2018
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, PMD Sports,
SirenLabs, CoreActive, and Metis Nutrition (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, 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
www.fitlifebrands.com
.
The Company’s Common Stock currently trades under the symbol
“FTLF” on the OTC: PINK market.
Recent Developments
Reverse/Forward Split
On April 11, 2019, the Company filed two
Certificates of Change with the Secretary of State of the State of
Nevada, the first to effect a reverse stock split of both the
Company’s issued and outstanding and authorized Common Stock,
par value $0.01 per share (“
Common
Stock
”), at a ratio of
1-for-8,000 (the “
Reverse
Split
”), and the second
to effect a forward stock split of both the Company’s issued
and outstanding and authorized Common Stock at a ratio of 800-for-1
(the “
Forward
Split
”, and together with
the Reverse Split, the “
Reverse/Forward
Split
”). The
Reverse/Forward Split became effective, and the Company’s
Common Stock began trading on a post-split basis, on Tuesday, April
16, 2019.
The
Company did not issue any fractional shares as a result of the
Reverse/Forward Split. Holders of fewer than 8,000 shares of the
Common Stock immediately prior to the Reverse/Forward Split
received cash in lieu of fractional shares based on the 5-day
volume weighted average price of the Company’s Common Stock
immediately prior to the Reverse/Forward Split, which was $0.57 per
pre-split share. As a result, such holders ceased to be
stockholders of the Company. Holders of more than 8,000 shares of
Common Stock immediately prior to the Reverse/Forward Split did not
receive fractional shares; instead any fractional shares resulting
from the Reverse/Forward Split were rounded up to the next whole
share.
As
a result of the Reverse/Forward Split, the number of shares of
Company Common Stock authorized for issuance under the
Company’s Articles of Incorporation, as amended, was
decreased from 150,000,000 shares to 15,000,000 shares. The
Reverse/Forward Split did not affect the Company’s preferred
stock, nor did it affect the par value of the Company’s
Common Stock.
The
share and per share amounts included in these consolidated
financial statements and footnotes have been retroactively adjusted
to reflect the 1-for-10 aspect of the Reverse/Forward Split as if
it occurred as of the earliest period presented.
Line of Credit Agreement
On September 24, 2019, the Company entered into a
Revolving Line of Credit Agreement (the "
Line of Credit
Agreement
") with Mutual of
Omaha Bank (the "
Lender
") providing the Company with a $2.5 million
revolving line of credit (the "
Line of
Credit
"). The Line of Credit
allows the Company to request advances thereunder and to use the
proceeds of such advances for working capital purposes until
September 23, 2020 (the “
Maturity
Date
”), unless renewed at
maturity upon approval by the Company’s Board of Directors
and the Lender. The Line of Credit is secured by all assets of the
Company.
Advances
drawn under the Line of Credit bear interest at an annual rate of
the one-month LIBOR rate plus 2.75%, and each advance will be
payable on the Maturity Date with the interest on outstanding
advances payable monthly. The Company may, at its option, prepay
any borrowings under the Line of Credit, in whole or in part at any
time prior to the Maturity Date, without premium or
penalty.
The
Line of Credit Agreement includes customary events of default. If
any such event of default occurs, the Lender may declare all
outstanding loans under the Line of Credit to be due and payable
immediately.
Repayment of Outstanding Notes
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,
the Company’s Chair of the Board and Chief
Executive Officer,
in the principal amount of $200,000 (the
“
Judd Note
”)
(together with the Sudbury Note, the “
Notes
”).
The
Notes matured on the earlier to occur of a Change in Control of the
Company, as defined in the Notes, or December 31, 2019, and
required monthly principal and interest payments beginning April 1,
2019, with a final payment of unpaid principal and interest due
December 31, 2019. 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.
On September 24, 2019, the Company repaid all
outstanding balances due on the Notes
in the aggregate principal amount, including
accrued but unpaid interest thereon, of $615,000. Mr. Judd is the
managing partner of Sudbury. As a result of the repayment of the
Notes, the Company terminated its line of credit entered into
between the Company and Sudbury on December 26, 2018 providing for
maximum borrowings of up to $600,000.
