Blueprint
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2017
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.
(Name
of small business issuer as specified in its charter)
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Nevada
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20-3464383
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(State
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)
884-1894
(Issuer’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 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
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (Sec.232.405 of this chapter) during the
preceding 12 months (or for such a shorter period that the
registrant was required to submit and post such files). Yes
[X] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company or emerging growth company. See definitions of “large
accelerated filer,” “accelerated filer,”
“smaller reporting company” and "emerging growth
company" in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non–Accelerated
filer
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☐
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Small
reporting company
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☒
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Emerging
growth company
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☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
State
the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked
price of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal
quarter: $4,377,710.
State
the number of shares outstanding of each of the registrant’s
classes of common stock, as of the latest practicable date: As of
April 16, 2018, there were 10,906,710 shares of common stock, $0.01
par value per share, issued and outstanding.
FITLIFE BRANDS, INC.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017 and 2016
TABLE OF CONTENTS
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PAGE
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PART I
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1
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1
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8
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12
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12
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13
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13
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PART II
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14
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14
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15
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21
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22
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PART III
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22
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22
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27
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29
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32
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32
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PART IV
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33
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33
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Form
10-K Summary |
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33
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34
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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 contains various “forward
looking statements” within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, regarding future
events or the future financial performance of the Company that
involve risks and uncertainties. Certain statements included
herein, including, without limitation, statements related to
anticipated cash flow sources and uses, and words including but not
limited to “anticipates,” “believes,”
“plans,” “expects,” “future”
and similar statements or expressions, identify forward looking
statements. Any forward-looking statements herein are subject to
certain risks and uncertainties in the Company’s business,
including but not limited to, reliance on key customers and
competition in its markets, market demand, product performance,
technological developments, maintenance of relationships with key
suppliers, difficulties of hiring or retaining key personnel and
any changes in current accounting rules, all of which may be beyond
the control of the Company. The Company adopted at
management’s discretion, the most conservative recognition of
revenue based on the most astringent guidelines of the SEC.
Management will elect additional changes to revenue recognition to
comply with the most conservative SEC recognition on a forward
going accrual basis as the model is replicated with other similar
markets. The Company’s actual results could differ materially
from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth
herein.
This Annual Report on Form 10-K, 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 risk factors emerge from time to time and it is
not possible for management to predict all such risk factors.
Further, it is not possible to assess the impact of all risk
factors 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.
As used
in this Annual Report, “we,” “us,” “our,” “FitLife,” “FitLife Brands”
“Company” or
“our company”
refers to FitLife Brands, Inc. and all of its
subsidiaries.
Overview
FitLife
Brands, Inc. (the “Company”) is a national provider
of innovative and proprietary nutritional supplements for
health-conscious consumers marketed under the brand names NDS
Nutrition Products™ (“NDS”) (www.ndsnutrition.com),
PMD™ (www.pmdsports.com),
SirenLabs™ (www.sirenlabs.com),
CoreActive™ (www.coreactivenutrition.com),
and Metis Nutrition™ (www.metisnutrition.com) (together,
“NDS
Products”). With the consummation of the merger with
iSatori, Inc. (“iSatori”) on September 30, 2015,
which became effective on October 1, 2015, described below (the
“Merger”), the
Company added several brands to its product portfolio, including
iSatori (www.isatori.com), BioGenetic
Laboratories, and Energize (together, “iSatori Products”). The NDS
Products are distributed principally through franchised General
Nutrition Centers, Inc. (“GNC”) stores located both
domestically and internationally, and, with the addition of Metis
Nutrition, through corporate GNC stores in the United
States. The iSatori Products are sold through more than 25,000
retail locations, which include specialty, mass, and
online.
The
Company was incorporated in the State of Nevada on July 26, 2005.
In October 2008, the Company acquired the assets of NDS Nutritional
Products, Inc., a Nebraska corporation, and moved those assets into
its wholly owned subsidiary NDS Nutrition Products, Inc., a Florida
corporation (“NDS”). The Company’s NDS
Products are sold through NDS and the iSatori Products are sold
through iSatori, Inc., a Delaware corporation and a wholly owned
subsidiary of the Company.
On
September 30, 2015, the Company consummated the Merger contemplated
by the Agreement and Plan of Merger, dated May 18, 2015 (the
“Merger
Agreement”), among the Company, ISFL Merger Sub, Inc.,
a Delaware corporation and a wholly-owned subsidiary of the Company
(“Merger
Sub“), and iSatori, pursuant to which iSatori merged
with and into Merger Sub, with iSatori surviving as a wholly-owned
subsidiary of the Company. The Merger was approved by iSatori
shareholders at a special meeting held on September 29, 2015 and
became effective on October 1, 2015.
FitLife
Brands is headquartered in Omaha, Nebraska. For more information on
the Company, please go to http://www.fitlifebrands.com.
The Company’s common stock currently trades under the symbol
FTLF on the OTC:PINK market.
Recent Developments
Merchant Agreement and Repayment of U.S. Bank Notes
In
December 2017, the Company, through its wholly-owned subsidiaries,
NDS and iSatori (together, the “Subsidiaries”), entered into a
Merchant Agreement (the “Merchant Agreement”) with
Compass Bank, d/b/a Commercial Billing Service (“Compass”). Under the terms of
the Merchant Agreement, subject to the satisfaction of certain
conditions to funding, the Subsidiaries agreed to sell to Compass,
and Compass agreed to purchase from the Subsidiaries, certain
accounts owing from customers of such Subsidiaries, including GNC.
All amounts due under the terms of the Merchant Agreement, totaling
up to $5.0 million, are guaranteed by the Company under the terms
of a Continuing Guarantee.
On
January 22, 2018, the Subsidiaries sold to Compass accounts
receivable under the Merchant Agreement aggregating approximately
$2.0 million, the proceeds from which were used to pay U.S. Bank
N.A. (“USB”)
all principal and accrued interest due and owing USB under the
terms of certain promissory notes previously issued to USB (the
“Notes”). As a
result of such payment, together with a payment of approximately
$360,000 from existing cash resources, the Notes, together with all
other instruments and agreements executed by the Company and USB
providing for the extension of credit by USB to the Company and the
Subsidiaries, or otherwise, have terminated, and are of no further
force and effect.
Industry Overview
We compete principally in the nutrition industry. The Nutrition
Business Journal categorizes the industry in the following
segments:
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Natural &
Organic Foods (products such as cereals, milk, non-dairy beverages
and frozen meals);
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Functional Foods
(products with added ingredients or fortification specifically for
health or performance purposes);
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Natural &
Organic Personal Care and Household Products;
and
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Supplements
(products focused on sports nutrition and weight
management).
Management believes that the following factors drive growth in the
nutrition industry:
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The
general public’s awareness and understanding of the
connection between diet and health;
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The
aging population in the Company’s markets who tend to use
more nutritional supplements as they age;
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Increasing
healthcare costs and the consequential trend toward preventative
medicine and non-traditional medicines; and
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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 nationally as well as
internationally. The Company currently markets approximately
60 different NDS Products to more than 900 GNC franchise locations
located in the United States, as well as to approximately 900
additional franchise locations in more than 15 countries, both of
which are distributed primarily through GNC’s distribution
system. In addition, as a result of the launch of Metis Nutrition,
we distribute products through more than 3,000 corporate GNC stores
in the United States, and with the completion of the Merger, we
sell iSatori Products through more than 25,000 retail locations,
which include specialty, mass, and online. 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 sold through GNC franchise locations
include:
●
NDS
– Innovative weight loss, general health and sports nutrition
supplements – examples include Censor, Cardio Cuts and
LipoRUSH XT;
●
PMD
– Precision sports nutrition formulations for professional
muscular development – examples include Amplify XL, Pump Fuel
and Flex Stack;
●
Siren Labs
– Weight loss and sports nutrition performance enhancing
supplements for fitness enthusiasts – examples include
Isolate, Ultrakarbs and NeuroLean; and
●
Metis Nutrition
– multifaceted men’s health and weight loss
formulations, including JXT5 and PyroStim, currently distributed
through more than 3,000 corporate stores and most franchise stores
nationally.
NDS
Products also include innovative diet, health and sports nutrition
supplements and related products marketed through its Core Active
Nutrition product line (“Core Active Nutrition
Products”). Core Active Nutrition Products
provide essential support for accelerated fitness and nutrition
goals, and are sold directly to athletic facilities, gyms, and
independent retailers nationwide.
iSatori
Products
iSatori
Products include scientifically engineered nutritional products
that are sold through online marketing, Fortune 500 retailers, and
thousands of retail stores around the world. iSatori Products
include:
●
Sports
Nutritionals: Products including Bio-Active Peptides product
(Bio-GroTM ), advanced
creatine powder (Creatine A5X), and a natural testosterone booster
(Isa-TestGFTM);
●
Energy &
Sports Drink Products: iSatori’s energy supplement,
Energize,
whose primary purpose is to safely “boost energy”
through a combination of time-released caffeine, vitamins, and
herbal formulations;
●
Meal
Replacements: protein-based products related to health nutrition
and performance, includes 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 BioGenetics Laboratories brand, and include Forskohlin
Lean & ToneTM and Garcinia Trim,
as well as iSatori’s newest thermogenic,
LIPO-DREXTM
with C3G nutrient partitioning technology.
Manufacturing, Sources and Availability of Raw
Materials
All of
the Company’s products are manufactured by pre-selected
FDA-regulated contract manufacturers. The Company utilizes
third-party manufacturers within the United States and Canada to
provide its finished products. 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 internally, 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 50 new products during the year ended
December 31, 2017, which included eight completely new products,
and 42 product reformulations and flavor extensions. We anticipate
launching a similar number of new, but fewer reformulated products
during 2018 across all brands.
Management
continually assesses and analyzes developing market trends to
detect and proactively address what they believe are areas of unmet
or growing demand that represent an opportunity for the Company
and, where deemed appropriate, attempts 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 approximately 900 GNC international
franchise locations in more than 15 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, which transitioned in
mid-September 2014. Prior to the change, the majority of the
Company’s revenue was realized upon direct shipment of NDS
Products to individual franchise locations. For the year ended
December 31, 2017, virtually all sales of NDS Products were
attributable to sales 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, as well as to develop a broader retail
presence for our Core Active Nutrition Products and for continued
expansion of our Metis Nutrition brand during 2018. The domestic
franchise market remains a strong business and the core of our
operations. Management is excited to continue to work
collaboratively with the franchisees to build on our established
track records of growth and innovation.
iSatori Products
iSatori
Products are distributed directly to consumers through its websites
and a proprietary online direct marketing system,
as well as through wholesalers, specialty, online-only, grocery,
convenience, drug and mass-market distribution channels. iSatori
products are currently sold in over 25,000 retail locations.
iSatori creates marketing, promotion, and packaging devices in its
efforts to drive demand for its products through its established
retail distribution.
In
some cases, iSatori utilizes independent brokers, who work in
conjunction with iSatori’s experienced sales employees and
management to oversee the grocery, drug and mass market channels.
iSatori sells its products to mass-market merchandisers either
directly or through distributors of nutritional supplement
products. Major distributor, grocery, drug, convenience, club and
mass-market customers are and/or have included: Albertsons, Amazon,
Bally’s Total Fitness, BodyBuilding.com, Costco, CVS,
Drugstore.com, Europa Sports, GNC, Kroger, Rite Aid, Super Value,
24 Hour Fitness, 7-Eleven, Vitamin Shoppe, Vitamin World, Walgreens
and Wal-Mart.
iSatori’s
core strategy is to build brands within its channels of
distribution that are appropriate for each product brand and to
develop increased brand awareness and strong brand recognition
among consumers seeking products with a reputation for quality and
innovation. iSatori has utilized social media campaigns, coupons,
print, radio, online and television advertising, plus cooperative
and other incentive programs to build consumer awareness and
generate trial and repeat purchases to drive sales revenue.
Marketing and sales groups regularly review the media mix for its
effectiveness in creating consumer demand and the highest return on
investment dollars.
In
addition, iSatori’s conventional distribution marketing and
its proprietary internet marketing strategy are designed to
increase awareness of proprietary brands and drive targeted traffic
to iSatori’s websites to make purchases. Through
iSatori’s online marketing system, its network affiliates use
a multi-channel approach, which includes search engine marketing,
email campaigns, banner advertisements and additional affiliate
programs to acquire new customers and retain a repeatable customer
base.
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. Historically,
with a few noted exceptions, product returns have been
immaterial. However, despite the best efforts of management,
product returns can and do occur from time to time and can be
material.
Competition
The
nutrition industry is highly competitive, and the Company competes
with many companies engaged in the nutritional supplement industry.
The Company also competes with companies who sell products similar
to the Company’s products online. Many of the Company’s
competitors have significantly greater financial and human
resources than our own. The Company seeks to differentiate its
products and marketing from its competitors based on product
quality, benefits, and functional ingredients. Patent and trademark
applications that cover new formulas and embody new technologies
are, and will be, pursued whenever possible. While we cannot
assure that such measures will block competitive products, we
believe our continued emphasis on innovation and new product
development targeted at the needs of the consumer will enable the
Company to effectively compete in the marketplace.
Regulatory Matters
Our
business is subject to varying degrees of regulation by a number of
government authorities in the U.S., including the Federal Drug
Administration (“FDA”), the Federal Trade
Commission (“FTC”), the Consumer Product
Safety Commission, the U.S. Department of Agriculture, and the
Environmental Protection Agency. Various agencies of the states and
localities in which we operate and in which our products are sold
also regulate our business, such as the California Department of
Health Services, Food and Drug Branch. The areas of our business
that these and other authorities regulate include, among
others:
●
product claims
and advertising;
●
product
ingredients; and
●
how
we manufacture, package, distribute, import, export, sell, and
store our products.
The
FDA, in particular, regulates the formulation, manufacturing,
packaging, storage, labeling, promotion, distribution and sale of
vitamins and other nutritional supplements in the U.S., while the
FTC regulates marketing and advertising claims. In August 2007, a
new rule issued by the FDA went into effect requiring companies
that manufacture, package, label, distribute or hold nutritional
supplements to meet cGMPs to ensure such products are of the
quality specified and are properly packaged and labeled. We are
committed to meeting or exceeding the standards set by the FDA and
believe we are currently operating within the FDA mandated
cGMPs.
The
FDA also regulates the labeling and marketing of dietary
supplements and nutritional products, including the
following:
●
the
identification of dietary supplements or nutritional products and
their nutrition and ingredient labeling;
●
requirements
related to the wording used for claims about nutrients, health
claims, and statements of nutritional support;
●
labeling
requirements for dietary supplements or nutritional products for
which “high potency” and “antioxidant”
claims are made;
●
notification
procedures for statements on dietary supplements or nutritional
products; and
●
premarket
notification procedures for new dietary ingredients in nutritional
supplements.
The
Dietary Supplement Health and Education Act of 1994
(“DSHEA”)
revised the provisions of the Federal Food, Drug and Cosmetic
Act (“FDCA”)
concerning the composition and labeling of dietary supplements, and
defined dietary supplements to include vitamins, minerals, herbs,
amino acids and other dietary substances used to supplement diets.
DSHEA generally provides a regulatory framework to help ensure
safe, quality dietary supplements and the dissemination of accurate
information about such products. The FDA is generally prohibited
from regulating active ingredients in dietary supplements as drugs
unless product claims, such as claims that a product may heal,
mitigate, cure or prevent an illness, disease or malady, trigger
drug status.
DSHEA also
permits statements of nutritional support to be included in
labeling for nutritional supplements without FDA premarket
approval. These statements must be submitted to the FDA within 30
days of marketing and must bear a label disclosure that includes
the following: “This statement has not been evaluated by the
FDA. This product is not intended to diagnose, treat, cure, or
prevent any disease.” These statements may describe a benefit
related to a nutrient deficiency disease, the role of a nutrient or
nutritional ingredient intended to affect the structure or function
in humans, the documented mechanism by which a nutrient or dietary
ingredient acts to maintain such structure or function, or the
general well-being from consumption of a nutrient or dietary
ingredient, but may not expressly or implicitly represent that a
nutritional supplement will diagnose, cure, mitigate, treat or
prevent a disease. An entity that uses a statement of nutritional
support in labeling must possess scientific evidence substantiating
that the statement is truthful and not misleading. If the FDA
determines that a particular statement of nutritional support is an
unacceptable drug claim or an unauthorized version of a disease
claim for a food product, or if the FDA determines that a
particular claim is not adequately supported by existing scientific
data or is false or misleading, we will be prevented from using the
claim.
In
addition, DSHEA provides that so-called “third-party
literature,” for example a reprint of a peer-reviewed
scientific publication linking a particular nutritional ingredient
with health benefits, may be used in connection with the sale of a
nutritional supplement to consumers without the literature being
subject to regulation as labeling. Such literature must not be
false or misleading; the literature may not promote a particular
manufacturer or brand of nutritional supplement; the literature
must present a balanced view of the available scientific
information on the nutritional supplement; if displayed in an
establishment, the literature must be physically separate from the
nutritional supplement; and the literature may not have appended to
it any information by sticker or any other method. If the
literature fails to satisfy each of these requirements, we may be
prevented from disseminating it with our products, and any
dissemination could subject our products to regulatory action as an
illegal drug. Moreover, any written or verbal representation by us
that would associate a nutrient in a product that we sell with an
effect on a disease will be deemed evidence of intent to sell the
product as an unapproved new drug, a violation of the
FDCA.
In
December 2006, the Dietary Supplement and Nonprescription Drug
Consumer Protection Act (“DSNDCPA”) was passed, which
further revised the provisions of the Federal Food, Drug and
Cosmetic Act. 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 their revered
brand equity. The Company believes that protecting such
intellectual property is crucial to its business strategy. The
Company pursues registration of the registrable trademarks, service
marks and patents, associated with its key products in the United
States, Canada, Europe and other places it distributes its
products.
