UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
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(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on which registered |
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OTC.PK |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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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, par value $0.001, outstanding on November 10, 2021 was
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “target,” “potential,” “contemplate,” “anticipate,” “goals,” “will,” “would,” “could,” “should,” “continue,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about our plans and ability to raise additional capital, including through equity offerings, debt financings, or other arrangements, the potential impact of the COVID-19 pandemic, and the efficacy and distribution of COVID-19 vaccines on our business operations.
These forward-looking statements are only predictions and we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. You should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q and in “Part I, Item 1A - Risk Factors” included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 16, 2021 that could cause actual future results or events to differ materially from the forward-looking statements that we make.
You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.
Twinlab Consolidated Holdings, Inc.
Form 10-Q
TABLE OF CONTENTS
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Page No. |
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Part I - FINANCIAL INFORMATION |
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Item 1. |
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Financial Statements |
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Condensed Consolidated Balance Sheets (Unaudited) |
1 |
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Condensed Consolidated Statements of Operations (Unaudited) |
2 |
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Condensed Consolidated Statements of Stockholders’ Deficit (Unaudited) |
3 |
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Condensed Consolidated Statements of Cash Flows (Unaudited) |
4 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
5 |
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Item 2. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
22 |
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Item 3. |
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Quantitative and Qualitative Disclosures About Market Risk |
25 |
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Item 4. |
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Controls and Procedures |
26 |
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Part II - OTHER INFORMATION |
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Item 1. |
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Legal Proceedings |
28 |
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Item 1A. |
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Risk Factors |
28 |
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
28 |
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Item 3. |
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Defaults Upon Senior Securities |
28 |
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Item 4. |
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Mine Safety Disclosures |
28 |
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Item 5. |
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Other Information |
28 |
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Item 6. |
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Exhibits |
29 |
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Signatures |
30 |
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Twinlab Consolidated Holdings, Inc.
(amounts in thousands, except share and per share data)
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September 30, 2021 |
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December 31, 2020 |
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ASSETS |
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Current assets: |
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Cash |
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$ |
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$ |
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Accounts receivable, net |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Right-of-use assets |
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Intangible assets, net |
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Goodwill |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Lease liabilities |
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Accrued expenses and other current liabilities |
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Accrued interest |
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Notes payable and current portion of long-term debt |
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Total current liabilities |
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Long-term liabilities: |
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Lease liabilities |
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Notes payable and long-term debt, net of current and debt discount |
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Total long-term liabilities |
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Total liabilities |
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Stockholders’ deficit: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Stock subscriptions receivable |
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( |
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Treasury stock, |
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Accumulated deficit |
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( |
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Total stockholders’ deficit |
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( |
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Total liabilities and stockholders' deficit |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| 1 |
Twinlab Consolidated Holdings, Inc.
(amounts in thousands, except share and per share data)
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Three Months Ended |
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Nine Months Ended |
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2021 |
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2020 |
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2021 |
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2020 |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Operating costs and expenses: |
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Selling expenses |
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General and administrative expenses |
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Income (loss) from operations |
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( |
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Other income (expense): |
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Interest expense, net |
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( |
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( |
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( |
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( |
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Gain on change in derivative liabilities |
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Other income (expense) |
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( |
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( |
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( |
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Total other expense |
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( |
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( |
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( |
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Income (loss) before income taxes |
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( |
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( |
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( |
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Provision for income taxes |
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Total net income (loss) |
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$ |
( |
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$ |
( |
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$ |
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$ |
( |
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Weighted average number of common shares outstanding - basic |
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Net income (loss) per common share - basic |
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$ |
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$ |
( |
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$ |
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$ |
( |
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Weighted average number of common shares outstanding - diluted |
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Net income (loss) per common share - diluted |
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(See Note 2) |
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$ |
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$ |
( |
) |
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$ |
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$ |
( |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| 2 |
Twinlab Consolidated Holdings, Inc.
(amounts in thousands, except share and per share data)
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Common Stock |
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Additional Paid-in |
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Stock Subscriptions |
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Treasury Stock |
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Accumulated |
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Shares |
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Amount |
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Capital |
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Receivable |
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Shares |
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Amount |
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Deficit |
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Total |
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Balance, December 31, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Shares issued upon exercise of warrants |
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( |
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Net loss |
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- |
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- |
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( |
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( |
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Balance, March 31, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Shares issued upon exercise of warrants |
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( |
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Net loss |
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- |
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- |
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( |
) |
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( |
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Balance, June 30, 2020 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
( |
) |
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$ |
( |
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Net loss |
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- |
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- |
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( |
) |
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( |
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Balance, September 30, 2020 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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Balance, December 31, 2020 |
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( |
) |
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( |
) |
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( |
) |
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( |
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Shares issued upon exercise of warrants |
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( |
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Net income |
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- |
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- |
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Balance, March 31, 2021 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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Net income |
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- |
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- |
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Balance, June 30, 2021 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
| Net loss | - | - | ( |
) | ( |
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| Balance, September 30, 2021 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
Twinlab Consolidated Holdings, Inc.
(amounts in thousands)
|
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Nine Months Ended |
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|||||
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2021 |
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2020 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
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$ |
( |
) |
|
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Amortization of right-to-use assets |
|
|
|
|
|
|
|
|
|
Amortization of debt discount |
|
|
|
|
|
|
|
|
|
Recovery of obsolete inventories |
|
|
( |
) |
|
|
( |
) |
|
Recovery of losses on accounts receivable |
|
|
( |
) |
|
|
( |
) |
|
Gain on change in derivative liability |
|
|
|
|
|
|
( |
) |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
( |
) |
|
|
|
|
|
Inventories |
|
|
( |
) |
|
|
( |
) |
|
Prepaid expenses and other current assets |
|
|
|
|
|
( |
) | |
|
Other assets |
|
|
( |
) |
|
|
|
|
|
Accounts payable |
|
|
( |
) |
|
|
( |
) |
|
Lease liabilities |
|
|
( |
) |
|
|
( |
) |
|
Accrued expenses and other current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of debt |
|
|
|
|
|
|
|
|
|
Repayment of debt |
|
|
|
|
|
|
( |
) |
|
Net borrowings from revolving credit facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
|
|
|
|
|
|
|
|
Cash at the beginning of the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at the end of the period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
Twinlab Consolidated Holdings, Inc.
