The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Twinlab Consolidated Holdings, Inc. (the “Company”, “Twinlab,” “we,” “our” and “us”) was incorporated on October 24, 2013 under the laws of the State of Nevada as Mirror Me, Inc. On August 7, 2014, we amended our articles of incorporation and changed our name to Twinlab Consolidated Holdings, Inc.
Nature of Operations
We are an integrated 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 (including the Twinlab® Fuel brand and REAAL sports nutrition products); a market leader in the healthy aging and beauty from within categories sold under the Reserveage Nutrition and ResVitale® brand names; diet and energy products sold under the Metabolife brand name; the Re-Body brand name; and a full line of herbal teas sold under the Alvita brand name. To accommodate consumer preferences, our products come in various formulations and delivery forms, including capsules, tablets, softgels, chewables, liquids, sprays and powders. These products are sold primarily through health and natural food stores and on-line retailers, supermarkets, and mass-market retailers.
We also perform contract manufacturing services for private label products. Our contract manufacturing services business involves the manufacture of custom products to the specifications of a customer who requires finished product under the customer’s own brand name. We do not market these private label products as our business is to sell the products to the customer, who then markets and sells the products to retailers or end consumers.
Principles of Consolidation
The 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 U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. Significant management estimates include those with respect to returns and allowances, allowance for doubtful accounts, reserves for inventory obsolescence, the recoverability of long-lived assets, intangibles and goodwill and the estimated value of warrants and derivative liabilities.
Revenue Recognition
Revenue from product sales, net of estimated returns and allowances, is recognized when evidence of an arrangement is in place, related prices are fixed and determinable, contractual obligations have been satisfied, title and risk of loss have been transferred to the customer and collection of the resulting receivable is reasonably assured. Shipping terms are generally freight on board shipping point. We sell predominately in the North American and European markets with international sales transacted in U.S. dollars.
Fair 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 December 31, 2018 and 2017:
December 31,
2018
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
4,359
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,359
|
|
December 31,
2017
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
6,791
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,791
|
|
Accounts Receivable and Allowances
We grant credit to customers and generally do not require collateral or other security. We perform credit evaluations of our customers and provide for expected claims related to promotional items; customer discounts; shipping shortages; damages; and doubtful accounts based upon historical bad debt and claims experience. As of December 31, 2018, total allowances amounted to $2,651, of which $1,954 was related to doubtful accounts receivable. As of December 31, 2017, total allowances amounted to $2,534, of which $329 was related to doubtful accounts receivable.
Inventories
Inventories are stated at the lower of cost or net realizable value and are reduced by an estimated reserve for obsolete inventory.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation, including amounts amortized under capital leases, is calculated on the straight-line method over the estimated useful lives of the related assets, which are 7 to 10 years for machinery and equipment, 8 years for furniture and fixtures and 3 years for computers. Leasehold improvements are amortized over the shorter of the useful life of the asset or the term of the lease.
Normal repairs and maintenance are expensed as incurred. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation or amortization is removed from the accounts and any gain or loss is included in the results of operations.
Intangible Assets
Intangible assets consist primarily of trademarks and customer relationships, which are amortized on a straight-line basis over their estimated useful lives ranging from 3 to 30 years. The valuation and classification of these assets and the assignment of amortizable lives involve significant judgment and the use of estimates.
We believe that our long-term growth strategy supports our fair value conclusions. For intangible assets, the recoverability of these amounts is dependent upon achievement of our projections and the execution of key initiatives related to revenue growth and improved profitability.
Goodwill
Goodwill is not subject to amortization, but is reviewed for impairment annually, or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. An impairment charge would be recorded to the extent the carrying value of goodwill exceeds its estimated fair value. The testing of goodwill under established guidelines for impairment requires significant use of judgment and assumptions. Changes in forecasted operations and other assumptions could materially affect the estimated fair values. Changes in business conditions could potentially require adjustments to these asset valuations.
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 December 31, 2018 and 2017 was $4,346 and $4,346, respectively. An impairment of $0 and $1,554 was recorded in the years ended December 31, 2018 and 2017, respectively (see Note 5).
Shipping and Handling Costs
Shipping and handling fees when billed to customers are included as a component of net sales. The total costs associated with shipping and handling are included as a component of cost of sales and totaled $3,244 and $3,521 in 2018 and 2017, respectively.
Advertising and Promotion Costs
We advertise our branded products through national and regional media and through cooperative advertising programs with customers. Costs for cooperative advertising programs are expensed as earned by customers and recorded in selling, general and administrative expenses. Our advertising expenses were $4,983 and $4,577 in 2018 and 2017, respectively. Customers are also offered in-store promotional allowances and certain products are also promoted with direct to consumer rebate programs. Costs for these promotional programs are recorded as incurred as a reduction to net sales.
Research and Development Costs
Research and development costs are expensed as incurred and totaled $436 and $1,377 in 2018 and 2017, respectively.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases and operating loss and income tax credit carry-forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in income tax rates is recognized in the period that includes the enactment date.
Value of Warrants Issued with Debt
We estimate the grant date value of certain warrants issued with debt, using a valuation method, such as the Black-Scholes option pricing model, or, if the terms are more complex, 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 $241 for 2018 and $162 for 2017. As of December 31, 2018, and 2017, unamortized deferred gain on sale of assets was $1,324 and $1,565, respectively.
Net Loss per Common Share
Basic net income or loss per common share (Basic EPS) is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted net income or loss per common share (Diluted EPS) is computed by dividing net income or loss by the sum of the weighted average number of common shares outstanding and the dilutive potential common shares then outstanding. Potential dilutive common share equivalents consist of total shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock using the treasury stock method and the average market price per share during the period.
The common shares used in the computation of our basic and diluted net loss per share are reconciled as follows:
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(20,409
|
)
|
|
$
|
(29,491
|
)
|
Effect of dilutive securities on net loss:
|
|
|
|
|
|
|
|
|
Common stock warrants
|
|
|
(2,431
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total net loss for purpose of calculating diluted net loss per common share
|
|
$
|
(22,840
|
)
|
|
$
|
(29,491
|
)
|
|
|
|
|
|
|
|
|
|
Number of shares used in per common share calculations:
|
|
|
|
|
|
|
|
|
Total shares for purposes of calculating basic net loss per common share
|
|
|
254,325,294
|
|
|
|
252,943,406
|
|
Weighted-average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Common stock warrants
|
|
|
12,358,794
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total shares for purpose of calculating diluted net loss per common share
|
|
|
266,684,088
|
|
|
|
252,943,406
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
Diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.12
|
)
|
Significant Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts which, at times, exceed federally insured limits. At December 31, 2018, the Company had approximately $6,382 of cash that exceeded federally insured limits. To date, the Company has not experienced a loss or lack of access to its invested cash; however, no assurance can be provided that access to the Company's invested cash will not be impacted by adverse conditions in the financial markets.
Sales to our top three customers aggregated to approximately 26% and 30% of total consolidated sales in 2018 and 2017, respectively. Sales to the largest customer were approximately 12% of total sales in 2018 and 2017. Accounts receivable from these customers were approximately 22% and 36% of total accounts receivable as of December 31, 2018 and 2017, respectively. A single customer represents 14% of total accounts receivable. Our two major vendors accounted for 42% and 16% of purchases for the year ended December 31, 2018 and 2017, respectively. A third vendor represents an additional 11%.
Recent Accounting Pronouncements
In January 2017, FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment (Topic 350)” which removes Step 2 of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted after January 1, 2017. We do not expect the new guidance to have a significant impact on our consolidated financial statements or related disclosures.
In February 2016, FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which requires companies to recognize all leases as assets and liabilities on the consolidated balance sheet. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in a consolidated statement of comprehensive income and a consolidated statement of cash flows is largely unchanged from previous GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Financial Statements. Our status as an emerging growth company allowed us to defer the adoption until the year (and interim periods therein) beginning January 1, 2020.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016; however, in July 2015, the FASB agreed to delay the effective date by one year. The proposed deferral may permit early adoption but would not allow adoption any earlier than the original effective date of the standard. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Our status as an emerging growth company allowed us to defer the adoption until the year (and interim periods therein) beginning January 1, 2019. We have determined that we have no material impact from this accounting pronouncement.
Although there are several other new accounting pronouncements issued or proposed by FASB, which we have adopted or will adopt, as applicable, we do not believe any of these accounting pronouncements has had or will have a material impact on our consolidated financial position or results of operations.
