iSatori, Inc. - FORM 10-Q - August 13, 2015

Attached files

file	filename
EX-32 - EXHIBIT 32.2 - iSatori, Inc.	exhibit322.htm
EX-32 - EXHIBIT 32.1 - iSatori, Inc.	exhibit321.htm
EX-31 - EXHIBIT 31.1 - iSatori, Inc.	exhibit311.htm
EX-31 - EXHIBIT 31.2 - iSatori, Inc.	exhibit312.htm

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: June 30, 2015

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

T13,368,791 shares of common stock, $0.01 par value per share, were outstanding as of August 10, 2015.

iSATORI, INC.

INDEX


	Page
PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements	4
Condensed Balance Sheets (unaudited): June 30, 2015 and December 31, 2014	5
Condensed Statements of Operations (unaudited): For the three and six months ended June 30, 2015 and 2014	6
Condensed Statements of Cash Flows (unaudited): For the six months ended June 30, 2015 and 2014	7
Notes to Condensed Financial Statements	8
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	23
Item 4 – Controls and Procedures	23

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings	24
Item 1A – Risk Factors	24
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3 – Defaults Upon Senior Securities	24
Item 4 – Mine Safety Disclosures	24
Item 5 – Other Information	24
Item 6 – Exhibits	25
Signature Page	26

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

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 2015 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.

PART 1

ITEM 1. FINANCIAL STATEMENTS

Condensed Financial Statements and Related Footnotes

June 30, 2015 and 2014

iSatori, Inc.

Condensed Balance Sheets

(Unaudited)


	June 30,		December 31,
ASSETS	2015		2014
Current assets:
Cash and cash equivalents	$	390,112	$	738,725
Accounts receivable trade		1,349,065		925,506
Note receivables - current portion		23,593		28,939
Inventories		2,158,853		2,483,602
Assets held for sale		-		34,979
Prepaid expenses		772,552		217,668
Total current assets		4,694,175		4,429,419

Property and equipment:
Leasehold improvements		11,485		11,485
Furniture and fixtures		196,025		128,902
Office equipment		110,418		57,408
Computer equipment		332,171		332,171
Dies and cylinders		57,317		43,942
Less accumulated depreciation		(467,091)		(425,238)
Net property and equipment		240,325		148,670

Note receivable – net of current portion		52,695		52,695

Other assets:
Deferred tax asset, net		57,314		57,314
Deposits and other assets		33,799		45,207
Total other assets		91,113		102,521
Total assets	$	5,078,308	$	4,733,305

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Trade accounts payable	$	1,905,258	$	819,918
Accrued expenses		236,645		253,208
Deferred revenues		-		191,127
Deferred tax liability, net		57,314		57,314
Line of credit		1,275,000		1,620,519
Notes payable		211,321		15,708
Total current liabilities		3,685,538		2,957,794

Long-term liabilities
Derivative liability		-		152,849

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; 13,368,791 shares issued and outstanding		133,688		129,093
Additional paid-in capital		5,058,077		4,796,241
Accumulated deficit		(3,799,220)		(3,302,897)
Total stockholders’ equity		1,392,770		1,622,662
Total liabilities and stockholders' equity	$	5,078,308	$	4,733,305

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

iSatori, Inc.

Condensed Statement of Operations

(Unaudited)


	Three Month Period Ended				Six Month Period Ended
	June 30		June 30		June 30		June 30
	2015		2014		2015		2014
Revenues:
Product revenue (Net of returns and discounts)	$	2,460,676	$	2,877,496	$	5,859,116	$	6,096,740
Royalty revenue		18,774		30,501		37,993		63,127
Other revenue		9,442		10,370		20,607		19,767
Total revenue		2,488,892		2,918,367		5,917,716		6,179,634

Cost of sales		1,494,658		1,306,245		3,204,205		2,550,043
Gross profit		994,234		1,612,122		2,713,511		3,629,591

Operating Expenses:
Selling and marketing		497,720		477,413		1,123,165		1,260,101
Salaries and labor related expenses		586,531		600,968		1,205,785		1,248,381
Administration		374,983		299,775		700,359		513,753
Depreciation and amortization		25,176		20,015		48,260		39,144
Total operating expenses		1,484,410		1,398,171		3,077,569		3,061,379

Income (loss) from operations		(490,176)		213,951		(364,058)		568,212

Other income (expense)		10,741		204,642		(57,482)		234,842
Financing expense		(15,385)		(9,476)		(27,746)		(30,827)
Interest expense		(20,096)		(9,636)		(36,311)		(20,685)

Income (loss) before income taxes		(514,916)		399,481		(485,597)		751,542

Income tax expense		(7,796)		(63,382)		(10,726)		(79,205)

Net income (loss)	$	(522,712)	$	336,099	$	(496,323)	$	672,337

Net income (loss) per common share
Basic	$	(0.04)	$	0.03	$	(0.04)	$	0.05
Diluted	$	(0.04)	$	0.02	$	(0.04)	$	0.05

Weighted average shares outstanding:
Basic		13,371,791		12,886,401		13,089,814		12,883,026
Diluted		13,371,791		13,686,754		13,089,814		13,714,797

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

iSatori, Inc.

