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.
Effective
January 1, 2019 the Company has merged its U.S. subsidiaries (Neuragen Corp., Breakthrough Products, Inc., Sneaky Vaunt Corp.,
and The Queen Pegasus Corp.) into the parent company.
Synergy
is the sole owner of two subsidiaries: NomadChoice Pty Ltd., and Synergy CHC Inc. 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 March 31, 2020 and December 31, 2019 and for the three months ended
March 31, 2020 and 2019 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 months
ended March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31,
2020. 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, 2019 and footnotes thereto included in the Company’s Annual Report
on Form 10-K filed with the SEC on April 29, 2020.
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.
All
amounts referred to in the notes to the consolidated financial statements are in United States Dollars ($) unless stated otherwise.
The
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, current income taxes, deferred income taxes valuation
allowance, useful life of fixed and intangible assets, and assumptions used in Black-Scholes-Merton, or BSM, valuation methods,
such as expected volatility, risk-free interest rate, and expected dividend rate. The results of any changes in accounting estimates
are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected in the period that they are determined to be necessary.
Reclassification
Certain
amounts in prior periods have been reclassified to conform to current period presentation. These reclassifications had no effect
on the previously reported net loss.
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 March
31, 2020, 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 March 31, 2020, the uninsured
balance amounted to $94,869.
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.
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
|
March
31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
314,933
|
|
|
$
|
1,224,514
|
|
|
$
|
688,836
|
|
Restricted
cash
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
137,351
|
|
Total cash, cash equivalents, and restricted
cash shown in the statement of cash flows
|
|
$
|
414,933
|
|
|
$
|
1,324,514
|
|
|
$
|
826,187
|
|
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 (“Perfekt”) 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. During the year ended December
31, 2018, the Company fully impaired intangible assets related to Perfekt and Cocowhite and charged to operations impairment loss
of $60,000. During the year ended December 31, 2019, the Company fully impaired intellectual property related to Focus Factor
and charged to operations impairment loss of $1,450,000.
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. However,
as of December 31, 2018 our review of intangible assets related to two of our subsidiaries did indicate that the carrying amount
of the asset may not be recoverable. During the year ended December 31, 2018, the Company fully impaired related intangible assets
and charged to operations impairment loss of $864,067. During the year ended December 31, 2019, the Company fully impaired intangible
assets and charged to operations impairment loss of $471,897.
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 December 31, 2019
our qualitative analysis of goodwill indicated potential impairment, thus the Company chose to fully impair goodwill and charged
to operations impairment loss of $7,793,240.
Revenue
Recognition
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 March 31,
2020.
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. As of March 31, 2020 and December 31, 2019, allowance for doubtful accounts was $113,662
and $283,972, respectively. During the three months ended March 31, 2020, the Company reversed
allowance for doubtful accounts of $170,309.
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 March 31, 2020, and 2019, options to purchase 5,666,667 and 7,166,667 shares of common stock, respectively, 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 months ended March 31, 2020, and 2019:
|
|
For
the three months ended
|
|
|
|
March
31, 2020
|
|
|
March
31, 2019
|
|
|
|
|
|
|
|
|
Net
income after tax
|
|
$
|
262,303
|
|
|
$
|
1,467,287
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
89,889,074
|
|
|
|
89,865,319
|
|
Incremental shares from the assumed
exercise of dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
Dilutive potential common shares
|
|
|
89,889,074
|
|
|
|
89,865,319
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
The
following securities were not included in the computation of diluted net earnings per share as their effect would have been antidilutive:
|
|
2020
|
|
|
2019
|
|
Options to purchase common
stock
|
|
|
5,666,667
|
|
|
|
7,166,667
|
|
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 March 31, 2020, 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).
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.
