U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 20182019

 

[  ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Synergy CHC Corp.

 

Nevada 000-55098 99-0379440
(State or other jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification Number)

 

865 Spring Street

Westbrook, Maine 04092

(Address of principal executive offices)

 

(615) 939-9004

(Issuer’s Telephone Number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer [  ]Accelerated filer [  ]Non-accelerated filer [  ]Smaller reporting company [X]
 
(Do not check if smaller reporting company)
Emerging Growth Company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

APPLICABLE ONLY TO CORPORATE ISSUERSSecurities registered pursuant to Section 12(b) of the Act:

 

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.00001 par valueSNYROTCQB

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of May 14, 2018, 89,862,6832, 2019, 89,889,074 shares of our common stock were issued and outstanding.

 

 

 

 

 

SYNERGY CHC CORP.

 

INDEX

 

Table of Contents

 

PART IFINANCIAL INFORMATION3
   
Item 1.Condensed consolidated financial statements3
   
 Condensed consolidated balance sheets as of March 31, 20182019 (unaudited) and December 31, 201720183
   
 Condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 20182019 and 20172018 (unaudited)4
   
 Condensed consolidated statement of changes in stockholders’ equity for the three months ended March 31, 2019 and 2018 (unaudited)5
Condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018 and 2017 (unaudited)56
   
 Notes to unaudited condensed consolidated financial statements67
   
Item 2.Management’s discussion and analysis of financial condition and results of operations2223
   
Item 3.Quantitative and qualitative disclosures about market risk2526
   
Item 4.Controls and procedures2526
   
PART IIOTHER INFORMATION26
   
Item 1.Legal proceedings2627
   
Item 1A.Risk factors2627
   
Item 2.Unregistered sales of equity securities and use of proceeds2627
   
Item 3.Defaults upon senior securities2627
   
Item 4.Mine Safety Disclosures2627
   
Item 5.Other information2627
   
Item 6.Exhibits2627
   
Signatures2728

2

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Synergy CHC Corp.

Condensed Consolidated Balance Sheets

 

  March 31, 2018  December 31, 2017 
  (Unaudited)    
Assets        
Current Assets:        
Cash and cash equivalents $1,686,181  $1,955,614 
Restricted cash  139,439   139,071 
Accounts receivable, net  3,847,981   4,333,608 
Prepaid expenses  807,491   1,143,251 
Inventory, net  3,248,155   2,842,376 
Total Current Assets  9,729,247   10,413,920 
         
Fixes assets, net  378,309   293,205 
Goodwill  7,793,240   7,793,240 
Intangible assets, net  5,132,345   5,532,210 
Total Assets $23,033,141  $24,032,575 
         
Liabilities and Stockholders’ Equity        
Current Liabilities:        
Accounts payable and accrued liabilities $4,174,093  $4,328,548 
Deferred revenue  6,793   3,058 
Provision for income taxes payable  194,902   94,956 
Current portion of long-term debt, net of debt discount and debt issuance cost, related party  1,932,194   2,487,233 
Royalties Payable  171,816   221,222 
Total Current Liabilities  6,479,798   7,135,017 
         
Long-term Liabilities:        
Note payable, net of debt discount and debt issuance cost, related party  6,995,430   7,464,279 
Total Long-term Liabilities  6,995,430   7,464,279 
Total Liabilities  13,475,228   14,599,296 
         
Commitments and contingencies        
         
Stockholders’ Equity:        
Common stock, $0.00001 par value; 300,000,000 shares authorized; 89,862,683 and 89,862,683 shares issued and outstanding, respectively  899   899 
Additional paid in capital  18,496,418   18,376,801 
Accumulated other comprehensive loss  (17,476  (77,989
Accumulated deficit  (8,921,928  (8,866,432)

Total stockholdersequity

  9,557,913   9,433,279 
Total Liabilities and Stockholders’ Equity $23,033,141  $24,032,575 

  March 31, 2019  December 31, 2018 
  (Unaudited)    
Assets        
Current Assets:        
Cash and cash equivalents $688,836  $459,736 
Restricted cash  137,351   136,180 
Accounts receivable, net  4,337,423   4,458,225 
Prepaid expenses  423,081   828,847 
Income taxes receivable  415,499   386,686 
Inventory, net  2,668,495   2,670,305 
Total Current Assets  8,670,685   8,939,979 
         
Fixed assets, net  231,710   269,771 
Goodwill  7,793,240   7,793,240 
Intangible assets, net  2,739,306   3,007,521 
Total Assets $19,434,941  $20,010,511 
         
Liabilities and Stockholders’ Equity        
Current Liabilities:        
Accounts payable and accrued liabilities $6,769,915  $8,397,220 
Deferred revenue  84,373   49,709 
Current portion of long-term debt, net of debt discount and debt issuance cost, related party  1,971,873   1,963,887 
Total Current Liabilities  8,826,161   10,410,816 
         
Long-term Liabilities:        
Note payable, net of debt discount and debt issuance cost, related party  5,156,621   5,629,002 
Total Long-term Liabilities  5,156,621   5,629,002 
Total Liabilities  13,982,782   16,039,818 
         
Commitments and contingencies        
         
Stockholders’ Equity:        
Common stock, $0.00001 par value; 300,000,000 shares authorized; 89,889,074 and 89,862,683 shares issued and outstanding, respectively  899   899 
Additional paid in capital  18,902,919   18,817,800 
Accumulated other comprehensive income  108,176   179,116 
Accumulated deficit  (13,559,835)  (15,027,122)
Total stockholders equity  5,452,159   3,970,693 
Total Liabilities and Stockholders’ Equity $19,434,941  $20,010,511 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

3

Synergy CHC Corp.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income

 

  For the three months ended 
  March 31, 2018  March 31, 2017 
Revenue $9,700,861  $10,788,319 
Cost of sales  2,809,908   2,502,530 
Gross profit  6,890,953   8,285,789 
         
Operating expenses        
Selling and marketing  4,252,703   2,897,197 
General and administrative  1,760,856   1,937,643 
Depreciation and amortization  451,486   292,318 
Total operating expenses  6,465,045   5,127,158 
         
Income from operations  425,908   3,158,631 
         
Other (income) expenses        
Interest income  (1,082)  (15)
Interest expense  270,176   247,364 
Remeasurement loss on translation of foreign subsidiary  10,698   14,243 
Loss on sale of assets  -   2,877 
Amortization of debt issuance cost  40,996   44,041 
         
Total other expenses  320,788   308,510 
         
Net income before income taxes  105,120   2,850,121 
Income tax expense  160,613   291,467 
Net (loss) income after tax $(55,493) $2,558,654 
         
Net (loss) income per share – basic $(0.00) $0.03 
Net (loss) income per share – diluted $(0.00) $0.03 
         
Weighted average common shares outstanding        
Basic  89,862,638   88,764,357 
Diluted  89,862,638   88,889,357 
         
Comprehensive income:        
Net (loss) income  (55,493)  2,558,654 
Foreign currency translation adjustment  60,513   (5,901)
Comprehensive income $5,020  $2,552,753 

  For the three months ended 
  March 31, 2019  March 31, 2018 
Revenue $9,468,955  $9,700,861 
Cost of sales  2,540,450   2,809,908 
Gross profit  6,928,505   6,890,953 
         
Operating expenses        
Selling and marketing  3,311,867   4,252,703 
General and administrative  1,487,107   1,760,856 
Depreciation and amortization  306,275   451,486 
Total operating expenses  5,105,249   6,465,045 
         
Income from operations  1,823,256   425,908 
         
Other (income) expenses        
Interest income  (111)  (1,082)
Interest expense  340,128   270,176 
Remeasurement (gain) loss on translation of foreign subsidiary  (16,508)  10,698 
Amortization of debt issuance cost  38,368   40,996 
         
Total other expenses  361,877   320,788 
         
Net income before income taxes  1,461,379   105,120 
Income tax (benefit) expense  (5,908)  160,613 
Net income (loss) after tax $1,467,287  $(55,493)
         
Net income (loss) per share – basic $0.02  $(0.00)
Net income (loss) per share – diluted $0.02  $(0.00)
         
Weighted average common shares outstanding        
Basic  89,865,319   89,862,638 
Diluted  89,865,319   89,862,638 
         
Comprehensive income:        
Net income (loss)  1,467,287   (55,493)
Foreign currency translation adjustment  (70,940)  60,513 
Comprehensive income $1,396,347  $5,020 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

4

Synergy CHC Corp.

Unaudited Condensed Consolidated Statement of Stockholders’ Equity

  Common stock  Additional
Paid in
  Accumulated Other
Comprehensive
  Accumulated  Total Stockholders’ 
  Shares  Amount  Capital  Income (Loss)  Deficit  Equity 
Balance as of December 31, 2017  89,862,683  $899  $18,376,801  $(77,989) $(8,866,432) $9,433,279 
                         
Fair value of vested stock options          119,617           119,617 
Foreign currency translation gain             60,513   -   60,513 
                         
Net loss                  (55,493)  (55,493)
Balance as of March 31, 2018  89,862,683  $899  $18,496,418  $(17,476) $(8,921,928) $9,557,913 

  Common stock  Additional
Paid in
  Accumulated Other
Comprehensive
  Accumulated  Total Stockholders’ 
  Shares  Amount  Capital  Income (Loss)  Deficit  Equity 
Balance as of December 31, 2018  89,862,683  $899  $18,817,800  $179,116  $(15,027,122) $3,970,693 
                         
Fair value of vested stock options          45,533           45,533 
Foreign currency translation loss              (70,940)  -   (70,940)
Common stock issued for Per-fekt settlement  26,391   -   39,586           39,586 
Net income                  1,467,287   1,467,287 
Balance as of March 31, 2019  89,889,074  $899  $18,902,919  $108,176  $(13,559,835) $5,452,159 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

5

Synergy CHC Corp.