(amounts in thousands, except share and per share amounts)
Note 1 – Nature of Business
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.
We are an integrated marketer, distributor, and retailer of branded nutritional supplements and other natural products sold to and through domestic health and natural food stores, mass market retailers, specialty store retailers, on-line retailers, and websites. Internationally, we market and distribute branded nutritional supplements and other natural products to and through health and natural product distributors and retailers.
Our products include vitamins, minerals, specialty supplements and sports nutrition products sold under the Twinlab® brand name, 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; and a full line of herbal teas sold under the Alvita® brand name. To accommodate consumer preferences, our products come in various formulations and delivery forms, including capsules, tablets, softgels, chewables, liquids, sprays and powders. These products are sold primarily through health and natural food stores and on-line retailers, supermarkets, and mass-market retailers.
We also perform services between private label distributors and contract manufacturers under the NutraScience Labs (“NSL”) brand name. NSL facilitates the production of new supplements to market and reformulates existing products to include scientifically-backed ingredients. We provide our customers with numerous production services, including manufacturing, testing, label and packaging design, order fulfillment, and regulatory compliance.
NSL facilitates the contract manufacture of a variety of high-quality vitamin and supplement products, including but not limited to, immune support supplements, cognitive support products, prebiotics and probiotics, supplements for weight management, and sports nutrition supplements. Our role in the production of these products is to help our customers manufacture or reformulate dietary supplements for sale and distribution. We do this by working with contract manufacturers to build scientifically backed formulas for resale to our end customers. We also simplify the production process by providing quality control checks, storing inventory on site, labeling and designing finished products, and drop shipping finished products ready for sale to our end customers. We do not market these private label products, but rather sell the products to the customer, who is then responsible for the marketing, distribution, and sale to retailers or to their end customers.
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, 2021, we had an accumulated deficit of $
Because of our history of operating losses and significant interest expense on our debt, we have a working capital deficiency of $
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.
| 5 |
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 2, 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, 2020.
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, 2020 as filed with the Securities and Exchange Commission (“SEC”) on April 16, 2021. 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.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. Significant management estimates include those with respect to returns and allowances, allowance for doubtful accounts, reserves for inventory obsolescence, the recoverability of long-lived assets, intangibles and goodwill and the estimated value of warrants and derivative liabilities.
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:
|
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||||
|
Contract Liabilities - Customer Deposits |
|
$ |
|
|
|
$ |
|
|
||
|
Contract Liabilities - Guaranteed Returns |
|
|
|
|
|
|
|
|
||
|
|
|
$ |
|
|
|
$ |
|
|
||
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.
|
|
|
Three Months Ended September 30, 2021 |
|
|
Three Months Ended September 30, 2020 |
|
||||
|
Product Sales |
|
$ |
|
|
|
$ |
|
|
||
|
Fulfillment Services |
|
|
|
|
|
|
|
|
||
|
|
|
$ |
|
|
|
$ |
|
|
||
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
||||
|
Product Sales |
|
$ |
|
|
|
$ |
|
|
||
|
Fulfillment Services |
|
|
|
|
|
|
|
|
||
|
|
|
$ |
|
|
|
$ |
|
|
||
| 6 |
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 Company did not have any financial instruments that are measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020.
Accounts Receivable and Allowances
We grant credit to customers and generally do not require collateral or other security. We perform credit evaluations of our customers and provide for expected claims related to promotional items, customer discounts, shipping shortages, damages, and doubtful accounts based upon historical bad debt and claims experience. As of September 30, 2021, total allowances amounted to $
Net Loss per Common Share
Basic net loss per common share (“Basic EPS”) is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per common share (“Diluted EPS”) is computed by dividing net loss by the sum of the weighted average number of common shares outstanding and the dilutive potential common shares then outstanding. Potential dilutive common share equivalents consist of total shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock using the treasury stock method and the average market price per share during the period.
When calculating diluted loss per share, if the effects are dilutive, companies are required to add back to net 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 loss, companies are required to include the warrants outstanding related to the derivative liability in the calculation of the weighted average dilutive shares.
| 7 |
The common shares used in the computation of our basic and diluted net income (loss) per share are reconciled as follows:
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
Effect of dilutive securities on net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net income (loss) for purpose of calculating diluted net income (loss) per common share |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in per common share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total shares for purpose of calculating basic net income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares for purpose of calculating diluted net income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
|
Diluted |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
Significant Concentration of Credit Risk
Sales to our top
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.
| 8 |
New and Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“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.
