UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 8-K/A

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): December 18, 2015 (October 2, 2015)

 

TWINLAB CONSOLIDATED HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   000-55181   46-3951742

(State or other jurisdiction of

Incorporation)

    (Commission File Number)  

(IRS Employer

Identification No.)

 

  632 Broadway, Suite 201, New York, New York 10012
  (Address of Principal Executive Offices)  (Zip Code)

 

(212) 651-8500

(Registrant’s telephone number, including area code)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

EXPLANATORY NOTE

 

This Form 8-K/A amends the Current Report on Form 8-K of Twinlab Consolidated Holdings, Inc. (the “Company”) filed on October 8, 2015 (the “Report”) in connection with the consummation of the acquisition by Twinlab Consolidation Corporation, a wholly-owned subsidiary of the Company, of all of the outstanding equity of Organic Holdings LLC. The purpose of this amendment is to provide the financial statements of the business acquired as required by Item 9.01(a) and the pro-forma financial information required by Item 9.01(b), which financial statements and information were excluded from the original filing in reliance on Items 9.01(a)(4) and 9.01(b)(2), respectively, of Form 8-K.

 

Item 2.01Completion of Acquisition or Disposition of Assets.

 

Incorporated herein by reference to Item 2.01 of the Report.

 

Item 9.01Financial Statements and Exhibits

 

(a)Financial Statements of Business Acquired.

 

The following are filed herewith:

 

·Audited consolidated financial statements of Organic Holdings LLC and subsidiaries for the years ended December 31, 2014 and 2013.
·Unaudited condensed consolidated financial statements of Organic Holdings LLC and subsidiaries for the nine months ended September 30, 2015 and 2014.

 

(b)Pro Forma Financial Information.

 

The following are filed herewith:

 

·Unaudited pro forma combined balance sheets as of September 30, 2015.
·Unaudited pro forma combined statements of loss for the year ended December 31, 2014.
·Unaudited pro forma combined statements of loss for the nine months ended September 30, 2015.

 

(d)Exhibits.

 

Exhibit 10.103 Unit Purchase Agreement, dated as of September 2, 2014, by and among Naomi L. Balcombe, Robert Whittel and Twinlab Consolidation Corporation (Filed as an exhibit to the Report and incorporated herein by reference).
   
Exhibit 10.104 Amendment No. 1 to Unit Purchase Agreement, dated as of July 17, 2015, by and among Naomi L. Balcombe, Robert Whittel and Twinlab Consolidation Corporation (Filed as an exhibit to the Report and incorporated herein by reference).
   
Exhibit 10.105 Employment Agreement, dated as of October 2, 2015, between Twinlab Consolidation Corporation and Naomi L. Balcombe (Filed as an exhibit to the Report and incorporated herein by reference).
   

 

 2 

 

 

Exhibit 99.1 Audited consolidated financial statements of Organic Holdings LLC and its subsidiaries for the years ended December 31, 2014 and 2013.
   
Exhibit 99.2 Unaudited condensed consolidated financial statements of Organic Holdings LLC and its subsidiaries for the nine months ended September 30, 2015 and 2014.
   
Exhibit 99.3 Unaudited condensed combined pro forma information of Twinlab Consolidated Holdings, Inc. and subsidiaries and Organic Holdings LLC and subsidiaries as of September 30, 2015, for the year ended December 31, 2014 and for the nine months ended September 30, 2015.

 

 3 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

  TWINLAB CONSOLIDATED HOLDINGS, INC.
   
  By: /s/ Thomas A. Tolworthy
  Thomas A. Tolworthy
  President and Chief Executive Officer
   
Date: December 18, 2015  

 

 4 

 

 

EXHIBIT INDEX

 

Exhibit No.   Description
     
99.1   Audited consolidated financial statements of Organic Holdings LLC and its subsidiaries for the years ended December 31, 2014 and 2013
     
99.2   Unaudited condensed consolidated financial statements of Organic Holdings LLC and its subsidiaries for the nine months ended September 30, 2015 and 2014
     
99.3   Unaudited condensed combined pro forma financial information of Twinlab Consolidated Holdings, Inc. and subsidiaries and Organic Holdings LLC and subsidiaries as of September 30, 2015, for the year ended December 31, 2014 and for the nine months ended September 30, 2015

 

 5 



 

Exhibit 99.1

 

Organic Holdings, LLC and subsidiaries

Financial Statements

For the Years Ended December 31, 2014 and 2013

 

 

 

Organic Holdings, LLC and subsidiaries
 
Contents
 

 

Independent Auditors’ Report 3
   
Financial Statements  
Consolidated Balance Sheets 5
Consolidated Statements of Operations 6
Consolidated Statements of Members’ Deficit 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 9

 

  2

 

 

Independent Auditors’ Report

 

To the Members

Organic Holdings, LLC

 

Report on the Financial Statements

 

We have audited the accompanying consolidated financial statements of Organic Holdings, LLC and subsidiaries (the “Company”), which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of operations, members’ equity and cash flows for the years then ended, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

  3

 

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated balance sheets of Organic Holdings, LLC and subsidiaries as of December 31, 2014 and 2013, and the results of their consolidated operations and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Foelgner Ronz & Straw, P.A.

St. Petersburg, Florida

April 21, 2015

 

  4

 

 

Organic Holdings, LLC and subsidiaries
 
Consolidated Balance Sheets
 

 

December 31,  2014   2013 
         
ASSETS          
           
Current assets:          
Cash and equivalents  $889,026   $916,308 
Accounts receivable, net   3,152,777    5,110,052 
Inventory, net   3,249,759    3,958,168 
Prepaid expenses   289,008    113,887 
Total current assets   7,580,570    10,098,415 
           
Property and equipment, net   141,410    344,733 
Debt financing costs   464,698    180,184 
Deposits   104,829    58,970 
           
   $8,291,507   $10,682,302 
           
LIABILITIES AND MEMBERS' DEFICIT          
           
Current liabilities:          
Accounts payable  $3,626,640   $3,937,739 
Accrued expenses   2,378,176    4,637,120 
Line of credit   559,504    2,046,955 
Total current liabilities   6,564,320    10,621,814 
           
Derivative warrant liability, at fair value   2,363,000    913,000 
Long term debt, net of debt discount   4,391,250    4,188,333 
Long term liability   –    124,000 
Total liabilities   13,318,570    15,847,147 
           
Members' deficit   (5,027,063)   (5,164,845)
           
   $8,291,507   $10,682,302 

 

See accompanying notes to financial statements.

 

  5

 

 

Organic Holdings, LLC and subsidiaries
 
Consolidated Statements of Operations
 

 

Year ended December 31,  2014   2013 
         
Gross sales  $35,923,664   $43,151,934 
Less: Sales returns and discounts   (4,937,816)   (7,380,450)
Net sales   30,985,848    35,771,484 
           
Cost of goods sold   18,077,385    21,473,179 
           
Gross margin   12,908,463    14,298,305 
           
Selling, general and administrative expense   10,326,720    13,230,299 
           
Operating income   2,581,743    1,068,006 
           
Other income (expense)          
Interest expense   (993,961)   (839,581)
Change in value of derivative warrant liability   (1,450,000)   38,000 
Other expense   (2,443,961)   (801,581)
           
Net income  $137,782   $266,425 

 

See accompanying notes to financial statements.

