NOTE

– NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Twinlab Consolidated Holdings, Inc. (the “Company”, “Twinlab,” “we,” “our” and “us”) was incorporated on

October 24, 2013

under the laws of the State of Nevada as Mirror Me, Inc. On

August 7, 2014,

we amended our articles of incorporation and changed our name to Twinlab Consolidated Holdings, Inc.

Nature of Operations

We are a marketer, distributor and direct to consumer retailer of branded nutritional supplements and other natural products sold to and through domestic health and natural food stores, mass market retailers, specialty store retailers, on-line retailers and websites. Internationally, we market and distribute branded nutritional supplements and other natural products to and through health and natural product distributors and retailers.

Our products include vitamins, minerals, specialty supplements and sports nutrition products sold under the Twinlab® brand name (including the REAAL®, Phytocab™ and Twinlab® Fuel brand of 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.

Through our NutraScience Labs division, we provide contract manufacturing services for private label products. Our contract manufacturing services business leverages our network of co-packers to manufacture 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.

Principles of Consolidation

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

Basis of Presentation and Unaudited Information

The condensed consolidated interim financial statements included herein have been prepared by the Company in accordance with United States Generally Accepted Accounting Principles (“GAAP”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe 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 herein. Financial results for any interim period are

not

necessarily indicative of financial results that

may

be expected for the fiscal year. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form

-K for the year ended

December 31, 2018

filed with the SEC on

April 16, 2019.

Use of Estimates

The preparation of financial statements in conformity with GAAP 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 Recognition

Revenue from product sales, net of estimated returns and allowances, is recognized when evidence of an arrangement is in place, related prices are fixed and determinable, contractual obligations have been satisfied, title and risk of loss have been transferred to the customer and collection of the resulting receivable is reasonably assured. Shipping terms are generally freight on board shipping point. We sell predominately in the North American and European markets, with international sales transacted in U.S. dollars.

Fair Value of Financial Instruments

We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into

three

levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level

– inputs are quoted prices in active markets for identical assets that the reporting entity has the ability to access at the measurement date.

Level

– inputs are other than quoted prices included within Level

that are observable for the asset, either directly or indirectly.

Level

– inputs are unobservable inputs for the asset that are supported by little or

market activity and that are significant to the fair value of the underlying asset or liability.

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

June 30, 2019

and

December 31, 2018:

	Total		Level 1		Level 2		Level 3
June 30, 2019:
Derivative liabilities	$	6,046		-		-	$	6,046

December 31, 2018:
Derivative liabilities	$	4,359		-		-	$	4,359

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, damages, and doubtful accounts based upon historical bad debt and claims experience. As of

June 30, 2019,

total allowances amounted to

$4,534,

of which

$3,370

was related to doubtful accounts receivable. As of

December 31, 2018,

total allowances amounted to

$2,651,

of which

$1,954

was related to doubtful accounts receivable.

Inventories

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

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

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

Intangible assets consist primarily of trademarks and customer relationships, which are amortized on a straight-line basis over their estimated useful lives ranging from

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 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.

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 of Organic Holdings, LLC (“Organic Holdings”), a market leader in the healthy aging and beauty from within categories, and owner of the Reserveage Nutrition brands, 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. The total indefinite-lived intangible assets as of

June 30, 2019

and

December 31, 2018

was

$4,346

Value of Warrants Issued with Debt

We estimate the grant date value of certain warrants issued with debt, 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.

Derivative Liabilities

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.

Deferred gain on sale of assets

We entered into a sale-leaseback arrangement relating to our office facilities in

2013.

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. Accordingly, we recorded amortization of deferred gain as a reduction of rental expense of

$40

and

$40

for the

three

months ended

June 30, 2019

and

2018,

respectively. For the

six

months ended

June 30, 2019

and

2018,

we recorded amortization of

$67

and

$81,

respectively. As of

June 30, 2019,

and

December 31, 2018,

unamortized deferred gain on sale of assets was

$1,257

and

$1,324,

respectively.

