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IFIT > SEC Filings for IFIT > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for ISATORI, INC.

Form 10-Q for ISATORI, INC.


9-Nov-2012

Quarterly Report


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 September 30, 2012 should be read in conjunction with our 2011 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 which develops and sells nutritional products in the performance, weight loss and energy markets through on-line marketing, catalogs and thousands of retail stores around the world. iSatori was formed in 2001 as a Colorado limited liability company and converted to a Colorado corporation in 2011. On June 29, 2012, the Company merged with and into Integrated Security System, Inc. and simultaneously changed its name to iSatori, Inc. iSatori is headquartered in Golden, Colorado.

iSatori has distributed its products to thousands of retail stores, those have included outlets such as GNC, Wal-Mart, Costco, CVS, Walgreens, 7-Eleven and other Fortune 500 companies, augmented by internet sales through its proprietary online marketing new product launch system. The Company's core competencies include the development of new, innovative products, supported by creative sales and marketing programs, all designed to expand its revenues and distribution in the rapidly growing nutritional products industry.

iSatori currently employs 19 full-time, one part-time and two contract employees. Additionally, from time to time, iSatori utilizes the contracted services of temporary employees, call-centers, fulfillment, and manufacturing.

Recent Developments

On July 16, 2012, iSatori entered into a Credit Agreement with Colorado Business Bank West of Denver, Colorado (the "New Credit Agreement"), and in connection with the entrance into the New Credit Agreement, terminated its commitments under its existing credit agreement with Avidbank Corporate Finance, a division of AvidBank. Borrowings under the New Credit Agreement will be used to provide ongoing working capital and for other general corporate purposes of the Company and its subsidiaries.

The New Credit Agreement provides a revolving commitment to the Company of $1,500,000, which increased the Company's previous borrowing capacity by 50%.
Amounts outstanding under the New Credit Agreement will be reflected in a promissory note with a principal balance of $1,500,000 and a maturity date of July 16, 2013 (the "Promissory Note"). The principal balance on the Promissory Note will note bear 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 3.750% with a minimum interest rate of 4.000% per annum.


Results of Operations

Comparison of the Three Months ended September 30, 2012 and 2011

Revenues

Our consolidated net revenues decreased $496 thousand or -17% to $2.46 million for the three months ended September 30, 2012 compared to $2.96 million for the same period in 2011. The main causes of the decrease were that internet revenues derived from an internet marketing program were down $638 thousand, or 40%; international distributor sales were down $95 thousand, or 31% and mass accounts sales were down $27 thousand, or 54% from the previous period. The decrease in the internet revenue was the result of an internet marketing program being in place during the same period in the previous year, but not in the current year. The program enabled consumers to receive a trial of an iSatori product, and we terminated the 2011 internet marketing program at the end of 2011. In late August 2012, we launched a new internet marketing program for a new product. However, only minimal revenue from the new program was reflected in the quarter results. We have not yet been able to determine the efficacy of the new internet marketing program. Due to the program not being in place during the entire quarter, less shipping and handling revenue was realized compared to the same quarter in the previous year. Offsetting the revenues decrease was product sales to our retail and domestic distributor accounts increased over $107 thousand or 7% from the previous period. In addition, the revenue during the quarter ended September 30, 2011 included an initial stocking order to a new international distributor.

The $21 thousand decrease in Other revenue for the during the quarter was also related to the planned delay of the launch of the internet marketing program - as less shipping and handling revenue for the campaign was realized.

Cost of Sales

Cost of sales, which includes product costs, costs of warehousing and distribution, and freight costs changed less than 1% to $931 thousand for the three month period ended September 30, 2012 compared to $938 thousand for the same period in 2011. However, cost of sales as a percentage of product revenue increased to 40% for the three month period ended September 30, 2012 compared to 33% for the same period in 2011. In 2011, gross profit as a percentage of product revenue was higher because of the contribution the internet marketing program provides. The planned delay in 2012 of this program resulted in lower margins.

