NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Nature of the Business
Synergy
CHC Corp. (“Synergy”, “we”, “us”, “our” or the “Company”) (formerly
Synergy Strips Corp.) was incorporated on December 29, 2010 in Nevada under the name “Oro Capital Corporation.” On
April 21, 2014, the Company changed its fiscal year end from July 31 to December 31. On April 28, 2014, the Company changed its
name to “Synergy Strips Corp.”. On August 5, 2015, the Company changed its name to “Synergy CHC Corp.”
The
Company is a consumer health care company that is in the process of building a portfolio of best-in-class consumer product brands.
Synergy’s strategy is to grow its portfolio both organically and by further acquisition.
Synergy
is the sole owner of six subsidiaries: Neuragen Corp., Breakthrough Products, Inc., NomadChoice Pty Ltd., Synergy CHC Inc., Sneaky
Vaunt Corp. and The Queen Pegasus Corp. and the results have been consolidated in these statements.
Note
2 – Summary of Significant Accounting Policies
General
The
accompanying condensed consolidated financial statements as of September 30, 2018 and December 31, 2017 and for the three and
nine months ended September 30, 2018 and 2017 are unaudited. These unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim
financial information and are presented in accordance with the requirements of Rule S-X of the Securities and Exchange Commission
(the “SEC”) and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for
the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2018. The unaudited condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements as of and for the year ended December 31, 2017 and footnotes thereto included
in the Company’s Annual Report on Form 10-K filed with the SEC on April 2, 2018.
Basis
of Presentation
The
unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates are assumptions about collection of accounts receivable, useful life of fixed and intangible assets, goodwill
and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate,
and expected dividend rate.
Cash
and Cash Equivalents
The
Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other
highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. As of September
30, 2018, the Company had no cash equivalents. The Company maintains its cash and cash equivalents in banks insured by the Federal
Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $250,000 per
bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At September 30, 2018, the
uninsured balance amounted to $1,040,864.
Restricted
Cash
The
following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial
position that sum to the total of the same such amounts shown in the statement of cash flows.
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,605,381
|
|
|
$
|
1,955,614
|
|
|
$
|
5,408,927
|
|
Restricted cash
|
|
|
137,096
|
|
|
|
139,071
|
|
|
|
139,172
|
|
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
|
|
$
|
1,742,477
|
|
|
$
|
2,094,685
|
|
|
$
|
5,548,099
|
|
Amounts
included in restricted cash represent amounts held for credit card collateral.
Capitalization
of Fixed Assets
The
Company capitalizes expenditures related to property and equipment, subject to a minimum rule, that have a useful life greater
than one year for: (1) assets purchased; (2) existing assets that are replaced, improved or the useful lives have been extended;
or (3) all land, regardless of cost. Acquisitions of new assets, additions, replacements and improvements (other than land) costing
less than the minimum rule in addition to maintenance and repair costs, including any planned major maintenance activities, are
expensed as incurred.
Intangible
Assets
We
evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised
estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization except
intellectual property of $1,450,000 acquired as part of an Asset Purchase Agreement entered into with Factor Nutrition Labs LLC
on January 22, 2015, $10,000 acquired as part of an Asset Purchase Agreement entered into with Perfekt Beauty Holdings LLC and
CDG Holdings, LLC on June 21, 2017 and $50,000 acquired as an Asset Purchase entered into with Cocowhite on May 22, 2018. Intangible
assets are amortized on a straight line basis over the useful lives. As of September 30, 2018, our qualitative analysis of intangible
assets with indefinite lives did not indicate any impairment.
Long-lived
Assets
Long-lived
assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived
asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset
is not recoverable when compared to undiscounted cash flows expected to result from the use and eventual disposition of the asset.
Indicators
of impairment include significant underperformance relative to historical or projected future operating results, significant changes
in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry
or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability
of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected,
net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically
a discounted cash flow analysis, and an impairment charge is recorded for the excess of carrying value over fair value. As of
September 30, 2018, our qualitative analysis of long-lived assets did not indicate any impairment.
Goodwill
An
asset purchase is accounted for under the purchase method of accounting. Under that method, assets and liabilities of the business
acquired are recorded at their estimated fair values as of the date of the acquisition, with any excess of the cost of the acquisition
over the estimated fair value of the net tangible and intangible assets acquired recorded as goodwill. As of September 30, 2018,
our qualitative analysis of goodwill did not indicate any impairment.
Revenue
Recognition
Adoption
of ASU 2014-09, Revenue from Contracts with Customers
On
January 1, 2018, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606,
Revenue from Contracts with Customers (ASC 606) using the modified retrospective (cumulative effect) transition method. Under
this transition method, results for reporting periods beginning January 1, 2018 or later are presented under ASC 606, while prior
period results continue to be reported in accordance with previous guidance. The cumulative effect of the initial application
of ASC 606 was immaterial, no adjustment was recorded to the opening balance of retained earnings. The timing of revenue recognition
for our various revenue streams was not materially impacted by the adoption of this standard. The Company believes its business
processes, systems, and controls are appropriate to support recognition and disclosure under ASC 606. In addition, the adoption
has led to increased footnote disclosures. Overall, the adoption of ASC 606 did not have a material impact on the Company’s
condensed consolidated balance sheet, statement of operations and comprehensive income and statement of cash flows for the nine
months ended September 30, 2018. ASC 606 also requires additional disclosures about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets
recognized from costs incurred to fulfill a contract. As described below, the analysis of contracts under ASC 606 supports the
recognition of revenue at a point in time, resulting in revenue recognition timing that is materially consistent with the Company’s
historical practice of recognizing product revenue when title and risk of loss pass to the customer.
Policy
The
Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting
Standards Codification (“ASC”) ASC 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are
recognized when control is transferred to customers in amounts that reflect the consideration the Company expects to be entitled
to receive in exchange for those goods. Revenue recognition is evaluated through the following five steps: (i) identification
of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination
of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition
of revenue when or as a performance obligation is satisfied.
The
Company recognizes revenue upon shipment from its fulfillment centers. Certain of our distributors may also perform a separate
function as a co-packer on our behalf. In such cases, ownership of and title to our products that are co-packed on our behalf
by those co-packers who are also distributors, passes to such distributors when we are notified by them that they have taken transfer
or possession of the relevant portion of our finished goods. Freight billed to customers is presented as revenues, and the related
freight costs are presented as cost of goods sold. Cancelled orders are refunded if not already dispatched, refunds are only paid
if stock is damaged in transit, discounts are only offered with specific promotions and orders will be refilled if lost in transit.