The
Company formulates its products using proprietary ingredient
formulations, flavorings and delivery systems. To further protect
its product formulations and flavors, the Company enters into
agreements with manufacturers that provide exclusivity to certain
products formulations and delivery technologies. When appropriate,
the Company will seek to protect its research and development
efforts by filing patent applications for proprietary product
technologies or ingredient combinations. We have abandoned or
not pursued efforts to register certain other patents and marks
identifying other items in our product line for various reasons,
including the inability of some names to qualify for registration
or patent applications to qualify for patent protection, and due to
our abandonment of certain 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 full-time employees (23 for NDS and five for iSatori) as of
December 31, 2017. We consider our employee relations to be good.
In addition to the above, the Company retains consultants for
certain services on an as needed basis.
Environmental Regulation
Our
business does not require us to comply with any particular
environmental regulations.
An investment in our common stock 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 on Form 10-K, before investing in our common stock. 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 common stock, causing you to lose all or part of your
investment.
We were not profitable during the year ended December 31, 2017, and
we may not be able to return to profitability. Our failure to
achieve profitability or, upon achieving profitability, to
effectively manage growth, could result in continued net losses,
and therefore negatively affect our financial
condition.
To
achieve profitable operations, we must reignite growth in revenue
from our products, including sales of NDS Products to GNC
franchisees, and sales of iSatori Products. In the event of
any continued decrease in sales, if we are not able to reignite
growth, or if we are unable to effectively manage our growth, we
may not be able to achieve profitability, and may incur net losses
in the future, and those net losses could be material. In the
event we continue to achieve net losses, our financial condition
will continue to be negatively affected, and such affect will 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 80.0% of our total sales for the year
ended December 31, 2017. GNC’s franchisees are not
required to purchase product from us. In the event GNC ceases
purchasing products from us, or otherwise reduces their purchases,
our total revenues would be negatively impacted, and such impact
will be material. Moreover, the transition to GNC’s
centralized distribution system has had the effect of concentrating
the majority of our accounts receivable with a single
payor. Prior to the transition, we collected receivables
directly from over 300 franchisees on an annual basis representing
more than 900 store locations. Although the acquisition of
iSatori has reduced the percentage of total accounts receivable
attributable to GNC, the Company anticipates that GNC will continue
to represent a substantial portion of all accounts receivable for
the foreseeable future. In the event that GNC stops paying or
there are other issues affecting our relationship with GNC, our
inability to collect on our outstanding accounts receivable would
have a material adverse impact on our financial position and
ability to support continued operations.
Our ability to materially increase sales is largely dependent on
the ability to increase sales of product to GNC, as well as
increasing sales of our iSatori Products. We may invest
significant amounts in these expansions with little
success.
We
currently are focusing our marketing efforts on increasing the sale
of products to GNC, both domestically and internationally, as well
as increasing the number of retailers selling iSatori
Products. We may not be able to successfully increase sales to
GNC or to contract with additional distributors or retailers to
market and sell iSatori Products. In addition, although we
continued efforts to expand international distribution for our
products in the year ended December 31, 2017, we cannot assure that
any further efforts to sell our products outside the United States
will result in material increased revenue. We may need to overcome
significant regulatory and legal barriers in order to continue to
sell our products internationally, and we cannot give assurances as
to whether we will be able to comply with such regulatory or legal
requirements.
We are affected by extensive laws, governmental regulations,
administrative determinations, court decisions and similar
constraints, which can make compliance costly and subject us to
enforcement actions by governmental agencies.
The
formulation, manufacturing, packaging, labeling, holding, storage,
distribution, advertising and sale of our products are affected by
extensive laws, governmental regulations and policies,
administrative determinations, court decisions and similar
constraints at the federal, state and local levels, both within the
United States and in any country where we conduct business. There
can be no assurance that we or our independent distributors will be
in compliance with all of these regulations. A failure by us or our
distributors to comply with these laws and regulations could lead
to governmental investigations, civil and criminal prosecutions,
administrative hearings and court proceedings, civil and criminal
penalties, injunctions against product sales or advertising, civil
and criminal liability for the Company and/or its principals, bad
publicity, and tort claims arising out of governmental or judicial
findings of fact or conclusions of law adverse to the Company or
its principals. In addition, the adoption of new regulations and
policies or changes in the interpretations of existing regulations
and policies may result in significant new compliance costs or
discontinuation of product sales, and may adversely affect the
marketing of our products, resulting in decreases in
revenues.
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
revenues may decrease.
We
rely entirely 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 revenues,
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, all of our third-party manufacturers source the raw
materials for our products, and if we were to use alternative
manufacturers we may not be able to duplicate the exact taste and
consistency profile of the product from the original manufacturer.
An extended interruption in the supply of our products would likely
result in decreased product sales and our revenues would likely
decline. We believe that we can meet our current supply and
manufacturing requirements with our current suppliers and
manufacturers or with available substitute suppliers and
manufacturers. Historically, we have not experienced any delays or
disruptions to our business caused by difficulties in obtaining
supplies.
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 revenues and the loss of
distributors.
While 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 revenues, 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 return to or maintain
profitability.
We
face intense competition from numerous resellers, manufacturers and
wholesalers of protein shakes and nutritional supplements similar
to ours, including retail, online and mail order
providers. Many of our competitors have longer operating
histories, established brands in the marketplace, revenues
significantly greater than ours and better access to capital than
us. We expect that these competitors may use their resources
to engage in various business activities that could result in
reduced sales of our products. Companies with greater capital and
research capabilities could re-formulate existing products or
formulate new products that could gain wide marketplace acceptance,
which could have a depressive effect on our future sales. In
addition, aggressive advertising and promotion by our competitors
may require us to compete by lowering prices because we do not
have the resources to engage in marketing campaigns against these
competitors, and the economic viability of our operations likely
would be diminished.
Adverse publicity associated with our products, ingredients, or
those of similar companies, could adversely affect our sales and
revenue.
Our
customers’ perception of the safety and quality of our
products or even similar products distributed by others can be
significantly influenced by national media attention, publicized
scientific research or findings, product liability claims, and
other publicity concerning our products or similar products
distributed by others. Adverse publicity, whether or not accurate,
that associates consumption of our products or any similar products
with illness or other adverse effects, will likely diminish the
public’s perception of our products. Claims that any products
are ineffective, inappropriately labeled or have inaccurate
instructions as to their use, could have a material adverse effect
on the market demand for our products, including reducing our sales
and revenues.
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 revenues or lower
growth rates in revenues.
Our
nutritional supplement products are made from various ingredients,
including vitamins, minerals, amino acids, herbs, botanicals,
fruits, berries, and other substances for which there is a long
history of human consumption. However, there is little long-term
experience with human consumption of certain product ingredients or
combinations of ingredients in concentrated form. Although we
believe all of our products fall within the generally known safe
limits for daily doses of each ingredient contained within them,
nutrition science is imperfect. Moreover, some people have peculiar
sensitivities or reactions to nutrients commonly found in certain
foods, and may have similar sensitivities or reactions to
nutrients contained in our products. Furthermore, nutrition science
is subject to change based on new research. New scientific evidence
may disprove the efficacy of our products or prove our
products to have effects not previously known. We could be
adversely affected by studies that may assert that our products are
ineffective or harmful to consumers, or if adverse effects are
associated with a competitor’s similar products.
Our products may not meet health and safety standards or could
become contaminated.
We
do not have control over all of the third parties involved in the
manufacturing of our products and their compliance
with government health and safety standards. Even if
our products meet these standards, they could otherwise become
contaminated. A failure to meet these standards or contamination
could occur in our operations or those of our distributors or
suppliers. This could result in expensive production interruptions,
recalls and liability claims. Moreover, negative publicity could be
generated from false, unfounded or nominal liability claims or
limited recalls. Any of these failures or occurrences could
negatively affect our business and financial
performance.
The sale of our products involves product liability and related
risks that could expose us to significant insurance and loss
expenses.
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. While our third-party
manufacturers perform tests in connection with the
formulations of our products, these tests are not designed to
evaluate the inherent safety of our products.
Although we
maintain product liability insurance, it may not be sufficient
to cover all product liability claims, and such claims that may
arise could have a material adverse effect on our business. The
successful assertion or settlement of an uninsured claim, a
significant number of insured claims or a claim exceeding the
limits of our insurance coverage would harm us by adding further
costs to our business and by diverting the attention of our senior
management from the operation of our business. Even if we
successfully defend a liability claim, the uninsured litigation
costs and adverse publicity may be harmful to our
business.
Any
product liability claim may increase our costs and adversely
affect our revenues and operating income. Moreover, liability
claims arising from a serious adverse event may increase our
costs through higher insurance premiums and deductibles, and
may make it more difficult to secure adequate insurance
coverage in the future. In addition, our product liability
insurance may fail to cover future product liability claims,
which, if adversely determined, could subject us to substantial
monetary damages.
If the products we sell do not have the healthful effects intended,
our business may suffer.
In
general, our products sold consist of nutritional supplements that
are classified in the United States as “dietary
supplements,” which do not currently require approval from
the FDA or other regulatory agencies prior to sale. Although
many of the ingredients in such products are vitamins, minerals,
herbs and other substances for which there is a long history of
human consumption, they contain innovative ingredients or
combinations of ingredients. Although we believe all of such
products and the combinations of ingredients in them are safe when
taken as directed by us, there is little long-term experience with
human or other animal consumption of certain of these ingredients
or combinations thereof in concentrated form. The products
could have certain side effects if not taken as directed or if
taken by a consumer that has certain medical
conditions. Furthermore, there can be no assurance that any of
the products, even when used as directed, will have the effects
intended or will not have harmful side
effects.
A slower growth rate in the nutritional supplement industry could
lessen our sales and make it more difficult for us to sustain
consistent growth.
The
nutritional supplement industry has been growing at a strong pace
over the past ten years, despite continued negative impacts of
popular supplements like Echinacea and ephedra on the supplement
market. However, any reported medical concerns with respect to
ingredients commonly used in nutritional supplements could
negatively impact the demand for our products. Additionally,
low-carb products, affected liquid meal replacements and similar
competing products addressing changing consumer tastes and
preferences could affect the market for certain categories of
supplements. All these factors could have a negative impact on
our sales growth.
Compliance with changing corporate governance regulations and
public disclosures may result in additional risks and
exposures.
Changing laws,
regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002 and new
regulations from the SEC, have created uncertainty for public
companies such as ours. These laws, regulations, and standards are
subject to varying interpretations in many cases and as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. As a result, our efforts to comply with
evolving laws, regulations, and standards have resulted in, and are
likely to continue to result in, increased expenses and significant
management time and attention.
Loss of key personnel could impair our ability to
operate.
Our
success depends on hiring, retaining and integrating senior
management and skilled employees. We are currently dependent on
certain current key employees, who are vital to our ability to grow
our business and maintain profitability. As with all personal
service providers, our officers can terminate their relationship
with us at will. Our inability to retain these individuals
may result in our reduced ability to operate our
business.
A limited trading market currently exists for our securities, and
we cannot assure you that an active market will ever develop, or if
developed, will be sustained.
There is
currently a limited trading market for our securities on the
OTC:PINK marketplace. An active trading market for the common
stock may not develop. Consequently, we cannot assure you when and
if an active-trading market in our shares will be established, or
whether any such market will be sustained or sufficiently liquid to
enable holders of shares of our common stock to liquidate their
investment in our company. If an active public market should
develop in the future, the sale of unregistered and restricted
securities by current shareholders may have a substantial impact on
any such market.
The price of our securities could be subject to wide fluctuations
and your investment could decline in value.
The
market price of the securities of a company such as ours with
little name recognition in the financial community and without
significant revenues can be subject to wide price swings. For
example, the adjusted closing price of our common stock has ranged
from a high of $0.90 to a low of $0.21 during the period commencing
January 1, 2017 and ending December 31, 2017. The market price
of our securities may be subject to wide changes in response to
quarterly variations in operating results, announcements of new
products by us or our competitors, reports by securities analysts,
volume trading, or other events or factors. In addition, the
financial markets have experienced significant price and volume
fluctuations for a number of reasons, including the failure of
certain companies to meet market expectations. These broad market
price swings, or any industry-specific market fluctuations, may
adversely affect the market price of our securities.
Companies that
have experienced volatility in the market price of their stock have
been the subject of securities class action litigation. If we were
to become the subject of securities class action litigation, it
could result in substantial costs and a significant diversion of
our management’s attention and resources.
Because our
common stock may be classified as “penny stock,”
trading may be limited, and the share price could decline because
broker-dealers would be required to provide their customers with
disclosure documents prior to allowing them to participate in
transactions involving the common stock. These disclosure
requirements are burdensome to broker-dealers and may discourage
them from allowing their customers to participate in transactions
involving our common stock.
We may issue preferred stock with rights senior to the common
stock.
Our
articles of incorporation authorize the issuance of up to
10,000,000 shares of preferred stock in the aggregate. 10,000,000
shares of Series A Preferred Stock, par value $0.01 per share,
1,000 shares of Series B Preferred Stock, par value $0.01 per
share, and 500 shares of Series C Preferred Stock par value $0.01
per share, are currently authorized (the “Preferred Stock”) and,
therefore, could be issued without shareholder approval subject to
the 10,000,000 share limitation. Currently, there are no shares of
Preferred Stock issued and outstanding, and we have no existing
plans to issue any shares of Preferred Stock. However, the rights
and preferences of any such class or series of Preferred Stock,
were we to issue it, would be established by our Board of Directors
in its sole discretion and may have dividend, voting, liquidation
and other rights and preferences that are senior to the rights of
the common stock.
You should not rely on an investment in our common stock for the
payment of cash dividends.
We
have never paid cash dividends on our stock and do not anticipate
paying any cash dividends in the foreseeable future. You should not
make an investment in our common stock if you require dividend
income. Any return on investment in our common stock would only
come from an increase in the market price of our stock, which is
uncertain and unpredictable.
SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT,
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED,
BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED.
ITEM 1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company is
headquartered in Omaha, Nebraska and maintains a lease at a cost of
approximately $7,500 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 $5,620 per month. The Company subleased its Golden
property subsequent to the year ended December 31, 2017.
Prior to January 2, 2016, iSatori also leased 17,426 square feet of
space at 6200 North Washington Street, Unit 10, Denver, Colorado
80216, for its distribution center, at a cost of $12,669 per month.
The lease is currently sublet through December 31, 2018, and
otherwise set to expire on December 31,
2018.
The
Company also leases some office equipment for an aggregate total
cost of approximately $535 per month.
ITEM 3. LEGAL
PROCEEDINGS
On
December 31, 2014, various plaintiffs, individually and on behalf
of a purported nationwide and sub-class of purchasers, filed a
lawsuit in the U.S. District Court for the Northern District of
California, captioned Ryan et al.
v. Gencor Nutrients, Inc. et al., Case No.: 4:14-CV-05682.
The lawsuit includes claims made against the manufacturer and
various producers and sellers of products containing a nutritional
supplement known as Testofen, which is manufactured and sold by
Gencor Nutrients, Inc. (“Gencor”). Specifically, the Ryan
plaintiffs allege that various defendants have manufactured,
marketed and/or sold Testofen, or nutritional supplements
containing Testofen, and in doing so represented to the public that
Testofen had been clinically proven to increase free testosterone
levels. According to the plaintiffs, those claims are false and/or
not statistically proven. Plaintiffs seek relief under violations
of the Racketeering Influenced Corrupt Organizations Act, breach of
express and implied warranties, and violations of unfair trade
practices in violation of California, Pennsylvania, and Arizona
law. NDS utilizes Testofen in a limited number of nutritional
supplements it manufactures and sells pursuant to a license
agreement with Gencor.
On
February 19, 2015 this matter was transferred to the Central
District of California to the Honorable Manuel Real. Judge Real had
previously issued an order dismissing a similar lawsuit that had
been filed by the same lawyer who represents the plaintiffs in the
Ryan matter. The United States Court of Appeals reversed part of
the dismissal issued by Judge Real and remanded the case back down
to the district court for further proceedings. As a result, the
parties in the Ryan matter issued a joint status report and that
matter is again active.
On
February 28, 2017, Kevin Fahey, through his attorney, and on behalf
of himself and the citizens of the District of Columbia, filed a
Complaint in the Superior Court of the District of Columbia Civil
Division captioned Fahey vs.
BioGenetic Laboratories, Inc., et al., case
No.2017 CA 001240. The Complaint was filed against BioGenetics, a
brand of the Company's iSatori division, and various GNC entities.
Fahey asserts in his Complaint that the labeling and marketing
materials of the product HCG Activator are fraudulent, false and
misleading with respect to certain weight loss and hunger
suppression claims. Fahey claims these actions violate the District
of Columbia Consumer Protection Procedures Act Section
28-3901 et seq., and has asked the court for direct
treble damages, punitive damages, disgorgement of profits,
attorneys’ fees and injunctive relief. This matter was
resolved and the lawsuit was dismissed June 27, 2017. The
resolution did not have a material impact on the Company, its
financial condition or results from operations.
We
are currently not involved in any litigation except noted above
that we believe could have a material adverse effect on our
financial condition or results of operations. Other than described
above, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government
agency, self-regulatory organization or body pending or, to the
knowledge of the executive officers of the Company or any of its
subsidiaries, threatened against or affecting the Company, our
common stock, any of our subsidiaries or of the Company’s or
our subsidiaries’ officers or directors in their capacities
as such, in which an adverse decision could have a material adverse
effect.
