10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☒
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT
For the transition period from N/A to N/A
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Commission File No. 000-52369
FITLIFE BRANDS, INC.
(Name of small business issuer as specified in its
charter)
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Nevada
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20-3464383
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(State or other jurisdiction of incorporation)
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(IRS Employer Identification No.)
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5214 S. 136th Street, Omaha, NE 68137
(Address of principal executive offices)
(402) 884-1894
(Issuer’s telephone number)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed
all reports required by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements
for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ☒ No
☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, 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. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b–2 of the Exchange
Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at November 13, 2017
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Common stock, $0.01 par value
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10,623,522
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FITLIFE BRANDS, INC.
INDEX TO FORM 10-Q FILING
FOR THE QUARTER ENDED SEPTEMBER 30, 2017
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CERTIFICATIONS
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Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act.
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Certification
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act.
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Certification
of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act.
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Certification
of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act.
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FINANCIAL INFORMATION
Item 1. Financial Statements
The
accompanying interim consolidated financial statements have been
prepared in accordance with the instructions to Form
10-Q. Therefore, they do not include all information and
footnotes necessary for a complete presentation of financial
position, results of operations, cash flows, and stockholders'
equity in conformity with generally accepted accounting
principles. Except as disclosed herein, there has been
no material change in the information disclosed in the notes to the
consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31,
2016. In the opinion of management, all adjustments
considered necessary for a fair presentation of the results of
operations and financial position have been included and all such
adjustments are of a normal recurring nature. Operating
results for the three and nine months ended September 30, 2017 are
not necessarily indicative of the results that can be expected for
the year ending December 31, 2017.
CONDENSED CONSOLIDATED BALANCE SHEETS
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ASSETS:
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CURRENT
ASSETS
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Cash
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$1,104,872
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$1,293,041
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Accounts
receivable, net
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3,380,984
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2,792,649
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Security
deposits
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24,956
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24,956
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Inventory
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2,869,383
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3,756,716
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Note
receivable, current portion
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48,727
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2,782
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Prepaid
income tax
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120,000
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120,000
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Prepaid
expenses and other current assets
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184,958
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136,014
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Total
current assets
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7,733,880
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8,126,158
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PROPERTY
AND EQUIPMENT, net
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145,910
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171,004
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Note
receivable, net of current portion
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-
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52,696
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Deferred
taxes
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689,000
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689,000
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Intangibles
assets, net
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6,212,193
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6,507,505
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TOTAL
ASSETS
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$14,780,983
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$15,546,363
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LIABILITIES
AND STOCKHOLDERS' EQUITY:
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CURRENT
LIABILITIES:
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Accounts
payable
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$2,476,417
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$1,596,748
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Accrued
expenses and other liabilities
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590,756
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539,765
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Line
of credit
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1,950,000
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1,950,000
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Term
loan agreement, current portion
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506,889
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544,825
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Notes
payable
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4,131
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12,700
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Total
current liabilities
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5,528,193
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4,644,038
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LONG-TERM
DEBT, net of current portion
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-
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369,177
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5,528,193
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5,013,215
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CONTINGENCIES
AND COMMITMENTS
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-
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-
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STOCKHOLDERS'
EQUITY:
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Preferred stock, $0.01 par value, 10,000,000 shares
authorized as of
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September 30, 2017 and December 31, 2016:
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Preferred stock Series A; 10,000,000 shares authorized; no
shares issued
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and
outstanding as of September 30, 2017 and December 31,
2016
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-
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-
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Preferred stock Series B; 1,000 shares authorized; no shares
issued
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and
outstanding as of September 30, 2017 and December 31,
2016
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-
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-
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Preferred
stock Series C; 500 shares authorized; no shares
issued
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and
outstanding as of September 30, 2017 and December 31,
2016
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-
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-
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Common
stock, $.01 par value, 150,000,000 shares authorized;
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10,623,533
and 10,483,389 issued and outstanding
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as
of September 30, 2017 and December 31, 2016,
respectively
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106,235
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104,495
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Subscribed
common stock
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-
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339
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Treasury
stock
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-
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(44,416)
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Additional
paid-in capital
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30,988,947
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30,919,289
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Accumulated
deficit
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(21,842,392)
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(20,446,559)
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Total
stockholders' equity
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$9,252,790
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$10,533,148
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
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$14,780,983
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$15,546,363
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The
accompanying notes are an integral part of these condensed
consolidated financial statements
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND
2016
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(Unaudited)
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(Unaudited)
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Three Months Ended
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Nine Months Ended
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September 30
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September 30
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Revenue
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$4,025,580
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$5,340,616
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$14,637,273
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$21,615,605
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Cost
of Goods Sold
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2,550,760
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3,353,224
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9,718,670
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12,469,081
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1,474,820
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1,987,392
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4,918,603
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9,146,524
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OPERATING
EXPENSES:
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General
and administrative
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1,030,215
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1,131,692
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3,200,218
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3,854,128
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Selling
and marketing
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828,829
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1,088,400
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2,689,587
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3,138,323
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Depreciation
and amortization
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98,917
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125,751
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335,566
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376,502
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Total
operating expenses
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1,957,961
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2,345,843
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6,225,371
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7,368,953
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OPERATING
INCOME (LOSS)
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(483,141)
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(358,451)
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(1,306,768)
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1,777,571
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OTHER
(INCOME) AND EXPENSES
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Interest
expense
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28,243
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27,417
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83,920
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84,016
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Other
expense (income)
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-
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(150)
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5,145
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(2,917)
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Total
other (income) expense
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28,243