Note 3 – Inventories, net
Inventories, net consisted of the following:
|
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||||
|
Raw materials |
|
$ |
|
|
|
$ |
|
|
||
|
Finished goods |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
|
Reserve for obsolete inventory |
|
|
( |
) |
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
||
|
Inventories, net |
|
$ |
|
|
|
$ |
|
|
||
Note 4 – Property and Equipment, Net
Property and equipment, net consisted of the following:
|
|
September 30, 2021 |
|
December 31, 2020 |
|||||
|
Machinery and equipment |
$ |
|
|
$ |
|
|||
|
Leasehold improvements |
|
|
|
|
|
|||
| Computers and other |
|
|
||||||
|
|
|
|
|
|
|
|||
|
Accumulated depreciation and amortization |
|
( |
) |
|
( |
) | ||
|
|
|
|
|
|
|
|||
|
Property and equipment, net |
$ |
|
|
$ |
|
|||
Note 5 – Intangible Assets
Intangible assets consisted of the following:
|
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||||
|
|
|
|
|
|
|
|
|
|
||
|
Trademarks |
|
$ |
|
|
|
$ |
|
|
||
|
Indefinite-lived intangible assets |
|
|
|
|
|
|
|
|
||
|
Customer relationships |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
|
Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
||
|
|
|
|
|
|
|
|
|
|
||
|
Intangible assets, net |
|
$ |
|
|
|
$ |
|
|
||
Trademarks are amortized over periods ranging from
| 9 |
Note 6 – Debt
Debt consisted of the following:
|
|
|
September 30, |
|
|
December 31, |
|
||||
|
|
|
2021 |
|
|
2020 |
|
||||
|
Related Party Debt: |
|
|
|
|
|
|
|
|
||
|
July 2014 note payable to Little Harbor, LLC |
|
$ |
|
|
|
$ |
|
|
||
|
July 2016 note payable to Little Harbor, LLC |
|
|
|
|
|
|
|
|
||
|
January 2016 note payable to Great Harbor Capital, LLC |
|
|
|
|
|
|
|
|
||
|
March 2016 note payable to Great Harbor Capital, LLC |
|
|
|
|
|
|
|
|
||
|
December 2016 note payable to Great Harbor Capital, LLC |
|
|
|
|
|
|
|
|
||
|
August 2017 note payable to Great Harbor Capital, LLC |
|
|
|
|
|
|
|
|
||
|
February 2018 note payable to Great Harbor Capital, LLC |
|
|
|
|
|
|
|
|
||
|
July 2018 note payable to Great Harbor Capital, LLC, net of discount of $ |
|
|
|
|
|
|
|
|
||
|
November 2018 note payable to Great Harbor Capital, LLC, net of discount of $ |
|
|
|
|
|
|
|
|
||
|
February 2020 note payable to Great Harbor Capital, LLC |
|
|
|
|
|
|
|
|
||
|
January 2016 note payable to Golisano Holdings LLC |
|
|
|
|
|
|
|
|
||
|
March 2016 note payable to Golisano Holdings LLC |
|
|
|
|
|
|
|
|
||
|
July 2016 note payable to Golisano Holdings LLC |
|
|
|
|
|
|
|
|
||
|
December 2016 note payable to Golisano Holdings LLC |
|
|
|
|
|
|
|
|
||
|
March 2017 note payable to Golisano Holdings LLC |
|
|
|
|
|
|
|
|
||
|
February 2018 note payable to Golisano Holdings LLC |
|
|
|
|
|
|
|
|
||
|
February 2020 note payable to Golisano Holdings LLC |
|
|
|
|
|
|
|
|
||
|
November 2014 note payable to Golisano Holdings LLC (formerly payable to Penta Mezzanine SBIC Fund I, L.P.), net of discount and unamortized loan fees in the aggregate of $ |
|
|
|
|
|
|
|
|
||
|
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 $ |
|
|
|
|
|
|
|
|
||
|
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 $ |
|
|
|
|
|
|
|
|
||
|
Macatawa Bank |
|
|
|
|
|
|
|
|
||
|
Total related party debt |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
|
Senior Credit Facility with Midcap |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
|
Other Debt: |
|
|
|
|
|
|
|
|
||
|
May 2020 Note Payable to Fifth Third Bank, N.A. |
|
|
|
|
|
|
|
|
||
|
February 2021 Note Payable to Fifth Third Bank, N.A. |
|
|
|
|
|
|
|
|
||
|
Total other debt |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
|
Total debt |
|
|
|
|
|
|
|
|
||
|
Less current portion |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
|
Long-term debt |
|
$ |
|
|
|
$ |
|
|
||
| 10 |
Little Harbor LLC
Mr. David L. Van Andel, the Chairman of the Company’s Board of Directors, is the owner and principal of Little Harbor LLC. Mr. Mark Bugge, at the time the notes were entered into, was a member of the Company’s Board of Directors and the Secretary of Little Harbor LLC.
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, on February 6, 2018 we entered into an agreement with Little Harbor to convert a debt repayment obligation of $
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 (“Little Harbor Delayed Draw Note”), pursuant to which Little Harbor loaned us the full approved amount of $
Little Harbor had delivered a deferment letter pursuant to which Little Harbor agreed to defer all payments due under the aforementioned notes held by Little Harbor, through October 22, 2021 and agreed to refrain from declaring a default and/or exercising any remedies under the notes.
Amendments to extend the maturity date and related payment deferrals have not been executed and these notes are currently in default. We anticipate extending the maturity dates and related payment deferrals with the lending party in December of 2021. To date, Little Harbor has not exercised any of its remedies available upon a default.
Great Harbor Capital LLC
Mr. David L. Van Andel, the Chairman of the Company’s Board of Directors, is the owner and principal of Great Harbor Capital LLC. Mr. Mark Bugge, at the time the notes were entered into, was a member of the Company’s Board of Directors and the Secretary of Great Harbor Capital LLC.