The
exchange rates used to translate amounts in AUD and CAD into USD for the purposes of preparing the consolidated financial statements
were as follows:
Balance
sheet:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
Period-end AUD: USD exchange
rate
|
|
$
|
0.6141
|
|
|
$
|
0.7030
|
|
Period-end CAD: USD exchange rate
|
|
$
|
0.7049
|
|
|
$
|
0.7699
|
|
Income
statement:
|
|
March
31, 2020
|
|
|
March
31, 2019
|
|
Average Quarterly AUD:
USD exchange rate
|
|
$
|
0.6585
|
|
|
$
|
0.7126
|
|
Average Quarterly CAD: USD exchange
rate
|
|
$
|
0.7445
|
|
|
$
|
0.7522
|
|
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.
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.
Presentation
of Financial Statements – Going Concern
Going
Concern Evaluation
In
connection with preparing unaudited condensed consolidated financial statements for the three months ended March 31, 2020, management
evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s
ability to continue as a going concern within one year from the date that the financial statements are issued.
The
Company considered the following:
●
At March 31, 2020, the Company had an accumulated deficit of $23,972,266.
●
At March 31, 2020, the Company had working capital deficit of $4,444,249.
●
Revenue decline in 2020 as compared to 2019 of $3,351,669.
●
During the three months ended March 31, 2020, the Company used cash
in operating activities of $1,302,062.
●
The Company was required to make repayment of loans payable of $500,000 and accrued interest during the three months ended
March 31, 2020.
Ordinarily,
conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern relate to the
entity’s ability to meet its obligations as they become due.
The
Company evaluated its ability to meet its obligations as they become due within one year from the date that the financial statements
are issued by considering the following:
●
The Company raised $10.0 million via debt financing during the year ended December 31, 2017.
● Subsequent to March 31,
2020, the Company raised $2.5 million via debt financing.
● During
the three months ended March 31, 2020, the Company repaid $12,500 of loans. Subsequent to March 31, 2020, the
Company repaid $500,000 of loans.
●
The Company generated net income of $262,303 for the three months ended March 31, 2020.
●
Working capital deficit of $4,444,249 at March 31, 2020, includes loans payables to related party of $5,486,377, payables to related
party of $839,124 and deferred revenue of $17,137.
●
The Company has line of credit facility of $20 million available from its current lender for future mergers and acquisition.
●
Subsequent to March 31, 2020, the Company has secured distribution of a new hand sanitizer product under its Hand MD brand in
Canada.
Management
concluded that above factors alleviates doubts about the Company’s ability to generate enough cash from operations and other
available sources to satisfy its obligations for the next twelve months from the issuance date.
The
Company will take the following actions if it starts to trend unfavorably to its internal profitability and cash flow projections,
in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:
●
Raise additional capital through line of credit and/or loans financing for future mergers and acquisition, which may be impacted
by the recent outbreak of COVID-19.
●
Implement additional restructuring and cost reductions.
●
Raise additional capital through a private placement, which may be impacted by the recent outbreak of COVID-19.
As
of June 29, 2020 and March 31, 2020, the Company had $2,098,237 and $414,933, respectively, in cash and cash equivalents.
Recent
Accounting Pronouncements
ASU
2016-13
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments and subsequent amendment to the initial guidance: ASU 2018-19 (collectively, Topic 326). ASU 2016-13
amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit
losses on certain types of financial instruments, including trade receivables. ASU 2016-13 is effective for fiscal years beginning
after December 15, 2019, with early adoption permitted. Adoption of this new standard did not have any impact on the Company’s
unaudited condensed consolidated financial statements.
ASU
2016-02
In
February 2016, the FASB issued ASU 201602, “Leases” (“ASU 201602”). This guidance, as amended by subsequent
ASU’s on the topic, improves transparency and comparability among companies by recognizing right of use (ROU) assets and
lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU No. 2016-02 is effective
for public business entities for annual periods, including interim periods within those annual periods, beginning after December
15, 2018, with early adoption permitted. We adopted ASU No. 2016-02
in our fiscal year beginning January 1, 2019 and used the optional transition method provided by the FASB in ASU No. 2018-10,
“Codification Improvements to Topic 842, Leases” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”,
with no restatement of comparative periods. The Company notes there was no impact on adoption as the leases entered into by the
Company were for less than 12 month terms.