N
OTE 2 – GOING CONCERN
The accompanying 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 December 31, 2018, we had an accumulated deficit of $274,372. 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, increase in debt, and the recording of significant derivative liabilities, we have a working capital deficiency of $69,505 at December 31, 2018. We also have $70,539 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 will 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:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
4,346
|
|
|
$
|
5,347
|
|
Work in process
|
|
|
-
|
|
|
|
1,965
|
|
Finished goods
|
|
|
5,997
|
|
|
|
12,236
|
|
|
|
|
10,343
|
|
|
|
19,548
|
|
Reserve for obsolete inventory
|
|
|
(2,398
|
)
|
|
|
(2,380
|
)
|
|
|
$
|
7,945
|
|
|
$
|
17,168
|
|
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
1,367
|
|
|
$
|
12,156
|
|
Computers and other
|
|
|
7,540
|
|
|
|
9,589
|
|
Aquifer
|
|
|
482
|
|
|
|
482
|
|
Leasehold improvements
|
|
|
1,553
|
|
|
|
1,530
|
|
|
|
|
10,942
|
|
|
|
23,757
|
|
Accumulated depreciation and amortization
|
|
|
(9,825
|
)
|
|
|
(20,588
|
)
|
|
|
$
|
1,117
|
|
|
$
|
3,169
|
|
Assets held under capital leases are included in machinery and equipment and amounted to $0 and $777 as of December 31, 2018 and 2017, respectively.
Depreciation and amortization expense totaled $820 and $841 in 2018 and 2017, respectively.
NOTE 5 – INTANGIBLE ASSETS AND GOODWILL
Intangible assets consisted of the following at:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
8,915
|
|
|
$
|
8,915
|
|
Indefinite-lived intangible assets
|
|
|
4,346
|
|
|
|
4,346
|
|
Customer relationships
|
|
|
19,110
|
|
|
|
19,110
|
|
Other
|
|
|
753
|
|
|
|
753
|
|
|
|
|
33,124
|
|
|
|
33,124
|
|
Accumulated amortization
|
|
|
(11,816
|
)
|
|
|
(10,061
|
)
|
|
|
$
|
21,308
|
|
|
$
|
23,063
|
|
Trademarks are amortized over periods ranging from 3 to 30 years, customer relationships are amortized over periods ranging from 15 to 16 years, and other intangible assets are amortized over 3 years. Amortization expense was $1,755 and $2,329 for 2018 and 2017, respectively.
In December 2018, we completed our annual impairment test of goodwill and intangible assets and recognized no impairment charges. During the fourth quarter of fiscal 2018, management updated the 2018 budget and financial projections beyond fiscal 2018. No impariment was recorded in 2018. In 2017, due to a decline in Metabolife sales we determined that the carrying value of the trademark exceeded its fair value. We also determined in 2017 that due to an increase in debt, our weighted average cost of capital increased, which created an impairment in both Reserveage and Rebody tradenames as well as Organic Holdings goodwill.
The fair value of these assets was determined using level 3 inputs in an income approach using the estimated discounted cash flow valuation methodology. In the second step of the impairment test, we performed a hypothetical acquisition and purchase price allocation and measured the implied fair value of each asset to its carrying value. The impairment was calculated by deducting the present value of the expected cash flows from the carrying value. The second step of the goodwill and intangible assets impairment tests resulted in a 2017 impairment charge of $6,301 for goodwill related to Organic Holdings and in an aggregate impairment loss of intangible assets of $4,805 in 2017. The impairment charges were recorded in operating expenses in the consolidated statement of operations.
Estimated aggregate amortization expense for the intangible assets for each of the five years subsequent to 2018 is as follows:
Years Ending December 31,
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
1,517
|
|
2020
|
|
|
1,517
|
|
2021
|
|
|
1,517
|
|
2022
|
|
|
1,517
|
|
2023
|
|
|
1,517
|
|
Thereafter
|
|
|
9,377
|
|
|
|
|
|
|
|
|
$
|
16,962
|
|
NOTE 6 – DEBT
Debt consisted of the following at:
|
|
December 31
,
2018
|
|
|
December 31,
2017
|
|
Related Party Debt:
|
|
|
|
|
|
|
|
|
July 2014 note payable to Little Harbor, LLC
|
|
$
|
3,267
|
|
|
$
|
3,267
|
|
July 2016 note payable to Little Harbor, LLC
|
|
|
4,770
|
|
|
|
4,770
|
|
January 2016 note payable to Great Harbor Capital, LLC
|
|
|
2,500
|
|
|
|
2,500
|
|
March 2016 note payable to Great Harbor Capital, LLC
|
|
|
7,000
|
|
|
|
7,000
|
|
December 2016 note payable to Great Harbor Capital, LLC
|
|
|
2,500
|
|
|
|
2,500
|
|
August 2017 note payable to Great Harbor Capital, LLC
|
|
|
3,000
|
|
|
|
3,000
|
|
February 2018 note payable to Great Harbor Capital, LLC
|
|
|
2,000
|
|
|
|
-
|
|
July 2018 note payable to Great Harbor Capital, LLC, net of discount of $1,056 at December 31, 2018
|
|
|
3,944
|
|
|
|
-
|
|
November 2018 note payable to Great Harbor Capital, LLC, net of discount of $1,088 at December 31, 2018
|
|
|
2,912
|
|
|
|
-
|
|
January 2016 note payable to Golisano Holdings LLC
|
|
|
2,500
|
|
|
|
2,500
|
|
March 2016 note payable to Golisano Holdings LLC
|
|
|
7,000
|
|
|
|
7,000
|
|
July 2016 note payable to Golisano Holdings LLC
|
|
|
4,770
|
|
|
|
4,770
|
|
December 2016 note payable to Golisano Holdings LLC
|
|
|
2,500
|
|
|
|
2,500
|
|
March 2017 note payable to Golisano Holdings LLC
|
|
|
3,267
|
|
|
|
3,267
|
|
February 2018 note payable to Golisano Holdings LLC
|
|
|
2,000
|
|
|
|
-
|
|
November 2014 note payable to Golisano Holdings LLC (formerly payable to Penta Mezzanine SBIC Fund I, L.P.), net of discount and unamortized loan fees in the aggregate of $678 and $1,491 as of December 31, 2018 and December 31, 2017, respectively
|
|
|
7,322
|
|
|
|
6,509
|
|
January 2015 note payable to Golisano Holdings LLC (formerly payable to JL-BBNC Mezz Utah, LLC), net of discount and unamortized loan fees in the aggregate of $915 and $1,829 as of December 31, 2018 and December 31, 2017, respectively
|
|
|
4,085
|
|
|
|
3,171
|
|
February 2015 note payable to Golisano Holdings LLC (formerly payable to Penta Mezzanine SBIC Fund I, L.P.), net of discount and unamortized loan fees in the aggregate of $60 and $131 as of December 31, 2018 and December 31, 2017, respectively
|
|
|
1,940
|
|
|
|
1,869
|
|
Macatawa Bank
|
|
|
15,000
|
|
|
|
-
|
|
Total related party debt
|
|
|
82,277
|
|
|
|
54,623
|
|
|
|
|
|
|
|
|
|
|
Senior Credit Facility with Midcap
|
|
|
-
|
|
|
|
12,088
|
|
|
|
|
|
|
|
|
|
|
Other Debt:
|
|
|
|
|
|
|
|
|
April 2016 note payable to JL-Utah Sub, LLC
|
|
|
62
|
|
|
|
313
|
|
Capital lease obligations
|
|
|
-
|
|
|
|
1,252
|
|
Huntington Holdings, LLC
|
|
|
3,200
|
|
|
|
3,200
|
|
Total other debt
|
|
|
3,262
|
|
|
|
4,765
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
85,539
|
|
|
|
71,476
|
|
Less current portion
|
|
|
(70,539
|
)
|
|
|
(68,093
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
15,000
|
|
|
$
|
3,383
|
|
Future aggregate maturities of debt as of December 31, 2018 were as follows:
Years Ending December 31,
|
|
|
|
|
2019
|
|
$
|
70,539
|
|
2020
|
|
|
15,000
|
|
|
|
|
|
|
|
|
$
|
85,539
|
|
Future aggregate maturities of debt that have maturities beyond 2019 have been classified as current on the consolidated balance sheet as the Company has determined that it is probable that the Company will not be able to meet the 2019 debt obligations as they become due, thus causing a technical default of the debt obligations.
Related-Party Debt
Little Harbor Capital LLC
Mr. David L. Van Andel, the Chairman of the Company’s Board of Directors, is the owner and principal of Little Harbor Capital LLC
.
Mr. Mark Bugge
at the time the note(s) were entered into was
a member of the Company’s Board of Directors
and
the Secretary of Little Harbor Capital 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, we were obligated to pay such party $4,900 per year in structured monthly payments for 3 years provided that such payment obligations would terminate at such earlier time as the trailing ninety day volume weighted average closing sales price of the Company’s common stock on all domestic securities exchanges on which such stock is listed equals or exceeds $5.06 per share. This note is unsecured and matured on July 25, 2017 with an outstanding balance of $3,267. On February 6, 2018, we entered into an agreement with Little Harbor to convert the obligations into an unsecured promissory note. The note matures on July 25, 2020, bears interest at an annual rate of 8.5%, with the principal payable at maturity.
