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 three subsidiaries: Neuragen Corp., Breakthrough Products, Inc. and NomadChoice Pty Ltd. and the results
have been consolidated in these statements.
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation
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, 2015 and 2014 significant estimates included in these estimates are assumptions about collection of accounts receivable,
useful life of fixed and intangible assets, goodwill and assumptions used in Black-Scholes-Merton, or BSM, valuation methods,
such as expected volatility, stock based compensation, 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, 2015 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, 2015, the
uninsured balance amounted to $3,453,290.
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.
Revenue
Recognition
The
Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting
Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”). ASC 605 requires that four basic
criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred
and/or service has been performed; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured.
The Company believes that these criteria are satisfied 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.
Accounts
receivable
Accounts
receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of
outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection
efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied
against the allowance for doubtful accounts.
Advertising
Expense
The
Company expenses marketing, promotions and advertising costs as incurred. Such costs are included in general and administrative
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.
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 loss 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
December 31, 2015, options to purchase 5,000,000 shares of common stock and warrants to purchase 9,132,002 shares of common stock
were outstanding these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion
would reduce net loss per share.
Going
Concern
The
Company’s consolidated financial statements are prepared using U.S. GAAP applicable to a going concern, which contemplates
the realization of assets and liquidation of liabilities in the normal course of business. The Company had an accumulated deficit
at December 31, 2015 of $8,569,841. The Company had a working capital deficit of $6,165,812 as of December 31, 2015. Due to acquisitions
during 2015 of revenue-producing products, the Company believes it has established an ongoing source of revenue that is sufficient
to cover its operating costs. The ability of the Company to continue as a going concern is dependent on the Company obtaining
adequate capital to fund operating losses until it establishes a revenue stream and becomes profitable. If the Company is unable
to obtain adequate capital it could be forced to cease development of operations.
In
order to continue as a going concern and to develop a reliable source of revenues, and achieve a profitable level of operations
the Company will need, among other things, additional capital resources. Management’s plans to continue as a going concern
include raising additional capital through borrowing and/or sales of equity and debt securities. However, management cannot provide
any assurances that the Company will be successful in accomplishing any of its plans.
The
ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described
in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying
consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue
as a going concern.
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, 2015, the Company has determined that there were no assets or liabilities measured at fair value except for the
warrant derivative liability which is valued using Level 3 estimates.
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 market. Finished goods include the cost of labor to assemble the items.
Stock-Based
Compensation
The
Company adopted the provisions of ASC 718. We estimate the fair value of stock options using a binomial model, consistent with
the provisions of ASC 718 and SEC Staff Accounting Bulletin No. 107, Share-Based Payment. Option-pricing models require the input
of highly subjective assumptions, including the price volatility of the underlying stock. We determined that the use of implied
volatility is expected to be more reflective of market conditions and, therefore, could reasonably be expected to be a better
indicator of our expected volatility than historical volatility. The expected term assumption used in calculating the estimated
fair value of our stock-based compensation awards using the Black-Scholes-Merton (BSM) model is based on detailed historical data
about employees’ exercise behavior, vesting schedules, and death and disability probabilities. In addition, we are required
to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture
rate based on historical experience of our stock-based awards that are granted, exercised and cancelled. We believe the resulting
BSM calculation provides a more refined estimate of the fair value of our employee stock options.
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, 2015, our qualitative analysis of long-lived assets did not indicate any impairment.
Goodwill
An
asset purchase is accounted for under the purchase method of accounting. Under that method, assets and liabilities of the business
acquired are recorded at their estimated fair values as of the date of the acquisition, with any excess of the cost of the acquisition
over the estimated fair value of the net tangible and intangible assets acquired recorded as goodwill. As of December 31, 2015
our qualitative analysis of goodwill did not indicate any impairment.
Foreign
Currency Translation
The
functional currency of each of the Company’s foreign subsidiaries is the U.S. Dollar. The Company’s subsidiary maintains
its record using local currency (Australian Dollar). All monetary assets and liabilities of foreign subsidiaries were translated
into U.S. Dollars at fiscal year-end exchange rates, non-monetary assets and liabilities of foreign subsidiaries 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.
Concentrations
of Credit Risk
In
the normal course of business, the Company provided 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 any additional costs relating to assembly or special pack-outs of the Company
products are charged to general and administrative expenses as incurred.
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 general and administrative expenses as incurred.
Warrant
Derivative Liabilities
ASC
815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments
and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a)
the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic
characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument
and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with
changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception
to this rule when the host instrument is deemed to be conventional, as described.
A
Black-Scholes-Merton option-pricing model, with dilution effects, was utilized to estimate the fair value of the Warrant Derivative
Liabilities as of November 12, 2015 and December 31, 2015. This model is subject to the significant assumptions discussed below
and requires the following key inputs with respect to the Company and/or instrument:
Input
|
|
November
12, 2015
|
|
|
December
31, 2015
|
|
Stock Price
|
|
$
|
0.46
|
|
|
$
|
0.69
|
|
Exercise Price
|
|
$
|
0.49
|
|
|
$
|
0.49
|
|
Expected Life (in years)
|
|
|
10.0
|
|
|
|
9.75
|
|
Stock Volatility
|
|
|
157.56
|
%
|
|
|
152.07
|
%
|
Risk-Free Rate
|
|
|
2.32
|
%
|
|
|
2.27
|
%
|
Dividend Rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Outstanding Shares of Common Stock
|
|
|
4,547,243
|
|
|
|
4,547,243
|
|
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 capitalized and are being
amortized to interest expense over the term of the related debt facilities.
Impairment
of Long-Lived Assets
When
facts and circumstances indicate that the carrying values of long-lived assets, including fixed assets, may be impaired, an evaluation
of recoverability is performed by comparing the carrying value of the assets to projected future cash flows in addition to other
quantitative and qualitative analyses. Upon indication that the carrying value of such assets may not be recoverable, the Company
recognizes an impairment loss as a charge against current operations. Long-lived assets to be disposed of are reported at the
lower of the carrying amount or fair value, less estimated costs to sell. The Company makes judgments related to the expected
useful lives of long-lived assets and its ability to realize undiscounted cash flows in excess of the carrying amounts of such
assets which are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions
and changes in operating performance. As the Company assesses the ongoing expected cash flows and carrying amounts of its long-lived
assets, these factors could cause the Company to realize a material impairment charge.
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. The All transactions
with related parties shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party
is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected
as a distribution to the related party.
Segment
Reporting
Segment
identification and selection is consistent with the management structure used by the Company’s chief operating decision
maker to evaluate performance and make decisions regarding resource allocation, as well as the materiality of financial results
consistent with that structure. Based on the Company’s management structure and method of internal reporting, the Company
has one operating segment. The Company’s chief operating decision maker does not review operating results on a disaggregated
basis; rather, the chief operating decision maker reviews operating results on an aggregate basis.
Recent
Accounting Pronouncements
ASU
2015-03
In
April 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-03, Interest - Imputation of Interest (Subtopic
835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related
to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments
in this ASU. The amendments are effective for financial statements issued for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2015. The amendments are to be applied on a retrospective basis, wherein the balance sheet
of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance. The Company
is evaluating the possible effect of this guidance on its financial statements.