Unaudited Condensed Consolidated Statements of Cash Flows

 

  For the three months ended 
  March 31, 2018  March 31, 2017 
Cash Flows from Operating Activities        
Net (loss) income $(55,493) $2,558,654 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:        
Depreciation and amortization  451,486   292,318 
Amortization of debt issuance cost  40,996   44,041 
Loss on sale of assets  -   2,877 
Stock based compensation expense  119,617   339,136 
Remeasurement loss on translation of foreign subsidiary  10,698   14,243 
Foreign currency transaction loss  112,876   76,849 
Non cash implied interest  23,208   23,194 
Changes in operating assets and liabilities:        
Accounts receivable  485,627   (1,031,743)
Inventory  (405,779)  362,153 
Prepaid expense  335,760   16,119 
Accounts payable and accrued liabilities  (178,084)  (994,245)
Deferred revenue  3,735   (27,267)
Net cash provided by operating activities  944,647   1,676,330 
         
Cash Flows from Investing Activities        
Payments for acquisition of fixed assets  (121,512)  (53,594)
Payment for acquisition of domain name  (15,213)  - 
Proceeds from sale of assets  -   6,199 
Restricted cash  (368)  (38,188)
Net cash used in investing activities  (137,093)  (85,583)
         
Cash Flows from Financing Activities        
Repayment of notes payable  (1,137,500)  (2,387,500)
Net cash used in financing activities  (1,137,500)  (2,387,500)
         
Effect of exchange rate on cash and cash equivalents  60,513   (5,901)
         
Net decrease in cash and cash equivalents  (269,433)  (802,654)
         
Cash and Cash Equivalents, beginning of period  1,955,614   2,517,642 
         
Cash and Cash Equivalents, end of period $1,686,181  $1,714,988 
         
Supplemental Disclosure of Cash Flow Information:        
Cash paid during the period for:        
Interest $416,904  $243,088 
Income taxes $56,220  $411,075 
         
         
         

  For the three months ended 
  March 31, 2019  March 31, 2018 
Cash Flows from Operating Activities        
Net income (loss) $1,467,287  $(55,493)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:        
Depreciation and amortization  306,275   451,486 
Amortization of debt issuance cost  38,368   40,996 
Stock based compensation expense  85,119   119,617 
Remeasurement (gain) loss on translation of foreign subsidiary  (16,508)  10,698 
Foreign currency transaction loss  98,357   112,876 
Non cash implied interest  9,737   23,208 
Changes in operating assets and liabilities:        
Accounts receivable  120,802   485,627 
Inventory  1,810   (405,779)
Prepaid expense  405,766   335,760 
Accounts payable and accrued liabilities  (1,737,966)  (178,084)
Deferred revenue  34,664   3,735 
Net cash provided by operating activities  813,711   944,647 
         
Cash Flows from Investing Activities        
Payments for acquisition of fixed assets  -   (121,512)
Payment for acquisition of domain name  -   (15,213)
Net cash used in investing activities  -   (136,725)
         
Cash Flows from Financing Activities        
Repayment of notes payable  (512,500)  (1,137,500)
Net cash used in financing activities  (512,500)  (1,137,500)
         
Effect of exchange rate on cash, cash equivalents and restricted cash  (70,940)  60,513 
         
Net increase (decrease) in cash, cash equivalents and restricted cash  230,271   (269,065)
         
Cash, Cash Equivalents and restricted cash, beginning of period  595,916   2,094,685 
         
Cash, Cash Equivalents and restricted cash, end of period $826,187  $1,825,620 
         
Supplemental Disclosure of Cash Flow Information:        
Cash paid during the period for:        
Interest $289,598  $416,904 
Income taxes $38,919  $56,220 
         
Supplemental Disclosure of Non-cash Investing and Financing Activities $-  $- 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

6

Synergy CHC Corp.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Nature of the Business

 

Synergy CHC Corp. (“Synergy”, “we”, “us”, “our” or the “Company”) (formerly Synergy Strips Corp.) was incorporated on December 29, 2010 in Nevada under the name “Oro Capital Corporation.” On April 21, 2014, the Company changed its fiscal year end from July 31 to December 31. On April 28, 2014, the Company changed its name to “Synergy Strips Corp.”. On August 5, 2015, the Company changed its name to “Synergy CHC Corp.”

 

The Company is a consumer health care company that is in the process of building a portfolio of best-in-class consumer product brands. Synergy’s strategy is to grow its portfolio both organically and by further acquisition.

 

Effective January 1, 2019 the Company has merged its U.S. subsidiaries (Neuragen Corp., Breakthrough Products, Inc., Sneaky Vaunt Corp., and The Queen Pegasus Corp.) into the parent company.

Synergy is the sole owner of sixtwo subsidiaries: Neuragen Corp., Breakthrough Products, Inc., NomadChoice Pty Ltd., and Synergy CHC Inc., Sneaky Vaunt Corp. and The Queen Pegasus Corp. and the results have been consolidated in these statements.

 

Note 2 – Summary of Significant Accounting Policies

 

General

 

The accompanying condensed consolidated financial statements as of March 31, 20182019 and December 31, 20172018 and for the three months ended March 31, 20182019 and 20172018 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, 20182019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018.2019. 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, 20172018 and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on April 2, 2018.March 29, 2019.

 

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, 2018,2019, 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, 2018,2019, the uninsured balance amounted to $1,143,835.$313,910.

Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows.

  March 31, 2019  December 31, 2018  March 31, 2018 
          
Cash and cash equivalents $688,836  $459,736  $1,686,181 
Restricted cash  137,351   136,180   139,439 
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows $826,187  $595,916  $1,825,620 

Amounts included in restricted cash represent amounts held for credit card collateral.

 

Capitalization of Fixed Assets

 

The Company capitalizes expenditures related to property and equipment, subject to a minimum rule, that have a useful life greater than one year for: (1) assets purchased; (2) existing assets that are replaced, improved or the useful lives have been extended; or (3) all land, regardless of cost. Acquisitions of new assets, additions, replacements and improvements (other than land) costing less than the minimum rule in addition to maintenance and repair costs, including any planned major maintenance activities, are expensed as incurred.

7

Intangible Assets

 

We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization except intellectual property of $1,450,000 acquired as part of an Asset Purchase Agreement entered into with Factor Nutrition Labs LLC on January 22, 2015, and $10,000 acquired as part of an Asset Purchase Agreement entered into with Perfekt Beauty Holdings LLC and CDG Holdings, LLC (“Perfekt”) on June 21, 2017.2017 and $50,000 acquired as an Asset Purchase entered into with Cocowhite on May 22, 2018. Intangible assets are amortized on a straight line basis over the useful lives. During the year ended December 31, 2018, the Company fully impaired intangible assets related to Perfekt and Cocowhite and charged to operations impairment loss of $60,000. As of March 31, 2018,2019, our qualitative analysis of intangible assets with indefinite lives did not indicate any impairment.

 

Long-lived Assets

 

Long-lived assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable when compared to undiscounted cash flows expected to result from the use and eventual disposition of the asset.

 

Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically a discounted cash flow analysis, and an impairment charge is recorded for the excess of carrying value over fair value. However, as of December 31, 2018 our review of intangible assets related to two of our subsidiaries did indicate that the carrying amount of the asset may not be recoverable. During the year ended December 31, 2018, the Company fully impaired related intangible assets and charged to operations impairment loss of $864,067. As of March 31, 2018,2019, 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, 2018,2019, our qualitative analysis of goodwill did not indicate any impairment.

 

Revenue Recognition

8

 

Adoption of ASU 2014-09, Revenue from Contracts with Customers

On January 1, 2018, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606) using the modified retrospective (cumulative effect) transition method. Under this transition method, results for reporting periods beginning January 1, 2018 or later are presented under ASC 606, while prior period results continue to be reported in accordance with previous guidance. The cumulative effect of the initial application of ASC 606 was immaterial, no adjustment was recorded to the opening balance of retained earnings. The timing of revenue recognition for our various revenue streams was not materially impacted by the adoption of this standard. The Company believes its business processes, systems, and controls are appropriate to support recognition and disclosure under ASC 606. In addition, the adoption has led to increased footnote disclosures. Overall, the adoption of ASC 606 did not have a material impact on the Company’s condensed consolidated balance sheet, statement of operations and comprehensive income and statement of cash flows for the three months ended March 31, 2018. ASC 606 also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. As described below, the analysis of contracts under ASC 606 supports the recognition of revenue at a point in time, resulting in revenue recognition timing that is materially consistent with the Company’s historical practice of recognizing product revenue when title and risk of loss pass to the customer.

PolicyRecognition

 

The Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting Standards Codification (“ASC”) ASC 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are recognized when control is transferred to customers in amounts that reflect the consideration the Company expects to be entitled to receive in exchange for those goods. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied.