January 2016 Note Payable to Great Harbor Capital, LLC
Pursuant to a January 28, 2016 unsecured promissory note (“January 2016 GH Note”) with Great Harbor Capital, LLC (“GH”), an affiliate of a member of our Board of Directors, GH lent us $
March 2016 Note Payable to Great Harbor Capital, LLC
Pursuant to a March 21, 2016 unsecured promissory note (“March 2016 GH Note”), GH lent us $
December 2016 Note Payable to Great Harbor Capital, LLC
Pursuant to a December 31, 2016 unsecured promissory note (“December 2016 GH Note”), GH lent us $
| 11 |
August 2017 Note Payable to Great Harbor Capital, LLC
Pursuant to an August 30, 2017 secured promissory note, GH lent us $
February 2018 Note Payable to Great Harbor Capital, LLC
Pursuant to a February 6, 2018 secured promissory note, GH lent us $
As previously reported, on February 6, 2018, the Company issued an amended and restated secured promissory note to GH (“A&R August 2017 GH Note”) replacing the prior secured promissory note issued on August 30, 2017. The amendment and restatement added a requirement that when the Company consummates any Special Asset Disposition (as defined in the February 2018 GH Note), provided that the Company has a minimum liquidity of $
Furthermore, as a result of notes issued on February 6, 2018, by GH and Golisano Holdings LLC (“Golisano LLC”), GH and Golisano LLC entered into an “Intercreditor Agreement” where they agreed that each of the February 2018 GH Note, A&R August 2017 GH Note, and the Golisano LLC February 2018 Note (as defined below) are pari passu as to repayment, security and otherwise and are equally and ratably secured.
July 2018 Note Payable to Great Harbor Capital, LLC
Pursuant to a July 27, 2018 secured promissory note, GH loaned the Company $
The July 2018 GH Note is subordinate to the indebtedness owed to MidCap. The July 2018 GH Note is senior to the indebtedness owed to Little Harbor and Golisano LLC.
November 2018 Note Payable to Great Harbor Capital, LLC
Pursuant to a November 5, 2018 secured promissory note, GH loaned the Company $
February 2020 Note Payable to Great Harbor Capital, LLC
Pursuant to a February 2020 unsecured promissory note (“February 2020 GH Note”), an affiliate of a member of our Board of Directors, GH lent us $
| 12 |
GH had delivered a deferment letter pursuant to which GH agreed to defer all payments due under the aforementioned notes held by GH, through October 22, 2021 and agreed to refrain from declaring a default and/or exercising any remedies under the notes.
Amendments to extend the maturity date and related payment deferrals have not been executed and these notes are currently in default. We anticipate extending the maturity dates and related payment deferrals with the lending parties in December of 2021. To date, GH has not exercised any of its remedies available upon a default.
Golisano Holdings LLC
Mr. B. Thomas Golisano, a member of the Company’s Board of Directors is a principal of Golisano LLC.
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 $
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 $
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 $
January 2016 Note Payable to Golisano Holdings LLC
Pursuant to a January 28, 2016 unsecured promissory note with Golisano LLC (“Golisano LLC January 2016 Note”), an affiliate of a member of our Board of Directors, Golisano LLC lent us $
| 13 |
March 2016 Note Payable to Golisano Holdings LLC
Pursuant to a March 21, 2016 unsecured promissory note, Golisano LLC lent us $
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 $
December 2016 Note Payable to Golisano Holdings LLC
Pursuant to a December 31, 2016 unsecured promissory note, as amended and restated, Golisano LLC lent us $
March 2017 Note Payable to Golisano Holdings LLC
Pursuant to a March 14, 2017 unsecured promissory note, as amended and restated, Golisano LLC lent us $
February 2018 Note Payable to Golisano Holdings LLC
Pursuant to a February 6, 2018 secured promissory note, Golisano LLC lent us $
February 2020 Note Payable to Golisano Holdings LLC
Pursuant to a February 2020 unsecured promissory note (“Golisano LLC February 2020 Note”), an affiliate of a member of our Board of Directors, Golisano LLC lent us $
Golisano LLC had delivered a deferment letter pursuant to which Golisano LLC agreed to defer all payments due under the aforementioned notes held by Golisano LLC through October 22, 2021 and agreed to refrain from declaring a default and/or exercising any remedies under the notes.
Amendments to extend the maturity date and related payment deferrals have not been executed and these notes are currently in default. We anticipate extending the maturity dates and related payment deferrals with the lending party in December of 2021. To date, Golisano LLC has not exercised any of its remedies available upon a default.
Macatawa Bank
Mr. Mark Bugge is a former member of the board of directors of Macatawa Bank (“Macatawa”) and was a member of the Company’s board of directors; he was an active member of both boards at the time of the term loan note. Two other members of the Company’s Board of Directors, Mr. B. Thomas Golisano and Mr. David L. Van Andel, are the owners and principals of the guarantor, 463IP Partners, LLC (“463IP”). Furthermore, Mr. Van Andel, through his interest in a trust, holds an indirect limited partnership interest in White Bay Capital, LLLP, which has an ownership interest of greater than
| 14 |
On December 4, 2018, the Company entered into a Term Loan Note and Agreement (the "Term Loan") in favor of Macatawa. Pursuant to the Term Loan, Macatawa loaned the Company $
In connection with the Term Loan, 463IP has entered into a limited guaranty, dated as of December 4, 2018, in favor of Macatawa (the "Limited Guaranty") pursuant to which it has agreed to guarantee payment under the Term Loan and any and all renewals of the Term Loan and all interest accrued on such indebtedness limited to $
Senior Credit Facility with Midcap
On January 22, 2015, we entered into a three-year $
On September 2, 2016, we entered into an amendment with Midcap to increase the Senior Credit Facility to $
On January 22, 2019, we entered into Amendment Sixteen to the Credit and Security Agreement (the "MidCap Sixteenth Amendment"). The MidCap Sixteenth Amendment reduced the revolving credit facility amount from a total of $
On February 13, 2019, MidCap informed the Company that MidCap had re-assigned all of its rights, powers, privileges and duties as “Agent” under the Credit and Security Agreement, as well as all of its right, title and interest in and to the revolving loans made under the facility from Midcap Funding X Trust to MidCap IV Funding.
