UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  September 30, 2014

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 1-11900

ISATORI, INC.
(Exact name of registrant as specified in its charter)
Delaware		75-2422983
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
15000 W 6th Avenue, Suite 202 Golden, Colorado		80401
(Address of principal executive offices)		(Zip Code)
(303) 215-9174
(Registrant’s telephone number, including area code)
Not Applicable
(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 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 T  No o

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 (§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 T  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company filer (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No T

T12,904,590 shares of common stock, $0.01 par value per share, were outstanding as of November 4, 2014.

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ISATORI, INC.

INDEX

	Page
PART I - FINANCIAL INFORMATION
Item 1 – Financial Statements	4
Condensed Balance Sheets (unaudited): September 30, 2014 and December 31, 2013	5
Condensed Statements of Operations (unaudited): For the three and nine months ended September 30, 2014 and 2013	6
Condensed Statements of Cash Flows (unaudited): For the nine months ended September 30, 2014 and 2013	7
Notes to Condensed Financial Statements	8
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	21
Item 4 – Controls and Procedures	21
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings	22
Item 1A – Risk Factors	22
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3 – Defaults Upon Senior Securities	22
Item 4 – Mine Safety Disclosures	22
Item 5 – Other Information	22
Item 6 – Exhibits	23
Signature Page	24

The terms “iSatori,” “Company,” “we,” “our,” and “us” refer to iSatori, Inc. unless the context suggests otherwise.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. The use of any statements containing the words “anticipate,” “intend,” “believe,” “estimate,” “project,” “expect,” “plan,” “should” or similar expressions are intended to identify such statements. Forward-looking statements included in this report relate to, among other things, expected future production, expenses and cash flows in 2014 and beyond, the nature, timing and results of capital expenditure projects, amounts of future capital expenditures, our plans with respect to potential future acquisitions and our future debt levels and liquidity. Although we believe that the expectations reflected in such forward-looking statements are reasonable, those expectations may prove to be incorrect. Disclosure of important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are included under the heading “Risk Factors” in this report. All forward-looking statements speak only as of the date made. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Except as required by law, we undertake no obligation to update any forward-looking statement. Factors that could cause actual results to differ materially from our expectations include, among others, those factors referenced in the “Risk Factors” section of this report and such things as:

·

increased competition in our industry, resulting in reductions in prices that would adversely affect our revenue, income, cash flow from operations and liquidity;

·

unfavorable publicity or consumer perception of our products, including actual or threatened litigation, the ingredients they contain and any similar products distributed by other companies;

·

failure to comply with FDA, FTC, and other relevant regulations and existing consent decrees imposed on us which could result in substantial monetary penalties;

·

the incurrence of  material product liability claims, which could increase our costs and adversely affect our reputation, revenues, and operating income;

·

product recalls, which could reduce our sales and margin and adversely affect our results of operations;

·

increases in the price or shortage of supply of key raw materials used to manufacture our products;

·

the availability or the inability of management to effectively implement our strategies and business plans;

·

the occurrence of natural disasters, unforeseen weather conditions, or other events or circumstances that could impact our operations or the operations of companies or contractors we depend upon in our operations; and

·

changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate.

You should not place undue reliance on any forward-looking statement, each of which applies only as of the date of this report. Except as required by law, we undertake no obligation to update or revise publicly any of the forward-looking statements after the date of this report to conform our statements to actual results or changed expectations.

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PART 1

ITEM 1.    FINANCIAL STATEMENTS

Condensed Financial Statements and Related Footnotes

September 30, 2014 and 2013

iSatori, Inc.

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iSatori, Inc

Condensed Balance Sheets

(Unaudited)

	September 30,			December 31,
	2014			2013
ASSETS
Current assets:
Cash and cash equivalents	$	1,153,865		$	822,876
Accounts receivable
Trade, net of allowance for doubtful accounts		1,893,580			2,398,178
Inventories		2,646,307			1,985,764
Income tax receivable		-			102,452
Note receivables - current portion		3,814			11,013
Assets held for sale		42,311			108,228
Deferred tax asset, net		9,156			53,081
Prepaid expenses		245,265			222,466
Total current assets		5,994,298			5,704,058
Property and equipment, net of accumulated depreciation		147,781			173,636
Note receivable – net of current portion		81,714			81,714
Other assets:
Deferred tax asset, net		170,912			147,941
Deposits and other assets		43,120			61,167
Total other assets		214,032			209,108
Total assets	$	6,437,825		$	6,168,516
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable	$	1,288,277		$	1,248,490
Accrued expenses		237,608			187,608
Deferred revenues		210,002			292,215
Line of credit		1,620,519			1,220,655
Notes payable		16,925			20,464
Total current liabilities		3,373,331			2,969,432
Long-term liabilities:
Derivative liability		226,445			471,015
Commitments and contingencies (Notes 1, 2, 5 and 6)
Stockholders' Equity:
Convertible preferred stock, $0.01 par value, 750,000 shares authorized; 22,500 shares issued and outstanding ($450,000 of liquidation value)		225			225
Common stock, $0.01 par value, 56,250,000 shares authorized; 12,896,852 shares issued and outstanding		128,969			128,797
Additional paid-in capital		4,778,079			4,731,535
Accumulated deficit		(2,069,224)			(2,132,488)
Total stockholders’ equity		2,838,049			2,728,069
Total liabilities and stockholders' equity	$	6,437,825		$	6,168,516

The accompanying notes are an integral part of these condensed financial statements

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iSatori, Inc.

Condensed Statements of Operations

(Unaudited)

	Quarter Ended						Nine Month Period Ended
	September 30,			September 30,			September 30,			September 30,
	2014			2013			2014			2013
Revenues:
Product revenue (Net of returns and discounts)	$	2,042,642		$	2,724,711		$	8,139,382		$	7,169,142
Royalty revenue		22,778			25,237			85,905			91,761
Other revenue		10,366			9,391			30,133			34,732
Total revenue		2,075,786			2,759,339			8,255,420			7,295,635
Cost of sales		1,157,590			1,136,350			3,707,632			3,138,916
Gross profit		918,196			1,622,989			4,547,788			4,156,719
Operating Expenses:
Selling and marketing		606,464			1,244,907			1,866,566			1,856,106
Salaries and labor related expenses		629,661			577,302			1,878,042			1,622,635
Administration		285,787			425,683			799,540			1,294,841
Depreciation and amortization		19,583			18,916			58,727			71,271
Total operating expenses		1,541,495			2,266,808			4,602,875			4,844,853
Income (loss) from operations		(623,299)			(643,819)			(55,087)			(688,134)
Other income (expense)		59,694			80,724			294,536			(121,153)
Financing expense		(14,671)			(7,889)			(45,498)			(63,223)
Interest expense		(12,653)			(10,615)			(33,338)			(23,200)
Income (loss) before income taxes		(590,929)			(581,599)			160,613			(895,710)
Income tax benefit (expense)		(18,144)			(73,608)			(97,349)			110,606
Net income (loss)	$	(609,073)		$	(655,207)		$	63,264		$	(785,104)
Net income (loss) per common share
Basic	$	(0.05)		$	(0.05)		$	-		$	(0.06)
Diluted	$	(0.05)		$	(0.05)		$	-		$	(0.06)
Weighted average shares outstanding:
Basic		12,892,515			12,878,216			12,886,216			12,730,371
Diluted		12,892,515			12,878,216			13,703,364			12,730,371