 

The Company recognizes revenue upon shipment from its fulfillment centers. Certain of our distributors may also perform a separate function as a co-packer on our behalf. In such cases, ownership of and title to our products that are co-packed on our behalf by those co-packers who are also distributors, passes to such distributors when we are notified by them that they have taken transfer or possession of the relevant portion of our finished goods. Freight billed to customers is presented as revenues, and the related freight costs are presented as cost of goods sold. Cancelled orders are refunded if not already dispatched, refunds are only paid if stock is damaged in transit, discounts are only offered with specific promotions and orders will be refilled if lost in transit.

 

Contract Assets

 

The Company does not have any contract assets such as work-in-process. All trade receivables on the Company’s condensed consolidated balance sheet are from contracts with customers.

 

Contract Costs

 

Costs incurred to obtain a contract are capitalized unless short term in nature. As a practical expedient, costs to obtain a contract that are short term in nature are expensed as incurred. The Company does not have any contract costs capitalized as of March 31, 2018.2019.

 

Contract Liabilities - Deferred Revenue

 

The Company’s contract liabilities consist of advance customer payments and deferred revenue. Deferred revenue results from transactions in which the Company has been paid for products by customers, but for which all revenue recognition criteria have not yet been met. Once all revenue recognition criteria have been met, the deferred revenues are recognized.

 

Accounts receivable

 

Accounts receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied against the allowance for doubtful accounts. As of both March 31, 2019 and December 31, 2018, allowance for doubtful accounts was $0.

 

Advertising Expense

 

The Company expenses marketing, promotions and advertising costs as incurred. Such costs are included in selling expense in the accompanying unaudited condensed consolidated statements of income.

 

Research and Development

 

Costs incurred in connection with the development of new products and processing methods are charged to general and administrative expenses as incurred.

 

Income Taxes

 

The Company utilizes FASB ASC 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is recorded when it is “more likely-than-not” that a deferred tax asset will not be realized.

9

The Company generated a deferred tax asset through net operating loss carry-forward. However, a valuation allowance of 100% has been established due to the uncertainty of the Company’s realization of the net operating loss carry forward prior to its expiration.

 

NomadChoice Pty Ltd, the Company’s wholly-owned foreign subsidiary, is subject to income taxes in the jurisdictions in which it operates. Significant judgment is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The company recognizes liabilities for anticipated tax audit issues based on the Company’s current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made.

 

Synergy CHC Inc. is a wholly-owned foreign subsidiary, is subject to income taxes in the jurisdictions in which it operates. Significant judgment is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The company recognizes liabilities for anticipated tax audit issues based on the Company’s current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made.

 

Net Earnings (Loss) Per Common Share

 

The Company computes earnings per share under ASC subtopic 260-10, Earnings Per Share. Basic earnings (loss) per share is computed by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the reporting periods. Diluted earnings per share is computed by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into common stock (using the “treasury stock” method), unless their effect on net loss per share is anti-dilutive. As of March 31, 20182019, and 2017,2018, options to purchase 8,666,6677,166,667 and 6,300,0008,666,667 shares of common stock, respectively, were outstanding. As of both March 31, 2018, and 2017, warrants to purchase 1,000,000 shares of common stock were outstanding.

 

The following is a reconciliation of the number of shares used in the calculation of basic earnings per share and diluted earnings per share for the three months ended March 31, 2018,2019, and 2017:

2018:

 

  2018  2017 
       
Net (loss) income after tax $(55,493) $2,558,654 
         
Weighted average common shares outstanding  89,862,683   88,764,357 
Common stock to be issued  -   125,000 
Dilutive potential common shares  89,862683   88,889,357 
         
Net (loss) earnings per share:        
Basic $(0.00) $0.03 
Diluted $(0.00) $0.03 

  For the three months ended 
  March 31, 2019  March 31, 2018 
       
Net income (loss) after tax $1,467,287  $(55,493)
         
Weighted average common shares outstanding  89,865,319   89,862,683 
Incremental shares from the assumed exercise of dilutive stock options  -   - 
Incremental shares from the assumed exercise of dilutive stock warrants  -   - 
Dilutive potential common shares  89,865,319   89,862,683 
         
Net earnings (loss) per share:        
Basic $0.02  $(0.00)
Diluted $0.02  $(0.00)

 

The following securities were not included in the computation of diluted net earnings per share as their effect would have been antidilutive:

 

 2018  2017  2019  2018 
          
Options to purchase common stock  8,666,667   6,300,000   7,166,667   8,666,667 
Warrants to purchase common stock  1,000,000   1,000,000   -   1,000,000 
  9,666,667   7,300,000   7,166,667   9,666,667 

 

Fair Value Measurements

 

The Company measures and discloses the fair value of assets and liabilities required to be carried at fair value in accordance with ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure.

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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, 2018,2019, the Company has determined that there were no assets or liabilities measured at fair value.

 

Inventory

 

Inventory consists of raw materials, components and finished goods. The Company’s inventory is stated at the lower of cost (FIFO cost basis) or net realizable value. Finished goods include the cost of labor to assemble the items.

 

Stock-Based Compensation

 

ASC 718, “Compensation – Stock Compensation,” prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

 

The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50, “Equity – Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.

 

Foreign Currency Translation

 

The functional currency of one of the Company’s foreign subsidiaries (Nomadchoice Pty Ltd.) is the U.S. Dollar. The Company’s foreign subsidiary maintains its records using local currency (Australian Dollar). 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 an average exchange rate for the period. The resulting translation adjustments, net of income taxes, were recorded in the 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 an average exchange rate for the period. The resulting translation adjustments, net of income taxes, are reported as other comprehensive income and accumulated other comprehensive income in the stockholder’s equity in accordance with ASC 220 – Comprehensive Income.

The exchange rates used to translate amounts in AUD and CAD into USD for the purposes of preparing the consolidated financial statements were as follows:

Balance sheet:

  March 31, 2019  December 31, 2018 
Period-end AUD: USD exchange rate $0.7096  $0.7046 
Period-end CAD: USD exchange rate $0.7483  $0.7330 

Income statement:

  March 31, 2019  March 31, 2018 
Average Quarterly AUD: USD exchange rate $0.7126  $0.7860 
Average Quarterly CAD: USD exchange rate $0.7522  $0.7908 

 

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.

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Concentrations of Credit Risk

 

In the normal course of business, the Company provides credit terms to its customers; however, collateral is not required. Accordingly, the Company performs credit evaluations of its customers and maintains allowances for possible losses which, when realized, were within the range of management’s expectations. From time to time, a higher concentration of credit risk exists on outstanding accounts receivable for a select number of customers due to individual buying patterns.

 

Warehousing costs

 

Warehouse costs include all third party warehouse rent fees and are charged to selling and marketing expenses as incurred. Any additional costs relating to assembly or special pack-outs of the Company’s products are charged to cost of sales.

 

Product display costs

 

All displays manufactured and purchased by the Company are for placement of product in retail stores. This also includes all costs for display execution and setup and retail services are charged to cost of sales and expensed as incurred.

 

Cost of Sales

 

Cost of sales includes the purchase cost of products sold and all costs associated with getting the products into the retail stores including buying and transportation costs.

 

Debt Issuance Costs

 

Debt issuance costs consist primarily of arrangement fees, professional fees and legal fees. These costs are netted off with the related loan and are being amortized to interest expense over the term of the related debt facilities.

 

Shipping Costs

 

Shipping and handling costs billed to customers are recorded in sales. Shipping costs incurred by the company are recorded in selling and marketing expenses.

 

Related parties

 

Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. All transactions with related parties are recorded at fair value of the goods or services exchanged.

 

Segment Reporting

 

Segment identification and selection is consistent with the management structure used by the Company’s chief operating decision maker to evaluate performance and make decisions regarding resource allocation, as well as the materiality of financial results consistent with that structure. Based on the Company’s management structure and method of internal reporting, the Company has one operating segment. The Company’s chief operating decision maker does not review operating results on a disaggregated basis; rather, the chief operating decision maker reviews operating results on an aggregate basis.

Presentation of Financial Statements – Going Concern

Going Concern Evaluation

In connection with preparing unaudited condensed consolidated financial statements for the three months ended March 31, 2019, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.

The Company considered the following:

At March 31, 2019, the Company had an accumulated deficit of $13,559,835.
At March 31, 2019, the Company had working capital deficit of $155,476.
Revenue decline in 2019 as compared to 2018 of $231,906.

Ordinarily, conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern relate to the entity’s ability to meet its obligations as they become due.

The Company evaluated its ability to meet its obligations as they become due within one year from the date that the financial statements are issued by considering the following:

● The Company raised $10.0 million via debt financing during the year ended December 31, 2017.

● In 2019, the Company repaid $512,500 of loans.

● The Company generated net income of $1,467,286 for the three months ended March 31, 2019.

● In 2019, the Company generated $813,711 of cash from operating activities.

● Working capital deficit of $155,476 at March 31, 2019, includes loans payables to related party of $1,971,873, royalty payable to related party of $270,818 and deferred revenue of $84,373.

● The Company has line of credit facility of $20 million available from its current lender for future mergers and acquisition.

Management concluded that above factors alleviates doubts about the Company’s ability to generate enough cash from operations and other available sources to satisfy its obligations for the next twelve months from the issuance date.

The Company will take the following actions if it starts to trend unfavorably to its internal profitability and cash flow projections, in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:

Raise additional capital through line of credit and/or loans financing for future mergers and acquisition.
Implement additional restructuring and cost reductions.
Raise additional capital through a private placement.

As of April 30, 2019 and March 31, 2019, the Company had $1,041,947 and $688,836, respectively, in cash and cash equivalents.

12

Recent Accounting Pronouncements

ASU 2018-13

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes in Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds certain disclosure requirements in Topic 820 “Fair Value Measurement”. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2018-13 is not expected to have any impact on the Company’s unaudited condensed consolidated financial statements.

ASU 2018-07

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2018-07 did not have any impact on the Company’s unaudited condensed consolidated financial statements.

 

ASU 2018-05

 

This Accounting Standards Update adds SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 118, which expresses the view of the staff regarding application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017 - the date on which the Tax Cuts and Jobs Act (H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018) was signed into law. We are currently evaluating the impact of adopting ASU 2017-132018-05 on our unaudited condensed consolidated financial statements.

 

ASU 2018-02

 

On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act of 2017). Stakeholders raised a narrow-scope financial reporting issue that arose as a consequence of the Tax Cuts and Jobs Act of 2017. The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement-Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this update is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.

 

This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2018-210—Income Statement—Reporting Comprehensive Income (Topic 220), which has been deleted. We are currently evaluatingThe adoption of ASU 2018-02 did not have any impact on the impact of adopting ASU 2017-13 on ourCompany’s unaudited condensed consolidated financial statements.

 

ASU 2018-01

 

The amendments in this Update provide an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under Topic 840, Leases. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. WeThe effective date and transition requirements for the amendments are currently evaluating the same as the effective date and transition requirements in Update 2016-02. The adoption of ASU 2018-01 did not have any impact of adopting ASU 2017-13 on ourthe Company’s unaudited condensed consolidated financial statements.

 

ASU 2017-13

 

In September 2017, the FASB issued Accounting Standard Update (ASU) 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). The effective date for ASU 2017-13 is for fiscal years beginning after December 15, 2018. We are currently evaluating the impacthave adopted ASC 606 as disclosed above. The adoption of adopting ASU 2017-13 did not have any impact on ourthe Company’s unaudited condensed consolidated financial statements.

 

ASU 2017-09

 

The Board is issuing this Update to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award.

 

The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendment is Effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance.

 

This Update is the final version of Proposed Accounting Standards Update 2016-360—Compensation—Stock Compensation (Topic 718)—Scope of Modification Accounting, which has been deleted.Adoption of this new standard did not have any impact on the Company’sunaudited condensedconsolidated financial statements.

 

ASU 2017-04

 

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), which simplifies the goodwill impairment test. The effective date for ASU 2017-04 is for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of adopting ASU 2017-04 on our unaudited condensed consolidated financial statements.

 

ASU No. 2017-01

13

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This new standard was effective for the Company on January 1, 2018.Adoption of this new standard did not have any impact on the Company’s consolidated financial statements.

 

ASU 2016-18

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. The effective date for ASU 2016-18 is for fiscal years beginning after December 15, 2018,2017, and interim periods within those fiscal years beginning after December 15, 2019.years. Early adoption is permitted.We are currently evaluating the impact of adoptingadopted ASU 2016-18 effective January 1, 2018. The adoption of ASU 2016-18 had no impact on our consolidated financial statements.retained earnings, and no impact to our net income on an ongoing basis. Adoption of the new standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash, or restricted cash equivalents. The amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The amendments have been applied using a retrospective transition method to each period presented, as required. The period ended March 31, 2018 has been reclassified to reflect this change.

 

ASU 2016-15

 

In August 2016, the FASB issued AS 2016-15, Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The effective date for ASU 2016-15 is for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. We are currently evaluatingAdoption of this new standard did not have any impact on the impact of adopting ASU 2016-18 on our Company’sunaudited condensedconsolidated financial statements.

ASU 2016-09

 

ASU 2016-02

In MarchFebruary 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, or2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU No. 2016-09.2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively Topic 842) to increase transparency and comparability of lease recognition and disclosure. The areas for simplification in this Update involve several aspects ofupdate requires lessees to recognize lease contracts with a term greater than one year on the accounting for share-based payment transactions, includingbalance sheet, while recognizing expenses on the income tax consequences,statement in a manner similar to current guidance. For lessors, the update makes targeted changes to the classification of awards as either equity or liabilities,criteria and classification on the statement of cash flows. For public entities,lessor accounting model to align the amendments in this Updateguidance with the new lessee model and revenue guidance. ASU 2016-02, ASU 2017-13, ASU 2018-10, ASU 2018-11 and ASU 2018-20 are effective for annual reporting periods beginning after December 15, 2016,2018, 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 electsperiods, with 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.permitted. Adoption of this new standard did not have any impact on the Company’s consolidated financial statements.

statements as the Company did not have long-term lease. ASU 2016-01

In January 2016, the FASB issued 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 standard2019-01 is effective for fiscal years and interimannual reporting periods beginning after December 15, 2017, and upon adoption, an entity should apply2019. The Company is currently assessing the amendments by meanspotential impact of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income.Adoption of this new standard did not have any impactASU 2019-01 on the Company’sits consolidated financial statements.

 

14

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 net realizable value.

 

The carrying value of inventory consisted of the following:

 

 March 31, 2018 December 31, 2017  March 31, 2019 December 31, 2018 
Finished goods $2,098,897  $1,507,344  $2,096,264  $1,956,942 
Components  809,882   1,197,228   428,961   441,282 
Inventory in transit  60,760   45,188   127,240   256,051 
Raw materials  278,616   92,616   16,030   16,030 
Total inventory $3,248,155  $2,842,376  $2,668,495  $2,670,305 

 

On January 22, 2015, inventory was pledged to Knight Therapeutics under the Loan Agreement (see note 10).

13

 

Note 4 – Accounts Receivable

 

Accounts receivable, net of allowances for sales returns and doubtful accounts, consisted of the following:

 

 March 31, 2018 December 31, 2017  March 31, 2019 December 31, 2018 
Trade accounts receivable $3,847,981  $4,333,608  $4,337,423  $4,458,225 
Less allowances  -   -   -   - 
Total accounts receivable, net $3,847,981  $4,333,608  $4,337,423  $4,458,225 

 

Note 5 – Prepaid Expenses

 

Prepaid expenses consisted of the following:

 

 March 31, 2018 December 31, 2017  March 31, 2019 December 31, 2018 
Advances for inventory $41,388  $206,973  $14,258  $25,170 
Components  8,004   104,668 
Media production  83,166   109,388   -   20,791 
Insurance  50,517   41,548   19,732   13,302 
Trade shows  8,600   17,150 
Deposits  50,640   44,841   6,633   45,144 
Trademarks  59,120   78,826 
Rent  -   19,500   85,577   103,912 
Promotion - Bloggers  172,773   246,592 
Promotions  88,463   342,220 
License agreement  133,333   158,333   33,334   58,333 
Software subscriptions  12,031   20,513   51,161   34,440 
Rebranding  127,480   32,841   29,661   40,783 
Clinical Research  47,490   47,490   31,660   35,617 
Advertising  6,500   2,500 
Promotions  -   37,500 
Miscellaneous  65,569   53,414   3,482   30,309 
Total $807,491  $1,143,251  $423,081  $828,847 

 

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, 20182019 and December 31, 2017,2018, the uninsured balances amounted to $1,143,835$313,910 and $1,557,373,$162,729, respectively.

 

Accounts receivable

 

As of March 31, 2018,2019, three customers accounted for 71%72% of the Company’s accounts receivable. As of December 31, 2017,2018, three customers accounted for 88%83% of the Company’s accounts receivable.

 

Major customers

 

For the three months ended March 31, 2019, two customers accounted for approximately 40% of the Company’s net revenue. For the three months ended March 31, 2018, three customers accounted for approximately 41% of the Company’s net revenue. For the year ended December 31, 2017,2018, two customers accounted for approximately 42%41% of the Company’s net revenues. Substantially all of the Company’s business is with companies in the United States.

 

Accounts payable

As of March 31, 2019 and December 31, 2018, two vendors accounted for 78% and 77%, respectively, of the Company’s accounts payable.

Major suppliers

 

For the three months ended March 31, 2019, two suppliers accounted for approximately 41% of the Company’s purchases. For the three months ended March 31, 2018, andthree suppliers accounted for approximately 53% of the year ended December 31, 2017, our products were made byCompany’s purchases. Substantially all of the following suppliers:Company’s business is with suppliers in the United States.

 

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The Queen PegasusNingbo Beautiful Daily Cosmetics - Zhejiang, China15 

 

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, 2018,2019, and December 31, 2017,2018, fixed assets and intangible assets consisted of the following:

 

 March 31, 2018 December 31, 2017  March 31, 2019 December 31, 2018 
          
Property and equipment $558,869  $437,358  $566,445  $566,445 
Less accumulated depreciation  (180,560)  (144,153)  (334,735)  (296,674)
Fixed assets, net $378,309  $293,205  $231,710  $269,771 

 

Depreciation expense for the three months ended March 31, 2019 and 2018 was $38,060 and 2017 was $36,408, and $25,065, respectively.