Condensed Statements of Cash Flow

(Unaudited)


	For the Six Month Period Ended
	June 30		June 30
	2015		2014
Cash flows from operating activities:
Net income (loss)	$	(496,323)	$	672,337
Adjustments to reconcile net income/(loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		48,260		39,144
Share based compensation expense		67,630		28,397
Change in value of assets held for sale		34,979		(14,800)
Change in fair value of derivative liability		61,988		(192,002)
Provision for deferred income taxes		-		66,152
Change in assets and liabilities:
Accounts receivable		(423,559)		250,030
Income tax receivable		-		45,448
Notes receivable		5,346		3,656
Inventory		324,749		(261,040)
Prepaid expenses		(570,920)		10,313
Deposits and other assets		5,002		20,904
Trade accounts payable		1,085,340		106,393
Accrued expenses		(16,563)		128,135
Deferred revenues		(191,127)		(77,238)
Net cash provided by (used in) operating activities		(65,197)		825,829

Cash flows from investing activities:
Purchase of property and equipment		(133,509)		(16,149)
Proceeds from the sale of assets held for sale		-		87,843
Net cash provided by (used in) investing activities		(133,509)		71,694

Cash flows from financing activities:
Proceeds from notes payable		203,010		-
Payment of notes payable		(7,397)		(2,347)
Payment of line of credit		(345,519)		(136)
Proceeds from the exercise of warrants
Net cash used in financing activities		(149,906)		(2,483)

Net increase (decrease) in cash		(348,612)		895,040

Cash and cash equivalents, beginning of year		738,725		822,876
Cash and cash equivalents, end of year	$	390,112	$	1,717,916

Supplemental Disclosure of Cash Flow Information
Cash paid for interest		39,696		26,670
Cash paid for taxes		8,500		6,700

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

Note 1 - Summary of Significant Accounting Policies

Organization and Nature of Business, and Basis of Presentation

iSatori, Inc. (the “Company”) is a Delaware incorporated Company who trades under the symbol of “IFIT” on the OCTQB exchange.

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, physique enhancement (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 does engage from time to time in funding of clinical studies with the objective of discovering and/or validating claims of new, efficacious 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 trademarks, patented or patent-pending, owned or licensed the Company.

Plan of Merger Announced

On May 18, 2015, iSatori, Inc., (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), among the Company, FitLife Brands, Inc., a Nevada corporation (“FitLife”) and ISFL Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of FifLife (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of FitLife (the “Merger”). The Merger Agreement and the Merger have been approved by the boards of directors of iSatori and FitLife.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each outstanding share of common stock of the Company (“iSatori Common Stock”), other than iSatori Common Stock with respect to which dissent rights have been properly exercised and not withdrawn (the “Dissenting Shares”), will be exchanged for 0.30000 of a share (the “Share Exchange Ratio”) of FitLife common stock (the “FitLife Common Stock”) subject to adjustment for iSatori’s Net Debt Amount and Non-Cash Working Capital (each as defined in the Merger Agreement). Each outstanding stock option to purchase iSatori Common Stock, warrant to purchase iSatori Common Stock, restricted stock unit measured in relation to, or settleable in, iSatori Common Stock and each award of restricted stock relating to iSatori Common Stock, whether vested or unvested, will be assumed by FitLife and converted automatically at the effective time of the Merger into an option, warrant, restricted stock unit or restricted stock award, as the case may be, denominated in shares of FitLife Common Stock based on the Share Exchange Ratio and subject to terms and conditions substantially identical to those in effect at the effective time of the Merger.

The closing of the Merger is subject to satisfaction of certain customary closing conditions.

The Company and FitLife have made customary representations, warranties and covenants in the Merger Agreement, including, among other things, covenants (i) with respect to the conduct of their respective businesses during the interim period between the execution of the Merger Agreement and consummation of the Merger and (ii) prohibiting each of the Company and FitLife from soliciting alternative acquisition proposals and providing information to or engaging in discussions with third-parties, except in the limited circumstances as provided in the Merger Agreement.

The Agreement contains certain termination rights for both the Company and FitLife including, but not limited to, in the event that (i) the Merger has not been consummated on or prior to September 30, 2015 (subject to certain extensions); (ii) the other party materially breaches its representations or covenants and such breach is not, or is not capable of being, cured within 30 days of notice; (iii) the Company’s shareholders fail to approve the Merger; or (iv) the other party’s board of directors makes Change of Recommendation (as defined in the Merger Agreement), or fails to reaffirm its recommendation following receipt of an Acquisition Proposal (as defined in the Merger Agreement). In addition, prior to obtaining shareholder approval of the Merger and subject to the payment of a termination fee, the Company and FitLife each may terminate the Agreement in order to enter into an agreement for a Superior Proposal (as defined in the Merger Agreement). Upon termination of the Agreement, under specified circumstances (including in connection with an Adverse Recommendation Change or a Superior Proposal), either the Company or FitLife will be obligated to pay to the other party a termination fee of $200,000.

