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 four subsidiaries: Neuragen Corp., Breakthrough Products, Inc., NomadChoice Pty Ltd. and Synergy CHC Inc.
and the results have been consolidated in these statements.
Synergy
CHC Inc., a Canadian corporation, was created during February 2016 in order to perform marketing and customer service operations
for the companies owned by Synergy CHC Corp.
Note
2 – Summary of Significant Accounting Policies
General
The
accompanying condensed consolidated financial statements as of September 30, 2016 and December 31, 2015 and for the three and
nine months ended September 30, 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 and nine months ended September 30, 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 September
30, 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 September 30, 2016, the
uninsured balance amounted to $3,802,571.
Capitalization
of Fixed Assets
The
Company capitalizes expenditures related to property and equipment, subject to a minimum rule, that have a useful life greater
than one year for: (1) assets purchased; (2) existing assets that are replaced, improved or the useful lives have been extended;
or (3) all land, regardless of cost. Acquisitions of new assets, additions, replacements and improvements (other than land) costing
less than the minimum rule in addition to maintenance and repair costs, including any planned major maintenance activities, are
expensed as incurred.
Intangible
Assets
We
evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised
estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization except
intellectual property of $1,450,000 acquired as part of Asset Purchase Agreement entered into with Factor Nutrition LLC on January
22, 2015. 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
September 30, 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 September 30, 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 selling 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 September 30, 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
an accumulated deficit at September 30, 2016 of $2,721,289. The Company had a working capital deficit of $2,487,840 as of September
30, 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 growing sales revenue on our existing brands, 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 September 30, 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 one of the Company’s foreign subsidiaries (Nomadchoice Pty Ltd.) is the U.S. Dollar. The Company’s
foreign subsidiary maintains its records using local currency (Australian Dollar). All monetary assets and liabilities of the
foreign subsidiary were translated into U.S. Dollars at quarter end exchange rates, non-monetary assets and liabilities of the
foreign subsidiary were translated into U.S. Dollars at transaction day exchange rates. Income and expense items related to non-monetary
items were translated at exchange rates prevailing during the transaction date and other incomes and expenses were translated
using average exchange rate for the period. The resulting translation adjustments, net of income taxes, were recorded in statements
of operations as Remeasurement gain or loss on translation of foreign subsidiary.
The
functional currency of the Company’s other foreign subsidiary (Synergy CHC Inc.) is the Canadian Dollar (CAD). The Company’s
foreign subsidiary maintains its records using local currency (CAD). All assets and liabilities of the foreign subsidiary were
translated into U.S. Dollars at period end exchange rates and stockholders’equity is translated at the historical rates.
Income and expense items were translated using average exchange rate for the period. The resulting translation adjustments, net
of income taxes, are reported as other comprehensive income and accumulated other comprehensive income in the stockholder’s
equity in accordance with ASC 220 – Comprehensive Income.
Translation
gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional
currency are translated into either Australian Dollars or Canadian Dollars, as the case may be, at the rate on the date of the
transaction and included in the results of operations as incurred.
Concentrations
of Credit Risk
In
the normal course of business, the Company provides credit terms to its customers; however, collateral is not required. Accordingly,
the Company performs credit evaluations of its customers and maintains allowances for possible losses which, when realized, were
within the range of management’s expectations. From time to time, a higher concentration of credit risk 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’s
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 September 30, 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
|
|
September 30, 2016
|
|
Stock Price
|
|
$
|
0.35
|
|
Exercise Price
|
|
$
|
0.49
|
|
Expected Life (in years)
|
|
|
9.0
|
|
Stock Volatility
|
|
|
143.11
|
%
|
Risk-Free Rate
|
|
|
1.60
|
%
|
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
2016-10
In
April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing, which provides further guidance on identifying performance obligations and improves the operability and understandability
of licensing implementation guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU 2014-09 as amended
by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within those years.
The Company has not yet determined the impact of ASU 2016-10 on its consolidated financial statements.
