ITEM 1A - Risk Factors
An investment in our securities involves a high degree of risk. You
should carefully consider the following information about these
risks, together with the other information contained in this Annual
Report, before investing in our securities. If any of the events
anticipated by the risks described below occur, our results of
operations and financial condition could be adversely affected,
which could result in a decline in the market price of our
securities, causing you to lose all or part of your
investment.
Risk Factors Relating to our Business and Industry
The Company was profitable during the years ended December 31, 2020
and 2019. However, we may not be able to achieve sustained
profitability. Our failure to sustain profitability or
effectively manage growth could result in net losses, and therefore
negatively affect our financial condition.
In
the event of any decrease in sales, if we are not able to maintain
growth, or if we are unable to effectively manage our growth, we
may not be able to sustain profitability, and may incur net losses
in the future, and those net losses could be
material. In the event we incur net losses, our
financial condition could be negatively affected, and such affect
could be material.
We are currently dependent on sales to GNC for a substantial
portion of our total sales.
Sales
to GNC’s centralized distribution platform, including
indirect distribution of product to domestic and international
franchisees, accounted for approximately 71% and 75% of our total
sales for the years ended December 31, 2020 and 2019,
respectively. GNC’s franchisees are not required to
carry our products. In the event GNC ceases purchasing
products from us, or otherwise reduces its purchases, our total
revenue will be negatively impacted, and such impact could be
material. Moreover, the transition to GNC’s centralized
distribution system has had the effect of concentrating the
majority of our accounts receivable with a single payor. Prior
to the transition, we collected receivables directly from over 300
franchisees. Although the acquisition of iSatori has reduced
the percentage of total accounts receivable attributable to GNC, we
anticipate that GNC will continue to represent a substantial
portion of all accounts receivable for the foreseeable
future. In the event that our sales to GNC decrease, our
results from operations will be negatively affected, and such
effect may be material.
Our ability to materially increase sales is largely dependent on
the ability to increase sales of product to our wholesale partners
as well as directly to the end consumer. We may invest significant
amounts in these expansions with little success, and if we are
unable to maintain good relationships with our existing customers
and e-commerce platforms, our business could suffer.
We
currently are focusing our marketing efforts on increasing the sale
of products to GNC, both domestically and internationally, as well
as increasing the number of retailers selling iSatori
Products. In addition, we are focused on increasing our
direct-to-consumer revenue through e-commerce platforms such as
Amazon. We may not be able to successfully increase sales through
these channels. Moreover, unilateral decisions could be taken
by our distributors, customers, or third-party e-commerce platforms
such as Amazon, to discontinue carrying all or any of our products
that they are carrying or selling at any time, which would cause
our business to suffer. The inability to sell our products through
e-commerce platforms, including Amazon, would materially impact our
sales and operating results.
In addition,
although we continued efforts to expand international distribution
for our products in the years ended December 31, 2020 and 2019, we
cannot assure that any further efforts to sell our products outside
the United States will result in material increased revenue. We may
need to overcome significant regulatory and legal barriers in order
to continue to sell our products internationally, and we cannot
give assurances as to whether we will be able to comply with such
regulatory or legal requirements.
We are affected by extensive laws, governmental regulations,
administrative determinations, court decisions and similar
constraints, which can make compliance costly and subject us to
enforcement actions by governmental agencies.
The
formulation, manufacturing, packaging, labeling, holding, storage,
distribution, advertising and sale of our products are affected by
extensive laws, governmental regulations and policies,
administrative determinations, court decisions and similar
constraints at the federal, state and local levels, both within the
United States and in any country where we conduct business. There
can be no assurance that we or our wholesale partners will be in
compliance with all of these regulations. A failure by us or our
wholesale partners to comply with these laws and regulations could
lead to governmental investigations, civil and criminal
prosecutions, administrative hearings and court proceedings, civil
and criminal penalties, injunctions against product sales or
advertising, civil and criminal liability for the Company and/or
its principals, bad publicity, and tort claims arising out of
governmental or judicial findings of fact or conclusions of law
adverse to the Company or its principals. In addition, the adoption
of new regulations and policies or changes in the interpretations
of existing regulations and policies may result in significant
new compliance costs or discontinuation of product sales, and may
adversely affect the marketing of our products, resulting in
decreases in revenue.
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We are currently dependent on a limited number of independent
suppliers and manufacturers of our products, which may affect
our ability to deliver our products in a timely manner. If we are
not able to ensure timely product deliveries, potential
distributors and customers may not order our products, and our
revenue may decrease.