FitLife agreed to take all necessary corporate action to appoint Stephen Adele, the Chief Innovation Officer and a director of FitLife as of the effective time of the Merger.

Each of Stephen Adele Enterprises, Inc., RENN Universal Growth Investment Trust PLC and RENN Global Entrepreneurs Fund Inc. has agreed to vote their shares of iSatori Common Stock in favor of the Merger.

The newly combined company will be called "Fit Life Brands."

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, 2014, and are unaudited. The unaudited interim condensed financial statements should be read in conjunction with the audited financial statements and accompanying notes for the year ended December 31, 2014. 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 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.

At June 30, 2015 and December 31, 2014, the financial instruments of the Company consisted principally of cash and cash equivalents, receivables, accounts payable, certain accrued liabilities and long-term debt. The carrying amount of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximates their fair value because of the short maturity of these instruments. The actual and estimated fair values, respectively, of the Company’s financial instruments are as follows:


	June 30, 2015				December 31, 2014
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents	$	390,112	$	390,112	$	738,725	$	738,725
Receivables	$	1,349,065	$	1,349,065	$	925,506	$	925,506
Accounts Payable	$	1,905,258	$	1,905,258	$	819,918	$	819,918
Derivative Liability	$	0	$	0	$	152,849	$	152,849

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 June 30, 2015 and December 31, 2014. Receivables at each of the below respective periods consisted of the following:


	June 30, 2015		December 31, 2014
Trade Receivables	$	1,307,881	$	951,396
Other	$	41,184	$	(25,890)
Allowance for doubtful accounts	$	(0)	$	(0)
Totals	$	1,349,065	$	925,506

In addition, the Company has recorded an allowance for customer returns in the amount of approximately $85,000 at June 30, 2015 and December 31, 2014 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:


	June 30, 2015		December 31, 2014
Labels and packaging	$	186,305	$	170,435
Raw materials	$	249,847	$	308,333
Finished goods	$	1,722,701	$	2,004,834
Totals	$	2,158,853	$	2,483,602

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 June 30, 2015 was $76,288, and is due to be repaid on or before May 1, 2017.

Revenue Recognition

The Company operates predominantly as a distributor of its dietary supplement products through traditional large retailers and electronic intermediaries. Revenue from product sales is recognized upon transfer of title to the Company’s product to its customers. Net sales represent product sales less actual returns, allowances, discounts, and promotions. Sales to direct customers have an unconditional money back guarantee for thirty to sixty days after the date of purchase. Sales to several 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, allowances and discounts, and promotions were $689,960 and $849,356 for the three month period ended June 30, 2015 and 2014, respectively. Returns, allowances and discounts, and promotions were $1,224,856 and $1,360,091 for the six month period ended June 30, 2015 and 2014, respectively.

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.

Cost of Sales

The Company purchases its products directly from third party manufacturers. The Company’s cost of sales include product costs, cost of warehousing and distribution. Included in the cost of sales are 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, 2014 and 2013. 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 June 30, 2015 and 2014, was $20,716. The total rent expense for each of the six month periods ended June 30, 2015 and 2014, was $41,394. The lease term expires January 31, 2017 and requires equal monthly payments over the remaining term. Future payments under the lease total $131,200.

The Company leases its warehouse facility, of approximately 17,026 square feet in Denver. The total rent expense for the warehouse lease for the three month period ended June 30, 2015 was $21,782. The total rent expense for the warehouse lease for the six month period ended June 30, 2015 was $43,565. The lease term expires on December 31, 2018 and calls for inflation-adjusted increasing payments over the remaining term. Future payments under the warehouse lease are $331,094.

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 and television when the advertisement has been broadcast or otherwise distributed. Other marketing expenses include digital and social media, product sampling, sponsorships and endorsements with athletes, promotional events, and consumer education efforts. For the three month period ended June 30, 2015 and 2014, marketing expenses totaled $279,208 and $314,696, respectively. For the six month period ended June 30, 2015 and 2014, marketing expenses totaled $619,759 and $942,119, respectively.

Research and Development Costs

Research and development costs are expensed when incurred. Research and development costs of $5,315 and $4,481 for the three month period ended June 30, 2015 and 2014, respectively, are included in selling and marketing expense. Research and development costs of $24,025 and $10,905 for the six month period ended June 30, 2015 and 2014.

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 temporary cash investments and 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 six month period ended June 30, 2015, sales to three customers made up 52% 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 45% of total accounts receivable at June 30, 2015. During the six month period ended June 30, 2014, sales to three customers made up 66% 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 80% of total accounts receivable as of June 30, 2014.

During the six month period ended June 30, 2015, purchases from four vendors made up 84% of total inventory purchases. These vendors’ combined accounts payable balances were 61% of total accounts payable as of June 30, 2015. During the six month period ended June 30, 2014, purchases from three vendors made up 63% of total inventory purchases. These vendors’ combined accounts payable balances were 48% of total accounts payable as of June 30, 2014.

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 notes receivable.

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 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 common stock, common stock equivalents and potentially dilutive securities outstanding during each period.

The Company has the following common stock equivalents as of June 30, 2015 and 2014:


	Three Months Ended		Six Months Ended
	2015	2014	2015	2014
Basic weighted average Common Shares	13,371,791	12,886,401	13,089,814	12,883,026
Stock options (exercise price – $0.573-$2.50/share)	110,514	382,258	168,203	413,280
Warrants (exercise price – $0.001-$2.25/share)	0	418,095	0	418,491
Total common stock equivalents	13,482,305	13,686,754	13,258,017	13,714,797

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. After many conversations and mediation attempts, both parties agreed to a settlement, which was approved by the iSatori Board of Directors. The documents were generated for presentation to the California Court. These documents were accepted by the court in early June 2015, and iSatori has initiated the payments of the settlement amounts of $60,000.00. Settlement amounts have been accrued into FY 2014 and are reflected in this 10Q report.

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 court ruled in favor of iSatori and its filing of a motion for summary judgment. As a result of this ruling the trademark has been ruled as “descriptive” and therefore not eligible for trademark assignment. Settlement discussions are underway and have been substantively agreed to by both parties. The settlement includes a settlement and release agreement and allows for the assignment of the mark to iSatori and the license of the mark to Wise Sports.

Note 4 - Income Taxes

For the three months ended June 30, 2015 and 2014, the Company recognized income tax expense of $7,796 and expense of $63,382, respectively. For the six months ended June 30, 2015 and 2014, the Company recognized income tax expense of $10,726 and expense of $79,205, respectively.

The difference between the three months ended June 30, 2015 effective rate of 0.0% and the Federal statutory rate of 35.0% is primarily due to a full valuation allowance of $844,543, which was recognized at December 31, 2014, on the deferred tax assets relating to the net operating loss carry forwards. Should future financial performance change and it is determined the Company can realize the use of these net operating losses, the appropriate tax expense and equity adjustments will be made. Any other difference is primarily due to state income taxes.

The difference between the six months ended June 30, 2014 effective rate of 8.96% and the Federal statutory rate of 35.0% is primarily due to state income taxes (net of federal benefit), change in the valuation allowance, and an adjustment to the income tax receivable.

At June 30, 2015 management believes there are no uncertain tax liabilities.

Note 5- Stockholders’ Equity

At June 30, 2015, there were 13,368,791 shares of common stock, par value $.01 per share, outstanding for the Company.

Warrants

As of June 30, 2015, there were common stock warrants outstanding to purchase aggregate shares of common stock pursuant to the warrant grants described below.

Effective January 1, 2013, the Company entered into a one year agreement, subject to quarterly cancellation at the Company’s sole discretion, with Microcap Headlines, Inc. In connection with this agreement, the Company issued warrants to purchase an aggregate of 100,000 shares of the Company’s common stock at an exercise price of $2.25 per share (the “Microcap warrants”). These warrants were subject to conditional vesting schedule in one-fourth (quarterly) increments, subject to the Company’s sole discretion. The first increment was granted and fully vested on January 1, 2013, the second increment was granted and fully vested on April 1, 2013, the third increment was granted and fully vested on July 1, 2013, and the fourth increment was granted and fully vested on October 1, 2013. These vested warrants expire on January 1, 2018.

Effective July 16, 2013, the Company entered into a business consulting agreement with Optivest Global Partners, LLC. In connection with this agreement, the Company issued warrants to purchase an aggregate of 250,000 shares of the Company’s common stock at an exercise price of $2.25 per share (the “Optivest warrants”). These warrants are fully vested and expire July 16, 2018. These warrants will be assignable and transferable, at Optivest’s discretion.

The Company has 350,000 warrants outstanding at June 30, 2015 and 770,649 at December 31, 2014.

The fair value of the Microcap and Optivest warrants were estimated on the date of grant using the Black-Scholes option-pricing model.

The Black-Scholes assumptions used when the warrants were issued are as follows:


	FY 2013
Exercise price	$	2.25
Expected dividends		0	%
Expected volatility		45.95-48.97	%
Risk fee interest rate		0.72-1.42	%
Expected life		5 years
Expected forfeiture		0	%

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 March 23, 2015, the Company issued options to purchase 195,000 shares of the Company’s common stock to six employees with an exercise price of $1.02 per share and which contained three year vesting schedules of 1/3 each year through March 2018. These options are due to expire on March 20, 2025.

On March 5, 2015, the Company issued options to purchase 10,000 shares of the Company’s common stock to a contracted employee with an exercise price of $1.0065 per share, which are fully vested. These options are due to expire on March 5, 2025.

On April 3, 2015, the Company issued options to purchase 200,000 shares of the Company’s common stock to a contractor with an exercise price of $0.01 per share, which will vest October 1, 2015. These options are due to expire on April 3, 2025.

On April 8, 2015, the Company issued options to purchase 25,000 shares of the Company’s common stock to a former employee with an exercise price of $0.95 per share, which will vest January 1, 2016. These options are due to expire on April 8, 2025.

