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EX-10.179 - EXHIBIT 10.179 - TWINLAB CONSOLIDATED HOLDINGS, INC.ex_130039.htm
EX-32.2 - EXHIBIT 32.2 - TWINLAB CONSOLIDATED HOLDINGS, INC.ex_130063.htm
EX-32.1 - EXHIBIT 32.1 - TWINLAB CONSOLIDATED HOLDINGS, INC.ex_130062.htm
EX-31.2 - EXHIBIT 31.2 - TWINLAB CONSOLIDATED HOLDINGS, INC.ex_130061.htm
EX-31.1 - EXHIBIT 31.1 - TWINLAB CONSOLIDATED HOLDINGS, INC.ex_130060.htm
EX-10.181 - EXHIBIT 10.181 - TWINLAB CONSOLIDATED HOLDINGS, INC.ex_130041.htm
EX-10.180 - EXHIBIT 10.180 - TWINLAB CONSOLIDATED HOLDINGS, INC.ex_130040.htm
EX-10.178 - EXHIBIT 10.178 - TWINLAB CONSOLIDATED HOLDINGS, INC.ex_129841.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2018

OR

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 000-55181

 

TWINLAB CONSOLIDATED HOLDINGS, INC.


(Exact name of registrant as specified in its charter)

Nevada

 

46-3951742

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

4800 T-Rex Avenue, Suite 305

Boca Raton, Florida

 

33431

(Address of principal executive offices)

 

(Zip Code)

(561) 443-5301


(Registrant’s telephone number, including area code)

 


(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 ☐    No ☒

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes ☒    No ☐

 

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

 

Large accelerated filer ☐

Accelerated filer ☐

   

Non-accelerated filer ☐

Smaller reporting company ☒

   
 

Emerging growth company ☒

   

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

The number of shares of common stock, $0.001 par value, outstanding on November 16, 2018 was 254,441,733 shares.

 

 

 

 

 

TABLE OF CONTENTS

     

Page No.

Part I - FINANCIAL INFORMATION

   
         

Item 1.

 

Financial Statements

   
         
    Condensed Consolidated Balance Sheets (Unaudited) 1  
         
    Condensed Consolidated Statements of Operations (Unaudited) 2  
         
    Condensed Consolidated Statements of Cash Flows (Unaudited) 3  
         
    Notes to Condensed Consolidated Financial Statements (Unaudited) 5  

 

 

 

   

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

 

   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

 

   

Item 4.

 

Controls and Procedures

29

 
         

Part II - OTHER INFORMATION

   
         

Item 1.

 

Legal Proceedings

30

 
         

Item 1A.

 

Risk Factors

30

 
         

Item 6.

 

Exhibits

31

 
         
   

Signatures

32

 

 

 

 

 

PART I – FINANCIAL INFORMATION

Item 1.     Financial Statements.

 

 

TWINLAB CONSOLIDATED HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(DOLLAR AMOUNTS IN THOUSANDS)

 

   

September 30,
201
8

   

December 31,
2017

 

ASSETS

               
                 

Current assets:

               

Cash

  $ 619     $ 1,350  

Accounts receivable, net of allowance of $2,712 and $2,534, respectively

    9,184       6,528  

Inventories, net

    8,609       17,168  

Prepaid expenses and other current assets

    4,423       2,256  

Total current assets

    22,835       27,302  
                 

Property and equipment, net

    2,602       3,169  

Intangible assets, net

    21,687       23,063  

Goodwill

    17,797       17,797  

Other assets

    1,720       1,762  
                 

Total assets

  $ 66,641     $ 73,093  
                 

LIABILITIES AND STOCKHOLDERS' DEFICIT

               
                 

Current liabilities:

               

Accounts payable

  $ 11,689     $ 10,146  

Accrued expenses and other current liabilities

    12,382       10,336  

Derivative liabilities

    8,672       6,791  

Notes payable and current portion of long-term debt, net of discount of $3,457 and $3,660, respectively

    73,173       68,093  

Total current liabilities

    105,916       95,366  
                 

Long-term liabilities:

               

Deferred gain on sale of assets

    1,444       1,565  

Notes payable and long-term debt, net of current portion

    3,224       3,383  

Total long-term liabilities

    4,668       4,948  
                 

Total liabilities

    110,584       100,314  
                 
Commitments and contingencies                
                 

Stockholders’ deficit:

               

Common stock, $0.001 par value, 5,000,000,000 shares authorized, 389,247,784 and 388,081,117 shares issued and outstanding, respectively

    389       388  

Additional paid-in capital

    229,571       226,884  

Stock subscriptions receivable

    (30 )     (30 )

Treasury stock, 134,806,051 shares at cost

    (500 )     (500 )

Accumulated deficit

    (273,373 )     (253,963 )

Total stockholders’ deficit

    (43,943 )     (27,221 )
                 

Total liabilities and stockholders’ deficit

  $ 66,641     $ 73,093  

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

1

 

 

 

TWINLAB CONSOLIDATED HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(DOLLAR AMOUNTS IN THOUSANDS)

 

   

Three Months Ended
September 30,

   

Nine Months Ended
September 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Net sales

  $ 14,933     $ 20,612     $ 56,259     $ 66,130  

Cost of sales

    13,726       17,103       46,095       50,368  
                                 

Gross profit

    1,207       3,509       10,164       15,762  
                                 

Selling, general and administrative expenses

    5,231       6,646       20,789       20,574  
                                 

Loss from operations

    (4,024 )     (3,137 )     (10,625 )     (4,812 )
                                 

Other income (expense):

                               

Interest expense, net

    (2,405 )     (1,876 )     (6,856 )     (6,318 )

Loss on change in derivative liabilities

    (2,269 )     (393 )     (1,881 )     (1,688 )

Other expense, net

    (15 )     (12 )     (48 )     (36 )
                                 

Total other expense, net

    (4,689 )     (2,281 )     (8,785 )     (8,042 )
                                 

Loss before income taxes

    (8,713 )     (5,418 )     (19,410 )     (12,854 )

Provision for income taxes

    -       -       -       -  
                                 

Net loss

  $ (8,713 )   $ (5,418 )   $ (19,410 )   $ (12,854 )
                                 

Weighted average number of common shares outstanding:

                               

Basic

    254,441,733       252,924,027       254,286,055       252,935,792  

Diluted

    254,441,733       252,924,027       254,286,055       252,935,792  
                                 

Net loss per common share:

                               

Basic

  $ (0.03 )   $ (0.02 )   $ (0.08 )   $ (0.05 )

Diluted

  $ (0.03 )   $ (0.02 )   $ (0.08 )   $ (0.05 )

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

2

 

 

 

TWINLAB CONSOLIDATED HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(AMOUNTS IN THOUSANDS)

 

   

Nine Months Ended
September 30,

 
   

2018

   

2017

 
                 

Cash flows from operating activities:

               

Net loss

  $ (19,410 )   $ (12,854 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization

    2,001       2,416  

Amortization of debt discount

    1,683       1,774  

Issuance of common stock for services

    352       -  

Stock-based compensation

    207       386  

Change in provision for obsolete inventories

    (94 )     466  

Change in provision for losses on accounts receivable

    178       167  

Loss on change in derivative liabilities

    1,881       1,688  

Other non-cash items

    (121 )     (121 )

Changes in operating assets and liabilities:

               

Accounts receivable

    (2,834 )     (1,136 )

Inventories

    8,653       (1,233 )

Prepaid expenses and other current assets

    (1,519 )     632  

Other assets

    42       (101 )

Accounts payable

    1,543       (3,259 )

Accrued expenses and other current liabilities

    2,046       2,032  
                 

Net cash used in operating activities

    (5,392 )     (9,143 )
                 

Cash flows from investing activities:

               

Purchase of property and equipment

    (58 )     (51 )
                 

Cash flows from financing activities:

               

Proceeds from issuance of debt

    9,000       6,267  

Repayment of debt

    (1,207 )     (1,583 )

Net borrowings from (repayments of) revolving credit facility

    (3,074 )     1,646  
                 

Net cash provided by financing activities

    4,719       6,330  
                 

Net decrease in cash

    (731 )     (2,864 )

Cash, beginning of the period

    1,350       5,097  
                 

Cash, end of the period

  $ 619     $ 2,233  

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3

 

 

TWINLAB CONSOLIDATED HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(AMOUNTS IN THOUSANDS) - Continued

 

   

Nine Months Ended
September 30,

 
   

2018

   

2017

 
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

               

Cash paid for interest

  $ 996     $ 982  

Cash paid for income taxes

    -       -  
                 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:

               

Issuance of common stock for prepaid expenses

  $ 648     $ -  

Reduction of common stock and increase in additional paid-in capital for surrender of common stock

    3       -  

Issuance of warrants for debt discount and additional paid-in capital

    1,481          

Relief of stock subscription accrual through long-term debt

    -       (3,200 )

Issuance of new long-term debt as payment of existing prepaid stock subscription

    -       3,200  

Property and equipment acquired through the issuance of capital leases

    -       330  

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4

 

 

TWINLAB CONSOLIDATED HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(DOLLAR AMOUNTS IN THOUSANDS)

 

 

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization

Twinlab Consolidated Holdings, Inc. (the “Company”, “Twinlab,” “we,” “our” and “us”) was incorporated on October 24, 2013 under the laws of the State of Nevada as Mirror Me, Inc. On August 7, 2014, we amended our articles of incorporation and changed our name to Twinlab Consolidated Holdings, Inc.

 

Nature of Operations

We are an integrated marketer, distributor and retailer of branded nutritional supplements and other natural products sold to and through domestic health and natural food stores, mass market retailers, specialty stores retailers, on-line retailers and websites. Internationally, we market and distribute branded nutritional supplements and other natural products to and through health and natural product distributors and retailers.

 

Our products include vitamins, minerals, specialty supplements and sports nutrition products sold under the Twinlab® brand name (including the REAAL®, and Twinlab® Fuel brand of sports nutrition products); a market leader in the healthy aging and beauty from within categories sold under the Reserveage™ Nutrition and ResVitale® brand names; diet and energy products sold under the Metabolife® brand name; the Re-Body® brand name; and a full line of herbal teas sold under the Alvita® brand name. To accommodate consumer preferences, our products come in various formulations and delivery forms, including capsules, tablets, softgels, chewables, liquids, sprays and powders. These products are sold primarily through health and natural food stores and on-line retailers, supermarkets, and mass-market retailers.

 

We also perform contract manufacturing services for private label products.  Our contract manufacturing services business involves the manufacture of custom products to the specifications of a customer who requires finished product under the customer’s own brand name.  We do not market these private label products as our business is to sell the products to the customer, who then markets and sells the products to retailers or end consumers.

 

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

 

Basis of Presentation and Unaudited Information

The condensed consolidated interim financial statements included herein have been prepared by the Company in accordance with United States generally accepted accounting principles, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management, are necessary for fair presentation of the information contained therein. Financial results for any interim period are not necessarily indicative of financial results that may be expected for the fiscal year. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on April 3, 2018.

 

Use of Estimates

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. Significant management estimates include those with respect to returns and allowances, allowance for doubtful accounts, reserves for inventory obsolescence, the recoverability of long-lived assets, intangibles and goodwill and the estimated value of warrants and derivative liabilities.

 

Revenue Recognition

Revenue from product sales, net of estimated returns and allowances, is recognized when evidence of an arrangement is in place, related prices are fixed, and determinable, contractual obligations have been satisfied, title and risk of loss have been transferred to the customer and collection of the resulting receivable is reasonably assured. Shipping terms are generally freight on board shipping point. We sell predominately in the North American and European markets, with international sales transacted in U.S. dollars.

 

5

 

 

Fair Value of Financial Instruments

We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

Level 1 – inputs are quoted prices in active markets for identical assets that the reporting entity has the ability to access at the measurement date.

 

Level 2 – inputs are other than quoted prices included within Level 1 that are observable for the asset, either directly or indirectly.

 

Level 3 – inputs are unobservable inputs for the asset that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability.