ASU
2016-09
In
March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, or ASU No. 2016-09. The areas for simplification
in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities,
the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods. Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim
period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity
that elects early adoption must adopt all of the amendments in the same period. Amendments related to the timing of when excess
tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using
a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period
in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows
when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments
requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating
expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess
tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method.
We are currently evaluating the impact of adopting ASU No. 2016-09 on our consolidated financial statements.
ASU
2016-08
In
March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net) that clarifies how to apply revenue recognition guidance related to whether an entity is
a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or
services before they are transferred to the customer and provides additional guidance about how to apply the control principle
when services are provided and when goods or services are combined with other goods or services. The effective date for ASU 2016-08
is the same as the effective date of ASU 2014-09 as amended by ASU 2015-14, for annual reporting periods beginning after December
15, 2017, including interim periods within those years. The Company has not yet determined the impact of ASU 2016-08 on its consolidated
financial statements.
ASU
2016-01
In
January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the
current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and
the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the
valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt
securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption,
an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the
first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record
fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other
comprehensive income. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
ASU
2015-17
In
November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. Currently deferred taxes for each
tax jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability on the balance sheet.
To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with
any related valuation allowances be classified as noncurrent in a classified statement of financial position. This guidance is
effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company
adopted this guidance in the fourth quarter of the year ended December 31, 2015 on a retrospective basis. The adoption of this
guidance did not have a material impact on the Company’s consolidated financial statements., and did not have any effect
on prior periods due to the full valuation allowance against the Company’s net deferred tax assets.
ASU
2015-16
In
September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement –Period Adjustments. Changes to
the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required
to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment
to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after
the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally
up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and,
instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard
is effective for both public and private companies for periods beginning after December 15, 2015. Adoption of this new standard
did not have any impact on the Company’s consolidated financial statements.
ASU
2015-14
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 on our consolidated financial statements.
ASU
2015-11
In
July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330). ASU 2015-11 simplifies the accounting
for the valuation of all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing that
inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for financial statements issued for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. We do not
expect the adoption of ASU 2015-11 to have a material effect on our consolidated financial statements.
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 consolidated financial statements.
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
consolidated financial statements.
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 $208,569 and $378,852 from other assets to liabilities and netted off with the related loans in the liabilities as of
September 30, 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 consolidated
financial statements.
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 consolidated financial statements.
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 consolidated financial statements.
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 have not previously and
do not currently have issued, nor were we or 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 consolidated financial statements.
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 consolidated financial statements.
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. 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. We are still evaluating the effect of the adoption of ASU 2014-09 on our 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
consolidated financial statements.
There
were various updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to a have a material impact on the Company’s consolidated financial statements.
Note
3 – Inventory
Inventory
consists of finished goods, components and raw materials. The Company’s inventory is stated at the lower of cost (FIFO cost
basis) or market.
The
carrying value of inventory consisted of the following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Finished goods
|
|
$
|
351,888
|
|
|
$
|
535,908
|
|
Components
|
|
|
599,244
|
|
|
|
115,340
|
|
Raw Materials
|
|
|
35,406
|
|
|
|
35,406
|
|
Total inventory
|
|
$
|
986,538
|
|
|
$
|
686,654
|
|
On
January 22, 2015, inventory was pledged to Knight Therapeutics under the Loan Agreement (see note 10).
During
the nine month period ended September 30, 2016, one of the Company’s subsidiaries reached an agreement with a former manufacturer
regarding a payment dispute and gained control over approximately $90,000 worth of raw materials which will be used in future
production.
Note
4 – Accounts Receivable
Accounts
receivable, net of allowances for sales returns and doubtful accounts, consisted of the following:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
Trade
accounts receivable
|
|
$
|
1,894,278
|
|
|
$
|
4,101,148
|
|
Less
allowances
|
|
|
0
-
|
|
|
|
(121,291
|
)
|
Total
accounts receivable, net
|
|
$
|
1,894,278
|
|
|
$
|
3,979,857
|
|
During
the year ended December 31, 2015, the Company charged $50,000 to bad debt expense in setting up an allowance. During the three
and nine months ended September 30, 2016, the Company charged $nil to bad debt expense in setting up an allowance.