Contract
Assets
The
Company does not have any contract assets such as work-in-process. All trade receivables on the Company’s condensed consolidated
balance sheet are from contracts with customers.
Contract
Costs
Costs
incurred to obtain a contract are capitalized unless short term in nature. As a practical expedient, costs to obtain a contract
that are short term in nature are expensed as incurred. The Company does not have any contract costs capitalized as of September
30, 2018.
Contract
Liabilities - Deferred Revenue
The
Company’s contract liabilities consist of advance customer payments and deferred revenue. Deferred revenue results from
transactions in which the Company has been paid for products by customers, but for which all revenue recognition criteria have
not yet been met. Once all revenue recognition criteria have been met, the deferred revenues are recognized.
Accounts
receivable
Accounts
receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of
outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection
efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied
against the allowance for doubtful accounts.
Advertising
Expense
The
Company expenses marketing, promotions and advertising costs as incurred. Such costs are included in selling expense in the accompanying
unaudited condensed consolidated statements of income.
Research
and Development
Costs
incurred in connection with the development of new products and processing methods are charged to general and administrative expenses
as incurred.
Income
Taxes
The
Company utilizes FASB ASC 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities
and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation allowance is recorded when it is “more likely-than-not”
that a deferred tax asset will not be realized.
The
Company generated a deferred tax asset through net operating loss carry-forward. However, a valuation allowance of 100% has been
established due to the uncertainty of the Company’s realization of the net operating loss carry forward prior to its expiration.
NomadChoice
Pty Ltd, the Company’s wholly-owned foreign subsidiary, is subject to income taxes in the jurisdictions in which it operates.
Significant judgment is required in determining the provision for income tax. There are many transactions and calculations undertaken
during the ordinary course of business for which the ultimate tax determination is uncertain. The company recognizes liabilities
for anticipated tax audit issues based on the Company’s current understanding of the tax law. Where the final tax outcome
of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions
in the period in which such determination is made.
Synergy
CHC Inc. is a wholly-owned foreign subsidiary, is subject to income taxes in the jurisdictions in which it operates. Significant
judgment is required in determining the provision for income tax. There are many transactions and calculations undertaken during
the ordinary course of business for which the ultimate tax determination is uncertain. The company recognizes liabilities for
anticipated tax audit issues based on the Company’s current understanding of the tax law. Where the final tax outcome of
these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in
the period in which such determination is made.
Net
Earnings (Loss) Per Common Share
The
Company computes earnings per share under ASC subtopic 260-10, Earnings Per Share. Basic earnings (loss) per share is computed
by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average number of shares
of common stock outstanding (the denominator) during the reporting periods. Diluted earnings per share is computed by increasing
the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible
into common stock (using the “treasury stock” method), unless their effect on net loss per share is anti-dilutive.
As of September 30, 2018, and 2017, options to purchase 7,166,667 and 6,300,000 shares of common stock, respectively, were outstanding.
As of both September 30, 2018 and 2017, warrants to purchase 1,000,000 shares of common stock were outstanding.
The
following is a reconciliation of the number of shares used in the calculation of basic earnings per share and diluted earnings
per share for the three and nine months ended September 30, 2018, and 2017:
|
|
For
the three months ended
|
|
|
For
the nine months ended
|
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) after tax
|
|
$
|
345,590
|
|
|
$
|
127,486
|
|
|
$
|
(493,296
|
)
|
|
$
|
2,635,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
89,862,683
|
|
|
|
89,237,683
|
|
|
|
89,862,683
|
|
|
|
88,939,470
|
|
Common stock to be issued
|
|
|
-
|
|
|
|
125,000
|
|
|
|
-
|
|
|
|
125,000
|
|
Incremental shares from the assumed exercise of dilutive stock
options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Incremental shares from the assumed exercise
of dilutive stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Dilutive potential common shares
|
|
|
89,862,683
|
|
|
|
89,362,683
|
|
|
|
89,862,683
|
|
|
|
89,064,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
The
following securities were not included in the computation of diluted net earnings per share as their effect would have been antidilutive:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
7,166,667
|
|
|
|
6,300,000
|
|
Warrants to purchase common stock
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
8,166,667
|
|
|
|
7,300,000
|
|
Fair
Value Measurements
The
Company measures and discloses the fair value of assets and liabilities required to be carried at fair value in accordance with
ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value,
and enhances fair value measurement disclosure.
ASC
825 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities
required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it
would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent
risk, transfer restrictions, and risk of nonperformance. ASC 825 establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825 establishes
three levels of inputs that may be used to measure fair value:
Level
1 - Quoted prices for identical assets or liabilities in active markets to which we have access at the measurement date.
Level
2 - Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level
3 - Unobservable inputs for the asset or liability.
The
determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant
to the fair value measurement.
As
of September 30, 2018, the Company has determined that there were no assets or liabilities measured at fair value.
Inventory
Inventory
consists of raw materials, components and finished goods. The Company’s inventory is stated at the lower of cost (FIFO cost
basis) or net realizable value. Finished goods include the cost of labor to assemble the items.
Stock-Based
Compensation
ASC
718, “Compensation – Stock Compensation,” prescribes accounting and reporting standards for all share-based
payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering
to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based
payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements
based on their fair values. That expense is recognized over the period during which an employee is required to provide services
in exchange for the award, known as the requisite service period (usually the vesting period).
The
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC
505-50, “Equity – Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees
is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments
issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance
completion date.
Foreign
Currency Translation
The
functional currency of one of the Company’s foreign subsidiaries (Nomadchoice Pty Ltd.) is the U.S. Dollar. The Company’s
foreign subsidiary maintains its records using local currency (Australian Dollar). All monetary assets and liabilities of the
foreign subsidiary were translated into U.S. Dollars at quarter end exchange rates, non-monetary assets and liabilities of the
foreign subsidiary were translated into U.S. Dollars at transaction day exchange rates. Income and expense items related to non-monetary
items were translated at exchange rates prevailing during the transaction date and other incomes and expenses were translated
using average exchange rate for the period. The resulting translation adjustments, net of income taxes, were recorded in statements
of operations as Remeasurement gain or loss on translation of foreign subsidiary.
The
functional currency of the Company’s other foreign subsidiary (Synergy CHC Inc.) is the Canadian Dollar (CAD). The Company’s
foreign subsidiary maintains its records using local currency (CAD). All assets and liabilities of the foreign subsidiary were
translated into U.S. Dollars at period end exchange rates and stockholders’ equity is translated at the historical rates.
Income and expense items were translated using average exchange rate for the period. The resulting translation adjustments, net
of income taxes, are reported as other comprehensive income and accumulated other comprehensive income in the stockholder’s
equity in accordance with ASC 220 – Comprehensive Income.
Translation
gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional
currency are translated into either Australian Dollars or Canadian Dollars, as the case may be, at the rate on the date of the
transaction and included in the results of operations as incurred.
Concentrations
of Credit Risk
In
the normal course of business, the Company provides credit terms to its customers; however, collateral is not required. Accordingly,
the Company performs credit evaluations of its customers and maintains allowances for possible losses which, when realized, were
within the range of management’s expectations. From time to time, a higher concentration of credit risk exists on outstanding
accounts receivable for a select number of customers due to individual buying patterns.
Warehousing
costs
Warehouse
costs include all third party warehouse rent fees and are charged to selling and marketing expenses as incurred. Any additional
costs relating to assembly or special pack-outs of the Company’s products are charged to cost of sales.
Product
display costs
All
displays manufactured and purchased by the Company are for placement of product in retail stores. This also includes all costs
for display execution and setup and retail services are charged to cost of sales and expensed as incurred.
Cost
of Sales
Cost
of sales includes the purchase cost of products sold and all costs associated with getting the products into the retail stores
including buying and transportation costs.
Debt
Issuance Costs
Debt
issuance costs consist primarily of arrangement fees, professional fees and legal fees. These costs are netted off with the related
loan and are being amortized to interest expense over the term of the related debt facilities.
Shipping
Costs
Shipping
and handling costs billed to customers are recorded in sales. Shipping costs incurred by the company are recorded in selling and
marketing expenses.
Related
parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. All transactions
with related parties are recorded at fair value of the goods or services exchanged.
Segment
Reporting
Segment
identification and selection is consistent with the management structure used by the Company’s chief operating decision
maker to evaluate performance and make decisions regarding resource allocation, as well as the materiality of financial results
consistent with that structure. Based on the Company’s management structure and method of internal reporting, the Company
has one operating segment. The Company’s chief operating decision maker does not review operating results on a disaggregated
basis; rather, the chief operating decision maker reviews operating results on an aggregate basis.
Recent
Accounting Pronouncements
ASU
2018-05
This
Accounting Standards Update adds SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 118, which expresses the view
of the staff regarding application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017 - the date
on which the Tax Cuts and Jobs Act (H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent
Resolution on the Budget for Fiscal Year 2018) was signed into law. We are currently evaluating the impact of adopting ASU 2017-13
on our consolidated financial statements.
ASU
2018-02
On
December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles
II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act of 2017). Stakeholders raised
a narrow-scope financial reporting issue that arose as a consequence of the Tax Cuts and Jobs Act of 2017. The amendments in this
Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting
from the Tax Cuts and Jobs Act of 2017. The amendments in this Update affect any entity that is required to apply the provisions
of Topic 220, Income Statement-Reporting Comprehensive Income, and has items of other comprehensive income for which the related
tax effects are presented in other comprehensive income as required by GAAP. The amendments in this update is effective for all
entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of
the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting
periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which
financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in
the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate
income tax rate in the Tax Cuts and Jobs Act is recognized.
This
Accounting Standards Update is the final version of Proposed Accounting Standards Update 2018-210—Income Statement—Reporting
Comprehensive Income (Topic 220), which has been deleted. We are currently evaluating the impact of adopting ASU 2017-13 on our
consolidated financial statements.
ASU
2018-01
The
amendments in this Update provide an optional transition practical expedient to not evaluate under Topic 842 existing or expired
land easements that were not previously accounted for as leases under Topic 840, Leases. An entity that elects this practical
expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842.
An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with
the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. We are currently
evaluating the impact of adopting ASU 2017-13 on our consolidated financial statements.
ASU
2017-13
In
September 2017, the FASB issued Accounting Standard Update (ASU) 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts
with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). The effective date for ASU 2017-13 is for fiscal years
beginning after December 15, 2018. We have adopted ASC 606 as disclosed above. We are currently evaluating the impact of adopting
Leases Topic 840 ASU 2017-13 on our consolidated financial statements.
ASU
2017-09
The
Board is issuing this Update to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying
the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment
award.
The
amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require
an entity to apply modification accounting in Topic 718. The amendment is Effective for all entities for annual periods, and interim
periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any
interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued
and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance.
This
Update is the final version of Proposed Accounting Standards Update 2016-360—Compensation—Stock Compensation (Topic
718)—Scope of Modification Accounting, which has been deleted.
Adoption of this new
standard did not have any impact on the Company’s consolidated financial statements.
ASU
2017-04
In
January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), which simplifies the goodwill impairment
test. The effective date for ASU 2017-04 is for fiscal years beginning after December 15, 2019. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the
impact of adopting ASU 2017-04 on our consolidated financial statements.
ASU
No. 2017-01
In
January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This
new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities
is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed
of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This
new standard will be effective for the Company on January 1, 2018; however, early adoption is permitted with prospective application
to any business development transaction. We are currently evaluating the impact of adopting ASU 2017-04 on our consolidated financial
statements.
ASU
2016-18
In
November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires that restricted cash and restricted
cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash
amounts shown on the statement of cash flows. The effective date for ASU 2016-18 is for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early adoption is permitted.
We
adopted ASU 2016-18 effective January 1, 2018. The adoption of ASU 2016-18 had no impact on our retained earnings, and no impact
to our net income on an ongoing basis. Adoption of the new standard requires that a statement of cash flows explain the change
during the period in the total of cash, cash equivalents and amounts generally described as restricted cash, or restricted cash
equivalents. The amounts generally described as restricted cash and restricted cash equivalents should be included with cash and
cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows.
The amendments have been applied using a retrospective transition method to each period presented, as required. The period ended
September 30, 2017 has been reclassified to reflect this change.
ASU
2016-15
In
August 2016, the FASB issued AS 2016-15, Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain
cash receipts and cash payments are presented and classified in the statement of cash flows. The effective date for ASU 2016-15
is for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.
Early adoption is permitted. We are currently evaluating the impact of adopting ASU 2016-18 on our consolidated financial statements.
ASU
2016-09
In
March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, or ASU No. 2016-09. The areas for simplification
in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities,
the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods. Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim
period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity
that elects early adoption must adopt all of the amendments in the same period. Amendments related to the timing of when excess
tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using
a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period
in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows
when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments
requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating
expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess
tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method.
We are currently evaluating the impact of adopting ASU No. 2016-09 on our consolidated financial statements.
