FORM 10-QUnited 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 endedJune 30, 2017September 30, 2017
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromfrom ________ to __________
Commission file number000-55181000-55181
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☐Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes☒ No☐Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,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.:
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | 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☒
Yes ☐ No ☒
The number of shares of common stock, $0.001 par value, outstanding on August 11,November 14, 2017 was 252,924,027 shares.
TABLE OF CONTENTS
Page No. | |||
Part I - FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | 1 | |
| Condensed Consolidated Balance Sheets (Unaudited) | |||
| 2 | |||
| Condensed Consolidated Statements of Comprehensive Loss (Unaudited) | 3 | ||
| Condensed Consolidated Statements of Cash Flows (Unaudited) | |||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |||
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Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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Item | Controls and Procedures |
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Part II - OTHER INFORMATION | |||
Item 1. | Legal Proceedings |
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Item1A. | Risk Factors |
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Item 6. | Exhibits |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.Statements.
TWINLAB CONSOLIDATED HOLDINGS, INC. | ||||||
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) | ||||||
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) |
June 30, | December 31, | September 30, | December 31, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 487 | $ | 5,097 | $ | 2,233 | $ | 5,097 | ||||||||
Accounts receivable, net of allowance of $1,602 and $2,365, respectively | 9,275 | 7,768 | ||||||||||||||
Accounts receivable, net of allowance of $2,777 and $2,365, respectively | 8,737 | 7,768 | ||||||||||||||
Inventories, net | 21,545 | 17,601 | 18,368 | 17,601 | ||||||||||||
Prepaid expenses and other current assets | 2,570 | 2,870 | 2,238 | 2,870 | ||||||||||||
Total current assets | 33,877 | 33,336 | 31,576 | 33,336 | ||||||||||||
Property and equipment, net | 3,109 | 3,528 | 3,240 | 3,528 | ||||||||||||
Intangible assets, net | 29,032 | 30,197 | 28,450 | 30,197 | ||||||||||||
Goodwill | 24,098 | 24,098 | 24,098 | 24,098 | ||||||||||||
Other assets | 1,767 | 1,667 | 1,768 | 1,667 | ||||||||||||
Total assets | $ | 91,883 | $ | 92,826 | $ | 89,132 | $ | 92,826 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 7,648 | $ | 7,866 | $ | 4,607 | $ | 7,866 | ||||||||
Accrued expenses and other current liabilities | 8,030 | 11,434 | 10,266 | 11,434 | ||||||||||||
Derivative liabilities | 7,750 | 6,455 | 8,143 | 6,455 | ||||||||||||
Notes payable and current portion of long-term debt, net of discount of $1,952and $2,297, respectively | 17,609 | 11,631 | ||||||||||||||
Notes payable and current portion of long-term debt, net of discount of $1,871 and $2,297, respectively | 17,091 | 11,631 | ||||||||||||||
Total current liabilities | 41,037 | 37,386 | 40,107 | 37,386 | ||||||||||||
Long-term liabilities: | ||||||||||||||||
Deferred gain on sale of assets | 1,646 | 1,727 | 1,606 | 1,727 | ||||||||||||
Deferred tax liability | 959 | 959 | 959 | 959 | ||||||||||||
Notes payable and long-term debt, net of current portion and discount of $2,551and $3,451, respectively | 53,612 | 50,988 | ||||||||||||||
Notes payable and long-term debt, net of current portion and discount of $2,102 and $3,451, respectively | 57,162 | 50,988 | ||||||||||||||
Total long-term liabilities | 56,217 | 53,674 | 59,727 | 53,674 | ||||||||||||
Total liabilities | 97,254 | 91,060 | 99,834 | 91,060 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ equity (deficit): | ||||||||||||||||
Preferred stock, $0.001 par value, 500,000,000 shares authorized,no shares issued and outstanding | - | - | ||||||||||||||
Stockholders’ equity (deficit): | ||||||||||||||||
Preferred stock, $0.001 par value, 500,000,000 shares authorized, no shares issued and outstanding | - | - | ||||||||||||||
Common stock, $0.001 par value, 5,000,000,000 shares authorized, 387,730,078 shares issued | 388 | 388 | 388 | 388 | ||||||||||||
Additional paid-in capital | 226,680 | 226,380 | 226,766 | 226,380 | ||||||||||||
Stock subscriptions receivable | (30 | ) | (30 | ) | (30 | ) | (30 | ) | ||||||||
Treasury stock, 134,806,051 and 134,163,685 shares at cost, respectively | (500 | ) | (500 | ) | (500 | ) | (500 | ) | ||||||||
Accumulated deficit | (231,909 | ) | (224,472 | ) | (237,326 | ) | (224,472 | ) | ||||||||
Total stockholders’ equity (deficit) | (5,371 | ) | 1,766 | |||||||||||||
Total stockholders’ equity (deficit) | (10,702 | ) | 1,766 | |||||||||||||
Total liabilities and stockholders' equity (deficit) | $ | 91,883 | $ | 92,826 | $ | 89,132 | $ | 92,826 | ||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
TWINLAB CONSOLIDATED HOLDINGS, INC. | |||||||||
CONDENSED CONSOLIDATED STATEMENTS OF | |||||||||
COMPREHENSIVE LOSS (UNAUDITED) | |||||||||
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net sales | $ | 20,612 | $ | 23,046 | $ | 66,130 | $ | 65,885 | ||||||||
Cost of sales | 17,103 | 15,963 | 50,368 | 49,405 | ||||||||||||
Gross profit | 3,509 | 7,083 | 15,762 | 16,480 | ||||||||||||
Selling, general and administrative expenses | 6,646 | 7,760 | 20,574 | 26,249 | ||||||||||||
Loss from operations | (3,137 | ) | (677 | ) | (4,812 | ) | (9,769 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest expense, net | (1,876 | ) | (2,423 | ) | (6,318 | ) | (6,530 | ) | ||||||||
Loss on stock purchase guarantee | - | - | - | (3,210 | ) | |||||||||||
Gain (loss) on change in derivative liabilities | (393 | ) | 14,065 | (1,688 | ) | 28,128 | ||||||||||
Other income (expense), net | (12 | ) | 3 | (36 | ) | (18 | ) | |||||||||
Total other income (expense) | (2,281 | ) | 11,645 | (8,042 | ) | 18,370 | ||||||||||
Income (loss) before income taxes | (5,418 | ) | 10,968 | (12,854 | ) | 8,601 | ||||||||||
Provision for income taxes | - | - | - | (17 | ) | |||||||||||
Total comprehensive income (loss) | $ | (5,418 | ) | $ | 10,968 | $ | (12,854 | ) | $ | 8,584 | ||||||
Weighted average number of common shares outstanding – basic | 252,924,027 | 250,806,152 | 252,935,792 | 264,740,245 | ||||||||||||
Net income (loss) per common share – basic | $ | (0.02 | ) | $ | 0.04 | $ | (0.05 | ) | $ | 0.03 | ||||||
Weighted average number of common shares outstanding – diluted (2016 corrected - see Note 1) | 252,924,027 | 264,224,781 | 252,935,792 | 277,221,732 | ||||||||||||
Net loss per common share – diluted (2016 corrected - see Note 1) | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.07 | ) | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
TWINLAB CONSOLIDATED HOLDINGS, INC. | |||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | |||||||
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(AMOUNTS IN | |||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net sales | $ | 21,419 | $ | 22,222 | $ | 45,518 | $ | 42,839 | ||||||||
Cost of sales | 15,766 | 16,247 | 33,265 | 33,442 | ||||||||||||
Gross profit | 5,653 | 5,975 | 12,253 | 9,397 | ||||||||||||
Selling, general and administrative expenses | 7,333 | 8,567 | 13,928 | 18,489 | ||||||||||||
Loss from operations | (1,680 | ) | (2,592 | ) | (1,675 | ) | (9,092 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest expense, net | (2,478 | ) | (2,147 | ) | (4,442 | ) | (4,107 | ) | ||||||||