The accompanying notes are an integral part of these condensed financial statements

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iSatori, Inc.

Condensed Statements of Cash Flow

(Unaudited)

	For the Nine Month Period Ended
	September 30,			September 30,
	2014			2013
Cash flows from operating activities:
Net income (loss)	$	63,264		$	(785,104)
Adjustments to reconcile net income/(loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		58,727			70,203
Amortization of debt issuance costs		-			4,375
Share based compensation expense		43,837			303,797
Change in value of assets held for sale		(21,926)			(109,791)
Change in fair value of derivative liability		(244,570)			71,398
Provision for (benefit from) deferred income taxes		77,958			(128,536)
Change in assets and liabilities:
Accounts receivable		504,598			(718,019)
Income tax receivable		45,448			-
Notes receivable		7,199			(1,066)
Inventory		(660,543)			(332,813)
Prepaid expenses		(19,920)			(581,336)
Deposits and other assets		8,280			(16,386)
Trade accounts payable		39,787			591,743
Accrued expenses		50,000			(95,375)
Deferred revenues		(82,213)			266,032
Net cash provided by (used in) operating activities		(130,074)			(1,460,878)
Cash flows from investing activities:
Purchase of property and equipment		(23,105)			(119,194)
Proceeds from the sale of assets held for sale		87,843			26,919
Sale of investments		-			965,886
Net cash provided by investing activities		64,738			873,611
Cash flows from financing activities:
Proceeds from notes payable		-			25,101
Payment of notes payable		(3,539)			(3,482)
Proceeds from line of credit		411,000
Payment of line of credit		(11,136)			(50,000)
Proceeds  from the exercise of warrants		-			334
Net cash (used in) provided by financing activities		396,325			(28,047)
Net increase in cash		330,989			(615,314)
Cash and cash equivalents, beginning of year		822,876			1,655,453
Cash and cash equivalents, end of year	$	1,153,865		$	1,040,139
Supplemental Disclosure of Cash Flow Information
Cash paid for interest		40,590			37,049
Cash paid for taxes		8,730			6,863
Non-cash transactions:
Decrease in warrant derivative liability due to warrant exercise		-			87,755
Decrease in deferred tax asset due to warrant exercise		-			33,355
Cashless exercise of options		-			600
Cashless exercise of warrants		-			1,555

The accompanying notes are an integral part of these condensed financial statements

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Note 1 - Summary of Significant Accounting Policies

Organization and Nature of Business, and Basis of Presentation

iSatori, Inc. (the “Company”) was incorporated under the laws of the state of Delaware on June 29, 2012. The trading symbol of the Company on OTCQB is “IFIT”.

The Company is engaged in researching, designing, developing, contracting for the manufacture, marketing, selling and distributing of various branded nutritional and dietary supplement products for the general nutrition market. The “general nutrition market” may include such activities as body-building, weight-training, physique enhancement (e.g., increase of lean body mass and decrease in fat mass) and enhanced athletic performance through increased strength and/or endurance and proper nutrition.

The Company engages in funding clinical studies with the objective of discovering and/or validating claims of new, efficacious and safe products for the Company’s relevant market as well as providing necessary and appropriate substantiation for any claims which the Company may use in its marketing and advertising. The Company markets products which are under its control and which are in some way proprietary to the Company. Some of the Company’s products are the subject of patents, service marks and or trademarks owned by the Company.

Unaudited Interim Financial Information

The accompanying interim condensed financial statements have been prepared in accordance with our accounting practices described in our audited financial statements for the year ended December 31, 2013, and are unaudited. These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements and accompanying notes for the year ended December 31, 2013. The accompanying interim condensed financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission and, accordingly, do not include all the disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”) with respect to annual financial statements.  In the opinion of management, all adjustments, consisting of normal recurring accruals that are considered necessary for a fair presentation of the interim condensed financial information, have been included. However, operating results for the periods presented are not necessarily indicative of the results that may be expected for a full year.

Financial Instruments

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Accordingly, cash and cash equivalents consist of petty cash, checking accounts and money market funds.

Fair Value Measurements

ASC 820-10 establishes a framework for measuring the fair value of assets and liabilities and requires additional disclosure about fair value measurements.  ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal (or most advantageous market) for the asset or liability in an orderly transaction between market participants at the measurement date.

The Company has a number of financial instruments, including cash, cash equivalents, receivables, inventory, payables and debt obligations. The carrying amount of cash and cash equivalents, receivables, accounts payable, accrued expenses and notes payable approximates their fair value because of the short maturity of these instruments. As further described in Note 7, the Company has issued warrants which are measured at fair value on a recurring basis and result in a long-term derivative liability on the balance sheet.  The actual and estimated fair values, respectively, of the Company’s financial instruments are as follows:

	September 30, 2014						December 31, 2013
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and cash equivalents	$	1,153,865		$	1,153,865		$	822,876		$	822,876
Receivables	$	1,893,580		$	1,893,580		$	2,398,178		$	2,398,178
Accounts Payable	$	1,276,642		$	1,276,642		$	1,248,490		$	1,248,490
Derivative Liability	$	226,445		$	226,445		$	471,015		$	471,015

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Trade Receivables and Credit Policy

Trade receivables are uncollateralized customer obligations due under normal trade terms requiring payment generally within 10-60 days from the invoice date. Accounts are considered delinquent when outstanding for more than 7 days past due date. The Company does not have a policy of accruing interest on past due accounts. Payments on trade receivables are applied as instructed per the customer, or to the earliest unpaid invoices. The allowance for doubtful accounts represents an estimate of amounts considered uncollectible and is determined based on management’s historical collection experience, adverse situations that may affect the customer’s ability to repay, and prevailing economic conditions.  Specific accounts deemed uncollectible are written off periodically with subsequent receipts on previously written off accounts credited to bad debt expense.  The allowance for doubtful accounts is $0 for each of the periods ended September 30, 2014 and December 31, 2013. Receivables at each of the below respective periods consisted of the following:

	September 30, 2014			December 31, 2013
Trade Receivables	$	1,834,174		$	2,323,522
Other	$	59,406		$	74,656
Allowance for doubtful accounts	$	(0)		$	(0)
Totals	$	1,893,580		$	2,398,178

In addition, the Company has recorded an allowance for customer returns in the amount of approximately $85,000 and $70,000 at September 30, 2014 and December 31, 2013, respectively, in accrued expenses.

Inventory Valuation

Inventories of nutritional and dietary supplements are stated at lower of cost or market on a first-in, first-out (FIFO) basis as noted below:

	September 30, 2014			December 31, 2013
Labels and packaging	$	170,189		$	120,057
Raw materials	$	284,560		$	207,320
Finished goods	$	2,191,558		$	1,658,387
Totals	$	2,646,307		$	1,985,764

Note Receivable

The predecessor company disposed of a dormant product line of vitamins in December 2010. As part of the consideration in this divestiture, the Company received from the purchaser of this product line an unsecured note in the amount of $170,000. The original note was due to be repaid on or before March 2014, where interest accrued principally at an annual rate of 5%, based upon the initial $170,000 principal and was payable monthly. As of March 31, 2013, the note was novated and a new promissory note was issued to reflect a modification in the payment terms, which includes no interest. The total note receivable balance at September 30, 2014 was $85,528, and is due to be repaid in monthly increments through May 1, 2017.

Revenue Recognition

The Company operates predominantly as a distributor of its dietary supplement products through traditional large retailers, wholesale distributors, and electronic intermediaries. Revenue from product sales is recognized upon transfer of title of the Company’s product to its customers. Net sales represent product sales less actual returns, trade allowances, discounts, and product promotions. Sales to direct customers have an unconditional money back guarantee for thirty to ninety days after the date of purchase. Sales to a select number of the retail customers carry a “Sale or Return” Purchase agreement per contract, where if minimum sales thresholds are not met within required timeframe, the inventory will be returned to the Company for full credit.  Other retail customers receive a percentage discount from invoice to cover any customer returns or damages they may incur. Returns, trade allowances, discounts, and product promotions were $840,670 and $484,296 for the three month period ended September 30, 2014 and 2013, respectively. Returns, trade allowances, discounts, and product promotions were $2,200,761 and $1,492,824 for the nine month period ended September 30, 2014 and 2013, respectively.

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In addition, the Company provides allowances for sales returns based upon estimated and known returns.  Product returns are recorded as a reduction of net revenues and as a reduction of the accounts receivable balance.

The Company receives other revenues which include but are not limited to shipping and handling charges billed to customers.

The Company has recorded $210,002 as of September 30, 2014 in deferred revenue as a liability pertaining to inventory sold under consignment terms, even though it has already been paid for by the customer.

Cost of Sales

The Company purchases its products directly from third party manufacturers. The Company’s cost of sales include product costs, including any associated materials used in production, cost of warehousing and distribution. Included in the cost of sales are transit freight and shipping and handling costs that are incurred by the Company.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under this asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. See Note 4, “Income Taxes”.

Since 2012 was the Company’s initial tax year, there are no prior federal or state tax returns subject to examination.  Accordingly, the only taxable periods subject to examination by federal and state taxing authorities are the periods ended December 31, 2013 and 2012. Federal and state tax returns for the Company prior to the short form merger are open for the period ended December 31, 2011.

Leases

The Company leases its headquarters facility, comprising approximately 10,044 square feet, in Golden (metropolitan Denver), Colorado. The total rent expense for each of the three month periods ended September 30, 2014 and 2013, was $20,716. The total rent expense for each of the nine month periods ended September 30, 2014 and 2013, was $62,147. The lease term expires January 31, 2017 and requires equal monthly payments over the remaining term. Future payments under the lease total $193,347. The Company also leases miscellaneous office and warehouse equipment. In most cases, management expects that in the normal course of business these leases will be renewed or replaced by other leases as applicable.

Marketing

The Company expenses all production costs related to advertising costs as they are incurred, including print, digital, and television when the advertisement has been broadcast or otherwise finished and or distributed.  The Company records website costs related to its direct-to-consumer advertisements in accordance with FASB ASC 340-20 “Capitalized Advertising Costs”.  In accordance with FASB ASC 340-20, direct response advertising costs incurred should be reported as assets and should be amortized over the estimated period of the benefits, based on the proportion of current period revenue from the advertisements to probable future revenue. As of September 30, 2014 and December 31, 2013, the Company had deferred $0 and $7,651 respectively, related to such advertising costs. This amount was included in Deposits and other assets and amortized over a one year period, the estimated time frame to which the existing commercial was used. For the three month period ended September 30, 2014 and 2013, marketing expenses totaled $310,580 and $1,005,858, respectively. For the nine month period ended September 30, 2014 and 2013, marketing expenses totaled $1,252,698 and $1,330,788, respectively.

Research and Development Costs

Research and development costs, which includes the funding of clinical research studies, as well as creation and development of new products, are expensed when incurred. Research and development costs of $57,002 and $68,071 for the three month period ended September 30, 2014 and 2013, respectively, are included in selling and marketing expense. Research and development costs of $67,907 and $155,836 for the nine month period ended September 30, 2014 and 2013, respectively, are included in selling and marketing expense.

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Distribution, Shipping and Handling Costs

Shipping costs on purchases and shipping and handling fees related to sales charged to customers are both included in cost of sales. As mentioned in Revenue Recognition, shipping and handling revenue billed customers are reflected in other revenues.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of trade accounts receivables. Concentrations of credit with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer bases and their dispersion across different geographic locations.

The Company maintains cash balances at one financial institution located in Colorado and one in California. Accounts at these institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account. At times during the year, the Company’s bank balances have exceeded the FDIC limit. Management believes the risk of loss at such institutions to be minimal.

During the nine month period ended September 30, 2014, sales to three customers made up 60% of total product revenue, with each customer representing greater than 10% of product revenue on an individual basis.  These customers’ combined accounts receivable balances were 56% of total accounts receivable at September 30, 2014. During the nine month period ended September 30, 2013, sales to three customers made up 56% of total product revenue, with each customer representing greater than 10% of product revenue on an individual basis.  These customers’ combined accounts receivable balances were 65% of total accounts receivable as of September 30, 2013. During the nine month period ended September 30, 2014, purchases from four vendors made up 70% of total inventory purchases.  These vendors’ combined accounts payable balances were 58% of total accounts payable as of September 30, 2014. During the nine month period ended September 30, 2013, purchases from two vendors made up 73% of total inventory purchases.  These vendors’ combined accounts payable balances were 43% of total accounts payable as of September 30, 2013.

Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include but are not limited to the fair value determination of derivative instruments, the valuation allowance with respect to estimated utilization of net operating losses, estimated allowances for sales returns and collectability of trade receivables.

Earnings (Loss) Per Share

Net earnings (loss) per share is computed by dividing net income (loss) less preferred dividends for the period by the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) less preferred dividends for the period by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.

Since the Company reflected a net loss for the three month period ended September 30, 2014 and the three and nine month periods ended September 30, 2013, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive.

The Company has the following common stock equivalents as of September 30, 2014 and 2013:

		Three Months Ended September 30,				Nine Months Ended September 30,
		2014		2013		2014		2013
Basic weighted average common shares outstanding		12,892,515		12,878,216		12,886,216		12,730,371
Stock options (exercise price – $0.573-$2.50/share)		334,647		430,132		398,922		460,587
Warrants (exercise price – $0.001-$2.25/share)		417,418		426,744		418,226		432,280
Total common stock equivalents		13,644,580		13,735,092		13,703,364		13,623,238

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Note 2 - Contingencies

In accordance with the standards on contingencies, the Company accrues a loss contingency if it is probable and can reasonably be estimated or a liability has been incurred at the date of the financial statements. If both of these conditions are not met, or if an exposure to loss exists in excess of the amount accrued, disclosure of the contingency shall be made when there is at least a reasonable possibility that a loss or an additional loss may have been incurred. The Company is exposed to legal claims encountered in the normal course of business. See Note 3, “Litigation”. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the operating results or the financial position of the Company.

Note 3 - Litigation

The Company is engaged in various legal actions, claims and proceedings arising in the normal course of business, including claims related to breach of contracts, product liabilities and intellectual property matters resulting from the Company’s business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. The following summaries highlight the current status of certain material commercial litigation in which the Company is involved.

On May 17, 2013 and on January 31, 2014 the Company received demand letters from the Environmental Research Corporation, “ERC” requesting substantiation of compliance with the State of California’s Proposition 65 regulations for ten of its products.  In October, while the Company was awaiting the results of the compliance testing, ERC contacted the Company again requesting settlement to their initial demand letter. And in February 2014, before compliance testing or any other demand letter validation was completed, ERC contacted the Company again requesting settlement to their second demand letter. After many discussions with ERC, a lawsuit was filed by ERC for the non-compliance issues with the State of California’ Proposition 65 regulations.  Along with the company’s California counsel the company has begun the process of discovery from both sides.  The Company continues to remain in communication with ERC and their counsel with the intent to settle the mutual disputes. The Company believes that there is a reasonable possibility, as defined by FASB ASC 450-20, of an unfavorable outcome. However, the range of any possible loss cannot be reasonably estimated as of the date of the financial statements.

On March 24, 2014 the Company received a summons in a civil action filed by Wise Sports Nutrition, LLC claiming alleged trademark infringement for iSatori’s Garcinia Trim product. Company counsel has made contact with the plaintiff’s attorney and filed a response to the alleged trademark infringement with the Company’s counterclaims. The Company believes the counterclaims have strong merit and are pursuing their defense. Both parties have prepared responses and presented them to the court.  The case has currently been stayed pending a ruling on the motion made by the Company to stay the case.  The Company believes that it is too early in the proceedings to make a determination of either a favorable or unfavorable outcome. Therefore, no range of any possible gain or loss can be reasonably estimated as of the date of the financial statements.

Note 4 - Income Taxes

For the three months ended September 30, 2014 and 2013, the Company recognized income tax expense of $18,144, and expense of $73,608, respectively.

For the nine months ended September 30, 2014, the Company recognized income tax expense of $97,349, and for the nine months ended September 30, 2013, the Company recognized an income tax benefit of $110,606.

The difference between the nine months ended September 30, 2014 effective rate of 48.64% and the Federal statutory rate of 35.0% is primarily due to state and foreign income taxes (net of federal benefit), change in the valuation allowance, and an adjustment to the income tax receivable.

At September 30, 2014 management believes there are no uncertain tax positions.

Note 5- Stockholders’ Equity

At September 30, 2014, there were 12,896,852 shares of common stock, par value $.01 per share, outstanding for the Company.

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The Company issued warrants, now totaling 420,549 shares, to purchase 3% of fully diluted shares of the common stock of the Company to Breakwater Structured Growth Opportunity Fund, L.P., with an imputed exercise price equal to approximately one-hundredth of a dollar in connection with a $1.025 million subordinated mezzanine loan arrangement. These warrants are fully vested and expire on June 15, 2016. The Company used a lattice model in developing a fair value for the Breakwater warrant obligation at September 30, 2014, using a quoted stock value of $.55 per share, which represents a discount of 50% from the closing stock price.  This reduction was based on the application of a discount for lack of liquidity. Other assumptions used in the above valuations include (a) risk-free interest rate of .58% based on duration, (b) weighted average expected term years of 1.79 (c) weighted average expected stock volatility of 37.46% (e) expected dividends of 0%, (f) stock price movements ranging from 1.05332062 to .94937855 and (g) risk neutral probabilities ranging from .48808915 to .51191085.

The warrant valuation resulted in income of $52,568 in the Statement of Operations for the three month period ended September 30, 2014, and income of $41,501 in the Statement of Operations for the three month period ended September 30, 2013. For the nine month period ended September 30, 2014, the valuation resulted in income of $244,570 in the Statement of Operations, and for the nine month period ended September 30, 2013 the valuation resulted in expense of $71,398 in the Statement of Operations.

On April 1, 2014, the Company issued 7,500 shares of its $.01 par value common stock to a business development consultant. The Company considered the fair value of the shares issued to be the most reliable measure of compensation to the consultant. At the time of the issuance, the Company’s stock price was $2.17 per share, and therefore the issuance resulted in $16,275 of share based compensation expense for the three and nine months ended September 30, 2014.