 

 March 31, 2018 December 31, 2017  March 31, 2019 December 31, 2018 
          
FOCUSfactor intellectual property $1,450,000  $1,450,000  $1,450,000  $1,450,000 
Per-fekt intellectual property  10,000   10,000 
Perfekt intellectual property  -   10,000 
Cocowhite intellectual property  -   50,000 
Intangible assets subject to amortization  7,150,165   7,134,952   5,388,230   7,150,165 
Less accumulated amortization  (3,477,820)  (3,062,742)  (4,098,924)  (4,728,576)
Less accumulated impairment  -   (924,068)
Intangible assets, net $5,132,345  $5,532,210  $2,739,306  $3,007,521 

 

Amortization expense for the three months ended March 31, 2019 and 2018 was $268,215 and 2017 was $415,078, and $267,253, respectively. These intangible assets were acquired through an Asset Purchase Agreement and Stock Purchase Agreements entered into during 2015.Agreements.

 

Note 8 – Related Party Transactions

 

The Company accrued and paid consulting fees of $57,917 for oneper month and a one-time management fee of $65,411 to a company owned by Mr. Jack Ross, Chief Executive Officer of the Company. The Company expensed $57,917$238,961 during the three months ended March 31, 2018.2019. As of March 31, 2018,2019, the total outstanding balance was $0 for consulting fees and reimbursements.

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, 2018, the Company owed Knight $0 on this loan, net of debt issuance cost (see Note 10).

 

On June 26, 2015, the Company entered into a Security Agreement with Knight Therapeutics, Inc. (“Knight Therapeutics”), through its wholly owned subsidiary Neuragen Corp., for the purchase of Knight Therapeutics, Inc.’s assets. At March 31, 2018,2019, the Company owed Knight Therapeutics $279,855$512,500 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 pays Ms. Harshbarger $10,000 a month for one year unless the Consulting Agreement is terminated earlier by either party. The Company has extended this agreement on a month to month basis. Hand MD, LLC is a 50% owner in Hand MD Corp. The Company expensed $30,000 through payroll for the three months ended March 31, 2018.2019. As of March 31, 2018,2019, the total outstanding balance was $0.

On November 12, 2015, the Company entered into a Loan Agreement with Knight for the purchase of NomadChoice Pty Limited and Breakthrough Products, Inc. At March 31, 2018, the Company owed Knight $0 on this loan, net of debt issuance cost (see Note 10).

 

On August 9, 2017, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party, for a working capital loan. At March 31, 2018,2019, the Company owed Knight $8,647,769$6,859,107 on this loan, net of debt issuance cost (see Note 10).

 

On December 23, 2016, we entered into an agreement with Knight Therapeutics for the distribution rights of FOCUSFactor in Canada. In conjunction with this agreement, we are required to pay Knight a distribution fee equal to 30% of gross sales for sales achieved through a direct sales channel and 5% of gross sales for sales achieved through retail sales. The minimum due to Knight under this agreement is $100,000 Canadian dollars. As of March 31, 2019, the total outstanding balance was $200,000 Canadian dollars. In US Dollars, the total outstanding balance was $152,834 as of March 31, 2019.

On December 23, 2016, we entered into an agreement with Knight Therapeutics for the distribution rights of Hand MD into Canada. In conjunction with this agreement, we are required to pay Knight a distribution fee equal to 60% of gross sales for sales achieved through a direct sales channel until the sales in the calendar year equal the threshold amount and then 40% of all such gross sales in such calendar year in excess of the threshold amount and 5% of gross sales for sales achieved through retail sales. The minimum due to Knight under this agreement is $25,000 Canadian dollars. As of March 31, 2019 the total outstanding balance was $25,000 Canadian dollars. In US Dollars, the total outstanding balance was $18,325.

The Company expensed royalty of $147,022$88,864 during the three months ended March 31, 2018.2019. At March 31, 20182019 NomadChoice Pty Ltd., a subsidiary of the Company, owed Knight Therapeutics $143,818$88,864 in connection with a royalty distribution agreement.

 

The Company expensed royalty of $5,662$1,085 during the three months ended March 31, 2018.2019. At March 31, 2018 Sneaky Vaunt Corp., a subsidiary of2019 the Company owed Knight Therapeutics $5,662$1,085 in connection with a royalty distribution agreement.agreement for Sneaky Vaunt.

 

The Company expensed commissions of $13,553$4,178 during the three months ended March 31, 2018.2019. At March 31, 2018 Sneaky Vaunt Corp., a subsidiary of2019, the Company, owed Founded Ventures, owned by a shareholder in the Company, $11,489$4,178 in connection with a commission agreement.agreement for Sneaky Vaunt.

 

The Company expensed royaltycommissions of $1,564$385 during the three months ended March 31, 2018.2019. At March 31, 2018 The Queen Pegasus, a subsidiary of2019, the Company owed Knight Therapeutics $1,564Founded Ventures $385 in connection with a royalty distribution agreement.commission agreement for The Queen Pegasus.

 

The Company expensed commissions of $2,985paid $2,794 during the three months ended March 31, 2018. At March 31, 2018, The Queen Pegasus, a subsidiary of the Company, owed Founded Ventures $1,985 in connection with a commission agreement.

The Company paid $62,500 during the three months ended March 31, 20182019 to Hand MD, Corp, related to a royalty agreement. At March 31, 2018,2019, the Company owed Hand MD Corp. $171,817$0 in minimum future royalties.

16

Note 9 – Accounts Payable and Accrued Liabilities

 

As of March 31, 2018,2019, and December 31, 2017,2018, accounts payable and accrued liabilities consisted of the following:

 

  March 31, 2018  December 31, 2017 
Accrued payroll $276,342  $296,491 
Accrued legal fees  174,698   96,017 
Accounting fees  -   19,681 
Commissions  53,950   178,286 
Professional Fees  32,109   45,921 
Manufacturers  2,648,721   2,147,751 
Promotions  111,281   897,925 
Rent  -   19,500 
Customers  17,278   106,395 
Interest  -   147,000 
Royalties, related party   230,577   138,143 
Warehousing  33,419   10,388 
Inventory  428,831   - 
Others  166,887   225,050 
Total $4,174,093  $4,328,548 

  March 31, 2019  December 31, 2018 
Accrued payroll $285,847  $217,069 
Legal fees  67,828   71,236 
Commissions  26,520   134,784 
Manufacturers  4,003,107   3,898,896 
Promotions  708,564   1,262,503 
Returns allowance  175,396   850,627 
Accounting fees  163,736   104,198 
Rent  -   61,738 
Customers  60,113   76,617 
Interest  49,306   - 
Royalties, related party  270,818   304,434 
Warehousing  42,930   64,289 
Sales taxes  238,209   180,222 
Taxes  3,414   178,069 
Severance Accrual  427,494   506,250 
Related Party Reimbursements  78,825   178,825 
Others  167,808   307,463 
Total $6,769,915  $8,397,220 

 

Note 10 – Notes Payable

 

The Company’s loans payable at March 31, 20182019 and December 31, 20172018 are as follows:

 

  March 31, 2018  December 31, 2017 
       
Loans payable $9,279,855  $10,344,739 
Unamortized debt issuance cost  (352,231)  (393,227)
Total  8,927,624   9,951,512 
Less: Current portion  (1,932,194)  (2,487,233)
Long-term portion $6,995,430  $7,464,279 

$6,000,000 January 22, 2015 Loan:

On January 22, 2015, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Knight Therapeutics (Barbados) Inc. (“Knight”), pursuant to which Knight agreed to loan the Company $6.0 million (the “Loan”), and which amount was borrowed at closing (the “Financing”) for the purpose of acquiring the Focus Factor Business (defined below). At closing, the Company paid Knight an origination fee of $120,000 and a work fee of $60,000 and also paid $40,000 of Knight’s expenses associated with the Loan. The Loan bears interest at a rate of 15% per year; provided, however, that upon the occurrence of an equity or convertible equity offering by the Company of at least $1.0 million, the interest rate will drop to 13% per year. Interest accrues quarterly and is payable in arrears on March 31, June 30, September 30 and December 31 in each year, beginning on March 31, 2015.

All outstanding principal and accrued and unpaid interest 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 to January 20, 2018. Principal payments under the Loan Agreement commenced on June 30, 2015 and continued quarterly as set forth on the Repayment Schedule to the Loan Agreement. This Loan was repaid in full on January 20, 2018. The Company recognized and paid interest expense of $4,611 during the three months ended March 31, 2018. Accrued interest expense was $0 as of March 31, 2018.

Subject to certain restrictions, the Company could 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 Knight amounted to $1,952,953 (ST warrants) and $1,462,560 (LT warrants), respectively, and was recorded as debt discount of the corresponding debt.

During 2016, this debt discount was fully expensed in conjunction with the cancellation of all warrants and options held by Knight.

The Company also recorded deferred financing costs of $289,045 with respect to the Knight loan. The Company recognized amortization of deferred financing costs of $3,257 during the three months ended March 31, 2018. Unamortized debt issuance cost as of March 31, 2018 amounted to $0.