ASU
2015-02
In
February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is
intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability
corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed
security transactions). The ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate
whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to
two, the new standard simplifies the FASB Accounting Standards Codification and improves current U.S. GAAP by placing more emphasis
on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party
guidance when determining a controlling financial interest in a variable interest entity (“VIE”), and changing consolidation
conclusions for companies in several industries that typically make use of limited partnerships or VIEs. The ASU will be effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted,
including adoption in an interim period. We do not expect the adoption of ASU 2015-02 to have a material effect on our financial
position, results of operations or cash flows.
ASU
2015-01
In
January 2015, the FASB issued ASU No. 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying
Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” This ASU eliminates from U.S. GAAP the
concept of extraordinary items. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2015. A reporting entity may apply the amendments prospectively. We do not expect the adoption of ASU 2015-01
to have a material effect on our financial position, results of operations or cash flows.
ASU
2014-17
In
November 2014, the FASB issued ASU No. 2014-17, “Business Combinations (Topic 805): Pushdown Accounting.” This ASU
provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of
an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown
accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is applied to an individual
change-in-control event, that election is irrevocable. ASU 2014-17 was effective on November 18, 2014. The adoption of ASU 2014-17
did not have any effect on our financial position, results of operations or cash flows.
ASU
2014-16
In
November 2014, the FASB issued ASU 2014-16, “Derivatives and Hedging (Topic 815).” ASU 2014-16 addresses whether the
host contract in a hybrid financial instrument issued in the form of a share should be accounted for as debt or equity. ASU 2014-16
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We do not currently
have issued, nor are we investors in, hybrid financial instruments. Accordingly, we do not expect the adoption of ASU 2014-16
to have any effect on our financial position, results of operations or cash flows.
ASU
2014-15
In
August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40)”.
ASU 2014-15 provides guidance related to management’s responsibility to evaluate whether there is substantial doubt about
an entity’s ability to continue as a going concern and to provide related footnote disclosure. ASU 2014-15 is effective
for annual periods ending after December 15, 2016, and for interim and annual periods thereafter. Early application is permitted.
We do not expect the adoption of ASU 2014-15 to have a material effect on our financial position, results of operations or cash
flows.
ASU
2014-12
In
June 2014, the FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based
Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.”
This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period
be treated as a performance condition. ASU 2014-12 is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2015. We do not expect the adoption of ASU 2014-12 to have a material effect on our financial position,
results of operations or cash flows.
ASU
2014-09
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 affects
any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts
for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts
or lease contracts). ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2016. We are still evaluating the effect of the adoption of ASU 2014-09. In August 2015, the FASB issued ASU 2015-14,
which defers the effective date of ASU 2014-09 by one year for all entities and permits early adoption on a limited basis. ASU
2014-09 will be effective for the Company in the first quarter of 2018, and early adoption permitted in the first quarter of 2017.
The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.
ASU
2014-08
In
April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and
Equipment (Topic 360) and Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU
2014-08 amends the definition for what types of asset disposals are to be considered discontinued operations, as well as amending
the required disclosures for discontinued operations and assets held for sale. ASU 2014-08 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15, 2014. The adoption of ASU 2014-08 did not have any
effect on our financial position, results of operations or cash flows.
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 condensed financial position, results
of operations or cash flows.
Change
in Fiscal Year End
On
April 21, 2014, the Company’s board of directors approved a change to the Company’s fiscal year end from July 31 to
December 31 of each year.
Note
3 – Acquisitions
Asset
Purchase Agreement with Factor Nutrition Labs, LLC:
On
January 22, 2015 (the “Closing Date”), the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”)
with Factor Nutrition Labs, LLC, a Delaware limited liability company (the “Seller”), Vita Partners, LLC, RPR Partners,
LLC, and Thor Associates, Inc. (each a “Principal Owner”). Pursuant to the Purchase Agreement, the Company purchased
all of the assets of the Seller’s line of business and products called FOCUS Factor (the product plus the business related
to the product is collectively referred to as the “Focus Factor Business”) and assumed the accounts payable and contractual
obligations of the Focus Factor Business for an aggregate purchase price of $6.0 million, with $4.5 million paid on the Closing
Date, and $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.
Distribution
Agreement
On
January 22, 2015, the Company and Knight entered into a Distribution, License and Supply Agreement (the “Distribution Agreement”),
pursuant to which the Company granted to Knight an exclusive license to commercialize FOCUSFactor, FOCUSFactor Kids and Synergy
Strip and all improvements thereto (together the “Licensed Products”) and appointed Knight as the exclusive distributor
to offer to sell and sell the Licensed Products in Canada, and, at Knight’s election, one or more of Israel, Russia, and
Sub-Saharan Africa. The Distribution Agreement provides that Knight may sublicense its rights or use sub-distributors under the
Distribution Agreement on terms consistent with the terms of the Distribution Agreement. During the term of the Distribution Agreement,
Knight agrees to obtain from the Company all its requirements for the Licensed Products and the Company agrees to supply the Licensed
Products at its adjusted production cost plus a designated percentage and any applicable taxes.
In
the event of a long term inability by the Company to supply Knight with the Licensed Products, Knight is entitled to require,
among other remedies, the Company to grant a Knight-designated third party a non-exclusive license to use all relevant intellectual
property to manufacture and supply Knight with the Licensed Products for commercialization in the Territory. The term of the Distribution
Agreement runs until 15 years from the date of the first commercial sale of a Licensed Product in Canada, and the Distribution
Agreement will automatically renew for successive 15-year periods unless either party provides the other with written notice of
its intention not to renew (a “Non-Renewal Notice”). The Company agrees that in the event it issues a Non-Renewal
Notice, the Company will pay to Knight a non-renewal fee equal to the net sales of the Licensed Products achieved by Knight in
the Territory during the eight calendar quarters preceding the date of such notice, plus all applicable taxes.
Distribution
Option Agreement
In
connection with the Loan Agreement, the Company entered into a Product Distribution Option Agreement, dated January 22, 2015 (the
“Option Agreement”), pursuant to which the Company granted Knight the exclusive right to negotiate the exclusive distribution
rights of any one or more of the Company’s products, including products from the Focus Factor Business, for the territories
of Canada, Russia, Sub-Saharan Africa and Israel (the “Option”), pursuant to designated parameters. The Option Agreement
is effective upon the date of the Option Agreement, will run until January 31, 2045, and will automatically renew thereafter for
successive five-year periods unless either party provides a notice of termination prior to the Option Agreement’s expiration.
If Knight does not exercise the option then the Company is free to contract for distribution with other parties, but only on terms
no less favorable than those offered by Knight pursuant to the Option Agreement.
On
December 3, 2015, we entered into an Amendment to First Amendment Agreement (the “Second Amendment Agreement”) with
Knight pursuant to which we agreed to grant distribution rights to Knight for Breakthrough’s products. To satisfy this obligation,
on December 3, 2015, we also entered into an Amendment and Confirmation Agreement (the “Confirmation Agreement”) with
Knight, Nomad and Breakthrough to amend the Distribution, License and Supply Agreement dated January 22, 2015 (the “Distribution
Agreement”) between us and Knight to grant to Knight an exclusive license to commercialize any and all Nomad and Breakthrough
products and appoint Knight as the exclusive distributor to offer and sell those products in Canada, Israel, Romania, Russia and
each of the countries within Sub-Saharan Africa, which is the new “Territory” under the Distribution Agreement, as
amended. Pursuant to the Second Amendment Agreement, Nomad will buy all Flat Tummy Tea products within the Territory for direct
to consumer sales exclusively from Knight and/or its affiliates at cost of goods plus 60% of gross sales.