Amendment of Share Repurchase Plan
On September 23, 2019, the Company's approved an
amendment the Company’s share repurchase program as approved
on August 16, 2019, pursuant to which the Board authorized
management to repurchase up to $500,000 of the Company's Common
Stock, over the next 24 months (the "
Share Repurchase
Program
"), which Share
Repurchase Program was previously reported on the Company's Current
Report on Form 8-K filed August 20, 2019. The Board approved an
amendment to the Share Repurchase Program to increase the
repurchase of up to $1,000,000 of the Company's Common Stock, its
Series A Convertible Preferred Stock, par value $0.01 per share
("
Series A
Preferred
"), and warrants to
purchase shares of the Company's Common Stock ("
Warrants
"), over the next 24 months, at a purchase price,
in the case of Common Stock, equal to the fair market value of the
Company's Common Stock on the date of purchase, and in the case of
Series A Preferred and Warrants, at a purchase price determined by
management, with the exact date and amount of such purchases to be
determined by management.
On
November 6, 2019, the Company’s Board amended the previously
approved Share Repurchase Program to increase the amount of
authorized repurchases to $2.5 million. All other terms of
the Share Repurchase Program remain unchanged.
The
Company intends to conduct its Share Repurchase Program in
accordance with all applicable securities laws and regulations,
including Rule 10b-18 of the Securities Exchange Act of 1934, as
amended. Repurchases may be made at management's discretion from
time to time in the open market or through privately negotiated
transactions. The Company may suspend or discontinue the Share
Repurchase Program at any time, and may thereafter reinstitute
purchases, all without prior announcement.
During
the year ended December 31, 2019, excluding the 99,238 shares
repurchased for total consideration of $569,000 as a result of the
Reverse/Forward split, the Company repurchased 99,493 shares of
Common Stock, or approximately 9% of the issued and outstanding
shares of the Company, through both open market and private
transactions, as follows:
|
Trade date
|
Total number of shares purchased
|
Average price paid per share
|
Total number of shares purchased as part of publicly announced
programs
|
Dollar value of shares that may yet be purchased
|
|
August
2019
|
-
|
$
-
|
-
|
$
500,000
|
|
September
2019
|
82,216
|
$
9.96
|
82,216
|
$
180,937
|
|
October
2019
|
-
|
$
-
|
-
|
$
180,937
|
|
November
2019
|
7,000
|
$
13.35
|
7,000
|
$
1,419,487
|
|
December
2019
|
10,277
|
$
13.41
|
10,277
|
$
1,281,717
|
|
Subtotal
|
99,493
|
$
10.56
|
99,493
|
|
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:
Principles 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 to consumers, primarily through GNC
stores.
The
Company accounts for revenues in accordance with Accounting
Standards Codification (“
ASC
”) 606,
Revenue from Contracts with Customers
.
The underlying principle of ASC 606 is to recognize revenue to
depict the transfer of goods or services to customers at the amount
expected to be collected. ASC 606 creates a five-step model that
requires entities to exercise judgment when considering the terms
of contract(s), which includes (1) identifying the contract(s) or
agreement(s) with a customer, (2) identifying our performance
obligations in the contract or agreement, (3) determining the
transaction price, (4) allocating the transaction price to the
separate performance obligations, and (5) recognizing revenue as
each performance obligation is satisfied. Under ASC 606, revenue is
recognized when performance obligations under the terms of a
contract are satisfied, which occurs for the Company upon shipment
or delivery of products or services to our customers based on
written sales terms, which is also when control is transferred.
Revenue is measured as the amount of consideration we expect to
receive in exchange for transferring the products or services to a
customer.
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.
For
direct-to-consumer sales, the Company allows for returns within 30
days of purchase. Our wholesale customers such as GNC, may return
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 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 2019 and 2018 were $14,795,000, and
$13,102,000, respectively, representing 75% and 77% of total
revenue, respectively. Accounts receivable attributable to GNC
before adjusting for product return reserves as of December 31,
2019 and 2018 were $2,038,000 and $1,543,000, respectively,
representing 87% 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, 2019 and 2018, the Company had provided a reserve for
doubtful accounts of $27,000 and $10,000,
respectively.
Product Returns, Sales Incentives and Other Forms of Variable
Consideration
In
measuring revenue and determining the consideration the Company is
entitled to as part of a contract with a customer, the Company
takes into account the related elements of variable consideration.
Such elements of variable consideration include, but are not
limited to, product returns and sales incentives, such as markdowns
and margin adjustments. For these types of arrangements, the
adjustments to revenue are recorded at the later of when (i) the
Company recognizes revenue for the transfer of the related products
to the customers, or (ii) the Company pays, or promises to pay, the
consideration.
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 specific 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. Product returns can and do
occur from time to time and can be material.
For
the sale of goods with a right of return, the Company estimates
variable consideration using the most likely amount method and
recognizes revenue for the consideration it expects to be entitled
to when control of the related product is transferred to the
customers and records a sales return accrual within Accrued expense
and other liabilities for the amount it expects to credit back its
customers. Under this method, certain forms of variable
consideration are based on expected sell-through results, which
requires subjective estimates. These estimates are supported by
historical results as well as specific facts and circumstances
related to the current period. In addition, the Company recognizes
an asset included in Inventories, net and a corresponding
adjustment to Cost of Goods Sold for the right to recover goods
from customers associated with the estimated returns. The sales
return accrual and corresponding asset include estimates that
directly impact reported revenue. These estimates are calculated
based on a history of actual returns, estimated future returns and
information provided by customers regarding their inventory levels.
Consideration of these factors results in an estimate for
anticipated sales returns that reflects increases or decreases
related to seasonal fluctuations. In addition, as necessary, sales
return accruals and the related assets may be established for
significant future known or anticipated events. The types of known
or anticipated events that are considered, and will continue to be
considered, include, but are not limited to, changes in the retail
environment and the Company's decision to continue to support new
and existing products.
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 specific 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 7% 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, 2019 and 2018 amounted to $256,000 and $446,000,
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, 2019. 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, 2019 and 2018.
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, 2019 and 2018, the aggregate allowance for expiring,
slow moving and excess inventory amounted to $130,000 and $107,000,
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 fixtures
|
|
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, 2019 and 2018.
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.
There
were no impairment charges incurred during the years ended December
31, 2019 and 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, 2019, and 2018, the Company has not
established a liability for uncertain tax positions.
Net Income Per Share
Basic
net income per share is computed by dividing net income 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 stockholders 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:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Series A Preferred
Stock
|
-
|
1,304,348
|
|
Warrants
|
-
|
39,130
|
|
Options
|
34,075
|
156,209
|
|
Total
|
34,075
|
1,499,687
|
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.
From prior periods until December 31, 2018, the
Company accounted for share-based compensation issued to
non-employees and consultants in accordance with the provisions of
FASB ASC 505-50, Equity-Based Payments to
Non-Employees
.
Measurement of share-based payment transactions
with non-employees is based on the fair value of whichever is more
reliably measurable: (a) the goods or services received or (b) the
equity instruments issued. The final fair value of the share-based
payment transaction is determined at the performance completion
date.
In
June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting (“ASU 2018-07”). The guidance was
issued to simplify the accounting for share-based transactions by
expanding the scope of ASU 2018-07 from only being applicable to
share-based payments to employees to also include share-based
payment transactions for acquiring goods and services from
nonemployees. As a result, nonemployee share-based transactions
will be measured by estimating the fair value of the equity
instruments at the grant date, taking into consideration the
probability of satisfying performance conditions. We adopted ASU
2018-07 on January 1, 2019. The adoption of the standard did not
have a material impact on our financial statements for the year
ended December 31, 2019 or the previously reported financial
statements.
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 requires 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.
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.
Reclassification
During
2019, the Company changed the presentation of its accounting for
customer returns. Previously, the sales return reserve was deducted
from accounts receivable. Beginning in 2019, the reserve is shown
as a current liability on the consolidated balance sheet. The
presentation of the customer return reserve has been changed in the
accompanying 2018 consolidated financial statements to be
consistent with the Company’s current approach.
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, 2019, the value of the Company’s inventory was
$2,998,000. At December 31, 2018, the value of the Company’s
inventory was $3,523,000.
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Finished
goods
|
$
2,688,000
|
$
3,168,000
|
|
Components
|
440,000
|
462,000
|
|
Allowance for
obsolescence
|
(130,000
)
|
(107,000
)
|
|
Total
|
$
2,998,000
|
$
3,523,000
|
NOTE 5. PROPERTY AND EQUIPMENT
The
Company had fixed assets as of December 31, 2019 and 2018 as
follows:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Equipment
|
$
902,000
|
$
902,000
|
|
Accumulated
depreciation
|
(766,000
)
|
(713,000
)
|
|
Total
|
$
136,000
|
$
189,000
|
Depreciation
expense was $52,000 for December 31, 2019 compared to $69,000 for
December 31, 2018. 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
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 Dayton Judd, the Company’s Chief Executive
Officer and Chair of the Board, in the principal amount of
$600,000, with an initial advance to the Company in the amount of
$300,000 which was outstanding at December 31, 2018.