On April 22, 2019, we entered into Amendment Seventeen to the Credit and Security Agreement (the "MidCap Seventeenth Amendment"), which effectively increased the revolving credit facility amount to $
On April 22, 2021, we entered into Amendment Eighteen to the Credit and Security Agreement (the "MidCap Eighteenth Amendment"), which effectively updated the unused line fee to
We have incurred loan fees totaling $
Other Debt
May 2020 Note Payable to Fifth Third Bank N.A.
On May 7, 2020, Twinlab Consolidated Corporation ("TCC"), the operating subsidiary of the Company, received the proceeds of a loan from Fifth Third Bank, National Association ("Fifth Third Bank") in the amount of $
| 15 |
February 2021 Note Payable to Fifth Third Bank N.A.
On February 9, 2021, TCC, the operating subsidiary of the Company, received the proceeds of a second loan from Fifth Third Bank, in the amount of $
Financial Covenants
Certain of the foregoing debt agreements, as amended, require us to meet certain affirmative and negative covenants, including maintenance of specified ratios. As of September 30, 2021, we were in default for lack of compliance with the EBITDA-related financial covenant of the debt agreement with MidCap. The amount due to MidCap for this revolving credit line is $
Note 7 – Warrants and Registration Rights Agreements
The following table presents a summary of the status of our issued warrants as of September 30, 2021, and changes during the nine months then ended:
|
|
|
|
|
|
|
Weighted Average |
|
|||
|
|
|
Shares Underlying |
|
|
Exercise |
|
||||
|
|
|
|
Warrants |
|
|
Price |
|
|||
|
|
|
|
|
|
|
|
|
|
||
|
Outstanding, December 31, 2020 |
|
|
|
|
|
$ |
|
|
||
|
Granted |
|
|
|
|
|
|
|
|
||
|
Canceled / Expired |
|
|
( |
) |
|
|
|
|
||
|
Exercised |
|
|
( |
) |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
|
Outstanding, September 30, 2021 |
|
|
|
|
|
$ |
|
|
||
Midcap Warrant
The line of credit agreement with MidCap described in Note 6 has been amended from time to time and when it was necessary under the terms of the agreement to obtain MidCap's consent to the transactions contemplated by the above mentioned GH notes and Golisano LLC notes. On April 22, 2019, subsequent to entering into the MidCap Seventeenth Amendment, the Company issued a warrant to MidCap exercisable for up to
GH Warrants
In connection with the July 2018 GH Note, we issued GH a warrant to purchase an aggregate of
| 16 |
In connection with the November 2018 GH Note, we issued GH a warrant to purchase an aggregate of
Warrants Issued into Escrow
At September 30, 2021, there were
Golisano Escrow Warrants
In connection with the Golisano LLC January 2016 Note, we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of
In connection with the Golisano LLC March 2016 Note, we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of
In connection with the Golisano LLC July 2016 Note, we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of
In connection with the Golisano LLC December 2016 Note, we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of
| 17 |
In connection with the Golisano LLC March 2017 Note, we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of
In connection with the Golisano LLC February 2018 Note, we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of
We previously entered into a registration rights agreement with Golisano LLC, dated as of October 5, 2015 (the “Registration Rights Agreement”), granting Golisano LLC certain registration rights for certain shares of the Company’s common stock. The shares of common stock issuable pursuant to the above Golisano LLC warrants are also entitled to the benefits of the Registration Rights Agreement.
GH Escrow Warrants
In connection with a January 2016 GH Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of
In connection with a March 2016 GH Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of
In connection with the December 2016 GH Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of
| 18 |
In connection with the August 2017 GH Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of
In connection with the February 2018 GH Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of
Little Harbor Escrow Warrant
The Little Harbor Delayed Draw Note required that we issue into escrow in the name of Little Harbor a warrant to purchase an aggregate of
Note 8 – Leases
The Company leases office space under non-cancelable operating leases with lease terms ranging from
In August 2021, the Company amended one of its lease agreements for office space to expand into an additional
For the three months and nine months ended September 30, 2021, the Company incurred $
| 19 |
As of September 30, 2021, the maturities of the Company’s lease liabilities were as follows:
|
2021 (excluding the nine months ended September 30, 2021) |
|
$ |
|
|
||
|
2022 |
|
|
|
|
||
|
2023 |
|
|
|
|
||
|
2024 |
|
|
|
|
||
|
2025 |
|
|
|
|
||
|
Thereafter |
|
|
|
|
||
|
Total lease payments |
|
|
|
|
||
|
Less: imputed interest |
|
|
( |
) | ||
|
Present value of lease liabilities |
|
$ |
|
|
Included below is other information regarding leases for the periods noted below.
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||
|
Sublease income |
|
$ |
|
|
|
$ |
|
|
||
|
Cash paid for operating leases |
|
$ |
|
|
|
$ |
|
|
||
|
Weighted average remaining lease term (years) - operating leases |
|
|
|
|
|
|
|
|
||
|
Weighted average discount rate – operating leases |
|
|
|
% |
|
|
|
% |
||
Note 9 – Stockholders’ Deficit
Preferred Stock
The Company has authorized
Twinlab Consolidation Corporation 2013 Stock Incentive Plan
The Twinlab Consolidation Corporation 2013 Stock Incentive Plan (the “TCC Plan”) was originally established with a pool of
Stock Subscription Receivable and Loss on Stock Price Guarantee
As of September 30, 2021, the stock subscription receivable dated August 1, 2014 for the purchase of
| 20 |
NOTE 10 – SUBSEQUENT EVENTS
SUBLEASES
On October 1, 2021, the Company entered into a sublease agreement for
| 21 |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission (the “SEC”) on April 16, 2021. This discussion and analysis and other parts of this Quarterly Report contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Any statements contained herein that are not statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position made in this report are forward-looking. We often use words such as "anticipates", "believes", "estimates", "expects", "intends", "predicts", "hopes", "should", "plans", "will" and similar expressions to identify forward-looking statements. These statements are based on management’s current expectations and accordingly are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained herein due to various important factors, including (but not limited to): the impact of the COVID-19 pandemic; the efficacy and distribution of COVID-19 vaccines; consumer preferences, spending and debt levels; the general economic and credit environment; interest rates; variations in consumer purchasing activities; competitive pressures on sales; the loss of a significant customer or material reduction of business with a significant customer; pricing and gross sales margins; the associated fees or estimated cost savings from contract renegotiations; and our ability to establish and maintain acceptable commercial terms with contract manufacturers. We undertake no obligation to publicly update or revise any forward-looking statements except as required by law.