ASU
2016-01
In
January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the
current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and
the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the
valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt
securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption,
an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the
first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record
fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other
comprehensive income. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
Note
3 – Inventory
Inventory
consists of finished goods, components and raw materials. The Company’s inventory is stated at the lower of cost (FIFO cost
basis) or net realizable value.
The
carrying value of inventory consisted of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Finished goods
|
|
$
|
2,529,198
|
|
|
$
|
1,507,344
|
|
Components
|
|
|
733,676
|
|
|
|
1,197,228
|
|
Inventory in transit
|
|
|
-
|
|
|
|
45,188
|
|
Raw materials
|
|
|
118,940
|
|
|
|
92,616
|
|
Total inventory
|
|
$
|
3,381,814
|
|
|
$
|
2,842,376
|
|
On
January 22, 2015, inventory was pledged to Knight Therapeutics under the Loan Agreement (see note 10).
Note
4 – Accounts Receivable
Accounts
receivable, net of allowances for sales returns and doubtful accounts, consisted of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Trade accounts receivable
|
|
$
|
2,024,258
|
|
|
$
|
4,333,608
|
|
Less allowances
|
|
|
-
|
|
|
|
-
|
|
Total accounts receivable,
net
|
|
$
|
2,024,258
|
|
|
$
|
4,333,608
|
|
Note
5 – Prepaid Expenses
Prepaid
expenses consisted of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Advances for inventory
|
|
$
|
71,087
|
|
|
$
|
206,973
|
|
Components
|
|
|
-
|
|
|
|
104,668
|
|
Media production
|
|
|
41,583
|
|
|
|
109,388
|
|
Insurance
|
|
|
29,273
|
|
|
|
41,548
|
|
Trade shows
|
|
|
18,295
|
|
|
|
17,150
|
|
Deposits
|
|
|
49,472
|
|
|
|
44,841
|
|
Rent
|
|
|
-
|
|
|
|
19,500
|
|
Promotion - Bloggers
|
|
|
101,700
|
|
|
|
246,592
|
|
License agreement
|
|
|
83,334
|
|
|
|
158,333
|
|
Software subscriptions
|
|
|
54,798
|
|
|
|
20,513
|
|
Rebranding
|
|
|
52,429
|
|
|
|
32,841
|
|
Clinical Research
|
|
|
39,575
|
|
|
|
47,490
|
|
Advertising
|
|
|
75,155
|
|
|
|
2,500
|
|
Promotions
|
|
|
-
|
|
|
|
37,500
|
|
Miscellaneous
|
|
|
150,755
|
|
|
|
53,414
|
|
Total
|
|
$
|
767,456
|
|
|
$
|
1,143,251
|
|
Note
6 – Concentration of Credit Risk
Cash
and cash equivalents
The
Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts
that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing
its cash deposits with major financial institutions. At September 30, 2018 and December 31, 2017, the uninsured balances amounted
to $1,040,864 and $1,557,373, respectively.
Accounts
receivable
As
of September 30, 2018, four customers accounted for 78% of the Company’s accounts receivable. As of December 31, 2017, three
customers accounted for 88% of the Company’s accounts receivable.
Major
customers
For
the nine months ended September 30, 2018, three customers accounted for approximately 50% of the Company’s net revenue.
For the three months ended September 30, 2018, two customers accounted for approximately 58% of the Company’s net revenue.
For the nine months ended September 30, 2017, two customers accounted for approximately 34% of the Company’s net revenue.
For the three months ended September 30, 2017, two customers accounted for approximately 50% of the Company’s net revenue.
For the year ended December 31, 2017, two customers accounted for approximately 42% of the Company’s net revenues. Substantially
all of the Company’s business is with companies in the United States.
Major
suppliers
For
the three and nine months ended September 30, 2018 and the year ended December 31, 2017, our products were made by the following
suppliers:
FOCUSfactor
|
Atrium
Innovations - Pittsburgh, PA
|
Vit-Best
Nutrition, Inc. - Tustin, CA
|
Flat
Tummy Tea
|
Caraway
Tea Company, LLC - Highland, NY
|
-
|
Neuragen
|
C-Care,
LLC - Linthicum Heights, MD
|
-
|
UrgentRx
|
Capstone
Nutrition - Ogden, UT
|
-
|
Hand
MD
|
HealthSpecialty
- Santa Fe Springs, CA
|
-
|
Sneaky
Vaunt
|
Dongguan
Jingrui – China
|
-
|
The
Queen Pegasus
|
Skin
Actives – Gilbert, AZ
|
Ningbo
Beautiful Daily Cosmetics – Zhejiang, China
|
It
is the opinion of management that the products can be produced by other manufacturers and the choice to utilize these suppliers
is not a significant concentration.
Note
7 – Fixed Assets and Intangible Assets
As
of September 30, 2018, and December 31, 2017, fixed assets and intangible assets consisted of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
566,446
|
|
|
$
|
437,358
|
|
Less accumulated depreciation
|
|
|
(258,614
|
)
|
|
|
(144,153
|
)
|
Fixed assets, net
|
|
$
|
307,832
|
|
|
$
|
293,205
|
|
Depreciation
expense for the three months ended September 30, 2018 and 2017 was $38,299 and $27,134, respectively. Depreciation expense for
the nine months ended September 30, 2018 and 2017 was $114,461 and $77,445, respectively.
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
FOCUSfactor intellectual property
|
|
$
|
1,450,000
|
|
|
$
|
1,450,000
|
|
Perfekt intellectual property
|
|
|
10,000
|
|
|
|
10,000
|
|
Cocowhite intellectual property
|
|
|
50,000
|
|
|
|
-
|
|
Intangible assets subject to amortization
|
|
|
7,150,165
|
|
|
|
7,134,952
|
|
Less accumulated amortization
|
|
|
(4,311,297
|
)
|
|
|
(3,062,742
|
)
|
Intangible assets, net
|
|
$
|
4,348,868
|
|
|
$
|
5,532,210
|
|
Amortization
expense for the three months ended September 30, 2018 and 2017 was $417,280 and $369,722, respectively. Amortization expense for
the nine months ended September 30, 2018 and 2017 was $1,248,555 and $968,841, respectively. These intangible assets were acquired
through an Asset Purchase Agreement and Stock Purchase Agreements.
Note
8 – Related Party Transactions
The
Company accrued and paid consulting fees of $57,917 for seven months to a company owned by Mr. Jack Ross, Chief Executive Officer
of the Company. The Company expensed $173,750 during the three months ended September 30, 2018 and $403,583 during the nine months
ended September 30, 2018. As of September 30, 2018, the total outstanding balance was $0 for consulting fees and reimbursements.