The
new standard provides optional practical expedients in transition. We will only elect the package of practical expedients where,
under the new standard, prior conclusions about lease identification, lease classification and initial direct costs do not need
to be reassessed. The new standard also provides practical expedients for ongoing accounting where we elected the practical expedients
on adoption and did not record any ROU asset with terms of less than 12 months.
There
were various updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to a have a material impact on the Company’s financial position, results of
operations or cash flows.
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:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
Finished goods
|
|
$
|
1,375,944
|
|
|
$
|
1,554,013
|
|
Components
|
|
|
269,501
|
|
|
|
264,518
|
|
Inventory in transit
|
|
|
451
|
|
|
|
42,507
|
|
Raw materials
|
|
|
68,200
|
|
|
|
-
|
|
Total
inventory
|
|
$
|
1,714,096
|
|
|
$
|
1,861,038
|
|
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:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
Trade accounts receivable
(including related party receivable of $470,984 and $277,432, respectively – see note 8)
|
|
$
|
3,151,103
|
|
|
$
|
1,707,758
|
|
Less allowances
|
|
|
113,662
|
|
|
|
283,972
|
|
Total
accounts receivable, net
|
|
$
|
3,037,441
|
|
|
$
|
1,423,786
|
|
During
the year ended December 31, 2019, the Company charged $283,972 to bad debt expense. During the three months ended March 31,
2020, the Company reversed allowance for doubtful accounts of $170,309.
Note
5 – Prepaid Expenses
Prepaid
expenses consisted of the following:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
Advances for inventory
|
|
$
|
24,082
|
|
|
$
|
9,071
|
|
Insurance
|
|
|
14,589
|
|
|
|
16,763
|
|
Deposits
|
|
|
6,500
|
|
|
|
10,234
|
|
Promotion - Bloggers
|
|
|
84,674
|
|
|
|
-
|
|
Software subscriptions
|
|
|
-
|
|
|
|
9,536
|
|
Promotions
|
|
|
44,455
|
|
|
|
122,626
|
|
Miscellaneous
|
|
|
16,853
|
|
|
|
17,913
|
|
Total
|
|
$
|
191,153
|
|
|
$
|
186,143
|
|
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 March 31, 2020 and December 31, 2019, the uninsured balances amounted
to $94,869 and $947,312, respectively.
Accounts
receivable
As
of March 31, 2020, five customers accounted for 83% of the Company’s accounts receivable. As of December 31,
2019, two customers accounted for 52% of the Company’s accounts receivable.
Major
customers
For
the three months ended March 31, 2020, three customers accounted for approximately 60% of the Company’s net revenue.
For the three months ended March 31, 2019, two customers accounted for approximately 40% of the Company’s net revenue. For
the year ended December 31, 2019, two customers accounted for approximately 51% of the Company’s net revenues. Substantially
all of the Company’s business is with companies in the United States.
Accounts
payable
As
of March 31, 2020 and December 31, 2019, two vendors accounted for 72% and 73%, respectively, of the Company’s accounts
payable. This includes a related party vendor.
Major
suppliers
For
the three months ended March 31, 2020, one supplier accounted for approximately 33% of the Company’s purchases.
For the three months ended March 31, 2019, two suppliers accounted for approximately 41% of the Company’s purchases. For
the year ended December 31, 2019, two suppliers accounted for approximately 40% of the Company’s purchases. Substantially
all of the Company’s business is with suppliers in the United States. This includes purchases from a related party supplier.
