NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Nature of the Business
Synergy
CHC Corp. (“Synergy”, “we”, “us”, “our” or the “Company”) (formerly
Synergy Strips Corp.) was incorporated on December 29, 2010 in Nevada under the name “Oro Capital Corporation.” On
April 21, 2014, the Company changed its fiscal year end from July 31 to December 31. On April 28, 2014, the Company changed its
name to “Synergy Strips Corp.”. On August 5, 2015, the Company changed its name to “Synergy CHC Corp.”
The
Company is a consumer health care company that is in the process of building a portfolio of best-in-class consumer product brands.
Synergy’s strategy is to grow its portfolio both organically and by further acquisition.
Synergy
is the sole owner of 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
General
The
accompanying condensed consolidated financial statements as of March 31, 2016 and December 31, 2015 and for the three months ended
March 31, 2016 and 2015 are unaudited. These unaudited condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and
are presented in accordance with the requirements of Rule S-X of the Securities and Exchange Commission (the “SEC”)
and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months
ended March 31, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31,
2016. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial
statements as of and for the year ended December 31, 2015 and footnotes thereto included in the Company’s Annual Report
on Form 10-K filed with the SEC.
Basis
of Presentation
The
unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in consolidation
.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates are assumptions about collection of accounts receivable, useful life of fixed and intangible assets, goodwill
and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate,
and expected dividend rate.
Cash
and Cash Equivalents
The
Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other
highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. As of March
31, 2016 the Company had no cash equivalents. The Company maintains its cash and cash equivalents in banks insured by the Federal
Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $250,000 per
bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At March 31, 2016, the uninsured
balance amounted to $3,501,952.
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. Intangible
assets are amortized on a straight line basis over the useful lives.
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
March 31, 2016, 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 March 31, 2016, our
qualitative analysis of goodwill did not indicate any impairment.
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 unaudited condensed 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 FASB ASC 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities
and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation allowance is recorded when it is “more likely-than-not”
that a deferred tax asset will not be realized.
The
Company generated a deferred tax asset through net operating loss carry-forward. However, a valuation allowance of 100% has been
established due to the uncertainty of the Company’s realization of the net operating loss carry forward prior to its expiration.
NomadChoice
Pty Ltd, the Company’s wholly-owned foreign subsidiary, is subject to income taxes in the jurisdictions in which it operates.
Significant judgment is required in determining the provision for income tax. There are many transactions and calculations undertaken
during the ordinary course of business for which the ultimate tax determination is uncertain. The company recognizes liabilities
for anticipated tax audit issues based on the Company’s current understanding of the tax law. Where the final tax outcome
of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions
in the period in which such determination is made.
Net
Earnings (Loss) Per Common Share
The
Company computes earnings per share under ASC subtopic 260-10, Earnings Per Share. Basic earnings (loss) per share is computed
by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average number of shares
of common stock outstanding (the denominator) during the reporting periods. Diluted earnings per share is computed by increasing
the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible
into common stock (using the “treasury stock” method), unless their effect on net loss per share is anti-dilutive.
As of March 31, 2016, 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 included in the shares used to calculate diluted earnings per share.
Going
Concern
The
Company’s unaudited condensed 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
accumulated deficit at March 31, 2016 of $5,759,365. The Company had a working capital deficit of $4,290,701 as of March 31, 2016.
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.
Management’s
plans to continue as a going concern include raising additional capital through borrowing and sales of common stock. 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
unaudited condensed 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 March 31, 2016, the Company has determined that there were no assets or liabilities measured at fair value, except for the
warrant derivative liability.
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.
Foreign
Currency Translation
The
functional currency of the Company’s foreign subsidiary (Nomadchoice Pty Ltd.) is the U.S. Dollar. The Company’s foreign
subsidiary maintains its record using local currency (Australian Dollar). All monetary assets and liabilities of the foreign subsidiary
were translated into U.S. Dollars at quarter end exchange rates, non-monetary assets and liabilities of the foreign subsidiary
were translated into U.S. Dollars at transaction day exchange rates. Income and expense items related to non-monetary items were
translated at exchange rates prevailing during the transaction date and other incomes and expenses were translated using average
exchange rate for the period. The resulting translation adjustments, net of income taxes, were recorded in statements of operations
as Remeasurement gain or loss on translation of foreign subsidiary.