 

The following table summarizes our financial instruments that are measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017:

 

   

Total

   

Level 1

   

Level 2

   

Level 3

 

September 30, 2018:

                               

Derivative liabilities

  $ 8,672     $ -     $ -     $ 8,672  
                                 

December 31, 2017:

                               

Derivative liabilities

  $ 6,791     $ -     $ -     $ 6,791  

 

Accounts Receivable and Allowances

We grant credit to customers and generally do not require collateral or other security. We perform credit evaluations of our customers and provide for expected claims related to promotional items, customer discounts, shipping shortages, damages, and doubtful accounts based upon historical bad debt and claims experience. As of September 30, 2018, total allowances amounted to $2,712, of which $490 was related to doubtful accounts receivable. As of December 31, 2017, total allowances amounted to $2,534, of which $329 was related to doubtful accounts receivable.

 

Inventories

Inventories are stated at the lower of cost or net realizable value and are reduced by an estimated reserve for obsolete inventory.

 

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation, including amounts amortized under capital leases, is calculated on the straight-line method over the estimated useful lives of the related assets, which are 7 to 10 years for machinery and equipment, 8 years for furniture and fixtures and 3 years for computers. Leasehold improvements are amortized over the shorter of the useful life of the asset or the term of the lease.

  

Normal repairs and maintenance are expensed as incurred. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation or amortization is removed from the accounts and any gain or loss is included in the results of operations.

 

Intangible Assets

Intangible assets consist primarily of trademarks and customer relationships, which are amortized on a straight-line basis over their estimated useful lives ranging from 3 to 30 years. The valuation and classification of these assets and the assignment of amortizable lives involve significant judgment and the use of estimates.

 

We believe that our long-term growth strategy supports our fair value conclusions. For intangible assets, the recoverability of these amounts is dependent upon achievement of our projections and the execution of key initiatives related to revenue growth and improved profitability.

 

Goodwill

Goodwill is not subject to amortization, but is reviewed for impairment annually, or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. An impairment charge would be recorded to the extent the carrying value of goodwill exceeds its estimated fair value. The testing of goodwill under established guidelines for impairment requires significant use of judgment and assumptions. Changes in forecasted operations and other assumptions could materially affect the estimated fair values. Changes in business conditions could potentially require adjustments to these asset valuations.

 

6

 

 

Impairment of Long-Lived Assets

Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment when changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount of the asset exceeds the expected undiscounted cash flows of the asset, an impairment charge is recognized equal to the amount by which the carrying amount exceeds fair value. The testing of these intangibles under established guidelines for impairment requires significant use of judgment and assumptions. Changes in forecasted operations and other assumptions could materially affect the estimated fair values. Changes in business conditions could potentially require adjustments to these asset valuations.

 

Indefinite-Lived Intangible Assets

Indefinite-lived intangible assets relating to the asset acquisition of Organic Holdings, a market leader in the healthy aging and beauty from within categories, and owner of the Reserveage Nutrition brands, are determined to have an indefinite useful economic life and as such are not amortized. Indefinite-lived intangible assets are tested for impairment annually which consists of a comparison of the fair value of the asset with its carrying value. The total indefinite-lived intangible assets as of September 30, 2018 and December 31, 2017 was $4,346.

 

Value of Warrants Issued with Debt

We estimate the grant date value of certain warrants issued with debt, using an outside professional valuation firm, which uses the Monte Carlo option lattice model. We record the amounts as interest expense or debt discount, depending on the terms of the agreement. These estimates involve multiple inputs and assumptions, including the market price of the Company’s common stock, stock price volatility and other assumptions to project earnings before interest, taxes, depreciation and amortization (“EBITDA”) and other reset events. These inputs and assumptions are subject to management’s judgment and can vary materially from period to period.

 

Derivative Liabilities

We have recorded certain warrants as derivative liabilities at estimated fair value, as determined based on our use of an outside professional valuation firm, due to the variable terms of the warrant agreements. The value of the derivative liabilities is generally estimated using the Monte Carlo option lattice model with multiple inputs and assumptions, including the market price of the Company’s common stock, stock price volatility and other assumptions to project EBITDA and other reset events. These inputs and assumptions are subject to management’s judgment and can vary materially from period to period.

 

Deferred gain on sale of assets

We entered into a sale-leaseback arrangement relating to our office facilities in 2013. Under the terms of the arrangement, we sold an office building and surrounding land and then leased the property back under a 15-year operating lease. We recorded a deferred gain for the amount of the gain on the sale of the asset, to be recognized as a reduction of rent expense over the life of the lease. Accordingly, we recorded amortization of deferred gain as a reduction of rental expense of $40 for the three months ended September 30, 2018 and 2017. For the nine months ended September 30, 2018 and 2017, we recorded amortization of $121 and $121, respectively. As of September 30, 2018, and December 31, 2017, unamortized deferred gain on sale of assets was $1,444 and $1,565, respectively.

 

Net Income (Loss) per Common Share

Basic net income or loss per common share (Basic EPS) is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted net income or loss per common share (Diluted EPS) is computed by dividing net income or loss by the sum of the weighted average number of common shares outstanding and the dilutive potential common shares then outstanding. Potential dilutive common share equivalents consist of total shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock using the treasury stock method and the average market price per share during the period.

 

When calculating diluted earnings or loss per share, if the effects are dilutive, companies are required to add back to net income or loss the effects of the change in derivative liabilities related to warrants. Additionally, if the effects of the change in derivative liabilities are added back to net income or loss, companies are required to include the warrants outstanding related to the derivative liability in the calculation of the weighted average dilutive shares. As there was no gain on change in derivative liabilities for the three and nine months ended September 30, 2018, there was no dilutive effect on net loss and the calculation of the weighted average dilutive shares. The numerator and the denominator of the calculation of basic and diluted net loss per share were identical for the three and nine months ended September 30, 2018 and 2017.

 

7

 

 

Significant Concentration of Credit Risk

Sales to our top three customers aggregated to approximately 30% and 33% of total sales for the three months ended September 30, 2018 and 2017, respectively, and 25% and 27% of total sales for the nine months ended September 30, 2018 and 2017. Sales to one of those customers were approximately 15% and 13% of total sales for the three months ended September 30, 2018 and 2017, respectively, and 14% and 12% of total sales for the nine months ended September 30, 2018 and 2017, respectively. Accounts receivable from the top three customers were approximately 23% and 39% of total accounts receivable as of September 30, 2018 and December 31, 2017, respectively.

 

Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, “Simplifying the Test for Goodwill Impairment (Topic 350)” which removes Step 2 of the goodwill impairment test that requires a hypothetical purchase price allocation.  A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2019.  Early adoption is permitted after January 1, 2017.  We do not expect the new guidance to have a significant impact on our condensed consolidated financial statements or related disclosures.

 

In February 2016, FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which requires companies to recognize all leases as assets and liabilities on the consolidated balance sheet. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in a consolidated statement of comprehensive income and a consolidated statement of cash flows is largely unchanged from previous GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its condensed consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments- Credit losses (Topic 326): Measurement of Credit losses on Financial Instruments". ASU 2016-13 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Our status as an emerging growth company allows us to defer adoption until the annual period, including interim periods within the annual period, beginning January 1, 2021. Management is currently evaluating the requirements of this guidance and has not yet determined the impact of the adoption on the Company's financial position or results from operations.

 

8

 

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016; however, in July 2015, the FASB agreed to delay the effective date by one year. The proposed deferral may permit early adoption but would not allow adoption any earlier than the original effective date of the standard. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.  Our status as an emerging growth company allows us to defer the adoption until the year (and interim periods therein) beginning January 1, 2019. We have chosen to delay our adoption until January 1, 2019.

 

Although there are several other new accounting pronouncements issued or proposed by the FASB, which we have adopted or will adopt, as applicable, we do not believe any of these accounting pronouncements has had or will have a material impact on our condensed consolidated financial position or results of operations.

 

 

NOTE 2 – GOING CONCERN

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liabilities in the ordinary course of business. In most periods since our formation, we have generated losses from operations. As of September 30, 2018, we had an accumulated deficit of $273,373. Historical losses are primarily attributable to lower than planned sales resulting from low fill rates on demand due to limitations of our working capital, delayed product introductions and postponed marketing activities, merger-related and other restructuring costs, and interest and refinancing charges associated with our debt refinancing. Losses have been funded primarily through debt.

 

Because of our history of operating losses, significant interest expense on our debt, and the recording of significant derivative liabilities, we have a working capital deficiency of $83,081 as of September 30, 2018.  We also have $73,173 of debt, net of discount, due within the next 12 months. These continuing conditions, among others, raise substantial doubt about our ability to continue as a going concern.

 

Management has addressed operating issues through the following actions: focusing on growing the core business and brands; continuing emphasis on major customers and key products; operating costs that include significant workforce and salary expense reduction, and continuing to negotiate lower prices from major suppliers.  We believe that we may need additional capital to execute our business plan. If additional funding is required, there can be no assurance that sources of funding will be available when needed on acceptable terms or at all.

 

 

 

NOTE 3 – INVENTORIES

 

Inventories consisted of the following as of:

 

   

September 30,
2018

   

December 31,
2017

 
                 

Raw materials

  $ 2,978     $ 5,347  

Work in process

    231       1,965  

Finished goods

    7,686       12,236  
      10,895       19,548  

Reserve for obsolete inventories

    (2,286 )     (2,380 )
                 
    $ 8,609     $ 17,168  

 

9

 

 

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following as of:

 

   

September 30,
2018

   

December 31,
2017

 
                 

Machinery and equipment

  $ 12,166     $ 12,156  

Computers and other

    9,614       9,589  

Aquifer

    482       482  

Leasehold improvements

    1,553       1,530  
      23,815       23,757  

Accumulated depreciation and amortization

    (21,213 )     (20,588 )
                 
    $ 2,602     $ 3,169  

 

 

Assets held under capital leases are included in machinery and equipment and amounted to $613 and $777 as of September 30, 2018 and December 31, 2017, respectively.

 

Depreciation and amortization expense totaled $201 and $222 for the three months ended September 30, 2018 and 2017, respectively, and totaled $625 and $669 for the nine months ended September 30, 2018 and 2017, respectively.

 

 

 

NOTE 5 – INTANGIBLE ASSETS

 

Intangible assets consisted of the following as of:

 

   

September 30,
2018

   

December 31,
2017

 
                 

Trademarks

  $ 8,915     $ 8,915  

Indefinite-lived intangible assets

    4,346       4,346  

Customer relationships

    19,110       19,110  

Other

    753       753  
      33,124       33,124  

Accumulated amortization

    (11,437 )     (10,061 )
                 
    $ 21,687     $ 23,063  

 

 

Trademarks are amortized over periods ranging from 3 to 30 years, customer relationships are amortized over periods ranging from 15 to 16 years, and other intangible assets are amortized over 3 years. Amortization expense was $459 and $582 for the three months ended September 30, 2018 and 2017 and was $1,376 and $1,747 for the nine months ended September 30, 2018 and 2017, respectively.