We rely
on a limited number of third parties to supply and manufacture our
products. Our products are manufactured on a purchase order basis
only, and manufacturers can terminate their relationships with us
at will. These third-party manufacturers may be unable to
satisfy our supply requirements, manufacture our products on a
timely basis, fill and ship our orders promptly, provide services
at competitive costs, or offer reliable products and services. The
failure to meet any of these critical needs would delay or reduce
product shipment and adversely affect our revenue, as well as
jeopardize our relationships with our distributors and customers.
In the event any of our third-party manufacturers were to become
unable or unwilling to continue to provide us with products in
required volumes and at suitable quality levels, we would be
required to identify and obtain acceptable replacement
manufacturing sources. There is no assurance that we would be able
to obtain alternative manufacturing sources on a timely basis.
Additionally, our third-party manufacturers source the majority of
the raw materials for our products and, if we were to use
alternative manufacturers, we may not be able to duplicate the
exact taste and consistency profile of the product from the
original manufacturer. An extended interruption in the supply of
our products would likely result in decreased product sales and a
corresponding decline in revenue. We believe that we can meet our
current supply and manufacturing requirements with our current
suppliers and manufacturers or with available substitute suppliers
and manufacturers. Historically, we have not experienced any
material delays or disruptions to our business caused by
difficulties in obtaining our products from
manufacturers.
COVID-19 could affect our sales and disrupt our operations and
could have a material adverse impact on us.
The
coronavirus (COVID-19) that was reported to have surfaced in Wuhan,
China in December 2019 and that has now spread to other countries,
including the U.S., could adversely impact our operations or those
of our third-party suppliers, as well as our sales to wholesale
partners. In addition, we rely on raw material suppliers located
within and outside the U.S. who source their materials from China,
among other countries. The extent to which the coronavirus impacts
our operations, those of our third-party suppliers or our wholesale
partners will depend on future developments, which are highly
uncertain and cannot be predicted with confidence. If the public
avoids public spaces, including retail stores, or if we, or any of
our third-party suppliers encounter any disruptions to our or their
respective operations, facilities or stores, or if our wholesale
partners’ retail stores were to partially or fully close due
to the coronavirus, which has previously occurred in the case of
certain GNC locations, then we or they may be prevented or delayed
from effectively operating our or their business, respectively, and
the manufacture, supply, distribution and sale of our products and
our financial results could be adversely affected.
We are dependent on our third-party manufacturers to supply our
products in the compositions we require, and we do not
independently analyze each production lot of our products. Any
errors in our product manufacturing could result in product
recalls, significant legal exposure, and reduced revenue and the
loss of distributors.
Although we require
that our manufacturers verify the accuracy of the contents of our
products, we do not have the expertise or personnel to monitor the
production of products by these third parties. We rely primarily,
with limited independent verification, on certificates of analysis
regarding product content provided by our third-party suppliers and
limited safety testing by them. We cannot be assured that these
outside manufacturers will continue to reliably supply products to
us in the compositions we require. Errors in the manufacture of our
products could result in product recalls, significant legal
exposure, adverse publicity, decreased revenue, and loss of
distributors and endorsers.
We face significant competition from existing suppliers of products
similar to ours. If we are not able to compete with these companies
effectively, we may not be able to maintain
profitability.
We face
intense competition from numerous resellers, manufacturers and
wholesalers of nutritional supplements similar to ours, including
retail, online and mail-order providers. Many of our
competitors have longer operating histories, more-established
brands in the marketplace, revenue significantly greater than ours
and better access to capital than we have. We anticipate that these
competitors may use their resources to engage in various
business activities that could result in reduced sales of our
products. Companies with greater capital and research capabilities
could re-formulate existing products or formulate new products that
could gain wide marketplace acceptance, which could have a negative
effect on our future sales. In addition, aggressive advertising and
promotion by our competitors may require us to compete by
lowering prices or by increasing our marketing expenditures, and
the economic viability of our operations likely would be
diminished.
Adverse publicity associated with our products, ingredients, or
those of similar companies, could adversely affect our sales and
revenue.
Our
customers’ perception of the safety and quality of our
products or even similar products distributed by others can be
significantly influenced by national media attention, publicized
scientific research or findings, product liability claims, and
other publicity concerning our products or similar products
distributed by others. Adverse publicity, whether or not accurate,
that associates consumption of our products or any similar products
with illness or other adverse effects, will likely diminish the
public’s perception of our products. Claims that any products
are ineffective, inappropriately labeled or have inaccurate
instructions as to their use, could have a material adverse effect
on the market demand for our products, including reducing our sales
and revenue.
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The efficiency of nutritional supplement products is supported by
limited conclusive clinical studies, which could result in less
market acceptance of these products and lower revenue or lower
growth rates in revenue.