Loss on stock purchase guarantee | - | - | - | (3,210 | ) | |||||||||||
Gain (loss) on change in derivative liabilities | (297 | ) | 1,072 | (1,295 | ) | 14,063 | ||||||||||
Other expense, net | (25 | ) | (23 | ) | (24 | ) | (21 | ) | ||||||||
Total other income (expense) | (2,800 | ) | (1,098 | ) | (5,761 | ) | 6,725 | |||||||||
Loss before income taxes | (4,480 | ) | (3,690 | ) | (7,436 | ) | (2,367 | ) | ||||||||
Provision for income taxes | - | (13 | ) | - | (17 | ) | ||||||||||
Total comprehensive loss | $ | (4,480 | ) | $ | (3,703 | ) | $ | (7,436 | ) | $ | (2,384 | ) | ||||
Weighted average number of common sharesoutstanding – basic | 252,959,714 | 250,762,072 | 252,941,772 | 271,783,852 | ||||||||||||
Net loss per common share – basic | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.01 | ) | ||||
Weighted average number of common sharesoutstanding – diluted (2016 corrected - see Note 1) | 252,959,714 | 266,753,987 | 252,941,772 | 285,936,529 | ||||||||||||
Net loss per common share – diluted(2016 corrected - see Note 1) | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.06 | ) | ||||
Nine Months Ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (12,854 | ) | $ | 8,584 | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Depreciation and amortization | 2,416 | 2,212 | ||||||
Amortization of debt discount | 1,774 | 2,717 | ||||||
Stock-based compensation | 386 | 540 | ||||||
Provision for obsolete inventory | 466 | 1,194 | ||||||
Provision for losses on accounts receivable | 167 | 267 | ||||||
Loss on stock purchase price guarantee | - | 3,210 | ||||||
(Gain) loss on change in derivative liabilities | 1,688 | (28,128 | ) | |||||
Other non-cash items | (121 | ) | (124 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (1,136 | ) | (2,293 | ) | ||||
Inventories | (1,233 | ) | (4,044 | ) | ||||
Prepaid expenses and other current assets | 632 | (1,113 | ) | |||||
Other assets | (101 | ) | 63 | |||||
Accounts payable | (3,259 | ) | (5,241 | ) | ||||
Accrued expenses and other current liabilities | 2,032 | 1,621 | ||||||
Net cash used in operating activities | (9,143 | ) | (20,535 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (51 | ) | (119 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from the exercise of warrants | - | 1 | ||||||
Proceeds from the issuance of debt | 6,267 | 22,089 | ||||||
Repayment of debt | (1,583 | ) | (2,973 | ) | ||||
Net borrowings from revolving credit facility | 1,646 | 3,342 | ||||||
Net cash provided by financing activities | 6,330 | 22,459 | ||||||
Net increase (decrease) in cash | (2,864 | ) | 1,805 | |||||
Cash at the beginning of the period | 5,097 | 1,240 | ||||||
Cash at the end of the period | $ | 2,233 | $ | 3,045 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
TWINLAB CONSOLIDATED HOLDINGS, INC. | |||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | |||||||
(AMOUNTS IN THOUSANDS) - Continued |
Six Months Ended | ||||||||
June 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (7,436 | ) | $ | (2,384 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 1,612 | 1,352 | ||||||
Amortization of debt discount | 1,244 | 1,129 | ||||||
Stock-based compensation | 301 | 358 | ||||||
Provision for obsolete inventory | 119 | 816 | ||||||
Provision for losses on accounts receivable | 185 | 1,064 | ||||||
Loss on stock purchase price guarantee | - | 3,210 | ||||||
(Gain) loss on change in derivative liabilities | 1,295 | (14,063 | ) | |||||
Other non-cash items | (81 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (1,692 | ) | (1,518 | ) | ||||
Inventories | (4,063 | ) | (952 | ) | ||||
Prepaid expenses and other current assets | 300 | (1,037 | ) | |||||
Other assets | (102 | ) | 97 | |||||
Accounts payable | (218 | ) | (3,515 | ) | ||||
Accrued expenses and other current liabilities | (204 | ) | 2,461 | |||||
Net cash used in operating activities | (8,740 | ) | (12,982 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (29 | ) | (110 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from the exercise of warrants | - | 1 | ||||||
Proceeds from the issuance of debt | 3,267 | 19,500 | ||||||
Repayment of debt | (1,057 | ) | (2,479 | ) | ||||
Net borrowings from revolving credit facility | 1,949 | 755 | ||||||
Decrease in security deposits | - | 27 | ||||||
Net cash provided by financing activities | 4,159 | 17,804 | ||||||
Net increase (decrease) in cash | (4,610 | ) | 4,712 | |||||
Cash at the beginning of the period | 5,097 | 1,240 | ||||||
Cash at the end of the period | $ | 487 | $ | 5,952 | ||||
Nine Months Ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for interest | $ | 982 | $ | 3,818 | ||||
Cash paid for income taxes | - | 27 | ||||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS: | ||||||||
Decrease in derivative liabilities and increase in common stock and additional paid-in capital on exercise of warrants | $ | - | $ | 1,975 | ||||
Issuance of other liability for purchase of treasury shares | - | 500 | ||||||
Relief of stock subscription accrual through long-term debt | (3,200 | ) | - | |||||
Issuance of new long-term debt as payment of existing stock subscription accrual | 3,200 | - | ||||||
Property and equipment acquired through the issuance of capital leases | 330 | - | ||||||
Repayment of short-term debt | - | (2,589 | ) | |||||
Issuance of long-term debt | - | 2,589 | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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Six Months Ended | ||||||||
June 30, | ||||||||
2017 | 2016 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for interest | $ | 3,198 | $ | 2,094 | ||||
Cash paid for income taxes | - | 27 | ||||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS: | ||||||||
Decrease in derivative liabilities and increase in common stock and additionalpaid-in capital on exercise of warrants | $ | - | $ | 1,975 | ||||
Issuance of other liability for purchase of treasury shares | - | 500 | ||||||
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 | - | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
TWINLAB CONSOLIDATED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 manufacturer, 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 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 powders and whole herbs.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 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 manufacture and 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 herein. 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, 2016 filed with the SEC on March 31, 2017.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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.
Fair ValueValue of Financial InstrumentsFinancial 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 June September 30, 2017 and December 31, 2016:
June 30, 2017 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
September 30, 2017 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
Derivative liabilities | $ | 7,750 | $ | - | $ | - | $ | 7,750 | $ | 8,143 | $ | - | $ | - | $ | 8,143 | ||||||||||||||||
December 31, 2016 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Derivative liabilities | $ | 6,455 | $ | - | $ | - | $ | 6,455 | ||||||||
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 JuneSeptember 30, 2017, total allowances amounted to $1,602,$2,777, of which $296$314 was related to doubtful accounts receivable. As of December 31, 2016, total allowances amounted to $2,365, of which $481 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.
