Exhibit 99.2
NUTRICAP LABS, LLC AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2013
NUTRICAP LABS, LLC AND SUBSIDIARIES
DECEMBER 31, 2013
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Page | ||
REPORT OF INDEPENDENT AUDITOR'S | 1-2 | |
CONSOLIDATED FINANCIAL STATEMENTS | ||
Consolidated Balance Sheet | 3 | |
Consolidated Statement of Income and Member's Equity | 4 | |
Consolidated Statement of Cash Flows | 5 | |
Notes to Consolidated Financial Statements | 6-10 |
INDEPENDENT AUDITOR'S REPORT
To the Member
NutriCap Labs, LLC and subsidiaries
Farmingdale, New York
We have audited the accompanying consolidated financial statements ofNutriCap Labs, LLC and subsidiaries, which comprise the consolidated balance sheet as of December 31, 2013, and the related consolidated statements of income and member's equity and cash flows for the year then ended, and the related notes to consolidated financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated 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 consolidated financial statements based on our audit. We conducted our audit 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 of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
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Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofNutriCap Labs, LLC and subsidiaries as of December 31, 2013, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
SHAPIRO GOLDSTEIN MOSES & ARTUSO, L.L.P.
April 22, 2014
Woodbury, New York
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NUTRICAP LABS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2013
ASSETS | ||||
CURRENT ASSETS | ||||
Cash and cash equivalents — Note 1 | $ | 1,144,294 | ||
Accounts receivable (net of allowance for doubtful accounts of $890,000) — Note 1 | 2,099,752 | |||
Inventory — Note 1 | 739,609 | |||
Prepaid expenses and other current assets | 236,174 | |||
Total current assets | 4,219,829 | |||
PROPERTY AND EQUIPMENT —Notes 1 and 3 | 699,879 | |||
OTHER ASSETS | ||||
Deposits | 15,225 | |||
Other assets | 33,453 | |||
Total other assets | 48,678 | |||
Total assets | $ | 4,968,386 | ||
LIABILITIES AND MEMBER'S EQUITY | ||||
CURRENT LIABILITIES | ||||
Accounts payable | $ | 2,353,294 | ||
Accrued expenses | 462,173 | |||
Unearned revenues — Note 1 | 1,703,940 | |||
Total current liabilities | 4,519,407 | |||
Total liabilities | 4,519,407 | |||
COMMITMENTS —Note 4 | ||||
MEMBER'S EQUITY | 448,979 | |||
Total liabilities and member's equity | $ | 4,968,386 |
See accompanying notes to financial statements.
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NUTRICAP LABS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND MEMBER'S EQUITY
YEAR ENDED DECEMBER 31, 2013
NET SALES | $ | 32,670,578 | ||
COST OF GOODS SOLD | 24,651,770 | |||
GROSS PROFIT | 8,018,808 | |||
OPERATING EXPENSES | 6,782,812 | |||
INCOME FROM OPERATIONS | 1,235,996 | |||
OTHER INCOME (EXPENSES) | ||||
Administrative income | 94,048 | |||
Interest income | 756 | |||
Interest expense | (2,766 | ) | ||
92,038 | ||||
NET INCOME | 1,328,034 | |||
Member's equity - beginning of year | 1,256,937 | |||
Member's distributions | (2,135,992 | ) | ||
Member's equity - end of year | $ | 448,979 |
See accompanying notes to financial statements.
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NUTRICAP LABS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES | ||||
Net income | $ | 1,328,034 | ||
Adjustments to reconcile net income to net cash from operating activities: | ||||
Depreciation | 234,222 | |||
Increase in inventory reserve for obsolescence | 47,454 | |||
Changes in operating assets and liabilities: | ||||
Decrease in accounts receivable | 1,221,916 | |||
Increase in inventory | (82,006 | ) | ||
Decrease in prepaid expenses and other current assets | 338,174 | |||
Increase in other assets | (22,851 | ) | ||
Decrease in accounts payable | (327,160 | ) | ||
Increase in accrued expenses | 14,150 | |||
Decrease in unearned revenues | (199,190 | ) | ||
Net cash provided by operating activities | 2,552,743 | |||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||
Purchases of property and equipment | (79,898 | ) | ||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||
Payments made on notes payable | (3,049 | ) | ||
Distributions to members | (2,135,992 | ) | ||
Net cash used in financing activities | (2,139,041 | ) | ||
Net increase in cash and cash equivalents | 333,804 | |||
Cash and cash equivalents, beginning of year | 810,490 | |||
Cash and cash equivalents, end of year | $ | 1,144,294 |
See accompanying notes to financial statements.
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NUTRICAP LABS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Date of Management's Review
Management has evaluated subsequent events through April 22, 2014, the date the financial statements were available to be issued.
b. Organization and Business Description
NutriCap Labs, LLC ("NCL"), a New York limited liability company, and VitaCap Labs, LLC ("VCL"), a New York limited liability company that is a variable interest entity of NCL, act to provide contract manufacturing services for health and wellness companies primarily engaged in selling dietary supplements and cosmetic products. In November 2011, Empire Botanical Labs, LLC ("Empire"), a New York limited liability company, was formed to develop and market nutraceutical supplements to retail establishments. The members' liability is limited to their investment.
In 2013, Canyon Marketing III, LLC ("Canyon III"), a Delaware limited liability company, acquired the equity interests of Jason Provenzano ("Provenzano") in both NCL and VCL. Canyon III is now the sole member of NCL and owns a 37.5% interest in VCL. Canyon Marketing II, LLC ("Canyon II"), a Delaware limited liability company, owns the remaining 62.5% equity interest of VCL (See Note 5).