During the three months ended March
31, 2019, an additional $300,000 was advanced to the Company,
resulting in aggregate borrowings of $600,000. In addition, on
December 26, 2018, the Company also issued a promissory note to Mr.
Judd in the principal amount of $200,000. On September 24, 2019,
the Company repaid all outstanding balances due under the terms of
the Notes in the aggregate principal amount, including accrued but
unpaid interest thereon, of $615,000. As a result of the repayment
of the Notes, the Company terminated its line of credit entered
into between the Company and Sudbury on December 26, 2018 providing
for maximum borrowings of up to $600,000.
As
of December 31, 2019 and 2018, the aggregate balance of the Notes
amounted to $0 and $501,000, respectively, including accrued
interest of $0 and $1,000, respectively.
Line of Credit
– Mutual of Omaha Bank
On
September 24, 2019, the Company entered into entered into a Line of
Credit Agreement with the Lender providing the Company with a $2.5
million revolving Line of Credit. The Line of Credit allows the
Company to request advances thereunder and to use the proceeds of
such advances for working capital purposes until the Maturity Date,
or unless renewed at maturity upon approval by the Company’s
Board and the Lender. The Line of Credit is secured by all assets
of the Company.
Advances
drawn under the Line of Credit bear interest at an annual rate of
the one-month LIBOR rate plus 2.75%, and each advance will be
payable on the Maturity Date with the interest on outstanding
advances payable monthly. The Company may, at its option, prepay
any borrowings under the Line of Credit, in whole or in part at any
time prior to the Maturity Date, without premium or
penalty.
Subsequent to the
year ended December 31, 2019, the Lender advanced the Company $2.5
million under the Line of Credit. The advance was intended to
provide the Company with additional liquidity in anticipation of an
expected negative impact on sales to GNC and our other wholesale
customers resulting from the COVID-19 outbreak.
NOTE 7. EQUITY
Common Stock
The
Company is authorized to issue 15.0 million shares of Common Stock,
$0.01 par value per share, of which 1,054,516 and 1,111,943 shares
of Common Stock were issued and outstanding as of December 31, 2019
and 2018, respectively.
Reverse/Forward Split
On April 11, 2019, the Company filed two
Certificates of Change with the Secretary of State of the State of
Nevada, the first to effect a reverse stock split of both the
Company’s issued and outstanding and authorized
Common
Stock, at a ratio of 1-for-8,000, and the second
to effect a forward stock split of both the Company’s issued
and outstanding and authorized Common Stock at a ratio of
800-for-1. The Reverse/Forward Split became effective, and the
Company’s Common Stock began trading on a post-split basis,
on Tuesday, April 16, 2019.
The
Company did not issue any fractional shares as a result of the
Reverse/Forward Split. Holders of fewer than 8,000 shares of the
Common Stock immediately prior to the Reverse/Forward Split
received cash in lieu of fractional shares based on the 5-day
volume weighted average price of the Company’s Common Stock
immediately prior to the Reverse/Forward Split, which was $0.57 per
pre-split share. As a result, such holders ceased to be
stockholders of the Company. Holders of more than 8,000 shares of
Common Stock immediately prior to the Reverse/Forward Split did not
receive fractional shares; instead any fractional shares resulting
from the Reverse/Forward Split were rounded up to the next whole
share.
As
a result of the Reverse/Forward Split, the number of shares of
Company Common Stock authorized for issuance under the
Company’s Articles of Incorporation, as amended, was
decreased from 150,000,000 shares to 15,000,000 shares. The
Reverse/Forward Split did not affect the Company’s preferred
stock, nor did it affect the par value of the Company’s
Common Stock.
The
share and per share amounts included in these unaudited interim
condensed consolidated financial statements and footnotes have been
retroactively adjusted to reflect the 1-for-10 aspect of the
Reverse/Forward Split as if it occurred as of the earliest period
presented.