Concentrations
of Credit Risk
In
the normal course of business, the Company provides credit terms to its customers; however, collateral is not required. Accordingly,
the Company performs credit evaluations of its customers and maintains allowances for possible losses which, when realized, were
within the range of management’s expectations. From time to time, a higher concentration of credit risk exist 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 March 31, 2016. 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
|
|
March
31, 2016
|
|
Stock
Price
|
|
$
|
0.45
|
|
Exercise
Price
|
|
$
|
0.49
|
|
Expected
Life (in years)
|
|
|
9.0
|
|
Stock
Volatility
|
|
|
156.96
|
%
|
Risk-Free
Rate
|
|
|
1.78
|
%
|
Dividend
Rate
|
|
|
0
|
%
|
Outstanding
Shares of Common Stock
|
|
|
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 netted off with the related
loan 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, 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 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.
Reclassification
of Prior Period Presentation
Certain
reclassifications have been made to conform the prior period data to the current presentations. These reclassifications had no
effect on the reported results.
Recent
Accounting Pronouncements
ASU
2016-01
In
January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the
current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and
the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the
valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt
securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption,
an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the
first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record
fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other
comprehensive income. The Company is currently evaluating the impact of adopting this guidance.
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
has 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 financial position, results of operations or cash flows, 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 financial position, results of operations or cash flows.
ASU
2015-14
In
August 2015, the FASB issued ASU No. 2015-14, Revenue From Contracts With Customers (Topic 606). The amendments in this ASU defer
the effective date of ASU 2014-09. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods
beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted
only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting
period. We are still evaluating the effect of the adoption of ASU 2014-09.
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. We do not
expect the adoption of ASU 2015-11 to have a material effect on our financial position, results of operations or cash flows.
ASU
2015-05
In
April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). ASU 2015-05
provides guidance regarding the accounting for a customer’s fees paid in a cloud computing arrangement; specifically about
whether a cloud computing arrangement includes a software license, and if so, how to account for the software license. ASU 2015-05
is effective for public companies’ annual periods, including interim periods within those fiscal years, beginning after
December 15, 2015 on either a prospective or retrospective basis. Early adoption is permitted. Adoption of this new standard did
not have any impact on the Company’s financial position, results of operations or cash flows.
ASU
2015-07
In
May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent) This guidance eliminates the requirement to categorize investments
within the fair value hierarchy if their fair value is measured using the net asset value (“NAV”) per share practical
expedient in the FASB’s fair value measurement guidance. The new standard is effective for fiscal years and interim periods
within those fiscal years, beginning after December 15, 2015. Adoption of this new standard did not have any impact on the Company’s
financial position, results of operations or cash flows.
ASU
2015-03
In
April 2015, the FASB issued 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 reclassified debt issuance
cost of $312,812 and $378,852 from other assets to liabilities and netted off with the related loans in the liabilities as of
March 31, 2016 and December 31, 2015, respectively.
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. Adoption of this new standard did not have any impact on the Company’s 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. Adoption of this new standard did not have any impact
on the Company’s 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. Adoption of this new standard did not have any impact on the Company’s
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. Adoption of this new standard did not have any impact on the Company’s 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 is 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.
Note
3 – Inventory
Inventory
consists of finished goods, components and raw materials. The Company’s inventory is stated at the lower of cost (FIFO cost
basis) or market.
The
carrying value of inventory consisted of the following:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Finished goods
|
|
$
|
513,536
|
|
|
$
|
535,908
|
|
Components
|
|
|
127,897
|
|
|
|
115,340
|
|
Raw Materials
|
|
|
35,406
|
|
|
|
35,406
|
|
Total inventory
|
|
$
|
676,839
|
|
|
$
|
686,654
|
|
As
of January 22, 2015, inventory was pledged to Knight Therapeutics under the Loan Agreement (see note 10).