Empire is the wholly-owned subsidiary of NCL.
c. Principles of Consolidation
The consolidated financial statements include the accounts of NutriCap Labs, LLC, VitaCap Labs, LLC and Empire Botanical Labs, LLC (collectively the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation.
d. Use of Estimates
The preparation of these 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 amount of assets and liabilities, 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 these estimates.
e. Cash and Cash Equivalents and Concentrations of Risk
Cash and cash equivalents consist of cash held in bank checking and bank money market accounts.
The statement of cash flows classifies changes in cash and cash equivalents (short-term, highly liquid investments readily convertible into cash with an original maturity of three months or less) according to operating, investing, or financing activities. Financial instruments which potentially expose the Company to concentrations of risk consist principally of cash.
The Company places its cash with financial institutions which management considers to be of high quality; however, at times, such deposits may be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit. As of December 31, 2013, the Company had $1,089,791 in excess of the FDIC limit.
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NUTRICAP LABS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
f. Accounts Receivable
Accounts receivable are reported at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is recorded based on specific known troubled accounts. Accounts are written off when they are determined to be uncollectible.
g. Inventory
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method, and market represents the lower of replacement cost or estimated net realizable value.
h. Property and Equipment
Property and equipment are recorded at cost. Depreciation of property and equipment is provided using the straight-line method over the estimated useful lives of the assets, generally three to seven years. Leasehold improvements are depreciated over the life of the lease on the premises.
i. Revenue Recognition
The Company provides contract manufacturing and in specific circumstances, warehousing and fulfillment services for its customers. Revenue from contract manufacturing is recognized upon shipment of products to the customer or upon transfer of the products to a fulfillment center designated by the customer. In some cases, the customer may request the Company to act as the warehouse and the fulfillment provider. Fulfillment service revenue is recognized upon shipment of the product and warehousing revenue is recognized monthly as the services are provided.
j. Income Taxes
The Company is a limited liability company and as such, income and losses flow through to the individual member. Accordingly, no provisions for federal and state taxes are provided in the consolidated financial statements.
In the normal course of business, the Company is subject to examination by Federal and State taxing authorities. The Company is no longer subject to income tax examinations by tax authorities for years earlier than 2010. The Company does not know of any uncertain tax positions that would have a material impact to the financial statements.
k. Shipping and Handling Costs
The Company classifies freight billed to customers as sales revenue and the related freight and shipping costs as cost of sales.
l. Advertising and Promotions
Costs for advertising and promotions are expensed as incurred. Advertising and promotions expense for the year ended December 31, 2013 was $80,530.
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NUTRICAP LABS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
NOTE 2 — VARIABLE INTEREST ENTITY
Accounting principles generally accepted in the United States of America provide a framework for identifying variable interest entities ("VIE") and determining when a company should include the assets, liabilities, and results of activities of a VIE in its consolidated financial statements. The principal of NCL formed and owns VCL for the purpose of supporting smaller sales orders than NCL requires of its customers. NCL does not have any ownership interest in VCL. NCL is the primary beneficiary since it provides more than half of VCL's subordinated financial support and, therefore, VCL qualifies as a VIE that is consolidated.
NOTE 3 — PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2013 consists of the following:
Leasehold improvements | $ | 595,880 | ||
Machinery and equipment | 382,892 | |||
Furniture and fixtures | 152,526 | |||
Computer software | 305,480 | |||
1,436,778 | ||||
Less: accumulated depreciation | 736,899 | |||
$ | 699,879 |
Depreciation expense for the year ended December 31, 2013 was $234,222.
NOTE 4 — COMMITMENTS
Effective January 2010, the Company entered into a five year office and warehouse lease agreement with an affiliated entity (Note 5). Effective November 1, 2013, a rider to the lease was executed extending this lease until October 31, 2022. In addition to the base rent, the Company is responsible for the cost of property taxes, insurance, and building operations.
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NUTRICAP LABS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
NOTE 4 — COMMITMENTS (Continued)
Future minimum lease payments are as follows:
Year ending December 31, 2014 | $ | 252,464 | ||
Year ending December 31, 2015 | 260,050 | |||
Year ending December 31, 2016 | 267,841 | |||
Year ending December 31, 2017 | 275,885 | |||
Year ending December 31, 2018 | 284,156 | |||
Total minimum annual lease payments | $ | 1,340,396 |
Total rental expense was $363,897 for the period ended December 31, 2013.
NOTE 5 — RELATED PARTY TRANSACTIONS
The Company leases its office and warehouse space from an affiliated entity owned by the CEO of the Company (see Note 4).
The CEO of the Company is also the sole member of both Canyon II and Canyon III (see Note 1b).
The following affiliated entities owed money to the Company as of December 31, 2013:
Stain Away LLC | $ | 18,701 | ||
American Empire Manufacturing | 14,752 | |||
$ | 33,453 |
These loans are non-interest bearing and have no formal repayment terms and are therefore classified as long-term.
NOTE 6 — RETIREMENT PLAN
The Company has a 401(k) plan for the benefit of employees. Employees have the option of contributing a percentage of their salary into the plan on a tax deferred basis. There is no provision for company matching contributions.
NOTE 7 — GUARANTEED PAYMENT
As part of the agreement to acquire the equity interests of NCL and VCL from Provenzano (see Note 1b), the Company was required to pay a guaranteed payment to Provenzano in the amount of $346,560 which has been included in executive compensation.
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NUTRICAP LABS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
NOTE 8 — SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest during the year ended December 31, 2013 was $2,766.
For the year ended December 31, 2013, there was no cash paid for income taxes.
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