Overview
We are an integrated formulator, 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 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®, Reserveage and ResVitale® brands. We also formulate, market and sell diet and energy products under the Metabolife® brand, 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 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. In most periods since our formation, we have generated losses from operations.
We also perform services between private label distributors and contract manufacturers under the NutraScience Labs ("NSL") brand name. NSL facilitates the production of new supplements to market and reformulates existing products to include scientifically-backed ingredients. We provide our customers with numerous production services, including manufacturing, testing, label and packaging design, order fulfillment, and regulatory compliance.
NSL facilitates the contract manufacture of a variety of high-quality vitamin and supplement products, including but not limited to, immune support supplements, cognitive support products, prebiotics and probiotics, supplements for weight management, and sports nutrition supplements. Our role in the production of these products is to help our customers manufacture or reformulate dietary supplements for sale and distribution. We do this by working with contract manufacturers to build scientifically backed formulas for resale to our end customers. We also simplify the production process by providing quality control checks, storing inventory on site, labeling and designing finished products, and drop shipping finished products ready for sale to our end customers. We do not market these private label products, but rather sell the products to the customer, who is then responsible for the marketing, distribution, and sale to retailers or to their end customers.
| 22 |
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 September 30, 2021, we had an accumulated deficit of $333.0 million. 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, interest and refinancing charges associated with our debt refinancing, and impairment of goodwill and intangible assets. Losses have been funded primarily through issuance of common stock and third-party or related party debt.
Because of our history of operating losses and increase in debt over time, we have a working capital deficiency of $115.5 million at September 30, 2021. We also have $100.2 million of debt, net of discount, which could be 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.
The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Results of Operations
Comparison of the Three and Nine Month Periods Ended September 30, 2021 and 2020
The following table summarizes our financial results for the three and nine month periods ended September 30, 2021 and 2020:
|
|
|
Three Months Ended |
|
|
Increase |
|
|
% |
|
|
Nine Months Ended |
|
|
Increase |
|
|
% |
|
||||||||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
(Decrease) |
|
|
Change |
|
|
2021 |
|
|
2020 |
|
|
(Decrease) |
|
|
Change |
|
||||||||||
|
Net sales |
|
$ |
18,272 |
|
|
$ |
18,371 |
|
|
$ |
(99 |
) |
|
|
-1 |
% |
|
$ |
55,841 |
|
|
$ |
47,012 |
|
|
$ |
8,829 |
|
|
|
19 |
% |
||
|
Cost of sales |
|
|
12,230 |
|
|
|
14,669 |
|
|
|
(2,439 |
) |
|
|
-17 |
% |
|
|
37,844 |
|
|
|
35,322 |
|
|
|
2,522 |
|
|
|
7 |
% |
||
|
Gross profit |
|
|
6,042 |
|
|
|
3,702 |
|
|
|
2,340 |
|
|
|
63 |
% |
|
|
17,997 |
|
|
|
11,690 |
|
|
|
6,307 |
|
|
|
54 |
% |
||
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Selling expenses |
|
|
912 |
|
|
|
420 |
|
|
|
492 |
|
|
|
117 |
% |
|
|
2,538 |
|
|
|
1,044 |
|
|
|
1,494 |
|
|
|
143 |
% |
||
|
General and administrative expenses |
|
|
4,096 |
|
|
|
2,981 |
|
|
|
1,115 |
|
|
|
37 |
% |
|
|
9,067 |
|
|
|
12,567 |
|
|
|
(3,500 |
) |
|
|
-28 |
% |
||
|
Income (loss) from operations |
|
|
1,034 |
|
|
|
301 |
|
|
|
733 |
|
|
|
244 |
% |
|
|
6,392 |
|
|
|
(1,921 |
) |
|
|
8,313 |
|
|
|
433 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Interest expense, net |
|
|
(2,208 |
) |
|
|
(2,183 |
) |
|
|
25 |
|
|
|
1 |
% |
|
|
(6,619 |
) |
|
|
(6,489 |
) |
|
|
130 |
|
|
|
2 |
% |
||
|
Gain on change in derivative liabilities |
|
|
- |
|
|
|
178 |
|
|
|
(178 |
) |
|
|
-100 |
% |
|
|
- |
|
|
|
35 |
|
|
|
(35 |
) |
|
|
-100 |
% |
||
|
Other income (expense) |
|
|
(14 |
) |
|
|
(148 |
) |
|
|
(134 |
) |
|
|
-91 |
% |
|
|
504 |
|
|
|
(3 |
) |
|
|
507 |
|
|
|
16,900 |
% |
||
|
Total other expense |
|
|
(2,222 |
) |
|
|
(2,153 |
) |
|
|
69 |
|
|
|
3 |
% |
|
|
(6,115 |
) |
|
|
(6,457 |
) |
|
|
(342 |
) |
|
|
-5 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Income (loss) before income taxes |
|
|
(1,188 |
) |
|
|
(1,852 |
) |
|
|
664 |
|
|
|
36 |
% |
|
|
277 |
|
|
|
(8,378 |
) |
|
|
8,655 |
|
|
|
103 |
% |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Provision for income taxes |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Total net income (loss) |
|
$ |
(1,188 |
) |
|
$ |
(1,852 |
) |
|
$ |
664 |
|
|
|
36 |
% |
|
$ |
277 |
|
|
$ |
(8,378 |
) |
|
$ |
8,655 |
|
|
|
103 |
% |
||
|
23 |
Net Sales
Net sales decreased by 1% for the three month period ended September 30, 2021 compared to the same period in 2020 due to a recovery of sales related to COVID-19 in 2020 that was not similarly realized in 2021. The increase in our net sales of 19% for the nine month period ended September 30, 2021 compared to the same period in 2020 is due to a recovery from the negative impacts of the COVID-19 pandemic upon 2020 sales figures as well as increased demand from some of our major customers.