Note
4 – Accounts Receivable
Accounts
receivable, net of allowances for sales returns and doubtful accounts, consisted of the following:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Trade accounts receivable
|
|
$
|
1,715,349
|
|
|
$
|
4,101,148
|
|
Less allowances
|
|
|
(96,699
|
)
|
|
|
(121,291
|
)
|
Total accounts receivable, net
|
|
$
|
1,618,650
|
|
|
$
|
3,979,857
|
|
During
the year ended December 31, 2015, the Company charged $50,000 to bad debt expense in setting up an allowance.
Note
5 – Prepaid Expenses
Prepaid
expenses consisted of the following:
|
|
March
31, 2016
|
|
|
December
31, 2015
|
|
Advances for inventory
|
|
$
|
266,388
|
|
|
$
|
171,494
|
|
Media production
|
|
|
70,587
|
|
|
|
55,849
|
|
Insurance
|
|
|
42,078
|
|
|
|
54,519
|
|
Trade shows
|
|
|
28,800
|
|
|
|
45,700
|
|
Deposits
|
|
|
41,228
|
|
|
|
41,228
|
|
Consultants
|
|
|
4,000
|
|
|
|
24,000
|
|
Rent
|
|
|
10,786
|
|
|
|
16,216
|
|
Media
|
|
|
20,650
|
|
|
|
-
|
|
Miscellaneous
|
|
|
18,350
|
|
|
|
13,428
|
|
Total
|
|
$
|
502,867
|
|
|
$
|
422,434
|
|
Note
6 – Concentration of Credit Risk
Cash
and cash equivalents
The
Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts
that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing
its cash deposits with major financial institutions. At March 31, 2016 and December 31, 2015, the uninsured balances amounted
to $3,501,592 and $3,453,290, respectively.
Accounts
receivable
As
of March 31, 2016, four customers accounted for 77% of the Company’s accounts receivable. As of December 31, 2015, one customer
accounted for 78% of the Company’s accounts receivable.
Major
customers
For
the three months ended March 31, 2016, two customers accounted for approximately 26% of the Company’s gross revenue. 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 period ended March 31, 2016 and 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
7 – Fixed Assets and Intangible Assets
As
of March 31, 2016 and December 31, 2015, fixed assets and intangible assets consisted of the following:
|
|
March
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
24,395
|
|
|
$
|
18,187
|
|
Less accumulated depreciation
|
|
|
(8,397
|
)
|
|
|
(6,170
|
)
|
Construction in progress
|
|
|
56,499
|
|
|
|
-
|
|
Fixed assets, net
|
|
$
|
72,497
|
|
|
$
|
12,017
|
|
Depreciation
expense for the three months ended March 31, 2016 and 2015 was $2,227 and $75, respectively
|
|
March
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
FOCUSfactor intellectual
property
|
|
$
|
1,450,000
|
|
|
$
|
1,000,000
|
|
Intangible assets subject to amortization
|
|
|
5,523,017
|
|
|
|
5,521,751
|
|
Less accumulated
amortization
|
|
|
(883,950
|
)
|
|
|
(606,489
|
)
|
Intangible
assets, net
|
|
$
|
6,089,067
|
|
|
$
|
5,915,262
|
|
Amortization
expense for the three months ended March 31, 2016 and 2015 was $276,410 and $77,167, respectively. These intangible assets were
acquired through Asset Purchase Agreement and Stock Purchase Agreements entered into during 2015.
Note
8 – Related Party Transactions
The
Company accrued and paid consulting fees of $25,000 per month to a company owned by Mr. Jack Ross, Chief Executive Officer of
the Company. As of March 31, 2016, the total outstanding balance was $0.
On
January 22, 2015, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc. (“Knight”), a
related party, for the purchase of the Focus Factor assets. At March 31, 2016, the Company owed Knight $4,110,521 on this loan,
net of discount (see Note 10).
On
June 26, 2015, the Company entered into a Security Agreement with Knight Therapeutics, Inc., through its wholly owned subsidiary
Neuragen Corp., for the purchase of Knight Therapeutics, Inc.’s assets. At March 31, 2016, the Company owed Knight $538,102
in relation to this agreement (see Note 10).
On
August 18, 2015, the Company entered into a Consulting Agreement with Kara Harshbarger, the co-founder of Hand MD, LLC, pursuant
to which she will provide marketing and sales related service. The Company 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 $30,000 through payroll for the three months ended March 31, 2016. As of March 31, 2016, 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 March 31, 2016, the Company owed Knight $3,828,660 on this
loan, net of discount (see Note 10).
At
March 31, 2016 NomadChoice Pty Ltd., a subsidiary of the Company, owed Knight Therapeutics $46,323 in connection with a royalty
distribution agreement.
Note
9 – Accounts Payable and Accrued Liabilities
As
of March 31, 2016 and December 31, 2015, accounts payable and accrued liabilities consisted of the following:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Accrued payroll
|
|
$
|
35,099
|
|
|
$
|
128,237
|
|
Accrued legal fees
|
|
|
50,955
|
|
|
|
38,752
|
|
Accounting fees
|
|
|
67,248
|
|
|
|
-
|
|
Manufacturers
|
|
|
1,082,696
|
|
|
|
1,527,333
|
|
Inventory
|
|
|
34,548
|
|
|
|
-
|
|
Promotions
|
|
|
353,050
|
|
|
|
1,213,021
|
|
Returns allowance
|
|
|
883,668
|
|
|
|
1,128,133
|
|
Customers
|
|
|
411,033
|
|
|
|
411,033
|
|
Interest
|
|
|
45,206
|
|
|
|
110,754
|
|
Royalties
|
|
|
46,323
|
|
|
|
71,573
|
|
Warehousing
|
|
|
7,298
|
|
|
|
31,748
|
|
Others
|
|
|
158,057
|
|
|
|
371,518
|
|
Total
|
|
$
|
3,175,181
|
|
|
$
|
5,032,102
|
|
Note
10 –Notes Payable
The
Company’s loans payable at March 31, 2016 and December 31, 2015 are as follows:
|
|
March
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Loans payable
|
|
$
|
11,288,103
|
|
|
$
|
12,406,589
|
|
Unamortized debt
discount
|
|
|
(2,060,819
|
)
|
|
|
(2,536,418
|
)
|
Unamortized debt
issuance cost
|
|
|
(312,812)
|
|
|
|
(378,852)
|
|
Total
|
|
|
8,914,472
|
|
|
|
9,491,319
|
|
Less: Current
portion
|
|
|
(4,812,639
|
)
|
|
|
(3,775,669
|
)
|
Long-term portion
|
|
$
|
4,101,833
|
|
|
$
|
5,715,650
|
|
$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 $218,253 (LT warrants) during the three months ended March 31, 2016. Unamortized
debt discount as of March 31, 2016 amounted to $389,479.
The
Company also recorded deferred financing costs of $289,045 with respect to the above loan in 2015. The Company recognized amortization
of deferred financing costs of $35,636 during the three months ended March 31, 2016.
The
Company recognized and paid interest expense of $181,814 during the three months ended March 31, 2016. Accrued interest expense
was $0 as of March 31, 2016. Loan payable balance was $4,500,000 as of March 31, 2016.
$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. 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 $750,000 as of March 31, 2016.
$950,000
June 26, 2015 Security Agreement:
On
June 26, 2015, the Company, through its wholly owned subsidiary, Neuragen Corp. (“Neuragen”), issued a 0% promissory
note in a principal amount of $950,000 in connection with an Asset Purchase Agreement. The note requires $250,000 to be paid on
or before June 30, 2016, and $700,000 to be paid in quarterly installments (beginning with the quarter ended September 30, 2015)
equal to the greater of $12,500 or 5% of U.S. net sales, and 2% of U.S. net sales of Neuragen for 60 months thereafter. The payment
of such amounts is secured by a security interest in certain assets, undertakings and property (“Collateral”) pursuant
to the Security Agreement, which will be released upon receipt of total payments of $1.2 million.