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, LLC (“Organic Holdings”), a market leader in the healthy aging and beauty from within categories and owner of the award-winning ReserveageTMReserveage™ Nutrition brand, 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 JuneSeptember 30, 2017 and December 31, 2016 was $5,900.
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 recordtherecord 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 projectearningsproject 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 and $41 for the three months ended JuneSeptember 30, 2017 and 2016.2016, respectively. For the sixnine months ended JuneSeptember 30, 2017 and 2016, we recorded amortization of $81$121 and $82,$122, respectively. As of JuneSeptember 30, 2017 and December 31, 2016, unamortized deferred gain on sale of assets was $1,646$1,606 and $1,727, respectively.
Net 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.
The common shares used in the computation of our basic and diluted net loss per share are reconciled as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(as corrected) | ||||||||||||||||
Numerator: | ||||||||||||||||
Net loss | $ | (4,480 | ) | $ | (3,703 | ) | $ | (7,436 | ) | $ | (2,384 | ) | ||||
Effect of dilutive securities on net loss: | ||||||||||||||||
Common stock warrants | - | (1,072 | ) | - | (14,063 | ) | ||||||||||
Total net loss for purpose of calculating diluted net loss per common share | $ | (4,480 | ) | $ | (4,775 | ) | $ | (7,436 | ) | $ | (16,447 | ) | ||||
Number of shares used in per common share calculations: | ||||||||||||||||
Total shares for purposes of calculating basic net loss per common share | 252,959,714 | 250,762,072 | 252,941,772 | 271,783,852 | ||||||||||||
Weighted-average effect of dilutive securities: | ||||||||||||||||
Common stock warrants | - | 15,991,915 | - | 14,152,677 | ||||||||||||
Total shares for purpose of calculating diluted net loss per common share | 252,959,714 | 266,753,987 | 252,941,772 | 285,936,529 | ||||||||||||
Net loss per common share: | ||||||||||||||||
Basic | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.01 | ) | ||||
Diluted | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.06 | ) | ||||
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||
(as corrected) | (as corrected) | ||||||||||||||||
Numerator: | |||||||||||||||||
Net income (loss) | $ | (5,418 | ) | $ | 10,968 | $ | (12,854 | ) | $ | 8,584 | |||||||
Effect of dilutive securities on net income (loss): | |||||||||||||||||
Common stock warrants | - | (14,065 | ) | - | (28,128 | ) | |||||||||||
Total net loss for purpose of calculating diluted net loss per common share | $ | (5,418 | ) | $ | (3,097 | ) | $ | (12,854 | ) | $ | (19,544 | ) | |||||
Number of shares used in per common share calculations: | |||||||||||||||||
Total shares for purposes of calculating basic net loss per common share | 252,924,027 | 250,806,152 | 252,935,792 | 264,740,245 | |||||||||||||
Weighted-average effect of dilutive securities: | |||||||||||||||||
Common stock warrants | - | 13,418,629 | - | 12,481,487 | |||||||||||||
Total shares for purpose of calculating diluted net loss per common share | 252,924,027 | 264,224,781 | 252,935,792 | 277,221,732 | |||||||||||||
Net income (loss) per common share: | |||||||||||||||||
Basic | $ | (0.02 | ) | $ | 0.04 | $ | (0.05 | ) | $ | 0.03 | |||||||
Diluted | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.07 | ) | |||||
Correction of 2016 Diluted Net Loss Per Share
The diluted net loss per share for the period ended JuneSeptember 30, 2016 has been corrected. In accordance with U.S. generally accepted accounting principles, 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.
For the period ended JuneSeptember 30, 2016, as originally reported, we did not add back the effects of the change in the derivative liability in computing dilutive income or loss per share. The dilutive loss per share for the three and sixnine months ended JuneSeptember 30, 2016 in the table above has been revised to correct this error.
The table below reflects the diluted net loss per share as originally reported and net loss per share as corrected for the three and six months ended June 30, 2016.
As originally reported | As corrected | |||||||
| Diluted net loss per shares (three months) | $ | (0.01 | ) | $ | (0.02 | ) | ||
Diluted net loss per shares (six months) | $ | (0.01 | ) | $ | (0.06 | ) | ||
| Weighted average shares outstanding - diluted (three months) | 250,762,072 | 266,753,987 | ||||||
Weighted average shares oustanding - diluted (six months) | 271,783,852 | 285,936,529 | ||||||
Additionally, the diluted loss per share for the period ended September 30, 2016 will be reflected as corrected in the Form 10-Q for the quarter ending September 30, 2017. The corrected diluted loss per share for the three and nine months ended September 30, 2016 was $(0.01) and $(0.07), respectively.2016.
As originally reported | As corrected | |||||||
Diluted net income (loss) per common share (three months) | $ | 0.04 | $ | (0.01 | ) | |||
Diluted net income (loss) per common share (nine months) | $ | 0.03 | $ | (0.07 | ) | |||
Weighted average shares oustanding - diluted (three months) | 258,565,687 | 264,224,781 | ||||||
Weighted average shares oustanding - diluted (nine months) | 275,633,914 | 277,221,732 | ||||||
The errors were corrected as of December 31, 2016, but since the adjustments were not material to any of the quarters previously reported, the Form 10-Qs for those periods were not amended. Management has determined the effects to be neither quantitatively or qualitatively material to the financial statements included in any of the Form 10-Qs filed during 2016.
Significant Concentration of Credit Risk
Sales to our top three customers aggregatedaggregated to approximately 22%33% and 26%25% of total sales for the three months ended JuneSeptember 30, 2017 and 2016, respectively, and 27% and 26% of total sales for the sixnine months ended JuneSeptember 30, 2017 and 2016.2016, respectively. Sales to one of those customers were approximately 10%13% and 9%11% of total sales for the three months ended JuneSeptember 30, 2017 and 2016, respectively, and 12% and 10%11% of total sales for the sixnine months ended JuneSeptember 30, 2017 and 2016, respectively. Accounts receivable from these customers were approximately 39%55% and 29% of total accounts receivable as of JuneSeptember 30, 2017 and December 31, 2016, respectively.
Recent Accounting Pronouncements
In JulyMay 2017, FASB amended its guidance regarding the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11, “Derivatives and Hedging (Topic 815)” which addresses the complexityscope of modification accounting for certain financial instruements with down round features.Theshare-based compensation arrangements. The amendments provide guidance about which changes to the terms or conditions of this update changea share-based payment award require an entity to apply modification accounting in Topic 718. For public entities, the determination of whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments in this ASUupdate are effective for fiscal years beginning after December 15, 2018.2017, including interim periods within those fiscal years, with early adoption permitted. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. We do not expect the new guidance to have not yet determined thea significant impact on our condensed consolidated financial statements of the adoption of this new accounting pronouncement.
or related disclosures.
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 March 2016, the FASB issued ASU No. 2016-09, “Stock Compensation (Topic 718)”, which is intended to simplify several aspects of the accounting for share-based payment award transactions, including the income tax impacts, the classification on the statement of cash flows, and forfeitures. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods. We have not yet determined the impact on our consolidated financial statements of the adoption of this new accounting pronouncement.