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27,267
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89,065
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81,099
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INCOME
TAXES (BENEFIT)
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-
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(25,000)
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-
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164,000
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NET
INCOME (LOSS)
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$(511,384)
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$(360,718)
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$(1,395,833)
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$1,532,472
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NET
INCOME (LOSS) PER SHARE:
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Basic
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$(0.05)
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$(0.03)
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$(0.13)
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$0.15
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Diluted
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$(0.05)
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$(0.03)
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$(0.13)
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$0.13
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Basic
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10,537,805
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10,446,954
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10,488,135
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10,413,703
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Diluted
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10,537,805
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10,446,954
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10,488,135
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11,515,169
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The
accompanying notes are an integral part of these condensed
consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
AND 2016
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(Unaudited)
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Net
income (loss)
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$(1,395,833)
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$1,532,472
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Adjustments
to reconcile net income (loss) to net cash
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provided by operating activities:
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Depreciation
and amortization
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335,566
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376,502
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Common
stock issued for services
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82,001
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105,501
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Warrants
and options issued for services
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33,474
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45,028
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Loss on disposal of property and equipment
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5,145
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-
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Changes
in operating assets and liabilities:
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Accounts
receivable
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(588,335)
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(1,369,673)
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Inventory
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887,333
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357,326
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Deferred
tax asset
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-
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123,879
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Prepaid
income tax
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-
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151,000
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Prepaid
expenses
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(48,944)
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145,167
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Note
receivable
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6,751
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9,985
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Accounts
payable
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879,669
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(666,806)
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Accrued
liabilities
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50,991
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(369,941)
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Litigation
reserve
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-
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(95,775)
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Income
tax payable
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-
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13,000
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Net
cash provided by operating activities
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247,818
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357,665
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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Purchase
of property and equipment
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(20,305)
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(21,619)
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-
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2,027
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Net
cash used in investing activities
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(20,305)
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(19,592)
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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Proceeds
from draw down on credit line
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-
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520,000
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Payments
for redemption of preferred stock
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-
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-
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Repayments
of note payable
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(415,682)
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(404,261)
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Net
cash provided by (used in) financing activities
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(415,682)
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115,739
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INCREASE
(DECREASE) IN CASH
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(188,169)
|
453,812
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CASH,
BEGINNING OF PERIOD
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1,293,041
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1,532,550
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CASH,
END OF PERIOD
|
$1,104,872
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$1,986,362
|
|
|
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|
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Supplemental disclosure operating activities
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Cash
paid for interest
|
$83,920
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$84,016
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The
accompanying notes are an integral part of these condensed
consolidated financial statements
FITLIFE BRANDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
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DECEMBER
31, 2016
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10,483,389
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$104,495
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$339
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$(44,416)
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$30,919,289
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$(20,446,559)
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$10,533,148
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Common
stock issued for services
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182,064
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1,820
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80,180
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82,001
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Cancellation
of treasury stock
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(41,920)
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(419)
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44,416
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(43,997)
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-
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Issuance
of subscribed common stock
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339
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(339)
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|
-
|
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Fair
value of options issued for services
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33,474
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33,474
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|
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Net
loss
|
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(1,395,833)
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(1,395,833)
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SEPTEMBER
30, 2017
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10,623,533
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$106,235
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$-
|
$-
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$30,988,947
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$(21,842,392)
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$9,252,790
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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
and maintains an office in Golden, Colorado. For more information
on the Company, please go to http://www.fitlifebrands.com.
The Company’s common stock currently trades under the symbol
FTLF on the OTC:PINK market.
NOTE 2 - BASIS OF PRESENTATION
The
accompanying interim condensed unaudited consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 8 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In our opinion, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation are included. Operating results for the three
and nine-month period ended September 30, 2017 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2017. While management of the Company
believes the disclosures presented herein are adequate and not
misleading, these interim condensed consolidated financial
statements should be read in conjunction with the audited condensed
consolidated financial statements and the footnotes thereto for the
fiscal year ended December 31, 2016 as filed with the Securities
and Exchange Commission as an exhibit to our Annual Report on Form
10-K.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company prepares its financial statements in accordance with
accounting principles generally accepted in the United States of
America. Significant accounting policies are as
follows:
Principles of Consolidation
The
consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Intercompany
accounts and transactions have been eliminated in the consolidated
condensed financial statements.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States (“GAAP”) requires management to make estimates and
assumptions that affect (i) the reported amounts of assets and
liabilities, (ii) the disclosure of contingent assets and
liabilities known to exist as of the date the financial statements
are published, and (iii) the reported amount of net sales and
expenses recognized during the periods presented. Adjustments made
with respect to the use of estimates often relate to improved
information not previously available. Uncertainties with respect to
such estimates and assumptions are inherent in the preparation of
financial statements; accordingly, actual results could differ from
these estimates.
These estimates and assumptions also affect the
reported amounts of revenues, costs and expenses and valuations of
long term assets, deferred tax assets and equity instruments issued
for services during the reporting period. Management
evaluates these estimates and assumptions on a regular
basis. Actual results could differ from those
estimates.
Impairment
of Long-Lived Assets
The Company had goodwill and intangible assets with a carrying
value of $6,212,193 and $6,507,505, respectively, as of September
30, 2017 and December 31, 2016. In accordance with ASC Topic 350
– Goodwill and Other Intangible Assets, the Company assesses
the carrying value of such intangible assets for impairment on a
periodic basis and records an impairment charge if the carrying
value of such intangible assets exceeds the estimated fair value of
the reporting unit, which in this case is the Company. The Company
performed its annual goodwill impairment test as of December 31,
2016, which did not indicate the existence of an impairment at that
time. While the fiscal year-to-date financial performance
have not met our expectations, and the enterprise value of the
Company based on the current price of our common stock may
fluctuate at or near the recorded levels of goodwill and
indefinite-lived intangible assets, Management does not consider
these results to be a triggering event requiring the performance of
an interim goodwill impairment test. The Company will continue to
monitor its operating results for indicators of impairment and
perform additional tests as necessary. The Company's fiscal 2017
annual impairment test will be performed as of December 31, 2017,
which could result in an impairment charge to goodwill depending on
the Company’s finalized forecast for fiscal 2018 and other
market conditions.
