TWINLAB CONSOLIDATED HOLDINGS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the ''Risk Factors'' section of this Annual Report on Form 10-K, our actual results could differ materially from the results described, in or implied, by these forward-looking statements. Overview We are an integrated formulator, marketer, distributor and retailer of branded nutritional supplements and other natural products sold to and through domestic health and natural food stores, mass market retailers, specialty retailers, on-line retailers and websites. Internationally, we market and distribute branded nutritional supplements and other natural products to and through health and natural product distributors and retailers. Our products include vitamins, minerals, specialty supplements and sports nutrition products primarily under the Twinlab®, Reserveage and ResVitale ® brands. We also formulate, market and sell diet and energy products under the Metabolife® brand and a full line of herbal teas under the Alvita® brand. To accommodate consumer preferences, our products come in various formulations and delivery forms, including capsules, tablets, softgels, chewables, liquids, sprays, powders and whole herbs. These products are sold primarily through health and natural food stores and on-line retailers, supermarkets, and mass-market retailers.
We 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.
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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.
Going Concern Uncertainty
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, 2020 , we
had an accumulated deficit of $333.3 million . Historical losses are primarily
attributable to lower than planned sales resulting from low fill rates on demand
due to limitations of our working capital, delayed product introductions and
postponed marketing activities, merger-related and other restructuring costs,
interest and refinancing charges associated with our debt refinancing, and
impairment of goodwill and intangible assets. Losses have been funded primarily
through issuance of common stock and third-party or related party debt.
Because of our history of operating losses, increase in debt over time, and the
recording of derivative liabilities, the latter of which has been removed as of
December 31, 2020 , we have a working capital deficiency of $114.7 million at
December 31, 2020 . We also have $96.8 million of debt, net of discount, which
could be due within the next 12 months. These continuing conditions, among
others, raise substantial doubt about our ability to continue as a going
concern.
Management has addressed operating issues through the following actions:
focusing on growing the core business and brands; continuing emphasis on major
customers and key products; reducing manufacturing and operating costs and
continuing to negotiate lower prices from major suppliers. We believe that we
may need additional capital to execute our business plan. If additional funding
is required, there can be no assurance that sources of funding will be available
when needed on acceptable terms or at all.
The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our consolidated financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, will be reflected in the financial statements prospectively from the date of change in estimates. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies used in the preparation of our consolidated financial statements require the most significant judgments and estimates. Revenue Recognition Revenue from product and service sales and the related cost of sales are recognized when the performance obligations are satisfied. The performance obligations are typically satisfied upon shipment of physical goods or as the services are performed over time. In addition to the satisfaction of the performance obligations, the following conditions are required for revenue recognition: an arrangement exists, there is a fixed price, and collectability is reasonably assured. Discounts, returns and allowances related to sales, including an estimated reserve for the returns and allowances, are recorded as reduction of revenue.
Shipping and handling activities fees are not recorded in sales.
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 and damages; and doubtful accounts based upon historical bad debt and claims experience. Inventories
Inventories are stated at the lower of cost or net realizable value and are reduced by an estimated reserve for obsolete inventory.
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--------------------------------------------------------------------------------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 is 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 ofOrganic Holdings 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.
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 theMonte 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. Share-Based Compensation We record share-based compensation, including grants of restricted stock units, based on their grant date fair values and record compensation expense over the vesting period of the restricted stock awards. Income Taxes We account for income taxes using an asset and liability approach. Deferred income taxes are determined by applying currently enacted tax laws and rates to the cumulative temporary differences between the carrying values of assets and liabilities for financial statement and income tax purposes. Valuation allowances against deferred income tax assets are recorded when we are unable to conclude that it is more likely than not that such deferred income tax assets will be realized. 26
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Results of Operations
The following table summarizes our results of operations for the years ended
For the Years Ended December 31,
2020 2019
Net sales $ 66,349 $ 73,460 $ (7,111 ) -10 %
Cost of sales 55,470 62,275
Gross profit 10,879 11,185 Operating costs and expenses: Selling expenses 1,688 1,326$ 362 27 % General and administrative expenses 14,599 24,219$ (9,620 ) -40 % Impairment of goodwill and intangible assets - 24,407$ (24,407 ) -100 % Loss from operations (5,408 ) (38,767 )$ 33,359 Other income (expense): Interest expense, net (8,954 ) (9,876 )$ 922 -9 % Gain on change in derivative liabilities 35 3,696$ (3,661 ) -99 % Other income (expense), net (24 ) 1,392$ (1,416 ) -102 % Loss on disposition of property and equipment - (867 )$ 867 -100 % Total other income (expense) (8,943 ) (5,655 )$ (3,288 ) 58 % Loss before income taxes (14,351 ) (44,422 )$ 30,071 -68 % Provision for income taxes (38 ) (79 )$ 41 -52 % Total net loss $ (14,389 )$ (44,501 ) $ 30,112 -68 % Weighted average number of common shares outstanding - basic 257,345,636 255,643,828 Net loss per common share - basic $ (0.06 )$ (0.17 ) Weighted average number of common shares outstanding - diluted 259,079,879 265,493,489 Net loss per common share - diluted (See Note 2) $ (0.06 )$ (0.18 ) Net Sales The decrease in our net sales by 10% and for the year endedDecember 31, 2020 compared to 2019, 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 decrease of 3% for the year endedDecember 31, 2020 compared to 2019, is 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 increased by 27% for the year ended
General and Administrative Expenses
Our general and administrative expenses decreased by 40% for the year ended
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Impairment of
During the fourth quarter of fiscal 2020, we completed our annual impairment test of goodwill and intangible assets and determined that there was no impairment as ofDecember 31, 2020 . During the fourth quarter of fiscal 2019, we completed our annual impairment test of goodwill and intangible assets and recognized impairment of$24.4 million . We recognized impairment charges of$9.0 million for goodwill related toOrganic Holdings and an aggregate impairment loss of intangible assets of$15.4 million . During the fourth quarter of fiscal 2019, management updated the fiscal 2019 budget and financial projections beyond fiscal 2019. Due to a decline in sales, we determined that the carrying value of our Twinlab and Metabolife trademarks exceeded their fair values and we recognized an impairment of the remaining carrying value of those trademarks. We also determined that a corresponding decline in sales also created an impairment in both Reserveage and Rebody tradenames as well as the remaining amount ofOrganic Holdings goodwill. Interest Expense, Net Our interest expense decreased by$0.9 million or 9% for the year endedDecember 31, 2020 compared to 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 on Change in Derivative Liabilities
We have recorded the estimated fair value of the warrants as of the date of issuance and at each balance sheet reporting date thereafter. As ofDecember 31, 2020 , none of the warrants that resulted in the recording of the related derivative liabilities were outstanding and during the year endedDecember 31, 2020 , we reported an immaterial gain on change in derivative liabilities.