Note
7 – Fixed Assets and Intangible Assets
As
of March 31, 2020, and December 31, 2019, fixed assets and intangible assets consisted of the following:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
569,681
|
|
|
$
|
566,445
|
|
Less accumulated
depreciation
|
|
|
(456,774
|
)
|
|
|
(430,547
|
)
|
Fixed
assets, net
|
|
$
|
112,907
|
|
|
$
|
135,898
|
|
Depreciation
expense for the three months ended March 31, 2020 and 2019 was $26,152 and $38,060, respectively.
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
FOCUSfactor intellectual
property
|
|
$
|
-
|
|
|
$
|
1,450,000
|
|
Perfekt intellectual property
|
|
|
-
|
|
|
|
-
|
|
Cocowhite intellectual property
|
|
|
-
|
|
|
|
-
|
|
Intangible assets subject to amortization
|
|
|
19,259
|
|
|
|
5,388,230
|
|
Less accumulated amortization
|
|
|
(12,588
|
)
|
|
|
(4,908,696
|
)
|
Less accumulated
impairment
|
|
|
-
|
|
|
|
(1,921,898
|
)
|
Intangible
assets, net
|
|
$
|
6,671
|
|
|
$
|
7,636
|
|
Amortization
expense for the three months ended March 31, 2020 and 2019 was $694 and $268,215, respectively.
Note
8 – Related Party Transactions
The
Company accrued and paid consulting fees of $82,917 per month to a company owned by Mr. Jack Ross, Chief Executive Officer of
the Company. The Company expensed $258,750 during the three months ended March 31, 2020. As of March 31, 2020, the total outstanding
balance was $82,917 for consulting fees and reimbursements.
On
June 26, 2015, the Company entered into a Security Agreement with Knight Therapeutics, Inc., (owner of greater than 10% shares
of the Company) through its wholly owned subsidiary Neuragen Corp., for the purchase of Knight Therapeutics, Inc.’s assets.
At March 31, 2020 and December 31, 2019, the Company owed Knight $462,500 and $475,000 in relation to this agreement. The Company
recorded present value of future payments of $257,259 as of March 31, 2020 (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 March 31,
2020. As of March 31, 2020, the total outstanding balance was $0.
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 March 31, 2020, the Company owed Knight $5,472,325 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 March 31, 2020, the total outstanding balance was $100,000 Canadian dollars.
In US Dollars, the total outstanding balance was $70,295 as of March 31, 2020.
On
December 23, 2016, we entered into an agreement with Knight Therapeutics for the distribution rights of Hand MD into Canada. In
conjunction with this agreement, we are required to pay Knight a distribution fee equal to 60% of gross sales for sales achieved
through a direct sales channel until the sales in the calendar year equal the threshold amount and then 40% of all such gross
sales in such calendar year in excess of the threshold amount and 5% of gross sales for sales achieved through retail sales. The
minimum due to Knight under this agreement is $25,000 Canadian dollars. As of March 31, 2020 the total outstanding balance was
$25,000 Canadian dollars. In US Dollars, the total outstanding balance was $17,574.
The
Company expensed royalty of $35,821 during the three months ended March 31, 2020. At March 31, 2020 NomadChoice Pty
Ltd., a subsidiary of the Company, owed Knight Therapeutics $35,821 in connection with a royalty distribution agreement.
The
Company expensed royalty of $410 during the three months ended March 31, 2020. At March 31, 2020 the Company owed
Knight Therapeutics $410 in connection with a royalty distribution agreement for Sneaky Vaunt.
The
Company paid $934 during the three months ended March 31, 2020 to Hand MD, Corp, related to a royalty agreement. At March 31,
2020, the Company owed Hand MD Corp. $0 in minimum future royalties.
A
member of the Company’s Board of Directors is an executive officer of a supplier to the Company. During the three months
ended March 31, 2020 the Company acquired $124,008 of products from the supplier and included in cost of sales. The Company owed
the supplier $559,584 at March 31, 2020.