Customer Concentration
Gross sales prior to reduction for vendor funded discounts and
coupons to GNC during the period ended September 30, 2017 and 2016
were $15,569,430 and $20,696,007, respectively, representing 81.0%
and 82.5% of total revenue, respectively. Accounts receivable
attributable to GNC as of September 30, 2017 and September 30, 2016
were $2,679,885 and $3,201,464, respectively, representing 77.7%
and 79.4% of the Company's total accounts receivable balance,
respectively.
Share Based Payment
The
Company issues stock options, warrants and common stock as
share-based compensation to employees and non-employees. The
Company accounts for its share-based compensation to employees in
accordance with FASB ASC718 "Compensation - Stock Compensation."
Stock-based compensation cost is measured at the grant date, based
on the estimated fair value of the award, and is recognized as
expense over the requisite service period.
The
Company accounts for share-based compensation issued to
non-employees and consultants in accordance with the provisions of
FASB ASC 505-50 "Equity - Based Payment to Non-Employees."
Measurement of share-based payment transactions with non-employees
is based on the fair value of whichever is more reliably
measurable: (a) the goods or services received; or (b) the equity
instruments issued. The final fair value of the share-based payment
transaction is determined at the performance completion date. For
interim periods, the fair value is estimated and the percentage of
completion is applied to that estimate to determine the cumulative
expense recorded.
The
Company values stock compensation based on the market price on the
measurement date. For employees this is the date of grant, and for
non-employees, this is the date of performance completion. The
Company values stock options and warrants using the Black-Scholes
option pricing model.
Recent Accounting Pronouncements
In May
2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update ("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. Early adoption is
permitted only in annual reporting periods beginning after December
15, 2016, including interim periods therein. 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.
In
February 2016, the FASB issued ASU No. 2016-02, Leases. This update will require the
recognition of a right-of-use asset and a corresponding lease
liability, initially measured at the present value of the lease
payments, for all leases with terms longer than 12 months. For
operating leases, the asset and liability will be expensed over the
lease term on a straight-line basis, with all cash flows included
in the operating section of the statement of cash flows. For
finance leases, interest on the lease liability will be recognized
separately from the amortization of the right-of-use asset in the
statement of comprehensive income and the repayment of the
principal portion of the lease liability will be classified as a
financing activity while the interest component will be included in
the operating section of the statement of cash flows. ASU 2016-02
is effective for annual and interim reporting periods beginning
after December 15, 2018. Early adoption is permitted. Upon
adoption, leases will be recognized and measured at the beginning
of the earliest period presented using a modified retrospective
approach. The Company is currently evaluating the impact of the
adoption of ASU 2016-02 on its financial statements and related
disclosures.
Other
recent accounting pronouncements issued by the FASB, including its
Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did
not or are not believed by management to have a material impact on
the Company's present or future financial statements.
NOTE 4 – INVENTORIES
The
Company’s inventories as of September 30, 2017 and December
31, 2016 are as follows:
|
|
|
|
|
Finished
goods
|
$2,237,607
|
$3,069,531
|
|
Components
|
631,776
|
687,185
|
|
Total
|
$2,869,383
|
$3,756,716
|
NOTE 5 - PROPERTY AND EQUIPMENT
The
Company’s fixed assets as of September 30, 2017 and December
31, 2016 are as follows:
|
|
|
|
|
Equipment
|
$807,061
|
792,930
|
|
Accumulated
depreciation
|
(661,151)
|
(621,926)
|
|
Total
|
$145,910
|
171,004
|
Depreciation
expense for the nine months ended September 30, 2017 was $40,254 as
compared to $60,003 for the nine-month period ended September 30,
2016. During the period
ended September 30, 2017, the Company disposed an equipment with a
cost of $6,174 and accumulated depreciation of $1,029 which
resulted in a loss of $5,145.
NOTE 6 – NOTES PAYABLE
Notes
payable consist of the following as of September 30, 2017 and
December 31, 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 line of credit
are now based solely on 80% of the eligible receivables of the
Company. The Company pays interest only on this line of
credit. As disclosed in Note 11, the Company has 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.
|
506,889
|
914,002
|
|
Notes payable for
warehouse equipment
|
4,131
|
12,700
|
|
Total of notes
payable and advances
|
2,461,021
|
2,876,703
|
|
Less current
portion
|
(2,461,021)
|
(2,507,526)
|
|
|
|
|
|
Long-term
portion
|
$-
|
$369,177
|
The
U.S. Bank revolving line of credit and term loan are subject to
certain financial covenants for which the Company was not in
compliance at September 30, 2017 (see Note 11).
The Company is
currently 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 is due and
owing as of September 30, 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 is
currently December 15, 2017, and the Company currently does not
anticipate that such line of credit will be extended or renewed.
Although no assurances can be given, management is currently
negotiating with alternative lenders to replace the line of credit
and term loan currently with U.S. Bank. In the event the Company is
unable to enter into a loan agreement with an alternate lender
prior to December 15, 2017, the Company's financial condition will
be negatively affected, and such affect will be
material.