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 (“LH Delayed Draw Note”), pursuant to which Little Harbor may, in its sole discretion and pursuant to draw requests made by the Company, loan us up to the maximum principal amount of $4,770. This note is unsecured and was to mature on January 28, 2019; however, the maturity of this note has been extended to June 30, 2019. This note bears interest at an annual rate of 8.5%, with the principal payable at maturity. If Little Harbor, in its discretion, accepts a draw request made by the Company under this note, Little Harbor shall not transfer cash to the Company, but rather Little Harbor shall irrevocably agree to accept the principal amount of any monthly delayed draw under this note in lieu and in complete satisfaction of the obligation to make an equivalent dollar amount of periodic cash payments otherwise due to Little Harbor under the July 2014 note payable. During the year ended December 31, 2016, we requested and Little Harbor LLC approved, full draw amounts totaling $4,770. We issued a warrant into escrow in connection with this loan (see Little Harbor Escrow Warrants in Note 7). (See also Subsequent Events in Note 13)
Little Harbor also delivered a deferment letter to which Little Harbor agreed to defer all payments due under all the notes specified in the Little Harbor Deferment Letter through May 31, 2019 and agreed to refrain from declaring a default and/or exercising any remedies under the notes.
Great Ha
r
bor 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 note(s) 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 Promissory Note”) with Great Harbor Capital, LLC (“GH”), an affiliate of a member of our Board of Directors, GH lent us $2,500. The note was to mature on January 28, 2019; however, the maturity of this note has been extended to June 30, 2019. The note bears interest at an annual rate of 8.5%, with the principal payable in 24 monthly installments of $104 which was to commence on February 28, 2017 but has been deferred to May 31, 2019. We issued a warrant into escrow in connection with this loan (see GH Escrow Warrants in Note 7). (See also Subsequent Events in Note 13)
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 $7,000. The note was to mature on March 21, 2019; however, the maturity of this note has been extended to June 30, 2019. This note bears interest at an annual rate of 8.5%, with the principal payable in 24 monthly installments of $292 which was to commence on April 21, 2017 but has been deferred to May 31, 2019. We issued a warrant into escrow in connection with this loan (see GH Escrow Warrants in Note 7). (See also Subsequent Events in Note 13)
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 $2,500. The note matures on December 30, 2019, bears interest at an annual rate of 8.5%, with the principal payable at maturity. We issued a warrant into escrow in connection with this loan (see GH Escrow Warrants in Note 7).
August 2017 Note Payable to Great Harbor Capital, LLC
Pursuant to an August 30, 2017 Secured Promissory Note, GH lent us $3,000 (“August 2017 GH Note”). The note matures on August 29, 2020, bears interest at an annual rate of 8.5%, with the principal payable at maturity. We issued a warrant into escrow in connection with this loan (see GH Escrow Warrants in Note 7).
February 2018 Note Payable to Great Harbor Capital, LLC
Pursuant to a February 6, 2018 Secured Promissory Note, GH lent us $2,000 (“February 2018 GH Note”). The note matures on February 6, 2021, bears interest at an annual rate of 8.5%, with the principal payable at maturity. This note is secured by collateral and is subordinate to the indebtedness owed to Midcap Funding X Trust as successor-by-assignment from MidCap Financial Trust (“MidCap”),
Also, 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 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 $1,000, the Company will use the net cash proceeds from the Special Asset Disposition to pay any accrued and unpaid interest under the A&R August 2017 GH Note and any other note subject to the Intercreditor Agreement (defined below). The maturity date, interest rate and payment terms remain unchanged from the original secured promissory note issued to GH on August 30, 2017.
Furthermore, as a result of notes issued on February 6, 2018, by GH and Golisano LLC, GH and Golisano 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 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 $5,000 ("July 2018 GH Note"). The July 2018 GH Note matures on January 27, 2020 and bears interest at an annual rate of 8.5%, with the principal payable on maturity. Interest on the outstanding principal accrues at a rate of 8.5% per year and is payable monthly on the first day of each month, beginning September 1, 2018. The principal of the July 2018 GH Note is payable at maturity on January 20, 2020. The July 2018 GH Note is secured by collateral. We issued a warrant in connection with this loan (see GH Warrants in Note 7).
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, LLC and Golisano Holdings LLC.
November 2018 Note Payable to Great Harbor Capital, LLC
Pursuant to a November 5, 2018 Secured Promissory Note, GH loaned the Company $4,000 ("November 2018 GH Note"). The November 2018 GH Note matures on November 5, 2020 and bears interest at an annual rate of 8.5%, with the principal payable on maturity. Interest on the outstanding principal accrues at a rate of 8.5% per year and is payable monthly on the first day of each month, beginning December 1, 2018. The principal of the November 2018 GH Note is payable at maturity on November 5, 2020. November 2018 GH Note is secured by collateral. We issued a warrant in connection with this loan (see GH Warrants in Note 7).
GH also delivered a deferment letter to which GH agreed to defer all payments due under all the notes specified in the Great Harbor Deferment Letter through May 31, 2019 and agreed to refrain from declaring a default and/or exercising any remedies under the notes.
Golisano Holdings LLC.
Mr. B. Thomas Golisano, a member of the Company’s Board of Directors
is a
principal
of Golisano Holdings 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 $8,000, less certain fees and expenses, from the issuance of a secured note to Penta Mezzanine SBIC Fund I, L.P. (“Penta”). The Managing Director of Penta, an institutional investor, is also a director of our Company. We granted Penta a security interest in our assets and pledged the shares of our subsidiaries as security for the note. On March 8, 2017, Golisano Holdings LLC (“Golisano LLC”) acquired this note payable from Penta. Interest on the outstanding principal accrued at a rate of 12% per year from date of issuance to March 8, 2017, and decreased to 8% per year thereafter, payable monthly. The note matures on November 13, 2019. On August 30, 2017, we entered into an amendment with Golisano LLC which extended payment of principal to maturity. We issued a warrant to Penta to purchase 4,960,740 shares of the Company’s common stock in connection with this loan (see Penta Warrants in Note 7). The estimated fair value of the warrant at the date of issuance was $3,770, which was recorded as a note discount and is being amortized into interest expense over the term of this loan. Additionally, we had incurred loan fees of $273, which is also being amortized into interest expense over the term of this loan.
January 2015 Note Payable to Golisano Holdings LLC (formerly payable to JL-Mezz Utah, LLC-f/k/a JL-BBNC Mezz Utah, LLC)
On January 22, 2015, we raised proceeds of $5,000, less certain fees and expenses, from the sale of a note to JL-Mezz Utah, LLC (f/k/a JL-BBNC Mezz Utah, LLC) (“JL-US”). The proceeds were restricted to pay a portion of the Nutricap Labs, LLC (“Nutricap”) asset acquisition. We granted JL-US a security interest in the Company’s assets, including real estate and pledged the shares of our subsidiaries as security for the note. On March 8, 2017, Golisano LLC acquired this note payable from JL-US. Interest on the outstanding principal accrued at a rate of 12% per year from date of issuance to March 8, 2017, and decreased to 8% per year thereafter, payable monthly. The note matures on November 13, 2019. On August 30, 2017, we entered into an amendment with Golisano LLC which extended payment of principal to maturity. We issued a warrant to JL-US to purchase 2,329,400 shares of the Company’s common stock on January 22, 2015 and 434,809 shares of the Company’s common stock on February 4, 2015 (see JL Warrants in Note 7). The estimated fair value of these warrants at the date of issuances was $4,389, which was recorded as a note discount and is being amortized into interest expense over the term of these loans. Additionally, we had incurred loan fees of $152 relating to this loan, which is also being amortized into interest expense over the term of these loans.
February 2015 Note Payable to Golisano Holdings LLC (formerly payable to Penta Mezzanine SBIC Fund I, L.P.)
On February 6, 2015, we raised proceeds of $2,000, less certain fees and expenses, from the issuance of a secured note payable to Penta. The proceeds were restricted to pay a portion of the acquisition of the customer relationships of Nutricap. On March 8, 2017, Golisano LLC acquired this note payable from Penta. Interest on the outstanding principal accrued at a rate of 12% per year from date of issuance to March 8, 2017, and decreased to 8% per year thereafter, payable monthly. The note matures on November 13, 2019. On August 30, 2017, we entered into an amendment with Golisano LLC which extended payment of principal to maturity. We issued a warrant to Penta to purchase 869,618 shares of the Company’s common stock in connection with this loan (see Penta Warrants in Note 7). The estimated fair value of these warrants at the date of issuances totaled $250, which was recorded as a note discount and is being amortized into interest expense over the term of this loan. Additionally, we had incurred loan fees of $90, which is also being amortized into interest expense over the term of these loans.
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 $2,500. The note was to mature on January 28, 2019; however, the maturity of this note has been extended to June 30, 2019. This notebears interest at an annual rate of 8.5%. We issued a warrant into escrow in connection with this loan (see Golisano Escrow Warrants in Note 7). (See also Subsequent Events in Note 13)
March 2016 Note Payable to Golisano Holdings LLC
Pursuant to a March 21, 2016 Unsecured Promissory Note, Golisano LLC lent us $7,000 (“Golisano LLC March 2016 Note”). The note was to matureon March 21, 2019; however, the maturity of this note has been extended to June 30, 2019. This note bears interest at an annual rate of 8.5%. We issued a warrant into escrow in connection with this loan (see Golisano Escrow Warrants in Note 7). (See also Subsequent Events in Note 13)
July 2016 Note Payable to Golisano Holdings LLC
On July 21, 2016, we issued an Unsecured Delayed Draw Promissory Note in favor of Golisano LLC pursuant to which Golisano LLC may, in its sole discretion and pursuant to draw requests made by the Company, loan the Company up to the maximum principal amount of $4,770 (the “Golisano LLC July 2016 Note”). The Golisano LLC July 2016 Note was to mature on January 28, 2019; however, the maturity of this note has been extended to June 30, 2019. Interest on the outstanding principal accrues at a rate of 8.5% per year. The principal of the Golisano LLC July 2016 Note is payable at maturity. We issued a warrant into escrow in connection with this loan (see Golisano Escrow Warrants in Note 7). During the year ended December 31, 2016, we requested and Golisano LLC approved, draws totaling $4,770. (See also Subsequent Events in Note 13)
December 2016 Note Payable to Golisano Holdings LLC
Pursuant to a December 31, 2016 Unsecured Promissory Note, Golisano LLC lent us $2,500 (“Golisano LLC December 2016 Note”). The note matures on December 30, 2019, bears interest at an annual rate of 8.5%, with the principal payable at maturity. We issued a warrant into escrow in connection with this loan (see Golisano Escrow Warrants in Note 7).
March 2017 Note Payable to Golisano Holdings LLC
Pursuant to a March 14, 2017 Unsecured Promissory Note, Golisano LLC lent us $3,267 (“Golisano LLC March 2017 Note”). The note matures on December 30, 2019, bears interest at an annual rate of 8.5%, with the principal payable at maturity. We issued a warrant into escrow in connection with this loan (see Golisano Escrow Warrants in Note 7).
February 2018 Note Payable to Golisano Holdings LLC
Pursuant to a February 6, 2018 Secured Promissory Note, Golisano LLC lent us $2,000 (“Golisano LLC February 2018 Note”). The note matures on February 6, 2021, bears interest at an annual rate of 8.5%, with the principal payable at maturity. This note is secured by collateral and is subordinate to the indebtedness owed to MidCap.
Golisano LLC also delivered a deferment letter pursuant to which Golisano LLC agreed to defer all payments due under the notes specified in the Golisano Deferment Letter through May 31, 2019 and agreed to refrain from declaring a default and/or exercising any remedies under the notes.
Macatawa Bank
Mr. Mark Bugge is a former member of the board of directors of Macatawa Bank and was a member of the Company’s Board of Directors 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. 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 10% in the Macatawa Bank.
On December 4, 2018, the Company entered into a Term Loan Note and Agreement (the "Term Loan") in favor of Macatawa Bank (the "Macatawa"). Pursuant to the Term Loan, the Macatawa loaned the Company $15,000. The Term Loan matures on November 30, 2020. The Term Loan accrues interest at the interest rate equivalent to the one-month LIBOR Rate plus 1.00% (the interest rate will not be less than 2.50%; the rate was 3.38% as of December 31, 2018). After the maturity date or upon the occurrence or continuation of an event of default, the unpaid principal balance shall bear interest at the interest rate of the note plus 3.00%. The note is secured by the Limited Guaranty, defined below, and is subordinate to the indebtedness owed to MidCap.
In connection with the Term Loan, 463IP Partners, LLC (the "463IP") has entered into a limited guaranty, dated as of December 4, 2018, in favor of the 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 $15,000 plus any accrued interest.
Senior Credit Facility
On January 22, 2015, we entered into a three-year $15,000 revolving credit facility (the “Senior Credit Facility”) based on our accounts receivable and inventory, increasable to up to $20,000, with MidCap. On September 2, 2016, we entered into an amendment with Midcap to increase the Senior Credit Facility to $17,000 and extend our facility an additional 12 months. We granted MidCap a first priority security interest in certain of our assets and pledged the shares of our subsidiaries as security for amounts owed under the credit facility. We are required to pay Midcap an unused line fee of 0.50% per annum, a collateral management fee of 1.20% per month and interest of LIBOR plus 5% per annum, which was 6.36% per annum as of December 31, 2017. We issued a warrant to Midcap to purchase 500,000 shares of the Company’s common stock (see Midcap Warrant in Note 7). The estimated fair value of these warrants at the date of issuance was $130, which was recorded as a note discount and is being amortized into interest expense over the term of the Senior Credit Facility. Additionally, we have incurred loan fees totaling $540 relating to the Senior Credit Facility and any subsequent amendments, which is also being amortized into interest expense over the term of the Senior Credit Facility. The balance owing on the Senior Credit Facility was $0 as of December 31, 2018. (See also Subsequent Events in Note 13)
On February 6, 2018, MidCap agreed to consent to the transactions contemplated in exchange for a warrant to MidCap exercisable for up to 500,000 shares of the Company’s common stock at an exercise price of $0.76 per share. The Company has reserved 500,000 shares of the Company’s common stock for issuance to MidCap. On February 6, 2019, the warrant expired, unexercised. (See also Subsequent Events in Note 13)
Other Debt
April 2016 Note Payable to JL-Utah Sub, LLC
Pursuant to an April 5, 2016 Unsecured Promissory Note, JL-Utah Sub, LLC lent us $500 (“JL-US Note”). On this note's maturity date, March 21, 2019, the note was paid in full. The note bore interest at an annual rate of 8.5%, with the principal payable in 24 monthly installments of $21 commencing on April 21, 2017. (See also Subsequent Events in Note 13)
Capital Lease Obligations
Our capital lease obligations pertain to various leasing agreements with Essex Capital Corporation (“Essex”), a related party to the Company as Essex’s principal owner was a director of the Company until January 22, 2018. This obligation was paid in full in November 2018.
Huntington Holdings, LLC
On August 6, 2016, the 18-month anniversary of the closing of a share purchase agreement, we were required to pay the purchaser of the common stock the difference between $2.29 per share and either a defined market price or a price per share determined by a valuation firm acceptable to both parties. Based on an outside professional valuation performed on the Company’s common stock, the Company estimated the stock price guarantee payment to be $3,210. Accordingly, the Company recorded a loss on the stock purchase price guarantee of $3,210 and a corresponding liability for the same amount in 2016, which was included in accrued expenses and other current liabilities in the accompanying consolidated balance sheet as of December 31, 2016. On June 2, 2017, the two parties came to an agreement in which we were required to issue an Unsecured Promissory Note (“Huntington Note”) in favor of Huntington Holdings, LLC (“Huntington”). The Huntington Note matures on June 2, 2019 with the principal amount of $3,200 payable at maturity. Interest on the outstanding principal accrues at a rate of 8.5% per year from August 6, 2016 to August 15, 2017 and increases to 10% per year thereafter. We paid $50 to Huntington related to accrued interest from August 6, 2016 through the date of issuance of the Huntington Note. Huntington was required to return 778,385 shares of the Company’s common stock which were issued into escrow. We were required to provide certain piggyback registration rights to Huntington in regards to the remaining 749,999 shares of the Company’s common stock held by Huntington. If the Huntington Note was paid off prior to August 14, 2017, the 778,385 shares held in escrow were to be released from escrow and transferred to the Company for no additional consideration. If the note remained outstanding on August 15, 2017, we had the right, but not the obligation, to pay $140 to Huntington to purchase 764,192 of the shares held in escrow (the “Subject Shares”). Upon the exercise of this purchase option, the Subject Shares were to be released from escrow and transferred to the Company. If the note remained outstanding on August 15, 2017 and we did not exercise the option to purchase the shares, the shares were to be returned from escrow to Huntington and we would no longer have repurchase rights. On August 15, 2017, the note was outstanding and we did not exercise the repurchase right. The 778,385 shares were returned from escrow to Huntington.
Financial Covenants
Certain of the foregoing debt agreements, as amended, require us to meet certain affirmative and negative covenants, including maintenance of specified ratios. We amended our debt agreements with MidCap, Penta and JL-US, effective July 29, 2016, to, among other things, reset the financial covenants of each debt agreement. Management has determined that as of December 31, 2018, and April 16, 2019 we were in compliance with the covenants.
NOTE 7 – WARRANTS AND REGISTRATION RIGHTS AGREEMENTS
The following table presents a summary of the status of our issued warrants as of December 31, 2018, and changes during the two years then ended:
|
|
|
|
|
|
Weighted
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
15,855,017
|
|
|
$
|
0.18
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Canceled / Expired
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
15,855,017
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,000,000
|
|
|
|
0.09
|
|
Canceled / Expired
|
|
|
(714,286
|
)
|
|
|
0.53
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2018
|
|
|
20,140,731
|
|
|
|
0.15
|
|
Warrants Issued
Midcap Warrant
On January 22, 2015, the Company entered into a revolving credit facility with MidCap Financial Trust, which subsequently assigned the agreement to MidCap.
In connection with the line of credit agreement with MidCap described in Note 6, we issued MidCap a warrant, exercisable through January 22, 2018, for an aggregate of 500,000 shares of the Company’s common stock at an exercise price of $0.76 per share (the “MidCap Warrant 1”). We entered into a registration rights agreement with Midcap, dated as of January 22, 2015, granting MidCap certain registration rights, commencing October 1, 2015, for the shares of common stock issuable on the exercise of the MidCap Warrant 1. The MidCap Warrant 1 was not exercised and expired on January 22, 2018.
The agreement is amended from time to time and wherein it was necessary under the terms of the agreement to obtain MidCap's consent to the transactions contemplated by the above mentioned February 2018 GH Note, A&R August 2017 GH Note and Golisano LLC Note; on February 6, 2018, MidCap agreed to consent to the transactions contemplated in exchange for a warrant to MidCap exercisable for up to 500,000 shares of the Company’s common stock at an exercise price of $0.76 per share (“MidCap Warrant 2”). The Company has reserved 500,000 shares of the Company’s common stock for issuance under the MidCap Warrant 2.
The MidCap Warrant 2 was not exercised and expired on February 6, 2019. (See also Subsequent Events in Note 13)
Penta Warrants
Pursuant to a stock purchase agreement dated June 30, 2015, a warrant was issued to Penta to purchase an aggregate 807,018 shares of our common stock at a price of $0.01 per share at any time prior to the close of business on June 30, 2020. We granted Penta certain registration rights, commencing October 1, 2015, for the shares of common stock issuable upon exercise of the warrant.
JL
-BBNC
Warrants
Pursuant to a June 30, 2015 stock purchase agreement, a warrant was issued to JL-BBNC Mezz Utah, LLC (“JL-BBNC”) to purchase an aggregate 403,509 shares of the Company’s common stock at a price of $0.01 per share at any time prior to the close of business on June 30, 2020, subject to certain adjustments. We granted JL-BBNC certain registration rights, commencing October 1, 2015, for the shares of common stock issuable upon exercise of the warrant. The warrant was subsequently assigned by JL-BBNC to two individuals.
Essex Warrants
In connection with the guarantee of a note payable issued in the Nutricap asset acquisition and equipment financing by Essex discussed in Note 6, Essex was issued a warrant exercisable for an aggregate 1,428,571 shares of the Company’s common stock at a purchase price of $0.77 per share, at any time prior to the close of business on June 30, 2020. The number of shares issuable upon the exercise of the warrant is subject to adjustment on terms and conditions customary for a transaction of this nature in the event of (i) reorganization, recapitalization, stock split-up, combination of shares, mergers, consolidations and (ii) sale of all or substantially all of our assets or property. Essex subsequently assigned warrants for 350,649 shares to another company.
JL Properties, Inc. Warrants
In April 2015, we entered into an office lease agreement which requires a $1,000 security deposit, subject to reduction if we achieve certain market capitalization metrics at certain dates. On April 30, 2015, we entered into a reimbursement agreement with JL Properties, Inc. (“JL Properties”) pursuant to which JL Properties agreed to arrange for and provide an unconditional, irrevocable, transferable, and negotiable commercial letter of credit to serve as the security deposit. As partial consideration for the entry by JL Properties into the reimbursement agreement and the provision of the letter of credit, we issued JL Properties two warrants to purchase shares of the Company’s common stock.
The first warrant is exercisable for an aggregate of 465,880 shares of common stock, subject to certain adjustments, at an aggregate purchase price of $0.01, at any time prior to April 30, 2020. In addition to adjustments on terms and conditions customary for a transaction of this nature in the event of (i) reorganization, recapitalization, stock split-up, combination of shares, mergers, consolidations and (ii) sale of all or substantially all of our assets or property, the number of shares of common stock issuable pursuant to the warrant will be increased in the event our consolidated audited adjusted EBITDA (as defined in the warrant agreement) for the year ending December 31, 2018 does not equal or exceed $19,250. JL Properties subsequently assigned the warrant to two individuals.
On December 31, 2018, our audited adjusted EBITDA yielded a negative calculation; therefore, the warrant will not increase in shares.
The second warrant is exercisable for an aggregate of 86,962 shares of common stock, at a per share purchase price of $1.00, at any time prior to April 30, 2020. The number of shares issuable upon exercise of the second warrant is subject to adjustment on terms and conditions customary for a transaction of this nature in the event of (i) reorganization, recapitalization, stock split-up, combination of shares, mergers, consolidations and (ii) sale of all or substantially all of our assets or property.
We have granted JL Properties certain registration rights, commencing October 1, 2015, for the shares of common stock issuable on exercise of the two warrants.
Golisano LLC Warrants (formerly Penta Warrants)
In connection with the November 13, 2014 note for $8,000 (see Note 6), Penta was issued a warrant to acquire 4,960,740 shares of the Company’s common stock at an aggregate exercise price of $0.01, through November 13, 2019. In connection with Penta’s consent to the terms of additional debt obtained by us, we also granted Penta a warrant to acquire an additional 869,618 shares of common stock at a purchase price of $1.00 per share, through November 13, 2019. Both warrant agreements grant Penta certain registration rights, commencing October 1, 2015, for the shares of common stock issuable on exercise of the warrants. Penta has the right, under certain circumstances, to require us to purchase all or any portion of the equity interest in the Company issued or represented by the warrant to acquire 4,960,740 shares at a price based on the greater of (i) the product of (x) ten times our adjusted EBITDA with respect to the twelve months preceding the exercise of the put right multiplied by (y) the investor’s percentage ownership in the Company assuming full exercise of the warrant; or (ii) the fair market value of the investor’s equity interest underlying the warrant. In the event (i) we do not have the funds available to repurchase the equity interest under the warrant or (ii) such repurchase is not lawful, adjustments to the principal of the note purchased by Penta will be made or, under certain circumstances, interest will be charged on the amount otherwise due for such repurchase. We have the right, under certain circumstances, to require Penta to sell to us all or any portion of the equity interest issued or represented by the warrant to acquire 4,960,740 shares. The price for such repurchase will be the greater of (i) the product of (x) eleven times our adjusted EBITDA with respect to the twelve months preceding the exercise of the call right multiplied by (y) the investor’s percentage ownership in the company assuming full exercise of the warrant; or (ii) the fair market value of the equity interests underlying the warrant; or (iii) $3,750. In connection with Golisano LLC’s acquisition of the note payable from Penta on March 8, 2017 (see Note 6 above for additional information), the above warrants in aggregate of 5,830,358 shares were assigned to Golisano LLC.
Golisano LLC Warrants (formerly JL Warrants)
In connection with the January 22, 2015 note payable to JL, we issued JL warrants to purchase an aggregate of 2,329,400 shares of the Company’s common stock, at an aggregate exercise price of $0.01, through February 13, 2020. On February 4, 2015, we also granted to JL a warrant to acquire a total of 434,809 shares of common stock at a purchase price of $1.00 per share, through February 13, 2020. Both warrant agreements grant JL certain registration rights, commencing October 1, 2015, for the shares of common stock issuable upon exercise of the warrants. These warrants were subsequently assigned to two individuals. During the year ended December 31, 2016, these individuals exercised warrants for a total of 1,187,995 shares of the Company’s common stock for total proceeds to the Company of less than $1. In connection with Golisano LLC’s acquisition of the note payable from JL on March 8, 2017 (see Note 6 above for additional information), the remaining portions of these warrants were assigned to Golisano LLC.
Golisano LLC Warrants
Pursuant to an October 2015 securities purchase agreement with Golisano LLC, we issued Golisano LLC a warrant (the “Golisano Warrant”), which Golisano Warrant is intended to maintain, following each future issuance of shares of common stock pursuant to the conversion, exercise or exchange of certain currently outstanding warrants to purchase shares of common stock held by third-parties (the “Outstanding Warrants”), Golisano LLC’s proportional ownership of our issued and outstanding common stock so that it is the same thereafter as on October 5, 2015. We have reserved 12,697,977 shares of common stock for issuance under the Golisano Warrant. The purchase price for any shares of common stock issuable upon exercise of the Golisano Warrant is $.001 per share. The Golisano Warrant is exercisable immediately and up to and including the date which is sixty days after the later to occur of the termination, expiration, conversion, exercise or exchange of all of the Outstanding Warrants and our delivery of notice thereof to Golisano LLC. The Golisano Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets. In addition, if any payments are made to a holder of an Outstanding Warrant in consideration for the termination of or agreement not to exercise such Outstanding Warrant, Golisano LLC will be entitled to equal treatment. We have entered into a registration rights agreement with Golisano LLC, dated as of October 5, 2015, granting Golisano LLC certain registration rights for the shares of common stock issuable on exercise of the Golisano Warrant. On February 6, 2016, Golisano LLC exercised the Golisano Warrant in part for 509,141 shares of the Company’s common stock for an aggregate purchase price of $1. During the year ended December 31, 2016, the Golisano Warrant was cancelled in part for 6,857,143 shares pursuant to the cancellation of a portion of the Outstanding Warrants. As of December 31, 2018, we have reserved 4,542,219 shares of our common stock for issuance under the Golisano Warrant.
GH Warrants
In connection with the July 2018 GH Note, we issued GH a warrant to purchase an aggregate of 2,500,000 shares of the Company’s common stock at an exercise price of $0.01 per share (the "July 2018 GH Warrant"). The July 2018 GH Warrant is exercisable on any business day prior to the expiration date. The Company has reserved 2,500,000 shares of the Company’s common stock for issuance under the July 2018 GH Warrant. The July 2018 GH Warrant expires on July 27, 2024. The July 2018 GH Warrant is also subject to customary adjustments upon any recapitalization, reorganization, stock split up, combination of shares, merger or consolidation. The Company estimated the value of the warrant using the Black-Scholes option pricing model and recorded a debt discount of $1,481 which will be amortized over the term of the July 2018 GH Note. $424 of the debt discount was amortized during the year ended December 31, 2018.
In connection with the November 2018 GH Note, we issued GH a warrant to purchase an aggregate of 2,000,000 shares of the Company’s common stock at an exercise price of $0.01 per share (the "November 2018 GH Warrant"). The November 2018 GH Warrant is exercisable on any business day prior to the expiration date. The Company has reserved 2,000,000 shares of the Company’s common stock for issuance under the November 2018 GH Warrant. The November 2018 GH Warrant expires on November 4, 2024. The November 2018 GH Warrant is also subject to customary adjustments upon any recapitalization, reorganization, stock split up, combination of shares, merger or consolidation. The Company estimated the value of the warrant using the Black-Scholes option pricing model and recorded a debt discount of $1,214 which will be amortized over the term of the November 2018 GH Note. $126 of the debt discount was amortized during for the year ended December 31, 2018.
Warrants Issued into Escrow
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 1,136,363 shares of the Company’s common stock at an exercise price of $0.01 per share (the “January 2016 Golisano Warrant”). The January 2016 Golisano Warrant will not be released from escrow or be exercisable unless and until we fail to pay Golisano LLC the entire unamortized principal amount of the related promissory note and any accrued and unpaid interest thereon as of January 28, 2019 or such earlier date as is required pursuant to an Acceleration Notice (as defined in the related note agreement). We have reserved 1,136,363 shares of the Company’s common stock for issuance under the January 2016 Golisano Warrant. The January 2016 Golisano Warrant, if exercisable, expires on February 28, 2022. The January 2016 Golisano Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.
In connection with the Golisano LLC March 2016 Note, we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of 3,181,816 shares of the Company’s common stock at an exercise price of $0.01 per share (the “March 2016 Golisano Warrant”). The March 2016 Golisano Warrant will not be released from escrow or be exercisable unless and until we fail to pay Golisano LLC the entire unamortized principal amount of the related promissory note and any accrued and unpaid interest thereon as of March 21, 2019 or such earlier date as is required pursuant to an Acceleration Notice (as defined in the related note agreement). We have reserved 3,181,816 shares of the Company’s common stock for issuance under the March 2016 Golisano Warrant. The March 2016 Golisano Warrant, if exercisable, expires on March 21, 2022. The March 2016 Golisano Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.
In connection with the Golisano LLC July 2016 Note, we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of 2,168,178 shares of the Company’s common stock, at an exercise price of $0.01 per share (the “Golisano July 2016 Warrant”). The Golisano July 2016 Warrant will not be released from escrow or be exercisable unless and until we fail to pay Golisano LLC the entire unamortized principal amount of the Golisano LLC July 2016 Note and any accrued and unpaid interest thereon as of January 28, 2019 or such earlier date as is required pursuant to an Acceleration Notice (as defined in the Golisano LLC July 2016 Note). We have reserved 2,168,178 shares of the Company’s common stock for issuance under the Golisano July 2016 Warrant. The Golisano July 2016 Warrant, if exercisable, expires on July 21, 2022. The Golisano July 2016 Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.
In connection with the Golisano LLC December 2016 Note, we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of 1,136,363 shares of the Company’s common stock, at an exercise price of $0.01 per share (the “Golisano December 2016 Warrant”). The Golisano December 2016 Warrant will not be released from escrow or be exercisable unless and until we fail to pay Golisano LLC the entire unamortized principal amount of the Golisano LLC December 2016 Note and any accrued and unpaid interest thereon as of December 30, 2019 or such earlier date as is required pursuant to an Acceleration Notice (as defined in the Golisano LLC December 2016 note). We have reserved 1,136,363 shares of the Company’s common stock for issuance under the Golisano December 2016 Warrant. The Golisano December 2016 Warrant, if exercisable, expires on December 30, 2022. The Golisano December 2016 Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.
In connection with the Golisano LLC March 2017 Note, we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of 1,484,847 shares of the Company’s common stock, at an exercise price of $0.01 per share (the “Golisano March 2017 Warrant”). The Golisano March 2017 Warrant will not be released from escrow or be exercisable unless and until we fail to pay Golisano LLC the entire unamortized principal amount of the Golisano LLC March 2017 Note and any accrued and unpaid interest thereon as of December 30, 2019 or such earlier date as is required pursuant to an Acceleration Notice (as defined in the Golisano LLC March 2017 Note). We have reserved 1,484,847 shares of the Company’s common stock for issuance under the Golisano March 2017 Warrant. The Golisano March 2017 Warrant, if exercisable, expires on March 14, 2023. The Golisano March 2017 Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.
In connection with the Golisano LLC, February 2018 Note, we issued into escrow in the name of Golisano LLC a warrant to purchase an aggregate of 1,818,182 shares of the Company’s common stock at an exercise price of $0.01 per share (the "Golisano 2018 Warrant"). The Golisano 2018 Warrant will not be released from escrow or be exercisable unless and until the Company fails to pay Golisano LLC the entire unamortized principal amount of the Golisano LLC, February 2018 note and any accrued and unpaid interest thereon as of February 6, 2021, or such earlier date as is required pursuant to an acceleration notice. The Company has reserved 1,818,182 shares of the Company’s common stock for issuance under the Golisano 2018 Warrant. The Golisano 2018 Warrant expires on February 6, 2024.
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 Promissory Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of 1,136,363 shares of the Company’s common stock at an exercise price of $0.01 per share (the “January 2016 GH Warrant”). The January 2016 GH Warrant will not be released from escrow or be exercisable unless and until we fail to pay GH the entire unamortized principal amount of the January 2016 GH Promissory Note and any accrued and unpaid interest thereon as of January 28, 2019 or such earlier date as is required pursuant to an Acceleration Notice (as defined in the January 2016 GH Promissory Note). We have reserved 1,136,363 shares of the Company’s common stock for issuance under the January 2016 GH Warrant. The January 2016 GH Warrant, if exercisable, expires on February 28, 2022. The January 2016 GH Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.
In connection with a March 2016 GH Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of 3,181,816 shares of the Company’s common stock at an exercise price of $0.01 per share (the “March 2016 GH Warrant”). The March 2016 GH Warrant will not be released from escrow or be exercisable unless and until we fail to pay GH the entire unamortized principal amount of the March 2016 GH Note and any accrued and unpaid interest thereon as of March 21, 2019 or such earlier date as is required pursuant to an Acceleration Notice (as defined in the March 2016 GH Note). We have reserved 3,181,816 shares of the Company’s common stock for issuance under the March 2016 GH Warrant. The March 2016 GH Warrant, if exercisable, expires on March 21, 2022. The March 2016 GH Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.
In connection with the December 2016 GH Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of 1,136,363 shares of the Company’s common stock, at an exercise price of $0.01 per share (the “December 2016 GH Warrant”). The December 2016 GH Warrant will not be released from escrow or be exercisable unless and until we fail to pay GH the entire unamortized principal amount of the December 2016 GH Note and any accrued and unpaid interest thereon as of December 30, 2019 or such earlier date as is required pursuant to an Acceleration Notice (as defined in the December 2016 GH Note). We have reserved 1,136,363 shares of common stock for issuance under the December 2016 GH Warrant. The December 2016 GH Warrant, if exercisable, expires on December 30, 2022. The December 2016 GH Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.
In connection with the GH August 2017 Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of 1,363,636 shares of the Company’s common stock, at an exercise price of $0.01 per share (the “August 2017 GH Warrant”). The August 2017 GH Warrant will not be released from escrow or be exercisable unless and until we fail to pay GH the entire unamortized principal amount of the August 2017 GH Note and any accrued and unpaid interest thereon as of August 29, 2020 or such earlier date as is required pursuant to an Acceleration Notice (as defined in the August 2017 GH Note). We have reserved 1,363,636 shares of common stock for issuance under the August 2017 GH Warrant. The August 2017 GH Warrant, if exercisable, expires on August 30, 2023. The August 2017 GH Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets.
In connection with the GH February 2018 Secured Promissory Note, we issued into escrow in the name of GH a warrant to purchase an aggregate of 1,818,182 shares of the Company’s common stock at an exercise price of $0.01 per share (the "February 2018 GH Warrant"). The February 2018 GH Warrant will not be released from escrow or be exercisable unless and until the Company fails to pay GH the entire unamortized principal amount of the note and any accrued and unpaid interest thereon as of February 6, 2021, or such earlier date as is required pursuant to an acceleration notice. The Company has reserved 1,818,182 shares of the Company’s common stock for issuance under the February 2018 GH Warrant. The February 2018 GH Warrant expires on February 6, 2024.