Operating Expenses

Selling and Marketing

Selling and Marketing expenses decreased slightly by $83 thousand or 6.5% to $1.2 million for the three months ended September 30, 2012 compared to $1.3 million for the same period in 2011. The decrease can be attributed to the planned delay of the launch of the internet marketing trial programs. While some upfront expenses related to the launch of the program were incurred, the overall comparative costs as incurred during the three months ended September 30, 2011 were not realized. The decrease was offset by other forms of marketing activities, such as print and tradeshows costs, which have increased in 2012.

Salaries and Labor Related Expenses

Salaries and Labor Related Expenses decreased $129 thousand or 25% to $393 thousand for the three month period ended September 30, 2012 compared to $522 thousand for the same period in 2011. This decrease is related to the reversal of an accrual for $71 thousand for a future payment as approved by the Company's Board of Directors (see "Merger Transaction" paragraph, below). This amount will not be paid out.

Administration

Administrative expenses increased $205 thousand or 133% to $358 thousand for the three months ended September 30, 2012 compared to $153 thousand for the same period in 2011. The increase in expenses was for professional fees, insurance and increased legal fees related to ongoing litigation.

Depreciation and Amortization

Depreciation and Amortization expense increased $21 thousand or 10054% to $21 thousand for the three months ended September 30, 2012 compared to a benefit of $214 for the same period in 2011. The 2011 number reflects an adjustment for the over-depreciation of an asset which was moved to a status of "Asset held for sale". Without this adjustment, depreciation would have been $23 thousand for the three months ended September 30, 2011.


Other Income/(Expense)

Other expense was $2 thousand for the three months ended September 30, 2012 compared to $0 for the same period in 2011. This expense was related to the change in the marketable securities held by the Company which the Company acquired as a result of the Merger.

Financing Expenses

Financing expenses increased $19 thousand or 28% to $91 thousand for the three months ended September 30, 2012 compared to $72 thousand for the same period in 2011. This additional expense relates to credit card processing fees associated with the internet marketing trial program. The model used in 2012 utilizes processors which charge higher fees than the previous offer in 2011, due to regulation changes in the industry.

Interest Income/(Expense)

Net interest income of $5 thousand was recognized for the three months ended September 30, 2012 compared to expense of $49 thousand for the same period in 2011. The 2011 expense was related to the subordinated Mezzanine Loan which was entered into July 15, 2011 (see Note 8 -Long-Term Indebtedness).

Income (loss) before income taxes

As a result of the foregoing, income (loss) before income taxes were a loss of $517 thousand, for the three months ended September 30, 2012, which is equal to -22% of product revenues during the period, compared to a loss of $44 thousand, for the same period in 2011, which amount is equal to -2% of product revenues during that period.

Income Tax Benefit/(Expense)

Income tax expense decreased $1 thousand or 29% to $2 thousand for the three months ended September 30, 2012 compared to $3 thousand for the same period in 2011. The expense is related to the foreign tax payable on royalty income received by the Company.

Net Income (loss)

As a result of the foregoing, net income (loss) was a loss of $519 thousand, which number is equal to -22% of product revenues for the three months ended September 30, 2012 compared to a loss of $47 thousand, which number is equal to -2% of product revenues for the same period in 2011.

Comparison of the Nine Months ended September 30, 2012 and 2011

Merger Transaction

On April 5, 2012, Integrated and iSatori Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Integrated ("Merger Sub"), consummated a merger (the "Merger") with iSatori Technologies, Inc., a Colorado corporation, pursuant to a Merger Agreement, dated as of February 17, 2012, by and among Integrated, Merger Sub and iSatori (the "Merger Agreement"). Pursuant to the Merger Agreement, iSatori was merged with and into Merger Sub with iSatori surviving as a wholly-owned subsidiary of Integrated. On June 29, 2012, iSatori Technologies, Inc. was merged with and into Integrated pursuant to a short-form merger effected under Delaware law. In connection with such merger, Integrated changed its name to iSatori, Inc. The trading symbol of the Company is "IFIT".