NOTE 7 - NET INCOME / (LOSS) PER SHARE
Basic
net income per share is calculated by dividing the net income
attributable to common stockholders by the weighted average number
of shares of common stock outstanding during the period. Diluted
net income per share also includes the weighted average number of
outstanding warrants and options in the denominator. In the event
of a loss, the diluted loss per share is the same as basic loss per
share. Because of the net loss, the weighted average number of
diluted shares of common stock outstanding for the three and nine
months ended September 30, 2017 did not include 60,620 shares of
common stock issuable upon the exercise of outstanding common stock
purchase warrants, and 893,361 shares of common stock issuable upon
the exercise of outstanding options to purchase common stock due to
its anti-dilutive effect. The following table represents the
computation of basic and diluted income and (losses) per share for
the three and nine months ended September 30, 2017 and
2016.
|
|
|
|
|
|
|
|
|
|
|
Income
/ (Losses) available for common shareholders
|
$(511,384)
|
$(360,718)
|
$(1,395,833)
|
$1,532,472
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
10,537,805
|
10,446,954
|
10,488,135
|
10,413,703
|
|
Basic
income / (loss) per share
|
$(0.05)
|
$(0.03)
|
$(0.13)
|
$0.15
|
|
|
|
|
|
|
|
Diluted
weighted average common shares outstanding
|
10,537,805
|
10,446,954
|
10,488,135
|
11,515,169
|
|
Diluted
income / (loss) per share
|
$(0.05)
|
$(0.03)
|
$(0.13)
|
$0.13
|
NOTE 8 - EQUITY
Common Stock
The
Company is authorized to issue 150.0 million shares of common
stock, $0.01 par value, of which 10,623,533 common shares were
issued and outstanding as of September 30, 2017. During the period
ended September 30, 2017, the Company issued 182,064 shares of
common stock with a fair value of $82,001 to employees and
directors for services rendered. The shares were valued at the
respective date of issuance.
The
Company is authorized to issue 10,000,000 shares of Series A
Convertible Preferred Stock, $0.01 par value, 1,000 shares of its
10% Cumulative Perpetual Series B Preferred Stock, $0.01 par value,
and 500 shares of its Series C Convertible Preferred Stock, par
value $0.01, none of which were issued and outstanding as of
September 30, 2017.
Options
As of September 30, 2017, options to purchase 877,725 shares of common stock
of the Company were issued and outstanding, additional information
about which is included in the following table.
|
|
|
|
|
|
|
50,000
|
$0.90
|
01/16/13
|
01/16/18
|
No
|
|
10,000
|
$1.00
|
03/04/13
|
03/04/18
|
No
|
|
217,614
|
$1.39
|
05/09/16
|
05/09/21
|
Yes
|
|
4,330
|
$1.44
|
09/29/15
|
09/29/25
|
No
|
|
40,000
|
$2.20
|
04/11/14
|
04/11/19
|
No
|
|
370,000
|
$2.30
|
02/23/15
|
02/23/20
|
No
|
|
93,503
|
$3.31
|
02/16/12
|
02/16/22
|
No
|
|
19,424
|
$4.62
|
05/13/15
|
05/13/25
|
Yes
|
|
4,330
|
$5.49
|
04/08/15
|
04/08/25
|
No
|
|
1,732
|
$5.81
|
03/05/15
|
03/05/25
|
No
|
|
33,774
|
$5.89
|
03/23/15
|
03/23/25
|
Yes
|
|
8,660
|
$12.13
|
09/17/13
|
09/17/23
|
Yes
|
|
7,038
|
$12.99
|
11/14/12
|
09/27/22
|
No
|
|
17,320
|
$14.43
|
01/16/13
|
11/30/22
|
No
|
|
877,725
|
|
|
|
|
During
the nine-month period ended September 30, 2017 and 2016, the
Company recognized compensation expense of $33,474 and $45,028,
respectively, to account the fair value of stock options that
vested during the period.
There
was no intrinsic value for all the outstanding options at September
30, 2017 since the exercise price of these options were greater
than the September 30, 2017 closing stock price of $0.35 per
share.
Warrants
As
of September 30, 2017, warrants to purchase 60,620 shares of common
stock of the Company were issued and outstanding, additional
information about which is included in the following
table:
|
|
|
|
|
|
|
17,320
|
$12.99
|
10/01/13
|
01/01/18
|
No
|
|
43,300
|
$12.99
|
07/16/13
|
07/16/18
|
No
|
|
60,620
|
|
|
|
|
There
was no intrinsic value for all the outstanding warrants at
September 30, 2017 since the exercise price of these warrants was
greater than the September 30, 2017 closing stock price of $0.35
per share.
NOTE 9 – INCOME TAXES
No federal tax
provision has been provided for the period ended September 30, 2017
due to the loss incurred during such periods. There was no
income tax provision provided for the period ended September 30,
2016 based on the Company’s net income for the period and
projected annual effective tax rate.
NOTE 10 – COMMITMENTS AND
CONTINGENCIES
On
December 31, 2014, various plaintiffs, individually and on behalf
of a purported nationwide and sub-class of purchasers, filed a
lawsuit in the U.S. District Court for the Northern District of
California, captioned Ryan et al. v. Gencor Nutrients, Inc. et al.,
Case No.: 4:14-CV-05682. The lawsuit includes claims made against
the manufacturer and various producers and sellers of products
containing a nutritional supplement known as Testofen, which is
manufactured and sold by Gencor Nutrients, Inc.
(“Gencor”).
Specifically, the Ryan plaintiffs allege that various defendants
have manufactured, marketed and/or sold Testofen, or nutritional
supplements containing Testofen, and in doing so represented to the
public that Testofen had been clinically proven to increase free
testosterone levels. According to the plaintiffs, those claims are
false and/or not statistically proven. Plaintiffs seek relief under
violations of the Racketeering Influenced Corrupt Organizations
Act, breach of express and implied warranties, and violations of
unfair trade practices in violation of California, Pennsylvania,
and Arizona law. NDS utilizes Testofen in a limited number of
nutritional supplements it manufactures and sells pursuant to a
license agreement with Gencor.
On
February 19, 2015, this matter was transferred to the Central
District of California to the Honorable Manuel Real. Judge
Real had previously issued an order dismissing a previously filed
but similar lawsuit that had been filed by the same lawyer who
represents the plaintiffs in the Ryan matter. The United
States Court of Appeals recently 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 recently 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 General Nutrition Center (“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.