 

10

 

 

 

NOTE 6 – DEBT

 

Debt consisted of the following as of:

 

   

September 30,
2018

   

December 31,
2017

 

Related Party Debt:

               

July 2014 note payable to Little Harbor, LLC (converted to a new note in February 2018)

  $ 3,267     $ 3,267  

July 2016 note payable to Little Harbor, LLC

    4,770       4,770  

January 2016 note payable to Great Harbor Capital, LLC

    2,500       2,500  

March 2016 note payable to Great Harbor Capital, LLC

    7,000       7,000  

December 2016 note payable to Great Harbor Capital, LLC

    2,500       2,500  

August 2017 note payable to Great Harbor Capital, LLC

    3,000       3,000  

February 2018 note payable to Great Harbor Capital, LLC

    2,000       -  

July 2018 note payable to Great Harbor Capital, LLC, net of discount of $1,303 at September 30, 2018

    3,697       -  

January 2016 note payable to Golisano Holdings LLC

    2,500       2,500  

March 2016 note payable to Golisano Holdings LLC

    7,000       7,000  

July 2016 note payable to Golisano Holdings LLC

    4,770       4,770  

December 2016 note payable to Golisano Holdings LLC

    2,500       2,500  

March 2017 note payable to Golisano Holdings LLC

    3,267       3,267  

February 2018 note payable to Golisano Holdings LLC

    2,000       -  

November 2014 note payable to Golisano Holdings LLC (formerly payable to Penta
Mezzanine SBIC Fund I, L.P.), net of discount and unamortized loan fees in the aggregate of $881 and $1,491 as of September 30, 2018 and December 31, 2017, respectively

    7,119       6,509  

January 2015 note payable to Golisano Holdings LLC (formerly payable to JL-BBNC Mezz Utah, LLC), net of discount and unamortized loan fees in the aggregate of $1,143 and $1,829 as of September 30, 2018 and December 31, 2017, respectively

    3,857       3,171  

February 2015 note payable to Golisano Holdings LLC (formerly payable to Penta Mezzanine SBIC Fund I, L.P.), net of discount and unamortized loan fees in the aggregate of $78 and $130 as of September 30, 2018 and December 31, 2017, respectively

    1,922       1,869  

Total related party debt

    63,669       54,623  
                 

Senior Credit Facility with Midcap

    9,014       12,088  
                 

Other Debt:

               

April 2016 note payable to JL-Utah Sub, LLC

    125       313  

Capital lease obligations, net of discount of $52 and $210 as of September 30, 2018 and December 31, 2017, respectively

    389       1,252  

Huntington Holdings

    3,200       3,200  

Total other debt

    3,714       4,765  
                 

Total debt

    76,397       71,476  

Less current portion

    (73,173 )     (68,093 )
                 

Long-term debt

  $ 3,224     $ 3,383  

 

Related-Party Debt

 

July 2014 Note Payable to Little Harbor, LLC

Pursuant to a July 2014 Debt Repayment Agreement with Little Harbor, LLC (“Little Harbor”), an entity owned by certain stockholders of the Company, we were obligated to pay such party $4,900 per year in structured monthly payments for 3 years provided that such payment obligations would terminate at such earlier time as the trailing ninety day volume weighted average closing sales price of the Company’s common stock on all domestic securities exchanges on which such stock is listed equals or exceeds $5.06 per share. This note is unsecured and matured on July 25, 2017 with an outstanding balance of $3,267. On February 6, 2018, we entered into an agreement with Little Harbor to convert the obligations into an unsecured promissory note. The note matures on July 25, 2020, bears interest at an annual rate of 8.5%, with the principal payable at maturity.

 

11

 

 

July 2016 Note Payable to Little Harbor, LLC

On July 21, 2016, we issued an Unsecured Delayed Draw Promissory Note in favor of Little Harbor, pursuant to which Little Harbor may, in its sole discretion and pursuant to draw requests made by the Company, loan us up to the maximum principal amount of $4,770. This note is unsecured and matures on January 28, 2019. This note bears interest at an annual rate of 8.5%, with the principal payable at maturity. If Little Harbor, in its discretion, accepts a draw request made by the Company under this note, Little Harbor shall not transfer cash to the Company, but rather Little Harbor shall irrevocably agree to accept the principal amount of any monthly delayed draw under this note in lieu and in complete satisfaction of the obligation to make an equivalent dollar amount of periodic cash payments otherwise due to Little Harbor under the July 2014 note payable. During the year ended December 31, 2016, we requested and Little Harbor LLC approved, draws totaling $4,770. There were no draws during the year ended December 31, 2017 and the quarter ended September 30, 2018. We issued a warrant into escrow in connection with this loan (see Little Harbor Escrow Warrant in Note 7).

 

Little Harbor also delivered a deferment letter to which Little Harbor agreed to defer all payments due under the notes specified in the Little Harbor Deferment Letter through September 30, 2018 until January 1, 2019 and agreed to refrain from declaring a default and/or exercising any remedies under the notes.

 

January 2016 Note Payable to Great Harbor Capital, LLC

Pursuant to a January 28, 2016 Unsecured Promissory Note with Great Harbor Capital, LLC (“GH”), an affiliate of a member of our Board of Directors, GH lent us $2,500. The note matures on January 28, 2019, bears interest at an annual rate of 8.5%, with the principal payable in 24 monthly installments of $104 commencing on February 28, 2017. We issued a warrant into escrow in connection with this loan (see GH Escrow Warrants in Note 7).

 

March 2016 Note Payable to Great Harbor Capital, LLC

Pursuant to a March 21, 2016 Unsecured Promissory Note, GH lent us $7,000. The note matures on March 21, 2019, bears interest at an annual rate of 8.5%, with the principal payable in 24 monthly installments of $292 commencing on April 21, 2017. We issued a warrant into escrow in connection with this loan (see GH Escrow Warrants in Note 7).

 

December 2016 Note Payable to Great Harbor Capital, LLC

Pursuant to a December 31, 2016 Unsecured Promissory Note, GH lent us $2,500. The note matures on December 30, 2019, bears interest at an annual rate of 8.5%, with the principal payable at maturity. We issued a warrant into escrow in connection with this loan (see GH Escrow Warrants in Note 7).

 

August 2017 Note Payable to Great Harbor Capital, LLC

Pursuant to an August 30, 2017 Secured Promissory Note, GH lent us $3,000. The note matures on August 29, 2020, bears interest at an annual rate of 8.5%, with the principal payable at maturity. We issued a warrant into escrow in connection with this loan (see GH Escrow Warrants in Note 7).

 

February 2018 Note Payable to Great Harbor Capital, LLC

Pursuant to a February 6, 2018 Secured Promissory Note, GH lent us $2,000 (Great Harbor Note 1”). The note matures on February 6, 2021, bears interest at an annual rate of 8.5%, with the principal payable at maturity. This note is secured by collateral and is subordinate to the indebtedness owed to Midcap Funding X Trust (“MidCap”), as successor-by-assignment from MidCap Financial Trust.

 

Also, on February 6, 2018, the Company issued an Amended and Restated Secured Promissory Note to GH (“Great Harbor Note 2”) replacing the prior Secured Promissory Note issued on August 30, 2017. The amendment added a requirement that when the Company consummates any Special Asset Disposition (as defined in the Great Harbor Note 2), provided that the Company has a minimum liquidity of $1,000, the Company will use the net cash proceeds from the Special Asset Disposition to pay any accrued and unpaid interest under the Great Harbor Note 2 and any other note subject to the Intercreditor Agreement (defined below). The maturity date, interest rate and payment terms remain unchanged from the original secured promissory note issued to GH on August 30, 2017.

 

12

 

 

July 2018 Note Payable to Great Harbor Capital, LLC

Pursuant to a July 27, 2018 Secured Promissory Note, GH loaned the Company $5,000 ("Great Harbor Note 3"). The Great Harbor Note 3 matures on January 27, 2020 and bears interest at an annual rate of 8.5%, with the principal payable at maturity. The principal of the Great Harbor Note is payable at maturity on January 27, 2020. The Great Harbor Note is secured by collateral.  We issued a warrant in connection with this loan (see GH Warrants in Note 7).

 

The Great Harbor Note 3 is subordinate to the indebtedness owed to MidCap. The Great Harbor Note 3 is senior to the indebtedness owed to Little Harbor, LLC and Golisano Holdings LLC.

 

GH also delivered a deferment letter to which GH agreed to defer all payments due under the notes specified in the Great Harbor Deferment Letter through September 30, 2018 until January 1, 2019 and agreed to refrain from declaring a default and/or exercising any remedies under the notes.

 

November 2014 Note Payable to Golisano Holdings LLC (formerly payable to Penta Mezzanine SBIC Fund I, L.P.)

On November 13, 2014, we raised proceeds of $8,000, less certain fees and expenses, from the issuance of a secured note to Penta Mezzanine SBIC Fund I, L.P. (“Penta”). The Managing Director of Penta, an institutional investor, is also a member of the Board of Directors of our Company. We granted Penta a security interest in our assets and pledged the shares of our subsidiaries as security for the note.  This note matures on November 13, 2019 with payments of principal due on a quarterly basis commencing on November 13, 2017 in installments of (i) $360 per quarter for the first four quarters, (ii) $440 per quarter for the next four quarters and (iii) $520 per quarter for each quarter thereafter.  This note bears interest of 12% per annum, payable monthly.  We issued a warrant to Penta to purchase 4,960,740 shares of the Company’s common stock in connection with this loan (see Penta Warrants in Note 7).  The estimated fair value of the warrant at the date of issuance was $3,770, which was recorded as a note discount and is being amortized into interest expense over the term of this loan.  Additionally, we had incurred loan fees of $273, which is also being amortized into interest expense over the term of this loan.  On March 8, 2017, Golisano Holdings LLC (“Golisano LLC”) acquired this note payable from Penta. The terms of this note payable remain the same with the only changes being the holder of the promissory note and reduction of the interest rate to 8%.

 

January 2015 Note Payable to Golisano Holdings LLC (formerly payable to JL-Mezz Utah, LLC-f/k/a JL-BBNC Mezz Utah, LLC)

On January 22, 2015, we raised proceeds of $5,000, less certain fees and expenses, from the sale of a note to JL-Mezz Utah, LLC (f/k/a JL-BBNC Mezz Utah, LLC) (“JL”). The proceeds were restricted to pay a portion of the Nutricap Labs, LLC (“Nutricap”) asset acquisition. We granted JL a security interest in the Company’s assets, including real estate and pledged the shares of our subsidiaries as security for the note. The note matures on February 13, 2020 with payments of principal due on a quarterly basis commencing March 1, 2017 in installments starting at $250 per quarter and increasing to $350 per quarter. This note bears interest of 8% per annum, payable monthly. We issued a warrant to JL to purchase 2,329,400 shares of the Company’s common stock on January 22, 2015 and 434,809 shares of the Company’s common stock on February 4, 2015 (see JL Warrants in Note 7). The estimated fair value of these warrants at the date of issuances was $4,389, which was recorded as a note discount and is being amortized into interest expense over the term of these loans. Additionally, we had incurred loan fees of $152 relating to this loan, which is also being amortized into interest expense over the term of these loans. On March 8, 2017, Golisano LLC acquired this note payable from JL. The terms of this note payable remain the same with the only change being the holder of the promissory note.

 

February 2015 Note Payable to Golisano Holdings LLC (formerly payable to Penta Mezzanine SBIC Fund I, L.P.)

On February 6, 2015, we raised proceeds of $2,000, less certain fees and expenses, from the issuance of a secured note payable to Penta. The proceeds were restricted to pay a portion of the acquisition of the customer relationships of Nutricap. This note matures on November 13, 2019 with payments of principal due on a quarterly basis commencing November 13, 2017 in installments of (i) $90 per quarter for the first four quarters, (ii) $110 per quarter for the next four quarters and (iii) $130 per quarter for each quarter thereafter. This note bears interest of 8% per annum, payable monthly. We issued a warrant to Penta to purchase 869,618 shares of the Company’s common stock in connection with this loan (see Golisano LLC Warrants (formerly Penta Warrants) in Note 7). The estimated fair value of these warrants at the date of issuances totaled $250, which was recorded as a note discount and is being amortized into interest expense over the term of this loan. Additionally, we had incurred loan fees of $90, which is also being amortized into interest expense over the term of these loans. On March 8, 2017, Golisano LLC acquired this note payable from Penta. The terms of this note payable remain the same with the only change being the holder of the promissory note.

 

January 2016 Note Payable to Golisano Holdings LLC

Pursuant to a January 28, 2016 Unsecured Promissory Note with Golisano LLC, an affiliate of a member of our Board of Directors, Golisano LLC lent us $2,500. The note matures on January 28, 2019, bears interest at an annual rate of 8.5%, with the principal payable in 24 monthly installments of $104 commencing on February 28, 2017. We issued a warrant into escrow in connection with this loan (see Golisano Escrow Warrants in Note 7).

 

13

 

 

March 2016 Note Payable to Golisano Holdings LLC

Pursuant to a March 21, 2016 Unsecured Promissory Note, Golisano LLC lent us $7,000. The note matures on March 21, 2019, bears interest at an annual rate of 8.5%, with the principal payable in 24 monthly installments of $292 commencing on April 21, 2017. We issued a warrant into escrow in connection with this loan (see Golisano Escrow Warrants in Note 7).