 

  6

 

 

Organic Holdings, LLC and subsidiaries
 
Consolidated Statements of Members’ Deficit
 

 

   Members' 
   Deficit 
     
Balance, December 31, 2012  $(5,425,422)
      
Distributions to members   (5,848)
      
Net income   266,425 
      
Balance, December 31, 2013  $(5,164,845)
      
Net income   137,782 
      
Balance, December 31, 2014  $(5,027,063)

 

See accompanying notes to financial statements.

 

  7

 

 

Organic Holdings, LLC and subsidiaries
 
Consolidated Statements of Cash Flows
 

 

Year ended December 31,  2014   2013 
         
Cash flows from operating activities:          
Net income  $137,782   $266,425 
Adjustments to reconcile net income to          
net cash provided by (used) in operating activities:          
Depreciation   89,261    72,363 
Amortization of debt discount   202,917    139,333 
Amortization of debt financing costs   57,657    57,532 
Change in fair value of derivative warrant liability   1,450,000    (38,000)
Changes in operating assets and liabilities:          
Accounts receivable   1,957,275    (1,965,267)
Inventory   708,409    93,120 
Prepaid expenses   (48,208)   25,879 
Accounts payable   (435,099)   (481,076)
Accrued expenses   (2,258,944)   (503,107)
Net cash provided by (used) in operating activities   1,861,050    (2,332,798)
           
Cash flows from investing activities:          
Purchases of property and equipment   (12,851)   (186,535)
Increase in deposits   (45,859)   (53,720)
Net cash used in investing activities   (58,710)   (240,255)
           
Cash flows from financing activities:          
Payment of debt financing costs   (342,171)   (15,483)
Net payments on line of credit   (1,487,451)   (1,000,000)
Distributions to members   –    (5,848)
Net cash used in financing activities   (1,829,622)   (1,021,331)
           
Net decrease in cash   (27,282)   (3,594,384)
Cash, beginning of the year   916,308    4,510,692 
Cash, end of the year  $889,026   $916,308 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $733,387   $700,248 
Noncash financing activities:          
Long term debt classified as derivative warrant liability  $–   $591,000 

 

See accompanying notes to financial statements.

 

  8

 

 

Organic Holdings, LLC and subsidiaries
 
Notes to Consolidated Financial Statements
 
Years ended December 31, 2014 and 2013
 

 

1.Nature of Operations

 

Organic Holdings, LLC and subsidiaries (collectively, the “Company”), a Delaware limited liability corporation, was formed in October 2009 with headquarters in Boca Raton, Florida. The Company is principally engaged in the business of developing, formulating, manufacturing, distributing and marketing branded and private-label nutritional products and dietary supplements.

 

2.Significant Accounting Policies

 

Basis of consolidation

The consolidated financial statements include the accounts of Organic Holdings, LLC and its wholly-owned subsidiaries:

Reserve Life Organics, LLC (d/b/a Reserveage Organics)

ResVitale, LLC

InnoVitamin Organics, LLC

Organics Management LLC

Re-Body, LLC

CocoaWell, LLC

Fembody, LLC

Reserve Life Nutrition, LLC

Innovita Specialty Distribution, LLC

Joie Essance, LLC

 

All intercompany transactions have been eliminated in consolidation.

 

Concentration of Credit Risk and Significant Customers

Financial instruments which potentially expose the Company to concentrations of credit risk include cash and trade accounts receivable. Cash includes accounts placed with federally insured financial institutions. Such accounts may at times exceed federally insured limits. The Company has not experienced any losses on such accounts.

 

  9

 

 

Organic Holdings, LLC and subsidiaries
 
Notes to Consolidated Financial Statements
 
Years ended December 31, 2014 and 2013
 

 

The Company’s gross sales are concentrated in several large customers as shown in the table below:

 

Year ended December 31,  2014   2013 
   Sales   % of Total   Sales   % of Total 
Customer 1  $10,262,624    29%  $15,304,322    35%
Customer 2   8,070,859    22%   8,257,024    19%
Customer 3   4,677,332    13%   4,506,896    10%
All other customers   12,912,849    36%   15,083,692    35%
Total  $35,923,664    100%   43,151,934    100%

 

The Company used two manufacturers to supply a significant portion of its inventory in 2014 and 2013. Purchases from these vendors amounted to 47% and 10% of total purchases in 2014 and 46% and 10% of total purchases in 2013.

 

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Company’s cash and cash equivalents are carried at fair market value.

 

Accounts Receivable

Accounts receivable relate to sales to customers on account in the ordinary course of business and are carried on a gross basis less the allowance for doubtful accounts. Management estimates the allowance for doubtful accounts based on existing economic conditions, the financial conditions of the customers and the amount and age of past due accounts. As of December 31, 2014 and 2013, the Company had recorded an allowance for doubtful accounts of $366,000 and $275,000, respectively. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are written off against the allowance for doubtful accounts only after collection attempts have been exhausted. Approximately 27%, 25% and 19% of the Company’s total accounts receivable related to three customers as of December 31, 2014. Approximately 55% of the Company’s total accounts receivable related to one customer as of December 31, 2013.

 

  10

 

 

Organic Holdings, LLC and subsidiaries
 
Notes to Consolidated Financial Statements
 
Years ended December 31, 2014 and 2013
 

 

Inventories

Inventories consist of finished product of packaged nutritional supplements, raw materials used in the manufacturing process, and packaging and labels. The cost of inventory is valued at lower of cost or market using the average cost method.

 

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation expense for the years ended December 31, 2014 and 2013 was $89,261 and $72,363 respectively, and is computed over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are depreciated over the shorter of their useful life or of the lease term.

 

Debt financing costs

Debt financing costs include direct costs incurred by the Company as part of long term debt financings. Amortization is provided using the interest method over the terms of the debt and is included in interest expense.

 

Revenue Recognition

Revenue is recognized upon shipment of inventory. Sales are recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the seller’s price to the buyer is fixed or determinable; and, (4) collectability is reasonably assured.

 

Net sales represent products at gross sales price, less estimated returns and allowances for which provisions are made at the time of sale and less other early payment discounts and sales incentives. The cost of product given to customers for no additional charge is also classified as sales discounts.

 

The Company’s largest customer has the right to return inventory to the Company that is outdated, slow-moving, discontinued or recalled (as defined by the purchase agreement). Another significant customer includes the right to return product within a specific time period, and to withhold payment for expected returns, as specified in individual purchase orders. The Company may allow a recurring customer to return inventory on a case-by-case basis regardless of the existence of a contractual right of return.

