NOTES
TO 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
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“US GAAP”).
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.
At December 31, 2018 and 2017 significant estimates included are assumptions about collection of accounts receivable, current
income taxes, deferred income taxes valuation allowance, useful life of fixed and intangible assets, impairment analysis of
goodwill and intangible assets, estimates used in the fair value calculation of stock based compensation, 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 December
31, 2018, and 2017, 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 December
31, 2018 and 2017, the uninsured balances amounted to $162,729 and $1,557,373, respectively.
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.
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
459,736
|
|
|
$
|
1,955,614
|
|
Restricted
cash
|
|
|
136,180
|
|
|
|
139,071
|
|
Total
cash, cash equivalents, and restricted cash shown in the statement of cash flows
|
|
$
|
595,916
|
|
|
$
|
2,094,685
|
|
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. As of December 31, 2017, our
qualitative analysis of intangible assets with indefinite lives did not indicate any impairment. 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.
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
December 31, 2017, our qualitative analysis of long-lived assets did not indicate any impairment. 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.
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, 2018,
and 2017, 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
consolidated balance sheet, statement of operations and comprehensive income and statement of cash flows for the year ended December
31, 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 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 December
31, 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. As of both December 31, 2018, and 2017, allowance for doubtful accounts was $0.
Advertising
Expense
The
Company expenses marketing, promotions and advertising costs as incurred. Such costs are included in selling and marketing expense
in the accompanying consolidated statements of operations.
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 FASBASC 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 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 income per share is anti-dilutive.
As of December 31, 2018, and 2017, options to purchase 7,166,667 and 8,666,667 shares of common stock, respectively, were outstanding.
As of December 31, 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 years ending December 31, 2018, and 2017:
|
|
For
the year ending
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Net
(loss) income after tax
|
|
$
|
(6,160,690
|
)
|
|
$
|
499,567
|
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
|
89,862,683
|
|
|
|
89,241,212
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
89,241,212
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
The
following securities were not included in the computation of diluted net earnings per share as their effect would have been antidilutive
due to the respective exercise prices being greater than the market price of the Company’s common stock on the dates shown:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Options
to purchase common stock
|
|
|
7,166,667
|
|
|
|
8,666,667
|
|
Warrants
to purchase common stock
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
|
7,166,667
|
|
|
|
9,666,667
|
|
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 December 31, 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 – “AUD”). 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:
|
|
December
31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Period-end
AUD: USD exchange rate
|
|
$
|
0.7046
|
|
|
$
|
0.7814
|
|
Period-end
CAD: USD exchange rate
|
|
$
|
0.7330
|
|
|
$
|
0.7971
|
|
Income
statement:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Average
Yearly AUD: USD exchange rate
|
|
$
|
0.7476
|
|
|
$
|
0.7748
|
|
Average
Yearly CAD: USD exchange rate
|
|
$
|
0.7718
|
|
|
$
|
0.7713
|
|
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 was not required. Accordingly,
the Company performed credit evaluations of its customers and maintained 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 existed 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 that, 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 aggregated basis.
Presentation
of Financial Statements – Going Concern
Going
Concern Evaluation
In
connection with preparing consolidated financial statements for the year ended December 31, 2018, 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:
●
Net loss of $6,160,690 for the year ended December 31, 2018.
●
At December 31, 2018, the Company had an accumulated deficit of $15,027,122.
●
At December 31, 2018, the Company had working capital deficit of $1,470,837.
●
Revenue decline in 2018 of $1,771,540.
● The Company obtained waiver against
not meeting financial covenants related to loans payable (maintaining minimum cash balance, net debt to EBITDA ratio and minimum
EBITDA).
● The Company is 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.
●
In 2018, the Company repaid $2.9 million of loans.
●
In 2018, the Company generated $1.3 million of cash from operating activities.
●
In 2019, the Company has repaid $500,000 of the loan payable.
● Working capital deficit of $1,470,837
at December 31, 2018, includes loans payables to related party of $1,963,887, royalty payable to related party of $304,434 and
deferred revenue of $49,709.