The
Company also recorded deferred financing costs of $10,486 with respect to the above agreement in 2015. The Company recognized
amortization of deferred financing costs of $1,293 during the three months ended March 31, 2016. The Company has recorded present
value of future payments of $538,102 and $515,854 as of March 31, 2016 and December 31, 2015, respectively. The Company has recorded
interest expense of $19,013 for the three months ended March 31, 2016.
$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 in 2015. For derivative liability
calculation on 4,547,243 warrants, refer to Note 15.
The
Company recognized amortization of debt discount of $257,347 (4,547,243 warrants) during the three months ended March 31, 2016.
Unamortized debt discount as of March 31, 2016 amounted to $1,671,339.
The
Company also recorded deferred financing costs of $233,847 with respect to the above loan in 2015. The Company recognized amortization
of deferred financing costs of $29,111 during the three months ended March 31, 2015.
The
Company recognized interest expense of $206,250 during the three months ended March 31, 2016. Accrued interest expense was $45,206
as of March 31, 2016. The balance at March 31, 2016 was $5,500,000.
Note
11 – Stockholders’ Equity
The
total number of shares of all classes of capital stock which the Company is authorized to issue is 300,000,000 shares of common
stock with $0.00001 par value.
As
of both March 31, 2016 and December 31, 2015, there were 81,692,954 shares of the Company’s common stock issued and outstanding.
Note
12 – Commitments & Contingencies
Litigation:
From
time to time the Company may become a party to litigation in the normal course of business. Management believes that there are
no current legal matters that would have a material effect on the Company’s financial position or results of operations.
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 three months ended March 31, 2016 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 March 31, 2016:
Year
ending December 31:
|
|
|
|
2016
– remaining nine months
|
|
$
|
163,407
|
|
2017
|
|
|
26,769
|
|
Total
|
|
$
|
190,176
|
|
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 March 31, 2016:
Year
ending December 31:
|
|
|
|
2016
– remaining nine months
|
|
$
|
8,046
|
|
2017
|
|
|
9,834
|
|
Total
|
|
$
|
17,880
|
|
Note
13 – 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 a 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 $0.65 per share to two employees of the
Company.
The
following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common
stock issued to employees and consultants under a stock option plan at March 31, 2016:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Exercise
Prices ($)
|
|
|
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
|
|
|
|
8.4
|
|
|
$
|
0.41
|
|
|
|
3,000,000
|
|
|
$
|
0.25
|
|
The
stock option activity for the three months ended March 31, 2016 is as follows:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31,
2015
|
|
|
5,000,000
|
|
|
$
|
0.41
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired or canceled
|
|
|
-
|
|
|
|
-
|
|
Outstanding at
March 31, 2016
|
|
|
5,000,000
|
|
|
$
|
0.41
|
|
Stock-based
compensation expense related to vested options was $302,641 during the three months ended March 31, 2016. The Company determined
the value of share-based compensation for options vesting during the period using the Black-Scholes fair value option-pricing
model with the following weighted average assumptions: estimated fair value of Company’s common stock of $0.74, risk-free
interest rate of 2.23%, volatility of 154%, expected lives of 10 years, and dividend yield of 0%. Stock options outstanding as
of March 31, 2016, as disclosed in the above table, have an intrinsic value of $600,000.
Note
14 – Stock Warrants
The
following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s common
stock at March 31, 2016:
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Exercise
Prices ($)
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
$
|
0.34
|
|
|
|
3,584,759
|
|
|
|
8.85
|
|
|
$
|
0.34
|
|
|
|
3,584,759
|
|
|
$
|
0.34
|
|
|
0.49
|
|
|
|
4,547,243
|
|
|
|
9.65
|
|
|
|
0.49
|
|
|
|
4,547,243
|
|
|
|
0.49
|
|
|
5.00
|
|
|
|
1,000,000
|
|
|
|
2.75
|
|
|
|
5.00
|
|
|
|
1,000,000
|
|
|
|
5.00
|
|
The
warrant activity for the three months ended March 31, 2016 is as follows:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at December 31, 2015
|
|
$
|
9,132,002
|
|
|
$
|
0.92
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired or canceled
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2016
|
|
$
|
9,132,002
|
|
|
$
|
0.92
|
|
Note
15 – 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.
Fair
value at March 31, 2016 was estimated to be $2,009,681 and based on the following assumptions:
|
|
March
31, 2016
|
|
Risk-free interest rate
|
|
|
1.78
|
%
|
Expected remaining term
|
|
|
9.5 Years
|
|
Expected volatility
|
|
|
156.96
|
%
|
Dividend yield
|
|
|
0
|
%
|
During
the period ended March 31, 2016, the decrease in the fair value of the warrant derivative liability of $1,086,498 was recorded
as a gain on change in fair value of derivative liability.
Note
16 – 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 period ended March 31, 2016 and 2015 were as
follows:
|
|
March
31, 2016
|
|
|
March
31, 2015
|
|
United States
|
|
$
|
8,198,083
|
|
|
$
|
1,600,249
|
|
Foreign countries
|
|
|
69,668
|
|
|
|
-
|
|
|
|
$
|
8,267,751
|
|
|
$
|
1,600,249
|
|
The
Company’s net sales by product group for the period ended March 31, 2016 and 2015 were as follows:
|
|
March
31, 2016
|
|
|
March
31, 2015
|
|
Nutraceuticals
|
|
$
|
7,865,915
|
|
|
$
|
1,600,249
|
|
Over the Counter (OTC)
|
|
|
377,063
|
|
|
|
-
|
|
Cosmeceuticals
|
|
|
24,773
|
|
|
|
-
|
|
|
|
$
|
8,267,751
|
|
|
$
|
1,600,249
|
|
(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 March 31, 2016 and December 31, 2015
were as follows:
|
|
March
31, 2016
|
|
|
December
31, 2015
|
|
United States
|
|
$
|
17,191,578
|
|
|
$
|
17,411,598
|
|
Foreign countries
|
|
|
16,385
|
|
|
|
12,081
|
|
|
|
$
|
17,207,963
|
|
|
$
|
17,423,679
|
|
Note
17 – Acquisitions
In
the Company’s Annual Report on Form 10-K, the following disclosure was made with regard to the Company’s initial allocation
of the fair value of the assets and liabilities acquired in the FOCUSfactor acquisition.
“Note
3 – Acquisitions
Asset
Purchase Agreement with Factor Nutrition Labs
:
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
Company has consulted with a valuation professional to assist in determining the fair value of the identifiable FOCUSfactor intangible
assets. As a result of this work, the Company has increased the amount allocated to the FOCUSfactor indefinite-lived brand and
patent by $450,000 and reduced the amount recorded to goodwill by an identical amount. This adjustment had no effect on the income
statement. The Company believes that the restated amount of $1,450,000 properly states the fair value of the FOCUSfactor brand
and patent.
Note
18 – Income Taxes
Income
tax expense was $183,905 for the three months ended March 31, 2016, compared to $0 for the same period in 2015. The current provision
is attributable to Australian operations and the current tax rate in effect in that country.
The
total deferred tax asset is calculated by multiplying a domestic (US) 34% marginal tax rate by the cumulative net operating loss
carryforwards (“NOL”). The Company currently has NOLs, which expire through 2035. The deferred tax asset related to
the NOLs. Management has determined based on all the available information that a 100% valuation reserve is required.
For
U.S. purposes, the Company has not completed its evaluation of NOL utilization limitations under Internal Revenue Code, as amended
(the “Code”) Section 382, 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 Code.
Note
19 – Subsequent Events
Management
evaluated all activities of the Company through the issuance date of the Company’s unaudited condensed consolidated financial
statements and concluded that no subsequent events have occurred that would require adjustments or disclosure into the unaudited
condensed consolidated financial statements.