TWINLAB CONSOLIDATED HOLDINGS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which was filed with theSecurities and Exchange Commission (the "SEC") onMay 29, 2020 . This discussion and analysis and other parts of this Quarterly Report contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Any statements contained herein that are not statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position made in this report are forward-looking. We often use words such as anticipates, believes, estimates, expects, intends, predicts, hopes, should, plans, will and similar expressions to identify forward-looking statements. These statements are based on management's current expectations and accordingly are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained herein due to various important factors, including (but not limited to): the impact of the COVID pandemic; consumer preferences, spending and debt levels; the general economic and credit environment; interest rates; variations in consumer purchasing activities; competitive pressures on sales; the loss of a significant customer or material reduction of business with a significant customer; pricing and gross sales margins; the associated fees or estimated cost savings from contract renegotiations; and our ability to establish and maintain acceptable commercial terms with contract manufacturers. We undertake no obligation to publicly update or revise any forward-looking statements except as required by law. Overview We are an integrated 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 primarily under the Twinlab® (including the REAAL®, and Twinlab® Fuel brand of sports nutrition products), Reserveage™ and ResVitale® brands. We also manufacture and sell diet and energy products under the Metabolife® and Re-Body® brands and a full line of herbal teas under the Alvita® brand. To accommodate consumer preferences, our products come in various formulations and delivery forms, including capsules, tablets, soft gels, chewables, liquids, sprays, powders and whole herbs. These products are sold primarily through health and natural food stores and on-line retailers, supermarkets, and mass-market retailers.
We also perform contract manufacturing services for private label products. Our contract manufacturing services business involves the manufacture of custom products to the specifications of a customer who requires finished products under the customer's own brand name. We do not market these private label products as our business is to sell the products to the customer, who then markets and sells the products to retailers or end consumers.
We distribute one of the broadest branded product lines in the industry with approximately 260 stock keeping units, or SKUs. We believe that as a result of our emphasis on innovation, quality, loyalty, education and customer service, our brands are widely recognized in health and natural food stores and among their customers. In most periods since our formation, we have generated losses from operations. As ofSeptember 30, 2020 , we had an accumulated deficit of$327,251 . Historical losses are primarily attributable to lower than planned sales resulting from low fill rates on demand due to limitations of our working capital, delayed product introductions and postponed marketing activities, merger-related and other restructuring costs, and interest and refinancing charges associated with our debt. Losses have been funded primarily through the issuance of common stock, warrants and third-party or related party debt. Because of this history of operating losses, significant interest expense on our debt, and the recording of significant derivative liabilities, we have a working capital deficiency of$108,638 as ofSeptember 30, 2020 . We also have$96,142 of debt, net of discount, presented in current liabilities. These continuing conditions, among others, raise substantial doubt about our ability to continue as a going concern. 24
-------------------------------------------------------------------------------- It is possible that we may need additional capital to execute our business plan. If additional funding is required, there can be no assurance that sources of funding will be available when needed on acceptable terms or at all. To meet capital requirements, the Company may consider selling certain assets or seeking financing through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing agreements. Results of Operations
Comparison of the Three and Nine Month Periods Ended
The following table summarizes our results of operations for the three and nine
month periods ended
Three Months Ended Nine Months Ended
September 30, Increase % September 30, Increase %
2020 2019 (Decrease) Change 2020 2019 (Decrease) Change
Net sales $ 18,371 $ 19,851 $ (1,480 ) -7 % $ 47,012 $ 57,558 $ (10,546 ) -18 %
Cost of sales 14,669 18,188 (3,519 ) -19 % 35,322 48,227 (12,905 ) -27 %
Gross profit 3,702 1,663 2,039 123 % 11,690 9,331 2,359 25 %
Operating costs
and expenses:
Selling expenses 420 1,300 (880 ) -68 % 1,044 1,412 (368 ) -26 %
General and
administrative
expenses 2,981 4,198 (1,217 ) -29 % 12,567 16,933 (4,366 ) -26 %
Income (loss) from
operations 301 (3,835 ) 4,136 108 % (1,921 ) (9,014 ) 7,093 79 %
Other income
(expense):
Interest expense,
net (2,183 ) (2,154 ) 29 1 % (6,489 ) (7,580 ) (1,091 ) -14 %
Gain (loss) on
change in
derivative
liabilities 178 2,789 (2,611 ) -94 % 35 474 (439 ) -93 %
Other expense (148 ) (16 ) 132 825 % (3 ) (36 ) (33 ) -92 %
Loss on
disposition of
property and
equipment - - - 0 % - (386 ) 386 100 %
Total other income
(expense) (2,153 ) 619 (2,772 ) -448 % (6,457 ) (7,528 ) 1,071 14 %
Loss before income
taxes (1,852 ) (3,216 ) (1,364 ) -42 % (8,378 ) (16,542 ) (8,164 ) -49 %
Provision for
income taxes - - - -
Total net loss
Net Sales The decrease in our net sales by 7% and 18% for the three and nine month periods endedSeptember 30, 2020 compared to the same periods in 2019, respectively, is primarily due to our focusing on fewer inventory SKUs and changing customer base, as well as the impacts of the COVID-19 pandemic. Gross Profit Our overall gross profit increase of 123% and 25% for the three and nine month periods endedSeptember 30, 2020 compared to the same periods in 2019, respectively, was primarily due to a focus on fewer SKUs with higher margins offset by shifts in the margin mix of sales. Selling Expenses
Our selling expenses decreased by 68% and 26% for the three and nine month
periods ended
General and Administrative Expenses
Our general and administrative expenses decreased by 29% and 26% for the three and nine month periods endedSeptember 30, 2020 compared to the same period in 2019, respectively, due to the Company's rightsizing initiatives. 25 --------------------------------------------------------------------------------
Interest Expense, Net Our interest expense was relatively unchanged with a$29 or 1% increase for the three months endedSeptember 30, 2020 compared to the same prior year period. On a year-to-date basis, our interest expense decreased by$1.1 million , or 14%, for the nine months endedSeptember 30, 2020 compared to the same period in 2019. The decrease is primarily due to debt reductions in 2020 compared to increased debt in the first quarter of 2019, including the payoff of theHuntington Holdings debt, as well as extension of the debt maturities, which decreased the monthly amount of interest recognized from debt discount amortization.