2012 Performance Incentive Plan

On September 27, 2012, the Company’s Board of Directors approved the 2012 Performance Incentive Plan (the Plan”). The Plan allows the Company to promote the success of the Corporation and to increase stockholder value by providing an additional means through the grant of awards to attract, motivate, retain and reward selected employees and other eligible persons. Any stock option granted in the form of an incentive stock option will be intended to comply with the requirements of Section 422 of the Code. Only stock options granted to employees qualify for incentive stock option treatment. A stock option may be exercised in whole or in installments, which may be cumulative. Shares of common stock purchased upon the exercise of a stock option must be paid for in full at the time of the exercise in cash or such other consideration determined by the compensation committee. Payment may include tendering shares of common stock or surrendering of a stock award, or a combination of methods.

The Plan is administered by the Plan Administrator, being the Board or one or more committees appointed by the Board or another committee (within its delegated authority) to administer all or certain aspects of this Plan. The Administrator has full and exclusive power within the limitations set forth in the Plan to make all decisions and determinations regarding the selection of participants and the granting of awards; establishing the terms and conditions relating to each award; adopting rules, regulations and guidelines; and interpreting the Plan.

On January 2, 2014, the Company issued options to purchase 10,000 shares of the Company’s common stock to an employee with an exercise price of $2.50 per share and which contain three year vesting schedules of 1/3 each year through October 2016. These options are due to expire on October 15, 2023.

On February 10, 2014, the Company issued options to purchase 6,000 shares of the Company’s common stock to an employee with an exercise price of $2.22 per share and which contain three year vesting schedules of 1/3 each year through February 2017. These options are due to expire on February 10, 2024.

The Company, in developing a fair value for the employee options used a current stock price of $1.11-1.25, which represents a discount of 50% from the quoted stock price for lack of marketability.  Other assumptions used in the above valuations include (a) risk-free interest rate of 2.13-2.41% based on duration, (b) weighted average expected terms ranging from 6.08 to 6.33 years; (c) weighted average expected stock volatility of 35.22 % and (e) expected dividends of 0%.

The Company has recorded share based compensation expense due to option issuances under the Plan totaling $5,352 for the three months ended September 30, 2014, and has recorded share based compensation expense due to option issuances under the Plan totaling $17,474 for the nine months ended September 30, 2014.

On July 10, 2014, the Company issued 5,603 shares of restricted stock to members of its board of directors. On September 23, 2014, the Company issued 4,098 shares of restricted stock to a new member of its board of directors.  The Company is amortizing total expense related to these issuances over the restriction period which is equivalent to the directors’ one-year term. The Company has recorded share based compensation expense due to these issuances of $1,961 for the three months ended September 30, 2014, and share based compensation expense due to these and prior issuances of $10,087 for the nine months ended September 30, 2014.

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Note 6- Revolving Line of Credit and Related Interest

The Company entered into a renewed and expanded Credit Agreement with Colorado Business Bank West of Denver, Colorado on August 27, 2014. Borrowings under this agreement are used to provide ongoing working capital and for other general corporate purposes of the Company.

The agreement provides a revolving commitment to the Company of $2,000,000. Amounts outstanding under the agreement are reflected in a promissory note with a principal balance of $2,000,000 and maturity date of November 16, 2015 (the “Promissory Note”).  The principal balance on the Promissory Note bears interest at the one month USD LIBOR rate measured not more often than once per month (the “Index”).  Interest on any unpaid balance under the promissory note will bear interest at the Index plus 3.75% with a minimum interest rate of 4.00% per annum, and is payable monthly. The agreement requires the Company to comply with certain affirmative covenants, including a minimum current ratio of 1.5 to 1, a maximum leverage ratio of 2 to 1, and minimum tangible equity capital of $2,750,000 through November 30, 2014, and $3,000,000 thereafter, as well as providing limitations on dividends, additional indebtedness, and certain other changes. As of September 30, 2014, the Company was in compliance with these covenants.

The Company’s prior line of credit with Colorado Business Bank West of Denver, Colorado provided a revolving commitment to the Company in the amount of $1,500,000 and was in effect since its inception on July 16, 2012 and subsequent renewal on October 16, 2013 through the date of the renewal and expansion on August 27, 2014. Other terms of the former credit agreement were the same as those of the renewed and expanded agreement described above.

The outstanding balance on the Company’s revolving line of credit as of September 30, 2014 and December 31, 2013 was $1,620,519 and $1,220,655, respectively.

Note 7 - Fair Value Measurements and Disclosures

The Company follows ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements.  The statement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

Level 1:  Quoted prices are available in active markets for identical assets or liabilities.

Level 2:  Quoted prices in active markets for similar assets and liabilities that are observable for the asset or liability; or

Level 3:  Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations.

ASC 820 requires financial assets and liabilities to be classified based on the lowest level of input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

For the purposes of marketable securities where there is an active market, the Company uses the quoted prices available for the identical asset or liability.  As of September 30, 2014, the Company had $42,311 in assets held for sale valued using the Level 1 mark-to-market approach. As of December 31, 2013, the Company had $108,228 in assets held for sale valued using the Level 1 mark-to-market approach.

For the purposes of the warrant derivative liability, the Company uses a lattice model and a combination of observable and unobservable inputs; therefore the fair value measurement of the liability is classified within Level 3 of the hierarchy.  The inputs used in the fair value measurements categorized within Level 3 include the stock price at the valuation date, the exercise price of the warrant, the expected period of time the warrant will be outstanding, the annual volatility of the underlying stock price, the annual yield rate of quarterly dividends, and the risk free rate of interest relevant to the expected time period the warrant will be outstanding.

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The following table represents the Company’s assets and liabilities that were accounted for at fair value on a recurring basis by level within the fair value hierarchy:

	September 30, 2014									December 31, 2013
	Level 1			Level 2			Level 3			Level 1			Level 2			Level 3
Balance	$	42,311		$	0		$	226,445		$	108,228		$	0		$	471,015
Beginning of Period		108,228			-			471,015			29,338			-			701,852
Deletions		(115,881)			-			-			(36,103)			-			(87,755)
Revisions		49,964			-			(244,570)			114,993			-			(143,082)
End of Period	$	42,311		$	0		$	226,445		$	108,228		$	0		$	471,015

Note 8 – Subsequent Events

Effective November 1, the Company executed a 50-month lease of a 17,426 square foot building in Denver, CO to accommodate the growth in inventory and support warehouse operations.  The warehouse operations will be moved prior to year end from its current location at the Golden, CO headquarters.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of the financial results and condition of iSatori, Inc. (collectively, “we,” “us,” “our,” “iSatori” or the “Company”) for the nine-month period ended September 30, 2014 should be read in conjunction with our 2013 Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth elsewhere in this report. See Cautionary Note Regarding Forward-Looking Statements.

Overview

iSatori is a consumer products firm who develops and sells proprietary nutritional products in the sports performance, weight loss and energy markets through on-line marketing, distributors and thousands of retail stores domestically and around the world. iSatori became a publically traded company on June 29, 2012.  iSatori is headquartered in Golden, Colorado and its stock symbol is “IFIT.”

iSatori distributes its products to thousands of retail stores, including outlets such as GNC, Vitamin Shoppe, Vitamin World, Walmart, Walgreens, and other Fortune 500 companies, augmented by internet sales through its various website properties. The Company’s core competencies include the development of new, innovative and proprietary products, supported by creative, yet effective sales and marketing programs, all designed to expand its distribution and revenues in the rapidly growing $35 billion nutritional products industry.

Led by industry veteran Stephen Adelé, who turned a $50,000 personal investment into a multi-million dollar Company, along with a highly experienced management team (most of whom came from their prior employer together, EAS, Inc), iSatori now employs 24 full-time, one part-time and seven contract employees. iSatori leverages a unique product development process to bring to market some of the industry's leading and most technologically advanced dietary supplement products. Many of the Company’s products are the subject of trademarks, trade dress, or patents, owned by the Company or licensed from its inventors and distributed throughout the world. Further separating itself from competitors, iSatori funds independent clinical studies to discover new, efficacious products for the Company’s markets and satisfy consumer’s need for increased performance, energy and or weight loss.

Recent Developments

New Products. Since June 30, 2014, iSatori added to its line an additional instantized flavored version of its break-through, category defining product Bio-Gro by introducing an Orange Creamsicle flavor launched through its top internet retailer, Bodybuilding.com, which first shipped in August.  Additionally, a trial-sized (e.g., 10-serving) Chocolate Ice Cream flavor was also added to the Bio-Gro line,to continue to increase consumer trial of the product. Under the BioGenetic Labs brand, the Company introduced its new diet support pill, Dyglo-Trim™ with patented Dyglomera® ingredient for which the Company has a limited exclusive supply agreement with the supplier and patent holder. The initial stocking order for Dyglo-Trim shipped to GNC at the end of the third quarter. DygloTrim's core ingredient, Dyglomera®, produces significant weight-loss results. In a randomized, double-blind, placebo-controlled trial—the "gold standard" of clinical research—318 participants demonstrated remarkable combined results in substantial body-weight reduction in just eight weeks, when they used the core ingredient, Dyglomera. At the end of the study, the Dyglomera group lost an average of 24.5 pounds and reduced body fat along with waist and hip circumference by over 10 times compared to the placebo group.

New Sales Force. In August, the Company added an additional two contractors (for a total of six) to continue to build up its outside sales force, in an effort to increase the “share of voice” of the Company’s brands within the competitive landscape that exists in the industry. These individuals, in strategic geographic territories, will assist in growing the number of retail store locations the Company’s products are available, and working to increase the velocity and sales volume for the products by increasing brand awareness through conducting training, sampling and promotional events in their territories. The Company expects to realize their full beneficial effect in fourth quarter and beyond into 2015.

Promotions. In September, iSatori drew their biggest crowds ever at the Joe Weider Olympia Fitness Expo in Las Vegas, Nevada, the largest and most well respected consumer trade show in the sports nutrition industry. Over 80,000 fitness enthusiasts interested in building muscle, strength, and fitness were in attendance, making this the top tradeshow for the fitness and nutrition industry. The Company attracted its largest crowds ever with product samples, providing weight-training information, and credible sources of education on nutrition and supplements, which included a variety of experts and YouTube personalities present at the booth throughout the weekend. This important event also hosted a number of key business meetings with the Company’s largest retail customers. In total, the Company generated over 1-million views (e.g., impressions) online, after the event, as a result of their popularity in attendance and social media promotions by consumers and athletes alike.

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Results of Operations

Comparison of the Three Months ended September 30, 2014 and 2013

Revenues

Gross product revenues, prior to returns, discounts and trade promotions, decreased $326 thousand or 10% to $2.883 million for the three months ended September 30, 2014 compared to $3.209 million for the same period in the prior year. Consolidated product revenues (net of returns, discounts and trade promotions) decreased $682 thousand or 25% to $2.043 million for the three months ended September 30, 2014 compared to $2.725 million for the same period in 2013.  The majority of the decrease in revenues is in the diet and weight loss category, which experienced a temporary lull in the third quarter, primarily due to the lack of consumer confidence in diet aids after a popular television doctor drew criticism by congress for his unabated support of these types of supplements. This decrease in revenues was partly offset by the exponential growth in Bio-Gro revenues, which increased over 305% from the same period in 2013. Adjustments from revenues (for retailer advertising discounts, returns, promotional credits and coupons) increased $357 thousand or 74% to $841 thousand for the three months ended September 30, 2014 compared to $484 thousand for the same period in 2013.  Of this variance, this increase is primarily driven by one-time $298 thousand in product returns to be received due to a shift in a retail partner’s focus in that product category, along with an increase in promotions mainly tied to the Bio-Gro new flavors product launch.

Cost of Sales

Cost of sales, which includes product contract manufacturing costs, costs of warehousing and distribution, and freight costs increased $22 thousand or 2% to $ 1.158 million for the three month period ended September 30, 2014 compared to $1.136 million for the same period in 2013. Cost of sales as a percentage of gross product revenue increased to 40%, for the three month period ended September 30, 2014 compared to 35% for the same period in 2013. This increase can be attributed to the shift in the product mix sold, which includes several items sold in promotional type configurations to help drive purchases, but carry a lower margin.

Operating Expenses

Selling and Marketing

Selling and marketing expenses decreased by $639 thousand or 51% to $606 thousand for the three months ended September 30, 2014, compared to $1.245 million for the same period in 2013. The decrease can be attributed to the move away from television advertising, and into more cost-effective digital form of advertising) during the current three month period, while $664 thousand was spent during the 2013 period.

Salaries and Labor Related Expenses

Salaries and labor related expenses increased $53 thousand or 9% to $630 thousand for the three month period ended September 30, 2014 compared to $577 thousand for the same period in 2013. The additions of personnel, contractors, and standard salary increases are the key contributors to the minor increase over periods.

Administration

Administrative expenses decreased approximately $140 thousand or 33% to $286 thousand for the three months ended September 30, 2014 compared to $426 thousand for the same period in 2013.  The 2013 balance includes $155 thousand in warrant/option expense related to Investor Relations contractors, while no such expense occurred during the three month period of 2014.

