United States

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.WASHINGTON, DC 20549

Form

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 201730, 2020

OR

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

For the transition period from ________from ____ to ______________

Commission file numberFile Number: 000000-55181

TWINLAB CONSOLIDATED HOLDINGS, INC.Twinlab Consolidated Holdings, Inc.

(Exact name of registrantregistrant as specified in its charter)

(561) 443-5301443-4301

(Registrant’sRegistrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically 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 ☐

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”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

The number of shares of common stock, $0.001 par value $0.001, outstanding on November 14, 201716, 2020 was 252,924,027258,058,131 shares.

Note 1 – Nature of Business

Organization

Nature of Business

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

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

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. As of September 30, 2020, we had an accumulated deficit of $327,251. Historical losses are primarily attributable to lower than planned sales resulting from low fill rates on demand due to limitations of our working capital, delayed product introductions and postponed marketing activities, merger-related and other restructuring costs, and interest and refinancing charges associated with our debt refinancing. Losses have been funded primarily through debt.

Because of our history of operating losses and significant interest expense on our debt, we have a working capital deficiency of $108,638 as of September 30, 2020. We also have $96,142 of debt, net of discount, presented in current liabilities. 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 operating costs that include significant workforce and salary expense reduction and continuing to negotiate lower prices from major suppliers.  We believe that we may need additional capital to execute our business plan. If additional funding is required, there can be no assurance that sources of funding will be available when needed on acceptable terms or at all. To meet capital requirements, the Company may consider selling certain assets or seeking financing through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing agreements.

Note 2 – Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Except as described herein, there have been no changes in the Company’s significant accounting policies as described in Note 1, Nature of Operations and Summary of Significant Accounting Policies, within the “Notes to Consolidated Financial Statements” accompanying the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and as required by Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission (“SEC”) on May 29, 2020. These interim condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the periods presented. All amounts and disclosures set forth in this Quarterly Report on Form 10-Q reflect adoption of these changes.

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 principlesGAAP 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.

Contract Liabilities

Our contract liabilities consist of customer deposits and contractual guaranteed returns. Net contract liabilities are recorded in accrued expenses and other current liabilities and consisted of the following:

Disaggregation of Revenue

Revenue is disaggregated from contracts with customers by goods or services as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the tables below.

Revenue RecognitionFair Value of Financial Instruments

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 Value of Financial Instruments

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

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

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

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

The following table summarizes our financial instruments that are measured at fair value on a recurring basis as of September 30, 20172020 and December 31, 2016:2019:

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;items, customer discounts;discounts, shipping shortages; damages;shortages, damages, and doubtful accounts based upon historical bad debt and claims experience. As of September 30, 2017,2020, total allowances amounted to $2,777,$2,633, of which $314$1,375 was related to doubtful accounts receivable. As of December 31, 2016,2019, total allowances amounted to $2,365,$5,884, of which $481$5,107 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 livesA significant customer of the Company, General Nutrition Corporation (“GNC”), declared bankruptcy on June 23, 2020.  The Company has reserved the full amount of $2,829 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 shorteraccounts receivable due from GNC as of the useful life of the asset or the term of the lease.balance sheet date.

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 Reserveage™ 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 September 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 record the amounts as interest expense or debt discount, depending on the terms of the agreement. These estimates involve multiple inputs and assumptions, including the market price of the Company’s common stock, stock price volatility and other assumptions to project earnings before interest, taxes, depreciation and amortization (“EBITDA”) and other reset events. These inputs and assumptions are subject to management’s judgment and can vary materially from period to period.

Derivative Liabilities

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

Deferred gain on sale of assets

We entered into a sale-leaseback arrangement relating to our office facilities in 2013. Under the terms of the arrangement, we sold an office building and surrounding land and then leased the property back under a 15-year operating lease. We recorded a deferred gain for the amount of the gain on the sale of the asset, to be recognized as a reduction of rent expense over the life of the lease. Accordingly, we recorded amortization of deferred gain as a reduction of rental expense of $40 and $41 for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, we recorded amortization of $121 and $122, respectively. As of September 30, 2017 and December 31, 2016, unamortized deferred gain on sale of assets was $1,606 and $1,727, respectively.

Net Loss per Common Share

Basic net income or loss per common share (Basic EPS)(“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)(“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:

Correction of 2016 Diluted Net Loss Per Share

The diluted net loss per share for the period ended September 30, 2016 has been corrected. In accordance with U.S. generally accepted accounting principles, whenWhen 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 September 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 nine months ended September 30, 2016 in the table above has been revised to correct this error.

The table below reflectscommon shares used in the computation of our basic and diluted net loss per share as originally reported and net loss per share are reconciled as corrected for the three and nine months ended September 30, 2016.follows: 

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 33%27% and 25%33% of total sales for the three months ended September 30, 20172020 and 2016,2019, respectively, and 27%24% and 26%34% of total sales for the nine months ended September 30, 20172020 and 2016, respectively.2019. Sales to one of those customers were approximately 13%15% and 11%13% of total sales for the three months ended September 30, 20172020 and 2016,2019, respectively, and 12%9% and 11%13% of total sales for the nine months ended September 30, 20172020 and 2016,2019, respectively. Accounts receivable from these customers were approximately 55%A single customer represents 5% and 29%4% of total accounts receivable as of September 30, 20172020 and December 31, 2016,2019, respectively, and this customer is a related party through a director who sits on both the Company’s board and that of the customer. A significant customer of the Company, General Nutrition Corporation (“GNC”), declared bankruptcy on June 23, 2020. GNC was 3% and 13% of revenue in the three months ended September 30, 2020 and 2019, respectively. The Company has reserved all amounts related to accounts receivable due from GNC as of the balance sheet date.