On
January 22, 2015, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc. (“Knight”), a
related party, for the purchase of the Focus Factor assets. At September 30, 2018, the Company owed Knight $0 on this loan, net
of debt issuance cost (see Note 10).
On
June 26, 2015, the Company entered into a Security Agreement with Knight Therapeutics, Inc., through its wholly owned subsidiary
Neuragen Corp., for the purchase of Knight Therapeutics, Inc.’s assets. At September 30, 2018, the Company owed Knight $274,814
in relation to this agreement (see Note 10).
On
August 18, 2015, the Company entered into a Consulting Agreement with Kara Harshbarger, the co-founder of Hand MD, LLC, pursuant
to which she will provide marketing and sales related service. The Company pays Ms. Harshbarger $10,000 a month for one year unless
the Consulting Agreement is terminated earlier by either party. The Company has extended this agreement on a month to month basis.
Hand MD, LLC is a 50% owner in Hand MD Corp. The Company expensed $30,000 through payroll for the three months ended September
30, 2018 and $90,000 for the nine months ended September 30, 2018. As of September 30, 2018, the total outstanding balance was
$0.
On
November 12, 2015, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party, for the
purchase of NomadChoice Pty Limited and Breakthrough Products, Inc. At September 30, 2018, the Company owed Knight $0 on this
loan, net of debt issuance cost (see Note 10).
On
August 9, 2017, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party, for a working
capital loan. At September 30, 2018, the Company owed Knight $8,053,411 on this loan, net of debt issuance cost (see Note 10).
On
December 23, 2016, we entered into an agreement with Knight Therapeutics for the distribution rights of FOCUSFactor in Canada.
In conjunction with this agreement, we are required to pay Knight a distribution fee equal to 30% of gross sales for sales achieved
through a direct sales channel and 5% of gross sales for sales achieved through retail sales. The minimum due to Knight under
this agreement is $100,000 Canadian dollars. As of September 30, 2018, the total outstanding balance was $100,000 Canadian dollars.
The
Company expensed royalty of $62,306 during the three months ended September 30, 2018 and $342,315 during the nine months ended
September 30, 2018. At September 30, 2018 NomadChoice Pty Ltd., a subsidiary of the Company, owed Knight Therapeutics $50,310
in connection with a royalty distribution agreement.
The
Company expensed royalty of $4,663 during the three months ended September 30, 2018 and $14,279 during the nine months ended September
30, 2018. At September 30, 2018 Sneaky Vaunt Corp., a subsidiary of the Company, owed Knight Therapeutics $3,948 in connection
with a royalty distribution agreement.
The
Company expensed commissions of $10,898 during the three months ended September 30, 2018 and $38,529 during the nine months ended
September 30, 2018. At September 30, 2018, Sneaky Vaunt Corp., a subsidiary of the Company, owed Founded Ventures, owned by a
shareholder in the Company, $5,734 in connection with a commission agreement.
The
Company expensed royalty of $386 during the three months ended September 30, 2018 and $2,297 during the nine months ended September
30, 2018. At September 30, 2018 The Queen Pegasus, a subsidiary of the Company, owed Knight Therapeutics $129 in connection with
a royalty distribution agreement.
The
Company expensed commissions of $1,228 during the three months ended September 30, 2018 and $7,118 during the nine months ended
September 30, 2018. At September 30, 2018, The Queen Pegasus, a subsidiary of the Company, owed Founded Ventures $649 in connection
with a commission agreement.
The
Company paid $62,500 and $187,500 during the three and nine months ended September 30, 2018 to Hand MD, Corp, related to a royalty
agreement. At September 30, 2018, the Company owed Hand MD Corp. $61,663 in minimum future royalties.
Note
9 – Accounts Payable and Accrued Liabilities
As
of September 30, 2018, and December 31, 2017, accounts payable and accrued liabilities consisted of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Accrued payroll
|
|
$
|
228,545
|
|
|
$
|
296,491
|
|
Accrued legal fees
|
|
|
16,319
|
|
|
|
96,017
|
|
Accounting fees
|
|
|
36,041
|
|
|
|
19,681
|
|
Commissions
|
|
|
186,666
|
|
|
|
178,286
|
|
Manufacturers
|
|
|
2,022,187
|
|
|
|
2,147,751
|
|
Promotions
|
|
|
99,181
|
|
|
|
897,925
|
|
Professional Fees
|
|
|
30,000
|
|
|
|
45,921
|
|
Rent
|
|
|
20,085
|
|
|
|
19,500
|
|
Customers
|
|
|
177
|
|
|
|
106,395
|
|
Interest
|
|
|
-
|
|
|
|
147,000
|
|
Royalties, related party
|
|
|
138,585
|
|
|
|
138,143
|
|
Warehousing
|
|
|
8,640
|
|
|
|
10,388
|
|
Others
|
|
|
125,843
|
|
|
|
225,050
|
|
Total
|
|
$
|
2,912,269
|
|
|
$
|
4,328,548
|
|
Note
10 – Notes Payable
The
Company’s loans payable at September 30, 2018 and December 31, 2017 are as follows:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Loans payable
|
|
$
|
8,274,814
|
|
|
$
|
10,344,739
|
|
Unamortized debt issuance cost
|
|
|
(221,403
|
)
|
|
|
(393,227
|
)
|
Total
|
|
|
8,053,411
|
|
|
|
9,951,512
|
|
Less: Current portion
|
|
|
(1,955,917
|
)
|
|
|
(2,487,233
|
)
|
Long-term portion
|
|
$
|
6,097,494
|
|
|
$
|
7,464,279
|
|
$6,000,000
January 22, 2015 Loan:
On
January 22, 2015, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Knight Therapeutics
(Barbados) Inc. (“Knight”), pursuant to which Knight agreed to loan the Company $6.0 million (the “Loan”),
and which amount was borrowed at closing (the “Financing”) for the purpose of acquiring the Focus Factor Business
(defined below). At closing, the Company paid Knight an origination fee of $120,000 and a work fee of $60,000 and also paid $40,000
of Knight’s expenses associated with the Loan. The Loan bears interest at a rate of 15% per year; provided, however, that
upon the occurrence of an equity or convertible equity offering by the Company of at least $1.0 million, the interest rate will
drop to 13% per year. Interest accrues quarterly and is payable in arrears on March 31, June 30, September 30 and December 31
in each year, beginning on March 31, 2015.
All
outstanding principal and accrued and unpaid interest is due on the earliest to occur of either January 20, 2017 (the “Maturity
Date”), or the date that Knight, in its discretion, accelerates the Company’s obligations due to an event of default.