  March 31, 2019  December 31, 2018 
       
Loans payable $7,269,387  $7,772,151 
Unamortized debt issuance cost  (140,893)  (179,261)
Total  7,128,494   7,592,890 
Less: Current portion  (1,971,873)  (1,963,887)
Long-term portion $5,156,621  $5,629,003 

 

$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. The Company recognized amortization of deferred financing costs of $0 during the three months ended March 31, 2018. Unamortized debt issuance cost as of March 31, 2018 amounted to $0. The Company recorded present value of future payments of $279,855$269,387 and $282,240$272,151 as of March 31, 20182019 and December 31, 2017,2018, respectively. The Company recorded imputed interest expense of $10,115$9,737 for the three months ended March 31, 2018.2019.

 

During the three months ended March 31, 2018,2019, the Company made payments of $12,500 in connection with this Security Agreement.

 

$5,500,000 November 12, 2015 Loan:

17

 

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 amended Loan Agreement matured on November 11, 2017 and was fully paid.

 

In connection with the First Amendment, 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 Knight warrants 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.

During 2016, this debt discount was fully expensed in conjunction with the cancellation of all warrants and options held by Knight.

$10,000,000 August 9, 2017 Loan:

 

On August 9, 2017, we entered into a Second Amendment to Loan Agreement (“Second Amendment”) with Knight, pursuant to which Knight agreed to loan us an additional $10 million, and an ongoing credit facility of up to $20 million, and which amount was borrowed at closing (the “Financing”) for working capital purposes. At closing, we paid Knight an origination fee of $200,000 and a work fee of $100,000 and also paid $100,000 of Knight’s expenses associated with the Loan.

Additional Tranches under the Loan Agreement are available to the Company until August 9, 2022 provided that no event of default exists. Each Additional Tranche must be for a minimum amount of $1.0 million, may only be used to finance qualified acquisitions (as defined in the Loan Agreement), and can be denied in Knight’s absolute discretion. If an Additional Tranche is denied, the Company can effect a qualified acquisition through a special purpose entity with such special purpose entity being entitled to obtain financing from third parties so long as such financing does not adversely affect Knight or Knight’s rights under the Loan Agreement. Upon the closing of any Additional Tranche, the Company will pay Knight an origination fee equal to 2% of the Additional Tranche, a work fee equal to 1% of the amount of the Additional Tranche, and reimburse Knight for its expenses incurred in connection with its consideration of any Additional Tranche (whether or not advanced).

The Loan bears interest at 10.5% per annum. The amended Loan Agreement matures on August 8, 2020. 2020 and (b) the date that Knight, in its discretion, accelerates the Company’s obligations due to an event of default.

On the Maturity Date of the Third Tranche and every Additional Tranche (or upon the acceleration of each such loan), the Company must pay Knight a success fee (the “Success Fee”) of that number of Company common shares equal to 10% of the loan, divided by the lesser of (a) $1.50, (b) the lowest price at which any common shares were issued by the Company in any offering or equity financing or other transaction between the Closing Date and the date the Success Fee is due, and (c) the current market price on the date the Success Fee is due. The Company may also pay the Success Fee in cash pursuant to the terms of the Loan Agreement.

The Loan Agreement includes customary representations, warranties, and affirmative and restrictive covenants, including covenants to attain and maintain certain financial metrics, and to not merge or dispose of assets, acquire other businesses (except for businesses substantially similar or complementary to the Company’s business, and provided that the aggregate consideration to be paid does not exceed $100,000 and the acquired business guarantees the Company’s obligations under the Loan Agreement) or make capital expenditures in excess of $500,000. The Loan Agreement also includes customary events of default, including payment defaults, breaches of covenants, change of control and material adverse effect defaults. Upon the occurrence of an event of default and during the continuation thereof, the principal amount of all loans under the Loan Agreement will bear a default interest rate of an additional 5%.

The Company’s obligations and liabilities under the Loan Agreement are secured and unconditionally guaranteed by certain of the Company’s wholly owned subsidiaries as provided in the Loan Agreement.

We have met all the covenants except for the TTM EBITDA of $5 million during the current period and accordingly,ending March 31, 2018. Default Interest rate of 5% (from 10.5% to 15.5%) applies in accordance to our current agreement and will be in effect starting April 1, 2018 and will be in effect until the $5 million TTM EDITDA covenant is achieved. We entered into Loan Amendment Agreement on May 14, 2018, the interest rate was reduced to 13% due to reducing payroll expenses. Also, Synergy will maintain Focus Factor Net Sales as measured on a year-end basis of at least USD $15 million for each fiscal year starting with December 31, 2017.

 

We have amended our covenants under our loan agreement on March 27, 2019 and are currently in compliance with all covenants. The new covenants are as follows: we will maintain a minimum EBITDA of $1,900,000 for the twelve months ending on December 31, 2018, $2,500,000 for the twelve months ending March 31, 2019, $3,500,000 for the twelve months ending June 30, 2019 and $5,000,000 for the twelve months period ending on last day of each fiscal quarters thereafter. We shall maintain a net debt to TTM EBITDA ratio of no more than 8:1 for the twelve month period ending on December 31, 2018 until March 31, 2019 and shall maintain a net debt to TTM EBITDA ratio of no more than 6:1 thereafter. We shall maintain at all times a positive cash balance of $575,000 for the three month period ending December 31, 2018, $750,000 for the three month period ending March 31, 2019 and $1,000,000 thereafter. The default interest rate of 2.5% applies (from 13% to 15.5%) in accordance to our current agreement and will be in effect as of October 1, 2018.

18

The Company also recorded deferred financing costs of $452,869 with respect to the above loan. The Company recognized amortization of deferred financing costs of $37,739$38,368 during the three months ended March 31, 2018.2019. Unamortized debt issuance cost as of March 31, 20182019 amounted to $352,231.$140,893.

 

The Company recognized and paid interest expense of $242,083$329,167 and paid $279,861 during the three months ended March 31, 2018.2019. Accrued interest was $0$49,306 as of March 31, 2018.2019. The loan balance at March 31, 20182019 was $9,000,000.$7,000,000.

 

Note 11 – Stockholders’ Equity

 

The total number of shares of all classes of capital stock which the Company is authorized to issue is 300,000,000 shares of common stock with $0.00001 par value.

 

During the three months ended March 31, 2019, the Company issued 26,391 shares of its common stock valued at $39,586 in full and final settlement on the Per-fekt transaction.

As of March 31, 2018,2019 and December 31, 2017,2018, there were 89,889,074 and 89,862,683, respectively, shares of the Company’s common stock issued and outstanding.

 

Note 12 – Commitments & Contingencies

 

Litigation:

 

From time to time the Company may become a party to litigation in the normal course of business. Management believes that there are no current legal matters that would have a material effect on the Company’s financial position or results of operations.

 

Employee Commitments

The Company and Mr. Kadanoff entered into an employment agreement on October 10, 2017 with an initial term of 3 years. In exchange for his service as Chief Financial Officer, Mr. Kadanoff will receive an annual base salary of $450,000. He will receive a signing bonus consisting of: (i) 100,000 shares of the Company’s common stock, and (ii) a cash payment equal to the value of 100,000 shares of the Company’s common stock based on a price of $0.55 per share. He will receive an annual bonus for calendar year 2017 of $37,500. Beginning with calendar year 2018, Mr. Kadanoff will be eligible for an annual target bonus of up to half his base salary. The target bonus will be determined at the discretion of our Board or compensation committee based upon the achievement of financial and other performance-related goals and may be paid in cash or shares of the Company’s common stock.

In connection with his employment, Mr. Kadanoff has committed to purchasing 400,000 shares of our common stock from the Company for a price of $0.55 per share. The Company granted Mr. Kadanoff an option to purchase 1,500,000 shares of the Company’s common stock at an exercise price of $0.55 (the “Initial Option”). The Initial Option will vest in three (3) equal annual installments on the first three anniversaries of Mr. Kadanoff’s Start Date with the Company, provided that Mr. Kadanoff remains employed by the Company on each such date. The Initial Option will expire on the tenth anniversary of the grant date. Subject to the approval by the Board, during each calendar year of Mr. Kadanoff’s employment with the Company beginning with 2018, the Company will grant to him an option to purchase 500,000 shares of the Company’s common stock (such options collectively the “Additional Options”). The exercise price of each Additional Option will be the Fair Market Value of the common stock on the date each such Additional Option is granted. Each Additional Option will expire on the tenth anniversary of the date of grant of such Additional Option. The Additional Options will vest in three (3) equal annual installments on the first three anniversaries of the date of grant of such Additional Option, provided that Mr. Kadanoff remains employed by the Company on each such date. Upon the occurrence of a Change in Control , the vesting of stock options granted to Mr. Kadanoff will be accelerated subject to his continued service to the Company as of such date and provided further that Mr. Kadanoff’s stock options will be treated no less favorably than those of any other senior executive or Chairman of the Company.