 

  11

 

 

Organic Holdings, LLC and subsidiaries
 
Notes to Consolidated Financial Statements
 
Years ended December 31, 2014 and 2013
 

 

The Company reserves for estimated returns based on historical rates of returns and specific identification of potential returns. The amount of future returns is inherently uncertain and may differ from the estimated returns.

 

The Company has recorded a reserve of $574,902 and $2,602,396 as of December 31, 2014 and 2013, respectively. The reserve includes the deferred gross profit for the estimated returns as well as the estimated unrecoverable cost of the returned inventory. The reserve is included in Accrued Expenses on the Consolidated Balance Sheet.

 

Costs of Goods Sold and Shipping and Handling Costs

Cost of goods sold includes expenses incurred to acquire and produce inventory for sale, including raw material product costs, manufacturing, packaging, freight-in, and import costs and certain warehousing, or handling, costs associated with the receiving or manufacturing of goods for sale. Cost of goods sold includes the cost of inventory related to estimated customer returns that cannot be resold to other customers. The Company’s shipping and handling costs are included in cost of goods sold.

 

Advertising Costs

Advertising costs are expensed when incurred. Advertising expense was $ 688,201 and $1,324,253 in 2014 and 2013, respectively.

 

Income taxes

For income tax reporting purposes, the Company is a pass-through tax entity. As such, the members include their respective share of taxable income of the Company in their individual tax returns and no federal or state income tax is imposed on the Company.

 

The Company identifies and evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a liability for uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. Income tax filings are subject to audit by taxing authorities and filings for periods after 2011 are open to examination by taxing authorities.

 

  12

 

 

Organic Holdings, LLC and subsidiaries
 
Notes to Consolidated Financial Statements
 
Years ended December 31, 2014 and 2013
 

 

Fair Value of Financial Instruments

The fair value of financial instruments is measured as the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs corroborated by market data.

Level 3: Unobservable inputs not corroborated by market data.

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, accounts receivable, inventory, prepaid expenses and accounts payable and accrued expenses.

 

The Company’s line of credit and long term debt approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements as of December 31, 2014 and 2013.

 

The Company’s Level 3 financial liabilities include the derivative warrant liability embedded in its long-term note payable. There is no current market for this security and as a result the determination of fair value requires significant judgment or estimation. The Company revalues its derivative warrant liability at each reporting period and recognizes gains or losses in the consolidated statements of operations attributable to the change in the fair value of the derivative warrant liability. The table below sets forth a summary of changes in the fair value of the warrant liability:

 

  13

 

 

Organic Holdings, LLC and subsidiaries
 
Notes to Consolidated Financial Statements
 
Years ended December 31, 2014 and 2013
 

 

Year ended December 31,  2014   2013 
Balance, beginning of year  $913,000   $380,000 
Issuance of derivative warrant liability   –    571,000 
Change in fair value   1,450,000    (38,000)
Balance, end of year  $2,363,000   $913,000 

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassifications

Certain amounts on the 2013 consolidated financial statements have been reclassified to conform to 2014 presentation.

 

Subsequent Events

The Company has evaluated events and transactions occurring subsequent to December 31, 2014 as of April 21, 2015, which is the date the financial statements were issued. Subsequent events occurring after April 21, 2015 have not been evaluated by management.

 

  14

 

 

Organic Holdings, LLC and subsidiaries
 
Notes to Consolidated Financial Statements
 
Years ended December 31, 2014 and 2013
 

 

3.Inventory

 

Inventory consists of the following:

 

 December 31,  2014   2013 
Finished goods  $2,700,133   $4,551,222 
Raw materials   604,346    846,668 
Packaging and labels   322,739    765,640 
    3,627,218    6,163,530 
Reserve for slow-moving and obsolete inventory   (377,459)   (2,205,362)
   $3,249,759   $3,958,168 

 

4.Property and Equipment

 

Property and equipment as of December 31, 2014 and 2013 consists of:

   Estimated  December 31, 
   Useful Lives  2014   2013 
Computer equipment and software  3 years  $228,909   $345,708 
Furniture and office equipment  7 years   151,650    151,650 
Leasehold improvements  2 years   2,891    75,658 
       383,450    573,016 
Less: Accumulated depreciation      (242,040)   (228,283)
      $141,410   $344,733 

 

  15

 

 

Organic Holdings, LLC and subsidiaries
 
Notes to Consolidated Financial Statements
 
Years ended December 31, 2014 and 2013
 

 

5.Accrued Expenses

 

Accrued expenses as of December 31, 2014 and 2013 consist of:

   December 31, 
   2014   2013 
Accrued expenses  $1,803,274   $2,034,724 
Reserve for estimated returns   574,902    2,602,396 
   $2,378,176   $4,637,120 

 

6.Lines of Credit

 

The Company entered into a revolving line of credit with a lender in November 2014. The line of credit had an maximum facility amount of $5,000,000 and outstanding principal of $559,504 as of December 31, 2014. The lender may make advances based on available collateral of accounts receivable and finished goods inventory, as defined in the loan agreement. Interest is due monthly at 1.5% plus a base rate, which is the greater of (a) 3.25%, (b) the Prime rate, (c) or the federal funds rate plus 0.5%. The loan is collateralized by a first interest in all assets of the Company. Early termination fees apply through the second anniversary of the loan and restrictive financial covenants apply starting in 2015. The line of credit matures on November 24, 2017.

 

As of December 31, 2013 the Company had a non-revolving line of credit with an outstanding balance of $2,046,955. The line of credit was repaid in 2014. The interest rate was 6% and was collateralized by accounts receivable, inventory, equipment, intangibles and fixtures and was guaranteed by the two members of the Company.

 

7.Long Term Debt and Warrant

 

Long term debt

On December 28, 2013 the Company borrowed $5,000,000 and entered into a Note and Warrant Purchase Agreement. The note bears interest at the greater of 12% or the prime rate plus 4%. Interest-only payments are due monthly and principal is due in full on December 31, 2017. Prepayment penalties of 5% apply in the first year and decrease by 1% each year thereafter. The note is secured by a second lien on all assets and is subordinated to the line of credit. Restrictive financial covenants apply with respect to debt levels, EBITDA and working capital.

 

  16

 

 

Organic Holdings, LLC and subsidiaries
 
Notes to Consolidated Financial Statements
 
Years ended December 31, 2014 and 2013
 

 

During 2014 the Company received waivers from the lender for covenant violations during various months through June 2014. The Company was in compliance with all debt covenants for July through December 2014. In 2013, the Company obtained a waiver from the lender relating to its violation of certain financial covenants, in which the lender waived past and future covenant defaults through December 31, 2013.

 

Warrants

In connection with the borrowing under the note payable above, the Company issued to the note holder a warrant to purchase a 2.5% equity interest in the Company at an exercise price of $100. The warrant may be exercised at any time, has a term of 10 years and includes both a put and call provision which can be triggered upon the occurrence of certain events. The warrant may be called by the Company upon a (a) change in control, (b) payment of 70% of the principal balance under the note, or (c) at the maturity date of the note. The warrant holder can exercise their put option upon (a) an event of default, (b) upon payment of the 70% of the principal balance of the note, or (c) at the maturity date of the note. In the event the put or call provision is exercised, the remaining principal amount of the note is also due in full. The put and call price is based on the lesser of the sales price (if applicable) or based on a historical EBITDA multiple, as defined by the agreement.

 

Based on relevant accounting guidance, the note is a hybrid instrument containing an embedded derivative feature which would individually require separate accounting as a derivative instrument. The embedded derivative feature includes the warrant as well as the warrant’s put and call feature. The value of the embedded derivative liability has been bifurcated from the debt and recorded as a separate liability, resulting in a reduction of the initial carrying amount of the note. This reduction in the carrying amount of the note is considered an unamortized discount on the debt instrument.

 

  17

 

 

Organic Holdings, LLC and subsidiaries
 
Notes to Consolidated Financial Statements
 
Years ended December 31, 2014 and 2013
 

 

The embedded derivative within the note has been valued using a discounted probability-weighted cash flow approach, recorded at fair value at the date of issuance; and is marked-to-market with the change in fair value recorded in the Company’s consolidated statements of operations as income or expense. The change in fair value resulted in $1,450,000 of expense for the year ended December 31, 2014 and $38,000 of income for 2013.

 

The fair value of the initial derivative was estimated at $380,000 as of the date of issuance in 2012 and was recorded as a liability on the Balance Sheet. The note payable was recorded net of a corresponding $380,000 discount, which is amortized as interest expense in the consolidated statements of operations using the effective-interest method over the 5-year term of the note.

 

Additional 2013 warrant

In July 2013 the Company issued the lender an additional warrant to purchase a 7.5% equity interest in the Company. The warrant has terms similar to the initial 2.5% warrant, but also provides for a decrease in the equity interest depending on the Company’s EBITDA (earnings before interest, taxes, depreciation & amortization). The fair value of the 2013 warrant derivative was estimated at $571,000 when granted during 2013 and was recorded in the same manner as the initial warrant derivative above.

 

8.Operating Leases

 

Rent expense was $ 278,787 and $371,773 for the years ended December 31, 2014 and 2013, respectively. Future minimum lease payments under noncancellable operating leases (with an initial or remaining term in excess of one year) are as follows:

 

  18

 

 

Organic Holdings, LLC and subsidiaries
 
Notes to Consolidated Financial Statements
 
Years ended December 31, 2014 and 2013
 

 

   Operating leases 
Year ended December 31:     
2015  $224,943 
2016   233,518 
2017   24,590 
2018   1,700 
      
   $484,751 

 

9.401(k) Retirement Plan

 

The Company maintains a 401(k) retirement plan (the Plan) for its employees who have completed one year of service. Under the Plan, eligible employees may contribute their compensation to the Plan on a pre-tax or after-tax (Roth) basis, subject to Internal Revenue Service limits. The Company made discretionary matching contributions of $45,046 and $30,318 to the Plan in the years ended December 31, 2014 and 2013, respectively.

 

10.Commitments and Contingencies

 

Employment Agreements

The Company has employment agreements with several key employees. These agreements have a term of one year and renew automatically for subsequent one year periods. The agreements provide for base compensation plus a grant of management incentive units (MIU’s). As of December 31, 2014, the Company had granted MIU’s to seven individuals. No distributions were paid to MIU holders in 2014 or 2013.

 

Regulatory framework and Product-related Contingencies

The Company has been, and in the future may be, subject to product liability claims, including that products caused injury or illness, do not include inadequate instructions for use or warnings concerning possible side effects or interactions with other substances. The Company also is at risk of claims from consumers and class action lawsuits relating to claims made for products and the substantiation of such claims.

 

  19

 

 

Organic Holdings, LLC and subsidiaries
 
Notes to Consolidated Financial Statements
 
Years ended December 31, 2014 and 2013
 

 

The Company could experience product recalls or a significant amount of product returns, and the Company may incur significant and unexpected costs, and its business reputation could be materially adversely affected.

 

The Company's operations, including the formulation, manufacturing, advertising and sale of its products, are subject to regulation by various, federal, state and local government agencies in the United States and internationally. The Company may be subject to challenges to its marketing, advertising or product claims in litigation or governmental, administrative or other regulatory proceedings. Failure to comply with applicable regulations or withstand such challenges could result in changes in product labeling, packaging, or advertising, product reformulations, discontinuation of our product by retailers, loss of market acceptance of the product by consumers, additional recordkeeping requirements, injunctions, product withdrawals, recalls, product seizures, fines, monetary settlements or criminal prosecution. Any of these actions could have a material adverse effect on Company's results of operations and financial condition.

 

Other contingencies

The Company is subject to various other legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of any ultimate liability with respect to these actions is undeterminable and should not materially affect the Company’s financial statements.

 

  20



 

Exhibit 99.2

 

Organic Holdings, LLC and Subsidiaries

Condensed Consolidated Financial Statements

(Unaudited)

As of September 30, 2015 and December 31, 2014

and For the Nine Month Periods Ended

September 30, 2015 and September 30, 2014

 

 

 

 

Organic Holdings, LLC and Subsidiaries
 
Condensed Consolidated Balance Sheets (Unaudited)
 

 

   September
30, 2015		   December
31, 2014		 
         
ASSETS          
           
Current assets:          
Cash  $248,710   $889,026 
Accounts receivable, net   3,583,782    2,350,083 
Inventory, net   4,137,315    3,249,759 
Prepaid expenses   133,973    289,008 
Total current assets   8,103,780    6,777,876 
           
Property and equipment, net   113,981    141,410 
Debt financing costs   386,452    464,698 
Deposits   21,468    104,829 
           
   $8,625,681   $7,488,813 
           
LIABILITIES AND MEMBERS' DEFICIT          
           
Current liabilities:          
Accounts payable  $2,906,948   $3,626,640 
Accrued expenses   2,394,750    1,575,482 
Total current liabilities   5,301,698    5,202,122 
           
Line of credit   2,056,108    559,504 
Derivative warrant liability, at fair value   1,655,469    2,363,000 
Long term debt, net of debt discount   4,544,000    4,391,250 
Total liabilities   13,557,275    12,515,876 
           
Members' deficit   (4,931,594)   (5,027,063)
           
   $8,625,681   $7,488,813 

  

See accompanying notes to condensed consolidated financial statements.

 

 2

 

 

Organic Holdings, LLC and Subsidiaries
 
Condensed Consolidated Statements of Operations (Unaudited)
 

 

   Nine Months Ended
September 30,		 
   2015   2014 
         
Gross sales  $26,295,137   $29,328,488 
Less: Sales returns and discounts   (3,770,957)   (4,074,354)
Net sales   22,524,180    25,254,134 
           
Cost of goods sold   12,555,078    14,732,786 
           
Gross margin   9,969,102    10,521,348 
           
Operating expenses   9,891,525    7,684,871 
           
Operating income   77,577    2,836,477 
           
Other income (expense)          
Interest expense   (689,639)   (538,765)
Change in value of derivative warrant liability   707,531    (1,273,000)
Other income (expense)   17,892    (1,811,765)
           
           
Net income  $95,469   $1,024,712 

  

See accompanying notes to condensed consolidated financial statements.