The
Company entered into transactions with a related party controlled by the CEO during the three months ended March 31, 2020. The
transactions were a pass through of expenses and reimbursements. During the three months ended March 31, 2020, the Company
received advances of $70,490 ($100,000 Canadian Dollars). As of March 31, 2020, there were $70,490 payable and $30,640
receivable.
The
Company entered into transactions with a related party controlled by the CEO during the three months ended March 31, 2020. The
transactions were a pass through and allocation of expenses and reimbursements. As of March 31, 2020 the Company was owed $440,343.
Note
9 – Accounts Payable and Accrued Liabilities
As
of March 31, 2020, and December 31, 2019, accounts payable and accrued liabilities consisted of the following:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
Accrued payroll (included
related party payable of $82,916 and $0, respectively)
|
|
$
|
173,795
|
|
|
$
|
110,536
|
|
Legal fees
|
|
|
27,047
|
|
|
|
68,098
|
|
Commissions
|
|
|
324,283
|
|
|
|
229,657
|
|
Manufacturers (including related
parties of $559,584 and $956,438, respectively)
|
|
|
2,311,659
|
|
|
|
2,082,256
|
|
Promotions
|
|
|
289,621
|
|
|
|
1,312,541
|
|
Accounting fees
|
|
|
30,101
|
|
|
|
10,873
|
|
Customers
|
|
|
23,994
|
|
|
|
26,206
|
|
Royalties, related party
|
|
|
125,720
|
|
|
|
93,643
|
|
Warehousing
|
|
|
5,977
|
|
|
|
13,746
|
|
Taxes
|
|
|
654,119
|
|
|
|
674,818
|
|
Related
party loan and reimbursements
|
|
|
70,904
|
|
|
|
1,135
|
|
Others
|
|
|
96,800
|
|
|
|
50,555
|
|
Total
|
|
$
|
4,134,020
|
|
|
$
|
4,674,064
|
|
During
the three months ended March 31, 2020, the Company recorded a gain on write-off of payables of $180,000.
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. The Company has estimated and accrued for its sales tax liability at $245,717 for the
parent entity as of March 31, 2020.
Note
10 – Notes Payable
The
Company’s loans payable at March 31, 2020 and December 31, 2019 are as follows:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
Loans payable
|
|
$
|
5,757,259
|
|
|
$
|
5,760,461
|
|
Unamortized debt
issuance cost
|
|
|
(27,675
|
)
|
|
|
(48,432
|
)
|
Total
|
|
|
5,729,584
|
|
|
|
5,712,029
|
|
Less: Current
portion
|
|
|
(5,486,377
|
)
|
|
|
(5,465,113
|
)
|
Long-term portion
|
|
$
|
243,207
|
|
|
$
|
246,916
|
|
$950,000
June 26, 2015 Security Agreement:
On
June 26, 2015, the Company 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 recorded present value of future payments of $257,259 and $260,461 as of March 31, 2020 and December 31, 2019, respectively.
The Company recorded imputed interest expense of $9,299 for the three months ended March 31, 2020.
During
the three months ended March 31, 2020, the Company made a payment of $12,500 in connection with this Security Agreement.
$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.
Additional
Tranches under the Loan Agreement are available to the Company until August 9, 2022 provided that no event of default exists.
Each Additional Tranche must be for a minimum amount of $1.0 million, may only be used to finance qualified acquisitions (as defined
in the Loan Agreement), and can be denied in Knight’s absolute discretion. If an Additional Tranche is denied, the Company
can effect a qualified acquisition through a special purpose entity with such special purpose entity being entitled to obtain
financing from third parties so long as such financing does not adversely affect Knight or Knight’s rights under the Loan
Agreement. Upon the closing of any Additional Tranche, the Company will pay Knight an origination fee equal to 2% of the Additional
Tranche, a work fee equal to 1% of the amount of the Additional Tranche, and reimburse Knight for its expenses incurred in connection
with its consideration of any Additional Tranche (whether or not advanced).
The
Loan bears interest at 10.5% per annum. The amended Loan Agreement matures on August 8, 2020 and (b) the date that Knight, in
its discretion, accelerates the Company’s obligations due to an event of default.
On
the Maturity Date of the Third Tranche and every Additional Tranche (or upon the acceleration of each such loan), the Company
must pay Knight a success fee (the “Success Fee”) of that number of Company common shares equal to 10% of the loan,
divided by the lesser of (a) $1.50, (b) the lowest price at which any common shares were issued by the Company in any offering
or equity financing or other transaction between the Closing Date and the date the Success Fee is due, and (c) the current market
price on the date the Success Fee is due. The Company may also pay the Success Fee in cash pursuant to the terms of the Loan Agreement.
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 provided that the aggregate consideration
to be paid does not exceed $100,000 and the acquired business guarantees the Company’s obligations under the Loan Agreement)
or make capital expenditures in excess of $500,000. The Loan Agreement also includes customary events of default, including payment
defaults, breaches of covenants, change of control and material adverse effect defaults. Upon the occurrence of an event of default
and during the continuation thereof, the principal amount of all loans under the Loan Agreement will bear a default interest rate
of an additional 5%.
The
Company’s obligations and liabilities under the Loan Agreement are secured and unconditionally guaranteed by certain of
the Company’s wholly owned subsidiaries as provided in the Loan Agreement.
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. We entered into Loan Amendment Agreement on May 14, 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.
We
have amended our covenants under our loan agreement on March 27, 2019. The new covenants are as follows: we will maintain a minimum
EBITDA of $1,900,000 for the twelve months ending on December 31, 2018, $2,500,000 for the twelve months ending March 31, 2019,
$3,500,000 for the twelve months ending June 30, 2019 and $5,000,000 for the twelve months period ending on last day of each fiscal
quarters thereafter. We shall maintain a net debt to TTM EBITDA ratio of no more than 8:1 for the twelve month period ending on
December 31, 2018 until March 31, 2019 and shall maintain a net debt to TTM EBITDA ratio of no more than 6:1 thereafter. We shall
maintain at all times a positive cash balance of $575,000 for the three month period ending December 31, 2018, $750,000 for the
three month period ending March 31, 2019 and $1,000,000 thereafter. The default interest rate of 2.5% applies (from 13% to 15.5%)
in accordance to our current agreement and will be in effect as of October 1, 2018 to June 30, 2019. Effective June 30, 2019 the
interest rate referred back to 10.5%. (See note 16)
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 $20,756 during the three months ended March 31, 2020. Unamortized debt issuance cost as of March
31, 2020 amounted to $27,675.
The
Company recognized interest expense of $138,542 and paid $138,542 during the three months ended March 31, 2020. Accrued interest
was $0 as of March 31, 2020. The loan balance at March 31, 2020 was $5,500,000.
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.
During
the three months ended March 31, 2019, the Company issued 26,391 shares of its common stock valued at $39,586 in full and final
settlement on the Per-fekt transaction.
As
of both March 31, 2020 and December 31, 2019, there were 89,889,074 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 paid on January 1, 2018, and an additional cash signing bonus of $37,500 paid on July
1, 2018. Mr. McCullough will be eligible for an annual bonus of up to twenty-five percent (25%) of his base salary. The annual
bonus will be determined at the discretion of our Board or compensation committee based upon the achievement of financial goals
established by the Company’s Chief Executive Officer. Mr. McCullough will also be eligible for additional bonus compensation
based on the Company’s achievement of certain annual earnings and retail sales goals established each year by the Company’s
Chief Executive Officer. Subject to the Company’s achievement of an annual overall earnings goal and certain adjustments
in the event of future acquisitions by the Company, Mr. McCullough will be eligible to receive five percent (5%) of all retail
sales by the Company in excess of the annual retail sales goal set by the Chief Executive Officer.