 

July 2016 Note Payable to Golisano Holdings LLC

On July 21, 2016, we issued an Unsecured Delayed Draw Promissory Note in favor of Golisano LLC pursuant to which Golisano LLC may, in its sole discretion and pursuant to draw requests made by the Company, loan the Company up to the maximum principal amount of $4,770 (the “Golisano LLC July 2016 Note”). The Golisano LLC July 2016 Note matures on January 28, 2019. Interest on the outstanding principal accrues at a rate of 8.5% per year. The principal of the Golisano LLC July 2016 Note is payable at maturity. We issued a warrant into escrow in connection with this loan (see Golisano Escrow Warrants in Note 7). During the year ended December 31, 2016, we requested and Golisano LLC approved, draws totaling $4,770.

 

December 2016 Note Payable to Golisano Holdings LLC

Pursuant to a December 31, 2016 Unsecured Promissory Note, Golisano LLC lent us $2,500. The note matures on December 30, 2019, bears interest at an annual rate of 8.5%, with the principal payable at maturity. We issued a warrant into escrow in connection with this loan (see Golisano Escrow Warrants in Note 7).

 

March 2017 Note Payable to Golisano Holdings LLC

Pursuant to a March 14, 2017 Unsecured Promissory Note, Golisano LLC lent us $3,267. The note matures on December 30, 2019, bears interest at an annual rate of 8.5%, with the principal payable at maturity. We issued a warrant into escrow in connection with this loan (see Golisano Escrow Warrants in Note 7).

 

February 2018 Note Payable to Golisano Holdings LLC

Pursuant to a February 6, 2018 Secured Promissory Note, Golisano LLC lent us $2,000 (“Golisano LLC Note”). The note matures on February 6, 2021, bears interest at an annual rate of 8.5%, with the principal payable at maturity. This note is secured by collateral and is subordinate to the indebtedness owed to MidCap.

 

Golisano LLC also delivered a deferment letter pursuant to which Golisano LLC agreed to defer all payments due under the notes specified in the Golisano Deferment Letter through September 30, 2018 until January 1, 2019 and agreed to refrain from declaring a default and/or exercising any remedies under the notes.

 

On February 6, 2018, GH and Golisano LLC entered into an intercreditor agreement where they agreed that each of the Great Harbor Note 1, the Great Harbor Note 2 and the Golisano LLC Note are pari passu as to repayment, security and otherwise and are equally and ratably secured (the “Intercreditor Agreement”).

 

On July 27, 2018, the Company and Golisano LLC, as successor by assignment to Penta Mezzanine SBIC Fund I, L.P. to the original Note and Warrant Purchase Agreement, dated as of November 13, 2014, as amended from time to time, entered into the Thirteenth Amendment to the Note (“Thirteenth Amendment”). Pursuant to the Thirteenth Amendment, Golisano LLC consented to the secured loan in the amount of $4,000 from GH to the Company. 

 

On July 27, 2018, the Company and Golisano LLC, as successor by assignment to JL-Mezz Utah, LLC (f/k/a JL-BBNC  Mezz Utah, LLC) to the original Note and Warrant Purchase Agreement, dated as of November 13, 2014, as amended from time to time, entered into the Twelfth Amendment to the Note (“Twelfth Amendment”). Pursuant to the Twelfth Amendment, Golisano LLC consented to the secured loan in the amount of $4,000 from GH to the Company. 

 

On July 27, 2018, GH and Golisano LLC entered into an intercreditor agreement (the “Intercreditor Agreement 2”) where they agreed that the Great Harbor Note 3 is subordinate to the indebtedness owed to MidCap. The Great Harbor Note 3 is senior to the indebtedness owed to Little Harbor, LLC and Golisano Holdings LLC.

 

Senior Credit Facility

 

On January 22, 2015, we entered into a three-year $15,000 revolving credit facility (the “Senior Credit Facility”) based on our accounts receivable and inventory, increasable to up to $20,000, with MidCap Financial Trust, which subsequently assigned the agreement to an affiliate, Midcap Funding X Trust (“MidCap”). On September 2, 2016, we entered into an amendment with Midcap to increase the Senior Credit Facility to $17,000 and extend our facility an additional 12 months. In conjunction with this Senior Credit Facility, we issued a warrant to Midcap to purchase 500,000 shares of the Company’s common stock that expired on January 21, 2018 (see MidCap Warrant 1 in Note 7). In addition, we granted MidCap a first priority security interest in certain of our assets and pledged the shares of our subsidiaries as security for amounts owed under the credit facility. We are required to pay Midcap an unused line fee of 0.50% per annum, a collateral management fee of 1.20% per month and interest of LIBOR plus 5% per annum, which calculated interest rate was 7.77% per annum as of September 30, 2018. The estimated fair value of these warrants at the date of issuance was $130, which was recorded as a note discount and is being amortized into interest expense over the term of the Senior Credit Facility. Additionally, we have incurred loan fees totaling $540 relating to the Senior Credit Facility and any subsequent amendments, which is also being amortized into interest expense over the term of the Senior Credit Facility.

 

14

 

 

Other Debt 

 

April 2016 Note Payable to JL-Utah Sub, LLC

Pursuant to an April 5, 2016 Unsecured Promissory Note, JL-Utah Sub, LLC lent us $500. The note matures on March 21, 2019, bears interest at an annual rate of 8.5%, with the principal payable in 24 monthly installments of $21 commencing on April 21, 2017.

 

Capital Lease Obligations

Our capital lease obligations pertain to various leasing agreements with Essex Capital Corporation (“Essex”), a related party to the Company as Essex’s principal owner was a member of the Board of Directors of the Company through January 22, 2018.

 

2014 Huntington Holdings, LLC

On August 6, 2016, the 18-month anniversary of the closing of a share purchase agreement, we were required to pay the purchaser of the common stock the difference between $2.29 per share and either a defined market price or a price per share determined by a valuation firm acceptable to both parties. Based on an outside professional valuation performed on the Company’s common stock, the Company estimated the stock price guarantee payment to be $3,210. Accordingly, the Company recorded a loss on the stock purchase price guarantee of $3,210 and a corresponding liability for the same amount in 2016, which was included in accrued expenses and other current liabilities in the consolidated balance sheet as of December 31, 2016. On June 2, 2017, the Company issued an unsecured promissory note (the “Huntington Note”) in favor of 2014 Huntington Holdings LLC (“Huntington.” The Huntington Note matures on June 2, 2019 with the principal amount of $3,200 payable at maturity. Interest on the outstanding principal accrues at a rate of 8.5% per year from August 6, 2016 to August 15, 2017 and increases to 10% per year thereafter. We paid $50 to Huntington related to accrued interest from August 6, 2016 through the date of issuance of the Huntington Note. Huntington was required to return 778,385 shares of the Company’s common stock which were issued into escrow. We were required to provide certain piggyback registration rights to Huntington in regard to the remaining 749,999 shares of the Company’s common stock held by Huntington. If the Huntington Note was paid off prior to August 14, 2017, the 778,385 shares held in escrow were to be released from escrow and transferred to the Company for no additional consideration. If the note remained outstanding on August 15, 2017, we had the right, but not the obligation, to pay $140 to Huntington to purchase 764,192 of the subject shares held in escrow. Upon the exercise of this purchase option, the subject shares were to be released from escrow and transferred to the Company. If the note remained outstanding on August 15, 2017 and we did not exercise the option to purchase the shares, the shares were to be returned from escrow to Huntington and we would no longer have repurchase rights. On August 15, 2017, the note was outstanding, and we did not exercise the repurchase right. The 778,385 shares were returned from escrow to Huntington.

 

Financial Covenants

 

Certain of the foregoing debt agreements, as amended, require us to meet certain affirmative and negative covenants, including maintenance of specified ratios. We amended our debt agreements with MidCap, Penta and JL, effective July 29, 2016, to, among other things, reset the financial covenants of each debt agreement. As of September 30, 2018, we were not in compliance with these financial covenants of the debt agreements; however, the lenders provided the Company with a waiver of the covenant violations through September 30, 2018.

 

 

NOTE 7 WARRANTS AND REGISTRATION RIGHTS AGREEMENTS

 

The following table presents a summary of the status of our issued warrants as of September 30, 2018, and changes during the nine months then ended:

 

   

Shares
Underlying
Warrants

   

Weighted Average
Exercise Price

 
                 

Outstanding, December 31, 2017

    15,855,017     $ 0.18  

Granted

    3,000,000       0.14  

Canceled / Expired

    (500,000 )     0.76  

Exercised

    -       -  
                 

Outstanding, September 30, 2018

    18,355,017     $ 0.15  

 

15

 

 

Warrants Issued

 

Midcap Warrant

In connection with the line of credit agreement with MidCap described in Note 6, we issued MidCap a warrant, exercisable through January 22, 2018, for an aggregate of 500,000 shares of the Company’s common stock at an exercise price of $0.76 per share (the “MidCap Warrant 1”). We entered into a registration rights agreement with Midcap, dated as of January 22, 2015, granting MidCap certain registration rights, commencing October 1, 2015, for the shares of common stock issuable on exercise of the MidCap Warrant 1. The MidCap warrant 1 was not exercised and expired on January 22, 2018.

 

On January 22, 2015, the Company entered into a revolving credit facility with MidCap Financial Trust, which subsequently assigned the agreement to an affiliate, Midcap Funding X Trust.

 

The agreement is amended from time to time and wherein it was necessary under the terms of the agreement to obtain MidCap's consent to the transactions contemplated by the above mentioned Great Harbor Note and Golisano LLC Note; on February 6, 2018, MidCap agreed to consent to the transactions contemplated in exchange for a warrant to MidCap exercisable for up to 500,000 shares of the Company’s common stock at an exercise price of $.76 per share (MidCap Warrant 2). The Company has reserved 500,000 shares of the Company’s common stock for issuance under MidCap Warrant. The warrant expires on February 6, 2019.

 

Penta Warrants

Pursuant to a stock purchase agreement dated June 30, 2015, a warrant was issued to Penta to purchase an aggregate 807,018 shares of our common stock at a price of $0.01 per share at any time prior to the close of business on June 30, 2020. We granted Penta certain registration rights, commencing October 1, 2015, for the shares of common stock issuable upon exercise of the warrant.

 

JL Warrants

Pursuant to a June 30, 2015 stock purchase agreement, a warrant was issued to JL to purchase an aggregate 403,509 shares of the Company’s common stock at a price of $0.01 per share at any time prior to the close of business on June 30, 2020, subject to certain adjustments. We granted JL certain registration rights, commencing October 1, 2015, for the shares of common stock issuable upon exercise of the warrant. The warrant was subsequently assigned by JL to two individuals.

 

Essex Warrants

In connection with the guarantee of a note payable issued in the Nutricap asset acquisition and capital lease obligations by Essex discussed in Note 6, Essex was issued a warrant exercisable for an aggregate 1,428,571 shares of the Company’s common stock at a purchase price of $0.77 per share, at any time prior to the close of business on June 30, 2020. The number of shares issuable upon the exercise of the warrant is subject to adjustment on terms and conditions customary for a transaction of this nature in the event of (i) reorganization, recapitalization, stock split-up, combination of shares, mergers, consolidations and (ii) sale of all or substantially all of our assets or property. Essex subsequently assigned warrants for 350,649 shares to another company.

 

JL Properties, Inc. Warrants

In April 2015, we entered into an office lease agreement which requires a $1,000 security deposit, subject to reduction if we achieve certain market capitalization metrics at certain dates. On April 30, 2015, we entered into a reimbursement agreement with JL Properties, Inc. (“JL Properties”) pursuant to which JL Properties agreed to arrange for and provide an unconditional, irrevocable, transferable, and negotiable commercial letter of credit to serve as the security deposit. As partial consideration for the entry by JL Properties into the reimbursement agreement and the provision of the letter of credit, we issued JL Properties two warrants to purchase shares of the Company’s common stock.

 

The first warrant is exercisable for an aggregate of 465,880 shares of common stock, subject to certain adjustments, at an aggregate purchase price of $0.01, at any time prior to April 30, 2020. In addition to adjustments on terms and conditions customary for a transaction of this nature in the event of (i) reorganization, recapitalization, stock split-up, combination of shares, mergers, consolidations and (ii) sale of all or substantially all of our assets or property, the number of shares of common stock issuable pursuant to the warrant will be increased in the event our consolidated adjusted EBITDA (as defined in the warrant agreement) for the fiscal year ending December 31, 2018 does not equal or exceed $19,250. JL Properties subsequently assigned the warrant to two individuals.