In February 2016, the FASB issued ASU No.No. 2016-02, “Leases (Topic 842)”. The amendments in this ASU revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifiesleases with terms greater than 12 months affecting the accounting for salepattern of expense recognition in the income statement. Leases previously defined as operating leases will be defined as financing leases and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.capitalized if the term is greater than one year. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018 and are to be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are performing an assessment of our leases and have not yet determinedbegun preparations for implementation and retrospective application to the earliest reporting period. As a result, financing leases will be recorded as an asset and a corresponding liability at the present value of the total lease payments. The asset will be decremented over the life of the lease on a pro-rata basis resulting in lease expense while the liability will be decremented using the interest method (ie. principal and interest). As such, we expect the new guidance will materially impact onthe asset and liability balances of our consolidated financial statements and related disclosures at the time of the adoption of this new accounting pronouncement.adoption.
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. At JuneSeptember 30, 2017, we had an accumulated deficit of $231,909.$237,326. 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 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 $7,160$8,531 at JuneSeptember 30, 2017. We also have $17,609$17,091 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; reducing manufacturing and operating costs 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 at:
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
Raw materials | $ | 7,020 | $ | 4,912 | ||||
Work in process | 1,448 | 1,189 | ||||||
Finished goods | 15,134 | 13,438 | ||||||
| 23,602 | 19,539 | |||||||
Reserve for obsolete inventory | (2,057 | ) | (1,938 | ) | ||||
| $ | 21,545 | $ | 17,601 | |||||
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Raw materials | $ | 6,348 | $ | 4,912 | ||||
Work in process | 2,013 | 1,189 | ||||||
Finished goods | 12,411 | 13,438 | ||||||
| 20,772 | 19,539 | |||||||
Reserve for obsolete inventory | (2,404 | ) | (1,938 | ) | ||||
| $ | 18,368 | $ | 17,601 | |||||
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
Machinery and equipment | $ | 12,155 | $ | 10,885 | ||||
Computers and other | 9,148 | 9,119 | ||||||
Aquifer | 482 | 482 | ||||||
Leasehold improvements | 1,518 | 1,518 | ||||||
| 23,303 | 22,004 | |||||||
Accumulated depreciation and amortization | (20,194 | ) | (18,476 | ) | ||||
| $ | 3,109 | $ | 3,528 | |||||
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Machinery and equipment | $ | 12,156 | $ | 10,885 | ||||
Computers and other | 9,500 | 9,119 | ||||||
Aquifer | 482 | 482 | ||||||
Leasehold improvements | 1,518 | 1,518 | ||||||
| 23,656 | 22,004 | |||||||
Accumulated depreciation and amortization | (20,416 | ) | (18,476 | ) | ||||
| $ | 3,240 | $ | 3,528 | |||||
Assets held under capital leases are included in machinery and equipment and amounted to $1,116$1,082 and $1,142 as of JuneSeptember 30, 2017 and December 31, 2016, respectively.
Depreciation and amortization expense totaled $220totaled $222 and $162$221 for the three months ended JuneSeptember 30, 2017 and 2016, respectively, and totaled $447$669 and $346$567 for the sixnine months ended JuneSeptember 30, 2017 and 2016, respectively.
NOTE 5 – INTANGIBLE ASSETS
Intangible assets consisted of the following at:
June 30, | December 31, | September 30, | December 31, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Trademarks | $ | 12,166 | $ | 12,166 | $ | 12,166 | $ | 12,166 | ||||||||
Indefinite-lived intangible assets | 5,900 | 5,900 | 5,900 | 5,900 | ||||||||||||
Customer relationships | 19,110 | 19,110 | 19,110 | 19,110 | ||||||||||||
Other | 753 | 753 | 753 | 753 | ||||||||||||
| 37,929 | 37,929 | 37,929 | 37,929 | |||||||||||||
Accumulated amortization | (8,897 | ) | (7,732 | ) | (9,479 | ) | (7,732 | ) | ||||||||
| $ | 29,032 | $ | 30,197 | $ | 28,450 | $ | 30,197 | |||||||||
Trademarks are amortized over periodsperiods 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 $582 and $557 for the three months ended JuneSeptember 30, 2017 and 2016, respectively, and was $1,165$1,747 and $1,088$1,645 for the sixnine months ended JuneSeptember 30, 2017 and 2016, respectively.
NOTE 6 – DEBT
Debt consisted of the following at:
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
Related-Party Debt: | ||||||||
July 2014 note payable to Little Harbor, LLC, net of unamortizeddiscount of $7 and $206 as of June 30, 2017 and December 312016, respectively. | $ | 3,259 | $ | 3,061 | ||||
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 | ||||||
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 | - | ||||||
November 2014 note payable to Golisano Holdings LLC (formerly payble to PentaMezzanine SBIC Fund I, L.P.), net of discount and unamortized loan fees in the aggregateof $1,898 and $2,304 as of June 30, 2017 and December 31, 2016, respectively | 6,102 | 5,696 | ||||||
January 2015 note payable to Golisano Holdings LLC (formerly payable to JL-BBNCMezz Utah, LLC), net of discount and unamortized loan fees in the aggregate of$2,286 as of June 30, 2017 | 2,714 | - | ||||||
February 2015 note payable to Golisano Holdings LLC (formerly payable to PentaMezzanine SBIC Fund I, L.P.), net of discount and unamortized loan fees in theaggregate of $166 and $201 as of June 30, 2017 and December 31, 2016, respectively | 1,834 | 1,799 | ||||||
Total related-party debt | 50,716 | 44,096 | ||||||
Senior Credit Facility with Midcap, net of unamortized loan fees of$146 and $293 as of June 30, 2017 and December 31, 2016,respectively | 15,131 | 13,035 | ||||||
Other Debt: | ||||||||
January 2015 note payable to JL-BBNC Mezz Utah, LLC, net of discount andunamortized loan fees in the aggregate of $2,744 as of December 31, 2016 | - | 2,256 | ||||||
April 2016 note payable to JL-Utah Sub, LLC | 437 | 500 | ||||||
Capital lease obligations | 1,737 | 2,732 | ||||||
Huntington Holdings | 3,200 | - | ||||||
Total other debt | 5,374 | 5,488 | ||||||
Total debt | 71,221 | 62,619 | ||||||
Less current portion | (17,609 | ) | (11,631 | ) | ||||
Long-term debt | $ | 53,612 | $ | 50,988 | ||||
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Related-Party Debt: | ||||||||
July 2014 note payable to Little Harbor, LLC, net of unamortized discount of $0 and $206 as of September 30, 2017 and December 31, 2016, respectively | $ | 3,267 | $ | 3,061 | ||||
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 | - | ||||||
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 | - | ||||||
November 2014 note payable to Golisano Holdings LLC (formerly payble to Penta | ||||||||
Mezzanine SBIC Fund I, L.P.), net of discount and unamortized loan fees in the aggregate of $1,694 and $2,304 as of September 30, 2017 and December 31, 2016, respectively | 6,306 | 5,696 | ||||||
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 $2,058 as of September 30, 2017 | 2,942 | - | ||||||
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 $148 and $201 as of September 30, 2017 and December 31, 2016, respectively | 1,852 | 1,799 | ||||||
Total related-party debt | 54,174 | 44,096 | ||||||
Senior Credit Facility with Midcap, net of unamortized loan fees of $73 and $293 as of September 30, 2017 and December 31, 2016, respectively | 14,901 | 13,035 | ||||||
Other Debt: | ||||||||
January 2015 note payable to JL-BBNC Mezz Utah, LLC, net of discount and unamortized loan fees in the aggregate of $2,744 as of December 31, 2016 | - | 2,256 | ||||||
April 2016 note payable to JL-Utah Sub, LLC | 396 | 500 | ||||||
Capital lease obligations | 1,582 | 2,732 | ||||||
Huntington Holdings | 3,200 | - | ||||||
Total other debt | 5,178 | 5,488 | ||||||
Total debt | 74,253 | 62,619 | ||||||
Less current portion | (17,091 | ) | (11,631 | ) | ||||
Long-term debt | $ | 57,162 | $ | 50,988 | ||||
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 are obligated to pay such party $4,900 per year in structured monthly payments for 3 years provided that such payment obligations will terminate at such earlier time as the trailing ninety day volume weighted average closing sales price of the Company’sCompany’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, 2017.2017 however this note remains outstanding and principal payment has been deferred to 2018. This note was non-interest bearing, accordingly, using an imputed interest rate of 16.2%, we recorded a note discount in July 2014, which has been amortized into interest expense based on the effective interest rate method over the term of the note.