The Company may extend the Maturity Date for two successive additional 12-month periods if at March 31, 2016 and March 31, 2017,
respectively, the Company’s revenues exceed $13.0 million and its EBITDA exceeds $2.0 million for the respective 12-month
period then ending. These covenants were achieved, therefore the Company chose to extend the loan for the first 12-month period
to January 20, 2018. Principal payments under the Loan Agreement commenced on June 30, 2015 and continue quarterly as set forth
on the Repayment Schedule to the Loan Agreement. This Loan was repaid in full on January 20, 2018. The Company recognized and
paid interest expense of $0 and $4,611, respectively during the three and nine months ended September 30, 2018. Accrued interest
expense was $0 as of September 30, 2018.
Subject
to certain restrictions, the Company may prepay the outstanding principal of the Loan (in whole but not in part) at any time if
the Company pays a concurrent prepayment fee equal to the greater of (i) the total unpaid annual interest that would have been
payable during the year in which the prepayment is made if the prepayment is made prior to the first anniversary of the closing,
and (ii) $300,000. The Company’s obligations under the Loan Agreement are secured by a first priority security interest
in all present and future assets of the Company. The Company also agreed to not pledge or otherwise encumber its intellectual
property assets, subject to certain customary exceptions.
The
Loan Agreement includes customary representations, warranties, and affirmative and restrictive covenants, including covenants
to attain and maintain certain financial metrics, and to not merge or dispose of assets, acquire other businesses (except for
businesses substantially similar or complementary to the Company’s business and the aggregate consideration to be paid does
not exceed $100,000) or make capital expenditures in excess of $100,000 over the Company’s annual business plan in any year.
The Loan Agreement also includes customary events of default, including payment defaults, breaches of covenants, change of control
and material adverse effect default. Upon the occurrence of an event of default and during the continuation thereof, the principal
amount of the Loan will bear a default interest rate of an additional 5%.
In
connection with the Loan Agreement, the Company issued to Knight a warrant that entitled Knight to purchase 4,595,187 shares of
common stock of the Company (“Common Stock”) on or prior to close of business on January 30, 2015 (the “ST Warrant”).
The aggregate exercise price of the Common Stock under the ST Warrant is $1.00. Knight exercised the ST Warrant on January 22,
2015. Also in connection with the Loan Agreement, the Company issued to Knight a warrant to purchase 3,584,759 shares of Common
Stock on or prior to the close of business of January 22, 2025 (the “LT Warrant”). The exercise price per share of
the Common Stock under the LT Warrant is $0.34. The LT Warrant provides for cashless exercise. The LT Warrant also provides that
in the event the closing price of the Common Stock remains above $1.00 for six consecutive months, Knight will forfeit the difference
between the number of shares acquired under the LT Warrant prior to 90 days after such six-month period, and 25% of the shares
purchasable under the LT Warrant.
The
beneficial conversion feature of the warrants issued to Knight amounted to $1,952,953 (ST warrants) and $1,462,560 (LT warrants),
respectively, and was recorded as debt discount of the corresponding debt.
During
2016, this debt discount was fully expensed in conjunction with the cancellation of all warrants and options held by Knight.
The
Company also recorded deferred financing costs of $289,045 with respect to the above loan. The Company recognized amortization
of deferred financing costs of $0 and $3,257 during the three and nine months ended September 30, 2018, respectively. Unamortized
debt issuance cost as of September 30, 2018 amounted to $0.
$950,000
June 26, 2015 Security Agreement:
On
June 26, 2015, the Company, through its wholly owned subsidiary, Neuragen Corp. (“Neuragen”), issued a 0% promissory
note in a principal amount of $950,000 in connection with an Asset Purchase Agreement. The note requires $250,000 to be paid on
or before June 30, 2016, and $700,000 to be paid in quarterly installments (beginning with the quarter ended September 30, 2015)
equal to the greater of $12,500 or 5% of U.S. net sales, and 2% of U.S. net sales of Neuragen for 60 months thereafter. The payment
of such amounts is secured by a security interest in certain assets, undertakings and property (“Collateral”) pursuant
to the Security Agreement, which will be released upon receipt of total payments of $1.2 million.
The
Company also recorded deferred financing costs of $10,486 with respect to the above agreement. The Company recognized amortization
of deferred financing costs of $0 during the three and nine months ended September 30, 2018. Unamortized debt issuance cost as
of September 30, 2018 amounted to $0. The Company recorded present value of future payments of $274,814 and $282,240 as of September
30, 2018 and December 31, 2017, respectively. The Company recorded imputed interest expense of $9,933 and $30,074 for the three
and nine months ended September 30, 2018, respectively.
During
the three and nine months ended September 30, 2018, the Company made payments of $12,500 and $37,500, respectively, in connection
with this Security Agreement.
$5,500,000
November 12, 2015 Loan:
On
November 12, 2015, we entered into a First Amendment to Loan Agreement (“First Amendment”) with Knight, pursuant to
which Knight agreed to loan us an additional $5.5 million, and which amount was borrowed at closing (the “Financing”)
for the purpose of acquiring Breakthrough Products, Inc. and NomadChoice Pty Limited through Stock Purchase Agreements. At closing,
we paid Knight an origination fee of $110,000 and a work fee of $55,000 and also paid $24,000 of Knight’s expenses associated
with the Loan. The Loan bears interest at a rate of 15% per year. The interest rate will decrease to 13% if we meet certain equity-fundraising
targets. The amended Loan Agreement matured on November 11, 2017 and was fully paid.
In
connection with the First Amendment, we issued Knight a warrant that entitles Knight to purchase 5,550,625 shares of our common
stock (“Knight Warrant Shares”) representing approximately 6.5% of our fully diluted capital, which Knight exercised
in full on November 12, 2015. Knight also received a 10-year warrant entitling Knight to purchase up to 4,547,243 shares of our
common stock at $0.49 per share (“Knight Warrants”).
The
beneficial conversion feature of the warrants issued to Knight amounted to $2,553,287 (5,550,625 warrants) and $2,067,258 (4,547,243
warrants), respectively, and was recorded as debt discount of the corresponding debt in 2015.
During
2016, this debt discount was fully expensed in conjunction with the cancellation of all warrants and options held by Knight.