ITEM 4. MINE SAFETY
DISCLOSURES
None.
PART 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, 2017, there were 10,623,522 shares of common stock
outstanding and there were approximately 228 shareholders of record
of the Company’s common stock in addition to an undetermined
number of holders for whose shares are held in “street
name.” In addition to the foregoing, 58,188 shares of common
stock were earned pending issuance by the transfer
agent.
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 represent actual
transactions.
|
|
|
|
|
Fiscal Year 2017
|
|
|
|
First Quarter
(January - March 2017)
|
$0.90
|
0.59
|
|
Second Quarter
(April - June 2017)
|
$0.70
|
0.46
|
|
Third Quarter
(July - September 2017)
|
$0.51
|
0.30
|
|
Fourth Quarter
(October - December 2017)
|
$0.44
|
0.21
|
|
|
|
|
|
Fiscal Year 2016
|
|
|
|
First Quarter
(January - March 2016)
|
$1.57
|
1.03
|
|
Second Quarter
(April - June 2016)
|
$1.56
|
1.00
|
|
Third Quarter
(July - September 2016)
|
$1.92
|
1.35
|
|
Fourth Quarter
(October - December 2016)
|
$1.87
|
0.87
|
On
April 12, 2018, the closing price of our common stock was
$0.26.
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.
Dividends
We
have not and may never pay any dividends to our shareholders. We
did not declare any dividends for the year ended December 31, 2017.
Our Board of Directors does not intend to distribute dividends in
the near future. The declaration, payment and amount of any future
dividends will be made at the discretion of the Board of Directors,
and will depend upon, among other things, the results of our
operations, cash flows and financial condition, operating and
capital requirements, and other factors as the Board of Directors
considers relevant. There is no assurance that future dividends
will be paid, and if dividends are paid, there is no assurance with
respect to the amount of any such dividend.
Transfer Agent
Our
transfer agent and registrar for the common stock is Colonial Stock
& Transfer located in Salt Lake City, Utah.
Securities Authorized for Issuance under Equity Compensation
Plans
For
a discussion of our equity compensation plans, please see Item 12
of this Annual Report.
ITEM 6. SELECTED
FINANCIAL DATA
Not
a required disclosure for Smaller Reporting Companies.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OR PLAN OF OPERATION
The
following is management’s discussion and analysis of certain
significant factors that have affected our financial position and
operating results during the periods included in the accompanying
consolidated financial statements, as well as information relating
to the plans of our current management. This report includes
forward-looking statements. Generally, the words
“believes,” “anticipates,”
“may,” “will,” “should,”
“expect,” “intend,” “estimate,”
“continue,” and similar expressions or the negative
thereof or comparable terminology are intended to identify
forward-looking statements. Such statements are subject to certain
risks and uncertainties, including the matters set forth in this
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
Form 10-K.
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 expenses recognized
during the periods presented. Uncertainties with respect to such
estimates and assumptions are inherent in the preparation of
financial statements; accordingly, actual results could differ from
these estimates. These estimates and assumptions also affect the
reported amounts of revenues, costs and expenses during the
reporting period. Management evaluates these estimates and
assumptions on a regular basis. Actual results could differ
from those estimates. The following
summarize our most significant estimates used in our accounting and
reporting policies and practices:
Revenue Recognition
Revenue
is derived from product sales. The Company recognizes revenue from
product sales in accordance with Accounting Standards Codification
(“ASC”) Topic
605 “Revenue Recognition in Financial
Statements” which assesses revenue upon: (i) the time
customers are invoiced at shipping point provided title and risk of
loss has passed to the customer, (ii) evidence of an arrangement
exists, (iii) fees are contractually fixed or determinable, (iv)
collection is reasonably assured through historical collection
results and regular credit evaluations, and (v) there are no
uncertainties regarding customer acceptance.
Revenue is recorded
net of all discounts taken at the time of sale for all direct
sales.
The Company’s
accounts receivable balance is related to trade receivables which
decreased due principally to lower overall sales volumes for the
year ended December 31, 2017 as compared to December 31, 2016 and
the establishment of approximately $1.1 million of return reserves
established during the fourth quarter of 2017 related to certain
products deemed at risk due to slow-moving inventory in channel.
Trade accounts receivable are recorded at the invoiced amount and
do not bear interest. The allowance for doubtful accounts is the
Company’s best estimate of the amount of probable credit
losses in its existing accounts receivable. The Company will
maintain allowances for doubtful accounts, estimating losses
resulting from the inability of its customers to make required
payments for products. Accounts with known financial issues are
first reviewed and specific estimates are recorded. The remaining
accounts receivable balances are then grouped in categories by the
amount of days the balance is past due, and the estimated loss is
calculated as a percentage of the total category based upon past
history. Account balances are charged off against the allowance
when it is probable the receivable will not be
recovered.
The
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.
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 product is damaged, short dated, expired or recalled. GNC
maintains a customer satisfaction program which allows customers to
return product to the store for credit or refund. Subject to
certain terms and restrictions, GNC may require reimbursement from
vendors for unsaleable returned product through either direct
payment or credit against a future invoice. We also support a
product return policy for iSatori Products, whereby customers can
return product for credit or refund. Historically, with a few noted
exceptions, product returns have been immaterial. However, despite
the best efforts of management, product returns can and do occur
from time to time and can be material.
Information for
product returns is received on regular basis and adjusted for
accordingly. Adjustments for returns are based on factual
information and historical trends for both NDS products and iSatori
products and are special to each distribution channel. We monitor,
among other things, remaining shelf life and sell through data on a
weekly basis. If we determine there are any risks or issues with
any specific products, we accrue sales return allowances based on
management’s assessment of the overall risk and likelihood of
returns in light of all information available.
Stock-Based
Compensation.
The
Company periodically issues stock options and warrants to employees
and non-employees in non-capital raising transactions for services
and for financing costs. 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”) whereas the value of the
award is measured on the date of grant and recognized as
compensation on the straight-line basis over the vesting period.
The Company accounts for stock option and warrant grants issued and
vesting to non-employees in accordance with the authoritative
guidance of the FASB whereas the value of the stock compensation is
based upon the measurement date as determined at either a) the date
at which a performance commitment is reached, or b) at the date at
which the necessary performance to earn the equity instruments are
complete. Options granted to non-employees are revalued each
reporting period to determine the amount to be recorded as an
expense in the respective period. As the options vest, they are
valued on each vesting date and an adjustment is recorded for the
difference between the value already recorded and the then current
value on the date of vesting. In certain circumstances where there
are no future performance requirements by the non-employee, option
grants are immediately vested and the total stock-based
compensation charge is recorded in the period of the measurement
date.
The
fair value of the Company’s stock option and warrant grants
are estimated using the Black-Scholes-Merton 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-Merton Option Pricing model could materially affect
compensation expense recorded in future periods.
Goodwill and Other 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.
Recent Accounting Pronouncements
See
Note 1 to the consolidated financial statements for Managements
discussion of Recent Accounting Policies.
Results of Operations
Fiscal Year Ended December 31, 2017 Compared to Fiscal Year Ended
December 31, 2016
Net Sales. Revenue for the year ended December 31, 2017
decreased 29.7% to $17,799,345 as compared to $25,313,601 for the
year ended December 31, 2016. Revenue for the year ended December
31, 2017 compared to the prior year, in part,
reflects declining traffic trends leading to lower same store
sales in GNC, our principal distribution channel, as well as
certain inventory level adjustments by GNC resulting from such
trends. Revenue in the year ended December 31, 2017 was also
negatively impacted by a one-time non-recurring adjustment of
$700,000 related to a margin support credit memorandum entered into
between the Company and GNC in April 2017. Management
believes the trends affecting GNC and the overall retail segment
have stabilized, and, while no assurances can be given, believes
that prevailing demographics suggest a growing demand for
nutritional supplements.
Revenue
attributable to the Company’s NDS Nutrition division
decreased 25.0% to $13,700,643 as compared to $18,259,853 for the
year ended December 31, 2016. This decrease was principally
attributable to the factors affecting total revenue for the
reported period, specifically lower total sales to GNC, our
principal distribution channel. GNC’s determination to reduce
average existing inventory levels to fulfill product demand in the
short term resulted in an unprecedented divergence of wholesale
purchases compared to product movement at retail. This
condition resulted in materially lower sales in the Company’s
NDS Nutrition division. Although no assurances can be given,
management anticipates that these conditions have
stabilized.
Revenue
attributable to the Company’s iSatori operating division
decreased 41.9% to $4,098,701 as compared to $7,053,748 for the
year ended December 31, 2016. This decrease was attributable to
several factors, principally to fewer new product introductions
during the period as compared to the prior year and the
restructuring and reorganization at iSatori’s largest
third-party distributor. The impact of both are expected to
stabilize in the coming quarters and management anticipates that it
will continue to benefit from new product introductions going
forward as a key element of its strategic growth plan for both
iSatori and NDS.
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 an
omnichannel product sales capability through its retail partners
and online through its direct response and ecommerce platform will
drive additional incremental sales in the short-term, while
yielding substantial benefits in the longer-term. While no
assurances can be given, management anticipates that such efforts,
together with the anticipated reversal in the decline in the sale
of NDS and iSatori Products, will drive future revenue growth and
reverse the negative sales trends experienced in the year ended
December 31, 2017 compared to the prior fiscal year.
Cost of Goods Sold. Cost of goods sold
for the year ended December 31, 2017 decreased 16.6% to $12,708,460
as compared to $15,242,537 for the year ended December 31, 2016.
This decrease is principally attributable to lower sales in the
period, but significantly impacted by the establishment of
approximately $1.1 million of product return reserves.
General and Administrative Expense.
General and administrative expense for the year ended December 31,
2017 decreased by $822,205 to $4,179,945 as compared to $5,002,150
for the year ended December 31, 2016. The decrease in general and
administrative expense for the year ended December 31, 2017 is
principally attributable to ongoing cost reduction initiatives as
well as the continued integration efforts at the iSatori
division.
Selling and Marketing Expense. Selling
and marketing expense for the year ended December 31, 2017
decreased to $3,525,202 as compared to $4,118,414 for the year
ended December 31, 2016. This decrease is principally the result of
budgetary controls.
Impairment loss - On September 30, 2015, the Company consummated the
acquisition of iSatori. In connection with this acquisition, the
Company recorded intangible assets of $1,965,000 and Goodwill of
$4,197,448. As of December 31, 2016, the Company did
not believe there were any indicators of impairment of its Goodwill
and other intangible assets give the recent acquisition, and that
management has not yet had the time to implement its business plan.
During the year ended December 31, 2017, sales from iSatori did not
meet our expectations, and we were not able to achieve our expected
operating results. As a result, the Company impaired Goodwill and
other remaining finite-lived intangible assets related to the
acquisition of iSatori and recorded an impairment charge equal to
$5,928,765 due to the operating results of that
unit.
Depreciation and Amortization.
Depreciation and amortization for the years ended December 31, 2017
and 2016 decreased to $409,476 from $478,235, respectively. The
decrease is principally attributable to certain assets becoming
fully depreciated during the period.
Net
Income/(Loss). We generated a net loss of $9,761,706 for the year ended
December 31, 2017, as compared to a net income of $368,078 for the
year ended December 31, 2016. The decrease in net income for
the year ended December 31, 2017 compared to the year ended
December 31, 2016 is principally attributable to lower sales
volumes, the establishment of $1.1 million in reserves and the
non-cash write-off of $5.9 million of certain intangible assets,
consisting of the carrying value of goodwill related to iSatori, as
well as the implied value of certain intellectual property related
to a prior investment written off by the Company during the year
ended December 31, 2014.
Non-GAAP Measures
The
financial presentation below contains certain financial measures
defined as “non-GAAP financial measures” by the
Securities and Exchange Commission, 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 expenses and other items that may
not be indicative of its core operating results and business
outlook. The Company believes that the inclusion of non-GAAP
measures in the financial presentation below allows investors to
compare the Company’s financial results with the
Company’s historical financial results, and is an important
measure of the Company’s comparative financial
performance.
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
$(9,761,706)
|
$368,078
|
|
Interest
|
112,128
|
109,391
|
|
Income
taxes; Write off of deferred tax asset
|
689,000
|
-
|
|
Depreciation
and amortization
|
409,476
|
478,235
|
|
EBITDA
|
(8,551,102)
|
955,704
|
|
Non-cash
and non-recurring adjustments
|
|
|
|
Stock
issued for services
|
95,967
|
40,508
|
|
Options
issued for services
|
44,189
|
58,178
|
|
Impairment
of intangibles and goodwill
|
5,928,765
|
-
|
|
Adjusted EBITDA
|
$(2,482,181)
|
$1,054,390
|
Financial Position, Liquidity and Capital Resources
The
Company has historically financed its operations primarily through
equity and debt financings, cash flow from operations, and more
recently, the sale of accounts receivable. 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.
Cash Provided by Operating Activities
Net
cash provided by operating activities was $665,781 during
the fiscal year ended
December 31, 2017, compared to $48,169 for the year ended
December 31, 2016. The increase is primarily attributable to
variations in certain working capital accounts consistent with
normal business practices and outcomes. Net working capital
decreased to $369,502 as of the year ended December 31, 2017 from
$3,457,163 as of December 31, 2016.
Cash Provided by (Used in) Investing Activities
Cash
used in investing activities for the fiscal year ended December 31,
2017 was $(185,064) as compared to $(23,405) used in investing
activities during the
year ended December 31, 2016. The primary difference was
related to certain leasehold improvements in the Omaha
headquarters.
Cash Provided by (Used in) Financing Activities
Cash
used in financing activities for the year ended December 31,
2017 was $(511,825), as compared to $(264,273) cash used in
financing activities during the year ended December 31, 2016. The
primary difference was that we drew down $459,695 during the year
ended December 31, 2016 from our previous line of credit
with U.S. Bank and made no draw downs on the line of credit during
the year ended December 31, 2017.
Working Capital
As of December 31,
2017, the Company had positive working capital of $369,502,
compared to positive working capital of $3,457,163 at December 31,
2016. The decrease in working capital is principally due to the
decrease in cash during the year ended December 31, 2017 due to
continued operating losses during the fiscal year, and the current
portion of notes payable at December 31, 2017 that was recorded as
long-term debt at December 31, 2016.
In
December 2017, the Company, through its Subsidiaries, entered into
the Merchant Agreement with BBVA Compass Bank (“Compass”). Under the terms of the
Merchant Agreement, subject to the satisfaction of certain
conditions to funding, the Subsidiaries agreed to sell to Compass,
and Compass agreed to purchase from the Subsidiaries, certain
accounts owing from customers of such Subsidiaries, including GNC.
On January 22, 2018, the Subsidiaries sold to Compass accounts
receivable under the Merchant Agreement aggregating approximately
$2.0 million, the proceeds from which were used to pay US Bank,
inclusive of a payment of approximately $360,000 from the Company,
all principal and accrued interest due and owed US Bank under the
terms of the Notes and revolving line of credit.
The
Company is dependent on cash flow from operations and the
accumulation of additional receivables available to sell to Compass
under the terms of the Merchant Agreement to satisfy its working
capital requirements. No assurances can be given that cash flow
from operations and/or that the Company will have access to
additional capital under the terms of the Merchant Agreement
necessary to provide for the Company’s liquidity for the next
twelve months. Should the Company be unable to generate sufficient
revenue in the future to achieve positive cash flow from
operations, and/or should capital be unavailable under the terms of
the Merchant Agreement, additional working capital will be
required. Management at present has no intention to raise
additional working capital through the sale of equity or debt
securities, and believes the agreement with Compass 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 Merchant Agreement, 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.
Off-Balance Sheet Arrangements
Other than
contractual obligations incurred in the normal course of business,
we do not have any off-balance sheet financing arrangements or
liabilities, retained or contingent interests in transferred assets
or any obligation arising out of a material variable interest in an
unconsolidated entity.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
business is currently conducted principally in the United States.
As a result, our financial results are not materially affected by
factors such as changes in foreign currency exchange rates or
economic conditions in foreign markets. We do not engage in hedging
transactions to reduce our exposure to changes in currency exchange
rates, although as the geographical scope of our business broadens,
we may do so in the future.
Our
exposure to risk for changes in interest rates relates primarily to
our investments in short-term financial instruments. Investments in
both fixed rate and floating rate interest earning instruments
carry some interest rate risk. The fair value of fixed rate
securities may fall due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest
rates fall. Partly as a result of this, our future interest income
may fall short of expectations due to changes in interest rates or
we may suffer losses in principal if we are forced to sell
securities that have fallen in estimated fair value due to changes
in interest rates. However, as substantially all of our cash
equivalents consist of bank deposits and short-term money market
instruments, we do not expect any material change with respect to
our net income as a result of an interest rate change.
We
do not hold any derivative instruments and do not engage in any
hedging activities.
ITEM 8. FINANCIAL
STATEMENTS
The
information required hereunder in this Annual Report on Form 10-K
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
April 21, 2017, Tarvaran, Askelson & Company, LLP
(“TA”) was
dismissed as the independent registered public accounting firm of
the Company. The Company’s Board of Directors approved the
dismissal of TA.
The
reports of TA regarding the Company’s financial statements
for the fiscal years ended December 31, 2016 and 2015 did not
contain any adverse opinion or disclaimer of opinion and were not
modified as to uncertainty, audit scope, or accounting principles.
During the Company’s fiscal years ended December 31, 2016 and
2015, and through April 21, 2017, there were (i) no disagreements
with TA 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 TA
would have caused TA to make reference to the subject matter of the
disagreements in connection with its report, and (ii) no
“reportable events” as that term is defined in Item
304(a)(1)(v) of Regulation S-K.
On
April 21, 2017, the Company engaged Weinberg & Company
(“Weinberg”)
as the Company’s new independent registered public accounting
firm. The appointment of Weinberg was approved by the
Company’s Board of Directors.
The
Company disclosed the change in auditors in a Current Report on
Form 8-K filed with the Securities and Exchange Commission on April
26, 2017.
ITEM 9A. CONTROLS AND
PROCEDURES
(a) Evaluation of Disclosure Controls and
Procedures.
Under the
supervision and with the participation of our Management, including
our principal executive officer and principal 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 of December 31, 2017. Based on this evaluation, the
Company’s Interim 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 and Exchange Act of 1934
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
Interim Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of our internal control over financial
reporting as of December 31, 2017. 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
Interim Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2017, our internal control over
financial reporting was effective.
(c) Changes in Internal Controls over Financial
Reporting.
The
Company’s Interim Chief Executive Officer and Chief Financial
Officer have determined that there have been no changes, in the
Company’s internal control over financial reporting during
the period covered by this report identified in connection with the
evaluation described in the above paragraph that have materially
affected, or are reasonably likely to materially affect,
Company’s internal control over financial
reporting.
ITEM 9B. OTHER
INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
Directors and Executive Officers
Set
forth below is information regarding each of the Company’s
current directors and executive officers. There are no family
relationships between any of our directors or executive officers.
Stockholders elect the directors annually. The executive officers
serve at the pleasure of the Board of Directors.
|
Name
|
|
Age
|
|
Title
|
|
Dayton Judd (1)
|
|
46
|
|
Interim Chief Executive Officer, Chairman
|
|
Michael Abrams
|
|
48
|
|
Chief Financial Officer, Director
|
|
Lewis Jaffe
|
|
61
|
|
Director
|
|
Grant Dawson
|
|
49
|
|
Director
|
|
Seth Yakatan
|
|
47
|
|
Director
|
|
Todd Ordal
|
|
60
|
|
Director
|
(1) Dayton Judd was appointed
as the Company’s Interim Chief Executive Officer on February
18, 2018, at which time John Wilson resigned as the Company’s
Chief Executive Officer and as a member of the Company’s
Board of Directors.
Each
of the Company’s executive officers and directors will hold
office until their successors are duly elected and
qualified. The background and principal occupations of each
officer and director are as follows:
Dayton Judd has served as a director of the Company since June
2017, is currently the Chairman of the Company’s Board of
Directors, and was appointed Interim Chief Executive Officer of the
Company on February 18, 2018. Mr. Judd is the Founder and
Managing Partner of Sudbury Capital Management. 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.
Mr. Judd serves on the Board of Directors of RLJ Entertainment
(NASDAQ: RLJE). 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 MBA
with high distinction from Harvard Business School in 2000, where
he was a Baker Scholar. Mr. Judd is a Certified Public
Accountant.
The
Company’s Nominating and Corporate Governance Committee
believes that Mr. Judd’s significant experience in investing
in microcap companies, together with his substantial ownership
position in the Company’s common stock, will assist the Board
of Directors in the management of the executive officers of the
Company, and setting goals and objectives to build shareholder
value.
Michael S.
Abrams has served as
a director of the Company since 2010, and as the
Company’s Chief Financial Officer since 2013. Mr. Abrams is
also currently a partner at Burnham Hill Capital Group, a New
York-based financial advisory, consulting, investment and
merchant-banking firm he joined in August of 2003. Mr. Abrams
currently serves on the Board of Directors of QuantRx Biomedical,
Inc. (OTC Pink: QTXB). He holds a Masters of Business
Administration with Honors from the Booth School of Business at the
University of Chicago.
The
Company’s Nominating and Corporate Governance Committee
believes that Mr. Abrams’ broad experience in corporate
finance, including investment banking and merchant banking, his
experience as a finance executive working with public companies, as
well as his experience restructuring the Company, provides
necessary and relevant experience to the Board of Directors in its
deliberations.
Lewis Jaffe has served as a director of the Company
since 2010, and served as the Chairman of the Company’s Board
of Directors from July 2011 to October 2017. Mr. Jaffe is a
Clinical Professor in the school of Entrepreneurship at Loyola
Marymount University, a position he has held since the fall of
2014, where he was awarded Professor of the Year in 2016. He was
Chief Executive Officer of Movio, a high speed, mobile movie and
content downloading service and application, prior to its sale.
Prior to Movio, Mr. Jaffe was a principal at Jaffe & Associates
(“J&A”), a consulting and advisory firm that
provides strategic and tactical planning to mid-market companies
and CEO coaching to their executives. Prior to 2009, Mr. Jaffe was
Interim Chief Executive Officer and President of Oxford Media,
Inc., where he served from 2006 to 2008. Mr. Jaffe has also served
in executive management positions with Verso Technologies, Inc.,
Wireone Technologies, Inc., Picturetel Corporation, and was also
previously a Managing Director of Arthur Andersen. Mr. Jaffe is a
graduate of the Stanford Business School Executive Program and
holds a Bachelor of Science from LaSalle University. Mr. Jaffe also
served on the Board of Directors of Benihana, Inc. as its lead
independent director from 2004 to 2012. He is currently on the
Board of Directors of Reed’s Inc. (NYSE: REED) and Yorktel, a
privately held telecommunications company.
The
Company’s Nominating and Corporate Governance Committee
believes that Mr. Jaffe’s experience as a CEO of both public
and private companies, and consultant providing strategic and
tactical planning to public companies, as well as his corporate
governance expertise, provide management and the Board of Directors
with a depth of experience, knowledge, systems and best practices
to guide corporate strategy and business
operations.
Grant
Dawson has served as a
director of the Company since November 2013, and is currently a
Portfolio Manager of Fixed Income Investments for Polar Asset
Management Partners (“Polar”). Mr.
Dawson brings more than 15 years of experience in finance and has
significant board-level experience in corporate governance for
public companies. Prior to Polar, he was Managing Director of Fixed
Income Investments for Manulife Asset Management, a subsidiary of
Manulife Financial Corporation, and Vice President and Lead
Analyst responsible for corporate debt ratings with Dominion Bond
Rating Agency. Prior to such time, Mr. Dawson held various senior
management positions in credit management and corporate finance
with Nortel and in equity research with Dain Rauscher Ltd. Mr.
Dawson earned an M.B.A. from the SMU Cox School of Business, a
B.Comm in Finance from the University of Windsor, and holds the
Chartered Financial Analyst designation. Additionally, Mr.
Dawson is a member of the Institute of Corporate Directors and
holds the ICD.D designation.
The
Company’s Nominating and Corporate Governance Committee
believes that Mr. Dawson’s extensive expertise and knowledge
regarding corporate finance and investment banking matters, as well
as corporate governance, provides the Company with valuable
insight following the Company’s recent capital
recapitalization, and will assist the Company as it builds a
long-term, sustainable capital structure.
Seth
Yakatan has served a
director of the Company since September 2015, as Vice President of
Business Development for Invion, Ltd. (ASX: IVX) since August 2012,
and as a Partner of Katan Associates, Inc., a corporate strategy
and finance advisory group, since April 2001. Prior to joining the
Company’s Board of Directors, Mr. Yakatan served as a
director for iSatori, Inc. from September 2014 until the completion
of the Company’s acquisition of iSatori. Prior to founding
Katan Associates, Inc. in 2001, Mr. Yakatan worked in merchant
banking at the Union Bank of California, N.A., in the Specialized
Lending Media and Telecommunications Group, and as a venture
capital analyst with Ventana Growth Funds and Sureste Venture
Management. Mr. Yakatan holds an MBA in Finance from the University
of California, Irvine, and a BA in History and Public Affairs from
the University of Denver.
The Company’s Nominating and Corporate
Governance Committee believes that Mr.
Yakatan’s 24 years of experience as a life sciences business
development and corporate finance professional, including actively
supporting small cap and major companies in achieving corporate,
financing, and asset monetization objectives, provides the Board of
Directors with valuable guidance and expertise based on his
extensive knowledge and understanding of banking
matters.
Todd
Ordal has served a
director of the Company since September 2015, and is the President
and founder of Applied Strategy, LLC, a private consulting company
founded in 2003 that provides consulting and coaching services to
chief executive officers and other executives around the word.
Prior to joining the Company’s Board of Directors, Mr. Ordal
served as a director for iSatori, Inc. from April 2012 until the
completion of the Company’s acquisition of iSatori. Before
founding Applied Strategy, LLC, Mr. Ordal served as Chief Executive
Officer of Dore Achievement Centers from December 2002 until
November 2004, and President and Chief Executive Officer of Classic
Sports Companies from January 2001 until December 2002. Prior to
Classic Sport Companies, Mr. Ordal served as a Division President
for Kinko’s Service Corporation, where he had accountability
for $500,000,000 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 bachelors in
psychology from Morehead State University and his MBA from Regis
University.
The
Company’s Nominating and Corporate Governance Committee
believes that Mr. Ordal’s considerable experience with
growing successful businesses, as well as his extensive knowledge
and understanding of marketing and finance matters, will provide
the Board of Directors with valuable guidance and
insight.
There
have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the
evaluation of the ability and integrity of any of the
Company’s executive officers or directors during the past ten
years.
CORPORATE GOVERNANCE, BOARD COMPOSITION AND BOARD
COMMITTEES
Term of Office
Pursuant
to our Bylaws, each member of our Board of Directors shall serve
from the time they are duly elected and qualified, until our next
Annual Meeting of Stockholders or until their death, resignation or
removal from office.
Board Member Independence
The
Board believes that a majority of its members are independent
directors. The Board has determined that, other than Messrs. Judd
and Abrams, all of its directors are independent directors as
defined by the rules and regulations of the NASDAQ Stock
Market.
Board Structure
The
Board does not have a policy regarding the separation of the roles
of the Chief Executive Officer and Chairman of the Board, as the
Board believes it is in the best interest of the Company and its
stockholders to make that determination based on the position and
direction of the Company and the membership of the Board, from time
to time. Currently, Mr. Judd serves as both our principal executive
officer and as Chairman of our Board of Directors.
Board Risk Oversight
Our
Board administers its oversight function through both regular and
special meetings and by frequent telephonic updates with our senior
management. A key element of these reviews is gathering and
assessing information relating to risks of our business. All
business is exposed to risks, including unanticipated or undesired
events or outcomes that could impact an enterprise’s
strategic objectives, organizational performance and stockholder
value. A fundamental part of risk management is not only
understanding such risks that are specific to our business, but
also understanding what steps management is taking to manage those
risks and what level of risk is appropriate for us. In setting our
business strategy, our Board assesses the various risks being
mitigated by management and determines what constitutes an
appropriate level of risk.
While
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,
2017, 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 2017, all incumbent directors
attended at least 75% of the aggregate number of meetings of the
Board.
Board Committees and Charters
The Board has a standing Audit Committee,
Compensation Committee, and Nominating and Corporate Governance
Committee. The Board appoints the members and chairpersons of these
committees. Copies of each committee charter is available by making
a request to the Company’s Corporate Secretary at 5214 S.
136th
Street, Omaha, Nebraska
68137.
Audit Committee
|
|
|
|
|
|
Members:
|
|
Grant
Dawson (Chairman)
|
|
|
|
|
Lewis
Jaffe
|
|
|
|
|
Todd
Ordal
|
|
|
|
|
|
|
|
Number of Meetings in 2017:
|
|
The
Audit Committee held four meetings during 2017.
|
|
|
|
|
|
|
|
Functions:
|
|
The
Audit Committee provides assistance to the Board of Directors in
fulfilling its legal and fiduciary obligations in matters involving
our accounting, auditing, financial reporting, internal control and
legal compliance functions by approving the services performed by
our independent accountants and reviewing their reports regarding
our accounting practices and systems of internal accounting
controls. The Audit Committee also oversees the audit efforts of
our independent accountants and takes those actions as it deems
necessary to satisfy it that the accountants are independent of
management.
|
|
|
|
|
|
|
|
Independence
|
|
The members of the Audit Committee each meet the
independence standards established by the NASDAQ Stock Market and
the Securities and Exchange Commission (the
“SEC”) for audit committees. In addition, the
Board has determined that Messrs. Dawson, Jaffe and Ordal each
satisfy the definition of an “audit committee financial
expert” under SEC rules and regulations. These designations
do not impose any duties, obligations or liabilities on Messrs.
Dawson, Jaffe and Ordal that are greater than those generally
imposed on them as members of the Audit Committee and the Board,
and their designations as audit committee financial experts does
not affect the duties, obligations or liability of any other member
of the Audit Committee or the Board
|
|
Compensation Committee
|
|
|
|
|
|
Members:
|
|
Grant Dawson (Chairman)
|
|
|
|
|
Lewis Jaffe
|
|
|
|
|
Seth Yakatan
|
|
|
|
|
|
|
|
Number of Meetings in 2017:
|
|
The Compensation Committee held 0 meetings during 2017, electing
instead to address compensation matters by action taken by the
entire Board of Directors.
|
|
|
|
|
|
|
|
Functions:
|
|
The Compensation Committee determines our general compensation
policies and the compensation provided to our directors and
officers. The Compensation Committee also reviews and determines
bonuses for our officers and other employees. In addition, the
Compensation Committee reviews and determines equity-based
compensation for our directors, officers, employees and consultants
and administers our stock option plans and employee stock purchase
plan.
|
|
|
|
|
|
|
|
Independence
|
|
We believe that the composition of our Compensation Committee meets
the criteria for independence under, and the functioning of our
Compensation Committee complies with, the applicable requirements
of the Sarbanes-Oxley Act of 2002 and current SEC rules and
regulations.
|
|
Nominating and Corporate Governance Committee
|
|
|
|
|
|
Members:
|
|
Lewis Jaffe (Chairman)
|
|
|
|
|
Todd Ordal
|
|
|
|
|
Seth Yakatan
|
|
|
|
|
|
|
|
Number of Meetings in 2017:
|
|
The Nominating and Corporate Governance Committee held one meeting
during 2017.
|
|
|
|
|
|
|
|
Functions:
|
|
The Nominating and Corporate Governance Committee is responsible
for making recommendations to the Board of Directors regarding
candidates for directorships and the size and composition of the
Board. In addition, the Nominating and Corporate Governance
Committee is responsible for overseeing our corporate governance
guidelines and reporting and making recommendations to the Board
concerning corporate governance matters.
|
|
|
|
|
|
|
|
Independence
|
|
We believe that the composition of our Nominating and Corporate
Governance Committee meets the criteria for independence under, and
the functioning of our Nominating and Corporate Governance
Committee complies with, the applicable requirements of the
Sarbanes-Oxley Act of 2002 and current SEC rules and
regulations.
|
|
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of
1934, as amended (“Exchange
Act”), requires the
Company’s directors and executive officers, and persons who
beneficially own more than 10% of a registered class of the
Company’s equity securities, to file reports of beneficial
ownership and changes in beneficial ownership of the
Company’s securities with the SEC on Forms 3 (Initial
Statement of Beneficial Ownership), 4 (Statement of Changes of
Beneficial Ownership of Securities) and 5 (Annual Statement of
Beneficial Ownership of Securities). Directors,
executive officers and beneficial owners of more than 10% of the
Company’s common stock are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms that
they file.
To
our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other
reports were required, during the fiscal year ended December 31,
2017, management believes that all necessary reports were filed in
a timely manner and all filings are current as of the date of this
filing, except the following:
|
●
|
Mr. Jaffe, a director, filed one late Form 4 disclosing two late
transactions, and one Form 5 disclosing one late
transaction;
|
|
●
|
Mr. Ordal, filed one late Form 4 disclosing three late
transactions; and
|
|
●
|
Mr. Dawson, a director, filed one late Form 4 disclosing two late
transactions.
|
Code of Ethics and Business Conduct
We
have adopted a Code of Ethics that applies to all of our executive
officers, directors and employees, which sets forth the business
and ethical principles that govern all aspects of our business.
This document will be made available in print, free of charge, to
any stockholder requesting a copy in writing from the Company. A
form of the Code of Conduct and ethics was filed as Exhibit 14.1 to
our Annual Report on Form 10-K for December 31, 2008.
Indemnification of Officers and Directors
As
permitted by Nevada law, the Company will indemnify its
directors and officers against expenses and liabilities they incur
to defend, settle, or satisfy any civil or criminal action brought
against them on account of their being or having been Company
directors or officers unless, in any such action, they are
adjudged to have acted with gross negligence or willful
misconduct.
Exclusion of Liability
The
Nevada Business Corporation Act excludes personal
liability for directors for monetary damages based upon
any violation of their fiduciary duties as
directors, except as to liability for any breach of the
duty of loyalty, acts or omissions not in good faith or
which involve intentional misconduct or a knowing
violation of law, acts in violation of
the Nevada Business Corporation Act, or any transaction
from which a director receives an improper personal
benefit. This exclusion of liability does not limit any
right that a director may have to be indemnified and does not
affect any director's liability under federal or applicable
state securities laws.
ITEM
11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information
concerning the compensation paid to the Company’s Chief
Executive Officer, and the Company’s two most highly
compensated executive officers other than its Chief Executive
Officer, who were serving as executive officers as of December 31,
2017 and whose annual compensation exceeded $100,000 during such
year (collectively the “Named Executive
Officers”).
|
Name and Principal Position
|
|
Year
|
|
Salary and Bonus ($)
|
|
|
Stock
Awards ($)
|
|
|
Warrants/
Option Awards ($)(1)
|
|
|
All Other
Compensation ($)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Wilson(2)
(3)
|
|
2017
|
|
$
|
326,129
|
|
|
$
|
17,000
|
|
|
$
|
-
|
|
|
$
|
22,500
|
|
|
$
|
365,629
|
|
|
Former CEO and Director
|
|
2016
|
|
$
|
284,500
|
|
|
$
|
83,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
367,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Abrams(4)
|
|
2017
|
|
$
|
267,193
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50,000
|
|
|
$
|
317,193
|
|
|
CFO and Director
|
|
2016
|
|
$
|
250,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick Ryan(5)
|
|
2017
|
|
$
|
246,402
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
246,838
|
|
|
Chief Retail Officer
|
|
2016
|
|
$
|
247,550
|
|
|
$
|
-
|
|
|
$
|
15,222
|
|
|
$
|
3,643
|
|
|
$
|
266,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. Wilson resigned from his position as Chief Executive Officer
and as a member of the Company’s Board of Directors on
February 18, 2018, subsequent to the year ended December 31,
2017.
|
|
|
|
|
(3)
|
All Other Compensation includes $22,500 paid Mr. Wilson equal to
the pro-rata amount of his salary increase in 2017 as if the
increase would have been effective on the date his employment
agreement expired.
|
|
|
|
|
(4)
|
All Other Compensation includes $50,000 paid Mr. Abrams equal to
the pro-rata amount of his salary increase in 2017 as if the
increase would have been effective on the date his employment
agreement expired.
|
|
|
|
|
(5)
|
All Other Compensation includes $3,643 paid to Mr. Ryan for an
automobile allowance.
|
Employment Agreements
Dayton
Judd. Dayton Judd, the Chairman
of the Board of Directors of the Company, was appointed to the
position of Interim Chief Executive Officer on February 18, 2018,
replacing Mr. John Wilson, who resigned on February 18, 2018. Under
the terms of a Consulting Agreement effective February 18, 2018,
Mr. Judd shall serve as Interim Chief Executive Officer in
consideration for (i) the payment to Mr. Judd of $225,000 annual
cash compensation; and (ii) the issuance to Mr. Judd of 225,000
shares of the Company's common stock.
John
Wilson. Until his resignation
on February 18, 2018, Mr. John Wilson served as the Company’s
Chief Executive Officer pursuant to the terms of an Employment
Agreement by and between the Company and Mr. Wilson dated December
31, 2009, as amended on April 13, 2012, July 1, 2014 and April 21,
2017. The Employment Agreement provided that Mr. Wilson shall serve
the Company in the capacity of its Chief Executive Officer through
June 30, 2018, subject to standard terms and provisions consistent
with agreements of such type.
Michael
Abrams. Mr. Michael Abrams
currently serves as the Company’s Chief Financial Officer
pursuant to the terms of an Employment Agreement by and between the
Company and Mr. Abrams, dated May 1, 2013, as amended April 21,
2017. The Employment Agreement provides that Mr. Abrams shall serve
the Company in the capacity of its Chief Financial Officer through
April 30, 2018, subject to standard terms and provisions consistent
with agreements of such type.
On October 1, 2017, Messrs. Wilson and Abrams reduced their annual
compensation by 15% and 12.5%, respectively, and agreed to revisit
executive compensation in light of the current reductions in six
months based on the Company’s results from operations and
financial condition at such time. The reductions were in addition
to certain other actions taken by management intended to increase
the Company’s operating margins, including certain other
reductions in the Company’s general and administrative costs
and expenses.
Patrick
Ryan. Mr. Patrick Ryan
currently serves as the Company’s Chief Retail Officer
pursuant to the terms of an Employment Agreement dated June 1,
2016. The Employment Agreement provides that Mr. Ryan shall serve
in the capacity of the Company’s Chief Retail Officer through
June 1, 2018, subject to standard terms and provisions consistent
with agreements of such type.
Outstanding Equity Awards at
Fiscal Year-End
The
following table sets forth information regarding unexercised
options, stock that has not vested and equity incentive awards held
by each of the Named Executive Officers outstanding as of
December 31, 2017:
|
|
|
|
|
Name
|
Number of securities underlying unexercised options (#)
exercisable
|
Number of securities underlying unexercised options (#)
unexercisable
|
Equity incentive plan awards: Number of underlying unexercised
unearned options (#)
|
Option
Exercise price ($)
|
|
Number of shares or units of stock that have not vested
(#)
|
Market value of shares or units of stock that have not vested
($)
|
Equity incentive plan awards: Number of Unearned shares, units or
other rights that have not vested (#)
|
Equity incentive plan awards: Market or Payout value of unearned
shares, units or other rights that have not vested ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Wilson
|
75,000
|
-
|
-
|
$2.30
|
|
-
|
-
|
-
|
-
|
|
Former Chief Executive Officer
and President
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Abrams
|
50,000
|
-
|
-
|
$0.90
|
|
-
|
-
|
-
|
-
|
|
Chief Financial Officer and
Director
|
50,000
|
-
|
-
|
$2.30
|
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick Ryan
|
20,000
|
-
|
-
|
$2.20
|
|
-
|
-
|
-
|
-
|
|
Chief Retail Officer
|
30,000
|
-
|
-
|
$2.30
|
|
-
|
-
|
-
|
-
|
|
|
16,667
|
13,333
|
-
|
$1.39
|
|
-
|
-
|
-
|
-
|
Director Compensation
We currently have six directors, four of whom are
considered independent. Our director compensation plan provided for
the issuance of 2,500 shares of the Company’s common stock
upon appointment of any independent director. In addition,
each independent director received $5,000 per quarter for service
on the Board, the Chairman of the Board was paid an additional
$5,000 per annum in addition to all other fees, and the chairman of
each committee of the Board of Directors was paid $2,500 per annum
in addition to all other fees. The maximum amount that may be paid
to any director for service on the Board of Directors in any
calendar year was $25,000. Effective January 1, 2017, the director
compensation plan was modified such that each independent director
would be paid $50,000 per annum with an additional $10,000 payable
to the Chairman per annum. On October 1, 2017,
each independent director reduced their total annual compensation
by 10%. The affected directors agreed to revisit Board compensation
in light of the current reductions in six months based on the
Company’s results from operations and financial condition at
such time.
The
table below summarizes the compensation paid to our independent
directors for the fiscal year ended December 31, 2017:
|
|
Fees earned or paid in cash (1)
|
|
|
|
|
Name
|
|
|
|
|
|
|
|
|
|
|
|
Lewis
Jaffe
|
$39,000
|
$17,715
|
$-
|
$56,715
|
|
Grant
Dawson
|
$24,375
|
$24,375
|
$-
|
$48,750
|
|
Seth
Yakatan
|
$48,750
|
$-
|
$-
|
$48,750
|
|
Todd
Ordal
|
$24,375
|
$24,375
|
$-
|
$48,750
|
|
Dayton Judd (3)
|
$14,134
|
$12,500
|
$-
|
$26,634
|
|
(1)
|
In an effort to conserve the Company’s cash, certain Board
members have the option to receive stock awards in lieu of cash
fees earned in respect of their annual retainers for service on the
Board and its committees. The stock awards vested immediately
upon grant and were not subject to any further service by the
directors. The amounts in this column represent the grant date fair
value of the restricted stock awards granted during 2017 and are
computed in accordance with FASB guidance, excluding the effect of
estimated forfeitures.
|
|
|
|
|
(2)
|
Represents the grant date fair value of stock option awards
computed in accordance with FASB guidance, excluding the effect of
estimated forfeitures under which the director has the right to
purchase, subject to vesting, shares of the Company’s common
stock.
|
|
|
|
|
(3)
|
Mr. Judd joined the Company’s Board of Directors in June
2017. He served as an independent director until his appointment as
the Company’s Interim Chief Executive Officer in February
2018.
|
|
|
|
Compensation
Committee Interlocks and Insider Participation
No
executive officers of the Company serve on the Compensation
Committee (or in a like capacity) for the Company or any other
entity.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding shares of our
common stock as of March 31, 2018, based on shares of common
stock issued and outstanding on a fully diluted basis, which
includes 10,906,710 shares of common stock, as well as 747,401
options and 43,300 warrants exercisable within 60 days of March 31,
2018. The information includes beneficial ownership by (i)
each of our executive officers and directors, (ii) all of our
executive 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. Except as noted below, to
our knowledge, each person named in the table has sole voting and
investment power with respect to all shares of our common stock
beneficially owned by them.
|
Name and Address of Owner
|
Title of Class
|
|
|
|
|
|
|
|
|
Dayton Judd(2)(3)(9)
|
Common
Stock
|
1,053,715
|
9.7%
|
|
|
|
|
|
Michael Abrams(2)(4)
|
Common
Stock
|
305,466
|
2.8%
|
|
|
|
|
|
Patrick Ryan(2)(5)
|
Common
Stock
|
67,724
|
*%
|
|
|
|
|
|
Lewis Jaffe(2)(6)
|
Common
Stock
|
118,586
|
1.1%
|
|
|
|
|
|
Todd Ordal(2)
|
Common
Stock
|
77,315
|
*%
|
|
|
|
|
|
Seth Yakatan(2)
|
Common
Stock
|
88,298
|
*%
|
|
|
|
|
|
Grant Dawson(2)(7)
|
Common
Stock
|
126,550
|
1.2%
|
|
|
|
|
|
|
|
151,757
|
1.4%
|
|
|
|
|
|
All
Officers and Directors as a group (eight persons)
|
Common
Stock
|
1,989,410
|
17.8%
|
|
|
|
|
|
Stephen Adele(8)
2263 South Loveland Street
Lakewood, CO 80228
|
Common
Stock
|
973,899
|
8.9%
|
|
(2)
|
The address of each of the officers and directors is c/o Fitlife
Brands, Inc., 5214 S. 136th Street, Omaha, NE
68137.
|
|
|
|
|
(3)
|
Mr. Judd exercises sole voting and dispositive power over 260,715
shares, and shared voting and dispositive power over 793,000
reported shares, which are owned by Sudbury Holdings, LLC, as set
forth in Footnote 9 to this table.
|
|
|
|
|
(4)
|
Includes 50,000 shares issuable upon the exercise of stock options
at $2.30 per share, exercisable within 60 days of March 31,
2018.
|
|
|
|
|
(5)
|
Includes 66,667 shares issuable upon the exercise of stock options
of which 30,000, 20,000 and 16,667 are exercisable at $2.30, $2.20
and $1.39 per share, respectively, and each group is exercisable
within 60 days of March 31, 2018.
|
|
|
|
|
(6)
|
Includes 15,000 shares issuable upon the exercise of stock options
at $2.30 per share, each exercisable within 60 days of March 31,
2018.
|
|
|
|
|
(7)
|
Includes 10,000 shares issuable upon the exercise of stock options
at $2.30 per share, exercisable within 60 days of March 31,
2018.
|
|
|
|
|
(8)
|
Mr. Adele is the former Chief Innovation Officer and a former
Director of the Company. Includes 55,898 shares issuable upon the
exercise of stock options, each exercisable within 60 days of March
31, 2018.
|
|
|
|
|
(9)
|
793,000 shares are held by Sudbury Capital Fund, LP, Sudbury
Holdings, LLC, Sudbury Capital GP, LP, and Sudbury Capital
Management, LLC. Sudbury Holdings, LLC is the parent company of
Sudbury Capital Fund, LP; Sudbury Capital GP, LP is the general
partner of Sudbury Capital Fund, LP; Sudbury Capital Management,
LLC is the investment adviser of Sudbury Capital Fund, LP; and Mr.
Judd as a member of Sudbury Holdings, LLC and Sudbury Capital
Management, LLC, and a limited partner of Sudbury Capital GP, LP.
Dayton Judd may be considered the beneficial owner of the shares
held by Sudbury Capital Fund, LP, as Mr. Judd is the Founder and
Managing Partner of Sudbury Capital Management, LLC.
|
|
(10)
|
Includes
137,778 shares issuable upon the exercise of stock options of which
100,000, 10,000 and 27,778 are exercisable at $2.30, $2.20 and
$1.39 per share, respectfully, and each group is exercisable within
60 days of March 31, 2018.
|
Securities Authorized For Issuance Under Equity Compensation
Plans
The
following table provides information as of December 31, 2017,
with respect to the shares of common stock that may be issued upon
the exercise of options and other rights under our existing equity
compensation plans and arrangements. The information includes the
number of shares covered by and the weighted average exercise price
of, outstanding options and other rights and the number of shares
remaining available for future grants, excluding the shares to be
issued upon exercise of outstanding options and other
rights.
|
Plan category
|
Number of
securities to be issued upon exercise of
outstanding options, warrants and rights
|
Weighted-
average exercise
price of
outstanding
options, warrants
and rights
|
Number of
securities
remaining
available
for future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a)
|
|
|
|
|
|
|
Equity compensation plans approved by security
holders:
|
810,284
|
$2.85
|
689,716
|
|
|
|
|
|
|
Equity compensation plans not approved by security
holders:
|
–
|
–
|
–
|
|
|
|
|
|
|
Total
|
810,284
|
$2.85
|
689,716
|
Description of Equity Compensation Plan
The 2010 Stock Incentive Plan (the
“2010
Plan”) was adopted by the
Company’s Board of Directors on June 30, 2010, and approved
by a majority of the Company’s shareholders on August 26,
2010. The 2010 Plan reserves for issuance 1,500,000 shares of the
Company’s common stock for issuance as one of four types of
equity incentive awards: (i) stock options, (ii) stock appreciation
rights, (iii) restricted stock, and (iv) stock units. The 2010 Plan
permits the qualification of awards under the plan as
“performance-based compensation” within the meaning of
Section 162(m) of the Internal Revenue
Code.
Changes in Control
We
are not aware of any arrangements that may result in a change in
control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
There
were no transactions between the Company and any of its directors,
executive officers or any other related persons during the year
ended December 31, 2017.
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
As discussed in Item 9
to this Annual Report on Form 10-K, the Company first
engaged Weinberg & Company
(“Weinberg”) on April 21, 2017, after it
dismissed
Tarvaran, Askelson & Company, LLP
(“TA”) as its independent registered public
accounting firm. The following table
presents approximate aggregate fees and other expenses for
professional services rendered by Weinberg for the audit of the
Company’s annual financial statements for the year ended
December 31, 2017, as well as other expenses for other services
rendered during that period, and by TA for the same services for
the year ended December 31, 2016.
|
|
|
|
|
|
|
|
Audit Fees (1)
|
$79,250
|
$74,774
|
|
Audit-Related Fees (2)
|
—
|
—
|
|
Tax Fees (3)
|
5,500
|
11,150
|
|
All Other Fees (4)
|
3,875
|
—
|
|
|
|
|
|
Total
|
$88,625
|
$85,924
|
|
(1)
|
Audit Fees include all services that are performed to comply with
Generally Accepted Auditing Standards (“GAAS”). In addition, this category includes fees
for services that normally would be provided by the accountant in
connection with statutory and regulatory filings or engagements,
such as audits, quarterly reviews, attest services, statutory
audits, comfort letters, consents, reports on an issuer’s
internal controls, and review of documents to be filed with the
SEC. Certain services, such as tax services and accounting
consultations, may not be billed as audit services. To the extent
that such services are necessary to comply with GAAS (i.e., tax
accrual work), an appropriate allocation of those fees is in this
category.
|
|
(2)
|
Audit-Related Fees include assurance and related services that are
traditionally performed by an independent accountant such as
employee benefit plan audits, due diligence related to mergers and
acquisitions, accounting assistance and audits in connection with
proposed or consummated acquisitions, and special assignments
related to internal control reviews.
|
|
(3)
|
Tax Fees include all services performed by an accounting
firm’s tax division except those related to the audit.
Typical services include tax compliance, tax planning and tax
advice.
|
|
(4)
|
All Other Fees include fees for any service not addressed in the
other three categories above.
|
The
Board has received and reviewed the written disclosures and the
letter from the independent registered public accounting firm
required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees), and has discussed
with its auditors its independence from the Company. The Board has
considered whether the provision of services other than audit
services is compatible with maintaining auditor
independence.
Based
on the review and discussions referred to above, the Board approved
the inclusion of the audited consolidated financial statements be
included in the Company’s Annual Report on Form 10-K for its
2017 fiscal year for filing with the SEC.
The
Board pre-approved all fees described above.
PART
IV
ITEM 15. EXHIBITS AND
REPORTS
Exhibits
|
|
|
Agreement
and Plan of Merger, by and among the Company, iSatori, Inc., and
ISFL Merger Sub, Inc., dated May 18, 2015 (incorporated by
reference to Exhibit 2.1 filed with Form 8-K on May 18,
2015).
|
|
|
|
Voting
and Standstill Agreement dated May 18, 2015 (incorporated by
reference to Exhibit 4.1 of Schedule 13D (Commission File No.
005-47773) filed by the Company, Stephen Adelé Enterprises,
Inc., Stephen Adelé, RENN Universal Growth Investment Trust,
PLC, RENN Global Entrepreneurs Fund, Inc. and Russell
Cleveland).
|
|
|
|
Articles
of Incorporation (incorporated by reference to Exhibit 3.1 filed
with Amendment No. 3 to the Company’s Registration Statement
on Form SB2 (Commission File No. 333-137170)).
|
|
|
|
Amendments
to Articles of Incorporation (incorporated by reference to Exhibit
3.2 filed with Amendment No. 3 to the Company’s Registration
Statement on Form SB2 (Commission File No.