●
Revenue declines were largely the result of 2017 being launch year of two new brands and 2018 being normalized revenue of those
brands.
●
The Company has line of credit facility of $20 million available from its current lender for future mergers and
acquisition.
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.
●
Implement additional restructuring and cost reductions.
●
Raise additional capital through a private placement.
At March 27, 2019 and December 31, 2018, the Company had $1,372,431 and $459,736, respectively in cash and
cash equivalents.
Recent
Accounting Pronouncements
ASU
2018-13
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes in Disclosure
Requirements for Fair Value Measurement, which removes, modifies and adds certain disclosure requirements in Topic 820 “Fair
Value Measurement”. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. Early adoption is permitted. The adoption of ASU 2018-13 is not expected to have any impact on the
Company’s consolidated financial statements.
ASU
2018-07
In
June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting
for share-based payments to employees, with certain exceptions. ASU 2018-07 is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2018-07 is not
expected to have any impact on the Company’s consolidated financial statements.
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 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 are currently evaluating the impact of adopting 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.
These
amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by
comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount
by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the
total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on
the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable.
The
amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative
assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the
option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
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
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. Adoption of this new standard did not have any impact on the Company’s 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 fiscal years beginning after December 15, 2019. 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
December 31, 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
2016-13
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. The Company is currently assessing the potential impact of ASU 2016-13
on its 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.
Adoption of this new standard did not have any impact on the Company’s consolidated financial statements.
ASU
2016-02
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13,
ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively Topic 842) to increase transparency and comparability of lease
recognition and disclosure. The update requires lessees to recognize lease contracts with a term greater than one year on the
balance sheet, while recognizing expenses on the income statement in a manner similar to current guidance. For lessors, the update
makes targeted changes to the classification criteria and the lessor accounting model to align the guidance with the new lessee
model and revenue guidance. ASU 2016-02, ASU 2017-13, ASU 2018-10, ASU 2018-11 and ASU 2018-20 are effective for annual reporting
periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. Adoption
of this new standard did not have any impact on the Company’s consolidated financial statements. ASU 2019-01 is effective
for annual reporting periods beginning after December 15, 2019. The Company is currently assessing the potential impact of ASU
2019-01 on its consolidated financial statements.
ASU
2016-01
In
January 2016, the FASBASU 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. Adoption of this new standard did not have any impact on the Company’s consolidated
financial statements.
ASU
2015-17
In
November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. Currently deferred taxes for each
tax jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability on the balance sheet.
To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with
any related valuation allowances be classified as noncurrent in a classified statement of financial position. This guidance is
effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company
adopted this guidance in the fourth quarter of the year ended December 31, 2015 on a retrospective basis. The adoption of this
guidance did not have a material impact on the Company’s consolidated financial statements, and did not have any effect
on prior periods due to the full valuation allowance against the Company’s net deferred tax assets.
ASU
2015-16
In
September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement –Period Adjustments. Changes to
the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required
to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment
to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after
the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally
up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and,
instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard
is effective for both public and private companies for periods beginning after December 15, 2015. Adoption of this new standard
did not have any impact on the Company’s consolidated financial statements.
ASU
2015-11
In
July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330). ASU 2015-11 simplifies the accounting
for the valuation of all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing that
inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for financial statements issued for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. Adoption
of this new standard did not have any impact on the Company’s consolidated financial statements.
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 – Acquisitions
Asset
Purchase Agreement with Perfekt Beauty Holdings LLC and CDG Holdings, LLC:
On
June 21, 2017, the Company entered into and simultaneously closed on an Asset Purchase Agreement with Perfekt Beauty Holdings
LLC and CDG Holdings, LLC, which owns 92.3% of the issued and outstanding equity interests of Perfekt Beauty. Perfekt Beauty is
engaged in the business of developing and selling skincare and cosmetics products under the brand Per-fekt.
The
acquisition was treated as an acquisition of assets as the transaction involved the acquisition of a brand and a license agreement.