On May 13, 2015, the Company issued options to purchase 120,538 shares of the Company’s common stock to thirteen employees with an exercise price of $0.75-$0.80 per share and which contained one and a half to three year vesting schedules of 1/3 each year through October 2016 and April 2018. These options are due to expire on May 13, 2025.

On May 13, 2015, the Company issued options to purchase 62,500 shares of the Company’s common stock to a contractor with an exercise price of $0.80 per share, which contained a three year vesting schedules of 1/3 each year through May 2018. These options are due to expire on May 13, 2025.

The Company applied fair value accounting for all share based payment awards. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The total valuation of the options granted in 2015 was $189,423. Of this, $74,198 will be expensed over the three year vesting schedule and $28,090 over the year and a half vesting schedule. The total valuation of the options granted in 2014 was $3,363. Due to their forfeiture prior to vesting, expense of $747 recognized in previous quarters of 2014 was reversed within subsequent periods of 2014, for a net expense of $0 related to 2014 grants for the year ended December 31, 2014. The total valuation of the options granted in 2013 was $30,985, which is being expensed over the three year vesting period. The expense recognized related to these options for the year ended December 31, 2014 was $10,328. The Black-Scholes assumptions used when the options were issued are as follows:


		FY 2015		FY 2014
Exercise price	$	0.01-1.02		2.22-2.50
Expected dividends		0	%	0	%
Expected volatility		45.65%-164.28	%	35.22	%
Risk fee interest rate		1.71-1.9	%	2.13-2.41	%
Expected life of option		5.51-8.01 years		6.08-6.33 years
Expected forfeiture		0	%	0	%

The Company recognized $51,964 in expense related to stock compensation for the three month period and $67,630 for the six month period ended June 30, 2015. The Company recognized $28,397 in expense related to stock compensation for both the three month and six month period ended June 30, 2015.

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 will be used to provide ongoing working capital and for other general corporate purposes of the Company and its subsidiaries.

The agreement provides a revolving commitment to the Company of $2,000,000. Amounts outstanding under the agreement will be reflected in a promissory note with a principal balance of $2,000,000 and a 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.

On January 7, 2015, Colorado Business Bank provided the Company with notice of a non-monetary event of default concerning the Company’s violation of the minimum tangible equity capital covenant set forth in the loan agreement. On March 27, 2015, and effective March 23, 2015, the Company and Colorado Business Bank (“CBB”) entered into a Change in Terms Agreement (the “Change in Terms Agreement) and Business Loan Agreement (the “Business Loan Agreement and, together with the Change in Terms Agreement, the “Agreements”), to replace that previous Business Loan Agreement, dated as of July 16, 2012, by and between iSatori, Inc. and CBB (the “Prior Agreement”).

Pursuant to the Agreements CBB agreed to waive the violation of the Minimum Tangible Equity Covenant; the lending relationship between the Company and CBB was restructured from a revolving loan to a term loan; the Company agreed to pay down the amount outstanding under the Prior Agreement to $1,500,000 in the short term; and the Company agreed to monthly payments of $75,000 plus interest, at an interest rate of Prime (as reflected in the Wall Street Journal) plus 2.0%, beginning in April 2015, and was set to mature on July 16, 2015.

On July 16, 2015, and effective June 30, 2015, the Company and Colorado Business Bank (“CBB”) entered into a Change in Terms Agreement (the “Change in Terms Agreement) and Business Loan Agreement (the “Business Loan Agreement and, together with the Change in Terms Agreement, the “Agreements”), to replace that previous Business Loan Agreement, dated as of March 27, 2015, by and between iSatori, Inc. and CBB (the “Prior Agreement”).

Pursuant to the Agreements CBB agreed to a revision of the Minimum Tangible Equity Covenant; the Company continues to pay down the amount outstanding under the Prior Agreement with monthly payments of $75,000 plus interest, at an interest rate of Prime (as reflected in the Wall Street Journal) plus 2.0%, and is set to mature on October 16, 2015.

The Company has, and will continue to, enter into discussions with certain material vendors, offering early pay discounts to improve the timing of accounts receivable collection. In addition, the Company has, and will continue to, enter into discussions with certain material suppliers concerning extended credit terms to improve the flexibility of the Company's cash management program. These actions will help ensure the Company's liquidity and compliance with its loan 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 credit agreement described above.

The outstanding balance on the revolving line of credit with CBB as of June 30, 2015 and December 31, 2014 was $1,275,000 and $1,620,519.

Note 7 – Notes Payable, Related Parties

On June 16, 2015, the Company entered into a promissory note arrangement with a key employee in the amount of $150,000. The note bore interest at a rate of 3% annually. The note is subordinated to the prior payment in full of the line of credit to Colorado Business Bank. The note is set to mature the earliest of (a) December 31, 2016, (b) ten business days following the closing date of the merger, and (c) the occurrence of an event of default. The balance of this note is $150,000 as of June 30, 2015 and is included in the balance of Notes Payable in the accompanying condensed balance sheet.