 

 3

 

 

Organic Holdings, LLC and Subsidiaries
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 

 

   Nine months ended
September 30,		 
   2015   2014 
         
Cash flows from operating activities:          
Net income  $95,469   $1,024,712 
Adjustments to reconcile net income to          
net cash (used in) provided by operating activities:          
Depreciation   63,761    67,500 
Amortization of debt discount   270,293    36,122 
Change in fair value of derivative warrant liability   (707,531)   1,273,000 
Changes in operating assets and liabilities:          
   Accounts receivable   (1,233,699)   1,520,442 
Inventory   (887,556)   1,424,030 
Prepaid expenses   232,847    (151,455)
Accounts payable   (719,692)   (2,027,420)
Accrued expenses   819,717    (1,103,456)
Net cash (used in) provided by operating activities   (2,066,391)   2,063,475 
           
Cash flows from investing activities:          
Purchases of property and equipment   (36,332)   (21,133)
Increase in deposits   83,361    27,282 
Net cash provided by investing activities   47,029    6,149 
           
Cash flows from financing activities:          
Payment of debt financing costs   (117,558)   (36,122)
Net proceeds from (payments on) line of credit   1,496,604    (396,955)
Net cash provided by (used in) financing activities   1,379,046    (433,077)
           
Net (decrease) increase in cash   (640,316)   1,636,547 
Cash, beginning of the period   889,026    916,308 
Cash, end of the period  $248,710   $2,552,855 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $536,889   $538,765 

 

See accompanying notes to condensed consolidated financial statements.

 

 4

 

 

Organic Holdings, LLC and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 

 

1.Nature of Operations

 

Organic Holdings, LLC and subsidiaries (collectively, the “Company”), a Delaware limited liability corporation, was formed in October 2009 with headquarters in Boca Raton, Florida. The Company is principally engaged in the business of developing, formulating, manufacturing, distributing and marketing branded and private-label nutritional products and dietary supplements.

 

2.Significant Accounting Policies

 

Basis of consolidation

The consolidated financial statements include the accounts of Organic Holdings, LLC and its wholly-owned subsidiaries:

Reserve Life Organics, LLC (d/b/a Reserveage Organics)

ResVitale, LLC

InnoVitamin Organics, LLC

Organics Management LLC

Re-Body, LLC

CocoaWell, LLC

Fembody, LLC

Reserve Life Nutrition, LLC

Innovita Specialty Distribution, LLC

Joie Essance, LLC

 

All intercompany transactions have been eliminated in consolidation.

 

Basis of Presentation and Unaudited Information

 

The condensed consolidated interim financial statements have been prepared by the Company in accordance with United States generally accepted accounting principles, without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted, 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 audited consolidated financial statements and notes.

 

 5

 

 

Organic Holdings, LLC and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 

 

Concentration of Credit Risk and Significant Customers

Financial instruments which potentially expose the Company to concentrations of credit risk include cash and trade accounts receivable. Cash includes accounts placed with federally insured financial institutions. Such accounts may at times exceed federally insured limits. The Company has not experienced any losses on such accounts.

 

The Company’s gross sales are concentrated in several large customers as shown in the table below:

 

   September 30, 2015   September 30, 2014 
   Sales   % of Total   Sales   % of Total 
Customer 1  $8,534,611    32%  $8,505,262    29%
Customer 2   3,841,816    15%   6,452,267    22%
Customer 3   3,433,745    13%   3,812,703    13%
All other customers   10,484,965    40%   10,558,256    36%
Total  $26,295,137    100%  $29,328,488    100%

 

The Company used two manufacturers to supply a significant portion of its inventory in 2015. Purchases from these vendors amounted to 50% and 12% of total purchases for the period ended September 30, 2015 and 46% and 10% of total purchases for the period ended September 30, 2014.

 

Cash

The Company’s cash is carried at fair market value.

 

 6

 

 

Organic Holdings, LLC and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 

 

Accounts Receivable

Accounts receivable relate to sales to customers on account in the ordinary course of business and are carried on a gross basis less the allowance for doubtful accounts. Management estimates the allowance for doubtful accounts based on existing economic conditions, the financial conditions of the customers and the amount and age of past due accounts. As of September 30, 2015 and December 31, 2014, the Company had recorded an allowance for doubtful accounts of $86,113 and $355,609, respectively. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are written off against the allowance for doubtful accounts only after collection attempts have been exhausted. Approximately 35%, 32% and 10% of the Company’s total accounts receivable related to three customers as of September 30, 2015. Approximately 27%, 25% and 19% of the Company’s total accounts receivable related to these same customers as of December 31, 2014.

 

Inventories

Inventories consist of finished product of packaged nutritional supplements, raw materials used in the manufacturing process, and packaging and labels. The cost of inventory is valued at lower of cost or market using the average cost method.

 

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation expense for the period ended September 30, 2015 and 2014 was $63,761 and $67,500 respectively, and is computed over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are depreciated over the shorter of their useful life or of the lease term.

 

Debt financing costs

Debt financing costs include direct costs incurred by the Company as part of long term debt financings. Amortization is provided on a straight-line basis, which approximates the interest method, over the terms of the debt and is included in interest expense.

 

Revenue Recognition

Revenue is recognized upon shipment of inventory. Sales are recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the seller’s price to the buyer is fixed or determinable; and, (4) collectability is reasonably assured.

 

 7

 

 

Organic Holdings, LLC and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 

 

Net sales represent products at gross sales price, less estimated returns and allowances for which provisions are made at the time of sale and less other early payment discounts and sales incentives. The cost of product given to customers for no additional charge is also classified as sales discounts.

 

The Company’s largest customer has the right to return inventory to the Company that is outdated, slow-moving, discontinued or recalled (as defined by the purchase agreement). Another significant customer includes the right to return product within a specific time period, and to withhold payment for expected returns, as specified in individual purchase orders. The Company may allow a recurring customer to return inventory on a case-by-case basis regardless of the existence of a contractual right of return.

 

The Company reserves for estimated returns based on historical rates of returns and specific identification of potential returns. The amount of future returns is inherently uncertain and may differ from the estimated returns.

 

The Company has recorded a reserve of $224,278 and $377,459 as of September 30, 2015 and December 31, 2014, respectively. The reserve includes the deferred gross profit for the estimated returns as well as the estimated unrecoverable cost of the returned inventory. The reserve is included in Accounts Receivable in the Condensed Consolidated Balance Sheets.