The allocation of the purchase price to the assets acquired and liabilities assumed based on the estimated fair values is as follows:
Accounts
Receivable
|
|
$
|
52,439
|
|
Inventory
|
|
|
290,174
|
|
Intellectual
Property
|
|
|
10,000
|
|
Accounts
Payable
|
|
|
(111,217
|
)
|
Consideration
paid in 473,326 shares of common stock
|
|
$
|
241,396
|
|
As
additional consideration, the Company will pay quarterly royalties equal to 5% of net sales for 10 years following the closing
date. The purchase price was subject to adjustment as provided in the Purchase Agreement, based on the final amounts of accounts
payable, accounts receivable and new and unsold inventory. Subsequent to December 31, 2018, we have issued 26,931 shares as
full and final payment to Perfekt Beauty Holdings LLC and CDG Holdings, LLC.
During
2018 the Company wrote off $164,694 worth of inventory to cost of sales as it was determined to be nearing expiration and slow
moving. The Company also determined the $10,000 intellectual property related to the brand may not be recoverable and thus recorded
full impairment of the asset.
Note
4 – 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.
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.
The
Company generated a deferred tax asset through net operating loss carry-forwards. Based upon Management’s evaluation, a
valuation allowance of 100% has been established due to the uncertainty of the Company’s realization of the benefit derived
from net operating loss carry-forwards.
Deferred
income taxes arise from temporary differences resulting from income and expense items reported for financial accounting and tax
purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets
and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability
are classified as current or noncurrent depending on the periods in which the temporary differences are expected to reverse. The
Company does not have any uncertain tax positions.
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. The Company has estimated and accrued for its sales tax liability at $180,222 as
of December 31, 2018.
The
table below summarizes the differences between the U.S. statutory federal rate and the Company’s effective tax rate for
the years ended December 31, 2018 and 2017:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
U.S.
Statutory Rate
|
|
|
21
|
%
|
|
|
34
|
%
|
U.S.
effective rate in excess of AU/CA rate
|
|
|
9
|
%
|
|
|
(1
|
)%
|
Carryback
of Australian tax loss
|
|
|
(4
|
)%
|
|
|
-
|
|
U.S.
valuation allowance
|
|
|
(30
|
)%
|
|
|
(34
|
)%
|
Foreign
Tax - Australia/Canada
|
|
|
-
|
|
|
|
40
|
%
|
Total
provision for income taxes
|
|
|
(4
|
)%
|
|
|
39
|
%
|
The
Company has deferred tax assets, which have been fully reserved, as follows as of December 31, 2018 and 2017:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Deferred
tax assets
|
|
$
|
8,400,000
|
|
|
$
|
7,174,556
|
|
Valuation
allowance for deferred tax assets
|
|
|
(8,400,000
|
)
|
|
|
(7,174,556
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Tax
expense (benefit) was $(247,694) and $316,012 for 2018 and 2017, respectively. The effective tax rate is attributable to the Company’s
world wide income/(loss) as it relates to the income tax expense due in Australia.
The
“TCJA” added a one-time taxation of offshore earnings for the period ending December 31, 2017 (IRC Sec. 965), regardless
of whether they are repatriated (“Deemed Repatriation”). The Company anticipates the one-time taxation of offshore
earnings relating to its foreign subsidiaries is applicable for the 2017 year end. The Company is reviewing its potential tax
liability at December 31, 2017, but has not fully completed the view. It is anticipated that such amount will not be a material
amount at December 31, 2017.
The
Company also has net operating loss carryforwards of approximately $40,000,000 and $33,634,744 (United States and Canada)
included in the deferred tax asset table above for 2018 and 2017, respectively, the majority attributable to the acquisition of
Breakthrough Products, Inc. However, due to limitations of carryover attributes and separate return limitation year rules, it
is unlikely the company will benefit from the NOL’s and thus Management has determined a 100% valuation reserved is required.
Further, the Company has not completed an evaluation of the NOL’s attributable to Breakthrough Products, Inc. at the date
of this report.