The following were Common Stock transactions during the year ended
December 31, 2019:
During
the year ended December 31, 2019, the Company issued 18,082 shares
of Common Stock with a fair value of $47,000 to employees and
directors for services rendered. The shares were valued at the
respective date of issuance.
As
of December 31, 2019, there was unearned compensation of $36,800
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, 2018:
During
the year ended December 31, 2018, the Company issued 43,772 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 45,000 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 45,000 shares of restricted Common Stock was 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 year 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.
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 Convertible Preferred Stock in exchange for cash of
$600,000, or $1,000 per share, to three investors, two of whom were
related-party investors.
During
November 2019, the Company repurchased and retired 50 shares of
Series A Convertible Preferred Stock. During December 2019, the
remaining 550 shares of Series A Convertible Preferred Stock were
converted into Common Stock in accordance with the terms of the
Certificate of Designations. As a result, no shares of Series A
Preferred Stock were outstanding as of December 31,
2019.
During
2019, the Company paid $63,000 for preferred
dividends.
Options
The
following table summarizes option activity:
|
|
Number of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Life
(Years)
|
|
Outstanding,
December 31, 2017
|
87,028
|
$
27.10
|
|
|
Issued
|
87,500
|
3.50
|
|
|
Exercised
|
-
|
|
|
|
Forfeited
|
(20,007
)
|
48.00
|
|
|
Outstanding,
December 31, 2018
|
154,521
|
$
13.10
|
|
|
Issued
|
8,000
|
$
6.85
|
|
|
Exercised
|
-
|
|
|
|
Forfeited
|
(13,236
)
|
$
24.45
|
|
|
Outstanding,
December 31, 2019
|
149,285
|
$
11.76
|
5.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|||||||||
|
|
Exercise
Price Per Share
|
|
|
Total Number of Options
|
|
|
Weighted
Average
Remaining
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of Vested Options
|
|
|
Weighted
Average
Exercise
Price
|
|
||||||
|
|
$
|
2.80 -
$23.00
|
|
|
|
143,710
|
|
|
|
5.08
|
|
|
$
|
8.72
|
|
|
|
112,210
|
|
|
$
|
10.09
|
|
|
|
$
|
23.10 -
$144.30
|
|
|
|
5,575
|
|
|
|
3.77
|
|
|
$
|
90.20
|
|
|
|
5,575
|
|
|
$
|
90.20
|
|
|
|
|
|
|
|
|
149,285
|
|
|
|
5.03
|
|
|
$
|
11.76
|
|
|
|
117,785
|
|
|
$
|
13.88
|
|
The
closing stock price for the Company’s stock on December 31,
2019 was $14.10. As such, there was an intrinsic value of
outstanding options of $1,027,000.
During
the year ended December 31, 2019,
the
Company granted stock options to employees for services rendered to
purchase 8,000 shares of Company Common Stock. The stock options
are exercisable at a price of $6.85 per share, expire in five 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
$38,000, which was determined using the Black-Scholes option
pricing model with the following average assumption: stock price of
$6.85 per share, expected term of three years, volatility of 108%,
dividend rate of 0% and risk-free interest rate of 2.18%. 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, 2019, the Company recognized
compensation expense of $111,000 based upon the vesting of
outstanding options. As of December 31, 2019, there was $54,000 of
unvested stock compensation that will be recognized as an expense
in future periods as the options vest.
During the year
ended December 31, 2018,
the Company
granted stock options to employees for services rendered to
purchase 87,500 shares of Common Stock. Of these options, 70,500
are exercisable at a price of $2.80 and expire in ten years, and
17,000 are exercisable at a price of $4.20 per share and expire in
five years. One-third of the options 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
$2.80 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
outstanding 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.
Warrants
The
following table summarizes warrant activity:
|
|
Number of
Warrants
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Life (Years)
|
|
Outstanding,
December 31, 2017
|
6,062
|
$
129.90
|
|
|
Issued
|
39,130
|
4.60
|
|
|
Exercised
|
-
|
-
|
|
|
Forfeited
|
(6,062
)
|
-
|
|
|
Outstanding,
December 31, 2018
|
39,130
|
$
4.60
|
|
|
Issued
|
-
|
-
|
|
|
Repurchased/Retired
|
(3,260
)
|
-
|
|
|
Forfeited
|
-
|
-
|
|
|
Outstanding,
December 31, 2019, vested and exercisable
|
35,870
|
$
4.60
|
3.9
|
Total
intrinsic value of the outstanding warrants as of December 31, 2019
amounted to $341,000.