 

The second warrant is exercisable for an aggregate of 86,962 shares of common stock, at a per share purchase price of $1.00, at any time prior to April 30, 2020. The number of shares issuable upon exercise of the second warrant is subject to adjustment on terms and conditions customary for a transaction of this nature in the event of (i) reorganization, recapitalization, stock split-up, combination of shares, mergers, consolidations and (ii) sale of all or substantially all of our assets or property.

 

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We have granted JL Properties certain registration rights, commencing October 1, 2015, for the shares of common stock issuable on exercise of the two warrants.

 

Golisano LLC Warrants (formerly Penta Warrants)

In connection with the November 13, 2014 note for $8,000 (see Note 6), Penta was issued a warrant to acquire 4,960,740 shares of the Company’s common stock at an aggregate exercise price of $0.01, through November 13, 2019. In connection with Penta’s consent to the terms of additional debt obtained by us, we also granted Penta a warrant to acquire 869,618 shares of common stock at a purchase price of $1.00 per share, through November 13, 2019. Both warrant agreements grant Penta certain registration rights, commencing October 1, 2015, for the shares of common stock issuable on exercise of the warrants. Penta has the right, under certain circumstances, to require us to purchase all or any portion of the equity interest in the Company issued or represented by the warrant to acquire 4,960,740 shares at a price based on the greater of (i) the product of (x) ten times our adjusted EBITDA with respect to the twelve months preceding the exercise of the put right times (y) the investor’s percentage ownership in the Company assuming full exercise of the warrant; or (ii) the fair market value of the investor’s equity interest underlying the warrant. In the event (i) we do not have the funds available to repurchase the equity interest under the warrant or (ii) such repurchase is not lawful, adjustments to the principal of the note purchased by Penta will be made or, under certain circumstances, interest will be charged on the amount otherwise due for such repurchase. We have the right, under certain circumstances, to require Penta to sell to us all or any portion of the equity interest issued or represented by the warrant to acquire 4,960,740 shares. The price for such repurchase will be the greater of (i) the product of (x) eleven times our adjusted EBITDA with respect to the twelve months preceding the exercise of the call right times (y) the investor’s percentage ownership in the company assuming full exercise of the warrant; or (ii) the fair market value of the equity interests underlying the warrant; or (iii) $3,750. In connection with Golisano LLC’s acquisition of the note payable from Penta on March 8, 2017 (see Note 6 above for additional information), these warrants were assigned to Golisano LLC.

 

Golisano LLC Warrants (formerly JL Warrants)

In connection with the January 22, 2015 note payable to JL, we issued JL warrants to purchase an aggregate of 2,329,400 shares of the Company’s common stock, at an aggregate exercise price of $0.01, through February 13, 2020. On February 4, 2015, we also granted to JL a warrant to acquire a total of 434,809 shares of common stock at a purchase price of $1.00 per share, through February 13, 2020. Both warrant agreements grant JL certain registration rights, commencing October 1, 2015, for the shares of common stock issuable upon exercise of the warrants. These warrants were subsequently assigned to two individuals. During the year ended December 31, 2016, these individuals exercised warrants for a total of 1,187,995 shares of the Company’s common stock for total proceeds to the Company of less than $1. In connection with Golisano LLC’s acquisition of the note payable from JL on March 8, 2017 (see Note 6 above for additional information), these warrants were assigned to Golisano LLC.

 

Golisano LLC Warrants

Pursuant to an October 2015 Securities Purchase Agreement with Golisano LLC, we issued Golisano LLC a warrant (the “Golisano Warrant”),which Golisano Warrant is intended to maintain, following each future issuance of shares of common stock pursuant to the conversion, exercise or exchange of certain currently outstanding warrants to purchase shares of common stock held by third-parties (the “Outstanding Warrants”), Golisano LLC’s proportional ownership of our issued and outstanding common stock so that it is the same thereafter as on October 5, 2015. We have reserved 12,697,977 shares of common stock for issuance under the Golisano Warrant. The purchase price for any shares of common stock issuable upon exercise of the Golisano Warrant is $.001 per share. The Golisano Warrant is exercisable immediately and up to and including the date which is sixty days after the later to occur of the termination, expiration, conversion, exercise or exchange of all of the Outstanding Warrants and our delivery of notice thereof to Golisano LLC. The Golisano Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets. In addition, if any payments are made to a holder of an Outstanding Warrant in consideration for the termination of or agreement not to exercise such Outstanding Warrant, Golisano LLC will be entitled to equal treatment. We have entered into a registration rights agreement with Golisano LLC, dated as of October 5, 2015, granting Golisano LLC certain registration rights for the shares of common stock issuable on exercise of the Golisano Warrant. On February 6, 2016, Golisano LLC exercised the Golisano Warrant in part for 509,141 shares of the Company’s common stock for an aggregate purchase price of $1. During the year ended December 31, 2016, the Golisano Warrant was cancelled in part for 6,857,143 shares pursuant to the cancellation of a portion of the Outstanding Warrants. As of September 30, 2018, we have reserved 4,756,505 shares of our common stock for issuance under the Golisano Warrant.

 

GH Warrant

In connection with the GH July 2018 Secured Promissory Note, we issued GH a warrant to purchase an aggregate of 2,500,000 shares of the Company’s common stock at an exercise price of $0.01 per share (the "July 2018 GH Warrant"). The July 2018 Great Harbor Warrant is exercisable on any business day prior to the expiration date.   The Company has reserved 2,500,000 shares of the Company’s common stock for issuance under the July 2018 GH Warrant. The July 2018 GH Warrant expires on July 27, 2024. The July 2018 GH Warrant is also subject to customary adjustments upon any recapitalization, reorganization, stock split, combination of shares, merger or consolidation. The Company estimated the value of the warrant using the Black-Scholes option pricing model and recorded a debt discount of $1,481 which will be amortized over the term of the GH July 2018 Secured Promissory Note. Amortized expense was $178 for the nine months ended September 30, 2018.

 

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Warrants Issued into Escrow

 

Golisano Escrow Warrants

In connection with a January 28, 2016 Unsecured Promissory Note, we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of 1,136,363 shares of the Company’s common stock at an exercise price of $0.01 per share (the “January 2016 Golisano Warrant”). The January 2016 Golisano Warrant will not be released from escrow or be exercisable unless and until we fail to pay Golisano LLC the entire unamortized principal amount of the related promissory note and any accrued and unpaid interest thereon as of January 28, 2019 or such earlier date as is required pursuant to an acceleration notice (as defined in the related note agreement). We have reserved 1,136,363 shares of the Company’s common stock for issuance under the January 2016 Golisano Warrant. The January 2016 Golisano Warrant, if exercisable, expires on February 28, 2022. The January 2016 Golisano Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.

 

In connection with a March 21, 2016 Unsecured Promissory Note, we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of 3,181,816 shares of the Company’s common stock at an exercise price of $0.01 per share (the “March 2016 Golisano Warrant”). The March 2016 Golisano Warrant will not be released from escrow or be exercisable unless and until we fail to pay Golisano LLC the entire unamortized principal amount of the related promissory note and any accrued and unpaid interest thereon as of March 21, 2019 or such earlier date as is required pursuant to an acceleration notice (as defined in the related note agreement). We have reserved 3,181,816 shares of the Company’s common stock for issuance under the March 2016 Golisano Warrant. The March 2016 Golisano Warrant expires on March 21, 2022. The March 2016 Golisano Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.

 

In connection with the Golisano LLC July 2016 Notes we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of 2,168,178 shares of the Company’s common stock, at an exercise price of $0.01 per share (the “Golisano July 2016 Warrant”). The Golisano July 2016 Warrant will not be released from escrow or be exercisable unless and until we fail to pay Golisano LLC the entire unamortized principal amount of the Golisano July 2016 Note and any accrued and unpaid interest thereon as of January 28, 2019 or such earlier date as is required pursuant to an Acceleration Notice (as defined in the Golisano LLC July 2016 Note). We have reserved 2,168,178 shares of the Company’s common stock for issuance under the Golisano July 2016 Warrant. The Golisano July 2016 Warrant expires on July 21, 2022. The Golisano July 2016 Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.

 

In connection with the Golisano LLC December 2016 Notes we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of 1,136,363 shares of the Company’s common stock, at an exercise price of $0.01 per share (the “Golisano December 2016 Warrant”). The Golisano December 2016 Warrant will not be released from escrow or be exercisable unless and until we fail to pay Golisano LLC the entire unamortized principal amount of the Golisano December 2016 Note and any accrued and unpaid interest thereon as of December 30, 2019 or such earlier date as is required pursuant to an acceleration notice (as defined in the note). We have reserved 1,136,363 shares of the Company’s common stock for issuance under the Golisano December 2016 Warrant. The Golisano December 2016 Warrant expires on December 30, 2022. The Golisano December 2016 Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.

 

In connection with the Golisano LLC March 2017 Notes we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of 1,484,847 shares of the Company’s common stock, at an exercise price of $0.01 per share (the “Golisano March 2017 Warrant”). The Golisano March 2017 Warrant will not be released from escrow or be exercisable unless and until we fail to pay Golisano LLC the entire unamortized principal amount of the Golisano March 2017 Note and any accrued and unpaid interest thereon as of December 30, 2019 or such earlier date as is required pursuant to an acceleration notice (as defined in the note). We have reserved 1,484,847 shares of the Company’s common stock for issuance under the Golisano March 2017 Warrant. The Golisano March 2017 Warrant expires on March 14, 2023. The Golisano March 2017 Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.

 

We previously entered into a registration rights agreement with Golisano LLC, dated as of October 5, 2015 (the “Registration Rights Agreement”), granting Golisano LLC certain registration rights for certain shares of the Company’s common stock. The shares of common stock issuable pursuant to the above warrants are also entitled to the benefits of the Registration Rights Agreement.

 

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In connection with the Golisano LLC, February 2018 note, we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of 1,818,182 shares of the Company’s common stock at an exercise price of $0.01 per share (the "Golisano 2018 Warrant"). The Golisano 2018 Warrant will not be released from escrow or be exercisable unless and until the Company fails to pay Golisano LLC the entire unamortized principal amount of the note and any accrued and unpaid interest thereon as of February 6, 2021, or such earlier date as is required pursuant to an acceleration notice. The Company has reserved 1,818,182 shares of the Company’s common stock for issuance under the Golisano 2018 Warrant. The Golisano 2018 Warrant expires on February 6, 2024.

 

GH Escrow Warrants

In connection with a January 28, 2016 Unsecured Promissory Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of 1,136,363 shares of the Company’s common stock at an exercise price of $0.01 per share (the “January 2016 GH Warrant”). The January 2016 GH Warrant will not be released from escrow or be exercisable unless and until we fail to pay GH the entire unamortized principal amount of the related promissory note and any accrued and unpaid interest thereon as of January 28, 2019 or such earlier date as is required pursuant to an acceleration notice (as defined in the related note agreement). We have reserved 1,136,363 shares of the Company’s common stock for issuance under the January 2016 GH warrant. The January 2016 GH Warrant expires on February 28, 2022. The January 2016 GH Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.

 

In connection with a March 21, 2016 Unsecured Promissory Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of 3,181,816 shares of the Company’s common stock at an exercise price of $0.01 per share (the “March 2016 GH Warrant”). The March 2016 GH Warrant will not be released from escrow or be exercisable unless and until we fail to pay GH the entire unamortized principal amount of the related promissory note and any accrued and unpaid interest thereon as of March 21, 2019 or such earlier date as is required pursuant to an acceleration notice (as defined in the related note agreement). We have reserved 3,181,816 shares of the Company’s common stock for issuance under the March 2016 GH Warrant. The March 2016 GH Warrant expires on March 21, 2022. The March 2016 GH Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.