Note
5 – Prepaid Expenses
Prepaid
expenses consisted of the following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Advances for inventory
|
|
$
|
14,718
|
|
|
$
|
171,494
|
|
Media production
|
|
|
173,518
|
|
|
|
55,849
|
|
Insurance
|
|
|
44,809
|
|
|
|
54,519
|
|
Trade shows
|
|
|
-
|
|
|
|
45,700
|
|
Deposits
|
|
|
134,970
|
|
|
|
41,228
|
|
Consultants
|
|
|
42,500
|
|
|
|
24,000
|
|
Rent
|
|
|
-
|
|
|
|
16,216
|
|
Promotion - Bloggers
|
|
|
639,259
|
|
|
|
-
|
|
License agreement
|
|
|
283,333
|
|
|
|
-
|
|
In-store demos
|
|
|
6,141
|
|
|
|
-
|
|
Miscellaneous
|
|
|
55,689
|
|
|
|
13,428
|
|
Total
|
|
$
|
1,394,937
|
|
|
$
|
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 September 30, 2016 and December 31, 2015, the uninsured balances amounted
to $3,802,571 and $3,453,290, respectively.
Accounts
receivable
As
of September 30, 2016, three customers accounted for 83% 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 nine months ended September 30, 2016, four customers accounted for approximately 37% of the Company’s net revenue. For
the three months ended September 30, 2016, three customers accounted for approximately 53% of the Company’s net revenue.
For the nine months ended September 30, 2015, four customers accounted for approximately 94% of the Company’s net revenue.
For the three months ended September 30, 2015, three customers accounted for approximately 96% of the Company’s net revenue.
For the year ended December 31, 2015, four customers accounted for approximately 75% of the Company’s net revenues. Substantially
all of the Company’s business is with companies in the United States.
Major
suppliers
For
the three and nine months ended September 30, 2016 and 2015, our products were made by the following suppliers:
FOCUSfactor
|
Atrium
Innovations - Pittsburgh, PA
|
Vit-Best
Nutrition, Inc. - Tustin, CA
|
Flat
Tummy Tea
|
Caraway
Tea Company, LLC - Highland, NY
|
-
|
Neuragen
|
C-Care,
LLC - Linthicum Heights, MD
|
-
|
UrgentRx
|
Capstone
Nutrition - Ogden, UT
|
-
|
It
is the opinion of management that the products can be produced by other manufacturers and the choice to utilize these suppliers
is not a significant concentration.
Note 7 – Fixed Assets and Intangible
Assets
As of September 30, 2016 and December 31, 2015,
fixed assets and intangible assets consisted of the following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
228,578
|
|
|
$
|
18,187
|
|
Less accumulated depreciation
|
|
|
(33,001
|
)
|
|
|
(6,170
|
)
|
Fixed assets, net
|
|
$
|
195,577
|
|
|
$
|
12,017
|
|
Depreciation expense for the three months ended
September 30, 2016 and 2015 was $16,089 and $217, respectively. Depreciation expense for the nine months ended September 30, 2016
and 2015 was $26,783 and $430, respectively.
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
FOCUSfactor intellectual property
|
|
$
|
1,450,000
|
|
|
$
|
1,000,000
|
|
Intangible assets subject to amortization
|
|
|
5,623,016
|
|
|
|
5,521,751
|
|
Less accumulated amortization
|
|
|
(1,451,842
|
)
|
|
|
(606,489
|
)
|
Intangible assets, net
|
|
$
|
5,621,174
|
|
|
$
|
5,915,262
|
|
Amortization expense for the nine months ended
September 30, 2016 and 2015 was $844,306 and $281,826, respectively. Amortization expense for the three months ended September
30, 2016 and 2015 was $281,990 and $102,886, respectively. These intangible assets were acquired through an Asset Purchase Agreement
and Stock Purchase Agreements entered into during 2015 for the acquisitions of the FocusFactor, UrgentRx and Flat Tummy Tea businesses.
During 2016, valuations were performed on acquisitions
that occurred during 2015. Based on those valuations the Company adjusted intangible asset and goodwill – see Note 17.