333-137170)).
|
|
|
|
Amended
and Restated Bylaws of the Corporation (incorporated by reference
to Exhibit 3.1 filed with Form 8-K on January 25,
2018).
|
|
|
|
Certificate
of Amendment to Articles of Incorporation (incorporated by
reference to Exhibit 3.1 filed with Form 8-K on September 13,
2010).
|
|
|
|
Certificate
of Amendment to Articles of Incorporation to change name to FitLife
Brands, Inc. (incorporated by reference to Exhibit 3.1
filed with Form 8-K on October 1, 2013).
|
|
|
|
Certificate
of Amendment to Articles of Incorporation to effect 1-for-10
reverse split (incorporated by reference to Exhibit 3.1 filed with
Form 8-K on October 1, 2013).
|
|
|
|
Certificate
of Designations of Series A Convertible Preferred Stock
(incorporated by reference to Exhibit 4.2 filed with Form 8-K on
June 30, 2008).
|
|
|
|
Certificate
of Designations of Series B Convertible Preferred Stock
(incorporated by reference to Exhibit 10.1 filed with Form 8-K on
January 23, 2009).
|
|
|
|
Certificate
of Designations of Series C Convertible Preferred Stock.
(incorporated by reference to Exhibit 4.3 filed with Form 10-K on
April 15, 2011).
|
|
|
|
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).
|
|
|
|
Consulting
Agreement for Services between the Company and Burnham Hill
Advisors LLC, dated August 20, 2009 (incorporated by reference to
Exhibit 99.1 filed with the Form 8-K on August 26,
2009).
|
|
|
|
Consulting
Agreement for Services between the Company and Burnham Hill
Advisors LLC, dated August 20, 2010 (incorporated by reference to
Exhibit 99.1 filed with Form 8-K on August 23, 2010).
|
|
|
|
Amendment
No. 1 to Consulting Agreement between the Company and Burnham Hill
Advisors LLC, dated September 15, 2010. (incorporated by
reference to Exhibit 10.12 filed with Form 10-K on April 15,
2011).
|
|
|
|
Amendment
No. 2 to Consulting Agreement between the Company and Burnham Hill
Advisors LLC, dated November 18, 2010. (incorporated by
reference to Exhibit 10.13 filed with Form 10-K on April 15,
2011).
|
|
|
|
Employment
Agreement, dated December 31, 2009, between the Company and John
Wilson. (incorporated by reference to Exhibit 10.14 filed
with Form 10-K on April 15, 2011).
|
|
|
|
2010
Equity Incentive Plan (incorporated by reference to Exhibit 10.18
filed with Form 10-K on April 15, 2011).
|
|
|
|
Form
of Exchange Agreement (incorporated by reference to Exhibit 10.1
filed with Form 8-K on October 7, 2013).
|
|
|
|
Employment
Agreement, dated May 1, 2013, by and between the Company and
Michael Abrams (incorporated by reference to Exhibit 10.15 filed
with the Annual Report on Form 10-K on March 28,
2014).
|
|
|
|
Amendment
No. 2 to Employment Agreement, dated July 14, 2014 between the
Company and John Wilson (incorporated by reference to Exhibit 10.1
filed with Form 8-K on July 15, 2014).
|
|
|
|
Demand
Promissory Note (incorporated by reference to Exhibit 10.1 filed
with Form 8-K on September 11, 2015).
|
|
|
|
Security
Agreement by and among the Company, Stephen Adele Enterprises, and
Stephen Adele, dated September 11, 2015 (incorporated by reference
to Exhibit 10.2 filed with Form 8-K on September 11,
2015).
|
|
|
|
Employment
Agreement between the Company, and Stephen Adelé (incorporated
by reference to Exhibit 2.3 filed with Form S-4 on July 7,
2015).
|
|
|
|
Employment
Agreement, by and between FitLife Brands, Inc. and Patrick Ryan,
dated June 7, 2016 (incorporated by reference to Exhibit 10.1 filed
with Form 8-k on June 13, 2016).
|
|
|
|
Amendment
No. 3 to Employment Agreement, dated July 14, 2014 between the
Company and John Wilson (incorporated by reference to Exhibit
10.1 filed with Form 8-K on April 26, 2017).
|
|
|
|
Amendment
No. 1 to Employment Agreement, dated May 1, 2013, by and between
the Company and Michael Abrams (incorporated by reference to
Exhibit 10.2 filed with Form 8-K on April 26, 2017).
|
|
|
|
Loan
Modification Agreement, dated August 28, 2017, by and between the
Company and U.S. National Bank Association Bank (incorporated by
reference to Exhibit 10.1 filed with Form 8-K on August 31,
2017).
|
|
|
|
Merchant
Agreement by and between NDS Nutrition, Inc., iSatori, Inc., and
Compass Bank, d/b/a Commercial Billing Service (incorporated by
reference to Exhibit 3.1 filed with Form 8-K on January 25,
2018).
|
|
|
|
Continuing
Guarantee of FitLife Brands, Inc. (incorporated by reference to
Exhibit 3.1 filed with Form 8-K on January 25, 2018).
|
|
|
|
Consulting
Services Agreement, by and between the Company and Dayton Judd,
dated March 13, 2018.
|
|
|
|
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).
|
|
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.
|
ITEM 16. FORM 10-K
SUMMARY
None.
In
accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, there unto duly
authorized.
|
Registrant
Date: April 17,
2018
|
|
FitLife Brands, Inc.
By: /s/ Dayton
Judd
|
|
|
|
Dayton
Judd
|
|
|
|
Interim Chief
Executive Officer (Principal Executive Officer)
|
|
Date: April 17,
2018
|
|
By: /s/ Michael
Abrams
|
|
|
|
Michael
Abrams
|
|
|
|
Chief Financial
Officer (Principal Financial Officer)
|
In
accordance with the Securities Exchange Act of 1934, 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: April 17,
2018
|
|
By: /s/ Dayton
Judd
|
|
|
|
Dayton
Judd
|
|
|
|
Interim Chief
Executive Officer (Principal Executive Officer), Chairman of the
Board
|
|
Date: April 17,
2018
|
|
By: /s/ Michael
Abrams
|
|
|
|
Michael
Abrams
|
|
|
|
Chief Financial
Officer (Principal Financial Officer)
|
|
|
|
|
|
Date: April 17,
2018
|
|
By: /s/ Lewis
Jaffe
|
|
|
|
Lewis
Jaffe
|
|
|
|
Director
|
|
Date: April 17,
2018
|
|
By: /s/ Grant
Dawson
|
|
|
|
Grant
Dawson
|
|
|
|
Director
|
|
Date: April 17,
2018
|
|
By: /s/ Seth
Yakatan
|
|
|
|
Seth
Yakatan
|
|
|
|
Director
|
|
Date: April 17,
2018
|
|
By: /s/ Todd
Ordal
|
|
|
|
Todd
Ordal
|
|
|
|
Director
|
|
|
|
|
ITEM 8. FINANCIAL 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, 2017 and 2016
|
|
|
F-2
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2017 and
2016
|
|
|
F-3
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2017 and
2016
|
|
|
F-4
|
|
|
Consolidated
Statement of Stockholders’ Equity for the years ended
December 31, 2017 and 2016
|
|
|
F-5
|
|
|
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
F-6
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of
FitLife
Brands, Inc and subsidiaries.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of FitLife
Brands, Inc. and Subsidiaries (the “Company”) as of
December 31, 2017 and 2016 and the related consolidated statements
of operations, stockholders’ equity and cash flows for the
years ended December 31, 2017 and 2016, 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, 2017 and 2016, and the consolidated
results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Weinberg
& Company, P.A.
We have
served as the Company’s auditor since 2017
Weinberg
& Company, P.A.
Los
Angeles, California
April
17, 2018
FITLIFE BRANDS,
INC.
CONSOLIDATED BALANCE SHEETS
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash
|
$1,261,933
|
$1,293,041
|
|
Accounts
receivable, net of
allowance for doubtful accounts of $1,263,674 and $166,901,
respectively
|
1,958,128
|
2,625,748
|
|
Inventories,
net of allowance for obsolescence of $48,730 and $138,789,
respectively
|
2,873,831
|
3,756,716
|
|
Note
receivable, current portion
|
5,000
|
2,782
|
|
Prepaid
income tax
|
-
|
120,000
|
|
Prepaid
expenses
|
221,200
|
136,014
|
|
Total
current assets
|
6,320,092
|
7,934,301
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net
|
295,187
|
171,004
|
|
|
|
|
|
Customer
note receivable, net of current portion
|
-
|
52,695
|
|
Deferred
taxes
|
-
|
689,000
|
|
|
225,000
|
6,507,505
|
|
|
21,908
|
24,958
|
|
TOTAL
ASSETS
|
$6,862,187
|
$15,379,463
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
Accounts
payable
|
$2,974,165
|
$1,596,749
|
|
Accrued
expenses and other liabilities
|
611,548
|
372,864
|
|
Line
of credit
|
1,950,000
|
1,950,000
|
|
Term
loan agreement, current portion
|
414,877
|
544,825
|
|
Notes
payable
|
-
|
12,700
|
|
Total
current liabilities
|
5,950,590
|
4,477,138
|
|
|
|
|
|
LONG-TERM
DEBT, net of current portion
|
-
|
369,177
|
|
|
|
|
|
TOTAL
LIABILITIES
|
5,950,590
|
4,846,315
|
|
|
|
|
|
CONTINGENCIES
AND COMMITMENTS
|
-
|
-
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
Preferred stock, $0.01 par value,
10,000,000 shares authorized as of December 31, 2017 and
2016:
|
|
|
|
Preferred stock Series A;
10,000,000 shares authorized; 0 shares issued and outstanding as of December
31, 2017 and 2016
|
-
|
-
|
|
Preferred stock Series B; 1,000
shares authorized; 0 shares issued and outstanding as of December
31, 2017 and 2016
|
-
|
-
|
|
Preferred stock Series C; 500
shares authorized; 0 shares issued and outstanding as of December
31, 2017 and 2016
|
-
|
-
|
|
Common stock, $.01 par value,
150,000,000 shares authorized; 10,681,710 and 10,483,389 issued
and outstanding as of December 31, 2017 and 2016,
respectively
|
106,819
|
104,836
|
|
Treasury
Stock
|
-
|
(44,413)
|
|
Additional
paid-in capital
|
31,013,043
|
30,919,284
|
|
Accumulated
deficit
|
(30,208,265)
|
(20,446,559)
|
|
Total
stockholders' equity
|
$911,597
|
$10,533,148
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$6,862,187
|
$15,379,463
|
The
accompanying notes are an integral part of these consolidated
financial statements
FITLIFE BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
|
|
|
|
|
|
|
|
|
Revenue
|
$17,799,345
|
$25,313,601
|
|
|
|
|
|
Cost
of Goods Sold
|
12,708,460
|
15,242,537
|
|
|
5,090,885
|
10,071,064
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
General
and administrative
|
4,179,945
|
5,002,150
|
|
Selling
and marketing
|
3,525,202
|
4,118,414
|
Impairment
of intangible assets and goodwill
|
5,928,765
|
-
|
|
Depreciation
and amortization
|
409,476
|
478,235
|
|
Total operating expenses
|
14,043,388
|
9,598,799
|
|
OPERATING
INCOME (LOSS)
|
(8,952,503)
|
472,265
|
|
|
|
|
|
OTHER
(INCOME) AND EXPENSES
|
|
|
|
Interest
expense
|
112,128
|
109,391
|
|
Other
expense (income)
|
8,075
|
(5,204)
|
Total other (income) expense
|
120,203
|
104,187
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
(9,072,706)
|
368,078
|
|
|
|
|
|
INCOME
TAXES, deferred
|
689,000
|
-
|
|
|
|
|
|
NET
INCOME (LOSS)
|
$(9,761,706)
|
$368,078
|
|
|
|
|
|
NET
INCOME (LOSS) PER SHARE:
|
|
|
|
Earnings (loss) Per Share - Basic and
diluted
|
$(0.93)
|
$0.04
|
|
Weighted average shares - Basic and diluted
|
10,518,239
|
10,340,162
|
The
accompanying notes are an integral part of these consolidated
financial statements
FITLIFE BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
|
|
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
Net
income (loss)
|
$(9,761,706)
|
$368,078
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
Depreciation
and amortization
|
409,476
|
478,235
|
|
Increase
(decrease) in allowance for sales returns and doubtful
accounts
|
1,096,773
|
(261,541)
|
|
Increase
(decrease) in allowance for inventory obsolescence
|
(90,059)
|
41,733
|
|
Loss
on disposal of assets
|
5,145
|
22,970
|
|
Common
stock issued for services
|
95,966
|
153,002
|
|
Fair
value of options issued for services
|
44,189
|
58,178
|
|
Impairment
of intangible assets and goodwill
|
5,928,765
|
-
|
|
Write-off
of note receivable
|
43,727
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(429,153)
|
320,360
|
|
Inventories
|
972,944
|
991,852
|
|
Deferred
taxes
|
689,000
|
-
|
|
Prepaid
income tax
|
120,000
|
32,000
|
|
Prepaid
expenses
|
(85,186)
|
198,469
|
|
Customer
note receivable
|
6,750
|
13,735
|
|
Security
deposits
|
3,049
|
1,119
|
|
Accounts
payable
|
1,377,417
|
(1,767,157)
|
|
Accrued
expenses and other liabilities
|
238,684
|
(602,864)
|
|
Net
cash provided by operating activities
|
665,781
|
48,169
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Purchase
of property and equipment
|
(185,064)
|
(23,405)
|
|
Net
cash used in investing activities
|
(185,064)
|
(23,405)
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Proceeds
from line of credit
|
-
|
459,695
|
|
Repurchases
of common stock
|
-
|
(156,907)
|
|
Repayments
of term loan and note payable
|
(511,825)
|
(567,061)
|
|
Net
cash used in financing activities
|
(511,825)
|
(264,273)
|
|
|
|
|
|
DECREASE
IN CASH
|
(31,108)
|
(239,509)
|
|
CASH,
BEGINNING OF PERIOD
|
1,293,041
|
1,532,550
|
|
CASH,
END OF PERIOD
|
$1,261,933
|
$1,293,041
|
|
|
|
|
|
Supplemental disclosure operating activities
|
|
|
|
|
|
|
|
Cash
paid for interest
|
$112,128
|
$109,391
|
The
accompanying notes are an integral part of these consolidated
financial statements
FITLIFE BRANDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER
31, 2015
|
10,453,945
|
$104,540
|
$-
|
$30,820,894
|
$(20,814,637)
|
$10,110,797
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
116,722
|
1,168
|
-
|
151,834
|
-
|
153,002
|
|
|
|
|
|
|
|
|
|
Common
stock purchased and cancelled from officer
|
(86,534)
|
(865)
|
-
|
(111,629)
|
-
|
(112,494)
|
|
|
|
|
|
|
|
|
|
Common
stock cancelled
|
(85,833)
|
(858)
|
-
|
858
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Treasury
stock
|
-
|
-
|
(44,413)
|
-
|
-
|
(44,413)
|
|
|
|
|
|
|
|
|
|
Common
stock issued upon cashless exercise of options
|
85,089
|
851
|
-
|
(851)
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Fair
value of options issued for services
|
-
|
-
|
-
|
58,178
|
-
|
58,178
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
368,078
|
368,078
|
|
|
|
|
|
|
|
|
|
DECEMBER
31, 2016
|
10,483,389
|
104,836
|
(44,413)
|
30,919,284
|
(20,446,559)
|
10,533,148
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
240,241
|
2,402
|
-
|
93,564
|
-
|
95,966
|
|
|
|
|
|
|
|
|
|
Cancellation
of treasury stock
|
(41,920)
|
(419)
|
44,413
|
(43,994)
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of options issued for services
|
-
|
-
|
-
|
44,189
|
-
|
44,189
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(9,761,706)
|
(9,761,706)
|
|
|
|
|
|
|
|
|
|
DECEMBER
31, 2017
|
10,681,710
|
$106,819
|
$-
|
$31,013,043
|
$(30,208,265)
|
$911,597
|
The
accompanying notes are an integral part of these consolidated
financial statements.
FITLIFE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2017 AND 2016
NOTE 1. DESCRIPTION OF BUSINESS
Summary
FitLife
Brands, Inc. (the “Company”) is a national provider
of innovative and proprietary nutritional supplements for
health-conscious consumers marketed under the brand names NDS
Nutrition Products™ (“NDS”) (www.ndsnutrition.com),
PMD™ (www.pmdsports.com),
SirenLabs™ (www.sirenlabs.com),
CoreActive™ (www.coreactivenutrition.com),
and Metis Nutrition™ (www.metisnutrition.com) (together,
“NDS
Products”). With the consummation of the acquisition
of iSatori, Inc. (“iSatori”) on October 1, 2015,
the Company added several brands to its product portfolio,
including iSatori (www.isatori.com), BioGenetic
Laboratories, and Energize (together, “iSatori Products”). The NDS
Products are distributed principally through franchised General
Nutrition Centers, Inc. (“GNC”) stores located both
domestically and internationally, and, with the addition of Metis
Nutrition, through corporate GNC stores in the United
States. The iSatori Products are sold through more than 25,000
retail locations, which include specialty, mass, and
online.
The
Company was incorporated in the State of Nevada on July 26, 2005.
In October 2008, the Company acquired the assets of NDS Nutritional
Products, Inc., a Nebraska corporation, and moved those assets into
its wholly owned subsidiary NDS Nutrition Products, Inc., a Florida
corporation (“NDS”). The Company’s
NDS Products are sold through NDS and the iSatori Products are sold
through iSatori, Inc., a Delaware corporation and a wholly owned
subsidiary of the Company, which the Company acquired in October
2015.
The
Company is headquartered in Omaha, Nebraska. For more information
about the Company, please go to http://www.fitlifebrands.com.
The Company’s common stock currently trades under the symbol
FTLF on the OTC:PINK market.
Liquidity
The
accompanying financial statements have been prepared under the
assumption that the Company will continue as a going concern. Such
assumption contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. For the year ended
December 31, 2017, the Company recorded a net loss of $9,761,706
and generated cash from operations of $665,781.