Note 8 - 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 June 30, 2015, the Company had $0 assets held for sale valued using the Level 1 mark-to-market approach. As of December 31, 2014, the Company had $34,979 assets held for sale valued using the Level 1 mark-to-market approach.

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.

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


	June 30, 2015						December 31, 2014
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
	$	0	$	-	$	0	$	34,979	$	-	$	152,849

Beginning of period		34,979		-		152,849		108,228		-		471,015
Additions		-		-		-		-		-		-
Deletions		(34,979)		-		(214,837)		(115,881)		-		-
Revisions				-		61,988		42,632		-		(318,166)
End of period	$	0	$	-	$	0	$	34,979	$	-	$	152,849

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 three-month period ended June 30, 2015 should be read in conjunction with our 2014 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.” Except as otherwise indicated by the context, all references in this report to “we,” “us,” “our,” the “Company,” “IFIT,” and “iSatori” refer to iSatori, Inc.

iSatori is engaged in researching, designing, developing, contracting for the manufacture of, marketing, selling and distributing of various nutritional and dietary supplement products for the general nutrition market consumer seeking a healthier lifestyle. The “general nutrition market” may include such activities as bodybuilding or physique enhancement (i.e., increase of lean body mass and decrease in fat mass); enhanced athletic performance through increased strength and/or endurance; and proper nutrition for weight management. iSatori distributes its products to thousands of retail stores, both domestically and in some international countries. Those retail stores include and/or have included outlets such as GNC, Vitamin Shoppe, Vitamin World, Walmart, CVS, Walgreens, and other Fortune 500 companies, augmented by internet sales through various online properties. The Company’s core competencies include the development of new, innovative 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, and together with a highly experienced management team (most of whom came from their prior employer together, EAS, Inc), iSatori now employs 22 full-time, and four contracted workers. 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, or pending 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

Bio-Gro™ Bio-Active Peptides IP.

The Company continues to carefully exploit and maximize its intellectual property surrounding the category-creating invention, Bio-active peptides, found only in BIO-GRO. The company presented its newest clinical study work on BIO-GRO at the most recent ISSN and NSCA scientific and sports national conferences in June and July respectively. The studies were commenced through University of Central Florida and the Superior Performance Research Center of Miami. Study results were positive, compared to placebos, and yielded statistically significant data (e.g., reduced recovery time, increased strength, and improved lean body mass gains) to support and validate product performance claims and safety from use. The Company plans to continue to invest in its intellectual property and to help further differentiate itself from the market competitors.

New Product Development.

Since December 31, 2014, the Company launched two new products to complement its growing Bio-Gro category-creating product line within in sports nutrition assortment. Pre-Gro™ is a pre-workout powder designed to deliver a high energy, muscle-building workout experience. Fortified with iSatori’s own patent-pending creation, clinically tested Bio-Gro™ Bio-Active Peptides and HydroMax® patented, stabilized glycerol to provide a noticeable muscle pump effect, combined of which will help users trigger new muscular growth from a more intense workout. The Company launched a new flavor of HYPER-GRO, Chocolate Peanut Butter, to distribution and expects to continue to track market demand for additional flavors of HYPER-GRO and PRE-GRO, for future development and product launches throughout the remainder for the fiscal year. The Company continues to seek out new inventions and product development efforts that will further differentiate it from market competitors and increase market potential.

New Distribution Customers.

In April the Company received notice from the largest specialty retailer, GNC, its product assortment of BIO-GRO, HYPER-GRO and PRE-GRO would be expanding in their number of stores from 1,100 corporate stores up to approximately 3,000 corporate stores. The shipments for those orders were fulfilled in May and July respectively for the distribution expansion. The Company expects to see and track point-of-sale product movement data in the third quarter, once the new store plan-o-gram sets are completed.

In the second quarter, the Company realized store placement of its Energize 28-count tablet at CVS Health drug stores in national distribution. The Company also received and shipped initial purchase orders from Rite-Aid drug stores for their Energize product, which would expand distribution in Rite-Aid drug stores, from partial to full national distribution. These customer acquisitions will increase iSatori’s retail footprint by adding over 11,000+ retail stores to its domestic distribution – increasing the Company’s ACV (all commodity volume, a measure of maximum retail distribution volume) from 18.6% to 34.1%, which includes such current retail distribution as Walmart, Walgreens, Super Value, Meijer, and other food, drug and mass retailers.

Celebrity-Athlete Full Feature Movie.

In the first quarter, iSatori signed a multi-year endorsement agreement with C.T. Fletcher. Deemed one of the most influential and motivated fitness trainers of our time, C.T. Fletcher will be the center of a new feature film documentary, entitled “C.T. Fletcher: My Magnificent Obsession” (Generation Iron//Film by Vlad Yudin, 2015). The movie premieres September 17, 2015 at the Palms Casino in Las Vegas, Nevada, just a day prior to the largest fitness exposition in the world, Joe Weider’s Olympia Fitness Expo Weekend also held in Las Vegas (September 18-20). The movie prominently displays iSatori, its products and how it contributes to CT Fletcher’s larger than life lifestyle. The movie explores the pain, struggle and hardships that CT has endured throughout his life, demonstrating the power motivation can have on the human spirit and in changing and transforming lives. The Company is excited about the new movie, along with future product development efforts surrounding CT Fletcher.