The
Company has accounted for this transaction under the acquisition method of accounting. Under the acquisition method of accounting,
the total acquisition consideration price is allocated to the assets acquired and liabilities assumed based on their preliminary
estimated fair values based on the management’s estimates as of the date of the acquisition. The Company expects to retain
the services of independent valuation firm to determine the fair value of these identifiable intangible assets. Once determined,
the Company will reallocate the purchase price of the acquisition based on the results of the independent evaluation if they are
materially different from the allocations as recorded on January 22, 2015. The Company expects the purchase price allocations
for the acquisition of Focus Factor Business to be completed by the filing of first quarter 2016 statements. The preliminary allocation
of the purchase price to the assets acquired and liabilities assumed based on the estimated fair values is as follows:
Assets
|
|
|
|
|
Accounts
Receivable
|
|
$
|
2,733,167
|
|
Inventory
|
|
|
67,113
|
|
Intellectual Property
|
|
|
1,000,000
|
|
Non-compete provision
|
|
|
50,000
|
|
Non-solicitation
provision
|
|
|
50,000
|
|
Intangible assets-Customer
relationships
|
|
|
1,941,030
|
|
Goodwill
|
|
|
2,071,517
|
|
Liabilities
|
|
|
|
|
Accounts Payable
|
|
|
(971,381
|
)
|
Accrued
Expenses
|
|
|
(941,446
|
)
|
|
|
$
|
6,000,000
|
|
The
Customer relationships, the non-compete and the non-solicitation provisions will be amortized over their estimated useful lives
of 5 years. During the year ended December 31, 2015, the Company charged to operations amortization expense of $384,720.
The
purchase price allocated to the acquisition of the assets of Factor Nutrition Labs, LLC is made up as follows:
|
|
Amount
|
|
Cash payment made on January
22, 2015
|
|
$
|
4,500,000
|
|
Cash payment to be made on January 20,
2016
|
|
|
750,000
|
|
Cash payment
to be made on January 20, 2017
|
|
|
750,000
|
|
Total
|
|
$
|
6,000,000
|
|
Pro
forma Results of Operations. The historical operating results of the Focus Factor Business prior to its acquisition date have
not been included in the Company’s historical consolidated operating results. Pro forma results of operations data (unaudited)
for the years ended December 31, 2014 and 2013, as if the acquisition had occurred on January 1, 2013, are as follows:
|
|
December
31,
|
|
|
|
2014
|
|
|
2013
|
|
Revenue
|
|
$
|
12,695,295
|
|
|
$
|
10,629,171
|
|
Net (loss) income
|
|
|
(183,471
|
)
|
|
|
932,209
|
|
Pro
forma revenue amount above does not include adjustment/reductions relating to certain discounts, coupons and placement fees and
is presented gross.
The
amounts of revenue and net income of the FOCUS Factor Business since the acquisition date included in the consolidated statement
of operations for the year ended December 31, 2015 are approximately $10,482,367 and $1,216,928, respectively.
Asset
Purchase Agreement with Knight Therapeutics Inc.:
On
June 26, 2015 (the “Closing Date”), Neuragen Corp., a Delaware corporation (“Neuragen”) and our wholly
owned subsidiary, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Knight Therapeutics Inc.,
a Canadian corporation (“Knight Canada”). Pursuant to the Purchase Agreement, Neuragen purchased the U.S. rights related
to an innovative OTC product that helps relieve pain caused by diabetic nerve damage (the “Purchased Assets”) for
an aggregate purchase price of $1.2 million, with (i) $250,000 paid on the Closing Date, (ii) $250,000 to be paid on or before
June 30, 2016, (iii) $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 (iv) 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 (collectively, “Total Consideration”).
The Company has recorded present value of future payments of $515,854 as of December 31, 2015. The Company has recorded interest
expense of $37,372 for the year ended December 31, 2015.
Security
Agreement
On
the Closing Date, Neuragen entered into a Security Agreement with Knight Canada, pursuant to which Neuragen granted a lien and
security interest to Knight Canada in Collateral in connection with the Purchase Agreement.
The
Security Agreement was made to secure the payment of all indebtedness, obligations and liabilities of Neuragen of the Purchase
Agreement, including all expenses and charges, legal or otherwise, suffered or incurred by Knight Canada in collecting or enforcing
such indebtedness of the Purchase Agreement.
The
Security Agreement includes customary events of default, including but not limited to: payment defaults; Neuragen becoming insolvent
or entering into bankruptcy; or if any contemplated security ceases to be a valid and perfected first-priority security interest
that is not remedied within fifteen business days by Neuragen. Upon the occurrence of an event of default and during the continuation
thereof, the principal amount of the outstanding Total Consideration will bear a default interest rate of an additional 10% per
annum.
The
acquisition was treated as an acquisition of assets as the transaction involved the acquisition of a brand and a license agreement.
The Company expects to retain the services of independent valuation firm to determine the fair value of these identifiable intangible
assets. Once determined, the Company will reallocate the purchase price of the acquisition based on the results of the independent
evaluation if they are materially different from the allocations as recorded on June 26, 2015. The Company expects the purchase
price allocations for the asset acquisition to be completed by the filing of second quarter 2016 statements. The preliminary allocation
of the purchase price to the assets acquired and liabilities assumed based on the estimated fair values is as follows:
Assets
|
|
|
|
|
Accounts
Receivable
|
|
$
|
58,054
|
|
Inventory
|
|
|
204,925
|
|
Intangible property
|
|
|
100,000
|
|
License agreement
|
|
|
606,553
|
|
Liabilities
|
|
|
|
|
Accounts Payable
|
|
|
(51,795
|
)
|
Accrued
Expenses
|
|
|
(148,520
|
)
|
|
|
$
|
769,217
|
|
The
intangible property and license agreement will be amortized over their estimated useful lives of 5 years. During the year ended
December 31, 2015, the Company charged to operations amortization expense of $70,655.
Contribution
Agreement with Hand MD Corp.:
On
August 18, 2015 (the “Closing Date”), we entered into a Contribution Agreement with Hand MD Corp., a Delaware corporation,
whereby we contributed to Hand MD Corp. 2,142,857 shares of our common stock in exchange for 50% of Hand MD Corp.’s outstanding
capital securities valued at $0.70 per share. Simultaneously, Hand MD, LLC, a California limited liability company, entered into
a Contribution Agreement with Hand MD Corp., the principal owners of Hand MD, LLC, and us whereby Hand MD LLC contributed to Hand
MD Corp. all of its right, title and interest in its intellectual property associated with skincare, nail care and nail polish
products (the “Hand MD Business”) in exchange for the other 50% of Hand MD Corp.’s outstanding capital securities.
In the Contribution Agreement among Hand MD Corp., Hand MD, LLC, the principal owners of Hand MD, LLC and us, Hand MD, LLC and
its principal owners agreed to not compete or solicit customers or employees for five years. As part of the transaction, we also
purchased from Hand MD Corp. all inventory related to the Hand MD Business for approximately $106,000. The Company has recorded
50% of the present value of future royalty payments of $258,897 as of December 31, 2015.
We
also entered into a license agreement with Hand MD Corp. on August 18, 2015, whereby we acquired the exclusive worldwide license
to commercialize Hand MD Corp. skincare products and all improvements thereto. The license runs in perpetuity unless earlier terminated.