NOTE
11 – SUBSEQUENT
EVENTS
The
Company is currently 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 is due
and owing as of September 30, 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, totaling approximately $2.4 million.
The maturity date of the line of credit is currently December 15,
2017, and the Company currently does not anticipate that such line
of credit will be extended or renewed. Although no assurances can
be given, management is currently negotiating with alternative
lenders to replace the line of credit and term loan currently with
U.S. Bank. In the event the Company is unable to enter into a loan
agreement with an alternative lender prior to December 15, 2017,
the Company's financial condition will be negatively affected, and
such affect will be material.
ITEM 2.
MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Management’s
Discussion and Analysis contains various “forward looking
statements” within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, regarding future
events or the future financial performance of the Company that
involve risks and uncertainties. Certain statements included in
this Form 10-Q, including, without limitation, statements related
to anticipated cash flow sources and uses, and words including but
not limited to “anticipates”, “believes”,
“plans”, “expects”, “future”
and similar statements or expressions, identify forward looking
statements. Any forward-looking statements herein are subject to
certain risks and uncertainties in the Company’s business,
including but not limited to, reliance on key customers and
competition in its markets, market demand, product performance,
technological developments, maintenance of relationships with key
suppliers, difficulties of hiring or retaining key personnel and
any changes in current accounting rules, all of which may be beyond
the control of the Company. The Company adopted at
management’s discretion, the most conservative recognition of
revenue based on the most astringent guidelines of the SEC.
Management will elect additional changes to revenue recognition to
comply with the most conservative SEC recognition on a forward
going accrual basis as the model is replicated with other similar
markets. The Company’s actual results could differ materially
from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth
therein.
Forward-looking statements involve risks,
uncertainties and other factors, which may cause our actual
results, performance or achievements to be materially different
from those expressed or implied by such forward-looking statements.
Factors and risks that could affect our results and achievements
and cause them to materially differ from those contained in the
forward-looking statements include those identified in the section
titled “Risk
Factors” in the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2016, as well as other factors that we are currently
unable to identify or quantify, but that may exist in the
future.
In
addition, the foregoing factors may affect generally our business,
results of operations and financial position. Forward-looking
statements speak only as of the date the statement was made. We do
not undertake and specifically decline any obligation to update any
forward-looking statements.
Overview
FitLife Brands, Inc. (the
“Company”) is a national provider of innovative and
proprietary nutritional supplements for health-conscious consumers
marketed under the brand names NDS Nutrition 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.
FitLife Brands is headquartered in Omaha, Nebraska
and maintains an office in Golden, Colorado, which it acquired in
connection with the Merger. For more information on the Company,
please go to http://www.fitlifebrands.com.
The Company’s common stock currently trades under the symbol
FTLF on the OTC:PINK market.
Results of Operations
Comparison of Three and Nine Months Ended September 30, 2017 to the
Three and Nine Months Ended September 30, 2016
Net
Sales. Revenue for
the three months ended September 30, 2017 decreased 24.6% to
$4,025,580 as compared to $5,340,616 for the three months ended September 30,
2016. Revenue for the nine months ended September 30, 2017
decreased 32.3% to $14,637,273 as compared to $21,615,605 for the
nine months ended September 30, 2016. Revenue for the nine months
ended September 30, 2017 included 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
as well as certain other elements deemed non-recurring by
management.
Revenue
attributable to the Company’s NDS Nutrition division for the
three months ended September 30, 2017 was $3,215,372 as compared to
$4,206,557 for the three months ended September 30, 2016. Revenue
attributable to the Company’s NDS Nutrition division for the
nine months ended September 30, 2017 was $10,938,272, as compared
to $15,463,141 for the nine months ended September 30, 2016. The
decrease in total revenue attributable to NDS products in the three
month and nine months ended September 30, 2017 compared to the
comparable period last year is principally attributable to the
impact of convention revenue during the second quarter in 2016 and
the Company’s election not to attend the convention in 2017,
as well as efforts of the Company’s largest distribution
partner to reduce average existing inventory levels to fulfill
product demand in the short term, which resulted in an
unprecedented divergence of wholesale purchases compared to product
movement at retail.
Revenue
attributable to the Company’s iSatori operating division for
the three months ended September 30, 2017 was $810,208, as compared
to $1,134,058 for the three months ended September 30, 2016.
Revenue attributable to the Company’s iSatori operating
division for the nine months ended September 30, 2017 was
$3,699,001, as compared to $6,152,464 for the nine months ended
September 30, 2016. The decrease in total revenue attributable to
iSatori products in the three and nine months ended September 30,
2017 compared to the comparable periods last year is 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.
Cost of Goods
Sold. Cost of goods
sold for the three months ended September 30, 2017 decreased to
$2,550,760 as compared to $3,353,224 for the three months ended
September 30, 2016. The decrease during the three-month
period is principally attributable to lower sales in the period.
Cost of goods sold for the nine months ended September 30, 2017
decreased to $9,718,670 as compared to $12,469,081 for the nine
months ended September 30, 2016. The decrease during the
nine-month period is principally attributable to lower sales in the
period. Notwithstanding the decrease, cost of goods sold was
negatively impacted during the nine months ended September 30, 2017
by an unusually large amount of inventory write-offs
totaling approximately $376,000, of which $276,000 related to the
write off of all remaining inventory of product containing
picamilion.