JL-US Escrow Warrant
In connection with an April 5, 2016 Unsecured Promissory Note, we issued into escrow in the name of JL-US a warrant to purchase an aggregate of 227,273 shares of the Company’s common stock at an exercise price of $0.01 per share (the “JL-US Warrant”). The JL-US Warrant will not be released from escrow or be exercisable unless and until we fail to pay JL-US the entire unamortized principal amount of the JL-US Note and any accrued and unpaid interest thereon as of March 21, 2019 or such earlier date as is required pursuant to an Acceleration Notice (as defined in the JL-US Note). We have reserved 227,273 shares of the Company’s common stock for issuance under the JL-US Warrant. The JL-US Warrant, if exercisable, expires on March 21, 2022. The JL-US Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets. This warrant expired as a result of payment of the April 5, 2016 Unsecured Promissory Note in full on March 21, 2019. (See also Subsequent Events in Note 13)
Little Harbor Escrow Warrant
The LH Delayed Draw Note provides that we issue into escrow in the name of Little Harbor a warrant to purchase an aggregate of 2,168,178 shares of common stock at an exercise price of $0.01 per share (the “Little Harbor July 2016 Warrant”). The Little Harbor July 2016 Warrant will not be released from escrow or be exercisable unless and until we fail to pay Little Harbor the entire unamortized principal amount of the LH Delayed Draw Note and any accrued and unpaid interest thereon as of January 28, 2019 or such earlier date as is required pursuant to an Acceleration Notice (as defined in the LH Delayed Draw Note). We have reserved 2,168,178 shares of the Company’s common stock for issuance under the Little Harbor July 2016 Warrant. The Little Harbor July 2016 Warrant, if exercisable, expires on July 21, 2022. The Little Harbor July 2016 Warrant is also subject to customary adjustments upon any recapitalization, capital reorganization or reclassification, consolidation, merger or transfer of all or substantially all of our assets. The Little Harbor July 2016 Warrant grants Little Harbor certain registration rights for the shares of the Company’s common stock issuable upon exercise of the Little Harbor July 2016 Warrant.
NOTE 8 – DERIVATIVE LIABILITIES
We have recorded the estimated fair value of the warrants as of the date of issuance. Due to the variable terms of the warrant agreements, the warrants are recorded as derivative liabilities with a corresponding charge to our consolidated statements of operations for changes in the estimated fair value of the warrants from the date of issuance to each balance sheet reporting date. As of December 31, 2018, we have estimated the total fair value of the derivative liabilities to be $4,359 as compared to $6,791 as of December 31, 2017. We had the following activity in our derivative liabilities account since December 31, 2016:
Derivative liabilities at January 1, 2017
|
|
$
|
6,455
|
|
Loss on change in fair value of derivative liabilities
|
|
|
336
|
|
Derivative liabilities at December 31, 2017
|
|
|
6,791
|
|
|
|
|
|
|
Gain on change in fair value of derivative liabilities
|
|
|
(2,432
|
)
|
Derivative liabilities at December 31, 2018
|
|
$
|
4,359
|
|
The value of the derivative liabilities is generally estimated using an options lattice model with multiple inputs and assumptions, including the market price of the Company’s common stock, stock price volatility and other assumptions to project EBITDA and other reset events. These inputs and assumptions are subject to management’s judgment and can vary materially from period to period.
NOTE 9 – STOCKHOLDERS’ DEFICIT
Preferred Stock
The Company has authorized 500,000,000 shares of preferred stock with a par value of $0.001 per share. No shares of the preferred stock have been issued.
Twinlab Consolidation Corporation
2013
Stock Incentive Plan
The only equity compensation plan currently in effect is the Twinlab Consolidation Corporation 2013 Stock Incentive Plan (the “TCC Plan”), which was assumed by the Company on September 16, 2014. The TCC Plan originally established a pool of 20,000,000 shares of common stock for issuance as incentive awards to employees for the purposes of attracting and retaining qualified employees who will aid in the success of the Company. From January through December 2015, the Company granted restricted stock units to certain employees of the Company pursuant to the TCC Plan. Each restricted stock unit relates to one share of the Company’s common stock. The restricted stock unit awards vest 25% each annually on various dates through 2019. The Company estimated the grant date fair market value per share of the restricted stock units and is amortizing the total estimated grant date value over the vesting periods. During 2018, there were 1,202,095 shares of common stock issued to employees pursuant to the vesting of restricted stock units. As of December 31, 2018, 7,194,412 shares remain available for use in the TCC Plan.
Common Stock Repurchase
On January 5, 2017, pursuant to a repurchase agreement, 642,366 shares of the Company’s common stock were repurchased for an aggregate repurchase price of less than $1.
Stock Subscription Receivable
At December 31, 2018, the stock subscription receivable dated August 1, 2014 for the purchase of 1,528,384 shares of the Company’s common stock had a principal balance of $30 and bears interest at an annual rate of 5%.
NOTE 10 - INCOME TAXES
Income tax (provision) benefit consisted of the following for the years ended December 31, 2018 and 2017 as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
Current:
|
|
|
|
|
|
|
|
|
State
|
|
$
|
(29
|
)
|
|
$
|
(16
|
)
|
Total current expense
|
|
|
(29
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,641
|
|
|
|
(22,899
|
)
|
State
|
|
|
2,264
|
|
|
|
2,064
|
|
Change in valuation allowance
|
|
|
(5,905
|
)
|
|
|
21,794
|
|
Total deferred benefit (expense)
|
|
|
-
|
|
|
|
959
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (provision)
|
|
$
|
(29
|
)
|
|
$
|
943
|
|
The income tax benefit (provision) differs from the amount computed at federal statutory rates for the years ended December 31, 2018 and 2017 as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
Income tax benefit at statutory rate
|
|
$
|
4,280
|
|
|
$
|
10,218
|
|
|
|
|
|
|
|
|
|
|
State income taxes (net of federal benefit)
|
|
|
1,363
|
|
|
|
1,143
|
|
Interest expense
|
|
|
(264
|
)
|
|
|
(427
|
)
|
Equity-based expenses
|
|
|
383
|
|
|
|
(138
|
)
|
Adjustment to state net operating loss carryforward
|
|
|
-
|
|
|
|
(1,750
|
)
|
Adjustment to book/tax difference in asset bases
|
|
|
-
|
|
|
|
(1,599
|
)
|
Change in valuation allowance
|
|
|
(5,905
|
)
|
|
|
21,794
|
|
Tax rate change
|
|
|
159
|
|
|
|
(28,549
|
)
|
Other
|
|
|
(45
|
)
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
Income tax (provision) benefit
|
|
$
|
(29
|
)
|
|
$
|
943
|
|
Deferred tax assets are comprised of the following at December 31, 2018 and 2017:
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accruals and reserves
|
|
$
|
4,011
|
|
|
$
|
2,366
|
|
Deferred revenue
|
|
|
418
|
|
|
|
452
|
|
Net operating loss carryforwards
|
|
|
53,167
|
|
|
|
49,245
|
|
Depreciation and amortization
|
|
|
1,383
|
|
|
|
1,450
|
|
Indefinite lived intangible assets
|
|
|
271
|
|
|
|
812
|
|
Other
|
|
|
2,184
|
|
|
|
1,204
|
|
Gross deferred tax assets
|
|
|
61,434
|
|
|
|
55,529
|
|
Less: valuation allowance
|
|
|
(61,434
|
)
|
|
|
(55,529
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As a result of recurring operating losses, we have recorded a full valuation allowance against our net deferred income tax assets as of December 31, 2018 and 2017, as management was unable to conclude that it is more likely than not that the deferred income tax assets will be realized. During the years ended December 31, 2018 and 2017, the valuation allowance on deferred income tax assets increased by $5,905 and decreased by $21,794, respectively.
We had federal net operating loss carryforwards of approximately $220,000 and state net operating loss carryforwards of approximately $141,000 at December 31, 2018, which are available to reduce future federal and state taxable income. The federal and state net operating loss carryforwards expire from 2022 through 2038. If substantial changes in our ownership should occur, there would be an annual limitation of the amount of the net operating loss carryforwards which could be utilized.
We perform a review of our material tax positions in accordance with recognition and measurement standards established by authoritative accounting literature, which requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. Based upon our review and evaluation, during the years ended December 31, 2018 and 2017, we concluded that we had no unrecognized tax benefit that would affect our effective tax rate if recognized.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The legislation significantly revises the U.S. corporate income tax system by, among other things, lowering corporate income tax rates from 35% to 21%, introducing new limitations on interest expense, subjecting foreign earnings in excess of an allowable return to U.S. taxation, adopting a territorial tax regime and imposing a one-time transitional tax on deemed repatriated earnings of foreign subsidiaries.
As a result of the enactment of the Tax Act, the Company’s deferred tax assets and liabilities were revalued at the lower federal income tax rate. Because the Company is in a full valuation allowance position, no deferred tax expense related to the Tax Act was recorded.
The Company is subject to audit by the IRS and various states for tax years dating back to 2014. No federal or state tax return are currently under audit.