We will pay Hand MD Corp. a royalty of 5% of the net sales price of product sold, transferred or otherwise disposed of by us,
as well as 5% of any amount we receive from sublicensees, subject to a minimum royalty of $250,000 in the second year of the license
and $500,000 in the third year of the license, after which the minimum royalty terminates. We are solely responsible for any regulatory
and intellectual property filings, including those necessary to maintain regulatory approvals for the licensed products. Either
we or Hand MD Corp. can terminate the agreement in the event of bankruptcy or insolvency of the other party, or the uncured material
breach of the agreement by the other party. Upon termination we would be entitled to sell any inventory of licensed product in
the normal course of business and consistent with sales of licensed product during the term of the agreement.
The
Contribution Agreements and the License Agreement contain customary representations and warranties and covenants by the respective
parties.
We
also entered into a Consulting Agreement on August 18, 2015, with Kara Harshbarger, the co-founder of Hand MD, LLC, pursuant to
which she will provide marketing and sales related services. We will pay Ms. Harshbarger $10,000 a month for one year unless the
Consulting Agreement is terminated earlier by either party. If we terminate the Consulting Agreement without cause, we will be
obligated to pay the remaining term of the Agreement. Ms. Harshbarger agreed not to compete with us in the United States in any
marketing or sales of skincare, nail polish and nail care products during the term of the Consulting Agreement and for 12 months
after its termination. Ms. Harshbarger also agreed not to solicit customers or employees for the same period.
The
acquisition was treated as an acquisition of assets as the transaction involved the acquisition of a brand and a license agreement.
The Company expects to retain the services of independent valuation firm to determine the fair value of these identifiable intangible
assets. Once determined, the Company will reallocate the purchase price of the acquisition based on the results of the independent
evaluation if they are materially different from the allocations as recorded on August 18, 2015. The Company expects the purchase
price allocations for the asset acquisition to be completed during 2016. The preliminary allocation of the purchase price to the
assets acquired and liabilities assumed based on the estimated fair values is as follows:
Assets
|
|
|
|
|
Intangible
property
|
|
$
|
100,000
|
|
License agreement
|
|
|
1,670,675
|
|
Liabilities
|
|
|
-
|
|
Royalty payable
|
|
|
(258,897
|
)
|
Others
|
|
|
(11,778
|
)
|
|
|
$
|
1,500,000
|
|
The
intangible property and license agreement will be amortized over their estimated useful lives of 5 years. During the year ended
December 31, 2015, the Company charged to operations amortization expense of $118,045.
Stock
Purchase Agreement with Breakthrough Products, Inc.:
On
November 12, 2015 (the “UrgentRx Closing Date”), we entered into a Stock Purchase Agreement (the “UrgentRx SPA”)
with Breakthrough Products, Inc., a Delaware corporation (the “Company”), URX ACQUISITION TRUST, a Delaware statutory
trust, (the “Trust”), Jordan Eisenberg, the chief executive officer and a shareholder of the Company (“Eisenberg”),
and the other shareholders of the Company (Eisenberg and such other shareholders collectively referred to as the “UrgentRx
Sellers”) for the purchase of all the issued and outstanding capital stock of the Company for 6,000,000 shares of our common
stock (“UrgentRx Equity Consideration”).
In
addition to the UrgentRx Equity Consideration, we have agreed to pay a royalty to the Trust, for the benefit of the UrgentRx Sellers,
equal to 5% of gross sales of the UrgentRx (as defined below) following the first $5,000,000 in gross sales by the UrgentRx Products,
on a quarterly basis for a period of seven years from the UrgentRx Closing Date.
The
Company is engaged in the business of developing and selling medications for headache, heart burn, allergy attack, ache and pain,
and upset stomach in the form of powders (“UrgentRx”).
Following
the UrgentRx Closing Date, we discovered certain liabilities and obligations of Breakthrough that required an adjustment to the
UrgentRx Equity Consideration and the royalty payments.
On
December 17, 2015, we entered into a Settlement and Release Agreement (the “Settlement Agreement”) with the UrgentRx
Sellers, the Trust, on its own behalf and as the representative of the UrgentRx Sellers, David T. Leyrer, Michael Valentino, Ron
Fugate, and Randall Kaplan (collectively with Leyrer, Valentino, Fugate, the “Former Directors”) to resolve the post-closing
liabilities. Pursuant to the terms of the Settlement Agreement, 3,000,000 shares of the Equity Consideration were returned by
the Trust to us and our obligation to pay royalties to the Trust was reduced from seven years to five years. The Settlement Agreement
further contained mutual releases among us, the UrgentRx Sellers, and the Former Directors, with limited exceptions. Additionally,
we issued a three-year warrant to the Trust with a $5.00 per share exercise price. We may redeem the warrant at a price of $0.001
per share if our common stock is traded on the OTCBB or on a national securities exchange, and the per share closing sale price
of our common stock equals or exceeds the exercise price for a period of 90 consecutive calendar days. In the event of a reorganization
or reclassification of our capital stock, the merger or consolidation of our company into another entity or the sale or transfer
of all or substantially all of our assets, the warrant will terminate if not exercised prior to the date of such event.
The
Company has accounted for this transaction under the acquisition method of accounting. Under the acquisition method of accounting,
the total acquisition consideration price is allocated to the assets acquired and liabilities assumed based on their preliminary
estimated fair values based on the management’s estimates as of the date of the acquisition. The Company expects to retain
the services of independent valuation firm to determine the fair value of these identifiable intangible assets. Once determined,
the Company will reallocate the purchase price of the acquisition based on the results of the independent evaluation if they are
materially different from the allocations as recorded on November 12, 2015. The Company expects the purchase price allocations
for the acquisition of UrgentRx to be completed during 2016. The preliminary allocation of the purchase price to the assets acquired
and liabilities assumed based on the estimated fair values is as follows:
Assets
|
|
|
|
|
Cash
|
|
$
|
2,298,619
|
|
Accounts Receivable
|
|
|
(68,976
|
)
|
Inventory
|
|
|
234,709
|
|
Prepaid expenses
|
|
|
57,569
|
|
Intellectual property
|
|
|
100,000
|
|
Non-compete provision
|
|
|
50,000
|
|
Goodwill
|
|
|
3,253,160
|
|
Liabilities
|
|
|
|
|
Accounts Payable
|
|
|
(741,822
|
)
|
Accrued Expenses
|
|
|
(2,202,848
|
)
|
|
|
$
|
2,980,411
|
|
The
Intellectual property will be amortized over its estimated useful live of 5 years and the non-compete provision will be amortized
over its term of 3 years. During the year ended December 31, 2015, the Company charged to operations amortization expense of $4,583.
The
purchase price allocated to the acquisition of the assets of UrgentRx is made up as follows:
|
|
Amount
|
|
Stock payment
|
|
$
|
2,550,000
|
|
Stock warrants issued
|
|
|
430,411
|
|
Total
|
|
$
|
2,980,411
|
|
Pro
forma Results of Operations. The historical operating results of the UrgentRx Business prior to its acquisition date have not
been included in the Company’s historical consolidated operating results. Pro forma results of operations data (unaudited)
for the year ended December 31, 2014 as if the acquisition had occurred on January 1, 2014, are as follows:
|
|
December
31, 2014
|
|
Revenue
|
|
$
|
2,722,288
|
|
Net (loss) income
|
|
|
(10,621,330
|
)
|
The
amounts of revenue and net loss of the UrgentRx Business since the acquisition date included in the consolidated statement of
operations for the year ended December 31, 2015 are approximately $90,590 and $80,249, respectively.
Stock
Purchase Agreement with TPR Investments Pty Ltd:
On
November 15, 2015 (the “Flat Tummy Tea Closing Date”), we entered into a Stock Purchase Agreement (the “Flat
Tummy Tea SPA”) with TPR Investments Pty Ltd ACN 128 396 654 as trustee for Polmear Family Trust (the “Flat Tummy
Tea Seller”), Timothy Polmear and Rebecca Polmear and NomadChoice Pty Limited ACN 160 729 939 trading as Flat Tummy Tea,
an Australian proprietary limited company (“NomadChoice”) for the purchase of all the issued and outstanding capital
stock of NomadChoice for $4,000,000 (AUD) in cash consideration (the “Cash Consideration”) and 3,571,428 shares of
our common stock (“Flat Tummy Tea Equity Consideration”).
In
addition to the Cash Consideration and the Flat Tummy Tea Equity Consideration, we have also agreed to pay the Flat Tummy Tea
Seller certain earn-out payments of up to $3,500,000 (AUD) in aggregate upon certain EBITDA thresholds are met as of June 30,
2016, as described in the Flat Tummy Tea SPA. This earn-out payment was distributed on March 4, 2016.
Flat
Tummy Tea is engaged in the business of developing, manufacturing, and selling herbal detox tea (“Flat Tummy Tea”).
The
Company has accounted for this transaction under the acquisition method of accounting. Under the acquisition method of accounting,
the total acquisition consideration price is allocated to the assets acquired and liabilities assumed based on their preliminary
estimated fair values based on the management’s estimates as of the date of the acquisition. The Company expects to retain
the services of independent valuation firm to determine the fair value of these identifiable intangible assets. Once determined,
the Company will reallocate the purchase price of the acquisition based on the results of the independent evaluation if they are
materially different from the allocations as recorded on November 1, 2015. The Company expects the purchase price allocations
for the acquisition of NomadChoice to be completed during 2016. The preliminary allocation of the purchase price to the assets
acquired and liabilities assumed based on the estimated fair values is as follows:
Assets
|
|
|
|
|
Cash
|
|
$
|
1,584,642
|
|
Other receivable
|
|
|
30,684
|
|
Inventory
|
|
|
134,212
|
|
Prepaid expenses
|
|
|
141,070
|
|
Fixed Assets, net
|
|
|
5,698
|
|
Intangible assets,
Net
|
|
|
3,493
|
|
Blogger Database
|
|
|
200,000
|
|
Customer Database
|
|
|
500,000
|
|
Intellectual property
|
|
|
100,000
|
|
Non-compete provision
|
|
|
50,000
|
|
Goodwill
|
|
|
6,174,899
|
|
Liabilities
|
|
|
|
|
Accounts Payable
|
|
|
(77,064
|
)
|
Accrued Expenses
|
|
|
(56,224
|
)
|
Dividends Payable
|
|
|
(1,177,152
|
)
|
Provision for Income
Tax
|
|
|
(518,558
|
)
|
|
|
$
|
7,095,700
|
|
The
Blogger Database, Customer Database, Intellectual property and non-compete provision will be amortized over its estimated useful
lives of 5 years. During the year ended December 31, 2015, the Company charged to operations amortization expense of $28,333.
The
purchase price allocated to the acquisition of the assets of NomadChoice is made up as follows:
|
|
Amount
|
|
Cash
|
|
$
|
2,848,800
|
|
Stock issued at closing
|
|
|
1,750,000
|
|
Earn-out payment
|
|
|
2,496,900
|
|
Total
|
|
$
|
7,095,700
|
|
Pro
forma Results of Operations. The historical operating results of the Flat Tummy Tea Business prior to its acquisition date have
not been included in the Company’s historical consolidated operating results. Pro forma results of operations data (unaudited)
for the year ended December 31, 2014 as if the acquisition had occurred on January 1, 2014, are as follows:
|
|
December
31, 2014
|
|
Revenue
|
|
$
|
2,494,812
|
|
Net (loss) income
|
|
|
(909,280
|
)
|
The
Company’s subsidiary Nomad has a fiscal year ended June 30 and the Company’s fiscal year end is December 31. The above
proforma information includes revenue and net income of Nomad for the year ended June 30, 2015.
The
amounts of revenue and net income of the Flat Tummy Tea Business since the acquisition date included in the consolidated statement
of operations for the year ended December 31, 2015 are approximately $2,513,990 and $966,671 respectively.
Note
4 – Income Taxes
The
Company utilizes FASBASC740, “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-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.
Income
tax expense for the year ended December 31, 2015 was $389,945, due to Foreign Income Tax relating to NomadChoice in Australia.
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, 2015 and 2014:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
U.S.
Statutory Rate
|
|
|
34
|
%
|
|
|
34
|
%
|
U.S.
effective rate in excess of AU rate
|
|
|
(1
|
%)
|
|
|
-
|
|
U.S.
valuation allowance
|
|
|
(34
|
%)
|
|
|
(34
|
%)
|
Foreign
Tax - Australia
|
|
|
6.8
|
%
|
|
|
-
|
|
Total
provision for income taxes
|
|
|
5.8
|
%
|
|
|
-
|
|
The
Company has deferred tax assets, which have been fully reserved, as follows as of December 31, 2015 and 2014:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Deferred
tax assets
|
|
$
|
11,460,536
|
|
|
$
|
241,245
|
|
Valuation
allowance for deferred tax assets
|
|
|
(11,460,536
|
)
|
|
|
(241,245
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company also has net operating loss carryforwards of approximately $25,137,583 included in the deferred tax asset table above
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 these NOL 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) 34 percent marginal tax rate by the cumulative Net Operating
Loss Carryforwards (“NOL”).The Company currently has net operating loss carryforwards approximately aggregating $33,707,458,
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.
The
Company has not completed its evaluation of NOL Utilization Limitations under IRC Section 382, change of ownership rules. If the
Company has had a change in ownership the NOL’s would be limited as to the amount that could be utilized each year, based
on the Internal Revenue Code, as amended.”
The
Company has not filed its Federal and State income tax returns. Such income tax returns remain subject to examination by federal
and most state tax authorities.
Note
5 – Accounts Receivable
Accounts
receivable, net of allowances for sales returns and doubtful accounts, consisted of the following:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Trade accounts receivable
|
|
$
|
4,101,148
|
|
|
$
|
2,898
|
|
Less allowances
|
|
|
(121,291
|
)
|
|
|
-
|
|
Total
accounts receivable, net
|
|
$
|
3,979,857
|
|
|
$
|
2,898
|
|
During
the year ended December 31, 2015, the Company charged $50,000 to bad debt expense in setting up an allowance.
Note
6 – Prepaid Expenses
At
December 31, 2015 and 2014, prepaid expenses consisted of the following:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Advances for inventory
|
|
$
|
171,494
|
|
|
$
|
-
|
|
Media production
|
|
|
55,849
|
|
|
|
-
|
|
Insurance
|
|
|
54,519
|
|
|
|
10,000
|
|
Trade shows
|
|
|
45,700
|
|
|
|
-
|
|
Deposits
|
|
|
41,228
|
|
|
|
-
|
|
Consultants
|
|
|
24,000
|
|
|
|
-
|
|
Rent
|
|
|
16,216
|
|
|
|
-
|
|
Miscellaneous
|
|
|
13,428
|
|
|
|
-
|
|
Total
|
|
$
|
422,434
|
|
|
$
|
10,000
|
|
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, 2015, the uninsured balance amounted to $3,453,290.
Accounts
receivable
As
of December 31, 2015, one customer accounted for 78% of the Company’s accounts receivable.
Major
customers
For
the year ended December 31, 2015, two customers accounted for approximately 71% of the Company’s gross revenues. Substantially
all of the Company’s business is with companies in the United States.
Major
suppliers
For
the year ended December 31, 2015, our products were made by the following suppliers:
FOCUSfactor
|
Pittsburgh,
PA
|
Tustin,
CA
|
Flat
Tummy Tea
|
Highland,
NY
|
-
|
Neuragen
|
Linthicum
Heights, MD
|
-
|
UrgentRx
|
Ogden,
UT
|
-
|
It
is the opinion of management that the products can be produced by other manufacturers and the choice to utilize these suppliers
is not a significant concentration.
Note
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 market.
The
carrying value of inventory consisted of the following:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Finished goods
|
|
$
|
535,908
|
|
|
$
|
-
|
|
Components
|
|
|
115,340
|
|
|
|
-
|
|
Raw Materials
|
|
|
35,406
|
|
|
|
-
|
|
Energy product
|
|
|
-
|
|
|
|
26,064
|
|
Total
inventory
|
|
$
|
686,654
|
|
|
$
|
26,064
|
|
As
of January 22, 2015, inventory was pledged to Knight under the Loan Agreement (see note 12).
Note
9 – Fixed Assets and Intangible Assets
As
of December 31, 2015 and 2014, fixed assets and intangible assets consisted of the following:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
18,187
|
|
|
$
|
-
|
|
Less accumulated
depreciation
|
|
|
(6,170
|
)
|
|
|
-
|
|
Fixed
assets, net
|
|
$
|
12,017
|
|
|
$
|
-
|
|
Depreciation
expense for the years ended December 31, 2015 and 2014 was $1,513 and $0, respectively.
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
|
|
|
|
|
|
|
FOCUSfactor intellectual
property
|
|
$
|
1,000,000
|
|
|
$
|
-
|
|
Intangible assets subject to amortization
|
|
|
5,521,751
|
|
|
|
-
|
|
Less accumulated
amortization
|
|
|
(606,489
|
)
|
|
|
-
|
|
Intangible
assets, net
|
|
$
|
5,915,262
|
|
|
$
|
-
|
|
Amortization
expense for the years ended December 31, 2015 and 2014 was $606,489 and $0, respectively. These intangible assets were acquired
through Asset Purchase Agreement and Stock Purchase Agreements disclosed in Note 3.
The
estimated aggregate amortization expense over each of the next five years is as follows:
2016
|
|
$
|
1,111,229
|
|
2017
|
|
|
1,111,229
|
|
2018
|
|
|
1,109,070
|
|
2019
|
|
|
1,094,329
|
|
2020
|
|
|
489,405
|
|
Note
10 – Related Party Transactions
On
April 2, 2014, the Company granted 1,000,000 options valued at approximately $282,000 to a company owned by Mr. Jack Ross, Chief
Executive Officer of the Company (see note 15).
On
October 31, 2014, the Company borrowed $100,000 through a promissory note bearing interest at 10% with a maturity date of October
31, 2015 from a company owned by Mr. Ross, the Company’s Chief Executive Officer. During the year ended December 31, 2015,
the note was converted into 400,000 shares of the Company’s common stock.
The
Company accrued and paid consulting fees of $15,000 per month to a company owned by Mr. Jack Ross, Chief Executive Officer of
the Company. The Company expensed $180,000 as consulting fees and made payments totaling $486,958 towards services to an entity
owned and controlled by an officer and shareholder of the Company for the year ended December 31, 2015. As of December 31, 2015,
the total outstanding balance was $0.
At
December 31, 2014, $16,077, was due from a company owned by Mr. Jack Ross, Chief Executive Officer of the Company in a form of
an advance in the normal course of business.
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, 2015, the Company owed Knight $4,267,268 on this loan, net of discount (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, 2015, the Company owed Knight $925,000
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. Hand MD, LLC is a 50% owner in Hand MD Corp. The Company
expensed $40,000 through payroll for the year ended December 31, 2015. As of December 31, 2015, the total outstanding balance
was $0.
On
November 12, 2015, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party, for the
purchase of NomadChoice Pty Limited and Breakthrough Products, Inc. At December 31, 2015, the Company owed Knight $3,571,314 on
this loan, net of discount (see Note 12).
At
December 31, 2015, NomadChoice Pty Ltd. (subsidiary) of the Company owed Knight Therapeutics $71,573 in connection with a royalty
distribution agreement (see Note 3).
Note
11 – Accounts Payable and Accrued Liabilities
As
of December 31, 2015 and 2014, accounts payable and accrued liabilities consisted of the following:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Payroll
|
|
$
|
128,237
|
|
|
$
|
10,867
|
|
Legal fees
|
|
|
38,752
|
|
|
|
47,916
|
|
Manufacturers
|
|
|
1,527,333
|
|
|
|
-
|
|
Promotions
|
|
|
1,213,021
|
|
|
|
-
|
|
Returns allowance
|
|
|
1,128,133
|
|
|
|
-
|
|
Customers
|
|
|
411,033
|
|
|
|
|
|
Interest
|
|
|
110,754
|
|
|
|
-
|
|
Royalties
|
|
|
71,573
|
|
|
|
-
|
|
Warehousing
|
|
|
31,748
|
|
|
|
-
|
|
Others
|
|
|
371,518
|
|
|
|
15,859
|
|
Total
|
|
$
|
5,032,102
|
|
|
$
|
74,642
|
|
Note
12 – Notes Payable
The
Company’s loans payable at December 31, 2015 and 2014 are as follows:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
|
|
|
|
|
|
|
Loans payable
|
|
$
|
12,406,589
|
|
|
$
|
-
|
|
Unamortized debt
discount
|
|
|
(2,536,419
|
)
|
|
|
-
|
|
Total
|
|
|
9,870,170
|
|
|
|
-
|
|
Less: Current
portion
|
|
|
(3,912,060
|
)
|
|
|
-
|
|
Long-term portion
|
|
$
|
5,958,110
|
|
|
$
|
-
|
|
$6,000,000
January 22, 2015 Loan:
On
January 22, 2015, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Knight Therapeutics
(Barbados) Inc. (“Knight”), pursuant to which Knight agreed to loan the Company $6.0 million (the “Loan”),
and which amount was borrowed at closing (the “Financing”) for the purpose of acquiring the Focus Factor Business
(defined below). At closing, the Company paid Knight an origination fee of $120,000 and a work fee of $60,000 and also paid $40,000
of Knight’s expenses associated with the Loan. The Loan bears interest at a rate of 15% per year; provided, however, that
upon the occurrence of an equity or convertible equity offering by the Company of at least $1.0 million, the interest rate will
drop to 13% per year. Interest accrues quarterly and is payable in arrears on March 31, June 30, September 30 and December 31
in each year, beginning on March 31, 2015.
All
outstanding principal and accrued and unpaid interest is due on the earliest to occur of either January 20, 2017 (the “Maturity
Date”), or the date that Knight, in its discretion, accelerates the Company’s obligations due to an event of default.
The Company may extend the Maturity Date for two successive additional 12-month periods if at March 31, 2016 and March 31, 2017,
respectively, the Company’s revenues exceed $13.0 million and its EBITDA exceeds $2.0 million for the respective 12-month
period then ending. 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.
Subject
to certain restrictions, the Company may prepay the outstanding principal of the Loan (in whole but not in part) at any time if
the Company pays a concurrent prepayment fee equal to the greater of (i) the total unpaid annual interest that would have been
payable during the year in which the prepayment is made if the prepayment is made prior to the first anniversary of the closing,
and (ii) $300,000. The Company’s obligations under the Loan Agreement are secured by a first priority security interest
in all present and future assets of the Company. The Company also agreed to not pledge or otherwise encumber its intellectual
property assets, subject to certain customary exceptions.
The
Loan Agreement includes customary representations, warranties, and affirmative and restrictive covenants, including covenants
to attain and maintain certain financial metrics, and to not merge or dispose of assets, acquire other businesses (except for
businesses substantially similar or complementary to the Company’s business and the aggregate consideration to be paid does
not exceed $100,000) or make capital expenditures in excess of $100,000 over the Company’s annual business plan in any year.
The Loan Agreement also includes customary events of default, including payment defaults, breaches of covenants, change of control
and material adverse effect default. Upon the occurrence of an event of default and during the continuation thereof, the principal
amount of the Loan will bear a default interest rate of an additional 5%.
In
connection with the Loan Agreement, the Company issued to Knight a warrant that entitled Knight to purchase 4,595,187 shares of
common stock of the Company (“Common Stock”) on or prior to close of business on January 30, 2015 (the “ST Warrant”).
The aggregate exercise price of the Common Stock under the ST Warrant is $1.00. Knight exercised the ST Warrant on January 22,
2015. Also in connection with the Loan Agreement, the Company issued to Knight a warrant to purchase 3,584,759 shares of Common
Stock on or prior to the close of business of January 22, 2025 (the “LT Warrant”). The exercise price per share of
the Common Stock under the LT Warrant is $0.34. The LT Warrant provides for cashless exercise. The LT Warrant also provides that
in the event the closing price of the Common Stock remains above $1.00 for six consecutive months, Knight will forfeit the difference
between the number of shares acquired under the LT Warrant prior to 90 days after such six-month period, and 25% of the shares
purchasable under the LT Warrant.
The
beneficial conversion feature of the warrants issued to the noteholders amounted to $1,952,953 (ST warrants) and $1,462,560 (LT
warrants), respectively, and was recorded as debt discount of the corresponding debt.
The
Company recognized amortization of debt discount of $1,952,953 (ST warrants) and $854,828 (LT warrants) during the year ended
December 31, 2015. Unamortized debt discount as of December 31, 2015 amounted to $607,732.
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 $136,207 during the year ended December 31, 2015.
The
Company recognized and paid interest expense of $805,686 during the year ended December 31, 2015. Accrued interest expense was
$0 as of December 31, 2015. Loan payable balance was $4,875,000 as of December 31, 2015.
$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 $1,500,000 as of December 31, 2015.
$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 $2,643 during the year ended December 31, 2015. The balance at December 31, 2015 was $925,000.
$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 matures on November 11, 2017.
In
connection with the New Loan Agreement, we issued Knight a warrant that entitles Knight to purchase 5,550,625 shares of our common
stock (“Knight Warrant Shares”) representing approximately 6.5% of our fully diluted capital, which Knight exercised
in full on November 12, 2015. Knight also received a 10-year warrant entitling Knight to purchase up to 4,547,243 shares of our
common stock at $0.49 per share (“Knight Warrants”).
The
beneficial conversion feature of the warrants issued to the noteholders amounted to $2,553,287 (5,550,625 warrants) and $2,067,258
(4,547,243 warrants), respectively, and was recorded as debt discount of the corresponding debt. For derivative liability calculation
on 4,547,243 warrants, refer to Note 17.
The
Company recognized amortization of debt discount of $2,553,287 (5,550,625 warrants) and $138,571 (4,547,243 warrants) during the
year ended December 31, 2015. Unamortized debt discount as of December 31, 2015 amounted to $1,928,686.
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 $15,675 during the year ended December 31, 2015.
The
Company recognized interest expense of $110,753 during the year ended December 31, 2015. Accrued interest expense was $110,753
as of December 31, 2015. The balance at December 31, 2015 was $5,500,000.
Note
13 – Stockholders’ Deficit
The
total number of shares of all classes of capital stock which the Company is authorized to issue is 75,000,000 shares of common
stock with $0.00001 par value. On July 30, 2014, the Company’s board of directors approved an increase of the Company’s
authorized common stock from 75,000,000 to 300,000,000 shares, which increase was approved by the Company’s shareholders
and became effective on August 5, 2015.
On
April 17, 2014, upon approval from FINRA, the Company effected a 30 for 1 forward stock split by way of a stock dividend, of all
of its issued and outstanding shares of common stock (the “Stock Split”). The Stock Split did not affect the number
of the Company’s authorized common stock or its par value. All references in the accompanying consolidated financial statements
and notes thereto have been retroactively restated to reflect the stock split.
During
the year ended December 31, 2015, the Company issued 4,595,187 shares of its common stock upon exercise of the ST Warrant at an
aggregate exercise price of $1.00 in connection with the Loan Agreement (see note1).
During
the year ended December 31, 2015, the Company issued 5,550,625 shares of its common stock upon exercise of a Warrant at an aggregate
exercise price of $1.00 in connection with the Loan Agreement (see note1).
During
the year ended December 31, 2015, the Company issued 400,000 shares of its common stock to a note holder in a note conversion
at $0.25 per share. At the time of conversion, the note was valued at $100,000 for outstanding principal.
During
the year ended December 31, 2015, the Company issued 2,142,857 shares of its common stock valued at $0.70 per share in accordance
with Contribution Agreement entered into with Hand MD Corp. in exchange for 50% of Hand MD Corp.’s outstanding capital securities.
During
the year ended December 31, 2015, the Company issued 3,571,428 shares of its common stock valued at $0.35 per share in accordance
with a stock purchase agreement entered into with NomadChoice Pty Limited in exchange for 100% of NomadChoice Pty Limited’s
outstanding capital securities.
During
the year ended December 31, 2015, the Company issued 3,000,000 shares of its common stock valued at $0.85 per share in accordance
with a stock purchase agreement entered into with Breakthrough Products, Inc. in exchange for 100% of Breakthrough Product Inc.’s
outstanding capital securities.
During
the year ended December 31, 2015, the Company issued 40,000 shares of its common stock valued at $0.65 per share for cash.
During
the year ended December 31, 2015, the Company issued 292,857 shares of its common stock valued at $0.70 per share to settle accounts
payable.
On
April 21, 2014, the Company entered into an agreement with accredited investors for the issuance and sale of 2,000,000 shares
of its common stock at a purchase price of $0.25 per share, for an aggregate consideration of $500,000.
During
the year ended December 31, 2014, the Company cancelled 135,900,000 shares of its common stock (4,530,000 pre-Stock Split) as
part of the Merger transaction.
During
the year ended December 31, 2014, the Company issued 16,000,000 shares of its common stock valued at $25,000 as part of the Merger
Agreement.
During
the year ended December 31, 2015 and 2014, the Company committed to issue common stock valued at $28,000 and $40,000, respectively
for services rendered.
As
of December 31, 2015 and 2014, there were 81,692,954 and 62,100,000 shares of the Company’s common stock issued and outstanding,
respectively.
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.