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. We issued a warrant into escrow in connection with this loan (see Little Harbor Escrow Warrants in Note 7).
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 which was to commence on February 28, 2017 but has been deferred to January 28, 2018. 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 which was to commence on April 21, 2017 but has been deferred to January 21, 2018. 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 30,30, 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).
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 Directordirector of our Company. We granted Penta a security interest in our assets and pledged the shares of our subsidiaries as security for the note. ThisOn March 8, 2017, Golisano Holdings LLC (“Golisano LLC”) acquired this note payable from Penta. Interest on the outstanding principal accrued at a rate of 12% per year from date of issuance to March 8, 2017, and decreased to 8% per year thereafter, payable monthly. The note matures on November 13, 20192019. On August 30, 2017, we entered into an amendment with paymentsGolisano LLC which extended payment of principal due on a quarterly basis which was to commence 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 but has been deferred to January 13, 2018. This note bears interest of 12% per annum, payable monthly.maturity. 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. Our terms of this note payable remain the same with the only change for us being the holder of the promissory note.
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”JL-US”). 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. On March 8, 2017, Golisano LLC acquired this note payable from JL.
Interest on the outstanding principal accrued at a rate of 12% per year from date of issuance to March 8, 2017, and decreased to 8% per year thereafter, payable monthly. The note matures on FebruaryNovember 13, 20202019. On August 30, 2017, we entered into an amendment with paymentsGolisano LLC which extended payment of principal due on a quarterly basis which was to commence on March 1, 2017 in installments starting at $250 per quarter and increasing to $350 per quarter but has been deferred to January 1, 2018. This note bears interest of 12% per annum, payable monthly.maturity. 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. Our terms of this note payable remain the same with the only change for us 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 relationshipsrelationships of Nutricap. ThisOn March 8, 2017, Golisano LLC acquired this note payable from Penta. Interest on the outstanding principal accrued at a rate of 12% per year from date of issuance to March 8, 2017, and decreased to 8% per year thereafter, payable monthly. The note matures on November 13, 20192019. On August 30, 2017, we entered into an amendment with paymentsGolisano LLC which extended payment of principal due on a quarterly basis which was to commence on 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 but has been deferred to January 13, 2018. This note bears interest of 12% per annum, payable monthly.maturity. We issued a warrant to Penta to purchase 869,618 shares of the Company’s common stock in connection with this loan (see 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. Our terms of this note payable remain the same with the only change for us 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 which was to commence on February 28, 2017 but has been deferred to January 28, 2018. We issued a warrant into escrow in connection with this loan (see Golisano Escrow Warrants in Note 7).
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 which was to commence on April 21, 2017 but has been deferred to January 21, 2018. 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).
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. 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 was 6.05%6.24% per annum as of JuneSeptember 30, 2017. We issued a warrant to Midcap to purchase 500,000 shares of the Company’s common stock (see Midcap Warrant in Note 7). 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.
Other Debt
April 2016 Note Payable toJL-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’sEssex’s principal owner is a director of the Company.
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 accompanying condensed consolidated balance sheet as of December 31, 2016.On2016. On June 2, 2017, the two parties came to an agreement in which we were required to issue an Unsecured Promissory Note (“Huntington Note”) in favor of 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.HuntingtonNote. 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 regards to the remaining 749,999 shares of the Company’s common stock held by Huntington. If the Huntington Note iswas paid off prior to August 14, 2017, the 778,385 shares held in escrow willwere to be released from escrow and transferred to the Company for no additional consideration. If the note remainsremained outstanding on August 15, 2017, we shall havehad the right, but not the obligation, to pay $140 to Huntington to purchase 764,192 of the shares held in escrow (the “Subject Shares”). Upon the exercise of this purchase option, the Subject Shares willwere to be released from escrow and transferred to the Company. If the Huntington Note remainsnote remained outstanding on August 15, 2017 and we dodid not exercise the option to purchase the shares, the shares willwere to be returned from escrow to Huntington and we willwould no longer have repurchase rights. PursuantOn August 15, 2017, the note was outstanding and we did not excerise the repurchase right. The 778,385 shares were returned from escrow to the agreement, we were also required to enter into a four-year lease agreement with the purchaser related to our premises occupied by Nutricap.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 JuneSeptember 30, 2017, management believes we are in compliance with our financial covenants for each debt agreement.
NOTE 7 –WARRANTS AND REGISTRATION RIGHTS AGREEMENTSAGREEMENTS
The following table presents a summary of the status of our issued warrants as of JuneSeptember 30, 2017, and changes during the sixnine months then ended:
Weighted Average | ||||||||
Shares | Exercise Price | |||||||
Outstanding, December 31, 2016 | 15,855,017 | 0.18 | ||||||
Granted | - | - | ||||||
Canceled / Expired | - | - | ||||||
Exercised | - | - | ||||||
Outstanding, June 30, 2017 | 15,855,017 | 0.18 | ||||||
Weighted Average | ||||||||
Shares | Exercise Price | |||||||
Outstanding, December 31, 2016 | 15,855,017 | 0.18 | ||||||
Granted | - | - | ||||||
Canceled / Expired | - | - | ||||||
Exercised | - | - | ||||||
Outstanding, September 30, 2017 | 15,855,017 | 0.18 | ||||||
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”). 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.
Penta Warrants
Pursuant to a Stock Purchase Agreementstock 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,stock purchase agreement, a warrant was issued to JL to purchase an aggregate 403,509 shares of the Company’sCompany’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 equipment financing 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 Agreementreimbursement 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 Agreementreimbursement agreement and the provision of the letter of credit, we issued JL Properties two warrants to purchase shares of the Company’sCompany’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 audited 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.
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.
GolisanoGolisano LLC Warrants (formerlyPenta 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 a total ofan additional 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 timesmultiplied by (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 timesmultiplied by (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.
GolisanoGolisano LLC Warrants (formerlyJL 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), the remaining portions of these warrants were assigned to Golisano LLC.
Golisano LLCWarrants
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 Agreementregistration 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 JuneSeptember 30, 2017, we have reserved 4,756,505 shares of its common stock for issuance under the Golisano Warrant.