Our
nutritional supplement products are made from various ingredients,
including vitamins, minerals, amino acids, herbs, botanicals,
fruits, berries, and other substances for which there is a long
history of human consumption. However, there is little long-term
experience with human consumption of certain product ingredients or
combinations of ingredients in concentrated form. Although we
believe that all of our products fall within the generally known
safe limits for daily doses of each ingredient contained within
them, nutrition science is imperfect. Moreover, some people have
peculiar sensitivities or reactions to nutrients commonly found in
certain foods and may have similar sensitivities or reactions
to nutrients contained in our products. Furthermore, nutrition
science is subject to change based on new research. New scientific
evidence may disprove the efficacy of our products or prove
our products to have effects not previously known. We could be
adversely affected by studies that may assert that our products are
ineffective or harmful to consumers, or if adverse effects are
associated with a competitor’s similar products.
Our products may not meet health and safety standards or could
become contaminated.
We do
not have control over the third parties involved in the
manufacturing of our products and their compliance
with government health and safety standards. Even if
our products meet these standards, they could otherwise become
contaminated. A failure to meet these standards or contamination
could occur in our operations or those of our distributors or
suppliers. This could result in expensive production interruptions,
recalls and liability claims. Moreover, negative publicity could be
generated from false, unfounded or nominal liability claims or
limited recalls. Any of these failures or occurrences could
negatively affect our business and financial
performance.
The sale of our products involves product liability and related
risks that could expose us to significant insurance and loss
expense.
We face
an inherent risk of exposure to product liability claims if the use
of our products results in, or is believed to have resulted in,
illness or injury. Most of our products contain combinations of
ingredients, and there is little long-term experience with the
effect of these combinations. In addition, interactions of these
products with other products, prescription medicines and
over-the-counter drugs have not been fully explored or understood
and may have unintended consequences. Although our third-party
manufacturers perform tests in connection with the
formulations of our products, these tests are not designed to
evaluate the inherent safety of our products.
Although we
maintain product liability insurance, it may not be sufficient
to cover all product liability claims, and any claims that may
arise could have a material adverse effect on our business. The
successful assertion or settlement of an uninsured claim, a
significant number of insured claims or a claim exceeding the
limits of our insurance coverage would harm us by adding further
costs to our business and by diverting the attention of our senior
management from the operation of our business. Even if we
successfully defend a liability claim, the uninsured litigation
costs and adverse publicity may be harmful to our
business.
Any
product liability claim may increase our costs and adversely
affect our revenue and operating income. Moreover, liability claims
arising from a serious adverse event may increase our costs
through higher insurance premiums and deductibles and may make
it more difficult to secure adequate insurance coverage in the
future. In addition, our product liability insurance may fail
to cover future product liability claims, which, if adversely
determined, could subject us to substantial monetary
damages.
If the products we sell do not have the healthful effects intended,
our business may suffer.
In
general, our products sold consist of nutritional supplements that
are classified in the United States as “dietary
supplements”, which do not currently require approval from
the FDA or other regulatory agencies prior to sale. Although
many of the ingredients in such products are vitamins, minerals,
herbs and other substances for which there is a long history of
human consumption, our products often contain innovative
ingredients or combinations of ingredients. Although we
believe such products and the combinations of ingredients in them
are safe when taken as directed by us, there is little long-term
experience with human or other animal consumption of certain of
these ingredients or combinations thereof in concentrated
form. The products could have certain side effects if not
taken as directed or if taken by a consumer that has certain
medical conditions. Furthermore, there can be no assurance
that any of the products, even when used as directed, will have the
effects intended or will not have harmful side
effects.
A slower growth rate in the nutritional supplement industry could
lessen our sales and make it more difficult for us to sustain
consistent growth.
The
nutritional supplement industry has been growing at a strong pace
over the past ten years. However, any reported medical
concerns with respect to ingredients commonly used in nutritional
supplements could negatively impact the demand for our
products. Additionally, low-carb products, liquid meal
replacements and similar competing products addressing changing
consumer tastes and preferences could affect the market for certain
categories of supplements. All these factors could have a
negative impact on our sales growth.
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Our U.S. Net Operating Loss ("NOL") carryforwards may expire or
could be substantially limited if we experience an ownership change
as defined in the Internal Revenue Code (“IRC”) or if
changes are made to the IRC.
We have
significant U.S. NOL carryforwards. Under federal tax laws, we can
carry forward and use our NOLs to reduce our future U.S. taxable
income and tax liabilities until such NOL carryforwards expire in
accordance with the IRC of 1986, as amended. Our NOL carryforwards
provide a benefit to us, if fully utilized, of significant future
tax savings. However, our ability to use these tax benefits in
future years will depend upon the amount of our federal and state
taxable income. If we do not have sufficient federal and state
taxable income in future years to use the benefits before they
expire, we will permanently lose the benefit of the NOL
carryforwards.