Operating
leases
In
April 2014, a subsidiary entered into an extension of a non-cancellable operating lease for office space that expires on March
31, 2017. Rent expense under this lease for the period from acquisition until December 31, 2015 was $8,923 per month less a $3,010
per month sublease through March 2017.
In
December 2015, a subsidiary entered into a non-cancellable operating lease for office space through November 2016. Rental payments
under this lease are $5,500 Australian dollars per month, which is approximately $4,200.
In
December 2015, the Company entered into a non-cancellable operating lease for office space through December 2016. Rental payments
under this lease are $5,500 per month.
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, 2015:
Year
ending December 31:
|
|
|
|
2016
|
|
$
|
220,676
|
|
2017
|
|
|
27,294
|
|
Total
|
|
$
|
247,970
|
|
On
December 8, 2014, a subsidiary entered into a non-cancellable 36 month phone lease with an estimated cost of $894 a month.
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, 2015:
Year
ending December 31:
|
|
|
|
2016
|
|
$
|
10,728
|
|
2017
|
|
|
9,834
|
|
Total
|
|
$
|
20,562
|
|
Note
15 – Stock Options
On
July 30, 2014, the Company’s board of directors approved the Company’s 2014 Equity Incentive Plan and the reservation
of 15,525,000 shares of common stock for issuance under such plan. Such plan was approved by the Company’s shareholders
and became effective on August 5, 2015.
On
April 2, 2014, the Company granted 1,000,000 options with an exercise price of $0.25 per share to the Company owned by Mr. Jack
Ross, Chief Executive Officer of the Company.
On
December 14, 2015, the Company granted 1,000,000 options each with an exercise price of $0.25 per share to two Board Members of
the Company.
On
December 14, 2015, the Company granted 1,000,000 options each with an exercise price of $0.65 per share to two employees of the
Company.
The
following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common
stock issued to employees and consultants under a stock option plan at December 31, 2015:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Exercise
Prices ($)
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
$
|
0.25
- $0.65
|
|
|
|
5,000,000
|
|
|
|
8.62
|
|
|
$
|
0.41
|
|
|
|
3,000,000
|
|
|
$
|
0.25
|
|
The
stock option activity for the year ended December 31, 2015 is as follows:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2014
|
|
|
1,000,000
|
|
|
$
|
0.25
|
|
Granted
|
|
|
4,000,000
|
|
|
|
0.45
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired or canceled
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2015
|
|
|
5,000,000
|
|
|
$
|
0.41
|
|
Stock-based
compensation expense related to vested options was $523,714 and $282,247 during the years ended December 31, 2015 and 2014, respectively.
The Company determined the value of share-based compensation for options vesting during the year ended December 31, 2015 using
the Black-Scholes fair value option-pricing model with the following weighted average assumptions: estimated fair value of Company’s
common stock of $0.74, risk-free interest rate of 2.23%, volatility of 154%, expected lives of 10 years, and dividend yield of
0%. The Company determined the value of share-based compensation for options vesting during the year ended December 31, 2014 using
the Black-Scholes fair value option-pricing model with the following weighted average assumptions: estimated fair value of Company’s
common stock of $0.33, risk-free interest rate of 1.8%, volatility of 125%, expected lives of 4.5 years, and dividend yield of
0%. Stock options outstanding as of December 31, 2015, as disclosed in the above table, have an intrinsic value of $1,400,000
Note
16 – Stock Warrants
The
following table summarizes the warrants outstanding and the related prices for the shares of the Company’s common stock
at December 31, 2015:
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Exercise
Prices ($)
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
$
|
0.34
|
|
|
|
3,584,759
|
|
|
|
9.1
|
|
|
$
|
0.34
|
|
|
|
3,584,759
|
|
|
$
|
0.34
|
|
|
0.49
|
|
|
|
4,547,243
|
|
|
|
9.9
|
|
|
|
0.49
|
|
|
|
4,547,243
|
|
|
|
0.49
|
|
|
5.00
|
|
|
|
1,000,000
|
|
|
|
3
|
|
|
|
5.00
|
|
|
|
1,000,000
|
|
|
|
5.00
|
|
The
warrant activity for the year ended December 31, 2015 is as follows:
|
|
Warrants
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
19,277,814
|
|
|
|
0.44
|
|
Exercised
|
|
|
(10,145,812
|
)
|
|
|
0.00000020
|
|
Expired or canceled
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2015
|
|
|
9,132,002
|
|
|
$
|
0.92
|
|
Note
17 – Derivatives
The
Company has incurred a liability for the estimated fair value of a derivative warrant instrument. The estimated fair value of
the derivative warrant instruments has been calculated using the Black-Scholes fair value option-pricing model with key input
variables provided by management, as of the issue date, with the valuation offset against additional paid in capital, and at each
reporting date, with changes in fair value recorded as gains or losses on revaluation in non-operating income (expense).
The
Company identified embedded derivatives related to the warrants issued along with loan payable entered into in November 2015.
These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments
requires that the Company record the fair value of the derivatives as of the inception date of the warrants and to adjust the
fair value as of each subsequent balance sheet date. At the inception of the warrants, the Company determined a fair value of
$2,067,258 of the embedded derivative. The fair value of the embedded derivative was determined using the Black-Scholes Model
based on the following assumptions:
|
|
November
12, 2015
|
|
Risk-free interest rate
|
|
|
2.32
|
%
|
Expected remaining term
|
|
|
10
Years
|
|
Expected volatility
|
|
|
157.56
|
%
|
Dividend yield
|
|
|
0
|
%
|
The
initial fair values of the embedded derivative of $2,067,258 was allocated as a debt discount $2,067,258.
Fair
value at December 31, 2015 was estimated to be $3,096,179 and based on the following assumptions:
|
|
December
31, 2015
|
|
Risk-free interest rate
|
|
|
2.27
|
%
|
Expected remaining term
|
|
|
9.75
Years
|
|
Expected volatility
|
|
|
152.07
|
%
|
Dividend yield
|
|
|
0
|
%
|
During
the year ended December 31, 2015, the increase in the fair value of the warrant derivative liability of $1,028,921 was recorded
as a loss on change in fair value of derivative liability.
Note
18 – 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 years ended December 31, 2015 and 2014 were as
follows:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
United States
|
|
$
|
13,129,753
|
|
|
$
|
9,158
|
|
Foreign countries
|
|
|
326,624
|
|
|
|
-
|
|
|
|
$
|
13,456,377
|
|
|
$
|
9,158
|
|
The
Company’s net sales by product group for the years ended December 31, 2015 and 2014 were as follows:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Focus Factor
|
|
$
|
10,482,367
|
|
|
$
|
-
|
|
Flat Tummy Tea
|
|
|
2,513,990
|
|
|
|
-
|
|
Other (1)
|
|
|
460,020
|
|
|
|
9,158
|
|
|
|
$
|
13,456,377
|
|
|
$
|
9,158
|
|
(1)
Net sales for any other product group of similar products are less than 10% of consolidated net sales.
Long-lived
assets (net) attributable to operations in the United States and foreign countries as of December 31, 2015 and 2014 were as follows:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
United States
|
|
$
|
17,411,598
|
|
|
$
|
-
|
|
Foreign countries
|
|
|
12,081
|
|
|
|
-
|
|
|
|
$
|
17,423,679
|
|
|
$
|
-
|
|
Note
19 – Subsequent Events
Management
evaluated all activities of the Company through the issuance date of the Company’s consolidated financial statements and
concluded that no subsequent events have occurred that would require adjustments or disclosure into the consolidated financial
statements.