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 September 30, 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 September 30, 2016, the Company owed Knight $3,060,920 on this loan, net of debt discount and debt issuance cost
(see Note 10).
On June 26, 2015, the Company entered into
a Security Agreement with Knight Therapeutics, Inc., through its wholly owned subsidiary Neuragen Corp., for the purchase of Knight
Therapeutics, Inc.’s assets. At September 30, 2016, the Company owed Knight $292,931 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 $90,000 through payroll for the nine
months ended September 30, 2016 and $30,000 for the three months ended September 30, 2016. As of September 30, 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 September 30, 2016, the Company owed Knight $3,528,163 on this loan, net of debt discount and debt issuance cost
(see Note 10).
At September 30, 2016 NomadChoice Pty Ltd.,
a subsidiary of the Company, owed Knight Therapeutics $74,056 in connection with a royalty distribution agreement.
Note 9 – Accounts Payable and Accrued
Liabilities
As of September 30, 2016 and December 31, 2015,
accounts payable and accrued liabilities consisted of the following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Accrued payroll
|
|
$
|
104,290
|
|
|
$
|
128,237
|
|
Accrued legal fees
|
|
|
12,337
|
|
|
|
38,752
|
|
Accounting fees
|
|
|
7,500
|
|
|
|
-
|
|
Manufacturers
|
|
|
839,296
|
|
|
|
1,527,333
|
|
Promotions
|
|
|
457,589
|
|
|
|
1,213,021
|
|
Returns allowance
|
|
|
860,127
|
|
|
|
1,128,133
|
|
Customers
|
|
|
417,055
|
|
|
|
411,033
|
|
Interest
|
|
|
45,206
|
|
|
|
110,754
|
|
Royalties
|
|
|
74,056
|
|
|
|
71,573
|
|
Warehousing
|
|
|
-
|
|
|
|
31,748
|
|
Others
|
|
|
177,681
|
|
|
|
371,518
|
|
Total
|
|
$
|
2,995,137
|
|
|
$
|
5,032,102
|
|
Note 10 – Notes Payable
The Company’s
loans payable at September 30, 2016 and December 31, 2015 are as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Loans payable
|
|
$
|
9,230,430
|
|
|
$
|
12,406,589
|
|
Unamortized debt discount
|
|
|
(1,393,769
|
)
|
|
|
(2,536,418
|
)
|
Unamortized debt issuance cost
|
|
|
(208,569
|
)
|
|
|
(378,852
|
)
|
Total
|
|
|
7,628,092
|
|
|
|
9,491,319
|
|
Less: Current portion
|
|
|
(5,823,033
|
)
|
|
|
(3,775,669
|
)
|
Long-term portion
|
|
$
|
1,805,059
|
|
|
$
|
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. These covenants
were achieved, therefore the Company chose to extend the loan for the first 12-month period. 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 $13,766 and $367,781 (LT warrants) during the three and nine months ended September 30, 2016, respectively. Unamortized
debt discount as of September 30, 2016 amounted to $239,951.
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 $14,267
and $78,709 during the three and nine months ended September 30, 2016, respectively. Unamortized debt issuance cost as of September
30, 2016 amounted to $74,129.
The Company recognized and paid interest expense
of $148,463 and $498,105 during the three and nine months ended September 30, 2016, respectively. Accrued interest expense was
$0 as of September 30, 2016. Loan payable balance was $3,375,000 as of September 30, 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. The loan payable balance was $750,000 as of September 30, 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
$1,321 and $3,921 during the three and nine months ended September 30, 2016, respectively. Unamortized debt issuance cost as of
September 30, 2016 amounted to $3,921. The Company recorded present value of future payments of $292,931 and $531,589 as of September
30, 2016 and December 31, 2015, respectively. The Company recorded interest expense of $10,588 and $48,842 for the three and nine
months ended September 30, 2016, respectively.
$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 $260,175 (4,547,243 warrants) during the three months and $774,868 during the nine months ended September 30, 2016,
respectively. Unamortized debt discount as of September 30, 2016 amounted to $1,153,818.