 

The Company and Mr. McCullough entered into an employment agreement on October 17, 2017 (the “Employment Agreement”) with an initial term of 3 years. In exchange for his service as President, Mr. McCullough will receive an annual base salary of $340,000. He will receivereceived a cash signing bonus of $37,500 to be paid on January 1, 2018, and an additional cash signing bonus of $37,500 to be paid on July 1, 2018, provided that he is employed by the Company through such dates.2018. Mr. McCullough will be eligible for an annual bonus of up to twenty-five percent (25%) of his base salary. The annual bonus will be determined at the discretion of our Board or compensation committee based upon the achievement of financial goals established by the Company’s Chief Executive Officer. Mr. McCullough will also be eligible for additional bonus compensation based on the Company’s achievement of certain annual earnings and retail sales goals established each year by the Company’s Chief Executive Officer. Subject to the Company’s achievement of an annual overall earnings goal and certain adjustments in the event of future acquisitions by the Company, Mr. McCullough will be eligible to receive five percent (5%) of all retail sales by the Company in excess of the annual retail sales goal set by the Chief Executive Officer.

 

The Company granted Mr. McCullough an option to purchase 1,000,000 shares of the Company’s common stock, subject to the approval of the Company’s Board of Directors (the “Option Grant”). The Option Grant will vestvests in three (3) equal annual installments on the first three anniversaries of Mr. McCullough’s start date with the Company, provided that Mr. McCullough remains employed by the Company on each such date. The Option Grant will be granted under the Company’s 2014 Stock Incentive Plan pursuant to a stock grant agreement between the Company and Mr. McCullough.

18

Operating leasesOther Commitments

 

On August 16, 2017,During the three months ended March 31, 2019 the Company entered intoreceived a sublease for office space, effective October 1, 2017 through May 2021. Rent expense under this lease will be $19,500 per month, and increasing annually on June 1.60 day Proposition 65 letter that one of its products did not have California’s prop 65 label. The Company is taking action to correct the oversight.

 

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, 2018:

19

 

Year ending December 31:   
2018 – remaining nine months $179,595 
2019  245,234 
2020  252,591 
2021  106,540 
2022  - 
Total $783,960 

 

Note 13 – Stock Options

On July 4, 2016, the Company granted 500,000 options with an exercise price of $0.70 per share to an employee of the Company. During 2017, 333,333 unvested options were cancelled due to termination of employee.

On October 10, 2017, the Company granted 1,000,000 options with an exercise price of $0.70 per share to an employee of the Company.

On October 16, 2017, the Company granted 1,500,000 options with an exercise price of $0.55 per share to an employee of the Company.

On October 18, 2017, the Company granted 200,000 options with an exercise price of $0.70 per share to an employee of the Company.

The following table summarizes the options outstanding, option exercisability and the related prices for the shares of the Company’s common stock issued to employees and consultants under the Plana stock option plan at March 31, 2018:2019:

 

  Options Outstanding  Options Exercisable 
Exercise
Prices ($)
 Number
Outstanding
  Weighted
Average
Remaining
Contractual
Life
(Years)
  Weighted
Average
Exercise
Price ($)
  Number
Exercisable
  Weighted
Average
Exercise
Price ($)
 
$0.25 - $0.70   8,666,667   6.97  $0.51   6,200,000  $0.46 

   Options Outstanding  Options Exercisable 
Exercise
Prices ($)
  Number
Outstanding
  Weighted
Average
Remaining
Contractual
Life
(Years)
  Weighted
Average
Exercise
Price ($)
  Number
Exercisable
  Weighted
Average
Exercise
Price ($)
 
$0.25 - $0.70   7,166,667   5.43  $0.50   6,583,333  $0.48 

 

The stock option activity for the three months ended March 31, 20182019 is as follows:

 

 Options
Outstanding
  Weighted
Average
Exercise Price
  Options
Outstanding
  

Weighted

Average
Exercise Price

 
Outstanding at December 31, 2017  8,666,667  $0.51 
Outstanding at December 31, 2018  7,166,667  $0.50 
Granted  -   -   -   - 
Exercised  -   -   -   - 
Expired or canceled  -   -   -   - 
Outstanding at March 31, 2018  8,666,667  $0.51 
Outstanding at March 31, 2019  7,166,667  $0.50 

 

Stock-based compensation expense related to vested options was $119,617$45,533 during the three months ended March 31, 20182019, which is a component of general and administrative expense in the statement of operations. The Company determined the value of share-based compensation for options vesting during the period using the Black-Scholes fair value option-pricing model with the following weighted average assumptions: estimated fair value of Company’s common stock of $0.40-0.74,$0.48-0.50, risk-free interest rate of 0.90-2.23%1.95-1.99%, volatility of 135-160%116-117%, expected lives of 3-1010 years, and dividend yield of 0%. Stock options outstanding as of March 31, 2018,2019, as disclosed in the above table, have an intrinsic value of $150,000.$0. As of March 31, 2018,2019, unamortized stock-based compensation costs related to options was $1,070,768,$244,966, and will be recognized over a period of 2.51.7 years.

20

 

Note 14 – Stock Warrants

The following table summarizes the warrants outstanding, warrant exercisability and the related exercise prices for the shares of the Company’s common stock at March 31, 2018:

   Warrants Outstanding Warrants Exercisable
Exercise
Prices ($)
  Number
Outstanding
 Weighted
Average
Remaining
Contractual
Life
(Years)
  Weighted
Average
Exercise
Price ($)
  Number
Exercisable
 Weighted
Average
Exercise
Price ($)
 
 5.00  1,000,000  0.72   5.00  1,000,000  5.00 

The warrant activity for the three months ended March 31, 2018 is as follows:

  Warrants
Outstanding
  Weighted
Average
Exercise
Price
 
Outstanding at December 31, 2017  1,000,000  $5 
Granted  -   - 
Exercised  -   - 
Expired or canceled  -           - 
Outstanding at March 31, 2018  1,000,000  $5 

Warrants outstanding as of March 31, 2018, as disclosed in the above table, have an intrinsic value of $0.

Note 15 – Segments

 

Segment identification and selection is consistent with the management structure used by the Company’s managementchief 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 managementchief operating decision maker does not review operating results on a disaggregated basis; rather, managementthe chief operating decision maker reviews operating results on an aggregate basis.

 

Net sales attributed to customers in the United States and foreign countries for the three months ended March 31, 20182019 and 20172018 were as follows:

 

 March 31, 2018  March 31, 2017  March 31, 2019  March 31, 2018 
United States $9,027,862  $9,944,879  $8,612,521  $9,027,862 
Foreign countries  672,999   843,440   856,434   672,999 
 $9,700,861  $10,788,319  $9,468,955  $9,700,861 

 

Foreign countries primarily consist of Australia and Canada.

The Company’s net sales by product group for the three months ended March 31, 20182019 and 20172018 were as follows:

 

 March 31, 2018  March 31, 2017  March 31, 2019  March 31, 2018 
Nutraceuticals $9,014,780  $9,546,446  $9,055,444  $9,014,780 
Over the Counter (OTC)  162,183   503,675   8,332   162,183 
Consumer Goods  272,291   731,548   157,623   272,291 
Cosmeceuticals  251,607   6,650   247,556   251,607 
 $9,700,861  $10,788,319  $9,468,955  $9,700,861 

 

(1) Net sales for any other product group of similar products are less than 10% of consolidated net sales.

 

The Company’s net sales by major sales channel for the three months ended March 31, 20182019 and 20172018 were as follows:

 

  March 31, 2019  March 31, 2018 
Online $3,853,024  $5,412,600 
Retail  5,615,931   4,288,261 
  $9,468,955  $9,700,861 

  March 31, 2018  March 31, 2017 
Online $5,412,600  $5,980,756 
Retail  4,288,261   4,807,563 
  $9,700,861  $10,788,319 
21

 

Long-lived assets (net) attributable to operations in the United States and foreign countries as of March 31, 20182019 and December 31, 20172018 were as follows:

 

 March 31, 2018  December 31, 2017  March 31, 2019  December 31, 2018 
United States $13,286,331  $13,613,043  $10,753,474  $11,058,528 
Foreign countries  17,563   5,612   10,772   12,004 
 $13,303,894  $13,618,655  $10,764,256  $11,070,532 

 

Foreign countries consist of Australia and Canada.

Note 1615 – Income Taxes

 

Income tax (benefit) expense was $160,613$(5,908) for the three months ended March 31, 2018, respectively,2019, compared to $291,467$160,613 for the same periodperiods in 2017.2018. The current provision is attributable to Australian operations and the current tax rate in effect in that country.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the TCJA), which significantly modified U.S. corporate income tax law, was signed into law by President Trump. The TCJA contains significant changes to corporate income taxation, including but not limited to the reduction of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and generally eliminating net operating loss carrybacks, allowing net operating losses to carryforward without expiration, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including changes to the orphan drug tax credit and changes to the deductibility of research and experimental expenditures that will be effective in the future). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain, including to what extent various states will conform to the newly enacted federal tax law.

 

The Company has not recorded the necessary provisional adjustments in the financial statements in accordance with its current understanding of the TCJA and guidance currently available as of this filing. But is reviewing the TCJA’s potential ramifications, as the Company acts to bring tax compliance up to day. ramifications.

 

The total deferred tax asset is calculated by multiplying a domestic (US) 21% marginal tax rate by the cumulative net operating loss carryforwards (“NOL”). The domestic marginal tax rate does not include any state & local marginal tax rate attributable to the Company. The Company currently has estimated NOLs, which expire through 2035. Management has determined based on all the available information that a 100% valuation reserve is required.