$10,000,000
August 9, 2017 Loan:
On
August 9, 2017, we entered into a Second Amendment to Loan Agreement (“Second Amendment”) with Knight, pursuant to
which Knight agreed to loan us an additional $10 million, and an ongoing credit facility of up to $20 million, and which amount
was borrowed at closing (the “Financing”) for working capital purposes. At closing, we paid Knight an origination
fee of $200,000 and a work fee of $100,000 and also paid $100,000 of Knight’s expenses associated with the Loan. The Loan
bears interest at 10.5% per annum. The amended Loan Agreement matures on August 8, 2020. We have met all the covenants except
for the TTM EBITDA of $5 million during the period ending March 31, 2018. Default Interest rate of 5% (from 10.5% to 15.5%) applies
in accordance to our current agreement and will be in effect starting April 1, 2018 and will be in effect until the $5 million
TTM EDITDA covenant is achieved. During the period ending June 30, 2018 the interest rate was reduced to 13% due to reducing payroll
expenses. Also, Synergy will maintain Focus Factor Net Sales as measured on a year-end basis of at least USD $15 million for each
fiscal year starting with December 31, 2017.
The
Company also recorded deferred financing costs of $452,869 with respect to the above loan. The Company recognized amortization
of deferred financing costs of $93,090 and $168,568 during the three and nine months ended September 30, 2018, respectively. Unamortized
debt issuance cost as of September 30, 2018 amounted to $221,403.
The
Company recognized and paid interest expense of $273,000 and $801,444 during the three and nine months ended September 30, 2018,
respectively. Accrued interest was $0 as of September 30, 2018. The loan balance at September 30, 2018 was $8,000,000.
Note
11 – Stockholders’ Equity
The
total number of shares of all classes of capital stock which the Company is authorized to issue is 300,000,000 shares of common
stock with $0.00001 par value.
As
of both September 30, 2018 and December 31, 2017, there were 89,862,683 shares of the Company’s common stock issued and
outstanding.
Note
12 – Commitments & Contingencies
Litigation:
From
time to time the Company may become a party to litigation in the normal course of business. Management believes that there are
no current legal matters that would have a material effect on the Company’s financial position or results of operations.
Employee
Commitments
The
Company and Mr. McCullough entered into an employment agreement on October 17, 2017 (the “Employment Agreement”) with
an initial term of 3 years. In exchange for his service as President, Mr. McCullough will receive an annual base salary of $340,000.
He received a cash signing bonus of $37,500, to be paid on January 1, 2018, and an additional cash signing bonus of $37,500, to
be paid on July 1, 2018, provided that he is employed by the Company through such dates. Mr. McCullough will be eligible for an
annual bonus of up to twenty-five percent (25%) of his base salary. The annual bonus will be determined at the discretion of our
Board or compensation committee based upon the achievement of financial goals established by the Company’s Chief Executive
Officer. Mr. McCullough will also be eligible for additional bonus compensation based on the Company’s achievement of certain
annual earnings and retail sales goals established each year by the Company’s Chief Executive Officer. Subject to the Company’s
achievement of an annual overall earnings goal and certain adjustments in the event of future acquisitions by the Company, Mr.
McCullough will be eligible to receive five percent (5%) of all retail sales by the Company in excess of the annual retail sales
goal set by the Chief Executive Officer.
The
Company granted Mr. McCullough an option to purchase 1,000,000 shares of the Company’s common stock, subject to the approval
of the Company’s Board of Directors (the “Option Grant”). The Option Grant vests in three (3) equal annual installments
on the first three anniversaries of Mr. McCullough’s start date with the Company, provided that Mr. McCullough remains employed
by the Company on each such date. The Option Grant will be granted under the Company’s 2014 Stock Incentive Plan pursuant
to a stock grant agreement between the Company and Mr. McCullough.
Operating
leases
On
August 16, 2017, the Company entered into a sublease for office space, effective October 1, 2017 through May 2021. Rent expense
under this lease will be $19,500 per month, and increasing annually on June 1.
The
following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of September 30, 2018:
Year ending December 31:
|
|
|
|
2018 – remaining three months
|
|
$
|
60,255
|
|
2019
|
|
|
245,234
|
|
2020
|
|
|
252,591
|
|
2021
|
|
|
106,540
|
|
2022
|
|
|
-
|
|
Total
|
|
$
|
664,620
|
|
Note
13 – Stock Options
On
July 4, 2016, the Company granted 500,000 options with an exercise price of $0.70 per share to an employee of the Company. During
2017, 333,333 unvested options were cancelled due to termination of employee.
On
October 10, 2017, the Company granted 1,000,000 options with an exercise price of $0.70 per share to an employee of the Company.
On
October 16, 2017, the Company granted 1,500,000 options with an exercise price of $0.55 per share to an employee of the Company.
During August 2018, 1,500,000 unvested options were cancelled due to termination of employee.
On
October 18, 2017, the Company granted 200,000 options with an exercise price of $0.70 per share to an employee of the Company.
The
following table summarizes the options outstanding, option exercisability and the related prices for the shares of the Company’s
common stock issued to employees and consultants under the Plan at September 30, 2018:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Exercise
Prices ($)
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
$
|
0.25
- $0.70
|
|
|
|
7,166,667
|
|
|
|
5.93
|
|
|
$
|
0.50
|
|
|
|
6,341,667
|
|
|
$
|
0.47
|
|
The
stock option activity for the nine months ended September 30, 2018 is as follows:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2017
|
|
|
8,666,667
|
|
|
$
|
0.51
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired or canceled
|
|
|
(1,500,000
|
)
|
|
|
(0.55
|
)
|
Outstanding at September 30, 2018
|
|
|
7,166,667
|
|
|
$
|
0.50
|
|
Stock-based
compensation expense related to vested options was ($90,396) and $148,990 during the three and nine months ended September 30,
2018, respectively, which is a component of general and administrative expense in the statement of income. The Company determined
the value of share-based compensation for options vesting during the period using the Black-Scholes fair value option-pricing
model with the following weighted average assumptions: estimated fair value of Company’s common stock of $0.40-0.74, risk-free
interest rate of 0.90-2.23%, volatility of 135-160%, expected lives of 3-10 years, and dividend yield of 0%. Stock options outstanding
as of September 30, 2018, as disclosed in the above table, have an intrinsic value of $30,000. As of September 30, 2018, unamortized
stock-based compensation costs related to options was $353,065, and will be recognized over a period of 2 years.
Note
14 – Stock Warrants
The
following table summarizes the warrants outstanding, warrant exercisability and the related prices for the shares of the Company’s
common stock at September 30, 2018:
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Exercise
Prices ($)
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
5.00
|
|
|
|
1,000,000
|
|
|
|
0.21
|
|
|
|
5.00
|
|
|
|
1,000,000
|
|
|
|
5.00
|
|
The
warrant activity for the nine months ended September 30, 2018 is as follows:
|
|
Warrants
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2017
|
|
|
1,000,000
|
|
|
$
|
5
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired or canceled
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2018
|
|
|
1,000,000
|
|
|
$
|
5
|
|
Warrants
outstanding as of September 30, 2018, as disclosed in the above table, have an intrinsic value of $0.