Additionally,
Section 382 and Section 383 of the IRC provide an annual
limitation on our ability to utilize our NOL carryforwards, as well
as certain built-in losses, against the future U.S. taxable income
in the event of a change in ownership, as defined under the IRC.
While we have implemented a stockholder’s right plan to
protect our NOL carryforwards, there is no assurance that we will
not experience a change in ownership in the future as a result of
changes in our stock ownership, and any such subsequent changes in
ownership for purposes of the IRC could further limit our ability
to use our NOL carryforwards.
If
other changes are made to the IRC, they could impact our ability to
utilize our NOLs. Accordingly, any such occurrences could adversely
affect our financial condition, operating results and cash
flows.
Compliance with changing corporate governance regulations and
public disclosures may result in additional risks and
exposures.
Changing laws,
regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002 and new
regulations from the SEC, have created uncertainty for public
companies such as ours. These laws, regulations, and standards are
subject to varying interpretations in many cases and as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. As a result, our efforts to comply with
evolving laws, regulations, and standards have resulted in, and are
likely to continue to result in, increased expense and significant
management time and attention.
Loss of key personnel could impair our ability to
operate.
Our
success depends on hiring, retaining and integrating senior
management and skilled employees. We are currently dependent on
certain current key employees, who are vital to our ability to grow
our business and maintain profitability. As with all personal
service providers, our officers can terminate their relationship
with us at will. Our inability to retain these individuals
may result in a reduced ability to operate our
business.
Risk Factors Relating to Our Common Stock
A limited trading market currently exists for our Common Stock, and
we cannot assure you that an active market will ever develop, or if
developed, will be sustained.
There
is currently a limited trading market for our Common Stock on the
OTC: PINK marketplace, and an active trading market may not
develop. Consequently, we cannot assure you when and if an active
trading market in our Common Stock will be established, or whether
any such market will be sustained or sufficiently liquid to enable
holders of shares of our Common Stock to liquidate their investment
in the Company.
The price of our securities could be subject to wide fluctuations
and your investment could decline in value.
The
market price of the securities of a company such as ours with
little name recognition in the financial community and without
significant revenue can be subject to wide price swings. For
example, the closing price of our Common Stock has ranged from a
high of $21.60 to a low of $7.70 during the year ending
December 31, 2020. The market price of our securities may be
subject to wide changes in response to quarterly variations in
operating results, announcements of new products by us or our
competitors, reports by securities analysts, volume trading, or
other events or factors. In addition, the financial markets have
experienced significant price and volume fluctuations for a number
of reasons, including the failure of certain companies to meet
market expectations. These broad market price swings, or any
industry-specific market fluctuations, may adversely affect the
market price of our securities.
Companies that have
experienced volatility in the market price of their stock have been
the subject of securities class action litigation. If we were to
become the subject of securities class action litigation, it could
result in substantial costs and a significant diversion of our
management’s attention and resources.
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We may issue preferred stock with rights senior to the common
stock.
Our
Articles of Incorporation authorize the issuance of up to 10.0
million shares of preferred stock in the aggregate. Currently,
1,000 shares of Series A Preferred Stock, par value $0.01 per
share, are authorized (the “Series A Preferred”) and,
therefore, could be issued without shareholder approval. For
purposes of enacting its Tax Benefits Preservation Plan, dated
February 26, 2021, by and between the Company and Colonial Stock
(the "Tax Benefits Plan"),
the Company's transfer agent, the Company has designating a new
class of Preferred Stock as Series B Junior Participating Preferred
Stock, par value $0.01, which shall have rights, powers, and
preferences similar to those of the Company's Common Stock.
However, the rights and preferences of any class or series of
preferred stock, were we to designate or issue additional shares of
preferred stock, would be established by our Board of Directors in
its sole discretion and may have dividend, voting, liquidation and
other rights and preferences that are senior to the rights of our
Common Stock.
You should not rely on an investment in our Common Stock for the
payment of cash dividends.
We have
never paid cash dividends on our Common Stock and do not anticipate
paying any cash dividends in the foreseeable future. You should not
make an investment in our Common Stock if you require dividend
income. Any return on investment in our Common Stock would only
come from an increase in the market price of our stock, which is
uncertain and unpredictable.
Our Chair of the Board of Directors, Chief Executive Officer and
significant shareholder may have certain personal interests that
may affect the Company.