The
Company granted Mr. McCullough an option to purchase 1,000,000 shares of the Company’s common stock, subject to the approval
of the Company’s Board of Directors (the “Option Grant”). The Option Grant vests in three (3) equal annual installments
on the first three anniversaries of Mr. McCullough’s start date with the Company, provided that Mr. McCullough remains employed
by the Company on each such date. The Option Grant will be granted under the Company’s 2014 Stock Incentive Plan pursuant
to a stock grant agreement between the Company and Mr. McCullough. (See note 16)
Note
13 – Stock Options
The
following table summarizes the options outstanding, option exercisability and the related prices for the shares of the Company’s
common stock issued to employees and consultants under a stock option plan at March 31, 2020:
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Exercise
Prices ($)
|
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price ($)
|
|
$
|
0.25 –
0.70
|
|
|
5,666,667
|
|
|
5.8
|
|
|
$
|
0.52
|
|
|
5,416,666
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
stock option activity for the three months ended March 31, 2020 is as follows:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2019
|
|
|
6,166,667
|
|
|
$
|
0.54
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired or canceled
|
|
|
(500,000
|
)
|
|
|
(0.70
|
)
|
Outstanding at March 31, 2020
|
|
|
5,666,667
|
|
|
$
|
0.52
|
|
Stock-based
compensation expense related to vested options was $38,679 during the three months ended March 31, 2020, which is a component
of general and administrative expense in the statement of operations. 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 $0.48-0.50, risk-free interest rate of 1.95-1.99%, volatility
of 116-117%, expected lives of 10 years, and dividend yield of 0%. Stock options outstanding as of March 31, 2020, as disclosed
in the above table, have an intrinsic value of $0. As of March 31, 2020, unamortized stock-based compensation costs related to
options was $90,251, and will be recognized over a period of 0.5 years.
Note
14 – 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 March 31, 2020 and 2019 were
as follows:
|
|
March
31, 2020
|
|
|
March
31, 2019
|
|
United States
|
|
$
|
5,963,815
|
|
|
$
|
8,612,521
|
|
Foreign countries
|
|
|
153,471
|
|
|
|
856,434
|
|
|
|
$
|
6,117,286
|
|
|
$
|
9,468,955
|
|
Foreign
countries primarily consist of Australia and Canada.
The
Company’s net sales by product group for the three months ended March 31, 2020 and 2019 were as follows:
|
|
March
31, 2020
|
|
|
March
31, 2019
|
|
Nutraceuticals
|
|
$
|
5,766,691
|
|
|
$
|
9,055,444
|
|
Over the Counter (OTC)
|
|
|
22,310
|
|
|
|
8,332
|
|
Consumer Goods
|
|
|
302,897
|
|
|
|
157,623
|
|
Cosmeceuticals
|
|
|
25,388
|
|
|
|
247,556
|
|
|
|
$
|
6,117,286
|
|
|
$
|
9,468,955
|
|
(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 March 31, 2020 and 2019 were as follows:
|
|
|
March
31, 2020
|
|
|
March
31, 2019
|
|
Online
|
|
|
$
|
2,671,221
|
|
|
$
|
3,853,024
|
|
Retail
|
|
|
|
3,446,065
|
|
|
|
5,615,931
|
|
|
|
|
$
|
6,117,286
|
|
|
$
|
9,468,955
|
|
Long-lived
assets (net) attributable to operations in the United States and foreign countries as
of March 31, 2020 and December 31, 2019 were as follows:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
United States
|
|
$
|
-
|
|
|
$
|
-
|
|
Foreign
countries
|
|
|
6,671
|
|
|
|
7,636
|
|
|
|
$
|
6,671
|
|
|
$
|
7,636
|
|
Note
15 – Income Taxes
Income
tax expense (benefit) was $285,540 for the three months ended March 31, 2020, compared to $(5,908) for the same periods
in 2019. The current provision is attributable to Australian operations and the current tax rate in effect in that country.