Note
15 – Segments
Segment
identification and selection is consistent with the management structure used by the Company’s chief operating decision
maker to evaluate performance and make decisions regarding resource allocation, as well as the materiality of financial results
consistent with that structure. Based on the Company’s management structure and method of internal reporting, the Company
has one operating segment. The Company’s chief operating decision maker does not review operating results on a disaggregated
basis; rather, the chief operating decision maker reviews operating results on an aggregate basis.
Net
sales attributed to customers in the United States and foreign countries for the three months ended September 30, 2018 and 2017
were as follows:
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
United States
|
|
$
|
8,944,970
|
|
|
$
|
8,472,498
|
|
Foreign countries
|
|
|
245,407
|
|
|
|
703,175
|
|
|
|
$
|
9,190,377
|
|
|
$
|
9,175,673
|
|
Foreign
countries primarily consist of Australia and Canada.
The
Company’s net sales by product group for the three months ended September 30, 2018 and 2017 were as follows:
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
Nutraceuticals
|
|
$
|
8,540,044
|
|
|
$
|
7,961,616
|
|
Over the Counter (OTC)
|
|
|
125,878
|
|
|
|
169,403
|
|
Consumer Goods
|
|
|
260,027
|
|
|
|
733,744
|
|
Cosmeceuticals
|
|
|
264,428
|
|
|
|
310,910
|
|
|
|
$
|
9,190,377
|
|
|
$
|
9,175,673
|
|
(1)
Net sales for any other product group of similar products are less than 10% of consolidated net sales.
The
Company’s net sales by major sales channel for the three months ended September 30, 2018 and 2017 were as follows:
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
Online
|
|
$
|
4,902,161
|
|
|
$
|
3,236,124
|
|
Retail
|
|
|
4,288,216
|
|
|
|
5,939,549
|
|
|
|
$
|
9,190,377
|
|
|
$
|
9,175,673
|
|
Net
sales attributed to customers in the United States and foreign countries for the nine months ended September 30, 2018 and 2017
were as follows:
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
United States
|
|
$
|
27,215,818
|
|
|
$
|
26,926,114
|
|
Foreign countries
|
|
|
1,404,132
|
|
|
|
2,356,796
|
|
|
|
$
|
28,619,950
|
|
|
$
|
29,282,910
|
|
The
Company’s net sales by product group for the nine months ended September 30, 2018 and 2017 were as follows:
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
Nutraceuticals
|
|
$
|
26,450,312
|
|
|
$
|
24,126,323
|
|
Over the Counter (OTC)
|
|
|
459,980
|
|
|
|
1,245,096
|
|
Consumer Goods
|
|
|
822,959
|
|
|
|
3,506,378
|
|
Cosmeceuticals
|
|
|
886,699
|
|
|
|
405,113
|
|
|
|
$
|
28,619,950
|
|
|
$
|
29,282,910
|
|
(1)
Net sales for any other product group of similar products are less than 10% of consolidated net sales.
The
Company’s net sales by major sales channel for the nine months ended September 30, 2018 and 2017 were as follows:
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
Online
|
|
$
|
13,926,758
|
|
|
$
|
14,696,177
|
|
Retail
|
|
|
14,693,192
|
|
|
|
14,586,733
|
|
|
|
$
|
28,619,950
|
|
|
$
|
29,282,910
|
|
Long-lived
assets (net) attributable to operations in the United States and foreign countries as of September 30, 2018 and December 31, 2017
were as follows:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
United States
|
|
$
|
12,436,714
|
|
|
$
|
13,613,043
|
|
Foreign countries
|
|
|
13,226
|
|
|
|
5,612
|
|
|
|
$
|
12,449,940
|
|
|
$
|
13,618,655
|
|
Note
16 – Income Taxes
Income
tax (benefit) expense was ($126,190) and $256,812 for the three and nine months ended September 30, 2018, respectively, compared
to $97,713 and $221,424, respectively, for the same periods in 2017. The current provision is attributable to Australian operations
and the current tax rate in effect in that country.
On
December 22, 2017, the Tax Cuts and Jobs Act (the TCJA), which significantly modified U.S. corporate income tax law, was signed
into law by President Trump. The TCJA contains significant changes to corporate income taxation, including but not limited to
the reduction of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction
for interest expense to 30% of earnings (except for certain small businesses), limitation of the deduction for net operating losses
to 80% of current year taxable income and generally eliminating net operating loss carrybacks, allowing net operating losses to
carryforward without expiration, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated,
elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments
instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including
changes to the orphan drug tax credit and changes to the deductibility of research and experimental expenditures that will be
effective in the future). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal
tax law is uncertain, including to what extent various states will conform to the newly enacted federal tax law.
The
Company has not recorded the necessary provisional adjustments in the financial statements in accordance with its current understanding
of the TCJA and guidance currently available as of this filing. But is reviewing the TCJA’s potential ramifications, as
the Company acts to bring tax compliance up to date.
The
total deferred tax asset is calculated by multiplying a domestic (US) 21% marginal tax rate by the cumulative net operating loss
carryforwards (“NOL”). The domestic marginal tax rate does not include any state & local marginal tax rate attributable
to the Company. The Company currently has estimated NOLs, which expire through 2035. Management has determined based on all the
available information that a 100% valuation reserve is required.
For
U.S. purposes, the Company has not completed its evaluation of NOL utilization limitations under Internal Revenue Code, as amended
(the “Code”) Section 382/383, change of ownership rules. If the Company has had a change in ownership, the NOL’s
would be limited or eliminated, as to the amount that could be utilized each year, based on the Code. NOL’s attributable
to Breakthrough Products, Inc., which are the majority of the Company’s domestic NOL’s are Separate Return Limitation
Year (SRLY) NOL’s. Such losses may generally not be available for use (limited or eliminated).
The
Company has not filed its State & Local Income/Franchise tax returns in States it is required to file for the last few years,
so such returns and liability remain open. Such liability, if any, has not yet been quantified by the Company, as of the reporting
date. The Company is currently assessing the requirements to file these returns in states to determine any potential liability,
which the Company believes is immaterial.
Note
17 – Subsequent Events
Management
evaluated all activities of the Company through the issuance date of the Company’s unaudited condensed consolidated financial
statements and concluded that no subsequent events except as disclosed below have occurred that would require adjustments or disclosure
into the unaudited condensed consolidated financial statements.
Subsequent
to September 30, 2018, the Company made an additional $500,000 payment on $10,000,000 loan.