 

In connection with the GH December 2016 Unsecured Promissory Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of 1,136,363 shares of the Company’s common stock, at an exercise price of $0.01 per share (the “December 2016 GH Warrant”). The December 2016 GH Warrant will not be released from escrow or be exercisable unless and until we fail to pay GH the entire unamortized principal amount of the December 2016 GH note and any accrued and unpaid interest thereon as of December 30, 2019 or such earlier date as is required pursuant to an acceleration notice (as defined in the December 2016 GH Warrant). We have reserved 1,136,363 shares of common stock for issuance under the December 2016 GH Warrant. The December 2016 GH Warrant expires on December 30, 2022. The December 2016 GH Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.

 

In connection with the GH August 2017 Secured Promissory Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of 1,363,636 shares of the Company’s common stock, at an exercise price of $0.01 per share (the “August 2017 GH Warrant”). The August 2017 GH Warrant will not be released from escrow or be exercisable unless and until we fail to pay GH the entire unamortized principal amount of the August 2017 GH note and any accrued and unpaid interest thereon as of August 29, 2020 or such earlier date as is required pursuant to an acceleration notice (as defined in the August 2017 GH Warrant). We have reserved 1,363,636 shares of common stock for issuance under the August 2017 GH Warrant. The August 2017 GH Warrant expires on August 30, 2023. The August 2017 GH Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.

 

In connection with the GH February 2018 Secured Promissory Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of 1,818,182 shares of the Company’s common stock at an exercise price of $0.01 per share (the "February 2018 GH Warrant"). The February 2018 GH Warrant will not be released from escrow or be exercisable unless and until the Company fails to pay GH the entire unamortized principal amount of the note and any accrued and unpaid interest thereon as of February 6, 2021, or such earlier date as is required pursuant to an acceleration notice. The Company has reserved 1,818,182 shares of the Company’s common stock for issuance under the February 2018 GH Warrant. The February 2018 GH Warrant expires on February 6, 2024.

 

JL-US Escrow Warrant

In connection with an April 5, 2016 Unsecured Promissory Note, we issued into escrow in the name of JL-Utah Sub (“JL-US”) a warrant to purchase an aggregate of 227,273 shares of the Company’s common stock at an exercise price of $0.01 per share (the “JL-US Warrant”). The JL-US Warrant will not be released from escrow or be exercisable unless and until we fail to pay JL-US the entire unamortized principal amount of the JL-US note and any accrued and unpaid interest thereon as of March 21, 2019 or such earlier date as is required pursuant to an acceleration notice (as defined in the JL-US note). We have reserved 227,273 shares of the Company’s common stock for issuance under the JL-US Warrant. The JL-US Warrant, if exercisable, expires on March 21, 2022. The JL-US Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.

 

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Little Harbor Escrow Warrant

The Little Harbor July 2016 unsecured delayed draw promissory note provides that we issue into escrow in the name of Little Harbor a warrant to purchase an aggregate of 2,168,178 shares of common stock at an exercise price of $0.01 per share (the “Little Harbor July 2016 Warrant”). The Little Harbor July 2016 Warrant will not be released from escrow or be exercisable unless and until we fail to pay Little Harbor the entire unamortized principal amount of the Little Harbor July 2016 note and any accrued and unpaid interest thereon as of January 28, 2019 or such earlier date as is required pursuant to an acceleration notice (as defined in the Little Harbor July 2016 note). We have reserved 2,168,178 shares of the Company’s common stock for issuance under the Little Harbor July 2016 Warrant. The Little Harbor July 2016 Warrant, if exercisable, expires on July 21, 2022. The Little Harbor July 2016 Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets. The Little Harbor July 2016 Warrant grants Little Harbor certain registration rights for the shares of the Company’s common stock issuable upon exercise of the Little Harbor July 2016 Warrant.

 

 

NOTE 8 – DERIVATIVE LIABILITIES

 

The number of shares of common stock issuable pursuant to certain warrants issued in 2015 will be increased if our adjusted EBITDA or the market price of the Company’s common stock do not meet certain defined amounts. We have recorded the estimated fair value of the warrants as of the date of issuance. Due to the variable terms of the warrant agreements, the warrants are recorded as derivative liabilities with a corresponding charge to our consolidated statements of comprehensive income (loss) for changes in the estimated fair value of the warrants from the date of issuance to each balance sheet reporting date. As of September 30, 2018, we have estimated the total fair value of the derivative liabilities to be $8,672 as compared to $6,791 as of December 31, 2017. We had the following activity in our derivative liabilities account for the nine months ended September 30, 2018:

 

Derivative liabilities as of December 31, 2017

  $ 6,791  

Loss on change in fair value of derivative liabilities

    1,881  
         

Derivative liabilities as of September 30, 2018

  $ 8,672  

 

The value of the derivative liabilities is generally estimated using an options lattice model with multiple inputs and assumptions, including the market price of the Company’s common stock, stock price volatility and other assumptions to project EBITDA and other reset events. These inputs and assumptions are subject to management’s judgment and can vary materially from period to period.

 

 

NOTE 9 STOCKHOLDERS’ DEFICIT

 

Preferred Stock

The Company has authorized 500,000,000 shares of preferred stock with a par value of $0.001 per share. No shares of the preferred stock have been issued.

 

Twinlab Consolidation Corporation 2013 Stock Incentive Plan

The only equity compensation plan currently in effect is the Twinlab Consolidation Corporation 2013 Stock Incentive Plan (the “TCC Plan”), which was assumed by the Company on September 16, 2014. The TCC Plan originally established a pool of 20,000,000 shares of common stock for issuance as incentive awards to employees for the purposes of attracting and retaining qualified employees who will aid in the success of the Company. From January through December 2015, the Company granted restricted stock units to certain employees of the Company pursuant to the TCC Plan. Each restricted stock unit relates to one share of the Company’s common stock. The restricted stock unit awards vest 25% each annually on various dates through 2019. The Company estimated the grant date fair market value per share of the restricted stock units and is amortizing the total estimated grant date value over the vesting periods.  During the nine months ended September 30, 2018, there were not any shares of common stock issued to employees pursuant to the vesting of restricted stock units. As of September 30, 2018, 6,607,285 shares remain in the TCC Plan.

 

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Common Stock Repurchase

On January 5, 2017, pursuant to a repurchase agreement 642,366 shares of the Company’s common stock was purchased by the Company for an aggregate repurchase price of less than $1.

 

Stock Subscription Receivable and Loss on Stock Price Guarantee

As of September 30, 2018, the stock subscription receivable dated August 1, 2014 for the purchase of 1,528,384 shares of the Company’s common stock had a principal balance of $30 and bears interest at an annual rate of 5%.

 

On June 6, 2018, the Company issued 4,166,667 shares of common stock to Platinum Advisory Services, LLC in accordance with the terms of the Equity in Exchange for Services Agreement that the parties entered into on December 27, 2017, wherein the Company received advertising services in exchange for the shares.

 

 

 

NOTE 10 – SUBSEQUENT EVENTS

 

Financing

 

Great Harbor Capital

On November 5, 2018, the Company issued a Secured Promissory Note in favor of GH, pursuant to which GH has loaned the Company the principal amount of $4,000, ("Great Harbor Note 4"). The Great Harbor Note 4 matures on November 5, 2021. Interest on the outstanding principal accrues at a rate of 8.5% per year and is payable monthly on the first day of each month, beginning December 1, 2018. The principal of the Great Harbor Note 4 is payable at maturity. The Great Harbor Note 4 is secured by collateral. The Great Harbor Note 4 is subordinate to the indebtedness owed to MidCap. The Great Harbor Note 4 is senior to the indebtedness owed to Little Harbor, LLC and Golisano Holdings LLC.

 

The Company also issued to GH a warrant to purchase an aggregate of 2,000,000 shares of Company common stock at an exercise price of $.01 per share (the "November 2018 Great Harbor Warrant"). The November 2018 Great Harbor Warrant is exercisable on any business day prior to the expiration date.  The Company has reserved 2,000,000 shares of Company common stock for issuance under the November 2018 Great Harbor Warrant. The November 2018 Great Harbor Warrant expires on November 5, 2024.

 

The November 2018 Great Harbor Warrant is also subject to customary adjustments upon any recapitalization, reorganization, stock split up, combination of shares, merger or consolidation. The November 2018 Great Harbor Warrant grants GH certain registration rights for the shares of Company common stock issuable upon exercise of the November 2018 Great Harbor Warrant.

 

Golisano Holdings LLC

The Company entered into the Thirteenth Amendment to the Note and Warrant Purchase Agreement, dated as of November 5, 2018, by and among the Company and Golisano LLC, as successor by assignment to JL-Mezz Utah, LLC f/k/a JL-BBNC Mezz Utah, LLC to the original Note and Warrant Purchase Agreement, dated as of January 22, 2015, as amended from time to time (the “Thirteenth Amendment”). Pursuant to the Thirteenth Amendment, Golisano LLC consented to the secured loan in the amount of $4,000 from GH.

 

The Company also entered into the Fourteenth Amendment to Note and Warrant Purchase Agreement and Limited Consent, dated as of November 5, 2018, by and among the Company and Golisano LLC, as successor by assignment to Penta Mezzanine SBIC Fund I, L.P. to the original Note and Warrant Purchase Agreement, dated as of November 13, 2014, as amended from time to time (the “Fourteenth Amendment”). Pursuant to the Fourteenth Amendment, Golisano LLC consented to the secured loan in the amount of $4,000 from GH.

 

Midcap Funding X Trust

 

On November 5, 2018, MidCap consented to the Great Harbor Note 3 and the repayment of the Great Harbor Note 3 in the future. The Company, its subsidiaries and Midcap, as successor-by-assignment from MidCap Financial Trust, are parties to a certain Senior Credit Facility dated as of January 22, 2015, as amended from time to time (the "Credit Agreement").

 

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Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Due to the current situation related to our need for additional capital, we find an increase of threatened litigation and we are working with those parties in order to obtain an outcome that does not have a material impact on the Company’s finances.

 

Other

 

In October 2018, the Company held an auction to divest itself of various unneeded, leased equipment at the Utah facility. In November 2018, the Company used proceeds from the auction to pay off the Utah facility’s two equipment lessors, Essex Capital and Kariba Capital.

 

 

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations. (Dollar amounts in thousands)

 

Overview

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations and other materials we file with the Securities and Exchange Commission (the "SEC") (as well as information included in oral statements or other written statements made or to be made by us) contain certain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements contained herein that are not statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position made in this report are forward-looking. We often use words such as anticipates, believes, estimates, expects, intends, predicts, hopes, should, plans, will and similar expressions to identify forward-looking statements. These statements are based on management’s current expectations and accordingly are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained herein due to various important factors, including (but not limited to): consumer preferences, spending and debt levels; the general economic and credit environment; interest rates; variations in consumer purchasing activities; competitive pressures on sales; pricing and gross sales margins; the associated fees or estimated cost savings from contract renegotiations; and our ability to establish and maintain acceptable commercial terms with contract manufacturers.

 

Our Operations

 

We are an integrated marketer, distributor and retailer of branded nutritional supplements and other natural products sold to and through domestic health and natural food stores, mass market retailers, specialty store retailers, on-line retailers and websites. Internationally, we market and distribute branded nutritional supplements and other natural products to and through health and natural product distributors and retailers.

 

Our products include vitamins, minerals, specialty supplements and sports nutrition products primarily under the Twinlab® (including the REAAL®, and Twinlab® Fuel brand of sports nutrition products), Reserveage™ and ResVitale® brands. We also manufacture and sell diet and energy products under the Metabolife® and Re-Body® brands and a full line of herbal teas under the Alvita® brand. To accommodate consumer preferences, our products come in various formulations and delivery forms, including capsules, tablets, softgels, chewables, liquids, sprays, powders and whole herbs. These products are sold primarily through health and natural food stores and on-line retailers, supermarkets, and mass-market retailers.

 

We also perform contract manufacturing services for private label products.  Our contract manufacturing services business involves the manufacture of custom products to the specifications of a customer who requires finished products under the customer’s own brand name.  We do not market these private label products as our business is to sell the products to the customer, who then markets and sells the products to retailers or end consumers.

 

We distribute one of the broadest branded product lines in the industry with approximately 260 stock keeping units, or SKUs. We believe that as a result of our emphasis on innovation, quality, loyalty, education and customer service, our brands are widely recognized in health and natural food stores and among their customers.

 

We have fully integrated our two 2015 acquisitions.  The first was the acquisition of the customer relationships of Nutricap, a provider of dietary supplement contract manufacturing services, into our subsidiary, NutraScience, in February 2015, and the second was the acquisition of 100% of the equity interests of Organic Holdings, a market leader in the healthy aging and beauty from within categories and owner of the award-winning Reserveage™ Nutrition brand, in October 2015. We continue to believe that these acquisitions significantly strengthened our product offerings, contract manufacturing services and our sales and marketing capabilities, providing us with opportunities to improve our market position in addition to adding to supply chain efficiencies.

 

Recent Developments

 

Chief Executive Officer and Board Member Changes

 

On July 17, 2018, the Board of Directors appointed Anthony Zolezzi as the Company’s Chief Executive Officer and President.

 

On July 17, 2018, the Company and Mr. Zolezzi entered into an employment agreement (the “Zolezzi Employment Agreement”), outlining the terms of Mr. Zolezzi’s employment with the Company. Under the terms of the Zolezzi Employment Agreement, Mr. Zolezzi will also be granted an initial equity award of restricted stock. The initial equity award is for up to 8,000,000 shares of common stock ("Initial Equity Award") with an exercise price equal to the fair market value of the Company's common stock and is subject to the Company's 2013 Stock Incentive Plan and further issuance of shares as necessary.  

 

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On August 16, 2018, Alan S. Gever, Chief Financial Officer and Chief Operations Officer of the Company tendered his resignation that was accepted on August 21, 2018, by the Board of Directors of the Company.  The Board of Directors appointed Carla Goffstein as interim Chief Financial Officer, effective August 21, 2018. These events were disclosed in their entirety in the Company’s Form 8-K filed with the SEC on August 21, 2018. 

 

On September 28, 2018, the Company filed its definitive proxy statement on Schedule 14A and its definitive additional materials announcing that its Annual Meeting and Proxy Vote would take place on November 9, 2018 at the Company’s headquarters in Boca Raton, Florida.

 

Plant Transition

 

On January 25, 2018, the Company announced that as part of a plan improving operational efficiencies, the Company will transition the manufacturing of the balance of its products to strategic manufacturing partners (the “Transition”). The announcement came the same day the Board of Directors made the decision to undertake the Transition. The Board of Directors believe that restructuring the supply chain similar to that of our NutraScience division, and leveraging access to exclusive technologies, and processes, should result in greater flexibility, more efficient capital allocation and an improved cost structure, all of which are believed to be in the best interest of the Company and its stockholders.

 

The Company has and expects to continue to incur certain foreseeable and unforeseeable costs to make the Transition, which have included but are not limited to increasing inventory to maintain products and services throughout the Transition, as well as providing severance to the affected Utah based employees. An accrual of $1.5 million was made at the end of March 31, 2018 for severance pay for Utah based employees scheduled to be terminated at various times this year. According to the plan, production at the underutilized American Fork, Utah facility ceased on or about April 30, 2018, has been shut down since April 30, 2018, but the clean-out of the facility is on-going and is expected to be completed on or about January 31, 2019. All manufacturing has been moved to our portfolio of qualified contract manufacturing partners across the country. We have also selected a third party logistics provider (“3PL”) to handle all of our warehouse and distribution needs.

 

Our contract manufacturing partners include softgel manufacturers, liquid manufacturers, capsule and tablet manufacturers, bulk powder operations and other specialty manufacturers when needed. These contract manufacturers do business with us under both short and long-term contracts depending on our needs. We do not manufacture any of the basic materials used in packaging (bottles, boxes, shipping cartons, caps, tamper resistant films, etc.). We believe that our portfolio of contract manufacturing partners provides us with flexibility and nimbleness in our supply chain giving us a competitive advantage.  In addition, we have redundancy across contract manufacturers giving us further flexibility.

 

We employ a supply chain staff that works with marketing, product development, formulations and quality control personnel as we carefully manage our contract manufacturing partners. Raw materials are sourced by our contract manufacturing partners through a variety of domestically and internationally approved suppliers principally from the United States, Europe and China. We have long-term relationships with many of our contract manufacturing partners and we are constantly evaluating our partners and looking for new relationships that can add value to our supply chain operations.

 

Going Concern Uncertainty

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liabilities in the ordinary course of business. In most periods since our formation, we have generated losses from operations. As of September 30, 2018, we had an accumulated deficit of $273,373. Historical losses are primarily attributable to lower than planned sales resulting from low fill rates on demand due to limitations of our working capital, delayed product introductions and postponed marketing activities, merger-related and other restructuring costs, and interest and refinancing charges associated with our debt refinancing. Losses have been funded primarily through issuance of common stock and third-party or related party debt.

 

Because of this history of operating losses, significant interest expense on our debt, and the recording of significant derivative liabilities, we have a working capital deficiency of $83,081 as of September 30, 2018.  We also have $73,173 of debt, net of discount, due within the next 12 months. These continuing conditions, among others, raise substantial doubt about our ability to continue as a going concern.

 

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Management has addressed operating issues through the following actions: focusing on growing the core business and brands; continuing emphasis on major customers and key products; reducing manufacturing and operating costs and continuing to negotiate lower prices from major suppliers. During the nine months ended September 30, 2018, we obtained debt funding totaling $9,000 to execute the new supply chain initiatives and increase inventory levels to support the closure of Utah facility initiatives. This funding will assist the company to pay for severance cost, unpaid vacation, and other facility closure expenses. Additionally, the funding will also enable the Company to procure inventory and launch new product initiatives. It is possible that we may need additional capital to execute our business plan. If additional funding is required, there can be no assurance that sources of funding will be available when needed on acceptable terms or at all. To meet capital requirements, the Company may consider selling certain assets.

 

Critical Accounting Policies and Estimates

 

This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which we have prepared in accordance with the U.S. generally accepted accounting principles. The preparation of our financial statements required us to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods. Significant estimates include values and lives assigned to acquired intangible assets, reserves for customer returns and allowances, uncollectible accounts receivable, valuation adjustments for slow moving, obsolete and/or damaged inventory and valuation, recoverability of long-lived assets, intangibles and goodwill, estimated values of stock options and warrants, share-based compensation, and the identification and valuation of derivatives. Actual results may differ from these estimates.

 

Our critical accounting policies and estimates include the following:

 

Revenue Recognition

Revenue from product sales, net of estimated returns and allowances, is recognized when evidence of an arrangement is in place, related prices are fixed, and determinable, contractual obligations have been satisfied, title and risk of loss have been transferred to the customer and collection of the resulting receivable is reasonably assured. Shipping terms are generally freight on board shipping point. We sell predominately in the North American and European markets, with international sales transacted in U.S. Dollars.

 

Accounts Receivable and Allowances

We grant credit to customers and generally do not require collateral or other security. We perform credit evaluations of our customers and provide for expected claims, related to promotional items; customer discounts; shipping shortages and damages; and doubtful accounts based upon historical bad debt and claims experience.

 

Inventories

Inventories are stated at the lower of cost or net realizable value and are reduced by an estimated reserve for obsolete inventory.

 

Intangible Assets

Intangible assets consist primarily of trademarks and customer relationships, which are amortized on a straight-line basis over their estimated useful lives ranging from 3 to 30 years. The valuation and classification of these assets and the assignment of amortizable lives involve significant judgment and the use of estimates.

 

We believe that our long-term growth strategy supports our fair value conclusions. For intangible assets, the recoverability of these amounts is dependent upon achievement of our projections and the execution of key initiatives related to revenue growth and improved profitability.

 

Goodwill

Goodwill is not subject to amortization, but is reviewed for impairment annually, or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. An impairment charge would be recorded to the extent the carrying value of goodwill exceeds its estimated fair value. The testing of goodwill under established guidelines for impairment requires significant use of judgment and assumptions. Changes in forecasted operations and other assumptions could materially affect the estimated fair values. Changes in business conditions could potentially require adjustments to these asset valuations.

 

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Impairment of Long-Lived Assets

Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment when changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount of the asset exceeds the expected undiscounted cash flows of the asset, an impairment charge is recognized equal to the amount by which the carrying amount exceeds fair value. The testing of these intangibles under established guidelines for impairment requires significant use of judgment and assumptions. Changes in forecasted operations and other assumptions could materially affect the estimated fair values. Changes in business conditions could potentially require adjustments to these asset valuations.

 

Indefinite-Lived Intangible Assets

Indefinite-lived intangible assets relating to the asset acquisition of Organic Holdings are determined to have an indefinite useful economic life and as such are not amortized. Indefinite-lived intangible assets are tested for impairment annually which consists of a comparison of the fair value of the asset with its carrying value.

 

Value of Warrants Issued with Debt

We estimate the grant date value of certain warrants issued with debt, using an outside professional valuation firm, which uses the Monte Carlo option lattice model. We record the amounts as interest expense or debt discount, depending on the terms of the agreement. These estimates involve multiple inputs and assumptions, including the market price of the Company’s common stock, stock price volatility and other assumptions to project earnings before interest, taxes, depreciation and amortization (“EBITDA”) and other reset events. These inputs and assumptions are subject to management’s judgment and can vary materially from period to period.

 

Derivative Liabilities

We have recorded certain warrants as derivative liabilities at estimated fair value, as determined based on the Company’s use of an outside professional valuation firm, due to the variable terms of the warrant agreements. The value of the derivative liabilities is generally estimated using Monte Carlo option lattice model with multiple inputs and assumptions, including the market price of the Company’s common stock, stock price volatility and other assumptions to project EBITDA and other reset events. These inputs and assumptions are subject to management’s judgment and can vary materially from period to period.

 

Share-Based Compensation

We record share-based compensation, including grants of restricted stock units, based on their grant date fair values and record compensation expense over the vesting period of the restricted stock awards.

 

Income Taxes

We account for income taxes using an asset and liability approach. Deferred income taxes are determined by applying currently enacted tax laws and rates to the cumulative temporary differences between the carrying values of assets and liabilities for financial statement and income tax purposes. Valuation allowances against deferred tax assets are recorded when we are unable to conclude that it is more likely than not that such deferred tax assets will be realized.

 

Results of Operations

 

Net Sales

Our net sales decreased $5,679, or 28%, to $14,933 for the three months ended September 30, 2018 from $20,612 for the three months ended September 30, 2017. On a year-to-date basis, our net sales decreased $9,871, or 15%, to $56,259 for the nine months ended September 30, 2018 from $66,130 for the nine months ended September 30, 2017. These decreases in our net sales are primarily related to a continued declining trend in Twinlab and Organic Holdings branded sales due to lost distribution from out-of-stock conditions caused by order fulfilment shortfalls.  Additionally, sales volume from a major customer in 2017 was not repeated in 2018.

 

Gross Profit

Our gross profit decreased $2,302, or 66%, to $1,207 for the three months ended September 30, 2018 from $3,509 for the three months ended September 30, 2017.  On a year-to-date basis, our gross profit decreased $5,598, or 36%, to $10,164 for the nine months ended September 30, 2018 from $15,762 for the nine months ended September 30, 2017. The decrease in our gross profit is derived from shifts in the margin mix of sales, lower net sales, and costs incurred in the plant transition to contract manufacturers.

 

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Selling, General and Administrative Expenses

Our selling, general and administrative expenses decreased $1,415, or 21% to $5,231 for the three months ended September 30, 2018 from $6,646 for the three months ended September 30, 2017. On a year-to-date basis, our selling, general and administrative expenses increased $215, or approximately 1%, to $20,789 for the nine months ended September 30, 2018 from $20,574 for the nine months ended September 30, 2017.  The decrease in selling, general and administrative expenses for the three months ended September 30, 2018 is related to the Company’s 2018 rightsizing initiatives.

 

Interest Expense, Net

Our interest expense increased $529, or 28%, to $2,405 for the three months ended September 30, 2018 from $1,876 for the three months ended September 30, 2017.  On a year-to-date basis, our interest expense increased $538 or 9% to $6,856 for the nine months ended September 30, 2018 and $6,318 for the nine months ended September 30, 2017.