Warrants Issued into Escrow
Golisano GolisanoEscrowWarrants
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, if exercisable, 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 thethe Golisano LLC July 2016 Note, 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, if exercisable, 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 thethe Golisano LLC December 2016 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 “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 Golisano LLC December 2016 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, if exercisable, 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 thethe Golisano LLC March 2017 Note, 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 Golisano LLC March 2017 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, if exercisable, 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 Agreementregistration 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.
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, if exercisable, 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, if exercisable, 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 thethe GH December 2016 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 Warrant 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, if exercisable, 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 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 Warrant 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, if exercisable, 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.
JL-US Escrow Warrant
In connection with an April 5, 2016 Unsecured Promissory Note, we issued into escrow in the name of JL-US a warrant to purchase an aggregate of 227,273 shares of the Company’sCompany’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.
Little Harbor Escrow Warrant
The Little Harbor July 2016 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 LIABILITIESLIABILITIES
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 dodoes 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 loss for changes in the estimated fair value of the warrants from the date of issuance to each balance sheet reporting date. As of JuneSeptember 30, 2017, we have estimated the total fair value of the derivative liabilities to be $7,750$8,143 as compared to $6,455 as of December 31, 2016. We had the following activity in our derivative liabilities account since December 31, 2016:
Six Months Ended | Nine Months Ended | |||||||
June 30, | September 30, | |||||||
2017 | 2017 | |||||||
Derivative liabilities at December 31, 2016 | $ | 6,455 | $ | 6,455 | ||||
Loss on change in fair value of derivative liabilities | 1,295 | 1,688 | ||||||
Derivative liabilities at June 30, 2017 | $ | 7,750 | ||||||
Derivative liabilities at September 30, 2017 | $ | 8,143 | ||||||
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’sCompany’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’ EQUITY (DEFICIT)
NOTE 9– STOCKHOLDERS’ EQUITY (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 Unitsrestricted stock units to certain employees of the Company pursuant to the TCC Plan. Each Restricted Stock Unitrestricted stock unit relates to one share of the Company’s common stock. The Restricted Stock Unitrestricted 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 Unitsrestricted stock units and is amortizing the total estimated grant date value over the vesting periods. During the sixnine months ended JuneSeptember 30, 2017, there were not any shares of common stock issued to employees pursuant to the vesting of Restricted Stock Units.Asrestricted stock units. As of JuneSeptember 30, 2017, 5,635,6266,060,943 shares remain available for use in the TCC Plan.
Common Stock Repurchase
On January 5, 2017, pursuant to a Repurchase Agreementrepurchase agreement, 642,366 shares of the Company’sCompany’s common stock were repurchased for an aggregate repurchase price of less than $1.
Stock Subscription Receivable and Loss on Stock Price Guarantee
At JuneSeptember 30, 2017, 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 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 accompanying condensed consolidated balance sheet as of December 31,
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of |
(Amounts in thousands, except share and per share amounts and number of |
Overview
This Quarterly Report on Form 10-Q contains forward-looking statements. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions identify some of the forward-looking statements. Forward-looking statements are not guarantees of performance or future results and involve risks, uncertainties and assumptions. The factors discussed elsewhere in this Form 10-Q and in subsequent Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K, could also cause actual results to differ materially from those indicated by our forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements.
Our Operations
We are an integrated manufacturer, marketer, distributor and retailer of branded nutritional supplements and other natural products sold to and through domestic health and natural food stores, mass marketmarket 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 primarily under the Twinlab® (including the 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 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 manufacture and sell the products to the customer, who then markets and sells the products to retailers or end consumers.
We manufacture and/or 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 continue to focus on integratinghave 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. Progress has been made in consolidating manufacturing operations and 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.
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. At JuneSeptember 30, 2017, we had an accumulated deficit of $231,909.$237,326. 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 $7,160$8,531 at JuneSeptember 30, 2017. We also have $17,609$17,091 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 addressedtaken steps to address 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 sixnine months ended JuneSeptember 30, 2017, we obtained debt funding totaling $3,267$6,267 to execute the new supply chain initiatives and increase inventory levels. 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.
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.
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 recordtherecord 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 projectearningsproject 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’sCompany’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 $803,$2,434, or 4%11%, to $21,419$20,612 for the three months ended JuneSeptember 30, 2017 from $22,222$23,046 for the three months ended JuneSeptember 30, 2016. On a year-to-date basis, our net sales increased $2,679,$245, or 6%0%, to $45,518$66,130 for the sixnine months ended JuneSeptember 30, 2017 from $42,839$65,885 for the sixnine months ended JuneSeptember 30, 2016. The increasedecrease in our net sales for the sixthree months ended September 30, 2017 reflects the decision to exit certain lower margin contract manufacturing business at Twinlab and lower Twinlab branded sales due to lost distribution from out-of-stock conditions caused by order fulfillment shortfalls during 2016. Our net sales for the nine months ended September 30, 2017 increased due to organic growth in ourNutrascience’s contract manufacturing business. In addition, we have increased sales of our Twinlab products due to improved stock levels, and have increased Organic Holdings sales through additional airtime and higher performance of sales through QVC channel.
Gross Profit
Our gross profit decreased $322,$3,574, or 5%50%, to $5,653$3,509 for the three months ended JuneSeptember 30, 2017 from $5,975$7,083 for the three monthsmonths ended JuneSeptember 30, 2016. On a year-to-date basis, our gross profit increased $2,856,decreased $718, or 30%4%, to $12,253$15,762 for the sixnine months ended JuneSeptember 30, 2017 from $9,397$16,480 for the sixnine months ended JuneSeptember 30, 2016. The increasedecrease in our gross profit for the sixthree months ended September 30, 2017 is derived from higherlower net sales volumes combined with increased sales of profitable products. In addition, compared to last year, there have been reductions toas well as one-time inventory write-offs. The decrease in our manufacturing related general and administrative expenses that have positively affected our margins.gross profit for the nine months ended September 30, 2017 is derived from one-time inventory write-offs.
Selling, General and Administrative Expenses
Our selling,selling, general and administrative expenses decreased $1,234,$1,114, or 14%, to $7,333$6,646 for the three months ended JuneSeptember 30, 2017 from $8,567$7,760 for the three months ended JuneSeptember 30, 2016. On a year-to-date basis, our selling, general and administrative expenses decreased $4,561,$5,675, or approximately 25%22%, to $13,928$20,574 for the sixnine months ended JuneSeptember 30, 2017 from $18,489$26,249 for the sixnine months ended JuneSeptember 30, 2016. The decreases in our selling, general and administrative expenses are primarily due to our reduction in force to right-size the number of employees against the needs of current operationswhich began in 2017.2016.