The
total deferred tax asset is calculated by multiplying a domestic (US) 21 percent marginal tax rate for 2018 and 21
percent marginal tax rate for 2017 by the cumulative Net Operating Loss Carryforwards (“NOL”). The Company
currently has net operating loss carryforwards approximately aggregating $40,000,000 and $33,634,744 for 2018 and
2017, respectively, which expire through 2035. The deferred tax asset related to the NOL carryforwards Management has
determined based on all the available information that a 100% Valuation reserve is required.
Note
5 – Accounts Receivable
Accounts
receivable, net of allowances for sales returns and doubtful accounts, consisted of the following:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Trade
accounts receivable
|
|
$
|
4,458,225
|
|
|
$
|
4,333,608
|
|
Less
allowances
|
|
|
-
|
|
|
|
-
|
|
Total
accounts receivable, net
|
|
$
|
4,458,225
|
|
|
$
|
4,333,608
|
|
During
the years ended December 31, 2018 and 2017, the Company charged $69,070 and $0, respectively to bad debt expense.
Note
6 – Prepaid Expenses
At
December 31, 2018 and 2017, prepaid expenses consisted of the following:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Advances
for inventory
|
|
$
|
25,170
|
|
|
$
|
206,973
|
|
Components
|
|
|
-
|
|
|
|
104,668
|
|
Media
production
|
|
|
20,791
|
|
|
|
109,388
|
|
Insurance
|
|
|
13,302
|
|
|
|
41,548
|
|
Trade
shows
|
|
|
-
|
|
|
|
17,150
|
|
Deposits
|
|
|
45,144
|
|
|
|
44,841
|
|
Trademarks
|
|
|
78,826
|
|
|
|
-
|
|
Rent
|
|
|
103,912
|
|
|
|
19,500
|
|
Promotion
- Bloggers
|
|
|
167,220
|
|
|
|
246,592
|
|
License
agreement
|
|
|
58,333
|
|
|
|
158,333
|
|
Software
subscriptions
|
|
|
34,440
|
|
|
|
20,513
|
|
Rebranding
|
|
|
40,783
|
|
|
|
32,841
|
|
Clinical
research
|
|
|
35,617
|
|
|
|
47,490
|
|
Advertising
|
|
|
-
|
|
|
|
2,500
|
|
Promotions
|
|
|
175,000
|
|
|
|
37,500
|
|
Miscellaneous
|
|
|
30,309
|
|
|
|
53,414
|
|
Total
|
|
$
|
828,847
|
|
|
$
|
1,143,251
|
|
Note
7 – 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 December 31, 2018 and 2017, the uninsured balance amounted to $162,729
and $1,557,373, respectively.
Accounts
receivable
As
of December 31, 2018 and 2017, three customers accounted for 83% and 88%, respectively, of the Company’s accounts receivable.
Major
customers
For
the year ended December 31, 2018, two customers accounted for approximately 41% of the Company’s net revenue.
For the year ended December 31, 2017, two customers accounted for approximately 42% of the Company’s net revenue. Substantially
all of the Company’s business is with companies in the United States.
Accounts
payable
As
of December 31, 2018 and 2017, two vendors accounted for 77% and 81%, respectively, of the Company’s accounts payable.
Major
suppliers
For
the year ended December 31, 2018, two suppliers accounted for approximately 45% of the Company’s purchases. For the year
ended December 31, 2017, three suppliers accounted for approximately 46% of the Company’s purchases. Substantially all of
the Company’s business is with suppliers in the United States.
Note
8 – 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:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Finished
goods
|
|
$
|
1,956,942
|
|
|
$
|
1,507,344
|
|
Components
|
|
|
441,282
|
|
|
|
1,197,228
|
|
Inventory
in transit
|
|
|
256,051
|
|
|
|
45,188
|
|
Raw
Materials
|
|
|
16,030
|
|
|
|
92,616
|
|
|
|
|
|
|
|
|
|
|
Total
inventory
|
|
$
|
2,670,305
|
|
|
$
|
2,842,376
|
|
As
of January 22, 2015, inventory was pledged to Knight under the Loan Agreement (see note 12). As of December 31, 2018 and 2017,
$256,051 and $45,188, respectively, of the Company’s inventory was in transit. During the year ended December 31,
2018, $1,056,209 of expiring and slow moving inventory was written off to cost of sales.
Note
9 – Fixed Assets and Intangible Assets
As
of December 31, 2018 and 2017, fixed assets and intangible assets consisted of the following:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
$
|
566,445
|
|
|
$
|
437,358
|
|
Less
accumulated depreciation
|
|
|
(296,674
|
)
|
|
|
(144,153
|
)
|
Fixed
assets, net
|
|
$
|
269,771
|
|
|
$
|
293,205
|
|
Depreciation
expense for the years ended December 31, 2018 and 2017 was $152,522 and $108,126, respectively.
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
FOCUSfactor
intellectual property
|
|
$
|
1,450,000
|
|
|
$
|
1,450,000
|
|
Per-fekt
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
|
|
|
(4,728,576
|
)
|
|
|
(3,062,742
|
)
|
Less
accumulated impairment
|
|
|
(924,068
|
)
|
|
|
-
|
|
Intangible
assets, net
|
|
$
|
3,007,521
|
|
|
$
|
5,532,210
|
|
Amortization
expense for the years ended December 31, 2018 and 2017 was $1,669,542 and $1,385,159, respectively. Impairment of intangible
assets for the year ended December 31, 2018 related to branding payments made during 2017.
The
estimated aggregate amortization expense over each of the next five years is as follows:
2019
|
|
$
|
1,078,018
|
|
2020
|
|
|
475,700
|
|
2021
|
|
|
3,803
|
|
Note
10 – Related Party Transactions
The
Company accrued and paid consulting fees of $41,250 per month through April 2017 and $57,917 per month through December 2018
to a company owned by Mr. Jack Ross, Chief Executive Officer of the Company. The Company also paid three months of a vehicle
allowance of $1,500 per month. The Company expensed $648,944 and $796,336, respectively during 2018 and 2017 as consulting
fees, and made payments totaling $648,944 and $796,336 towards services to an entity owned and controlled by an officer
and shareholder of the Company for the year ended December 31, 2018 and 2017, respectively. The Company also paid out a bonus
of $525,000 during 2017. As of December 31, 2018 and 2017, the total outstanding balance was $28,213 and $0, respectively.
On
January 22, 2015, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party, for the
purchase of the Focus Factor assets. At December 31, 2017, the Company owed Knight $559,243 on this loan, net of discount, which
was paid-off during 2018 (see Note 12).
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 December 31, 2018 and 2017, the Company owed
Knight $525,000 and $575,000 in relation to this agreement (see Note 12).
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 will pay Ms. Harshbarger $10,000 a month for one year
unless the Consulting Agreement is terminated earlier by either party. The Company decided to extend the contract on a month to
month basis. Hand MD, LLC is a 50% owner in Hand MD Corp. The Company expensed $120,000 through payroll for each of the years
ended December 31, 2018 and 2017. As of December 31, 2018 and 2017, 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 December 31, 2018 and 2017, the Company owed Knight $7,320,739 and $9,110,030, respectively, 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 December 31, 2018 and 2017, the total outstanding balance was $200,000 and
$100,000 Canadian dollars, respectively. In US Dollars, the total outstanding balance was $152,834 and $79,534 as of December
31, 2018 and 2017, respectively.
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 December 31, 2018 the total outstanding balance
was $25,000 Canadian dollars. In US Dollars, the total outstanding balance was $18,325.
The
Company expensed royalty of $16,066 and $117,722 for the years ended December 31, 2018 and 2017, respectively. At December 31,
2018 and 2017, Sneaky Vaunt Corp., a subsidiary of the Company, owed Knight Therapeutics $5,906 and $4,608, respectively in connection
with a royalty distribution agreement.
The
Company expensed commissions of $43,374 and $172,579 for the years ended December 31, 2018 and 2017, respectively. At December
31, 2018 and 2017, Sneaky Vaunt Corp., a subsidiary of the Company, owed Founded Ventures, owned by a shareholder in the Company,
$10,579 and $2,581, respectively in connection with a commission agreement. The Company paid a development fee for the brand,
Sneaky Vaunt, in the amount of $761,935 for the year ended December 31, 2017.