Gain (Loss) on Change in Derivative Liabilities
We have recorded the estimated fair value of the warrants as of the date of issuance. Due to the variable terms of the warrant agreements, changes in the estimated fair value of the warrants from the date of issuance to each balance sheet reporting date are recorded as derivative liabilities with a corresponding charge to our condensed consolidated statements of operations. As ofSeptember 30, 2020 , none of the warrants that resulted in the recording of the related derivative liabilities is outstanding.
Liquidity and Capital Resources
AtSeptember 30, 2020 , we had an accumulated deficit of$327.3 million primarily because of our history of operating losses and our recording of derivative liabilities and loss on stock purchase guarantee. We have a working capital deficiency of$108,638 atSeptember 30, 2020 . Losses have been funded primarily through the issuance of common stock and warrants, borrowings from our stockholders and third-party debt and proceeds from the exercise of warrants. As ofSeptember 30, 2020 , we had cash of$877 . On an ongoing basis, we also seek to improve operating cash through trade receivables and payables management as well as inventory stocking levels. We used net cash in operating activities of$4,408 for the nine months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2020 , we incurred a net borrowings from our senior credit facility of$671 and debt repayment of$2,310 . Our total liabilities increased by$14.5 million to$132.6 million atSeptember 30, 2020 from$118.1 million atDecember 31, 2019 . This increase in our total liabilities was primarily due to the increase of$5.8 million in notes payable and$5.5 million in lease liabilities with the adoption of ASC 842.
Cash Flows from Operating, Investing and Financing Activities
Net cash used in operating activities was$4.4 million for the nine months endedSeptember 30, 2020 as a result of our net loss of$8.4 million , a recovery for losses on accounts receivable of$3,251 in doubtful accounts receivable, a non-cash gain on change in derivative liabilities of$35 , other non-cash expenses totaling$1,981 net and an increase in net operating assets and liabilities of$5,275 . By comparison, for the nine months endedSeptember 30, 2019 , net cash used in operating activities was$7.7 million as a result of our net loss of$16.5 million , a provision for losses on accounts receivable of$2,700 , a non-cash gain on change in derivative liabilities of$474 , a loss on disposal of property and equipment of$386 , other non-cash expenses totaling$3,087 net and an increase in net operating assets and liabilities of$3,121 . Net cash provided by financing activities was$5,035 for the nine months endedSeptember 30, 2020 , consisting of net borrowings of$671 under our revolving credit facility, proceeds from the issuance of debt of$6,674 , and repayment of debt of$2,310 . Ongoing Funding Requirements As set forth above, we obtained additional debt financing in the nine months endedSeptember 30, 2020 to support operations. It is possible that we may need additional funding to enable us to fund our operating expenses and capital expenditure requirements. 26
-------------------------------------------------------------------------------- In response to COVID-19 and to protect our liquidity and cash position, we have taken a number of steps. In August of 2020, we obtained deferment letters from each ofGreat Harbor ,Little Harbor andGolisano Holdings pursuant to which each lender agreed to defer all payments due under outstanding notes held by each lender throughOctober 22, 2021 and agreed to refrain from declaring a default and/or exercising any remedies under the outstanding notes. OnMay 7, 2020 , TCC, the operating subsidiary of the Company, received the proceeds of a loan fromFifth Third Bank , National Association in the amount of$1,674 obtained under the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which was enactedMarch 27, 2020 (the "PPP Loan"). The PPP Loan, evidenced by a promissory note datedMay 5, 2020 (the "Note"), has a two-year term and bears interest at a rate of 1.0% per annum, with the monthly principal and interest payments due beginningDecember 1, 2020 . TCC may prepay 20% or less of the principal balance of the Note at any time without notice. TCC will use the proceeds of the PPP Loan for payroll, office rent, and utilities. While we intend to pursue the forgiveness of the PPP loans received in accordance with the requirements and limitations under the CARES Act, no assurance can be provided that forgiveness of any portion of the PPP Loan will be obtained. Until such time, if ever, as we can generate substantial product revenues, we intend to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. There can be no assurance that any of those sources of funding will be available when needed on acceptable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or relationships with third parties when needed or on acceptable terms, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts; abandon our business strategy of growth through acquisitions; or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any
off-balance sheet arrangements, as defined under applicable
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