Gross Profit
Our overall gross profit increase of 63% and 54% for the three month and nine month periods ended September 30, 2021 compared to the same periods in 2020 was primarily due to a focus on SKUs with higher margins and a reduction in supply chain costs as part of the recovery from the negative impacts of the COVID-19 pandemic.
Selling Expenses
Our selling expenses increased by 117% and 143% for the three month and nine month periods ended September 30, 2021 compared to the same periods in 2020 primarily due to increased advertising and marketing campaigns related to a new product launch, as well as the launch of our new websites and trade show attendance.
General and Administrative Expenses
Our general and administrative expenses increased by 37% for the three month period ended September 30, 2021 compared to the same period in 2020 primarily due to an increase in staffing levels. For the nine month period ended September 30, 2021, our general and administrative expenses decreased by 28% compared to the same period in 2020 due to the recognition of bad debt in 2020 due to the bankruptcy of the Company’s largest customer.
Interest Expense, Net
Our interest expense slightly increased by $25 and $130, or 1% and 2%, for the three month and nine month periods ended September 30, 2021 compared to the same periods in 2020. The increases were primarily due to increased debt via the addition of two PPP loans (See Other Debt in Note 6).
Gain on Change in Derivative Liabilities
We have recorded the estimated fair value of the warrants as of the date of issuance. Due to the variable terms of the warrant agreements, changes in the estimated fair value of the warrants from the date of issuance to each balance sheet reporting date are recorded as derivative liabilities with a corresponding charge to our condensed consolidated statements of operations. As of September 30, 2021, none of the warrants that resulted in the recording of the related derivative liabilities are outstanding.
Liquidity and Capital Resources
At September 30, 2021, we had an accumulated deficit of $333.0 million primarily because of our history of operating losses and our recording of derivative liabilities and loss on stock purchase guarantee. We have a working capital deficiency of $115.5 million at September 30, 2021. Losses have been funded primarily through the issuance of common stock and warrants, borrowings from our stockholders and third-party debt and proceeds from the exercise of warrants. As of September 30, 2021, we had cash of $2,148. 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 $730 for the nine months ended September 30, 2021. During the nine months ended September 30, 2021, we incurred net borrowings from our revolving credit facility of $1,257.
Our total liabilities increased by $9.4 million to $146.5 million at September 30, 2021 from $137.1 million at December 31, 2020 primarily due to the increase of $4.9 million in accrued interest and $3.3 million in notes payable.
Cash Flows from Operating, Investing and Financing Activities
Net cash used in operating activities was $0.7 million for the nine months ended September 30, 2021 as a result of our net income of $0.3 million, a recovery for losses on accounts receivable of $682 in doubtful accounts receivable, other non-cash expenses totaling $653, net and a decrease in net operating assets and liabilities of $978. By comparison, for the nine months ended September 30, 2020, net cash used in operating activities was $4.4 million as a result of our net loss of $8.4 million, a recovery for losses on accounts receivable of $3,251 in doubtful accounts receivable, a non-cash gain on change in derivative liabilities of $35, other non-cash expenses totaling $1,981 net, and an increase in net operating assets and liabilities of $5,275.
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Net cash provided by financing activities was $2,601 for the nine months ended September 30, 2021, consisting of net borrowings of $1,257 under our revolving credit facility, and proceeds from the issuance of debt of $1,344.
Ongoing Funding Requirements
As set forth above, we obtained additional debt financing in the year ended December 31, 2020 and the nine months ended September 30, 2021 to support operations. It is possible that we may need additional funding to enable us to fund our operating expenses and capital expenditure requirements.
In response to COVID-19 and to protect our liquidity and cash position, we have taken a number of steps. In August of 2020, we obtained deferment letters from each of Great Harbor Capital, LLC, Little Harbor, LLC, and Golisano LLC, pursuant to which each lender agreed to defer all payments due under outstanding notes held by each lender through October 22, 2021 and agreed to refrain from declaring a default and/or exercising any remedies under the outstanding notes. Amendments to extend the maturity date and related payment deferrals have not been executed and these notes are currently in default. We anticipate extending the maturity dates and related payment deferrals with the lending parties in December of 2021. On May 7, 2020, TCC received the proceeds of a loan from Fifth Third Bank in the amount of $1.7 million obtained under the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted March 27, 2020 (the “PPP Loan”). The PPP Loan, evidenced by a promissory note dated May 5, 2020 (the “PPP Note”), has a two-year term and bears interest at a rate of 1.0% per annum, with the monthly principal and interest payments that were due beginning December 1, 2020; however, the Company is applying for debt forgiveness for this loan. On January 25, 2021, TCC applied for another PPP Loan with Fifth Third Bank in the amount of $1.3 million (the “Second PPP Loan”). The Second PPP Loan, evidenced by a promissory note dated February 5, 2021 (the “Second PPP Note”), has a two-year term and bears interest at a rate of 1.0% per annum, with expected monthly principal and interest payments that were due to begin September 1, 2021; however, the Company is applying for debt forgiveness for this loan.