General and Administrative
Expense. General and administrative expense for the
three months ended September 30, 2017 decreased to $1,030,215 as
compared to $ 1,131,692 for the
three months ended September 30, 2016. General and
administrative expense for the nine months ended September 30, 2017
decreased to $3,200,218 as compared to $ 3,854,128 for the nine months ended September 30,
2016. The decrease in general and administrative expense for
the three and nine months ended September 30, 2017 is s 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 three months ended September 30, 2017
decreased to $828,829 as compared to $ 1,088,400 for the three
months ended September 30, 2016. Selling and marketing
expense for the nine months ended September 30, 2017 decreased to
$2,689,587 as compared to $ 3,138,323 for the nine months ended
September 30, 2016. The decrease in selling and marketing
expense for the three and nine and month periods ended September
30, 2017 is principally the result of budgetary controls and
efficiencies gained through the acquisition of
iSatori.
Depreciation and
Amortization. Depreciation and amortization for the
three months ended September 30, 2017 decreased to $98,917 as
compared to $125,751 for the three months ended September 30,
2016. Depreciation and amortization for the nine months
ended September 30, 2017 decreased to $335,566 as compared
to $376,502 for the nine months ended September 30,
2016.
Net
Income/(Loss). We
generated a net loss of $(511,384) for the three-month period ended
September 30, 2017 as compared to a net loss of $(360,718) for the
three months ended September 30, 2016. The increase in net loss for
the three-month period ended September 30, 2017 compared to the
comparable period last year is principally attributable to lower
sales volumes due to a variety of factors discussed above. We
generated a net loss of $(1,395,833) for the nine-month period
ended September 30, 2017 as compared to a net income of $1,532,472
for the nine months ended September 30, 2016, which was principally
attributable to 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, lower sales volumes, increased
write-off activity and the decision to not participate in 2017
annual franchise convention.
Liquidity and Capital Resources
At September 30,
2017, we had positive working capital of approximately $2,205,687,
compared to positive working capital of approximately $3,482,120 at
December 31, 2016. Our principal sources of liquidity at September
30, 2017 consisted of $1,104,872 of cash and $3,380,984 from
accounts receivable. The decrease in working capital is principally
attributable to our net loss incurred during the quarter ending
September 30, 2017.
The Company has historically financed its
operations primarily through equity and debt financings, and more
recently, cash flow from operations. The Company has also provided
for its cash needs by issuing common stock, options and
warrants for certain operating costs, including consulting and
professional fees. Although the
anticipated cash derived from operations and existing cash
resources are expected to provide for the Company’s liquidity
for the next 12 months, our line of credit with U.S. Bank National
Bank Association ("U.S.
Bank") matures on December 15, 2017, at which time all
amounts owed U.S. Bank will be due and payable. The Company has
received a notice of default from U.S. Bank relating to its line of
credit. The Company is currently negotiating with alternative
lenders to replace U.S. Bank, and to satisfy our obligations to
U.S. Bank under the line of credit and our term note. In the event
the Company is unable to enter into a loan agreement with an
alternative lender prior to maturity of the current line of credit
with U.S. Bank, or in the event that all amounts due U.S. Bank,
totalling approximately $2.4 million, are accelerated as a result
of the event of default, the Company’s financial condition
will be negatively affected, and such affect will be
material.
Cash Provided by (Used in)
Operations. Our cash
provided by operating activities for the nine months ended
September 30, 2017 was $247,818, as compared to cash provided by
operating activities of $357,665 for the nine months ended
September 30, 2016. The decrease is principally attributable to a
decrease in revenue during the nine-month period, and variations in
certain working capital accounts consistent with normal business
practices and outcomes. Net working capital decreased to $2,205,687
as of the quarter ended September 30, 2017 compared to $4,758,923
as of September 30, 2016.
Cash Used in Investing
Activities. Cash
used in investing activities for the nine months ended
September 30, 2017 was $(20,305) as compared to $(19,592) used in
investing activities for the nine months ended September 30,
2016.
Cash Provided by (Used in)
Financing Activities. Our cash
used in financing activities for the nine months ended September
30, 2017 was $(415,681), as compared to cash provided by
financing activities of $115,739 during the nine months ended
September 30, 2016. The primary difference was that we drew down
$520,000 during the nine months ended September 30,
2016 from our existing line of credit with U.S. Bank and
made no draw downs on the line of credit during the nine months
ended September 30, 2017. The line of credit matured
on June 15, 2017; however, U.S. Bank agreed to extend the maturity
date of the line of credit until December 15, 2017. The line of
credit is secured by substantially all of the assets of the
Company. In connection with an amendment to the line of credit
dated August 28, 2017, the Company agreed to additional loan
covenants, one of which the Company was in violation of as of
September 30, 2017. Although no
assurances can be given, we currently intend to replace the line of
credit with U.S. Bank with an alternative lender, and therefore pay
U.S. Bank all amounts due U.S. Bank, totaling approximately $2.5
million at September 30, 2017, at maturity inclusive of both the
revolving line of credit and outstanding term loan (see Item
3).
Goodwill and Indefinite-Lived Intangible Assets
The
Company had goodwill and indefinite-lived intangible assets with a
carrying value of $6,212,193 and $6,507,505, respectively, as of
the quarter ended September 30, 2017 and December 31, 2016. In
accordance with ASC Topic 350 – Goodwill and Other Intangible
Assets, in lieu of amortizing such amounts the Company assesses the
carrying value of such intangible assets for impairment on a
periodic basis and records an impairment charge if the carrying
value of such intangible assets exceeds the estimated fair value of
the reporting unit, which in this case is the Company. The Company
performed its annual goodwill impairment test as of December 31,
2016, which did not indicate the existence of an impairment at that
time. While the fiscal year-to-date financial performance has
not met our expectations, and the enterprise value of the Company
based on current price of the stock the Company may fluctuate at or
near the recorded levels of goodwill and indefinite-lived
intangible assets, Management does not consider these results to be
a triggering event requiring the performance of an interim goodwill
impairment test. The Company will continue to monitor its operating
results for indicators of impairment and perform additional tests
as necessary. The Company's fiscal 2017 annual impairment test will
be performed as of December 31, 2017, which could result in an
impairment charge to goodwill depending on the Company’s
finalized forecast for fiscal 2018 and other market
conditions.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation
of these consolidated financial statements and related disclosures
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, expenses, and related
disclosure of contingent assets and liabilities. We evaluate, on an
on-going basis, our estimates and judgments, including those
related to the useful life of the assets. We base our estimates on
historical experience and assumptions that we believe to be
reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
The
methods, estimates and judgments we use in applying our most
critical accounting policies have a significant impact on the
results that we report in our consolidated financial statements.