Because of this merger transaction, and the corresponding payoff of the mezzanine financing, there were numerous one-time expenditures incurred by the Company, which has impacted the financial statement for the 2012 periods presented in this document. The Company has isolated approximately $441 thousand which has been expensed as of September 30, 2012 and are reflected in the table below.

    iSatori Inc.
    One-time Expenses

    Merger-Related Expenses
    Professional Fees                                                $  26,898
    Severance per Agreement                                          $  28,600
    Integrated operating loss for the period after the merger, prior
    to the upstream merger                                           $  19,490

    Total One-time Merger Related Expenses                           $  74,988

    Mezzanine Financing Expenses at Payoff
    Amortize remaining balance of Professional Fees                  $  44,995
    Amortize remaining balance of Closing Fees, Debt Discount        $ 100,031
    Payout of OID/Interest                                           $ 121,123
    Negotiated Settlement for removal of Put Right                   $ 100,000
    Total One-time Mezzanine Financing Payoff Expenses               $ 366,149
    Total One-time expenses                                          $ 441,137

Additionally $121 thousand was incurred in 2012 for an audit of the fiscal years 2010 and 2011, which were not incurred in the prior years.

Revenues

Our consolidated net revenues decreased slightly $72 thousand or 1% to $7.2 million for the nine months ended September 30, 2012 compared to $7.3 million for the same period in 2011. The decrease was because sales to mass customers were down $48 thousand or 34% and internet revenues derived from an internet marketing program offer were down $1.1 million or 45% from the previous period.
This was the result of a planned delay in launching the new internet marketing program with a new product, which began to take off in September 2012. We had stopped the previous trial at the end of 2011. Offsetting the decrease was product sales to our retail and distributor (domestic and international) which increased [to] $1.1 million or 14% from the previous period.

The $83 thousand decrease in Other Revenue for the quarter was also a related to the planned delay of the launch of the internet marketing trial program.

Cost of Sales

Cost of sales, which includes product costs, costs of warehousing and distribution, and freight costs increased $366 thousand, or 15% to $2.8 million for the nine month period ended September 30, 2012 compared to $2.4 million for the same period in 2011. In 2011, margins were higher because of the contribution the internet marketing trial program provided. The planned delay in 2012 of this program resulted in lower margins.


Operating Expenses

Selling and Marketing

Selling and Marketing expenses decreased $312 thousand or 13% to $2.1 million for the nine months ended September 30, 2012 compared to $2.4 million for the same period in 2011. The decrease can be attributed to the planned delay of the launch of the internet marketing trial program. Without the anticipated revenue from the internet marketing trial program, the corresponding expense associated with the program was not realized. The decrease was offset by other forms of marketing activities, such as print and tradeshows, which have increased in 2012.

Salaries and Labor Related Expenses

Salaries and Labor Related Expenses increased $83 thousand or 6% to $1.4 million for the nine months period ended September 30, 2012 compared to $1.3 million for the same period in 2011. This variance is related to normal salary increases, coupled with a severance payout of $29 thousand, as established in the Merger agreement with Integrated.

Administration

Administrative expenses increased $653 thousand or 187% to $1.0 million for the nine months ended September 30, 2012 compared to $350 thousand for the same period in 2011. The increase in expenses were for professional fees incurred as a result of the Merger and mezzanine finance payoff (totaling $72 thousand, see "Merger Transaction" paragraph above), accounting fees related to the audit of fiscal years 2010 and 2011, and increased legal fees related to ongoing litigation.

Depreciation and Amortization

Depreciation and Amortization expense decreased $5 thousand or -7.5% to $57 thousand for the nine months ended September 30, 2012 compared to $61 thousand for the same period in 2011. This is a result of the disposition of an auto asset at the beginning of 2012, as well as some of the assets owned by the Company have reached the end of their depreciable lives.