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 $29,431
and $87,653 during the three and nine months ended September 30, 2016, respectively. Unamortized debt issuance cost as of September
30, 2016 amounted to $130,519.
The Company recognized interest expense of
$201,953 and $614,453 during the three and nine months ended September 30, 2016, respectively. During the three and nine months
ended September 30, 2016, the Company paid interest of $206,250 and $684,298, respectively. Accrued interest was $45,206 as of
September 30, 2016. The balance at September 30, 2016 was $4,812,500.
Note 11 – Stockholders’ Equity
The total number of shares of all classes of
capital stock which the Company is authorized to issue is 300,000,000 shares of common stock with $0.00001 par value.
During the nine months ended September 30,
2016, the Company issued 213,742 shares of its common stock valued at $0.32 per share as part of an agreement for services rendered.
During the nine months ended September 30,
2016, the Company issued 71,428 shares of its common stock valued at $0.70 per share for services rendered.
During the nine months ended September 30,
2016, the Company cancelled 713,767 shares of its common stock valued at $125,000 in conjunction with an agreement with a former
shareholder. The Company committed to issue 125,000 shares to former shareholders valued at $56,250 recorded as settlement expense
during the three and nine months ended September 30, 2016. These shares were not issued as of the date of this Quarterly Report.
As of September 30, 2016 and December 31, 2015,
there were 81,264,357 and 81,692,954 shares of the Company’s common stock issued and outstanding, respectively.
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 first six months of 2016 was $8,923 per month less a $3,010 per month sublease through March 2017. During the month of June
2016, the subsidiary was relieved from a portion of the lease, leaving the monthly obligation at $2,609 with the sublease of $3,010
still in effect.
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 September 30, 2016:
Year ending December 31:
|
|
|
|
2016 – remaining three months
|
|
$
|
32,727
|
|
2017
|
|
|
7,827
|
|
Total
|
|
$
|
40,554
|
|
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 September 30, 2016:
Year ending December 31:
|
|
|
|
2016 – remaining three months
|
|
$
|
2,682
|
|
2017
|
|
|
9,834
|
|
Total
|
|
$
|
12,516
|
|
Note 13 – Stock Options
On July 30, 2014, the Company’s board
of directors approved the Company’s 2014 Equity Incentive Plan (the “Plan”) and the reservation of 15,525,000
shares of common stock for issuance under the Plan. The 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 $0.65 per share to two employees of the Company.
The following table summarizes the options
outstanding, option exercisability and the related prices for the shares of the Company’s common stock issued to employees
and consultants under the Plan at September 30, 2016:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise
Prices ($)
|
|
|
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
|
|
|
|
7.9
|
|
|
$
|
0.41
|
|
|
|
3,000,000
|
|
|
$
|
0.25
|
|
The stock option activity for the nine months
ended September 30, 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 September 30, 2016
|
|
|
5,000,000
|
|
|
$
|
0.41
|
|
Stock-based compensation expense related to
vested options was $306,646 and $913,930 during the three and nine months ended September 30, 2016, respectively. 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 September
30, 2016, as disclosed in the above table, have an intrinsic value of $nil.
Note 14 – Stock Warrants
The following table summarizes the warrants
outstanding, warrant exercisability and the related prices for the shares of the Company’s common stock at September 30,
2016:
|
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Exercise
Prices ($)
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
$
|
0.34
|
|
|
|
3,584,759
|
|
|
|
8.3
|
|
|
$
|
0.34
|
|
|
|
3,584,759
|
|
|
$
|
0.34
|
|
|
0.49
|
|
|
|
4,547,243
|
|
|
|
9.1
|
|
|
|
0.49
|
|
|
|
4,547,243
|
|
|
|
0.49
|
|
|
5.00
|
|
|
|
1,000,000
|
|
|
|
2.2
|
|
|
|
5.00
|
|
|
|
1,000,000
|
|
|
|
5.00
|
|
The warrant activity for
the nine months ended September 30, 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 September 30, 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 September 30, 2016 was estimated
to be $1,535,795 and based on the following assumptions:
|
|
September 30, 2016
|
|
Risk-free interest rate
|
|
|
1.60
|
%
|
Expected remaining term
|
|
|
9.00 Years
|
|
Expected volatility
|
|
|
143.11
|
%
|
Dividend yield
|
|
|
0
|
%
|
During the nine months ended September 30,
2016, the decrease in the fair value of the warrant derivative liability of $1,560,384 was recorded as a gain on change in fair
value of derivative liability.