Leases

The Company accounts for leases in accordance with Accounting Standards Codification ("ASC") 842. The Company reviews all contracts and determines if the arrangement is or contains a lease, at inception. Operating leases are included in right-of-use (“ROU”) assets, current lease liabilities and long-term lease liabilities on the condensed consolidated balance sheets. The Company does not have any finance leases. 

Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The operating lease ROU asset also includes any upfront lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with a term of 12 months or less are not recorded on the balance sheet. The Company’s lease agreements do not contain any residual value guarantees.

Recent New and Recently Adopted Accounting Pronouncements

In May 2017, FASB amended its guidance regarding the scope of modification accounting for share-based compensation arrangements. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 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 a significant impact on our condensed consolidated financial statements or related disclosures.

In January 2017, FASBthe Financial Accounting Standards Board (“FASB”) issued ASUan Accounting Standard Update (“ASU”) No. 2017-04, “SimplifyingSimplifying 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 doThe adoption of this guidance effective January 1, 2020 did not expect the new guidance to have a significant impact on our condensed consolidated financial statements or related disclosures.

In February 2016, the FASB issued ASU No.No. 2016-02, “LeasesLeases (Topic 842)”. The amendments, which requires lessees to record most leases on the balance sheet and recognize the expenses on the income statement in thisa manner similar to current practice. ASU revise the accounting related to2016-02 states that a lessee accounting. Under the new guidance, lessees will be required towould recognize a lease liability for the obligation to make lease payments and a right-of-useright-to-use asset for all leases with terms greater than 12 months affecting the pattern of expense recognition inright to use the income statement. Leases previously defined as operating leases will be defined as financing leases and capitalized ifunderlying asset for the termlease term. For public entities, the new standard is greater than one year. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within that reporting period. For all other entities, this standard is effective for annual reporting periods beginning after December 15, 2019 and interim periods within annual periods beginning after December 15, 2020. The Company adopted the standard using the modified retrospective approach as of January 1, 2020, with the effective date as of the date of initial application. Consequently, results for the three months and nine months ended September 30, 2020 are presented under Topic 842. No prior period amounts were adjusted and continue to be appliedreported in accordance with previous lease guidance, ASC Topic 840, Leases. The Company elected the practical expedients available under the provisions of the new standard, including: not reassessing whether expired or existing contracts are or contain leases; not reassessing the classification of expired or existing leases; and not reassessing the initial direct cost for any existing leases. The Company also elected the practical expedient allowing the use of hindsight in determining the lease term and assessing impairment of right-of-use assets based on all facts and circumstances through the effective date of the new standard. Upon adoption, and prior to Q1 FY20 activity, the Company recognized cumulative operating lease liabilities of $6.1 million and operating right-of-use assets of $5.5 million. 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments- Credit losses (Topic 326): Measurement of Credit losses on Financial Instruments. ASU 2016-13 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Our status as a smaller reporting company allows us to defer adoption until the annual period, including interim periods within the annual period, beginning January 1, 2023. Management is currently evaluating the requirements of this guidance and has not yet determined the impact of the adoption on the Company's financial position or results from operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016; however, in July 2015, the FASB agreed to delay the effective date by one year. The proposed deferral may permit early adoption but would not allow adoption any earlier than the original effective date of the standard. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Our prior status as an emerging growth company allowed us to defer the adoption until the annual reporting period beginning January 1, 2019, and interim reporting periods within the annual reporting period beginning January 1, 2020.  These condensed consolidated interim financial statements include the adoption of ASU 2014-09.  Beginning in our interim reporting period for the three months ended March 31, 2020, the Company used the modified retrospective transition approach for leases existing at, or entered into after, the beginningmethod of the earliest comparative period presented in the financial statements. Earlyadoption. The adoption is permitted. We are performing an assessment of our leases and have begun 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 the asset and liability balances of our consolidated financial statements and related disclosures at the time of adoption.

Although there are several other new accounting pronouncements issued or proposed by FASB, which we have adopted or will adopt, as applicable, we dothis ASU did not believe any of these accounting pronouncements has had or will have a material impact on our the Company’s financial statements as the impact of this ASU was limited to reclassifying sales return reserves and additional disclosures in the notes to condensed consolidated financial position or resultsstatements. Sales return reserves were reclassified as a current liability instead of operations.as a reduction of accounts receivable of $383 and $56 as of January 1, 2019 and December 31, 2019, respectively.

NOTE 2 Note 3– GOING CONCERNInventories

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 September 30, 2017, we had an accumulated deficit of $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 $8,531 at September 30, 2017. We also have $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:

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at:

Assets held under capital leases are included in machinery and equipment and amounted to $1,082 and $1,142 as of September 30, 2017 and December 31, 2016, respectively.

Depreciation and amortization expense totaled $222 and $221 for the three months ended September 30, 2017 and 2016, respectively, and totaled $669 and $567 for the nine months ended September 30, 2017 and 2016, respectively.following:

NOTE N5ote 4 – INTANGIBLE ASSETSIntangible Assets

Intangible assets consisted of the following at:following:

Trademarks are amortized over periodsperiods ranging from 3 to 30 years and customer relationships are amortized over periods ranging from 151 to 16 years, and other intangible assets are amortized over 3 years. Amortization expense was $582$277 and $557$379 for the three months ended September 30, 20172020, and 2016,2019, respectively, and was $1,747$832 and $1,645$1,137 for the nine months ended September 30, 20172020 and 2016,2019, respectively.

NOTE N6ote 5 – DEBTDebt

Debt consisted of the following at:following: