Twinlab Consolidated Holdings, Inc. (the “Company”)
was incorporated on October 24, 2013 under the laws of the State of Nevada as Mirror Me, Inc. On August 7, 2014, the Company amended
its articles of incorporation and changed its name to Twinlab Consolidated Holdings, Inc.
The Company and its subsidiaries manufacture and market high-quality,
science-based nutritional supplements. The consolidated financial statements include the accounts of the Company and its wholly
owned subsidiary, Twinlab Consolidation Corporation (“TCC”); TCC’s wholly owned subsidiaries, Twinlab Holdings,
Inc. (formerly known as Idea Sphere Inc.) (“THI”), NutraScience Labs, Inc. (“NutraScience”), NutraScience
Labs IP Corporation, and Organic Holdings LLC (“Organic Holdings”); THI’s wholly owned subsidiaries, Twinlab
Corporation (sometimes referred to herein as “Twinlab”) and ISI Brands, Inc. (“ISI”); and Organic Holdings’
wholly owned subsidiaries, CocoaWell, LLC, Fembody, LLC, InnoVitamin Organics, LLC, Joie Essance, LLC, Organics Management LLC,
Re-Body, LLC, Reserve Life Organics, LLC, ResVitale, LLC, Reserve Life Nutrition, L.L.C. and Innovita Specialty Distribution LLC.
Products include vitamins, minerals, specialty supplements and
sports nutrition products primarily under the Twinlab® brand name (including the Twinlab® Fuel family of sports nutrition
products) and the Reserveage
TM
nutrition brand; diet and energy products under the Metabolife® brand name; a line
of products that promote joint health under the Trigosamine® brand name and a full line of herbal teas under the Alvita®
brand name. These products are sold primarily through health and natural food stores and national and regional drug store chains,
supermarkets, and mass-market retailers.
The condensed consolidated financial statements include the
accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
The condensed consolidated interim financial statements included
herein have been prepared by the Company in accordance with United States generally accepted accounting principles, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote
disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate
to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments,
which in the opinion of management, are necessary for fair presentation of the information contained therein. Financial results
for any interim period are not necessarily indicative of financial results that may be expected for the fiscal year. The unaudited
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes
thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on April
14, 2016.
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 and the estimated value of warrants and derivative liabilities.
Certain amounts in the 2015 consolidated financial statements
have been reclassified to conform with the current year presentation.
Sales to the Company’s top three customers aggregated
to approximately 24% and 37% of total sales for the three months ended March 31, 2016 and 2015, respectively. Sales to one of those
customers were approximately 12% and 26% of total sales for the three months ended March 31, 2016 and 2015, respectively. Accounts
receivable from these customers were approximately 35% and 24% of total accounts receivable as of March 31, 2016 and December 31,
2015, respectively.
The Company applies 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 the financial instruments of
the Company measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015:
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 share equivalents then outstanding. Potential dilutive common share equivalents consist of 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 income (loss) per share are reconciled as follows:
In February 2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)”. The amendments in this ASU
revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability
and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions
primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for public
companies for fiscal years beginning after December 15, 2018 and are to be applied through a modified retrospective transition
approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements. Early adoption is permitted. We have not yet determined the impact on our consolidated financial statements of the
adoption of this new accounting pronouncement.
In March 2016, the FASB issued ASU No. 2016-09, “Stock
Compensation (Topic 718)”, which is intended to simplify several aspects of the accounting for share-based payment award
transactions, including the income tax impacts, the classification on the statement of cash flows, and forfeitures. The amendments
in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods. We have not yet determined
the impact on our consolidated financial statements of the adoption of this new accounting pronouncement.
Although there are several other new accounting pronouncements
issued or proposed by the FASB, which the Company has 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.
The accompanying condensed consolidated financial statements
have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liabilities in
the ordinary course of business. Since its formation, the Company has generated losses from operations. At March 31, 2016, the
Company had an accumulated deficit of $222,469. These losses were associated with start-up activities and brand and infrastructure
development. Recently, 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, restructuring costs and
interest. Losses have been funded primarily through issuance of common stock, borrowings from our stockholders and third-party
debt.
Because of this history of operating losses, significant interest
expense on the Company’s debt, and the recording of significant derivative liabilities, the Company has a working capital
deficiency of $26,290 at March 31, 2016. The Company also has significant debt due within the next 12 months. These continuing
conditions raise substantial doubt about the Company's 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. During the three months ended March 31, 2016
and in April 2016, the Company obtained debt funding totaling $19,500 to fund current operations. However, the Company believes
that it may need additional capital to execute its 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.
Assets held under capital leases are included in machinery and
equipment and amounted to $1,493 and $1,737 as of March 31, 2016 and December 31, 2015, respectively.
Depreciation and amortization expense totaled $184 and $121
for the three months ended March 31, 2016 and 2015, respectively.
In 2013, the Company entered into a sale-leaseback arrangement
relating to its office facilities. Under the terms of the arrangement, the Company sold an office building and surrounding land
and then leased the property back under a 15-year operating lease. The Company 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.
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 $506 and $155 for the three months ended March 31, 2016 and 2015, respectively.
NOTE 6 – DEBT
Debt consisted of the following at:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Related-Party
Debt:
Note payable to Little Harbor, LLC, a related party, unsecured, with an imputed
interest rate of 16.2%, maturing through July 25, 2017
|
|
$
|
6,615
|
|
|
$
|
6,615
|
|
|
|
|
|
|
|
|
|
|
Related-Party Debt:
Note payable to GREAT HARBOR CAPITAL, LLC, a related party, unsecured, with an interest
rate of 8.5%, maturing through January 28, 2019
|
|
|
2,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Related-Party Debt:
Note payable to GREAT HARBOR CAPITAL, LLC, a related party, unsecured, with an interest
rate of 8.5%, maturing through March 21, 2019
|
|
|
7,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Related-Party Debt:
Note payable to Golisano Holdings LLC, a related party, unsecured, with an interest
rate of 8.5%, maturing through January 28, 2019
|
|
|
2,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Related-Party Debt:
Note payable to Golisano Holdings LLC, a related party, unsecured, with an interest
rate of 8.5%, maturing through March 21, 2019
|
|
|
7,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Senior Credit Facility:
Revolving $15,000 asset-based credit facility payable to Midcap Funding X Trust, with
an interest rate equal to LIBOR plus 5% and expiring on January 22, 2018, net of discount of $512 and $586, respectively
|
|
|
8,213
|
|
|
|
9,263
|
|
|
|
|
|
|
|
|
|
|
Notes Payable:
Notes payable to Penta Mezzanine SBIC Fund I, L.P., with interest rate of 12%, maturing in November 2019, net of discount
of $3,168 and $3,389, respectively
|
|
|
6,832
|
|
|
|
6,612
|
|
|
|
|
|
|
|
|
|
|
Note Payable:
Note payable to JL-BBNC Mezz Utah, LLC, with interest rate of 12%, maturing in February 2020, net of discount of $3,430 and
$3,658, respectively
|
|
|
1,571
|
|
|
|
1,342
|
|
|
|
|
|
|
|
|
|
|
Vendor Term Notes:
Unsecured loans payable to vendors with interest rates ranging from 5% to 7.5% and maturity
dates of April 21, April 29, and June 15, 2016
|
|
|
709
|
|
|
|
1,475
|
|
|
|
|
|
|
|
|
|
|
Capital Lease Obligations:
Capital leases with interest rates ranging from 10.25% to 10.50% and maturity dates
ranging from October 2016 to July 2017, secured by certain manufacturing equipment, net of discount of $454 and $496, respectively
|
|
|
3,479
|
|
|
|
3,868
|
|
|
|
|
|
|
|
|
|
|
Note
Payable:
Unsecured note payable issued in connection with the Nutricap asset acquisition,
repaid in 2016
|
|
|
-
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
46,419
|
|
|
|
29,425
|
|
Less
current portion
|
|
|
(16,271
|
)
|
|
|
(16,564
|
)
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
30,148
|
|
|
$
|
12,861
|
|
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, the Company is obligated pay
such party $4,900 per year in structured monthly payments for 3 years provided that such payment obligations will terminate at
such earlier time as the trailing ninety day volume weighted average closing sales price of the Company’s common stock on
all domestic securities exchanges on which such stock is listed equals or exceeds $5.06 per share. Pursuant to a stock purchase
agreement with Little Harbor in June 2015, the Company issued shares of its common stock in lieu of $2,500 worth of periodic payments
due under this agreement.
GREAT HARBOR CAPITAL, LLC
Pursuant to a January 28, 2016 Unsecured Promissory Note with
GREAT HARBOR CAPITAL, LLC (“GH”), an affiliate of a member of the Company’s Board of Directors, GH lent the Company
$2,500. The note matures on January 28, 2019, bears interest at an annual rate of 8.5%, with the principal payable in 24 monthly
installments of $104 commencing on February 28, 2017. The Company issued warrants into escrow in connection with this loan. (see
Note 7 below).
Pursuant to a March 21, 2016 Unsecured Promissory Note, GH lent
the Company $7,000. The note matures on March 21, 2019, bears interest at an annual rate of 8.5%, with the principal payable in
24 monthly installments of $292 commencing on April 21, 2017. The Company issued warrants into escrow in connection with this loan.
(see Note 7 below).
Golisano Holdings LLC
Pursuant to a January 28, 2016 Unsecured Promissory Note
with Golisano Holdings LLC (“Golisano LLC”), an affiliate of a member of the Company’s Board of Directors,
Golisano LLC lent the Company $2,500. The note matures on January 28, 2019, bears interest at an annual rate of 8.5%, with
the principal payable in 24 monthly installments of $104 commencing on February 28, 2017. The Company issued warrants into
escrow in connection with this loan. (see Note 7 below).
Pursuant to a March 21, 2016 Unsecured Promissory Note, Golisano
LLC lent the Company $7,000. The note matures on March 21, 2019, bears interest at an annual rate of 8.5%, with the principal
payable in 24 monthly installments of $292 commencing on April 21, 2017. The Company issued warrants into escrow in connection
with this loan. (see Note 7 below).
Midcap Funding X Trust
On January 22, 2015, the Company paid off all amounts owed under
its credit facility with Fifth Third Bank and entered into a new three-year $15,000 revolving credit facility (the “Senior
Credit Facility”) based on the Company’s accounts receivable and inventory, increasable to up to $20,000, with MidCap
Financial Trust, which assigned the agreement to an affiliate, Midcap Funding X Trust (“MidCap”), on January 23, 2015.
The Company (i) granted MidCap a first priority security interest in certain of its assets and (ii) pledged the shares of its subsidiaries
as security for amounts owed under the credit facility. The Company is required to pay Midcap an unused line fee of 0.042% per
month and a collateral management fee of 0.10% per month. The Company issued warrants in connection with this loan (see Note 7
below).
Penta Mezzanine SBIC Fund I, L.P.
On November 13, 2014, the Company raised proceeds of $8,000,
less certain fees and expenses, from the issuance of a note to Penta Mezzanine SBIC Fund I, L.P. (“Penta”), an institutional
investor. The note matures on November 13, 2019 with payments of principal due on a quarterly basis commencing November 13, 2017
in installments starting at $360 per quarter and increasing to $520 per quarter. Interest at an original rate of 12% is payable
monthly from November 30, 2014. The Company (i) granted Penta a security interest in the Company’s assets and (ii) pledged
the shares of its subsidiaries as security for the note. Penta also agreed to purchase from the Company an additional note in the
amount of $2,000, no later than November 13, 2015. The Company issued warrants in connection with this loan (see Note 7 below).
On February 6, 2015, the Company raised proceeds of $2,000,
less certain fees and expenses, from Penta. The proceeds were restricted to pay a portion of the acquisition of the customer relationships
of Nutricap. This note matures on November 13, 2019 with payments of principal due on a quarterly basis from November 13, 2017
in installments of $90 per quarter and increasing to $130 per quarter. Interest at an original rate of 12% is payable monthly commencing
on February 28, 2015. The Company issued warrants in connection with this loan (see Note 7 below).
Pursuant to a June 2015 stock purchase agreement with Penta,
the Company issued shares of its common stock in lieu of $613 worth of interest payments due under these agreements.
JL-BBNC Mezz Utah, LLC
On January 22, 2015, the Company raised proceeds of $5,000,
less certain fees and expenses, from the sale of a note to JL-BBNC Mezz Utah, LLC (“JL”). The proceeds were restricted
to pay a portion of the Nutricap Labs, LLC (“Nutricap”) asset acquisition. The note matures on February 13, 2020 with
payments of principal due on a quarterly basis commencing March 1, 2017 in installments starting at $250 per quarter and increasing
to $350 per quarter. Interest is payable monthly from February 2, 2015. The Company (i) granted JL a security interest in the Company’s
assets, including real estate and (ii) pledged the shares of its subsidiaries as security for the note. The Company issued warrants
in connection with this loan (see Note 7 below). Pursuant to a June 2015 stock purchase agreement with JL, the Company issued shares
of its common stock in lieu of $307 worth of interest payments due under this agreement.
Nutricap Asset Acquisition Notes and Essex Capital Corporation
Payment Guarantee
The short-term notes payable issued in the Nutricap asset acquisition
included a promissory note of $2,500 bearing interest at a rate of 6% per annum and maturing 60 days after the closing of the acquisition
and a promissory note of $1,478 bearing interest at a rate of 3% per annum, payable in 12 equal monthly installments of principal
and interest commencing in February 2015. On June 30, 2015, NutraScience and Nutricap entered into an Amended and Restated Promissory
Note (the “Nutricap Note”) in the original principal amount of $2,750, representing the original principal amount of
$2,500 plus a late fee of $250, with a maturity date of January 1, 2016. The Nutricap Note was repaid during the three months ended
March 31, 2016. As a condition to the extension provided in the Nutricap Note, Nutricap required that payment be guaranteed by
TCC and also, jointly and severally, by Essex Capital Corporation, a California corporation (“Essex”), a related party,
and its owner Ralph Iannelli (“Iannelli”), a related party and a director of the Company. Accordingly, on June 30,
2015, TCC entered into a Payment Guaranty with Nutricap (the “TCC Guaranty”), and Essex and Iannelli, jointly and severally,
entered into a Payment Guaranty with Nutricap (the “Essex Guaranty”), with both the TCC Guaranty and the Essex Guaranty
guaranteeing payment in full to Nutricap of all amounts as and when due by NutraScience under the Nutricap Note, including payment
in full of all amounts due and owing upon maturity, as well as any costs of enforcement incurred by Nutricap in connection therewith.
On June 30, 2015, Twinlab entered into a bill of sale with Essex
pursuant to which Twinlab sold certain machinery and equipment associated with Twinlab’s manufacturing operations in American
Fork, Utah to Essex for an aggregate purchase price of $2,900 in exchange for (i) Essex’s agreement to enter into the Essex
Guaranty described above, and (ii) Essex’s agreement, in addition to simply providing the Essex Guaranty, to in fact make
all payments to Nutricap as and when due under the Nutricap Note, including payment in full of all amounts due and owing at maturity
thereof, thus extinguishing the Nutricap Note of $2,750. On the same date, Twinlab leased the same machinery and equipment back
from Essex, pursuant to two 36-month commercial lease agreements requiring monthly lease payments by Twinlab of $89 and $5, respectively.
On December 30, 2015, the Company consolidated these two leases
into a single lease with a new 36-month term and requiring monthly payments of $96. The Company received $496 of additional consideration
for this consolidation, amendment and extension of the initial lease.
Certain of the foregoing debt agreements, as amended, require
the Company to meet certain affirmative and negative covenants, including maintenance of specified ratios. As of March 31, 2016,
the Company was not in compliance with the financial covenants of its debt facilities with Midcap, Penta and JL; however, the Company
has obtained waivers from the respective lenders for such defaults.
NOTE 7 – WARRANTS AND REGISTRATION RIGHTS AGREEMENTS
A summary of the status of the warrants issued by the Company
as of March 31, 2016, and changes during the three months then ended, is presented below:
|
|
|
|
|
Weighted
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
28,286,507
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Canceled / Expired
|
|
|
(4,000,000
|
)
|
|
$
|
0.76
|
|
Exercised
|
|
|
(1,187,995
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2016
|
|
|
23,098,512
|
|
|
$
|
0.52
|
|
Capstone Warrants
In May 2015, the Company and Capstone Financial Group, Inc.
(“Capstone”) entered into an amendment to a previously issued Series B Warrant, with the following warrants outstanding
as of March 31, 2016: Tranche 3 consisting of 6,000,000 shares exercisable at $0.76 per share through July 31, 2016 and Tranche
4 consisting of 6,000,000 shares exercisable at $0.76 per share through November 30, 2016. Tranche 2 warrants for 4,000,000 shares
expired March 31, 2016.
The Company and Capstone previously entered into a Registration
Rights Agreement pursuant to which Capstone can require the Company to register the shares of common stock acquired upon exercise
of the Series B Warrant at such time as the Company is eligible to register securities on a Registration Statement on Form S-3
and thereafter file additional registration statements if requested by Capstone on a quarterly basis. The Registration Agreement
contains terms and conditions customary for the grant of registration rights.
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 the Company,
the Company also granted Penta a warrant to acquire a total of 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
the Company 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 the Company’s adjusted EBITDA with respect
to the twelve months preceding the exercise of the put right times (y) the investor’s percentage ownership in the Company
assuming full exercise of the warrant; or (ii) the fair market value of the investor’s equity interest underlying the warrant.
In the event (i) the Company does 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.
The Company has the right, under certain circumstances, to require
Penta to sell to the Company 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 the Company’s adjusted EBITDA
with respect to the twelve months preceding the exercise of the call right times (y) the investor’s percentage ownership
in the Company assuming full exercise of the warrant; or (ii) the fair market value of the equity interests underlying the warrant;
or (iii) $3,750.
Pursuant to a Stock Purchase Agreement dated June 30, 2015,
a warrant was issued to Penta to purchase an aggregate 807,018 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. The Company granted Penta certain registration rights, commencing
October 1, 2015 for the shares of common stock issuable upon exercise of the warrant.
Midcap Warrants
In connection with the line of credit agreement with MidCap
described in Note 6, the Company 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”). The Company and
MidCap have entered into a Registration Rights Agreement, dated as of January 22, 2015, granting MidCap certain registration rights,
commencing October 1, 2015, for the shares of common stock issuable on exercise of the MidCap Warrant.
JL Warrants
In connection with the January 22, 2015 note payable to JL,
the Company 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, the Company 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 three months ended March 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 $0.
Pursuant to a June 30, 2015 Stock Purchase Agreement, a warrant
was issued to JL to purchase an aggregate 403,509 shares of the Company’s common stock at a price of $0.01 per share at any
time prior to the close of business on June 30, 2020, subject to certain adjustments. The Company granted JL certain registration
rights, commencing October 1, 2015, for the shares of common stock issuable upon exercise of the warrant. The warrant was subsequently
assigned by JL to two individuals.
JL Properties, Inc. Warrants
In April 2015, the Company entered into an office lease agreement
which requires a $1,000 security deposit, subject to reduction if the Company achieves certain market capitalization metrics at
certain dates. On April 30, 2015, the Company and JL Properties, Inc. (“JL Properties”) entered into a Reimbursement
Agreement 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, the Company 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 the
Company’s assets or property, the number of shares of common stock issuable pursuant to the warrant will be increased in
the event the Company’s consolidated audited Adjusted EBITDA (as defined in the warrant agreement) for the fiscal year ending
December 31, 2018 does not equal or exceed $19,250. JL Properties subsequently assigned the warrant to two individuals.
The second warrant is exercisable for an aggregate of 86,962
shares of common stock, at a per share purchase price of $1.00, at any time prior to April 30, 2020. The number of shares issuable
upon exercise of the second warrant is subject to adjustment on terms and conditions customary for a transaction of this nature
in the event of (i) reorganization, recapitalization, stock split-up, combination of shares, mergers, consolidations and (ii) sale
of all or substantially all of the Company’s assets or property.
The Company has granted JL Properties certain registration rights,
commencing October 1, 2015, for the shares of common stock issuable on exercise of the two warrants.
Essex Warrants
In connection with the guarantee of the Nutricap Note 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 the Company’s assets or property. Essex subsequently assigned warrants for 350,649
shares to another company.
Golisano Warrants
Pursuant to an October 2015 Securities Purchase Agreement with
Golisano LLC, the Company 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 the Company’s issued and outstanding common stock so that it is the same thereafter
as on October 5, 2015. The Company has reserved 12,697,977 shares of its 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 the Company’s 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 the assets of the Company. 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.
The Company and Golisano LLC have entered into a Registration Rights Agreement, dated as of October 5, 2015, granting Golisano
LLC certain registration rights for the shares of common issuable on exercise of the Golisano Warrant.
On February 4, 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 three months ended March 31, 2016, the Golisano Warrant
was cancelled in part for 1,714,286 shares pursuant to the cancellation of a portion of the Outstanding Warrants.
In connection with a January 28, 2016 Unsecured Promissory Note,
the Company 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 the Company fails 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). The Company has reserved 1,136,363
shares of its 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 the assets of the
Company.
In connection with a March 21, 2016 Unsecured Promissory Note,
the Company 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 the Company fails 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). The Company has reserved 3,181,816
shares of its 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 the assets of the
Company.
GH Warrants
In connection with a January 28, 2016 Unsecured Promissory Note,
the Company 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 the Company fails to pay GH the entire unamortized principal amount
of the related promissory note and any accrued and unpaid interest thereon as of January 28, 2019 or such earlier date as is required
pursuant to an Acceleration Notice (as defined in the related note agreement). The Company has reserved 1,136,363 shares of its
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 the assets of the Company.
In connection with a March 21, 2016 Unsecured Promissory Note,
the Company 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 the Company fails to pay GH the entire unamortized principal amount
of the related promissory note and any accrued and unpaid interest thereon as of March 21, 2019 or such earlier date as is required
pursuant to an Acceleration Notice (as defined in the related note agreement). The Company has reserved 3,181,816 shares of its
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 the assets of the Company.
NOTE 8 – DERIVATIVE LIABILITIES
The number of shares of common stock issuable pursuant to certain
warrants issued in 2015 will be increased if the Company’s audited adjusted earnings before interest, taxes, depreciation
and amortization (“EBITDA”) or the market price of the Company’s common stock do not meet certain defined amounts.
The Company has recorded these warrants as derivative liabilities due to the variable terms of the warrant agreements. Accordingly,
the Company has estimated the total fair value of the derivative liabilities at $18,126 as of March 31, 2016.
During the three months ended March
31, 2016, the Company had the following activity in its derivative liabilities account:
Derivative liabilities at December 31, 2015
|
|
$
|
33,091
|
|
Exercise of warrants
|
|
|
(1,974
|
)
|
Gain on change in fair value of derivative liabilities
|
|
|
(12,991
|
)
|
|
|
|
|
|
Derivative liabilities at March 31, 2016
|
|
$
|
18,126
|
|
The value of the derivative liabilities
is generally estimated using an options lattice model with multiple inputs and assumptions, including the market price of the Company’s
common stock, stock price volatility and other assumptions to project EBITDA and other reset events. These inputs and assumptions
are subject to management’s judgment and can vary materially from period to period.
NOTE 9 – STOCKHOLDERS’ DEFICIT
Preferred Stock
The Company has authorized 500,000,000 shares of preferred stock
with a par value of $0.001 per share. No shares of the preferred stock have been issued.