N
OTE 11 - COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, the Company and its subsidiaries are parties to litigation arising in the ordinary course of business operations. Such litigation primarily involves claims for personal injury, property damage, breach of contract and claims involving employee relations and certain administrative proceedings. Based on current information, we believe that the ultimate conclusion of the various pending litigation matters, in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations and cash flows and liquidity.
Leases
We have operating leases for certain factory, warehouse, office space, and machinery and equipment. Certain leases provide for payment of real estate taxes, common area maintenance, insurance and certain other expenses. Lease terms may have escalating rent provisions and rent holidays that are expensed on a straight-line basis over the term of the lease and expire at various dates through 2028. Certain rent expenditures are made on a month-to-month basis as the underlying operating lease has expired. Total rental expense for operating leases was $1,778 and $1,831 for the years ended December 31, 2018 and 2017, respectively.
The future minimum lease payments in the aggregate are as follows:
|
|
Operating
|
|
Years Ending December 31,
|
|
Leases
|
|
|
|
|
|
|
2019
|
|
$
|
2,036
|
|
2020
|
|
|
2,069
|
|
2021
|
|
|
1,933
|
|
2022
|
|
|
1,841
|
|
2023
|
|
|
1,941
|
|
Thereafter
|
|
|
7,048
|
|
|
|
|
|
|
|
|
$
|
16,868
|
|
St. Petersburg Office Lease Agreement
On April 7, 2015, we entered into an Office Lease Agreement (the "Lease") for premises in St. Petersburg, Florida (the "Building"). The term of the Lease is for twelve years, commencing on May 1, 2015 and ending on April 30, 2027.
We initially leased the fifth floor of the Building (“Initial Premises”) and were required to expand the Initial Premises to include the sixth floor of the Building (“Expansion Premises”) between February 1, 2016 and October 31, 2016, upon notice to the landlord and provided that the landlord is not obligated to deliver the Expansion Premises unless we then have a traded market capitalization of $50,000 or more for the immediately preceding thirty days prior to the date of notice (“Market Cap Test”).
On November 30, 2016, both parties agreed to delay the planned improvements for the 6th floor of the Building to allow us the opportunity to obtain potential subtenants. Additionally, both parties agreed that the Initial Premises rent commencement date occurred on May 1, 2016, the Expansion Premises commencement date occurred on October 1, 2016 and our obligation to pay rent commenced on October 1, 2016. The aggregate amount of rent to be paid over the term of the Lease is $4,466 for the Initial Premises. In the event that we lease the Expansion Premises, rent for the Expansion Premises will be paid at the same rental rate payable for the Initial Premises and, if leased by us at the earliest date available under the Lease, will result in additional payments of up to approximately $4,552 over the term of the Lease.
The Lease required us to deposit a $1,000 security deposit with the landlord, payable July 1, 2015. If on May 1, 2018 (or on any subsequent May 1st during the term of the Lease), we satisfy the Market Cap Test, the landlord is required to return the entire security deposit to the Company. On April 30, 2015, the Company and a current institutional investor and lender entered into a Reimbursement Agreement pursuant to which the investor agreed to arrange for and provide an unconditional, irrevocable, transferable, and negotiable commercial letter of credit to serve as the security deposit.
On November 30, 2016, we entered into a sublease agreement for the 5th floor of the Building with Powerchord, Inc. (“Subtenant”). The term commenced on February 1, 2017 and expires on June 30, 2022. We granted an option to renew the subleased space for the period July 1, 2022 through April 29, 2027. Subtenant will pay us an aggregate of $2,005 over the term of the agreement and an aggregate of $2,133 in the event of lease renewal. The Subtenant has delivered an irrevocable letter of credit in the amount of $100 to secure its performance under the sublease agreement. In the event Subtenant exercises its option for renewal, Subtenant must secure its performance under the renewed sublease agreement by delivering an amended Letter of Credit or a new letter of credit.
Employee Agreements
We have entered into employment agreements with certain members of management. The terms of each agreement are different. However, one or all of these agreements include stipulated base salary, bonus potential, vacation benefits, severance and non-competition agreements.
Platinum Advisory Services LLC Agreement
On December 27, 2017, we entered into an agreement for equity in exchange for services with Platinum Advisory Services LLC (“Platinum”). Pursuant to the agreement, we will issue from time to time shares of the Company’s common stock with an aggregate purchase price of $3,000 in exchange for payment in-kind consisting of the provision of media support and services performed by Platinum or its affiliates.
On June 6, 2018, the Company issued 4,166,667 shares of common stock to Platinum in accordance with the terms of the equity in exchange for services agreement that the parties entered into on December 27, 2017, wherein the Company received, or will receive, advertising services in exchange for the shares.
NOTE 12 - RELATED PARTY TRANSACTIONS
See Note 6 for discussion of notes payable to related parties Little Harbor, GH, and Golisano LLC. In addition, Little Harbor, GH, and Golisano LLC were also issued warrants to purchase shares of the Company’s common stock, as discussed in Note 7.
Also discussed in Note 6 are certain loan guarantees made jointly and severally by related party Essex and its owner, Ralph Ianelli who was a director of the company until January 22, 2018. See also Note 6 for discussion of operating leases with Essex, the 2015 purchase by Essex of certain machinery and equipment from us, and the lease back to use of same assets.
We had sales of $5,161 and $3,103 in 2018 and 2017, respectively, to an entity whose board of directors includes an individual who is also a member of the Company's board of directors. Such sales were made to this related party on the same terms that would have been obtained by an unrelated party.
NOTE 13 – SUBSEQUENT EVENTS
Debt Agreements
July 2016 Note Payable to Little Harbor, LLC
On January 28, 2019, the Company issued an amendment to the LH Delayed Draw Note extending the maturity date of this note to June 30, 2019.
January 2016 Note Payable to Great Harbor Capital, LLC
On January 28, 2019, the Company issued an amendment to the January 2016 GH Promissory Note extending the maturity date of this note to June 30, 2019.
March 2016 Note Payable to Great Harbor Capital, LLC
On January 28, 2019, the Company issued an amendment to the March 2016 GH Note extending the maturity date of this note to June 30, 2019.
January 2016 Note Payable to Golisano Holdings LLC
On January 28, 2019, the Company issued an amendment to the Golisano LLC January 2016 Note extending the maturity date of this note to June 30, 2019.
March 2016 Note Payable to Golisano Holdings LLC
On January 28, 2019, the Company issued an amendment to the Golisano LLC March 2016 Note extending the maturity date of this note to June 30, 2019.
July 2016 Note Payable to Golisano Holdings LLC
On January 28, 2019, the Company issued an amendment to the Golisano LLC July 2016 Note extending the maturity date of this note to June 30, 2019.
April 2016 Note Payable to JL-Utah Sub, LLC
In March 2019, payment of the Unsecured Promissory Note, JL-Utah Sub, LLC was satisfied in full. The subsequent warrant (Warrant 2016-25) that issued in conjunction with this note, expired as the result of payment of the note in full.
JL-Utah Sub Escrowed Warrant
This warrant (Warrant 2016-25) which was issued in conjunction with the April 2016 Note Payble to JL-Utah Sub. That note was satisfied in full on March 21, 2019. This warrant expired as the result of payment of the note in full.
Senior Credit Facility
On January 22, 2019, the Company and its direct and indirect wholly owned subsidiaries, TCC, THI, Twinlab Corporation, ISI, NutraScience, NutraScience Labs IP Corporation ("NSLIP"), Organic Holdings, Reserve Life Organics, LLC ("Reserve"), Resvitale, LLC ("Resvitale"), Re-Body, LLC ("Re-Body"), Innovitamin Organics, LLC ("Innovitamin"), Organics Management LLC ("Organics Mgmt."), Cocoawell, LLC ("Cocoawell"), Fembody, LLC ("Fembody"), Reserve Life Nutrition, L.L.C. ("Reserve Life"), Innovita Speciality Distribution, LLC ("Innovita") and Joie Essance, LLC ("Joie" and with the Company, TCC, THI, Twinlab Corporation, ISI, NutraScience, NSLIP, Organic Holdings, Reserve, Resvitale, Re-Body, Innovitamin, Organics Mgmt., Cocoawell, Fembody, Reserve Life and Innovita, collectively, the "Twinlab Companies") and MidCap entered into Amendment Sixteen to the Credit and Security Agreement (the "MidCap Sixteenth Amendment"). The MidCap Sixteenth Amendment reduced the Revolving Loan Commitment Amount (as defined in the Sixteenth Amendment) from a total of $17,000 to a total of $5,000 and extended the expiration date from January 22, 2019 to April 22, 2019. Additionally, the Company issued the Third Amended and Restated Revolving Loan Note (the “Midcap Revolver Note”) in favor of MidCap, pursuant to which MidCap will loan the Company up to a principal amount of $5,000 pursuant to the credit agreement as modified by the MidCap Sixteenth Amendment.
On February 6, 2019, the Midcap Warrant 2 expired, unexercised.
Changes in Directors
On March 27, 2019, Mr. Mark Bugge resigned from the Company’s Board of Directors.
71