The SEC considers an entity’s most critical accounting
policies to be those policies that are both most important to the
portrayal of a company’s financial condition and results of
operations and those that require management’s most
difficult, subjective or complex judgments, often as a result of
the need to make estimates about matters that are inherently
uncertain at the time of estimation. For a more detailed discussion
of the accounting policies of the Company, see Note 3 of the Notes
to the Condensed Consolidated Financial Statements, “Summary
of Significant Accounting Policies”.
We
believe the following critical accounting policies, among others,
require significant judgments and estimates used in the preparation
of our consolidated financial statements.
Use of Estimates
The preparation of financial
statements in conformity with 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 and
valuations of long term assets, deferred tax assets and equity
instruments issued for services during the reporting
period. Management evaluates these estimates and
assumptions on a regular basis. Actual results could
differ from those estimates.
Impairment
of Long-Lived Assets
The Company had goodwill and intangible
assets with a carrying value of $6,212,193 and $6,507,505,
respectively, as of September 30, 2017 and December 31, 2016. In
accordance with ASC Topic 350 – Goodwill and Other Intangible
Assets, the Company assesses the carrying value of such intangible
assets for impairment on a periodic basis and records an impairment
charge if the carrying value of such intangible assets exceeds the
estimated fair value of the reporting unit, which in this case is
the Company. The Company performed its annual goodwill impairment
test as of December 31, 2016, which did not indicate the existence
of an impairment at that time. While the fiscal year-to-date
financial performance have not met our expectations, and the
enterprise value of the Company based on the current price of our
common stock may fluctuate at or near the recorded levels of
goodwill and indefinite-lived intangible assets, Management does
notconsider these results to be a triggering event requiring the
performance of an interim goodwill impairment test. The Company
will continue to monitor its operating results for indicators of
impairment and perform additional tests as necessary. The Company's
fiscal 2017 annual impairment test will be performed as of December
31, 2017, which could result in an impairment charge to goodwill
depending on the Company’s finalized forecast for fiscal 2018
and other market conditions.
Share Based Payment
The Company issues stock options, warrants and common stock as
share-based compensation to employees and non-employees. The
Company accounts for its share-based compensation to employees in
accordance with FASB ASC718 "Compensation - Stock Compensation."
Stock-based compensation cost is measured at the grant date, based
on the estimated fair value of the award, and is recognized as
expense over the requisite service period.
The Company
accounts for share-based compensation issued to non-employees and
consultants in accordance with the provisions of FASB ASC 505-50
"Equity - Based Payment to Non-Employees." Measurement of
share-based payment transactions with non-employees is based on the
fair value of whichever is more reliably measurable: (a) the goods
or services received; or (b) the equity instruments issued. The
final fair value of the share-based payment transaction is
determined at the performance completion date. For interim periods,
the fair value is estimated and the percentage of completion is
applied to that estimate to determine the cumulative expense
recorded.
The Company
values stock compensation based on the market price on the
measurement date. For employees this is the date of grant, and for
non-employees, this is the date of performance completion. The
Company values stock options and warrants using the Black-Scholes
option pricing model.
Recent Accounting Polices
See
Footnote 3 in the accompanying financial statements for a
discussion of recent accounting policies.
WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Quarterly Report on
Form 10-Q in conjunction with other reports and documents that we
file from time to time with the SEC. In particular, please read our
Quarterly Reports on Form 10-Q, Annual Report on Form 10-K, and
Current Reports on Form 8-K that we file from time to time. You may
obtain copies of these reports directly from us or from the SEC at
the SEC’s Public Reference Room at 100 F. Street, N.E.
Washington, D.C. 20549, and you may obtain information about
obtaining access to the Reference Room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains information for
electronic filers at its website http://www.sec.gov.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Our
business is currently conducted principally in the United States.
As a result, our financial results are not affected by factors such
as changes in foreign currency exchange rates or economic
conditions in foreign markets. We do not engage in hedging
transactions to reduce our exposure to changes in currency exchange
rates, although as the geographical scope of our business broadens,
we may do so in the future.
Our
exposure to risk for changes in interest rates relates primarily to
our investments in short-term financial instruments. Investments in
both fixed rate and floating rate interest earning instruments
carry some interest rate risk. The fair value of fixed rate
securities may fall due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest
rates fall. Partly as a result of this, our future interest income
may fall short of expectations due to changes in interest rates or
we may suffer losses in principal if we are forced to sell
securities that have fallen in estimated fair value due to changes
in interest rates. However, as substantially all of our cash
equivalents consist of bank deposits and short-term money market
instruments, we do not expect any material change with respect to
our net income as a result of an interest rate change.
We
do not hold any derivative instruments and do not engage in any
hedging activities.
ITEM 4. CONTROLS AND
PROCEDURES
(a) Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange
Commission’s rules and forms and that such information is
accumulated and communicated to our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Our disclosure
controls and procedures were designed to provide reasonable
assurance that the controls and procedures would meet their
objectives. As required by SEC Rule 13a-15(b), our Chief Executive
Officer and Chief Financial Officer carried out an evaluation of
the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this
report. Based on the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance
level.
Our Chief Executive Officer and Chief Financial
Officer are responsible for establishing and maintaining adequate
internal control over our financial reporting. In order to evaluate
the effectiveness of internal control over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act, management has
conducted an assessment, including testing, using the criteria in
Internal Control — Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Our system of internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Management has
used the framework set forth in the report entitled Internal
Control-Integrated Framework published by the COSO to evaluate the
effectiveness of our internal control over financial reporting.
Based on this assessment, our Chief Executive Officer and Chief
Financial Officer have concluded that our internal control over
financial reporting was effective as of September 30, 2017. This
Quarterly Report does not include an attestation report of our
independent registered public accounting firm regarding internal
control over financial reporting. Our internal control over
financial reporting was not subject to attestation by our
independent registered public accounting firm pursuant to temporary
rules of the SEC that permit us to provide only management’s
report in this Quarterly Report. There has been no change in our
internal controls over financial reporting during our most recent
fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.
(b) Changes
in Internal Controls Over Financial Reporting
There
have been no changes in our internal controls over financial
reporting or in other factors that could materially affect, or are
reasonably likely to affect, our internal controls over financial
reporting during the quarter ended September 30, 2017. There have
not been any significant changes in the Company's critical
accounting policies identified since the Company filed its Annual
Report on Form 10-K as of December 31, 2016.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On
December 31, 2014, various plaintiffs, individually and on behalf
of a purported nationwide and sub-class of purchasers, filed a
lawsuit in the U.S. District Court for the Northern District of
California, captioned Ryan et al. v. Gencor Nutrients, Inc. et al.,
Case No.: 4:14-CV-05682. The lawsuit includes claims made against
the manufacturer and various producers and sellers of products
containing a nutritional supplement known as Testofen, which is
manufactured and sold by Gencor Nutrients, Inc.
(“Gencor”).
Specifically, the Ryan plaintiffs allege that various defendants
have manufactured, marketed and/or sold Testofen, or nutritional
supplements containing Testofen, and in doing so represented to the
public that Testofen had been clinically proven to increase free
testosterone levels. According to the plaintiffs, those claims are
false and/or not statistically proven. Plaintiffs seek relief under
violations of the Racketeering Influenced Corrupt Organizations
Act, breach of express and implied warranties, and violations of
unfair trade practices in violation of California, Pennsylvania,
and Arizona law. NDS utilizes Testofen in a limited number of
nutritional supplements it manufactures and sells pursuant to a
license agreement with Gencor.
On
February 19, 2015 this matter was transferred to the Central
District of California to the Honorable Manuel Real. Judge
Real had previously issued an order dismissing a previously filed
but similar lawsuit that had been filed by the same lawyer who
represents the plaintiffs in the Ryan matter. The United
States Court of Appeals recently 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 recently 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 General Nutrition Center (“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.
Our
results of operations and financial condition are subject to
numerous risks and uncertainties described in our Annual Report on
Form 10-K for our fiscal year ended December 31, 2016, filed on
April 17, 2017. You should carefully consider these risk factors in
conjunction with the other information contained in this Quarterly
Report. Should any of these risks materialize, our business,
financial condition and future prospects could be negatively
impacted. As of September 30, 2017, there have been the following
changes to the disclosures made in the above-referenced Form
10-K.
We have received a notice of default from U.S. Bank relating to our
line of credit with U.S. Bank. Although U.S. Bank has elected
not to exercise its rights and remedies relating to the default, in
the event U.S. Bank declares all amounts due U.S. Bank caused by
the default immediately due and payable prior to maturity, or
approximately $2.4 million, or we are otherwise unable to replace
the line of credit with an alternative lender, our financial
condition will be materially and negatively affected.
The
Company is currently 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. Approximately $2.4 million is due and
owing U.S. Bank as of September 30, 2017 under the revolving line
of credit and a term note issued to U.S. Bank. The maturity date of
the line of credit is currently December 15, 2017, and the Company
currently does not anticipate that such line of credit will be
extended or renewed. On October 27, 2017, the Company received a
notice of default from U.S. Bank related to the line of credit and
term loan. As such, if the Company is unable to enter into a
loan agreement with an alternative lender prior to December 15,
2017, or in the event that all amounts due U.S. Bank are
accelerated, the Company’s financial condition will be
negatively affected, and such affect will be material.
ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
On
October 27, 2017, the Company received a notice of default
(the “Notice”) from U.S. Bank related
to certain promissory notes in the aggregate principal amount of
approximately $2.4 million (as amended,
the “Notes” and
together with all other instruments and agreements executed by the
Company and US Bank, the “Loan Documents”). The
Notice was precipitated by the Company’s failure to comply
with certain loan covenants set forth in the Loan Documents related
to the maintenance of minimum EBITDA for the one month period ended
August 31, 2017 and the two-month period ending September 30,
2017.
As a
result of the default, U.S. Bank has elected not to exercise its
available rights and remedies under the Loan Documents at this
time, which includes declaring all principal, interest and other
sums owed U.S. Bank under the terms of the Notes immediately due
and payable in full, but reserves the right to do so in the
future.
The
Company is currently in active discussions with potential new
lending partners to satisfy all obligations due under the terms of
the Notes to U.S. Bank, however, no assurances can be given that
the Company will be successful in its efforts to replace U.S. Bank
with a new lending partner.
ITEM 5. OTHER
INFORMATION
There
is no information with respect to which information is not
otherwise called for by this form.
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Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act.
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Certification
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act.
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Certification
of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act.
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Certification
of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act.
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101.INS
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Instance Document
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XBRL
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XBRL
Taxonomy Extension Calculation Linkbase
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Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
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Registrant
Date: November 14, 2017
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FitLife Brands, Inc.
By: /s/ John Wilson
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John Wilson
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Chief Executive Officer and Director
(Principal Executive Officer)
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Registrant
Date: November 14, 2017
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FitLife Brands, Inc.
By: /s/ Michael Abrams
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Michael Abrams
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Chief Financial Officer and Director
(Principal Financial Officer)
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