 

Costs of Goods Sold and Shipping and Handling Costs

Cost of goods sold includes expenses incurred to acquire and produce inventory for sale, including raw material product costs, manufacturing, packaging, freight-in, and import costs and certain warehousing, or handling, costs associated with the receiving or manufacturing of goods for sale. Cost of goods sold includes the cost of inventory related to estimated customer returns that cannot be resold to other customers. The Company’s shipping and handling costs are included in cost of goods sold.

 

 8

 

 

Organic Holdings, LLC and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 

 

Advertising Costs

Advertising costs are expensed when incurred. Advertising expense was $354,290 and $201,946 for the nine months ended September 30, 2015 and 2014, respectively.

 

Income taxes

For income tax reporting purposes, the Company is a pass-through tax entity. As such, the members include their respective share of taxable income of the Company in their individual tax returns and no federal or state income tax is imposed on the Company.

 

The Company identifies and evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a liability for uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. Income tax filings are subject to audit by taxing authorities and filings for periods after 2011 are open to examination by taxing authorities.

 

Fair Value of Financial Instruments

The fair value of financial instruments is measured as the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs corroborated by market data.

Level 3: Unobservable inputs not corroborated by market data.

 

 9

 

 

Organic Holdings, LLC and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management.

 

The fair value of the Company’s derivative warrant liability is determined under Level 3. There is no current market for this security and as a result the determination of fair value requires significant judgment or estimation. The Company revalues its derivative warrant liability at each period end and recognizes gains or losses in the consolidated statements of operations attributable to the change in the fair value of the derivative warrant liability.

 

   September 30,
2015		   December 31,
2014		 
Balance, beginning of period  $2,363,000   $913,000 
Issuance of derivative warrant liability   –    – 
Change in fair value   (707,531)   1,450,000 
Balance, end of period  $1,655,459   $2,363,000 

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassifications

 

Certain amounts in the 2014 consolidated financial statements have been reclassified to conform with the current year presentation.

 

Subsequent Event

On October 5, 2015 the Company was acquired by Twinlab Consolidation Corporation (TCC) for a purchase price of $37,000,000. TCC and the Organic Holdings each provided customary representations, warranties and covenants in the Purchase Agreement, and Organic Holdings agreed to be bound by certain non-compete and non-solicitation provisions. Organic Holdings also agreed to customary indemnification of TCC and its affiliates for certain losses and damages, by way of the cancellation of shares of common stock of the Company owned by Health, KP LLC (“Health”), an affiliate of Organic Holdings.

 

 10

 

 

Organic Holdings, LLC and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 

 

3.Inventory

 

Inventory consists of the following:

   September 30,   December 31, 
   2015   2014 
Finished goods  $2,733,535   $2,700,133 
Raw materials   1,118,557    604,346 
Packaging and labels   509,501    322,739 
    4,361,593    3,627,218 
Reserve for slow-moving and obsolete inventory   (224,278)   (377,459)
   $4,137,315   $3,249,759 

 

4.Property and Equipment

 

Property and equipment as of September 30, 2015 and December 31, 2014 consists of:

   Estimated    
   Useful Lives  2015   2014 
Computer equipment and software  3 years  $261,790   $228,909 
Furniture and office equipment  7 years   155,100    151,650 
Leasehold improvements  2 years   2,891    2,891 
       419,781    383,450 
Less: Accumulated depreciation      (305,800)   (242,040)
      $113,981   $141,410 

 

5.Accrued Expenses

 

Accrued expenses as of September 30, 2015 and December 31, 2014 consist of:

 

 11

 

 

Organic Holdings, LLC and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 

 

     
   2015   2014 
Accrued expenses – other  $523,248   $929,443 
Accrued transaction bonuses   1,084,000    - 
Accrued 2015 employee bonuses   229,035    - 
Accrued executive compensation   -    425,000 
Accrued contingencies   15,000    113,000 
Accrued payroll   210,688    108,039 
Accrued purchases   332,779    - 
   $2,394,750   $1,575,482 

  

6.Lines of Credit

 

The Company entered into a revolving line of credit with a lender in November 2014. The line of credit had a maximum facility amount of $5,000,000 and outstanding principal of $2,056,108 and $559,504 as of September 30, 2015 and December 31, 2014, respectively. The lender may make advances based on available collateral of accounts receivable and finished goods inventory, as defined in the loan agreement. Interest is due monthly at 1.5% plus a base rate, which is the greater of (a) 3.25%, (b) the Prime rate, or (c) the federal funds rate plus 0.5%. The loan is collateralized by a first interest in all assets of the Company. Early termination fees apply through the second anniversary of the loan. The line of credit matures on November 24, 2017.

 

7.Long Term Debt and Warrant

 

Long term debt

On December 28, 2013, the Company borrowed $5,000,000 and entered into a Note and Warrant Purchase Agreement. The note bears interest at the greater of 12% or the prime rate plus 4%. Interest-only payments are due monthly and principal is due in full on December 31, 2017. Prepayment penalties of 5% apply in the first year and decrease by 1% each year thereafter. The note is secured by a second lien on all assets and is subordinated to the line of credit. Restrictive financial covenants apply with respect to debt levels, EBITDA and working capital.

 

 12

 

 

Organic Holdings, LLC and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 

 

 

During 2014, the Company received waivers from the lender for covenant violations during various months through June 2014. Management believes the Company was in compliance with these covenants as of September 30, 2015.

 

Warrants

In connection with the borrowing under the note payable above, the Company issued to the note holder a warrant to purchase a 2.5% equity interest in the Company at an exercise price of $100. The warrant may be exercised at any time, has a term of 10 years and includes both a put and call provision which can be triggered upon the occurrence of certain events. The warrant may be called by the Company upon a (a) change in control, (b) payment of 70% of the principal balance under the note, or (c) at the maturity date of the note. The warrant holder can exercise their put option upon (a) an event of default, (b) upon payment of the 70% of the principal balance of the note, or (c) at the maturity date of the note. In the event the put or call provision is exercised, the remaining principal amount of the note is also due in full. The put and call price is based on the lesser of the sales price (if applicable) or based on a historical EBITDA multiple, as defined by the agreement.

 

Based on relevant accounting guidance, the warrant is considered to be a derivative which requires separate accounting as a derivative instrument. The initial fair value of the derivative liability was recorded as a separate liability and a corresponding debt discount, resulting in a reduction of the initial carrying amount of the note. This discount is being amortized as interest expense over the life of the loan.

 

The warrant derivative liability has been valued using a discounted probability-weighted cash flow approach, recorded at fair value at the date of issuance; and is marked-to-market with the change in fair value recorded in the Company’s consolidated statements of operations as income or expense. The change in fair value resulted in a gain of $707,531 for the period ended September 30, 2015 and a loss of $1,273,000 for the period ended September 30, 2014.

 

 13

 

 

Organic Holdings, LLC and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 

 

The fair value of the initial derivative was estimated at $380,000 as of the date of issuance in 2012 and was recorded as a liability on the Balance Sheet. The note payable was recorded net of a corresponding $380,000 discount, which is amortized as interest expense in the consolidated statements of operations using the effective-interest method over the 5-year term of the note.