Loss on StockStock Purchase Price Guarantee
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 accompanying condensed consolidated balance sheet as of December 31, 2016.On2016. On June 2, 2017, the two parties came to an agreement in which we were required to issue an Unsecured Promissory Note (“Huntington Note”) in favor of 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 accruesaccrued at a rate of 8.5% per year from August 6, 2016 to August 15, 2017, and increasesincreased 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.HuntingtonNote. 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 regards to the remaining 749,999 shares of the Company’s common stock held by Huntington. If the Huntington Note iswas paid off prior to August 14, 2017, the 778,385 shares held in escrow willwere to be released from escrow and transferred to the Company for no additional consideration. If the note remainsremained outstanding on August 15, 2017, we shall havehad the right, but not the obligation, to pay $140 to Huntington to purchase 764,192 of the sharesSubject Shares held in escrow (the “Subject Shares”).escrow. Upon the exercise of this purchase option, the Subject Shares willwere to be released from escrow and transferred to the Company. If the Huntington Note remainsremained outstanding on August 15, 2017 and we dodid not exercise the option to purchase the shares, the shares willwere to be returned from escrow to Huntington and we willwould no longer have repurchase rights. PursuantOn August 15, 2017, the note was outstanding and we did not excerise the repurchase right. The 778,385 shares were returned from escrow to the agreement we were also required to enter into a four-year lease agreement with the purchaser related to our premises occupied by Nutricap. Huntington.
Interest Expense, Net
Our interest expense increased $331,decreased $547, or 15%23%, to $2,478$1,876 for the three months ended JuneSeptember 30, 2017 from $2,147$2,423 for the three months ended JuneSeptember 30, 2016. On a year-to-date basis, our interest expense increased $335,decreased $212, or 8%3%, to $4,442$6,318 for the sixnine months ended JuneSeptember 30, 2017 from $4,107$6,530 for the sixnine months ended JuneSeptember 30, 2016. The increasedecrease in our interest expense is primarily due to increasesa decrease in our third-party or related party debt.note discounts which are amortized into interest expense.
Gain (Loss) on ChangeChange 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 and each subsequent balance sheet reporting date. 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 gain (loss) on change in derivative liabilities in our consolidated statements of comprehensive loss. During the three months and sixnine months ended JuneSeptember 30, 2017, we reported a loss on change in derivative liabilities of $297$393 and $1,295,$1,688, respectively. During the three and sixnine months ended JuneSeptember 30, 2016, we reported a gain on change in derivative liabilities of $1,072$14,065 and $14,063,$28,128, respectively.
Liquidity and Capital Resources
At JuneSeptember 30, 2017, we had an accumulated deficit of $231,909,$237,326, primarily because of our history of operating losses and our recording of derivative liabilities and loss on a stock purchase price guarantee. We have a working capital deficiency of $7,160$8,531 at JuneSeptember 30, 2017. Losses have been funded primarily through issuance of common stock, borrowings from our stockholders and third-party or related party debt and proceeds from the exercise of warrants. As of JuneSeptember 30, 2017, we had cash of $487.$2,233. 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 $8,740$9,143 for the sixnine months ended JuneSeptember 30, 2017. During the sixnine months ended JuneSeptember 30, 2017, we incurred new debt of $3,267,$6,267, had a net increase in borrowings on our senior credit facility of $1,949$1,646 to fund our operations and debt repayment of $1,057.$1,583.
Our total liabilities increased by $6,194$8,774 to $97,254$99,834 at JuneSeptember 30, 2017 from $91,060 at December 31, 2016. This increase in our total liabilities was primarily due to an increase in our non-cash derivative liabilities of $1,295,$1,688, a non-cash increase in our debt of $3,200,$3,530, a decrease in our liabilities related to operations of $3,703$4,548 and a net increase of $5,402$8,104 in debt. For discussion of our debt financings completed to date during 2017, see Notes 6 and 7 in the Notes to Condensed Consolidated Financial Statements included in this Report.report.
Cash Flows from Operating, Investing and Financing Activities
Net cash used in operating activities was $8,740$9,143 for the sixnine months ended JuneSeptember 30, 2017 as a result of our net loss of $7,436,$12,854, a non-cash loss on change in derivative liabilities of $1,295,$1,688, as well as non-cash expenses totaling $3,380$5,088 and an increase in net operating assets and liabilities of $5,979.$3,065. By comparison, for the sixnine months ended JuneSeptember 30, 2016, net cash used in operating activities was $12,982$20,535 as a result of our net lossincome of $2,384,$8,584, a non-cash gain on change in derivative liabilities of $14,063$28,128 as well as other non-cash expenses totaling $7,929and$10,016 and a decreaseincrease in net operating assets and liabilities of $4,464.$11,007. See Condensed Consolidated Statements of Cash Flows included in this Reportreport for additional information.
Net cash used in investing activities for the sixnine months ended JuneSeptember 30, 2017 and 2016 was $29$51 and $110,$119, respectively, consisting of the purchase of property and equipment.
Net cash provided by financing activities was $4,159$6,330 for the sixnine months ended JuneSeptember 30, 2017, primarily consisting of proceeds from the issuance of debt of $3,267,$6,267, net borrowings of $1,949$1,646 under our revolving credit facilities, partially offset by repayment of debt of $1,057.$1,583. Net cash provided by financing activities was $17,804$22,459 for the sixnine months ended JuneSeptember 30, 2016, consisting of proceeds from the exercise of warrants of $1, proceeds from the issuance of debt of $19,500,$22,089, net borrowings of $755$3,342 under our revolving credit facilities, and a decrease in security deposits of $27, partially offset by repayment of debt of $2,479.$2,973.
Ongoing Funding Requirements
As set forth above, we have obtained additional debt financing to date in 2017 to support operations. It is possible that we may need additional funding to enable us to fund our operating expenses and capital expenditure requirements.
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 we may have 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 PronouncementsAccounting Pronouncements
In JulyMay 2017, FASB amended its guidance regarding the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11, “Derivatives and Hedging (Topic 815)” which addresses the complexityscope of modification accounting for certain financial instruements with down round features.Theshare-based compensation arrangements. The amendments provide guidance about which changes to the terms or conditions of this update changea share-based payment award require an entity to apply modification accounting in Topic 718. For public entities, the determination of whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments in this ASUupdate are effective for fiscal years beginning after December 15, 2018.2017, including interim periods within those fiscal years, with early adoption permitted. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. We do not expect the new guidance to have not yet determined thea significant impact on our condensed consolidated financial statements of the adoption of this new accounting pronouncement.or related disclosures.
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 March 2016, the FASB issued ASU No. 2016-09, “Stock Compensation (Topic 718)”, which is intended to simplify several aspects of the accounting for share-based payment award transactions, including the income tax impacts, the classification on the statement of cash flows, and forfeitures. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods. We have not yet determined the impact on our consolidated financial statements of the adoption of this new accounting pronouncement.
In February 2016, the FASB issued ASU No.No. 2016-02, “Leases (Topic 842)”. The amendments in this ASU revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifiesleases with terms greater than 12 months affecting the accounting for salepattern of expense recognition in the income statement. Leases previously defined as operating leases will be defined as financing leases and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.capitalized if the term is greater than one year. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018 and are to be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are performing an assessment of our leases and have not yet determinedbegun preparations for implementation and retrospective application to the earliest reporting period. As a result, financing leases will be recorded as an asset and a corresponding liability at the present value of the total lease payments. The asset will be decremented over the life of the lease on a pro-rata basis resulting in lease expense while the liability will be decremented using the interest method (ie. principal and interest). As such, we expect the new guidance will materially impact onthe asset and liability balances of our consolidated financial statements and related disclosures at the time of the adoption of this new accounting pronouncement.adoption.
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.
MaterialContractual Obligations
On December 15, 2016, we entered into an operating lease agreement for approximately 13,00013,000 square feet of office space in Boca Raton, Florida. The agreement expires 103 months after the commencement, which occuedoccured in August 2017, and has a monthly base rent of $17.