NOTE 8. INCOME TAXES
The
Company had available federal net operating loss carryforwards of
approximately $26.6 million and $28.0 million as of December 31,
2019 and 2018, 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
carryforwards, the utilization of the Company’s NOL may be
limited to statutory limits as a result of change in stock
ownership. NOLs incurred subsequent to the latest change in control
are not subject to the limitations.
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, 2019 and December 31, 2018, 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, 2019, and 2018, the
Company has not accrued interest or penalties related to uncertain
tax positions. Tax years 2016 through 2019 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 years ended December 31, 2019 and December 31, 2018, the
Company recorded a provision for income tax of $7,000 and $11,000,
respectively, pertaining to various state income taxes. Due to the
utilization of the Company’s NOL, there was no provision for
federal income taxes in either year.
Significant components of the Company’s deferred income tax
assets are as follows:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Net operating loss
carryforward
|
$
5,579,000
|
$
7,262,000
|
|
Allowances for
sales returns, bad debt and inventory
|
87,000
|
15,000
|
|
Share based
compensation
|
94,000
|
34,000
|
|
Other
|
202,000
|
46,000
|
|
Total deferred
asset
|
5,962,000
|
7,357,000
|
|
Valuation
allowance
|
(5,962,000
)
|
(7,357,000
)
|
|
|
|
|
|
Net deferred tax
asset
|
$
-
|
$
-
|
Reconciliation of the effective income tax rate to the U.S.
statutory rate is as follows:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Federal statutory
tax rate
|
21
%
|
21
%
|
|
State tax, net of
federal benefit
|
4
%
|
5
%
|
|
|
25
%
|
26
%
|
|
Effect of change in
tax rate
|
-
%
|
-
%
|
|
Valuation
allowance
|
(25
%)
|
(26
%)
|
|
Effective tax
rate
|
-
%
|
-
%
|
NOTE 9. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
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. 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 iSatori property as of February 1, 2018 which expires
January 31, 2020.
Rent
expense for the year ended December 31, 2019 was $84,000, of which
$50,000 is included in cost of goods sold and $34,000 is included
in operating expense in the accompanying consolidated statement of
operations. Rent expense for the year ended December 31, 2018 was
$104,000 of which $50,000 was included in cost of goods sold and
$54,000 was included in operating expenses.
Minimum
annual rental commitments under non-cancelable leases are as
follows:
|
Years
ending December 31,
|
Lease
Commitments
|
Sublease
|
Amount
|
|
2020
|
$
67,000
|
$
(5,000
)
|
$
62,000
|
|
2021
|
67,000
|
-
|
67,000
|
|
2022
|
67,000
|
-
|
67,000
|
|
2023
|
61,000
|
-
|
61,000
|
|
2024 and
thereafter
|
51,000
|
-
|
51,000
|
|
Less: Imputed
interest/present value discount
|
(59,000
)
|
-
|
(59,000
)
|
|
TOTAL
|
$
254,000
|
$
(5,000
)
|
$
249,000
|
NOTE 10. SUBSEQUENT EVENTS
On March 20, 2020 the Company
borrowed $2.5 million under the terms of the Company’s Line
of Credit Agreement (the "
Line of
Credit
") with
the Lender, the term of which are disclosed under the caption
"
Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources
" in this Annual Report on Form
10-K, and in Note 6 to the Consolidated Financial Statements under
the caption “
Line of Credit
– Mutual of Omaha Bank
”.
The advance was
intended to provide the Company with additional liquidity in
anticipation of an expected negative impact on sales to GNC and our
other wholesale customers resulting from the COVID-19
outbreak.
F-19
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A - Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Stock, Related Stockholder Matters and Issuers Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of Or Plan Of OperationItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial StatementsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors and Executive OfficersItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and ReportsItem 16. Form 10-k SummaryNote 1. Description Of BusinessNote 2. Summary Of Significant Accounting PoliciesNote 3 Merchant AgreementNote 4. InventoriesNote 5. Property and EquipmentNote 6. Notes PayablesNote 7. EquityNote 8. Income TaxesNote 9. Commitments and ContingenciesNote 10. Subsequent Events