During the three months ended September 30,
2016, the decrease in the fair value of the warrant derivative liability of $1,137,309 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 nine months ended September 30, 2016 and 2015 were as follows:
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
United States
|
|
$
|
26,144,435
|
|
|
$
|
7,237,619
|
|
Foreign countries
|
|
|
1,967,459
|
|
|
|
-
|
|
|
|
$
|
28,111,894
|
|
|
$
|
7,237,619
|
|
The Company’s net sales by product group
for the nine months ended September 30, 2016 and 2015 were as follows:
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
Nutraceuticals
|
|
$
|
27,281,476
|
|
|
$
|
7,237,619
|
|
Over the Counter (OTC)
|
|
|
780,265
|
|
|
|
-
|
|
Cosmeceuticals
|
|
|
50,153
|
|
|
|
-
|
|
|
|
$
|
28,111,894
|
|
|
$
|
7,237,619
|
|
Net sales attributed to customers in the United
States and foreign countries for the three months ended September 30, 2016 and 2015 were as follows:
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
United States
|
|
$
|
10,771,707
|
|
|
$
|
3,181,623
|
|
Foreign countries
|
|
|
797,861
|
|
|
|
-
|
|
|
|
$
|
11,569,568
|
|
|
$
|
3,181,623
|
|
The Company’s net sales by product group
for the three months ended September 30, 2016 and 2015 were as follows:
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
Nutraceuticals
|
|
$
|
11,341,036
|
|
|
$
|
3,181,623
|
|
Over the Counter (OTC)
|
|
|
222,390
|
|
|
|
-
|
|
Cosmeceuticals
|
|
|
6,142
|
|
|
|
-
|
|
|
|
$
|
11,569,568
|
|
|
$
|
3,181,623
|
|
(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 September 30, 2016 and December 31, 2015 were as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
United States
|
|
$
|
15,567,926
|
|
|
$
|
17,411,598
|
|
Foreign countries
|
|
|
25,225
|
|
|
|
12,081
|
|
|
|
$
|
15,593,151
|
|
|
$
|
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.
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 Breakthrough Products, Inc. acquisition.
“Note 3 – Acquisitions
Stock Purchase Agreement with Breakthrough
Products, Inc.:
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 Company has consulted with a valuation
professional to assist in determining the fair value of the identifiable Breakthrough Products, Inc.’s intangible assets.
As a result of this work, the Company has increased the amount allocated to the UrgentRx patent by $150,000, decreased the amount
allocated to a Non-Compete agreement by $50,000 and reduced the amount recorded to goodwill by the identical amounts. In addition,
it was determined that an incorrect stock price was used to calculate the purchase price of the transaction. As a result of this
determination, the Company decreased Additional Paid In Capital and Goodwill by $1,170,000. These adjustments had no effect on
the income statement. The Company believes that these restated amounts properly states the fair value of the Breakthrough Products,
Inc. transaction.
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 TPR Investments Pty Ltd. acquisition.
“Note 3 – Acquisitions
Stock Purchase Agreement with TPR Investments
Pty Ltd.:
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 Company has consulted with a valuation
professional to assist in determining the fair value of the identifiable NomadChoice’s intangible assets. As a result of
this work, the Company has increased the amount allocated to the Customer Database by $215,000, decreased the amount allocated
to Intellectual Property by $100,000 and decreased the amount allocated to the Blogger Database by $115,000. These adjustments
had no effect on the income statement. The Company believes that these restated amounts properly states the fair value of the TPR
Investments Pty Ltd. transaction.
Note 18 – Income Taxes
Income tax expense was $264,377 and $659,462
for the three and nine months ended September 30, 2016, respectively, compared to $0 for the same periods 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. 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.