The
Company expensed commissions of $10,016 and $13,952 for the years ended December 31, 2018 and 2017, respectively. The Company
paid a development fee for the brand, The Queen Pegasus, in the amount of $1,000,000 for the year ended December 31, 2017. At
December 31, 2018 and 2017, The Queen Pegasus, a subsidiary of the Company, owed Founded Ventures $3,547 and $1,462, respectively
in connection with a commission agreement.
The
Company expensed royalty of $2,361 and $24,227 for the years ended December 31, 2018 and 2017, respectively. At December 31, 2018
and 2017, The Queen Pegasus, a subsidiary of the Company, owed Knight Therapeutics $193 and $10,274, respectively in connection
with a royalty distribution agreement.
The
Company paid $250,000 and $125,000 for the years ended December 31, 2018 and 2017, respectively, to Hand MD, Corp, related to
a royalty agreement. At December 31, 2018 and 2017, the Company owed Hand MD Corp. $0 and $250,000, respectively in minimum future
royalties.
The
Company expensed royalty of $392,589 and $380,166 for the years ended December 31, 2018 and 2017, respectively. At December 31,
2018 and 2017, NomadChoice Pty Ltd., a subsidiary of the Company owed Knight Therapeutics $109,329 and $39,682, respectively,
in connection with a royalty distribution agreement (see Note 3).
Note
11 – Accounts Payable and Accrued Liabilities
As
of December 31, 2018 and 2017, accounts payable and accrued liabilities consisted of the following:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Accrued
payroll
|
|
$
|
217,069
|
|
|
$
|
296,491
|
|
Legal
fees
|
|
|
71,236
|
|
|
|
96,017
|
|
Commissions
|
|
|
134,784
|
|
|
|
178,286
|
|
Manufacturers
|
|
|
3,898,896
|
|
|
|
2,147,751
|
|
Promotions
|
|
|
1,262,503
|
|
|
|
897,925
|
|
Returns
allowance
|
|
|
850,627
|
|
|
|
-
|
|
Professional
Fees
|
|
|
-
|
|
|
|
45,921
|
|
Accounting
Fees
|
|
|
104,198
|
|
|
|
19,681
|
|
Rent
|
|
|
61,738
|
|
|
|
19,500
|
|
Customers
|
|
|
76,617
|
|
|
|
106,395
|
|
Interest
|
|
|
-
|
|
|
|
147,000
|
|
Royalties,
related party
|
|
|
304,434
|
|
|
|
138,143
|
|
Warehousing
|
|
|
64,289
|
|
|
|
10,388
|
|
Sales
taxes
|
|
|
180,222
|
|
|
|
-
|
|
Taxes
|
|
|
178,069
|
|
|
|
-
|
|
Severance
Accrual
|
|
|
506,250
|
|
|
|
-
|
|
Related
Party Reimbursements
|
|
|
178,825
|
|
|
|
-
|
|
Others
|
|
|
307,463
|
|
|
|
225,050
|
|
Total
|
|
$
|
8,397,220
|
|
|
$
|
4,328,548
|
|
The
Company has accounted for a severance accrual in the amount of $506,250 as of December 31, 2018 relating to the termination of
an employee. This liability will be paid out in three remaining equal installments of $168,750 during 2019.
Note
12 – Notes Payable
The
Company’s loans payable at December 31, 2018 and 2017 are as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Loans
payable
|
|
$
|
7,772,151
|
|
|
$
|
10,344,739
|
|
Unamortized
debt issuance cost
|
|
|
(179,261
|
)
|
|
|
(393,227
|
)
|
Total
|
|
|
7,592,890
|
|
|
|
9,951,512
|
|
Less:
Current portion
|
|
|
(1,963,887
|
)
|
|
|
(2,487,233
|
)
|
Long-term
portion
|
|
$
|
5,629,003
|
|
|
$
|
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 was 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 also recorded deferred financing costs of $289,045 with respect to the above loan. The Company recognized amortization
of deferred financing costs of $3,257 and $56,605 during the years ended December 31, 2018 and 2017, respectively. Unamortized
debt issuance cost as of December 31, 2018 amounted to $0.