Liquidity and Capital Resources
AtDecember 31, 2020 , we had an accumulated deficit of$333.3 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$114.7 million atDecember 31, 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 ofDecember 31, 2020 , we had cash of$0.4 million . 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$5.1 million for the year endedDecember 31, 2020 . During the year endedDecember 31, 2020 , we incurred net borrowings from our senior credit facility of$0.9 million and debt repayment of$2.3 million . Our total liabilities increased by$18.9 million to$137.1 million atDecember 31, 2020 from$118.1 million atDecember 31, 2019 . This increase in our total liabilities was primarily due to the increase of$6.2 million in notes payable and$5.3 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$5.1 million for the year endedDecember 31, 2020 as a result of our net loss of$14.4 million , a recovery for losses on accounts receivable of$3.8 million in doubtful accounts receivable, a non-cash gain on change in derivative liabilities of$0.04 million , other non-cash expenses totaling$3.4 million net and an increase in net operating assets and liabilities of$9.7 million . By comparison, for the year endedDecember 31, 2019 , net cash used in operating activities was$8.4 million as a result of our net loss of$44.5 million , a provision for losses on accounts receivable of$2.7 million , a non-cash impairment of goodwill and intangible assets of$24.4 million , a non-cash gain on change in derivative liabilities of$3.7 million , a loss on disposal of property and equipment of$0.9 million , other non-cash expenses totaling$2.4 million , net and an increase in net operating assets and liabilities of$9.4 million . Net cash provided by financing activities was$5.2 million for the year endedDecember 31, 2020 , consisting of net borrowings of$0.9 million under our revolving credit facility, proceeds from the issuance of debt of$6.7 million , and repayment of debt of$2.3 million . 28 --------------------------------------------------------------------------------
Ongoing Funding Requirements
As set forth above, we obtained additional debt financing in the year ended
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$1.7 million 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 ; however, the Company has applied for debt forgiveness for this loan. 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.
Recent Accounting Pronouncements
InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments- Credit losses (Topic 326): Measurement of Credit losses on Financial Instruments. ASU 2016-13 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Our status as a smaller reporting company allows us to defer adoption until the annual period, including interim periods within the annual period, beginningJanuary 1, 2023 . Management is currently evaluating the requirements of this guidance and has not yet determined the impact of the adoption on the Company's financial position or results from operations.
Although there are several other new accounting pronouncements issued or proposed by the 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.
Material Contractual Obligations
As ofDecember 31, 2020 , we have total debt of$97.3 million , of which$90.4 million is considered to be related-party debt. For discussion of our debt financings, see Notes 6 and 7 in the Notes to Consolidated Financial Statements included in this report. OnDecember 15, 2016 , we entered into an operating lease agreement for approximately 13,000 square feet of office space inBoca Raton, Florida . The agreement expires inFebruary 2026 and has a monthly base rent of$17 thousand in year 1 to$21 thousand in year 8. The commencement date wasAugust 2017 . EffectiveApril 7, 2015 , we entered into an operating lease agreement for approximately 31,000 square feet of office space inSt. Petersburg, Florida . The agreement expires inApril 2027 and has a monthly base rent of$59 thousand for year 1 to$76 thousand for year 12. OnNovember 30, 2016 , we entered into a sublease agreement to sublease half of the 31,000 square feet of office space. The sublease term commenced onFebruary 1, 2017 and expires onJune 30, 2022 . OnJuly 12, 2019 , we entered into a sublease agreement to sublease the other half of the 31,000 square feet of office space. The sublease term commenced onDecember 1, 2019 and expires onApril 30, 2027 .
Manufacturing and Distribution Licensing Agreement
OnApril 24, 2019 , the Company entered into a manufacturing and distribution licensing agreement withAmherst Industries, Inc. ("Amherst") to manufacture and distribute the Alvita Tea brand of products worldwide. Amherst will adhere to the Company's quality standards in manufacturing the products and will pay the Company a royalty. The Company and Amherst will work together to market and create further innovation for this brand. 29 --------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
None.
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