Depreciation and Amortization

Depreciation and amortization expense increased $1 thousand or 6% to $20 thousand for the three months ended September 30, 2014 compared to $19 thousand for the same period in 2013.  This increase between periods is due to acquisition of new assets acquired during the year.

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Other Income

Other income was $60 thousand for the three months ended September 30, 2014 compared to $81 thousand for the same period in 2013.  The 2014 balance consists of income of $7 thousand related to the change in value of assets held for sale and $53 thousand for the change in the value of derivative instruments. The 2013 balance includes income of $59 thousand related to the change in value of assets held for sale and $42 thousand in income for the change in the value of derivative instruments offset by $20 thousand in settlement expenses.

Financing Expenses

Financing expenses increased $7 thousand or 88% to $15 thousand for the three months ended September 30, 2014 compared to $8 thousand for the same period in 2013.  These expenses include credit card, banking and other financing expenses.

Interest Expense

Net interest expense of $13 thousand was recognized for the three months ended September 30, 2014 compared to $11 thousand for the same period in 2013.  Interest expense for 2014 was slightly over $1 thousand more than the same period in 2013, however there is almost $1 thousand less in interest income realized in 2014 compared to 2013.

Loss Before Income Taxes

As a result of the foregoing, loss before income taxes was a slight increase of 2% to $591 thousand for the three months ended September 30, 2014, compared to a loss of $582 thousand for the same period in 2013.

Income Tax Expense

Income tax expense of $18 thousand was realized for the three months ended September 30, 2014 compared to expense of $74 thousand for the same period in 2013. Of this, expense of $12 thousand for 2014 and expense of $69 thousand for 2013 was related to the change in the provision for deferred tax asset/liability.

Net Loss

As a result of the foregoing, net loss was improved by 7% to $609 thousand for the three months ended September 30, 2014 compared to net loss of $655 thousand for the same period in 2013.

Comparison of the Nine Months ended September 30, 2014 and 2013

Revenues

Gross product revenues, prior to returns, discounts and trade promotions, increased $1.678 million or 19% to $10.340 million for the nine months ended September 30, 2014 compared to $8.662 million for the same period in the prior year. Consolidated product revenues (net of returns, discounts and trade promotions) increased $970 thousand or 14% to $8.139 million for the nine months ended September 30, 2014 compared to $7.169 million for the same period in 2013. The increase in revenues can primarily be attributed to continued success of products such as Bio-Gro and Garcinia Trim, both of which were introduced during the second quarter of 2013. Adjustments from revenues (for retailer advertising discounts, returns, promotional credits and coupons) increased $708 thousand or 47% to $2.201 million for the nine months ended September 30, 2014 compared to $1.493 million for the same period in 2013.  The majority of this increase can be attributed to approximately $648 thousand in product returns due to a shift in a retail partner’s focus in that product category.

Cost of Sales

Respective to an increase in product revenues, cost of sales, which includes product contract manufacturing costs, costs of warehousing and distribution, and freight costs increased $569 thousand to 18% to $3.708 million for the nine month period ended September 30, 2014 compared to $3.139 million for the same period in 2013. However, cost of sales as a percentage of gross product revenue remained the same for both periods at 36%.

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Operating Expenses

Selling and Marketing

Selling and marketing expenses increased by $11 thousand or less than 1% to $1.867 million for the nine months ended September 30, 2014, compared to $1.856 million for the same period in 2013. Marketing expenses decreased for the nine months ended September 30, 2014 by $78 thousand with the largest variance in television advertising, as tactics have shifted from television to online digital advertising and social media forums.  Selling expenses have increased $177 thousand during 2014 with the addition of the outside sales representatives.  R&D has decreased $88 thousand, with the variance in clinical studies.  One study was completed in 2013, but a portion of the study completed during the current year was also expensed in 2013, as it began during that period.

Salaries and Labor Related Expenses

Salaries and labor related expenses increased $255 thousand or 16% to $1.878 million for the nine month period ended September 30, 2014 compared to $1.623 million for the same period in 2013. The additions of executive personnel, contractors, and standard salary increases are the key contributors to the increase over periods and have been commensurate with sales growth.

Administration

Administrative expenses decreased $495 thousand or 38% to $800 thousand for the nine months ended September 30, 2014 compared to $1.295 thousand for the same period in 2013.  The decrease in expenses can be attributed to the reduction in expense related to professional fees over the two periods, along with minimal warrant/option expense related to Investor Relations contractors during 2014, which was $16 thousand compared to $274 thousand for the same period in 2013.

Depreciation and Amortization

Depreciation and amortization expense decreased $12 thousand or 17% to $59 thousand for the nine months ended September 30, 2014 compared to $71 thousand for the same period in 2013.  This reduction between periods is due to end of the depreciable life of a piece of software, offset by the depreciation expense of new assets acquired during the year.

Other Income/(expense)

Other income was $295 thousand for the nine months ended September 30, 2014 compared to expense of $121 thousand for the same period in 2013.  The 2014 balance consists of income of $50 thousand related to the change in value of assets held for sale and $245 thousand for the change in the value of derivative instruments. The 2013 balance includes income of $120 thousand related to the change in value of assets held for sale offset by $71 thousand in expense for the change in the value of derivative instruments and $170 thousand in expense related to a contingent liability.

Financing Expenses

Financing expenses decreased approximately $18 thousand or 28% to $45 thousand for the nine months ended September 30, 2014 compared to $63 thousand for the same period in 2013.  The 2013 expense is related to higher credit card fees associated with various internet auto ship offers running during that timeframe.  There are no similar offers running during 2014.

Interest Expense

Net interest expense of $33 thousand was recognized for the nine months ended September 30, 2014 compared to $23 thousand for the same period in 2013.  Interest expense for 2014 was only $3 thousand more than the same period in 2013, however there was an additional $7 thousand in interest income realized in 2013 when the Company cashed in a short term investment.

Income / (Loss) Before Income Taxes

As a result of the foregoing, income before income taxes was an improvement of 118% to $161 thousand for the nine months ended September 30, 2014, compared to a loss of $896 thousand for the same period in 2013.

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Income Tax Expense / Benefit

Income tax expense of $97 thousand was realized for the nine months ended September 30, 2014 compared to a benefit of $111 thousand for the same period in 2013. Of this, expense of $19 thousand for 2014 and income of $129 thousand for 2013 was related to the change in the provision for deferred tax asset/liability. The 2014 expense includes $57 thousand as an adjustment for income tax receivable, along with a nominal foreign tax paid on royalty income received and other state taxes paid. The 2013 benefit from the deferred tax provision was partially offset by the nominal foreign tax paid on royalty income received by the Company and a final federal payment on previous year taxes.