Net Income (Loss) per Common Share

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.

When calculating diluted earnings or loss per share, if the effects are dilutive, companies are required to add back to net income or loss the effects of the change in derivative liabilities related to warrants. Additionally, if the effects of the change in derivative liabilities are added back to net income or loss, companies are required to include the warrants outstanding related to the derivative liability in the calculation of the weighted average dilutive shares.

The common shares used in the computation of our basic and diluted net loss per share are reconciled as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Numerator:
Net loss	$	(4,542	)	$	(5,739	)	$	(13,326	)	$	(10,697	)
Effect of dilutive securities on net loss:
Common stock warrants		-			-			-			(388	)

Total net loss for purpose of calculating diluted net loss per common share	$	(4,542	)	$	(5,739	)	$	(13,326	)	$	(11,085	)

Number of shares used in per common share calculations:
Total shares for purpose of calculating basic net loss per common share		255,643,828			255,149,140			255,643,828			254,206,926
Weighted-average effect of dilutive securities:
Common stock warrants		-			-			-			11,315,870

Total shares for purpose of calculating diluted net loss per common share		255,643,828			255,149,140			255,643,828			265,522,796

Net loss per common share:
Basic	$	(0.02	)	$	(0.02	)	$	(0.05	)	$	(0.04	)
Diluted	$	(0.02	)	$	(0.02	)	$	(0.05	)	$	(0.04	)

Significant Concentration of Credit Risk

Sales to our top

three

customers aggregated to approximately

34%

and

28%

of total sales for the

three

months ended

June 30, 2019

and

2018,

respectively, and

36%

and

28%

of total sales for the

six

months ended

June 30, 2019

and

2018.

Sales to

one

of those customers were approximately

14%

and

12%

of total sales for the

three

months ended

June 30, 2019

and

2018,

respectively, and

14%

and

14%

of total sales for the

six

months ended

June 30, 2019

and

2018,

respectively. A single customer represents

20%

and

14%

of total accounts receivable as of

June 30, 2019

and

December 31, 2018,

respectively, and this customer is a related party through a director who sits on both the Company’s board and that of the customer.

Recent Accounting Pronouncements

January 2017,

the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”)

No.

2017

04,

“Simplifying the Test for Goodwill Impairment (Topic

350

)” 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,

not

to exceed the carrying amount of goodwill. The amendments in this ASU are effective for fiscal years beginning after

December 15, 2019.

Early adoption is permitted after

January 1, 2017.

We do

not

expect the new guidance to have a significant impact on our consolidated financial statements or related disclosures.

February 2016,

the FASB issued ASU

No.

2016

02,

“Leases (Topic

842

)”, 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

842,

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

December 15, 2018,

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

January 1, 2020.

The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Financial Statements.

June 2016,

the FASB issued ASU

2016

13,

"Financial Instruments- Credit losses (Topic

326

): Measurement of Credit losses on Financial Instruments". ASU

2016

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 an emerging growth company allows us to defer adoption until the annual period, including interim periods within the annual period, beginning

January 1, 2021.

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.

May 2014,

the FASB issued ASU

2014

09,

“Revenue from Contracts with Customers (Topic

606

)”. ASU

2014

amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a

five

-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after

December 15, 2016;

however, in

July 2015,

the FASB agreed to delay the effective date by

one

year. The proposed deferral

may

permit early adoption but would

not

allow adoption any earlier than the original effective date of the standard. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Our status as an emerging growth company allowed us to defer the adoption until the annual reporting period beginning

January 1, 2019,

and interim reporting periods within the annual reporting period beginning

January 1, 2020.

These condensed consolidated interim financial statements do

not

include the adoption of ASU

2014

09.

We will include the adoption of ASU

2014

in our annual reporting period ending

December 31, 2019,

and beginning in our interim reporting period for the

three

months ending

March 31, 2020.

We have reviewed this ASU and determined that it has

material impact to the Company's consolidated financial position or results of operations, but will impact the Company's disclosures.

Although there are several other new accounting pronouncements issued or proposed by 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.