NOTE – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Twinlab Consolidated Holdings, Inc. (the “Company”, “Twinlab,” “we,” “our” and “us”) was incorporated on under the laws of the State of Nevada as Mirror Me, Inc. On we amended our articles of incorporation and changed our name to Twinlab Consolidated Holdings, Inc.

 

We are an integrated marketer, distributor and retailer of branded nutritional supplements and other natural products sold to and through domestic health and natural food stores, mass market retailers, specialty stores 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 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.

 

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

 

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 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 recorded in sales.

 

Our contract liabilities consist of customer deposits and contractual guaranteed returns.

 

Net contract liabilities are recorded in accrued expenses and other current liabilities and consisted of the following:

 

 

Revenue is disaggregated from contracts with customers by goods or services as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the tables below.

 

 

We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

 

 

 

The following table summarizes our financial instruments that are measured at fair value on a recurring basis as of and

 

We grant credit to customers and generally do 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 total allowances amounted to of which was related to doubtful accounts receivable. As of total allowances amounted to of which was related to doubtful accounts receivable.

 

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 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 to years for machinery and equipment, years for furniture and fixtures and 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 consist primarily of trademarks and customer relationships, which are amortized on a straight-line basis over their estimated useful lives ranging from to 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 is subject to amortization, but is reviewed for impairment annually, or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill 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.

 

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 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 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 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 and was and respectively. An impairment of and was recorded in the years ended and respectively (see Note ).

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 and in and respectively.

 

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 and in and 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 are expensed as incurred and totaled and in and respectively.

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.

 

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.

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.

We entered into a sale-leaseback arrangement relating to our office facilities in Under the terms of the arrangement, we sold an office building and surrounding land and then leased the property back under a -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. The property was sold in and the remaining deferred gain of was recorded in other income. Accordingly, we recorded amortization of deferred gain as a reduction of rental expense of for and for As of and unamortized deferred gain on sale of assets was and respectively.

 

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:

 

 

The Company maintains its cash in bank deposit accounts which, at times, exceed federally insured limits. At the Company’s cash did exceed federally insured limits. To date, the Company has experienced a loss or lack of access to its invested cash; however, assurance can be provided that access to the Company's invested cash will be impacted by adverse conditions in the financial markets.

 

Sales to our top customers aggregated to approximately and of total consolidated sales in and respectively. Sales to of those customers were approximately and of total sales in and Accounts receivable from these customers were approximately and of total accounts receivable as of and respectively. An additional single customer represented and of total accounts receivable as of and respectively. Our major vendors accounted for and of purchases for the year ended and respectively. A vendor represents an additional

In FASB issued ASU - “Simplifying the Test for Goodwill Impairment (Topic )” which removes Step 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, to exceed the carrying amount of goodwill.  The amendments in this ASU are effective for fiscal years beginning after Early adoption is permitted after We do expect the new guidance to have a significant impact on our consolidated financial statements or related disclosures.

  

In FASB issued ASU - “Leases (Topic )”, 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 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 including interim periods within those fiscal years. Earlier application is permitted. Our status as an emerging growth company allowed us to defer the adoption until the year (and interim periods therein) beginning The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Financial Statements.

 

In the FASB issued ASU - “Revenue from Contracts with Customers (Topic ),” which superseded all existing revenue recognition guidance under GAAP. This ASU’s core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU also calls for additional disclosures around the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this ASU on and used the modified retrospective transition method of adoption. The adoption of this ASU did have a material impact on the Company’s financial statements as the impact of this ASU was limited to reclassifying sales return reserves and additional disclosures in the notes to consolidated financial statements. Sales return reserves were reclassified as a current liability instead of as a reduction of accounts receivable of and as of and

Although there are several other new accounting pronouncements issued or proposed by FASB, which we have adopted or will adopt, as applicable, we do believe any of these accounting pronouncements has had or will have a material impact on our consolidated financial position or results of operations.