 

Additional 2013 warrant

In July 2013 the Company issued the lender an additional warrant to purchase a 7.5% equity interest in the Company. The warrant has terms similar to the initial 2.5% warrant, but also provides for a decrease in the equity interest depending on the Company’s EBITDA (earnings before interest, taxes, depreciation & amortization). The fair value of the 2013 warrant derivative was estimated at $571,000 when granted during 2013 and was recorded in the same manner as the initial warrant derivative above.

 

8.Operating Leases

 

Rent expense was $201,362 and $202,847 for the nine months ended September 30, 2015 and 2014, respectively. Future minimum lease payments under noncancellable operating leases (with an initial or remaining term in excess of one year) are as follows:

 

   Operating
leases		 
Period ended September 30:     
2015  $224,943 
2016   233,518 
2017   24,590 
2018   1,700 
      
   $484,751 

 

9.401(k) Retirement Plan

 

The Company maintains a 401(k) retirement plan (the Plan) for its employees who have completed one year of service. Under the Plan, eligible employees may contribute their compensation to the Plan on a pre-tax or after-tax (Roth) basis, subject to Internal Revenue Service limits. The Company made discretionary matching contribution of $25,302 and $37,567 to the Plan during the nine months ended September 30, 2015 and 2014 respectively.

 

 14

 

 

Organic Holdings, LLC and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 

 

10.Commitments and Contingencies

 

Employment Agreements

The Company has employment agreements with several key employees. These agreements have a term of one year and renew automatically for subsequent one year periods. The agreements provide for base compensation plus a grant of management incentive units (MIU’s). As of September 30, 2015, the Company had granted MIU’s to seven individuals. No distributions were paid to MIU holders through September 30, 2015. Distributions were made at the time of the Twinlab Consolidation Corporation acquisition on October 5, 2015.

 

Regulatory Framework and Product-related Contingencies

The Company has been, and in the future may be, subject to product liability claims, including that products caused injury or illness, do not include inadequate instructions for use or warnings concerning possible side effects or interactions with other substances. The Company also is at risk of claims from consumers and class action lawsuits relating to claims made for products and the substantiation of such claims.

 

The Company could experience product recalls or a significant amount of product returns, and the Company may incur significant and unexpected costs, and its business reputation could be materially adversely affected.

 

The Company's operations, including the formulation, manufacturing, advertising and sale of its products, are subject to regulation by various, federal, state and local government agencies in the United States and internationally. The Company may be subject to challenges to its marketing, advertising or product claims in litigation or governmental, administrative or other regulatory proceedings. Failure to comply with applicable regulations or withstand such challenges could result in changes in product labeling, packaging, or advertising, product reformulations, discontinuation of our product by retailers, loss of market acceptance of the product by consumers, additional recordkeeping requirements, injunctions, product withdrawals, recalls, product seizures, fines, monetary settlements or criminal prosecution. Any of these actions could have a material adverse effect on Company's results of operations and financial condition.

 

 15

 

 

Organic Holdings, LLC and Subsidiaries
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
 

 

Other contingencies

The Company is subject to various other legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of any ultimate liability with respect to these actions is undeterminable and should not materially affect the Company’s financial statements.

 

 16



 

EXHIBIT 99.3

 

Unaudited Pro Forma Condensed Combined Financial Information

(Amounts in Thousands Except Share Amounts)

 

Twinlab Consolidated Holdings, Inc. (the “Company”), through its wholly owned subsidiary, Twinlab Consolidation Corporation) (“TCC”), entered into an option agreement in September 2014 (the “Option Agreement”) that gave TCC an exclusive option to purchase 100% of the outstanding equity interests of Organic Holdings, LLC (“Organic”). Organic, through its subsidiaries, is engaged in the business of developing and selling premium nutritional supplements, including under the well-known ReserveageTM Nutrition family of brands. Effective August 13, 2015, TCC exercised the option and entered into a Unit Purchase Agreement, as amended (the “Purchase Agreement”), with the owners of the membership interests of Organic (the “Sellers”). The parties subsequently agreed to extend the closing date of the Purchase Agreement to October 5, 2015 when TCC closed the transactions contemplated by the Purchase Agreement and acquired all of the membership units for a purchase price of $37,000. The Company had previously paid the Sellers a non-refundable deposit of $2,000. In addition, the Company paid the Organic warrant holder $339 and assumed an Organic line of credit of $2,372. The Company considers the acquisition of Organic as the acquisition of a business, and the Company is therefore required to make the pro forma disclosures described below.

 

The unaudited pro forma condensed combined balance sheet as of September 30, 2015 reflects the acquisition of Organic as if such acquisition had occurred on September 30, 2015, combining the consolidated balance sheets of the Company and Organic as of September 30, 2015.

 

The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2014 reflects the acquisition of Organic as if it had occurred on January 1, 2014, combining the historical audited statements of operations of the Company and Organic for the year ended December 31, 2014.

 

The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2015 reflects the acquisition of Organic as if it had occurred on January 1, 2014, combining the historical unaudited statements of operations of the Company and Organic for the nine months ended September 30, 2015.

 

The unaudited pro forma condensed combined financial information is unaudited and is based upon the historical consolidated financial statements of the Company and of Organic, and certain adjustments directly related to the acquisition that the Company believes are reasonable to give effect to the Organic acquisition.

 

The unaudited pro forma condensed combined financial information should be read in conjunction with:

 

·the accompanying notes to the Condensed Combined Pro Forma Financial Information;
·the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2014 filed with the Securities and Exchange Commission;
·the Company’s unaudited condensed consolidated financial statements and related notes for the nine months ended September 30, 2015 contained in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 filed with the Securities and Exchange Commission;
·Organic’s audited consolidated financial statements and related notes for the year ended December 31, 2014 included as Exhibit 99.1 to this current report on Form 8-K/A; and

 

 

 

 

·Organic’s unaudited condensed consolidated financial statements and related notes for the nine months ended September 30, 2015 included as Exhibit 99.2 to this current report on Form 8-K/A.