Twinlab Consolidation Corporation 2013 Stock Incentive Plan
The only equity compensation plan currently in effect is the
Twinlab Consolidation Corporation 2013 Stock Incentive Plan (the “TCC Plan”), which was assumed by the Company on September
16, 2014. The TCC Plan originally established a pool of 20,000,000 shares of common stock for issuance as incentive awards to employees
for the purposes of attracting and retaining qualified employees who will aid in the success of the Company. From January through
December 2015, the Company granted Restricted Stock Units to certain employees of the Company pursuant to the TCC Plan. Each Restricted
Stock Unit relates to one share of the Company’s common stock. The Restricted Stock Unit awards vest 25% each annually on
various dates through 2019. The Company estimated the grant date fair market value per share of the Restricted Stock Units and
is amortizing the total estimated grant date value over the vesting periods. During the three months ended March 31, 2016, a total
of 21,778 shares of common stock were issued to employees pursuant to the vesting of Restricted Stock Units. As of March 31, 2016, 5,899,884 shares remain available for use in the TCC Plan.
Separation and Release Agreement
The employment of Thomas A. Tolworthy as President and Chief
Executive Officer of the Company was terminated by the Company on March 16, 2016. On March 23, 2016, the Company and Mr. Tolworthy
entered into a Separation and Release Agreement (the “Separation Agreement”). Pursuant to the Separation Agreement,
the Company purchased from Mr. Tolworthy 35,551,724 shares of the Company’s common stock for an aggregate price of $500.
In connection with the Separation Agreement, Mr. Tolworthy also
surrendered 9,306,898 shares of the Company’s common stock pursuant to that certain Surrender Agreement between Mr. Tolworthy
and the Company, dated September 3, 2014.
Treasury Stock
During the three months ended March 31, 2016, the Company purchased
an aggregate of 2,559,388 shares of its common stock from employees or former employees for total cash consideration of $1, equal
to the employees’ original purchase price. These shares were unvested restricted shares previously acquired by the employee
under the TCC Plan and have been placed in treasury. Treasury shares acquired during the three months ended March 31, 2016 also
include shares of the Company’s common stock purchased by the Company and surrendered by Mr. Tolworthy pursuant to the Separation
Agreement discussed above.
Warrant Exercises
As discussed in Note 7, the Company 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. JL subsequently assigned the warrants to three individuals and a corporation. On February 4, 2016, one individual exercised
warrants to acquire a total of 930,538 shares of the Company’s common stock for an aggregate purchase price of $0. On February
4, 2016, another individual exercised warrants to acquire a total of 257,457 shares of the Company’s common stock for an
aggregate purchase price of $0.
As discussed in Note 7, warrants were exercised for a total
of 1,697,136 shares of the Company’s common stock for an aggregate purchase price of $1, including the warrant exercises
discussed in the paragraph above and warrants exercised by Golisano LLC for a total of 509,141 shares of the Company’s common
stock.
Stock Subscription Receivable
At March 31, 2016, the stock subscription receivable dated August
1, 2014 for the purchase of 1,528,384 shares of the Company’s common stock had a principal balance of $30 and bears interest
at an annual rate of 5%. On the 18-month anniversary of the closing of the share purchase, the Company must 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 a valuation performed during the three months ended March 31, 2016, the Company
estimated the total loss on the stock purchase price guarantee and recorded a liability included in accrued expenses and other
current liabilities at March 31, 2016 of $3,210.
NOTE 10 – SUBSEQUENT EVENTS
Issuance of Common Shares
On April 5, 2016, the Company issued a total of 800,952 shares
of its common stock to employees pursuant to the vesting of Restricted Stock Units.
JL-Utah Sub, LLC Note and Warrant
On April 5, 2016, JL-Utah Sub, LLC (“JL-US”) lent
the Company $500 pursuant to an Unsecured Promissory Note (the “JL-US Note”). The JL-US Note matures on March 21, 2019.
Interest on the outstanding principal accrues at a rate of 8.5% per year. The principal of the JL-US Note is payable in 24 monthly
installments of $21 commencing on April 21, 2017. The JL-US Note provides that the Company issue 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 the Company
fails 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). The Company
has reserved 227,273 shares of its common stock for issuance under the JL-US Warrant. The JL-US Warrant, if exercisable, expires
on March 21, 2022.