In
response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed
into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits,
deferment of employer’s social security payments, net operating loss utilization and carryback periods and modifications
to the net interest deduction limitations. At this time, the Company does not believe that the CARES Act will have a material
impact on its income tax provision for 2020. The Company will continue to evaluate the impact of the CARES Act on its financial
position, results of operations and cash flows.
The
total deferred tax asset is calculated by multiplying a domestic federal (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.
Note
16 – 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 except as noted below, no subsequent events have occurred that would require adjustment or disclosure
into the unaudited condensed consolidated financial statements.
On
May 8, 2020, the Company entered into a Third Amendment Agreement (the “Third Amendment”) to the Amended and Restated
Loan Agreement (the “Loan Agreement”) with Knight Therapeutics (Barbados) Inc. (“Knight”), pursuant to
which Knight agreed to loan the Company an additional $2.5 million (the “Additional Loan”). That same day (the “Closing”),
the Company paid Knight a work fee of $36,000, and $25,000 for Knight’s legal costs and expenses incurred in connection
with the Third Amendment. The Third Amendment amends the original loan agreement that the Company and Knight entered into in January
2015 and subsequently amended (as amended, the “Original Loan Agreement”). The Additional Loan matures on May 8, 2021
(the “TA Maturity Date”) and bears interest at 12.5% per annum compounding quarterly. On the TA Maturity Date, the
Company will pay Knight a success fee (the “Success Fee”) of $83,250. The Success Fee is payable in cash or stock
as set forth in the Loan Agreement. The Third Amendment includes customary representations, warranties, and affirmative and restrictive
covenants, including covenants to attain and maintain certain financial metrics, including an undertaking to maintain at all times
a cash balance of $600,000 and EBITDA of $3,000,000.
Terms
of the $10,000,000 August 9, 2017 loan (Third Tranche) (see note 10) was modified in the Third amendment. Third tranche shall
bear interest from May 8, 2020 at a rate equal to 12.5% per annum compounded quarterly. The Company shall pay success fee in the
amount of $1,000,000 with respect to the Third Tranche, which shall be fully earned on May 8, 2020 and payable no later than August
31, 2022. Third Tranche success fee shall bear interest at 12.5% per annum compounding quarterly.
Patrick
McCullough, and the Company are in a contractual services relationship till November 2020. On May 5, 2020, Patrick McCullough
and the Company mutually agreed that Mr. McCullough would step down as President but remain a consultant under such contract with
the Company. This mutual decision was not due to any disagreement on any matter relating to the Company’s operations, policies
or practices.
Immediately
thereafter, the Company’s Chief Executive Officer, assumed the role as President of the Company.
Subsequent
to March 31, 2020 the Company has secured distribution of a new hand sanitizer product under its Hand MD brand in Canada.
The
recent outbreak of COVID-19, which has been declared by the World Health Organization to be a pandemic, has spread across the
globe and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemic poses the
risk that the Company or its employees, suppliers, and other partners may be prevented from conducting business activities at
full capacity for an indefinite period of time, including due to spread of the disease within these groups or due to shutdowns
that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that
COVID-19 could have on the Company’s business, the continued spread of COVID-19 and the measures taken by the governments
of countries affected and in which the Company operates could disrupt the operation of the Company’s business. The COVID-19
outbreak and mitigation measures may also have an adverse impact on global economic conditions, which could have an adverse effect
on the Company’s business and financial condition, including on its potential to conduct financings on terms acceptable
to the Company, if at all. In addition, the Company may take temporary precautionary measures intended to help minimize the risk
of the virus to its employees, including temporarily requiring all employees to work remotely, and discouraging employee attendance
at in-person work-related meetings, which could negatively affect the Company’s business. The extent to which the COVID-19
outbreak impacts the Company’s results will depend on future developments that are highly uncertain and cannot be predicted,
including new information that may emerge concerning the severity of the virus and the actions to contain its impact.