 

Gain (Loss) on Change in Derivative Liabilities

The number of shares of common stock issuable pursuant to certain warrants issued in 2015 will be increased if our audited adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) or the market price of the Company’s common stock do not meet certain defined amounts. We have recorded the estimated fair value of the warrants as of the date of issuance. Due to the variable terms of the warrant agreements, changes in the estimated fair value of the warrants from the date of issuance to each balance sheet reporting date are recorded as derivative liabilities with a corresponding charge to our consolidated statements of operations. During the three months and nine months ended September 30, 2018, we reported a loss on change in derivative liabilities of $2,269 and a loss of $1,881, respectively. During the three and nine months ended September 30, 2017, we reported a loss on change in derivative liabilities of $393 and $1,688, respectively.

 

Liquidity and Capital Resources

 

At September 30, 2018, we had an accumulated deficit of $273,373, primarily because of our history of operating losses and our recording of derivative liabilities and loss on stock purchase guarantee.  We have a working capital deficiency of $83,081 at September 30, 2018.  Losses have been funded primarily through issuance of common stock, borrowings from our stockholders and third-party debt and proceeds from the exercise of warrants. As of September 30, 2018, we had cash of $619.  On an ongoing basis, we also seek to improve operating cash through trade receivables and payables management as well as inventory stocking levels. We used net cash in operating activities of $5,392 for the nine months ended September 30, 2018.  During the nine months ended September 30, 2018, we incurred new debt of $9,000 and a net decrease in borrowings on our senior credit facility of $3,074 to fund our operations and debt repayment of $1,207.

 

Our total liabilities increased by $10,270 to $110,584 at September 30, 2018 from $100,314 at December 31, 2017.  This increase in our total liabilities was primarily due to the accrual of $1,462 for severance pay for Utah based employees scheduled to be terminated, a net increase of $9,000 in new debt financings obtained during the first nine months of 2018.  For discussion of our debt financings completed to date during 2018, see Notes 6 and 7 in the Notes to Condensed Consolidated Financial Statements included in this Report.

 

Cash Flows from Operating, Investing and Financing Activities

Net cash used in operating activities was $5,392 for the nine months ended September 30, 2018 as a result of our net loss of $19,410, a non-cash loss on change in derivative liabilities of $1,881, other non-cash expenses totaling $4,206 net and an increase in net operating assets and liabilities of $7,931.  By comparison, for the nine months ended September 30, 2017, net cash used in operating activities was $9,143 as a result of our net loss of $12,854, a non-cash loss on change in derivative liabilities of $1,688 as well as other non-cash expenses totaling $5,088 and a decrease in net operating assets and liabilities of $3,065. See Condensed Consolidated Statements of Cash Flows included in this Report for additional information.

 

Net cash used in investing activities for the nine months ended September 30, 2018 and 2017 was $58 and $51, respectively, consisting of the purchase of property and equipment. 

 

Net cash provided by financing activities was $4,719 for the nine months ended September 30, 2018, primarily consisting of proceeds from the issuance of debt of $9,000, decrease in borrowings of $3,074 under our revolving credit facility, and repayment of debt of $1,207.

 

Ongoing Funding Requirements

As set forth above, we have obtained additional debt financing to date in 2018 to support operations. It is possible that we may need additional funding to enable us to fund our operating expenses and capital expenditure requirements.

 

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Until such time, if ever, as we can generate substantial product revenues, we intend to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. There can be no assurance that any of those sources of funding will be available when needed on acceptable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or relationships with third parties when needed or on acceptable terms, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts; abandon our business strategy of growth through acquisitions; or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

Recent Accounting Pronouncements

 

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment (Topic 350)” which removes Step 2 of the goodwill impairment test that requires a hypothetical purchase price allocation.  A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2019.  Early adoption is permitted after January 1, 2017.  We do not expect the new guidance to have a significant impact on our condensed consolidated financial statements or related disclosures.

 

In February 2016, FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which requires companies to recognize all leases as assets and liabilities on the consolidated balance sheet. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in a consolidated statement of comprehensive income and a consolidated statement of cash flows is largely unchanged from previous GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its condensed consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments- Credit losses (Topic 326): Measurement of Credit losses on Financial Instruments". ASU 2016-13 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Our status as an emerging growth company allows us to defer adoption until the annual period, including interim periods within the annual period, beginning January 1, 2021. Management is currently evaluating the requirements of this guidance and has not yet determined the impact of the adoption on the Company's financial position or results from operations.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016; however, in July 2015, the FASB agreed to delay the effective date by one year. The proposed deferral may permit early adoption but would not allow adoption any earlier than the original effective date of the standard. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.  Our status as an emerging growth company allows us to defer the adoption until the year (and interim periods therein) beginning January 1, 2019. We have chosen to delay our adoption until January 1, 2019.

 

Although there are several other new accounting pronouncements issued or proposed by the FASB, which we have adopted or will adopt, as applicable, we do not believe any of these accounting pronouncements has had or will have a material impact on our condensed consolidated financial position or results of operations

 

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Material Contractual Obligations

 

On December 15, 2016, we entered into an operating lease agreement for approximately 13,000 square feet of office space in Boca Raton, Florida.  The agreement expires in February 2026, and has a monthly base rent of $17 in year 1 to $21 in year 8. The commencement date is August 2017.

 

As of September 30, 2018, we have total debt of $76,397, of which $63,669 is considered to be related-party debt.  For discussion of our debt financings, see Notes 6 and 7 in the Notes to Condensed Consolidated Financial Statements included in this Report.

 

Effective February 6, 2013, we entered into an operating lease agreement for approximately 170,000 square feet of manufacturing, R&D, warehousing and shipping space, which includes roughly 30,000 square feet of office space, in American Fork, Utah. The agreement expires in February 2028 and has a monthly base rent of $60, provided that commencing on the five-year anniversary date thereafter, the base rent shall be increased by 10% over the base rent for the preceding five-year period.

 

Effective April 7, 2015, we entered into an operating lease agreement for approximately 31,000 square feet of office space in St. Petersburg, Florida. The agreement expires in April 2027 and has a monthly base rent of $59 for year 1 to $76 for year 12.

 

On January 17, 2018, the Company entered into a Sublicense Agreement with 463IP Partners, LLC (“463IP”) in which 463IP granted an exclusive, worldwide, perpetual sublicense to the licensed patents, licensed processes and licensed technology with the right to use, make, sell, offer, import, export, practice and develop the licensed patents, licensed processes, licensed products and licensed technology in all of the countries and territories of the world and with respect to the direct marketing, sale, use and consumption efforts directed towards athletes. In return for this sublicense, the Company agreed to purchase certain minimum amounts of licensed product solely from 463IP or from a manufacturer approved by 463IP. The minimum requirements are 10,000 kilograms of blended licensed product during the first year of the Sublicense Agreement and 20,000 kilograms of blended licensed product during the second year of the Sublicense Agreement.

 

If purchased from 463IP, the price will be equivalent to the fully loaded cost to 463IP. Additionally, the Company will pay a royalty equal to $2.50 per kilogram of blended licensed product purchased regardless of whether it is purchased from 463IP or a manufacturer approved by 463IP. The Per Kilo Fee shall be reduced by 50% under certain circumstances set forth in the Sublicense Agreement.

 

Off-Balance Sheet Arrangements

 

None.

 

Item 3.          Quantitative and Qualitative Disclosures About Market Risk.

 

This item is not applicable as we are currently considered a smaller reporting company.

 

 

Item 4.          Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2018 pursuant to Rule 13a-15(b) under the Exchange Act. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Based on the evaluation of our disclosure controls and procedures as of September 30, 2018, our management has concluded that our disclosure controls and procedures were effective as of September 30, 2018.

 

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Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

PART II—OTHER INFORMATION

 

Item 1.          Legal Proceedings

 

CH Robinson Worldwide v. Twinlab Consolidation Corporation, Case No.: Pending, in the District Court of the Fourth Judicial District in and for Hennepin County, Minnesota, allegedly filed on March 7, 2018. Investigation of this claim revealed the complaint was never actually filed and that the Plaintiff’s invoices in the Company’s name were paid timely.

 

See also Note 10, Subsequent Events, to the consolidated financial statements for discussion of legal proceedings in general.

 

Item 1A.       Risk Factors.

 

Risks and uncertainties that, if they were to occur, could materially adversely affect our business or cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements were set forth in the “Item 1A Risk Factors” section of our Annual Report on Form 10-K filed with the SEC on April 3, 2018.

 

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial conditions and/or operating results.

 

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Item 6.          Exhibits.

 

Exhibit

Number

Exhibit Description

   

10.177

Employment Agreement, dated July 17, 2018, by and between Twinlab Consolidated Holdings, Inc. and Mr. Anthony Zolezzi (incorporated by reference to Exhibit 10.177 to the Company’s report on Form 8-K on July 19, 2018)

10.178 Secured Promissory Note, dated July 27, 2018, issued by Twinlab Consolidated Holdings, Inc., Twinlab Consolidation Corporation, Twinlab Holdings, Inc., ISI Brands Inc., Twinlab Corporation, Nutrascience Labs, Inc., Nutrascience Labs IP Corporation, Organic Holdings LLC, Reserve Life Organics, LLC, Resvitale, LLC, Re-Body, LLC, Innovitamin Organics, LLC, Organics Management LLC, Cocoawell, LLC, Fembody, LLC, Reserve Life Nutrition, LLC, Innovita Specialty Distribution LLC, and Joie Essance, LLC in favor of Great Harbor Capital, LLC.*
10.179 Warrant, dated July 27, 2018, by and between Twinlab Consolidated Holdings, Inc. and Great Harbor Capital, LLC
10.180 Twelfth Amendment to Note and Warrant Purchase Agreement, dated as of July 27, 2018, by and between Twinlab Consolidated Holdings, Inc., Twinlab Consolidation Corporation, Twinlab Holdings, Inc., ISI Brands Inc., Twinlab Corporation, NutraScience Labs, Inc., NutraScience Labs IP Corporation, Organic Holdings LLC, Reserve Life Organics, LLC, Resvitale, LLC, Re-Body, LLC, Innovitamin Organics, LLC, Organics Management LLC, Cocoawell, LLC, Fembody, LLC, Reserve Life Nutrition, L.L.C., Innovita Speciality Distribution, LLC, Joie Essance, LLC and Golisano Holdings LLC, as successor by assignment to JL-Mezz Utah LLC (f/k/a JL-BBNC Mezz Utah, LLC).*
10.181 Thirteenth Amendment to Note and Warrant Purchase Agreement, dated as of July 27, 2018, by and between Twinlab Consolidated Holdings, Inc., Twinlab Consolidation Corporation, Twinlab Holdings, Inc., ISI Brands Inc., Twinlab Corporation, NutraScience Labs, Inc., NutraScience Labs IP Corporation, Organic Holdings LLC, Reserve Life Organics, LLC, Resvitale, LLC, Re-Body, LLC, Innovitamin Organics, LLC, Organics Management LLC, Cocoawell, LLC, Fembody, LLC, Reserve Life Nutrition, L.L.C., Innovita Speciality Distribution, LLC, Joie Essance, LLC and Golisano Holdings LLC, as successor by assignment to Penta Mezzanine SBIC Fund I, L.P.*

31.1

Rule 13a-14(a)/15d-14(a) Certification.

31.2

Rule 13a-14(a)/15d-14(a) Certification.

32.1

Certification Pursuant to 18 U.S.C. Section 1350.

32.2

Certification Pursuant to 18 U.S.C. Section 1350.

101.INS

XBRL Instance.

   

101.SCH

XBRL Taxonomy Extension Schema.

   

101.CA

XBRL Taxonomy Extension Calculation.

   

101.DEF

XBRL Taxonomy Extension Definition.

   

101.LAB

XBRL Taxonomy Extension Label.

   

101.PRE

XBRL Taxonomy Extension Presentation.

 

________

*          Portions of these exhibits have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

 

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SIGNATURES

 

 

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

 

 

   

TWINLAB CONSOLIDATED HOLDINGS, INC.

       
       

Date: November 19, 2018

 

By:

/s/ Anthony Zolezzi

     

Anthony Zolezzi

     

Chief Executive Officer and President 

       

Date: November 19, 2018

 

By:

/s/ Carla Goffstein

      Carla Goffstein
     

SVP, Finance & Accounting, and Interim Chief Financial

Officer & Treasurer

 

 

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