The
Company recognized and paid interest expense of $4,611 and $293,238 during the years ended December 31, 2018 and 2017, respectively.
Accrued interest expense was $0 as of both December 31, 2018 and 2017. Loan payable balance was $0 and $562,500 as of December
31, 2018 and 2017, respectively.
$1,500,000
January 22, 2015 Loan:
On
January 22, 2015, the Company issued a 0% promissory note in a principal amount of $1,500,000 in connection with an Asset Purchase
Agreement (see note 1). The note has a maturity date of January 20, 2017, with $750,000 to be paid on or before January 20, 2016
and an additional $750,000 to be paid on or before January 20, 2017. Loan payable balance was $0 as of December 31, 2018 and 2017.
The loan was paid in full in January 2017.
$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 (see note 1). 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 ending 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 and $2,600 during the years ended December 31, 2018 and 2017, respectively. Unamortized debt
issuance cost as of December 31, 2017 amounted to $0. The Company recorded present value of future payments of $272,151 and $282,240
as of December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017, the Company owed Knight $525,000 and $575,000 in
relation to this agreement. The Company recorded interest expense of $39,911 and $41,292 for the year ended December 31, 2018
and 2017, respectively. The Company made payments of $50,000 during both 2018 and 2017.
$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 New Loan Agreement matured on November 11, 2017 and was fully paid.
The
Company also recorded deferred financing costs of $233,847 with respect to the above loan. The Company recognized amortization
of deferred financing costs of $101,088 during the year ended December 31, 2017. Unamortized debt issuance cost as of December
31, 2017 amounted to $0.
The
Company recognized interest expense of $252,515 during the year ended December 31, 2017. The principal balance outstanding at
both December 31, 2018 and 2017 was $0.
$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 and are currently in compliance with all
covenants. 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.
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 $210,710 and $62,898 during the years ended December 31, 2018 and 2017, respectively. Unamortized
debt issuance cost as of December 31, 2018 amounted to $179,261.
The
Company recognized interest expense of $1,057,833 and $412,417 during the years ended December 31, 2018 and 2017, respectively.
Accrued interest was $0 and $147,000 as of December 31, 2018 and 2017, respectively. The loan balance at December 31, 2018 and
2017 was $7,500,000 and $9,500,000, respectively.
Note
13 – Stockholders’ Equity
During
the year ended December 31, 2017, the Company issued 473,326 shares of its common stock valued at $0.51 per share in accordance
with an asset purchase agreement entered into with Perfekt Beauty Holdings, LLC and CDG Holdings, LLC, in exchange for assets
and liabilities related to the Per-fekt brand.
During
the year ended December 31, 2017, the Company sold 400,000 shares of its common stock valued at $220,000 to an employee of the
Company.
During
the year ended December 31, 2017, the Company issued 100,000 shares of its common stock valued at $55,000 to an employee of the
Company.
As
of December 31, 2018 and 2017, there were 89,862,683 shares of the Company’s common stock issued and outstanding.
Note
14 – Commitments and 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 $37,500paid 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 will vest 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 was $19,500 per month, and increasing annually on June 1. Effective January 31, 2019 this sublease was cancelled.
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 December 31, 2018:
Year
ending December 31:
|
|
|
|
2019
|
|
$
|
20,085
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
2023
|
|
|
-
|
|
Total
|
|
$
|
20,085
|
|
Note
15 – 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 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 $0.70 per share to an employee of the Company.