Net Income / (Loss)

As a result of the foregoing, net income was improved by 108% to income of $63 thousand for the nine months ended September 30, 2014 compared to a net loss of $785 thousand for the same period in 2013.

Liquidity and Capital Resources

Cash Position

iSatori’s cash and cash equivalents, consisting primarily of deposits with financial institutions, was $1.154 million at September 30, 2014, compared with $823 thousand at December 31, 2013.

iSatori requires significant amounts of working capital to operate its business and to pay expenses relating to the development, testing and marketing of its products.  iSatori’s traditional use of cash includes primarily making significant expenditures to market new and existing products, as well as the financing of clinical studies for discovering new, efficacious products and providing necessary substantiation for claims iSatori makes concerning its current products and paying third parties to manufacture and distribute iSatori products.

iSatori generally expects to fund expenditures for operations, administrative expenses, marketing expenses, research and development expenses and debt service obligations with internally generated funds from operations, and to satisfy working capital needs from time to time with borrowings under its credit facility pursuant to the New Credit Agreement.  iSatori believes that it will be able to meet its debt service obligations and fund its short-term and long-term operating requirements in the future with cash flow from operations and borrowings under its credit facility.  If iSatori is unable to achieve projected operating results and/or obtain additional financing if and when needed, it will be required to curtail growth plans and significantly scale back its activities.  Currently, iSatori continues to focus on working capital management by monitoring key metrics associated with accounts receivable, payroll expenses, marketing expenses and research and development expenses.

Credit Arrangements as of September 30, 2014

As of September 30, 2014, iSatori had outstanding credit indebtedness of $1.637 million, which consisted of $1.621 million outstanding balance under the $2.0 million revolving line of credit and $17 thousand for a loan on a piece of motorized warehouse equipment.

Prepaid Expenses

As of September 30, 2014, iSatori carried a balance of $234 thousand in prepaid expenses on its balance sheet, compared to $222 thousand at December 31, 2013.  The 2014 balance includes an additional $37 thousand for prepaid business insurance over the 2013 balance, due to the renewal of the policy in May, offset by a reduction of other miscellaneous prepaid expenses such as television advertising and merchandising.

Off Balance Sheet Arrangements

iSatori has no off-balance sheet arrangements as defined by the Securities Act.

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Contractual Obligations

As of September 30, 2014, the Company has the following operational lease commitments:

					Payments due by period
Contractual Obligations		Total			Less than 1 year			2-3 years			3-5 years			More than 5 years
Operating lease obligations		$	568,006		$	20,716		$	344,342		$	202,948		$	-

ITEM 3.

QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company we are not required to provide the information required by this Item.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness, as of September 30, 2014, of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. The purpose of this evaluation was to determine whether as of the evaluation date our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in our filings with the SEC under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. We have designed our internal controls to provide reasonable assurance that our financial statements are prepared in accordance with GAAP and include those policies and procedures that:

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of our assets;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorization of our management and directors; and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Our management conducted an evaluation of the effectiveness of our internal controls based on the criteria set forth in the Internal Control — Integrated Framework developed by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, as of September 30, 2014. Based on this evaluation, our management, including our Chief Executive Officer and Chief Financial Officer has concluded that our internal control over financial reporting was effective as of September 30, 2014.

There have been no changes in our internal control over financial reporting during the period ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

ITEM 1.

LEGAL PROCEEDINGS

The Company is engaged in various legal actions, claims and proceedings arising in the normal course of business, including claims related to breach of contracts, product liabilities and intellectual property matters resulting from the Company’s business activities. As with most actions such as these, an estimation of any possible and/or ultimate liability cannot always be determined. The following summaries highlight the current status of certain material commercial litigation in which the Company is involved.

On May 17, 2013 and on January 31, 2014 the Company received demand letters from the Environmental Research Corporation, “ERC” requesting substantiation of compliance with the State of California’s Proposition 65 regulations for ten of its products.  In October, while the Company was awaiting the results of the compliance testing, ERC contacted the Company again requesting settlement to their initial demand letter. And in February 2014, before compliance testing or any other demand letter validation was completed, ERC contacted the Company again requesting settlement to their second demand letter. After many discussions with ERC, a lawsuit was filed by ERC for the non-compliance issues with the State of California’ Proposition 65 regulations.  Along with the company’s California counsel the company has begun the process of discovery from both sides.  The Company continues to remain in communication with ERC and their counsel with the intent to settle the mutual disputes.

The Company believes that there is a reasonable possibility, as defined by FASB ASC 450-20, of an unfavorable outcome.  However, the range of any possible loss cannot be reasonably estimated as of the date of the financial statements.

On March 24, 2014 the Company received a summons in a civil action filed by Wise Sports Nutrition, LLC claiming alleged trademark infringement for iSatori’s Garcinia Trim product. Company counsel has made contact with the plaintiff’s attorney and filed a response to the alleged trademark infringement with the Company’s counterclaims. The Company believes the counterclaims have strong merit and are pursuing their defense. Both parties have prepared responses and presented them to the court.  The case has currently been stayed pending a ruling on the motion made by the company to stay the case.  The Company believes that it is too early in the proceedings to make a determination of either a favorable or unfavorable outcome. Therefore, no range of any possible gain or loss can be reasonably estimated as of the date of the financial statements.

Item 1A.

RISK FACTORS

As a smaller reporting company we are not required to provide the information required by this Item.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

None.

ITEM 5.

OTHER INFORMATION

None.

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ITEM 6.

EXHIBITS

The following exhibits are filed with this report on Form 10-Q or are incorporated by reference:

Exhibit No.	Description of Exhibit
31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Chief Executive Officer*
31.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Chief Financial Officer*
32.1	Chief Executive Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2	Chief Financial Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.ins	XBRL Instance Document**
101.sch	XBRL Taxonomy Schema Document**
101.cal	XBRL Taxonomy Calculation Document**
101.def	XBRL Taxonomy Linkbase Document**
101.lab	XBRL Taxonomy Label Linkbase Document**
101.pre	XBRL Taxonomy Presentation Linkbase Document**

* Filed herein

** In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Amendment to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014 shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

ISATORI, INC.

By:	/s/ Stephen Adelé
	Stephen Adelé
	Chief Executive Officer
By:	/s/ Michael Wilemon
	Michael Wilemon
	Chief Financial Officer

November 10, 2014

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