Results of Operations

Comparison of the Three Months ended June 30, 2015 and 2014

Revenues

Our consolidated product revenues (net of returns, trade allowances, and discounts) decreased $416 thousand or -14% to $2.461 million for the three months ended June 30, 2015 compared to $2.877 million for the same period in 2014. Gross product revenues decreased -15% to $3.151 million compared to $3.727 million for the same period in 2014. The decrease in revenues can be tied directly to the diet and weight-loss category, which has experienced a decline since Q3 of 2014 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 category decreased $1.201 million from the same period in 2014. The decrease of those revenues have been offset with the continued increasing demand for Company’s GRO series of sports nutrition fitness products, which consists of Bio-Gro, Pre-Gro and Hyper-Gro. Adjustments from revenues (for retailer advertising discounts, returns, promotional credits and coupons) decreased $159 thousand or -19% to $690 thousand for the three months ended June 30, 2015 compared to $849 thousand for the same period in 2014.

Cost of Sales

Cost of sales, which includes product contract manufacturing costs, costs of warehousing and distribution, and freight costs increased 14% to $1.495 million for the three month period ended June 30, 2015 compared to $1.306 million for the same period in 2014. This increase can be attributed to the shift in the concentration of product mix with sales in some lower margin powder products coupled with increased freight costs associated with backordered new products due to high customer demand and pending purchase order fulfillment.

Operating Expenses

Selling and Marketing

Selling and marketing expenses increased approximately $21 thousand or 4% to $498 thousand for the three months ended June 30, 2015, compared to $477 thousand for the same period in 2014. There was a reduction in spending in marketing categories such as magazine advertising, tradeshow and consumer exhibition expenses, which was partially offset by celebrity spokesperson expense and digital and online media expenses. There was an increase in selling expense for promotional spiffs and the outside sales representatives when compared to the 2014 period.

Salaries and Labor Related Expenses

Salaries and labor related expenses decreased $14 thousand or -2% to $587 thousand for the three month period ended June 30, 2015 compared to $601 thousand for the same period in 2014.

Administration

Administrative expenses increased approximately $75 thousand or 25% to $375 thousand for the three months ended June 30, 2015 compared to $300 thousand for the same period in 2014. The increase in expenses can be attributed to the rent and operational expense of opening up the new Denver-based distribution and fulfillment center location, additional professional business consulting fees.

Depreciation and Amortization

Depreciation and amortization expense increased $5 thousand or 25% to $25 thousand for the three months ended June 30, 2015 compared to $20 thousand for the same period in 2014. The increase between periods is due to acquiring new equipment and storage racking for the new distribution and fulfillment center.

Other Income

Other income was $11 thousand for the three months ended June 30, 2015 compared to $205 thousand for the same period in 2014. The 2015 balance is related to the change in value of assets held for sale. These shares were sold in full during the period. The 2014 balance consists of income of $13 thousand related to the change in value of assets held for sale and $192 thousand for the change in the value of derivative instruments.

Financing Expenses

Financing expenses increased approximately $6 thousand or 62% to $15 thousand for the three months ended June 30, 2015 compared to $9 thousand for the same period in 2014.

Interest Expense

Net interest expense of $20 thousand was recognized for the three months ended June 30, 2015 compared to $10 thousand for the same period in 2014. The increased expense is mostly related to the higher interest rate being currently charged on the line of credit.

Income/(loss) before taxes

As a result of the foregoing, a loss before taxes was $515 thousand for the three months ended June 30, 2015, compared to income of $399 thousand for the same period in 2014.

Income Tax Expense

Income tax expense of $8 thousand was realized for the three months ended June 30, 2015 compared to expense of $63 thousand for the same period in 2014.

Net Income/(loss)

As a result of the foregoing, the net loss was $523 thousand for the three months ended June 30, 2015 compared to a net income of $336 thousand for the same period in 2014.

Comparison of the Six Months ended June 30, 2015 and 2014

Revenues

Our consolidated product revenues (net of returns and discounts) decreased $238 thousand or -4% to $5.859 million for the six months ended June 30, 2015 compared to $6.097 million for the same period in 2014. Gross product revenues decreased -5% to $7.084 million compared to $7.457 million for the same period in 2014. The decrease in revenues can be tied directly to the diet and weight-loss category, which has experienced a decline since Q3 of 2014, primarily due to the lack of consumer confidence in diet aids after a popular television personality and doctor drew criticism by Congress for his unabated support of these types of supplements. This category decreased $2.612 million from the same period in 2014. The decrease of those revenues have been offset with the continued increasing demand for Company’s Bio-Gro, and the release of Pre-Gro and Hyper-Gro, which was introduced during the first quarter of 2015. Adjustments from revenues (for retailer advertising discounts, returns, promotional credits and coupons) decreased $135 thousand or -10% to $1.225 million for the six months ended June 30, 2015 compared to $1.360 million for the same period in 2014.

Cost of Sales

Cost of sales, which includes product contract manufacturing costs, costs of warehousing and distribution, and freight costs increased 26% to $3.204 million for the six month period ended June 30, 2015 compared to $2.550 million for the same period in 2014. This increase can be attributed to the shift in the concentration of product mix with sales in some lower margin powder products along with increased freight costs associated with backordered new products due to high customer demand and pending purchase order fulfillment.

Operating Expenses

Selling and Marketing

Selling and marketing expenses decreased approximately $137 thousand or 11% to $1.123 million for the six months ended June 30, 2015, compared to $1.260 million for the same period in 2014. There was a reduction in spending in marketing categories such as television and magazine advertising, tradeshow and consumer exhibition expenses, which was partially offset by increased spending for celebrity spokesperson expense and digital and online media. There was an increase in selling expense for promotional spiffs and the outside sales representatives when compared to the 2014 period.

Salaries and Labor Related Expenses

Salaries and labor related expenses decreased $42 thousand or -4% to $1.206 million for the six month period ended June 30, 2015 compared to $1.248 million for the same period in 2014.

Administration

Administrative expenses increased approximately $186 thousand or 37% to $700 thousand for the six months ended June 30, 2015 compared to $514 thousand for the same period in 2014. The increase in expenses can be attributed to the rent and operational expense of opening up the new Denver-based distribution and fulfillment center location, additional consulting fees, and travel expenses.

Depreciation and Amortization

Depreciation and amortization expense increased $9 thousand or 23% to $48 thousand for the six months ended June 30, 2015 compared to $39 thousand for the same period in 2014. The increase between periods is due to acquiring new equipment and storage racking for the new distribution and fulfillment center.

Other Income/(expense)

Other income/(expense) was an expense of $57 thousand for the six months ended June 30, 2015 compared to income of $235 thousand for the same period in 2014. The 2015 balance consists of income of $5 thousand related to the change in value of assets held for sale, which were sold during the quarter, and $62 thousand for the change in the value of derivative instruments, upon the exercise of warrants by Breakwater Capital during the first quarter. The 2014 balance consists of income of $43 thousand related to the change in value of assets held for sale and $192 thousand for the change in the value of derivative instruments.

Financing Expenses

Financing expenses decreased approximately $3 thousand or 10% to $28 thousand for the six months ended June 30, 2015 compared to $31 thousand for the same period in 2014.

Interest Expense

Net interest expense of $36 thousand was recognized for the six months ended June 30, 2015 compared to $21 thousand for the same period in 2014. The increased expense is mostly related to the higher interest rate being currently charged on the line of credit.

Income/(loss) before taxes

As a result of the foregoing, a loss before taxes was $486 thousand for the six months ended June 30, 2015, compared to income of $752 thousand for the same period in 2014.

Income Tax Expense

Income tax expense of $11 thousand was realized for the six months ended June 30, 2015 compared to expense of $79 thousand for the same period in 2014.

Net Income/(loss)

As a result of the foregoing, the net loss was $496 thousand for the six months ended June 30, 2015 compared to a net income of $672 thousand for the same period in 2014.

Liquidity and Capital Resources

Cash Position

iSatori’s cash and cash equivalents, consisting primarily of deposits with financial institutions, was $390 thousand at June 30, 2015, compared with $739 thousand at December 31, 2014. The majority of the decrease in cash was due to payments made toward the CoBiz (CBB) line of credit facility during the year.

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. 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.

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, inventory management, marketing expenses and manufacturing production costs. If needed, the Company will seek additional debt financing to fund operations and debt service obligations.

Credit Arrangements as of June 30, 2015

As of June 30, 2015, iSatori had outstanding credit indebtedness of $1.486 million, which consisted of $1.275 million outstanding balance under the $1.5 million revolving line of credit and $211 thousand in note payables.

Prepaid Expenses

As of June 30, 2015, iSatori carried a balance of $773 thousand in prepaid expenses on its balance sheet, compared to $217 thousand at December 31, 2014. The increase can be attributed to the financing of the renewal of the annual insurance, new distribution retailer slotting fees which will be amortized over a one year period, signing bonus to be amortized over the contract period, and prepaid expenses for media and trade shows.

Off Balance Sheet Arrangements

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

Contractual Obligations

As of June 30, 2015, the Company has the following operational lease commitment:


		Payments due by period
Contractual Obligations	Total	Less than 1 year	2-3 years	3-5 years	More than 5 years
Operating lease obligations	462,294	84,997	277,098	100,199	-

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 June 30, 2015, 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 June 30, 2015. 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 June 30, 2015.

There have been no changes in our internal control over financial reporting during the period ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1.

LEGAL PROCEEDINGS

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.

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 June 30, 2015 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.

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/ Seth Yakatan
	Seth Yakatan
	Chief Financial Officer

August 13, 2015

Attached files

Stock widget

Investing forum

iSatori, Inc. Reports