The
following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common
stock issued to employees and consultants under a stock option plan at December 31, 2018:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Exercise
Price ($)
|
|
|
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
|
|
|
|
5.67
|
|
|
$
|
0.50
|
|
|
|
6,475,000
|
|
|
$
|
0.48
|
|
The
stock option activity for the year ended December 31, 2018 is as follows:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
at December 31, 2016
|
|
|
6,300,000
|
|
|
$
|
0.47
|
|
Granted
|
|
|
2,700,000
|
|
|
|
0.62
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
or canceled
|
|
|
(333,333
|
)
|
|
|
(0.70
|
)
|
Outstanding
at December 31, 2017
|
|
|
8,666,667
|
|
|
$
|
0.51
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
or canceled
|
|
|
(1,500,000
|
)
|
|
|
(0.55
|
)
|
Outstanding
at December 31, 2018
|
|
|
7,166,667
|
|
|
$
|
0.50
|
|
Stock-based
compensation expense related to vested options was $440,999 and $1,458,850 during the years ended December 31, 2018 and 2017,
respectively. The Company determined the value of share-based compensation for options vesting during the year ended December
31, 2017 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 December 31, 2018, as disclosed in the above table, have
an intrinsic value of $0. As of December 31, 2018, unamortized stock-based compensation costs related to options was $290,499,
and will be recognized over a period of 2 years.
Note
16 – Stock Warrants
The
following table summarizes the warrants outstanding and the related prices for the shares of the Company’s common stock
at December 31, 2018:
|
|
|
Warrants
Outstanding
|
|
|
|
|
|
|
|
Warrants
Exercisable
|
|
|
|
Exercise
Prices ($)
|
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Weighted
Average Exercise Price ($)
|
|
|
Number
Exercisable
|
|
Weighted
Average Exercise Price ($)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
The
warrant activity for the year ended December 31, 2018 is as follows:
|
|
Warrants
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
at December 31, 2016
|
|
|
1,000,000
|
|
|
$
|
5
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
or canceled
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2017
|
|
|
1,000,000
|
|
|
$
|
5
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
or canceled
|
|
|
(1,000,000
|
)
|
|
|
(5
|
)
|
Outstanding
at December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
Note
17 – 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 aggregated basis.
Net
sales attributed to customers in the United States and foreign countries for the years ended December 31, 2018 and 2017 were as
follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
United
States
|
|
$
|
31,731,304
|
|
|
$
|
32,922,730
|
|
Foreign
countries
|
|
|
2,093,191
|
|
|
|
2,673,305
|
|
|
|
$
|
33,824,495
|
|
|
$
|
35,596,035
|
|
Foreign
countries primarily consist of Australia and Canada.
The
Company’s net sales by product group for the years ended December 31, 2018 and 2017 were as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Nutraceuticals
|
|
$
|
31,332,952
|
|
|
$
|
29,903,714
|
|
Over
the Counter (OTC)
|
|
|
427,871
|
|
|
|
1,203,034
|
|
Consumer
Goods
|
|
|
987,230
|
|
|
|
3,614,090
|
|
Cosmeceuticals
|
|
|
1,076,442
|
|
|
|
875,197
|
|
|
|
$
|
33,824,495
|
|
|
$
|
35,596,035
|
|
(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 years ended December 31, 2018 and 2017 were as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Online
|
|
$
|
16,156,081
|
|
|
$
|
16,828,932
|
|
Retail
|
|
|
17,668,414
|
|
|
|
18,767,103
|
|
|
|
$
|
33,824,495
|
|
|
$
|
35,596,035
|
|
Long-lived
assets (net) attributable to operations in the United States and foreign countries as of December 31, 2018 and 2017 were as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
United
States
|
|
$
|
11,058,528
|
|
|
$
|
13,613,043
|
|
Foreign
countries
|
|
|
12,004
|
|
|
|
5,612
|
|
|
|
$
|
11,070,532
|
|
|
$
|
13,618,655
|
|
Note
18 – Subsequent Events
During
2019, the Company made an additional $500,000 payment on Loan 3.
Effective
January 1, 2019 the Company has merged its U.S. subsidiaries into the parent company.
On January 28, 2019 the Company issued
26,391 shares of stock in full and final settlement of Per-fekt transaction.
Effective
January 31, 2019, the sublease for office space entered into on October 1, 2017 was cancelled.
During
March 2019 the Company received a 60 day Proposition 65 letter that one of its products did not have California’s Prop 65
label. The Company is taking action to correct the oversight.