TCC may prepay 20% or less of the principal balances of the notes at any time without notice. TCC used the proceeds of the PPP Loans for payroll, office rent, and utilities which allows the Company to seek forgiveness of these loans. While we intend to pursue the forgiveness of the PPP loan and Second PPP loan received in accordance with the requirements and limitations under the CARES Act, no assurance can be provided that forgiveness of any portion of the PPP Loan will be obtained.
Until such time, if ever, as we can generate substantial product revenues, we intend to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. There can be no assurance that any of those sources of funding will be available when needed on acceptable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or relationships with third parties when needed or on acceptable terms, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts; abandon our business strategy of growth through acquisitions; or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules.
This item is not applicable as we are currently considered a smaller reporting company.
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Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021 pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), as amended. 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 SEC’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. On the basis of this review, our management, including our principal executive officer and chief financial officer, has concluded that as of the end of the period covered by this report, our disclosure controls and procedures were not effective to give reasonable assurance that the information required to be disclosed in our reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and to ensure that the information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and chief financial officer, in a manner that allows timely decisions regarding required disclosure.
On May 14, 2021, the Company announced that an internal investigation had discovered that a recently terminated employee in the Company’s accounting department had been embezzling Company funds. The investigation indicated losses of approximately $500,000 occurring between 2016 and 2021. As a result of the findings of the investigation, the terminated employee returned the majority of the embezzled funds to the Company.
The employee had taken advantage of a complex consolidation process between multiple ERP systems, a lack of segregation of duties, weak internal controls, and a lack of managerial oversight.
In the first quarter of 2021, the Company transitioned into a single ERP system which allows for establishment of increased segregation of duties and improvements of internal controls within the ERP system itself. Additionally, remediation of internal control weaknesses includes additional focus on managerial oversight and staffing changes within the accounting department.
During the fourth quarter of 2018 (and continuing into 2019), management identified material weaknesses in the selection and testing of our third-party logistics (“3PL”) and fulfillment provider, whom the Company engaged to replace the Company's Utah manufacturing facility. The Company has determined that the 3PL does not issue reports pursuant to the Statement on Standards for Attestation Engagement No. 18 attestation standards. Management also identified a material weakness related to a lack of appropriate staffing in our accounting and information technology departments to address the Company's ability to continue to close the books both timely and accurately and to meet internal control documentation requirements. Prior normal staffing turnover along with technical accounting issues and the Company's change to a 3PL impacted the Company's ability to react to technical accounting matters encountered. During the first quarter of 2020, management identified material weaknesses related to our financial reporting procedures which resulted in the Company not properly recording a reserve for accounts receivable related to a significant customer that had recently entered bankruptcy proceedings. This material weakness caused the Company to have to amend its 2020 first quarter 10-Q on August 17, 2020 to properly state our financial position. Management believes that this control failure has been resolved with staffing changes and system improvements.
Although we have implemented certain measures that we believe will remediate these material weaknesses, we can provide no assurance that our remediation efforts will be effective or that additional material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties that may be encountered in their implementation, could result in additional material weaknesses, cause us to fail to meet our periodic or annual reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes Oxley Act of 2002 and the rules promulgated thereunder. The existence of material weaknesses could result in errors in our financial statements that could result in a restatement of those financial statements.
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Limitations on Effectiveness of Controls and Procedures
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but we cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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Item 1. |
Legal Proceedings
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From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. As of the date of this Quarterly Report on Form 10-Q, the Company is not aware of any legal proceedings that could have a material impact on the Company’s financial condition, results of operations, or cash flows.
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Item 1A. |
Risk Factors
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Risks and uncertainties that, if they were to occur, could materially adversely affect our business or cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements were set forth in the “Item 1A Risk Factors” section of our Annual Report on Form 10-K filed with the SEC on April 16, 2021.
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial conditions and/or operating results.
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds.
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None. |
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Item 3. |
Defaults Upon Senior Securities.
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As of September 30, 2021, we were in default for lack of compliance with the EBITDA-related financial covenant of the debt agreement with MidCap. The amount due to MidCap for this revolving credit line is $6,551 as of September 30, 2021.
To date, we are in default for not executing the amendments to extend the maturity date and related payment deferrals of the promissory notes payable to Little Harbor, GH and Golisano LLC which matured on October 22, 2021 (see Note 6). As of September 30, 2021 we had $8,037, $28,455 and $39,509 of net of discount indebtedness outstanding to Little Harbor, GH and Golisano LLC, respectively.
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Item 4. |
Mine Safety Disclosures.
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Not applicable. |
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Item 5. |
Other Information.
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None. |
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Item 6. |
Exhibits. |
The exhibits filed or furnished as part of this Quarterly Report on Form 10-Q are set forth below.
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Exhibit Number |
Exhibit Description |
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10.1 |
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31.1 |
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31.2 |
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32.1* |
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32.2* |
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101.INS |
Inline XBRL Instance. |
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101.SCH |
Inline XBRL Taxonomy Extension Schema. |
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101.CA |
Inline XBRL Taxonomy Extension Calculation. |
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101.DEF |
Inline XBRL Taxonomy Extension Definition. |
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101.LAB |
Inline XBRL Taxonomy Extension Label. |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation. |
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104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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| * Furnished herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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TWINLAB CONSOLIDATED HOLDINGS, INC. |
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Date: November 15, 2021 |
By: |
/s/ Daniel DiPofi |
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Daniel DiPofi |
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Chief Executive Officer and Director |
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Date: November 15, 2021 |
By: |
/s/ Kyle Casey |
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Kyle Casey |
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Chief Financial Officer |
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