Gain on the sale of a product line

As mentioned in Note 2 - Sale of Product Line in the financial statements, the Company recognized a $500 thousand gain when the sale of dormant children's vitamin product line was sold to an unrelated third party. The sale was consummated in January 2012.

Other Income

Other income was $14 thousand for the nine months ended September 30, 2012 compared to $0 for the same period in 2011. The income incurred related to the change in the marketable securities held by the Company which the company acquired as a result of the Merger.

Financing Expenses

Financing expenses increased $273 thousand or 257% to $379 thousand for the nine months ended September 30, 2012 compared to $106 thousand for the same period in 2011. This additional expense relates to the financing expenses incurred during the first quarter and the payoff of the Mezzanine Loan at the time of the Merger for a total of $200 thousand (see Note 8 -Long-Term Indebtedness and Interest and "Merger Transaction" paragraph above). All fees which were being amortized over the life of the loan were expensed in full at this time. This loan was entered into July 15, 2011, so minimal financing fees were reflected in the nine months ended September 30, 2011.


Interest Expense

Interest expense increased $154 thousand or 177% to $241 thousand for the nine months ended September 30, 2012 compared to $87 thousand for the same period in 2011. This additional expense relates to the interest incurred over the period up to the date of the Merger and the payoff of the original issue discount of the Mezzanine Loan, which totaled $121 thousand (see Note 8 -Long-Term Indebtedness and Interest and "Merger Transaction" paragraph above).

Income before income taxes

As a result of the foregoing, income before income taxes was a loss of $243 thousand, or -3% of product revenues for the nine months ended September 30, 2012 compared to income of $529 thousand or 8% of product revenues for the same period in 2011.

Without the corresponding one-time expenditures associated with the Merger (see "Merger Transaction" paragraph above) income before income taxes would be $319 thousand, or 5% of product revenues, compared to $529, thousand, or 8% of product revenues for the same period in 2011.

Income Tax Benefit (Expense)

Income tax expense was $112 thousand for the nine months ended September 30, 2012 compared to an income tax benefit of $268 thousand for the same period in 2011. The expense incurred for the above mentioned period in 2012 was a result of the overall income for the short period to be filed for taxes for iSatori Technologies, Inc, (the "Predecessor Company") prior to the Merger. The benefit reported for the nine period in 2011, was a result of recording a net deferred tax asset, by a credit to income tax expense, for temporary differences between financial reporting and the income tax basis of the existing assets and liabilities, when the Predecessor Company converted from a limited liability company to a corporation on September 1, 2011.

Net Income/(Loss)

As a result of the foregoing, the Company incurred a net loss of $358 thousand, which amount is equal to -5% of product revenues for the nine months ended September 30, 2012 compared to income of $797 thousand, which amount is equal to 11% of product revenues for the same period in 2011.

Liquidity and Capital Resources

Cash Position

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's cash and cash equivalents, consisting primarily of deposits with financial institutions, was $2.4 million at September 30, 2012, compared with $365 thousand at September 30, 2011. Net cash provided to iSatori on the date of the Merger (after payoff of the Mezzanine loan discussed in Note 8 - Long-term Indebtedness and Interest of the financial statements) was $3.6 million.


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

Credit Arrangements as of September 30, 2012

As of September 30, 2012, iSatori had outstanding credit indebtedness of $673,155, which consisted solely of amounts outstanding under the revolving line of credit.

Off Balance Sheet Arrangements

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

Contractual Obligations

iSatori has no contractual obligations.

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

Our management, with the participation of Stephen Adelé, our Chief Executive Officer, and Michael Wilemon, our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2012. Based on the evaluation, those officers have concluded that:

·

our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

·

our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There has not been any change in the Company's internal control over financial reporting that occurred during the quarterly period ended September 30, 2012, that has materially affected, or is reasonably likely to affect, the Company's internal control over financial reporting.


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