 

 2 

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS

As of September 30, 2015

(Amounts in Thousands Except Share Amounts)

 

   Twinlab             
   Consolidated   Organic         
   Holdings, Inc.   Holdings, LLC   Pro Forma     
   Historical   Historical   Adjustments   Pro Forma 
ASSETS                    
                     
Current assets:                    
Cash  $1,740   $249   $37,000{b}  $1,650 
              (37,000){c}     
              (339){c}     
Marketable securities   67    -         67 
Accounts receivable, net   4,940    3,584         8,524 
Inventories, net   9,924    4,137         14,061 
Prepaid expenses and other current assets   4,330    134    (2,000){c}   2,464 
Total current assets   21,001    8,104    (2,339)   26,766 
                     
Property, plant and equipment, net   3,463    114         3,577 
Intangible assets, net   10,490    -    22,453{c}   32,943 
Goodwill   8,818    -    16,342{c}   25,160 
Other assets   1,484    408    (386){a}   1,506 
                     
   $45,256   $8,626   $36,070   $89,952 
                     
LIABILITIES AND STOCKHOLDERS’ DEFICIT/MEMBERS’ EQUITY (DEFICIT)     
                     
Current liabilities:                    
Accounts payable  $13,738   $2,907        $16,645 
Accrued expenses and other current liabilities   4,562    2,395         6,957 
Derivative liabilities   13,599    -         13,599 
Notes payable and current portion of long-term debt, net of discount   13,384    -    2,372{c}   15,756 
Total current liabilities   45,283    5,302    2,372    52,957 
                     
Long-term liabilities:                    
Deferred gain on sale of assets   1,930    -         1,930 
Derivative warrant liability   -    1,655    (1,655){a}   - 
Long-term debt, net of current portion and discount   13,368    6,600    (6,600){a}   13,368 
Total long-term liabilities   15,298    8,255    (8,255)   15,298 
                     
Total liabilities   60,581    13,557    (5,883)   68,255 
                     
Commitments and contingencies                    
                     
Stockholders’ equity (deficit)/members’ equity (deficit):                    
Common stock   249    -    130{b}   379 
Additional paid-in capital   203,104    -    36,870{b}   239,974 
Stock subscriptions receivable   (100)   -         (100)
Treasury stock at cost   -              - 
Accumulated deficit   (218,533)   -         (218,533)
Accumulated other comprehensive loss   (45)   -         (45)
Members’ equity (deficit)   -    (4,931)   7,869{a}   22 
              (2,916){c}     
Total stockholders’ equity (deficit)/members’ equity (deficit)   (15,325)   (4,931)   41,953    21,697 
                     
   $45,256   $8,626   $36,070   $89,952 

 

See notes to unaudited condensed combined pro forma financial information.

 

 3 

 

 

UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS

Year Ended December 31, 2014

(Amounts in Thousands Except Share Amounts)
 

   Twinlab             
   Consolidated   Organic         
   Holdings, Inc.   Holdings, LLC   Pro Forma     
   Historical   Historical   Adjustments   Pro Forma 
                 
Net sales  $61,426   $30,986        $92,412 
Cost of sales   47,654    18,077         65,731 
                     
Gross profit   13,772    12,909         26,681 
                     
Selling, general and administrative expenses   25,924    10,327   $1,358{f}   37,609 
                     
Income (loss) from operations   (12,152)   2,582    (1,358)   (10,928)
                     
Other income (expense):                    
Interest expense, net   (6,388)   (994)   994{d}   (6,388)
Gain (loss) on change in derivative liabilities   -    (1,450)   1,450{e}   - 
Other income (expense), net   (2,529)   -         (2,529)
                     
Total other income (expense)   (8,917)   (2,444)   2,444    (8,917)
                     
Income (loss) before income taxes   (21,069)   138    1,086    (19,845)
                     
Provision for income taxes   (61)   -         (61)
                     
Net income (loss)  $(21,130)  $138   $1,086   $(19,906)
                     
Weighted average number of common shares
outstanding – basic and diluted		   213,366,479         130,081,551{g}   343,448,030 
                     
Loss per common share – basic and diluted  $(0.10)            $(0.06)

 

See notes to unaudited condensed combined pro forma financial information.

 

 4 

 

 

UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS

Nine Months Ended September 30, 2015

(Amounts in Thousands Except Share Amounts)

 

 

   Twinlab             
   Consolidated   Organic         
   Holdings, Inc.   Holdings, LLC   Pro Forma     
   Historical   Historical   Adjustments   Pro Forma 
                 
Net sales  $60,215   $22,524        $82,739 
Cost of sales   50,816    12,555         63,371 
                     
Gross profit   9,399    9,969         19,368 
                     
Selling, general and administrative expenses   21,178    9,892   $1,018{f}   32,088 
                     
Income (loss) from operations   (11,779)   77    (1,018)   (12,720)
                     
Other income (expense):                    
Interest expense, net   (5,280)   (690)   690{d}   (5,280)
Gain (loss) on change in derivative liabilities   (14,523)   708    (708){e}   (14,523)
Other income (expense), net   428    -         428 
                     
Total other income (expense)   (19,375)   18    (18)   (19,375)
                     
Income (loss) before income taxes   (31,154)   95    (1,036)   (32,095)
                     
Provision for income taxes   (1)   -         (1)
                     
Net income (loss)  $(31,155)  $95   $(1,036)  $(32,096)
                     
Weighted average number of common shares
outstanding – basic and diluted		   222,344,684         130,081,551{g}   352,426,235 
                     
Loss per common share – basic and diluted  $(0.14)            $(0.09)

 

See notes to unaudited condensed combined pro forma financial information.

 

 5 

 

 

NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA
FINANCIAL INFORMATION

(Amounts in Thousands)

Basis of Presentation

 

The accompanying unaudited pro forma condensed combined balance sheet as of September 30, 2015 reflects the Organic acquisition as if it had occurred September 30, 2015, combining the consolidated balance sheets of the Company and of Organic as of September 30, 2015. The accompanying unaudited pro forma condensed combined statements of operations for the year ended December 31, 2014 and the nine months ended September 30, 2015 reflect the Organic acquisition as if it had occurred January 1, 2014. The unaudited condensed combined pro forma financial information is not intended to reflect the financial position and results that would have actually resulted had the Organic acquisition occurred on the dates indicated.

 

Summary of Significant Pro Forma Adjustments

 

{a}        To eliminate the assets and liabilities of Organic not acquired or assumed in the acquisition.

 

{b}        To record the issuance of the Company’s common stock to fund the acquisition. Pursuant to two stock purchase agreements, a total of 130,081,551 shares of the Company’s common stock were issued for total proceeds to the Company of $37,000.

 

{c}        To record the purchase price and allocation of the purchase price. The aggregate consideration for the purchased assets is comprised of the following:

 

Cash  $37,000 
Deposit paid in 2014   2,000 
Line of credit assumed   2,372 
Payment to warrant holder   339 
      
Total purchase price  $41,711 

 

The purchase price has been allocated as follows:

 

Intangible assets:     
   Customer relationships  $15,600 
   Trade name – Reserveage Nutrition & Resvitale   5,900 
   Trade name – Rebody   200 
   Assembled workforce   753 
      
   Total intangible assets   22,453 
Goodwill   16,342 
Other net assets   2,916 
      
   Total  $41,711 

 

 6 

 

 

The definite lived intangible assets will be amortized using the straight-line method over the following estimated economic lives (in years):

 

Customer relationships   15 
Trade name – Rebody   3 
Assembled workforce   3 

 

{d}        To eliminate the interest expense of Organic.

 

{e}        To eliminate the gain (loss) on change in derivative liabilities of Organic.

 

{f}        To record amortization of the definitive lived intangible assets.

 

{g}        To increase the weighted average number of common shares outstanding by the number of common shares issued to fund the acquisition.

 

 7 

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