As of JuneSeptember 30, 2017, we have total debt of $71,221,$74,253, of which $50,716$54,174 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.report.
Effective February 6, 2013, we entered into an operating lease agreement for approximately 170,000 square feet of manufacturing, research and development, 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 approximatelyapproximately 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.
Off-Balance Sheet Arrangements
None.
Item 3.Quantitative and Qualitative DisclosuresDisclosures About Market Risk.Risk.
This item is not applicable as we are currently considered a smaller reporting company.
Item 4.Controls and Procedures.Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of JuneSeptember 30, 2017, 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, as appropriate to allow timely decisions regarding required disclosure.
Based on the evaluation of our disclosure controls and procedures as of JuneSeptember 30, 2017, our management concluded that, as a result of material weaknesses in our internal control over financial reporting discussed below, our disclosure controls and procedures were not effective as of JuneSeptember 30, 2017.
ManagementManagement’s’s Remediation Initiatives
Management plans and has initiated actions to implement a number of initiatives that address the ineffective design of the system of internal control over financial reporting and plans to initiate further actions to implement a number of initiatives, including but not limited to the following:
Work throughout the year with our independent Sarbanes-Oxley Act consultant to help improve the overall designtesting of our system of internal control over financial reporting, so we promptly identify and refine prior to year-end.
Continue to evaluate control procedures on an ongoing basis, and, where possible modify those control procedures to improve management oversight.
Implement and improve systems to automate certain financial reporting processes and to improve information accuracy.
We made various staff changes during 2016 and during our most recent fiscal quarter2017 in our finance and accounting department and we believe these changes have enabled us to broaden the scope and quality of our controls relating to the oversight and review of financial statements and to properly apply all relevant accounting. Furthermore, we plan to implement and improve systems to automate certain financial reporting processes and to improve information accuracy.
Management will continue the process of reviewing existing controls, procedures and responsibilities to more closely identify financial reporting risks and the required controls to address them. Key control and compensating control procedures will behave been developed to ensure that weaknesses are properly addressed and related financial reporting risks are mitigated. Periodic control validation and testing will also behas been implemented to ensure that controls continue to operate consistently and as designed. Management plans to complete this remediation process as quickly as possible. Although we expect it will take at least a year, we cannot estimate how long it will take to remediate the material weaknesses in our system of internal control over financial reporting. In addition, theThe remediation steps we have taken, are taking and expect to take may not effectively remediate the material weaknesses, in which case our internal control over financial reporting would continue to be ineffective. Even if we are able to complete these actions successfully, these measures may not adequately address our material weaknesses and may take more than a yearadditional time to complete. In addition, it is possible that we will discover additional material weaknesses in our internal control over financial reporting or that our existing material weaknesses will result in additional errors in or restatements of our financial statements.
Changes in Internal Control over Financial Reporting
Other than the items discussed above, there were no changes in our internal control over financial reporting during our most recent fiscal quarter that 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—II—OTHER INFORMATION
Item 1. Legal Proceedings
In re: Herbal Supplements Marketing and Sales Practice Litigation, MDL No. 2619, Case No. 1:15-cv-5070, U.S. District Court for the Northern District of Illinois, filed on June 9, 2015. We are not a party to this matter, which joined in a multidistrict litigation a number of purported class actions arising from allegations raised by a state attorney general claiming that DNA barcoding testing conducted on behalf of the attorney general indicated that certain herbal supplement products did not contain the herbal ingredients stated on the label. We do, however, pursuant to contractual obligations, provide indemnity and defense with respect to certain of the claims in this litigation. The defendants in this litigation intend to take all necessary steps to vigorously defend this matter.
Amy Mathews v. Wal-Mart Stores, Inc. and Wal-Mart Stores Arkansas LLC, Case No. CV-2015-0294, in the Circuit Court of Independence County, Arkansas, Civil Division. This purported class action alleges a violation of the Arkansas Deceptive Trade Practices Act based on the same allegations of the state attorney general that serve as the basis for the claims in the Herbal Supplements multidistrict litigation referenced above, and seeks certification of a class of Arkansas residents purportedly impacted by the allegations. We are not a party to this litigation but provide indemnity and defense with respect to certain of the claims in this litigation.
Rite Aid Hdqrts. Corp v. Twinlab Corporation, Case No. 2016-05532, in the Cumberland Court of Common Pleas, Pennsylvania, filed on October 11, 2016. The plaintiff in this matter alleges that we are in breach of contract related to the return of damaged, defective, outdated or discontinued goods, and further alleges that we are in breach of contract related to certain temporary price reductions or mark-downs of Twinlab products in Rite Aid Stores. On April 25, 2017, we entered into a confidential settlement of this matter with the Plaintiff, which does not have a material adverse effect on our financial condition/results of operations or cash flows.
Wilk Auslander LLP v. Twinlab Consolidation Corporation and Twinlab Corporation, Index No. 652339/2017, in the Supreme Court of the State of New York, County of New York, filed on May 1, 2017. The plaintiff in this matter alleged that we were in breach of a retainer agreement related to the payment of certain legal fees and expenses. On June 1, 2017, we entered into a settlement of this matter with the plaintiff, which does not have material adverse effect on our financial conditions/results of operations or cash flows.
Corr-Jensen Inc. v. Mark Walsh and Twinlab Corporation, Case No. 1:17-cv-01473-CBS, in the U.S. District Court for the District of Colorado, filed on June 16, 2017. The plaintiff, Corr-Jensen Inc., alleges Twinlab Corporation intentionally and improperly interfered with Mr. Walsh’s employment agreement and release with the plaintiff by allegedly engaging Mr. Walsh or continuing to engage him. TheOn September 21, 2017, we entered into a confidential settlement of this matter with the plaintiff, is seeking an injunction to enjoin Twinlab from employingwhich did not have a material adverse effect on our financial condition/results of operations or engaging Mr. Walsh for a period of six months and for such damages to be determined at trial, attorney’s fees, costs and expenses, interest and any other relief the court deems proper. The Company intends to take necessary steps to vigorously defend itself.cash flows.
Winn-Dixie Stores, Inc., BI-LO, LLC and Sampson Merger Sub, LLC v. Twinlab Corporation, Case No.: 16-2017-CA-004367, in the Circuit Court of the Fourth Judicial District in and for Duval County, Florida, filed on July 11, 2017. The plaintiffs in this matter allege Twinlab Corporation is in breach of a contract agreement related to unpaid invoices. We are reviewingOn September 25, 2017, we entered into a confidential settlement of this matter with the plaintiffs’ claims and we planplaintiffs, which did not have a material adverse effect on responding timely to the plaintiffs’ lawsuit.our financial condition/results of operations or cash flows.
Item 1A.Risk Factors.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 March 31, 2017.
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.cash flow.
Item 6.Exhibits.
Exhibit Number | Exhibit Description |
10.1 |
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10.2 | |
10.3 | |
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31.1 | |
31.2 | |
32.1 | |
32.2 | |
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. |
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SIGNATURESIGNATURESS
Pursuant to the requirements of the SecuritiesSecurities 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: | By: | /s/ Naomi L. Whittel | |
Naomi L. Whittel | |||
Chief Executive Officer | |||
Date: | By: | /s/ Alan S. Gever | |
Alan S. Gever | |||
Chief Financial Officer | |||
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