Due to
the securities held by Sudbury Capital Fund, LP ("Sudbury") and Dayton Judd, the
Company’s Chair of the Board and Chief Executive Officer, Mr.
Judd may be deemed to be the beneficial owner of a majority of the
Company’s outstanding voting securities. Consequently, Mr.
Judd individually, and together with Sudbury, as stockholders
acting together, can significantly influence all matters requiring
approval by our stockholders, including the election of directors
and significant corporate transactions, such as mergers or other
business transactions requiring shareholder approval. This
concentration of ownership may have effects such as delaying or
preventing a change in control of the Company that may be favored
by other shareholders or preventing transactions in which
shareholders might otherwise recover a premium for their shares
over current market prices. In addition, as a result of Mr.
Judd’s position as Chair of the Board and Chief Executive
Officer, he and/or Sudbury may have the ability to exert influence
over both the actions of the Board of Directors, as well as the
execution of management’s plans.
SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT,
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED,
BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None.
ITEM 2. PROPERTIES
The
Company, including its subsidiaries, leases its headquarters in
Omaha, Nebraska. Management believes that the Company's site
is adequate to support the business and suitable for present
purposes, and the property and equipment have been well
maintained.
ITEM 3. LEGAL
PROCEEDINGS
We
are currently not involved in any litigation that we believe could
have a material adverse effect on our financial condition or
results of operations. There is no action, suit, proceeding,
inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or,
to the knowledge of the executive officers of the Company or any of
its subsidiaries, threatened against or affecting the Company, our
Common Stock, any of our subsidiaries or of the Company’s or
our subsidiaries’ directors or officers in their capacities
as such, in which an adverse decision could have a material adverse
effect.
ITEM 4. MINE SAFETY
DISCLOSURES
None.
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PART II
ITEM
5. MARKET FOR
REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND
ISSUERS PURCHASES OF EQUITY SECURITIES
Our
Common Stock is traded in the over-the-counter market, and quoted
on the OTC: PINK market under the symbol
“FTLF”.
As of
December 31, 2020, there were 1,060,818 shares of Common Stock
outstanding, and there were 34 shareholders of record of the
Company’s Common Stock in addition to an undetermined number
of holders whose shares are held in “street
name.”
The
following table sets forth for the periods indicated the high and
low closing prices for our Common Stock.
High Low
High Low
On
March 25, 2021, the closing price of our Common Stock was $24.04
per share.
Recent Sales of Unregistered Securities
No
unregistered securities were issued during the fiscal year that
were not previously reported in a Quarterly Report on Form 10-Q or
Current Report on Form 8-K.
During
the year ended December 31, 2020, the Company repurchased 11,900
shares of Common Stock under the Share Repurchase Program, or
approximately 1% of the issued and outstanding shares of the
Company’s Common Stock, through private transactions. As of
December 31, 2020, we were authorized to repurchase up to $2.5
million, of which approximately $1.1 million remained
available.
Subsequent to the
end of the fiscal year, on February 1, 2021, the Board approved an
additional amendment to the previously authorized Share Repurchase
Program. Under the terms of the amendment, the Company is
authorized to repurchase up to $5.0 million of securities issued by
the Company. Common Stock repurchase
activity under our publicly announced Share Repurchase Program
during each quarter of 2020 was as follows:
Transfer Agent
Our
transfer agent and registrar for the Common Stock is Colonial Stock
Transfer located in Salt Lake City, Utah.
Securities Authorized for Issuance under Equity Compensation
Plans
For a
discussion of our equity compensation plans, please see Item 12 of
this Annual Report.
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ITEM 6. SELECTED
FINANCIAL DATA
Not a
required disclosure for Smaller Reporting Companies.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OR PLAN OF OPERATION
The
following is management’s discussion and analysis of certain
significant factors that have affected our financial position and
operating results during the periods included in the accompanying
consolidated financial statements, as well as information relating
to the plans of our current management. This report includes
forward-looking statements. Generally, the words
“believes”, “anticipates”,
“may”, “will”, “should”,
“expect”, “intend”, “estimate”,
“continue”, and similar expressions or the negative
thereof or comparable terminology are intended to identify
forward-looking statements. Such statements are subject to certain
risks and uncertainties, including the matters set forth in this
Annual Report or other reports or documents we file with the
Securities and Exchange Commission from time to time, which could
cause actual results or outcomes to differ materially from those
projected. Undue reliance should not be placed on these
forward-looking statements, which speak only as of the date hereof.
We undertake no obligation to update these forward-looking
statements.
The
following discussion and analysis should be read in conjunction
with our consolidated financial statements and the related notes
thereto and other financial information contained elsewhere in this