As of
December 31, 2017, we had cash on hand of $1,261,933 and working
capital of $369,502. We estimate the Company currently has
sufficient cash and liquidity to meet its anticipated working
capital for the next twelve months.
In
December 2017, the Company, through its Subsidiaries, entered into
the Merchant Agreement with BBVA Compass Bank (“Compass”). Under the terms of the
Merchant Agreement, subject to the satisfaction of certain
conditions to funding, the Subsidiaries agreed to sell to Compass,
and Compass agreed to purchase from the Subsidiaries, certain
accounts owing from customers of such Subsidiaries, including GNC.
On January 22, 2018, the Subsidiaries sold to Compass accounts
receivable under the Merchant Agreement aggregating approximately
$2.0 million, the proceeds from which were used to pay US Bank all
principal and accrued interest due and owed US Bank under the terms
of the Notes and revolving line of credit.
The
Company is dependent on cash flow from operations and the
accumulation of additional receivables available to sell Compass
under the terms of the Merchant Agreement to satisfy its working
capital requirements. No assurances can be given that cash flow
from operations and/or that the Company will have access to
additional capital under the terms of the Merchant Agreement
necessary to provide for the Company’s liquidity for the next
twelve months. Should the Company be unable to generate sufficient
revenue in the future to achieve positive cash flow from
operations, and/or should capital be unavailable under the terms of
the Merchant Agreement, additional working capital will be
required. Management at present has no intention to raise
additional working capital through the sale of equity or debt
securities, and believes the agreement with Compass 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 Merchant Agreement, 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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The
Company prepares its financial statements in accordance with
accounting principles generally accepted in the United States of
America. Significant accounting policies are as
follows:
Principle of Consolidation
The
consolidated financial statements include the accounts of the
Company and NDS Nutrition Products, Inc. Intercompany accounts
and transactions have been eliminated in the consolidated financial
statements.
Use of Estimates and Assumptions
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States
(“GAAP”)
requires management to make estimates and assumptions that affect
(i) the reported amounts of assets and liabilities,
(ii) the disclosure of contingent assets and liabilities known
to exist as of the date the financial statements are published, and
(iii) the reported amount of net sales and expenses recognized
during the periods presented. Adjustments made with respect to the
use of estimates often relate to improved information not
previously available. Uncertainties with respect to such estimates
and assumptions are inherent in the preparation of financial
statements; accordingly, actual results could differ from these
estimates.
These estimates
and assumptions also affect the reported amounts of revenues, costs
and expenses during the reporting period. Management evaluates
these estimates and assumptions on a regular basis. Actual
results could differ from those estimates. Those
estimates and assumptions include estimates for reserves of
uncollectible accounts, inventory obsolescence, depreciable lives
of property and equipment, analysis of impairments of recorded
long-term assets and intangibles, realization of deferred tax
assets, accruals for potential liabilities and assumptions made in
valuing stock instruments issued for services.
Revenue Recognition
Revenue
is derived from product sales. The Company recognizes revenue from
product sales in accordance with Accounting Standards Codification
(“ASC”) Topic
605 “Revenue Recognition in Financial
Statements,” which assesses revenue upon: (i) the time
customers are invoiced at shipping point provided title and risk of
loss has passed to the customer, (ii) evidence of an arrangement
exists, (iii) fees are contractually fixed or determinable, (iv)
collection is reasonably assured through historical collection
results and regular credit evaluations, and (v) there are no
uncertainties regarding customer acceptance.
Revenue is
recorded net of all discounts taken at the time of
sale.
Customer Concentration
Total gross
sales to GNC during 2017 and 2016 were $19,382,148 and $21,897,633,
respectively, representing 80% and 82% of total revenue,
respectively. Accounts receivable attributable to GNC before
adjusting for product return reserves as of December 31, 2017 and
2016 were $2,625,003 and $2,327,689, respectively, representing 82%
and 83% of the Company’s total accounts receivable balance,
respectively.
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. The
Company recorded an expense of $169,188 related to bad debt and
doubtful accounts during the year ended December 31, 2017 versus
$3,553 for the year ended December 31, 2016. The difference was
primarily attributable to losses related to the Vitamin World
bankruptcy filing, and write-off of an outstanding note receivable
that management
determined was not collectible. As of December 31, 2017, the
Company has provided a reserve for doubtful accounts of
$112,101. There was no such reserve as of December 31,
2016.
Allowance for Product Returns, Sales Returns and Incentive
Programs
We
currently have a 30-day product return policy for NDS Products,
which allows for a 100% sales price refund, less a 20% restocking
fee, for the return of unopened and undamaged products purchased
from us online through one of our websites. Product sold to GNC may
be returned from store shelves or the distribution center in the
event product is damaged, short dated, expired or recalled.
Information for product returns is received on regular basis and
adjusted for accordingly. Adjustments for returns are based on
factual information and historical trends for both NDS products and
iSatori products and are special to each distribution channel. We
monitor, among other things, remaining shelf life and sell through
data on a weekly basis. If we determine there are any risks or
issues with any specific products, we accrue sales return
allowances based on management’s assessment of the overall
risk and likelihood of returns in light of all information
available. Management determined the need to establish $1,151,573
of product return reserves as of December 31, 2017. As of December
31, 2016, the product return reserve was $166,901. These amounts
are included in the allowance for doubtful accounts on the
accompanying balance sheet.
GNC
maintains a customer satisfaction program which allows customers to
return product to the store for credit or refund. Subject to
certain terms and restrictions, GNC may require reimbursement from
vendors for unsaleable returned product through either direct
payment or credit against a future invoice. We also support a
product return policy for iSatori Products, whereby customers can
return product for credit or refund. Historically, with a few noted
exceptions, product returns have been immaterial. However, despite
the best efforts of management, product returns can and do occur
from time to time and can be material. The Company currently does
not establish reserve allowances against accounts receivable
related to sales returns or incentive programs. Sales returns are
captured on a weekly basis and accounts receivable are updated
accordingly. Given the real-time nature of the information, an
allowance account for sales returns is not necessary.
Regarding
incentives, the Company accrues an estimate of 8% for promotional
expenses 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. Vendor funded discounts for the years
ended December 31, 2017 and 2016 were $3,521,556 and
$3,618,436 respectively and are recorded as a reduction to gross
sales.
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. Expenses not related to the production of our
products are classified as operating expenses.
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 expenses.
Cash and Cash Equivalents
The
Company maintains cash balances in several financial institutions
that are insured by the Federal Deposit Insurance Corporation up to
certain federal limitations. At times, the Company’s cash
balance exceeds these federal limitations. The amount in excess was
$1,011,933 and $1,043,041 as of December 31, 2017 and 2016,
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.
Property and Equipment
Property and
equipment is recorded at cost and depreciated over the estimated
useful lives of the assets using the straight-line method. When
items are retired or otherwise disposed of, income is charged or
credited for the difference between net book value and proceeds
realized. Ordinary maintenance and repairs are charged to
expense as incurred, and replacements and betterments are
capitalized.
The
range of estimated useful lives used to calculate depreciation for
principal items of property and equipment are as
follows:
|
Asset
Category
|
|
Depreciation
/ Amortization Period
|
|
Furniture
and Fixture
|
|
3
Years
|
|
Office
equipment
|
|
3
Years
|
|
Leasehold
improvements
|
|
5
Years
|
Management
regularly reviews property, equipment and other long-lived assets
for possible impairment. This review occurs annually or more
frequently if events or changes in circumstances indicate the
carrying amount of the asset may not be recoverable. Based upon
management’s annual assessment, there were no indicators of
impairment of the Company’s property and equipment and other
long-lived assets as of December 31, 2017 or December 31,
2016.
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.
On September 30, 2015, the Company consummated the
acquisition of iSatori. In connection with this acquisition, the
Company recorded intangible assets of $1,965,000 and Goodwill of
$4,197,448. As of December 31, 2016, the Company did
not believe there were any indicators of impairment of its Goodwill
and other intangible assets given the recent acquisition, and that
management had not yet had the time to implement its business plan.
During the year ended December 31, 2017, sales from iSatori did not
meet management’s expectations, and the Company was not able
to achieve the expected operating results. As a result, the Company
impaired Goodwill and other remaining finite-lived intangible
assets related to the acquisition of iSatori and recorded an
impairment charge equal to $5,928,765 due to the operating results
of that unit.
Income Taxes
The
Company accounts for income taxes using the asset and liability
method whereby deferred tax assets are recognized for deductible
temporary differences, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will
not be realized before the Company is able to realize their
benefits, or that future deductibility is uncertain.
Tax
benefits from an uncertain tax position are recognized only if it
more likely than not that the tax position will be sustained on
examination by the taxing authorities based on technical merits of
the position. The tax benefits recognized in the financial
statements from such a position are measured based on the largest
benefit that has greater than 50 percent likelihood of being
realized upon ultimate resolution. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Concentration of Business and Credit Risk
The
Company maintains cash balances in several financial institutions
that are insured by the Federal Deposit lnsurance Corporation up to
certain federal limitations. At times, the Company’s cash
balance exceeds these federal limitations. The amount in excess was
$1,011,933 and $1,043,041 as of December 31, 2017 and 2016,
respectively.
The
Company provides credit in the normal course of business to
customers located throughout the U.S. The Company performs ongoing
credit evaluations of its customers and maintains allowances for
doubtful accounts based on factors surrounding the credit risk of
specific customers, historical trends, and other
information.
One
customer comprised 80% and 82% of the
Company’s revenues for the years ended December 31, 2017 and
2016, respectively. The loss of this customer would have a material
adverse effect on the Company’s business, financial
condition, and results of operation.
Net Income
(Loss) Per Share
Basic
net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed by dividing
the net income applicable to common stock holders by the weighted
average number of common shares outstanding plus the number of
additional common shares that would have been outstanding if all
dilutive potential common shares had been issued using the treasury
stock method. Potential common shares are excluded from the
computation when their effect is antidilutive. The dilutive effect
of potentially dilutive securities is reflected in diluted net
income per share if the exercise prices were lower than the average
fair market value of common shares during the reporting
period.
The
following potentially dilutive shares were excluded from the shares
used to calculate diluted earnings per share as their inclusion
would be anti-dilutive:
|
|
|
|
|
|
|
|
Warrants
|
60,620
|
60,620
|
|
Options
|
870,284
|
969,924
|
|
Total
|
930,904
|
1,030,544
|
The
following table represents the computation of basic and diluted
losses per share at December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
Net income (loss)
available for common shareholders
|
$(9,761,706)
|
$368,078
|
|
Weighted average
common shares outstanding – Basic and diluted
|
10,518,239
|
10,340,162
|
|
Income (loss) per
share – Basic and diluted
|
(0.93)
|
0.04
|
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
and for financing costs. 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")
whereas the value of the award is measured on the date of grant and
recognized as compensation expense on the straight-line basis over
the vesting period. The Company accounts for stock option and
warrant grants issued and vesting to non-employees in accordance
with the authoritative guidance of the FASB whereas the value of
the stock compensation is based upon the measurement date as
determined at either a) the date at which a performance commitment
is reached, or b) at the date at which the necessary performance to
earn the equity instruments is complete. Options granted to
non-employees are revalued each reporting period to determine the
amount to be recorded as an expense in the respective period. As
the options vest, they are valued on each vesting date and an
adjustment is recorded for the difference between the value already
recorded and the then current value on the date of vesting. In
certain circumstances where there are no future performance
requirements by the non-employee, option grants are immediately
vested and the total stock-based compensation charge is recorded in
the period of the measurement date.
The
fair value of the Company’s stock option and warrant grants
are estimated using the Black-Scholes-Merton 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-Merton Option
Pricing model and based on actual experience. The assumptions used
in the Black-Scholes-Merton 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
Stock Compensation - Employee Share-Based
Payments – In
March 2016, the FASB issued guidance to amend certain aspects of
accounting for employee share-based awards, including accounting
for income taxes related to those transactions. This guidance will
require recognizing excess tax benefits and deficiencies (that
result from an increase or decrease in the fair value of an award
from grant date to the vesting date or exercise date) on
share-based compensation arrangements in the tax provision, instead
of in equity as under the current guidance. In addition, these
amounts will be classified as an operating activity in the
statement of cash flows, instead of as a financing activity. In
addition, cash paid for shares withheld to satisfy employee taxes
will be classified as a financing activity, instead of as an
operating activity. The guidance is effective beginning in the
first quarter of the Company’s 2018 fiscal year (with early
adoption permitted) and is required to be adopted as
follows:
●
Prospectively
for the recognition of excess tax benefits and deficiencies in the
tax provision.
●
Retrospectively
or prospectively for the classification of excess tax benefits and
deficiencies in the statement of cash flows.
●
Retrospectively
for the classification of cash paid for shares withheld to satisfy
employee taxes in the statement of cash flows.
Leases – In
February 2016, the FASB issued Accounting Standards Update
(“ASU”) No.
2016-02, “Leases
(Topic 842)” (“ASU 2016-02”). ASU 2016-02
requires entities to recognize right-of-use assets and lease
liabilities on the balance sheet for the rights and obligations
created by all leases, including operating leases, with terms of
more than 12 months. The new standard also requires additional
disclosures on the amount, timing, and uncertainty of cash flows
arising from leases. These disclosures include qualitative and
quantitative information. The new standard will be effective for
the Company on January 1, 2019. Early adoption is permitted. The
Company is in the process of evaluating the impact the adoption of
this standard will have on its consolidated financial statements
and related disclosures.
Inventory Measurement – In
July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the
Measurement of Inventory” (“ASU 2015-11”), which requires
entities to measure inventory at the lower of cost and net
realizable value (“NRV”). ASU 2015-11 defines NRV
as the estimated selling price in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and
transportation. The ASU will not apply to inventories that are
measured by using either the last-in, first-out method or the
retail inventory method. The guidance in ASU 2015-11 is effective
prospectively for fiscal years beginning after December 15, 2017,
and interim periods therein. Early adoption is permitted. Upon
transition, entities must disclose the nature of and reason for the
accounting change. The Company does not expect that the adoption of
this standard will have a material effect on its consolidated
financial statements.
Going Concern Disclosures – In
August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an
Entity’s Ability to Continue as a Going
Concern” (“ASU 2014-15”). ASU 2014-15
requires management to perform interim and annual assessments of an
entity’s ability to continue as a going concern within one
year of the date the financial statements are issued and provides
guidance on determining when and how to disclose going concern
uncertainties in the financial statements. Certain disclosures will
be required if conditions give rise to substantial doubt about an
entity’s ability to continue as a going concern. ASU 2014-15
is effective for annual and interim reporting periods ending after
December 15, 2017, with early adoption permitted. The
Company’s adoption of this standard did not have a material
effect on its consolidated financial statements.
Revenue from Contracts with Customers
– In May 2014, FASB issued ASU No. 2014-09,
Revenue from Contracts with
Customers. ASU 2014-09 is a comprehensive revenue
recognition standard that will supersede nearly all existing
revenue recognition guidance under current U.S. GAAP and replace it
with a principle based approach for determining revenue
recognition. Under ASU 2014-09, revenue is recognized when a
customer obtains control of promised goods or services and is
recognized in an amount that reflects the consideration which the
entity expects to receive in exchange for those goods or services.
In addition, the standard requires disclosure of the nature,
amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers. The FASB has recently issued ASU
2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, and
ASU 2017-05, all of which clarify certain implementation guidance
within ASU 2014-09. ASU 2014-09 is effective for interim and annual
periods beginning after December 15, 2017. The standard can be
adopted either retrospectively to each prior reporting period
presented (full retrospective method), or retrospectively with the
cumulative effect of initially applying the guidance recognized at
the date of initial application (the cumulative catch-up transition
method). The Company is currently in the process of analyzing the
information necessary to determine the impact of adopting this new
guidance on its financial position, results of operations, and cash
flows, but does not believe the adoption of this pronouncement will
have a material effect, if any.
In
January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic
350). ASU 2017-04 simplifies the subsequent measurement of
goodwill by removing the second step of the two-step impairment
test. The amendment requires an entity to perform its annual, or
interim goodwill impairment test by comparing the fair value of a
reporting unit with its carrying amount. An impairment charge
should be recognized for the amount by which the carrying amount
exceeds the reporting unit’s fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated
to that reporting unit. An entity still has the option to perform
the qualitative assessment for a reporting unit to determine if the
quantitative impairment test is necessary. The amendment should be
applied on a prospective basis. ASU 2017-04 is effective for fiscal
years beginning after December 15, 2019, including interim periods
within those fiscal years. Early adoption is permitted for interim
or annual goodwill impairment tests performed on testing dates
after January 1, 2017. The Company intends to early adopt the ASU
in 2018.
Reclassification
Certain
prior year balances have been reclassified to conform to the
current year presentation. In the consolidated balance sheets and
the consolidated statement of stockholders’ equity certain
prior year amounts previously recorded as current liabilities have
been presented in a manner more representative of the
Company’s current operations. These reclassifications have no
effect on previously reported net income or stockholders’
equity. In addition, certain reclassifications have been made in
the statements of cash flows with regards to the presentation of
repurchases of common stock. The reclassification had no effect on
previously reported decrease in cash.
NOTE 3. INVENTORIES
At December 31,
2017, the value of the Company’s inventory was $2,873,831, of
which $2,066,108 and $807,723 was related to NDS Products and
iSatori Products, respectively. At December 31, 2016, the value of
the Company’s inventory was $3,756,716, of which $2,624,461
and $1,132,256 was related to NDS Products and iSatori Products,
respectively.
|
|
|
|
|
|
|
|
Finished
goods
|
$2,462,530
|
$3,069,531
|
|
Components
|
411,301
|
687,185
|
|
Total
|
$2,873,831
|
$3,756,716
|
NOTE 4. PROPERTY AND EQUIPMENT
The
Company has fixed assets as of December 31, 2017 and 2016 as
follows:
|
|
|
|
|
|
|
|
Equipment
|
$971,820
|
$792,930
|
|
Accumulated
depreciation
|
$(676,633)
|
$(621,926)
|
|
Total
|
$295,187
|
$171,004
|
Depreciation
expense was $54,707 for December 31, 2017 compared to $56,236 for
December 31, 2016.
NOTE 5. NOTE RECEIVABLE
In
connection with iSatori’s sale of its Living Orchard product
line in 2010, the Company recorded a note receivable representing
all or a portion of the purchase price. As of December 31, 2016,
the balance of the Note Receivable was $55,477. During the year
ended December 31, 2017, we received payments of $6,750 from Living
Orchard, which had previously ceased operations, we wrote off
$43,727 to bad debt and received the difference of $5,000 in
February 2018.
NOTE
6. NOTE PAYABLES
Notes payable
consist of the following as of December 31, 2017 and
2016:
|
|
|
|
|
|
Revolving line of
credit of $3.0 million from U.S. Bank National Association
(“U.S. Bank”),
dated April 9, 2009, as amended July 15, 2010, May 25, 2011, August
22, 2012, April 29, 2013, May 22, 2014, June 25, 2014, May 15,
2015, August 15, 2016 and August 28, 2017, at an effective interest
rate equal to the prime rate announced from time to time by U.S.
Bank plus 0.50%. The line of credit matured on June 15, 2017;
however, U.S. Bank extended
the maturity date of the line of credit until December 15, 2017.
The line of credit is secured by substantially all the assets of
the Company. As a result of the August 28, 2017 amendment, the
Company agreed to amended and additional loan covenants and certain
additional terms. Advances to the Company under the amended line of
credit are based solely on 80% of the eligible receivables of the
Company. The Company pays interest only on this line of credit. The
Company received a notice of default from U.S. Bank resulting from
a violation of a loan covenant set forth in the amended line of
credit.
|
|
$1,950,000
|
$1,950,000
|
|
Term loan of
$2,600,000 from US Bank, dated September 4, 2013, at a fixed
interest rate of 3.6%. The term loan amortizes evenly on a monthly
basis and matures August 15, 2018.
|
|
414,877
|
914,003
|
|
|
|
|
|
|
Notes payable for
warehouse equipment
|
|
-
|
12,700
|
|
Total of notes
payable and advances
|
|
2,364,877
|
2,876,703
|
|
Less current
portion
|
|
(2,364,877)
|
(2,507,526)
|
|
|
|
|
|
|
Long-term
portion
|
|
$-
|
$369,177
|
As of the fiscal
year end, the Company was in violation of a loan covenant set forth
in the Company’s revolving line of credit of $3.0 million
from U.S. Bank, as modified by that certain loan modification
agreement dated August 28, 2017, of which approximately $1.95
million was due and owing as of December 31, 2017. On October 27,
2017, the Company received a notice of default from U.S. Bank
related to the line of credit and term loan. The maturity date of
the line of credit was December 15, 2017. Subsequent to the year
end, on January 22, 2018, the Company paid U.S. Bank all principal
and accrued interest due and owed to U.S. Bank and as a result of
such payment the notes, together with all other instruments and
agreements executed by the Company and U.S. Bank providing for the
extension of credit by U.S. Bank to the Company and the
Subsidiaries, or otherwise, terminated, and are of no further force
and effect (See Note 10 – Subsequent
Events).
NOTE 7. EQUITY
Year Ended December 31, 2017
During
the year ended December 31, 2017, the Company issued 240,241 shares
of common stock with a fair value of $95,966 to employees and
directors for services rendered. The shares were valued at the
respective date of issuance.
During
the year ended December 31, 2017, the Company retired 41,920 shares
of common stock that was accounted a treasury stock at December 31,
2016.
Year
Ended December 31, 2016
During the
year ended December 31, 2016, the Company issued 116,722 shares of
common stock with a fair value of $153,002 to employees and
directors for services rendered. The shares were valued at the
respective date of issuance. In addition, the Company also issued
85,089 shares of common stock as a result of the cashless exercise
of stock options.
During
the year ended December 31, 2016, the Company acquired 86,534
shares of common stock from an officer in exchange for cash of
$112,494. At the date of acquisition, the fair value of the shares
acquired approximates the cash paid to the officer. Concurrent with
the acquisition, the entire 86,534 shares were
cancelled.
During
the year ended December 31, 2016, pursuant to the Company’s
stock buyback program, the Company paid $44,413 for the acquisition
of 41,920 shares of common stock that was accounted as a Treasury
Stock at December 31, 2016. In January 2017, the entire 41,920
shares of common stock were acquired and retired by the
Company.
During
the year ended December 31, 2016, the Company retired 85,833 shares
of common stock that was acquired in fiscal 2015 pursuant to the
Company’s stock buyback program.
Preferred Stock
Subject
to a limit of 10.0 million preferred shares in the aggregate, the
Company is authorized to issue 10.0 million shares of Series A
Convertible Preferred Stock, $0.01 par value, 1,000 shares of its
10% Cumulative Perpetual Series B Preferred Stock, $0.01 par value,
and 500 shares of its Series C Convertible Preferred Stock, par
value $0.01, none of which were issued and outstanding as of
December 31, 2017 and 2016.
Options
The
following table summarizes option activity:
|
|
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Life (Years)
|
|
Outstanding,
December 31, 2015
|
902,205
|
$2.80
|
6.34
|
|
Issued
|
219,000
|
$1.39
|
|
|
Exercised
|
(90,064)
|
0.06
|
|
|
Forfeited
|
(61,217)
|
1.62
|
|
|
Outstanding,
December 31, 2016
|
969,924
|
$2.81
|
5.12
|
|
Issued
|
-
|
-
|
|
|
Exercised
|
-
|
-
|
|
|
Forfeited
|
(99,640)
|
3.65
|
|
|
Outstanding,
December 31, 2017
|
870,284
|
$2.71
|
4.16
|
As of December 31,
2017, 870,284 options to purchase common stock of the Company were
issued and outstanding
|
|
|
|
|
|
50,000
|
$0.90
|
01/16/13
|
01/16/18
|
|
10,000
|
$1.00
|
03/04/13
|
03/04/18
|
|
212,074
|
$1.39
|
05/09/16
|
05/09/21
|
|
4,330
|
$1.44
|
09/29/15
|
09/29/25
|
|
40,000
|
$2.20
|
04/11/14
|
04/11/19
|
|
370,000
|
$2.30
|
02/23/15
|
02/23/20
|
|
93,503
|
$3.31
|
02/16/12
|
02/16/22
|
|
18,966
|
$4.62
|
05/13/15
|
05/13/25
|
|
4,330
|
$5.49
|
04/08/15
|
04/08/25
|
|
1,732
|
$5.81
|
03/05/15
|
03/05/25
|
|
32,331
|
$5.89
|
03/23/15
|
03/23/25
|
|
8,660
|
$12.13
|
09/17/13
|
09/17/23
|
|
7,038
|
$12.99
|
11/14/12
|
09/27/22
|
|
17,320
|
$14.43
|
01/16/13
|
11/30/22
|
|
870,284
|
|
|
|
The
closing stock price for the Company’s stock on December 31,
2017 was $0.24, as such, there was no intrinsic value. Stock
compensation to be recognized in future periods based upon the
vesting of these options is approximately
$50,000.
During
the year ended December 31, 2016, the Company granted options to
purchase 219,000 shares of common stock. The options vest over
three years, exercisable at $1.39 per share and will expire in five
years. At the date of grant, the fair value of these stock options
amounted to $111,124 computed using the Black Scholes Option
Pricing Model with the following assumptions: stock price and
exercise price of $1.39 per share, expiration of five years, risk
free of 1.20%, volatility rate of 40% and dividend yield of
0%
During
the year ended December 31, 2016, the Company recognized
compensation expense of $58,178 based upon the vesting of these
options.
During
the year ended December 31, 2017 and 2016, the Company recognized
compensation expense of $44,189 based upon the vesting of options
granted in prior periods. There were no stock options granted in
2017.
Warrants
As of
December 31, 2017 and 2016, 60,620 warrants to purchase common
stock of the Company were issued and outstanding, all of which were
assumed by the Company in connection with the acquisition of
iSatori. Additional information about the outstanding warrants is
included in the following table:
|
|
|
|
|
|
17,320
|
$12.99
|
10/01/13
|
01/01/18
|
|
43,300
|
$12.99
|
07/16/13
|
07/16/18
|
|
60,620
|
|
|
|
The
closing stock price for the Company’s stock on December 31,
2017 was $0.24, therefore there were no intrinsic value. The entire
60,620 warrants are fully vested as of December 31,
2017.
NOTE 8. INCOME TAXES
At
December 31, 2017 and 2016, the Company had available Federal net
operating loss (NOL) carryforwards to reduce future taxable income.
The amounts available were approximately $8.6 million and $6.6
million for Federal purposes, respectively. The Federal
carryforward expires in 2036. The NOL is also subject to statutory
limitations under Internal Revenue Code Section 382 regarding
substantial changes in ownership of companies with loss carry
forwards.
ASC 740
requires the consideration of a valuation allowance to reflect the
likelihood of realization of deferred tax assets. Significant
management judgment is required in determining any valuation
allowance recorded against deferred tax assets. In evaluating the
ability to recover deferred tax assets, the Company considered
available positive and negative evidence, giving greater weight to
its recent cumulative losses and its ability to carry-back losses
against prior taxable income and lesser weight to its projected
financial results due to the challenges of forecasting future
periods. The Company also considered, commensurate with its
objective verifiability, the forecast of future taxable income
including the reversal of temporary differences. At that time the
Company continued to have sufficient positive evidence, including
recent cumulative profits, a reduction in operating expenses, the
ability to carry-back losses against prior taxable income and an
expectation of improving operating results, showing a full
valuation allowance was not required. As of December 31, 2016,
expectations of taxable income allowed for $689,000 of deferred tax
assets.
During
the year ended December 31, 2017, 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 due to significant
operating losses. Based on their evaluation, the Company determined
that the net deferred tax assets of approximately 689,000 during
2017, do not meet the requirements to realize, and as such, the
Company has provided a full valuation allowance against
them.
The Company has no
provision for current income taxes during the year ended December
31, 2017 due to net loss incurred, and full valuation allowance on
the net deferred tax assets. Deferred income taxes result from
temporary differences in the recognition of income and expenses for
the financial reporting purposes and for tax purposes. The
components of deferred tax assets are comprised of the
following:
|
|
|
|
|
Net operating loss
carryforward
|
2,236,000
|
2,585,515
|
|
Allowances for
sales returns, bad debt and inventory
|
392,000
|
-
|
|
Share based
compensation
|
167,000
|
39,000
|
|
Other
|
76,000
|
(3,000)
|
|
|
2,871,000
|
1,932,515
|
|
Valuation
allowance
|
(2,871,000)
|
(1,932,515)
|
|
|
|
|
|
Net deferred tax
asset
|
$-
|
$689,000
|
Reconciliation
of the effective income tax rate to the U.S. statutory rate is as
follows:
|
|
|
|
|
|
|
|
Federal Statutory
tax rate
|
(34%)
|
34%
|
|
State tax, net of
federal benefit
|
(4.9%)
|
4.9%
|
|
|
(38.9%)
|
38.9%
|
|
Effect of change in
tax rate
|
13%
|
-
|
|
Valuation
allowance
|
25.9%
|
38.9
|
|
Effective tax
rate
|
-%
|
-%
|
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, 2017, and 2016, 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, 2017, and 2016, the
Company has not accrued interest or penalties related to uncertain
tax positions. Tax years 2010 through 2017 remain open to
examination by the major taxing jurisdictions to which the Company
is subject.
NOTE 9. COMMITMENTS
AND CONTINGENCIES
Legal
Proceedings
On
December 31, 2014, various plaintiffs, individually and on behalf
of a purported nationwide and sub-class of purchasers, filed a
lawsuit in the U.S. District Court for the Northern District of
California, captioned Ryan et al.
v. Gencor Nutrients, Inc. et al., Case No.: 4:14-CV-05682.
The lawsuit includes claims made against the manufacturer and
various producers and sellers of products containing a nutritional
supplement known as Testofen, which is manufactured and sold by
Gencor Nutrients, Inc. (“Gencor”). Specifically, the Ryan
plaintiffs allege that various defendants have manufactured,
marketed and/or sold Testofen, or nutritional supplements
containing Testofen, and in doing so represented to the public that
Testofen had been clinically proven to increase free testosterone
levels. According to the plaintiffs, those claims are false and/or
not statistically proven. Plaintiffs seek relief under violations
of the Racketeering Influenced Corrupt Organizations Act, breach of
express and implied warranties, and violations of unfair trade
practices in violation of California, Pennsylvania, and Arizona
law. NDS utilizes Testofen in a limited number of nutritional
supplements it manufactures and sells pursuant to a license
agreement with Gencor.
On
February 19, 2015 this matter was transferred to the Central
District of California to the Honorable Manuel Real. Judge Real had
previously issued an order dismissing a similar lawsuit that had
been filed by the same lawyer who represents the plaintiffs in the
Ryan matter. The United States Court of Appeals reversed part of
the dismissal issued by Judge Real and remanded the case back down
to the district court for further proceedings. As a result, the
parties in the Ryan matter issued a joint status report and that
matter is again active.
On
February 28, 2017, Kevin Fahey, through his attorney, and on behalf
of himself and the citizens of the District of Columbia, file a
Complaint in the Superior Court of the District of Columbia Civil
Division captioned Fahey vs.
BioGenetic Laboratories, Inc., et al., case
No.2017 CA 001240. The Complaint was filed against BioGenetics, a
division of the Company, and various GNC entities. Fahey asserts in
his Complaint that the labeling and marketing materials of the
product HCG Activator are fraudulent, false and misleading with
respect to certain weight loss and hunger suppression claims. Fahey
claims these actions violate the District of Columbia Consumer
Protection Procedures Act Section 28-3901 et seq., and
has asked the court for direct treble damages, punitive damages,
disgorgement of profits, attorneys’ fees and injunctive
relief. This matter was resolved and the lawsuit was dismissed June
27, 2017. The resolution did not have a material impact on the
Company, its financial condition or results from
operations.
We are
currently not involved in any litigation except noted above that we
believe could have a material adverse effect on our financial
condition or results of operations. Other than described above,
there is no action, suit, proceeding, inquiry or investigation
before or by any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge
of the executive officers of the Company or any of its
subsidiaries, threatened against or affecting the Company, our
common stock, any of our subsidiaries or of the Company’s or
our subsidiaries’ officers or directors in their capacities
as such, in which an adverse decision could have a material adverse
effect.
Lease Commitments
The
Company is headquartered in Omaha, Nebraska and maintains a lease
at a cost of approximately $7,500 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 $5,620 per month. The Company was in
an active process to sublease its Golden property as of December
31, 2017. Prior to January 2, 2016, iSatori also leased
17,426 square feet of space at 6200 North Washington Street, Unit
10, Denver, Colorado 80216, for its distribution center, at a cost
of $12,669 per month. The lease is currently sublet through
December 31, 2018, and otherwise set to expire on December 31,
2018. The Company also leases some office equipment for an
aggregate total cost of approximately $535 per month.
Rent
expense for the years ending December 31, 2017 and 2016 was
$263,597 and $289,710 , respectively, and is included in operating
expenses in the accompanying consolidated statement of
operations.
Minimum
annual rental commitments under non-cancelable leases are as
follows:
|
Years ending
December 31,
|
|
|
2018
|
$209,299
|
|
2019
|
111,441
|
|
2020
|
61,509
|
|
2021
|
60,984
|
|
2022 and
thereafter
|
167,706
|
|
TOTAL
|
$610,939
|
NOTE 10. SUBSEQUENT EVENTS
Merchant Agreement and Repayment of U.S. Bank Notes
In
December 2017, the Company, through its Subsidiaries, entered into
the Merchant Agreement with Compass. Under the terms of the
Merchant Agreement, subject to the satisfaction of certain
conditions to funding, the Subsidiaries agreed to sell to Compass,
and Compass agreed to purchase from the Subsidiaries, certain
accounts owing from customers of such Subsidiaries, including GNC.
All amounts due under the terms of the Merchant Agreement, totaling
up to $5.0 million, are guaranteed by the Company under the terms
of a Continuing Guarantee. . The Company shall pay a fee of LIBOR plus 550
basis points calculated based upon the excess of the amount owing
over cash collected from customers. Additionally, the Company will
be charged a non-utilization fee by which the average outstanding
amount of obligations is less than $3,000,000. The Company has
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 Merchant with Bank and any and all
substitutions, accessions, additions, parts, accessories,
attachments, replacements, proceeds and products of, for and to
inventory, whether now or hereafter owned, existing, created,
arising or acquired. The Merchant Agreement renews automatically
unless either party terminates with a written notice with thirty
days of the anniversary date.
On
January 22, 2018, the Subsidiaries sold to Compass accounts
receivable under the Merchant Agreement aggregating approximately
$2.0 million, the proceeds from which were used to pay USB all
principal and accrued interest due and owing USB under the terms of
the Notes previously issued to USB. As a result of such payment,
together with a payment of approximately $360,000 from existing
cash resources, the Notes, together with all other instruments and
agreements executed by the Company and USB providing for the
extension of credit by USB to the Company and the Subsidiaries, or
otherwise, have terminated, and are of no further force and
effect.
In
March 2018 the Company issued 225,000 shares of common stock with a
fair value of $67,500 to an officer of the Company for services
rendered.