 

For U.S. purposes, the Company has not completed its evaluation of NOL utilization limitations under Internal Revenue Code, as amended (the “Code”) Section 382/383, change of ownership rules. If the Company has had a change in ownership, the NOL’s would be limited or eliminated, as to the amount that could be utilized each year, based on the Code. NOL’s attributable to Breakthrough Products, Inc., which are the majority of the Company’s domestic NOL’s are Separate Return Limitation Year (SRLY) NOL’s. Such losses may generally not be available for use (limited or eliminated).

The Company has not filed its State & Local Income/Franchise tax returns in States it is required to file for the last few years, so such returns and liability remain open. The Company has estimated and accrued for its sales tax liability at $238,209 and $180,222 as of March 31, 2019 and December 31, 2018, respectively.

 

Note 1716 – 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 except as disclosed below have occurred that would require adjustments or disclosure into the unaudited condensed consolidated financial statements.

 

22

Subsequent to March 31, 2018, the Company made an additional $500,000 payment on $10,000,000 loan.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the results of operations and financial condition of Synergy for the three months ended March 31, 20182019 and 2017,2018, should be read in conjunction with the unaudited condensed consolidated financial statements of Synergy, and the notes to those unaudited condensed consolidated financial statements that are included elsewhere in this Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the caption, “Cautionary NoticeNote Regarding Forward-Looking Statements” and the “Business” section in our Form 10-K filed on April 2, 2018.March 29, 2019. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

Overview

 

The Company is in the business of marketing and distributing consumer branded products through various distribution channels primarily in the health and wellness industry. The Company’s strategy is to grow both organically and by future acquisition.

 

Our management’s discussion and analysis of our financial condition and results of operations are only based on our current business and should be read in conjunction with our unaudited condensed consolidated financial statements. Key factors affecting our results of operations include revenues, cost of revenues, operating expenses and income and taxation.

 

Non-GAAP Financial Measures

 

We currently focus on Adjusted EBITDA to evaluate our business relationships and our resulting operating performance and financial position. Adjusted EBITDA is defined as EBITDA (net income plus interest expense, income tax expense, depreciation and amortization), further adjusted to exclude certain non-cash expenses and other adjustments as set forth below. We present Adjusted EBITDA because we consider it an important measure of our performance and it is a meaningful financial metric in assessing our operating performance from period to period by excluding certain items that we believe are not representative of our core business, such as certain non-cash items and other adjustments.

 

We believe that Adjusted EBITDA, viewed in addition to, and not in lieu of, our reported results in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), provides useful information to investors.

 

 For the three
months ended
March 31, 2018
  For the three
months ended
March 31, 2019
 
Net loss $(55,493)
Net income after tax $1,467,287 
Interest income  (1,082)  (111)
Interest expense  270,176   340,128 
Taxes  160,613   (5,908)
Depreciation  36,408   38,060 
Amortization  456,084   306,583 
EBITDA $866,706  $2,146,039 
Stock-based compensation  119,617   45,533 
One-time expenses  152,227 
Loss on foreign currency translation and transaction  123,574   81,849 
Adjusted EBITDA $1,262,124  $2,273,420 

 

EBITDA and Adjusted EBITDA are considered non-GAAP financial measures. EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA, further adjusted to exclude the impact of higher-than-normal revenue change other activity and certain expenses and transactions that we believe are not representative of our core operating results, including gain on change in fair value of derivative liability; stock-based compensation; one-time expenses;expenses for acquisitions; and the lossgain on foreign currency translation and transaction. The Company’s definitions of EBITDA and adjusted EBITDA might not be comparable to similarly titled measures reported by other companies.

 

Results of Operations for the Three months Ended March 31, 20182019 and 20172018

 

Revenue

 

For the three months ended March 31, 2018,2019, we had revenue of $9,700,861$9,468,955 from sales of our products, as compared to revenue of $10,788,319$9,700,861 for the same period in 2017. The decrease is2018. We had an increase in Nutraceuticals in 2019 as compared to 2018 due to regular fluctuationsbusiness. We had a decrease in Over the Counter in 2019 as compared to 2018 due to an out of stock product. We had a decrease in Consumer Goods in 2019 as compared to 2018 due to a shift in business andfocus. We had a decrease in Cosmeceuticals in 2019 as compared to 2018 due to regular business. The revenue is comprised of the following categories:

 

 March 31, 2018  March 31, 2017  March 31, 2019  March 31, 2018 
Nutraceuticals $9,014,780  $9,546,446  $9,055,444  $9,014,780 
Over the Counter (OTC)  162,183   503,675   8,332   162,183 
Consumer Goods  272,291   731,548   157,623   272,291 
Cosmeceuticals  251,607   6,650   247,556   251,607 
 $9,700,861  $10,788,319  $9,468,955  $9,700,861 

23

Cost of Revenue

 

For the three months ended March 31, 2018,2019, our cost of revenue was $2,809,908.$2,540,450. Our cost of revenue for the three months ended March 31, 2017,2018, was $2,502,530. The$2,809,908. We had a decrease in Nutraceuticals in 2019 as compared to 2018 due to higher sales and a different mix of products being sold. We had an decrease in Over the Counter in 2019 as compared to 2018 due to an out of stock product. We had a decrease in Consumer Goods in 2019 as compared to 2018 due to a decrease in revenue. We had an increase isin Cosmeceuticals in 2019 as compared to 2018 due to a different mix of productsproduct being sold andsold. The cost of revenue is comprised of the following categories:

 March 31, 2018  March 31, 2017  March 31, 2019  March 31, 2018 
Nutraceuticals $2,709,646  $2,416,913  $2,472,115  $2,709,646 
Over the Counter (OTC)  18,548   20,033   -   18,548 
Consumer Goods  40,704   65,021   13,784   40,704 
Cosmeceuticals  41,010   563   54,551   41,010 
 $2,809,908  $2,502,530  $2,540,450  $2,809,908 

 

Gross Profit

 

Gross profit was $6,890,953,$6,928,505, or 71%73% for the three months ended March 31, 2018,2019, as compared to gross profit of $8,285,789,$6,890,953, or 77%71% for the same period in 2017, a decrease2018, an increase of $1,394,836,$37,552, or 17%1%. The decreaseincrease in gross profit margin is directly related to a decrease in sales and promotions run online.the mix of products being sold.

 

Operating Expenses

 

Selling and Marketing Expenses

 

For the three months ended March 31, 2018,2019, our selling and marketing expenses were $4,252,703$3,311,867 as compared to $2,897,197$4,252,703 for the same period in 2017,2018, which is primarily due to increaseddecreased personnel in our advertising and marketing departments.

 

General and Administrative Expenses

 

For the three months ended March 31, 2019, our general and administrative expenses were $1,487,107. For the three months ended March 31, 2018, our general and administrative expenses were $1,760,856. For the three months ended March 31, 2017, our general and administrative expenses were $1,937,643. The decrease is primarily due to better management of operating costs.

 

Depreciation and Amortization Expenses

 

For the three months ended March 31, 2018,2019, our depreciation and amortization expenses were $451,486$306,275 as compared to $292,318$451,486 for the same period in 2017.2018. The increasedecrease is due to moreimpairment of intangible assets owned in 2018.

 

Other Income and Expenses

 

For the three months ended March 31, 20182019 and 20172018 we had other (income) and expense items of the following:

 

 Three months
ended
March 31, 2018
  Three months
ended
March 31, 2017
  Three months
ended
March 31, 2019
 Three months
ended
March 31, 2018
 
Interest income $(1,082) $(15) $(111) $(1,082)
Interest expense  270,176   247,364   340,128   270,176 
Remeasurement loss on translation of foreign subsidiary  10,698   14,243 
Loss on sale of assets  -   2,877 
Remeasurement (gain) loss on translation of foreign subsidiary  (16,508)  10,698 
Amortization of debt issuance cost  40,996   44,041   38,368   40,996 
Total other expense $320,788  $308,510  $361,877  $320,788 

 

For the three months ended March 31, 2018,2019, we had interest expense of $270,176$340,128 as compared to $247,364$270,176 for the same period in 2017.2018. The increase was due to increase in the interest rate of Loan 3.3 from 13% to 15.5%.

 

Net Income (Loss) Income

 

For the three months ended March 31, 2018,2019, our net (loss)income was ($55,493)$1,467,287 as compared to a net incomeloss of $2,558,654$(55,493) for the same period in 2017.2018.

 

Liquidity and Capital Resources

 

Overview

 

As of March 31, 2018,2019, we had $1,686,181$688,836 cash on hand and a $3,249,449$155,476 working capital surplus.deficit. In addition, we also had restricted cash of $139,439,$137,351 which is primarily held for credit card collateral.

24

Three months ended March 31, 20182019 and 20172018

 

Net Cash Provided by Operating Activities

 

Net cash provided by operating activities for the three months ended March 31, 20182019 was $944,647,$813,711, compared to $1,676,330$944,647 for the same period in 2017.2018. This decrease in net cash provided by operating activities for the three months ended March 31, 20182019 was primarily attributable to an increase in inventory and a decrease in accounts payable.payable and accrued expenses.

 

The $944,647$813,711 consists of our net lossincome of $55,493$1,467,287 adjusted by:

 

Amortization of debt issuance cost $40,996  $38,368 
Depreciation and amortization  451,486   306,275 
Stock based compensation  119,617   85,119 
Non cash implied interest  23,208   9,737 
Remeasurement loss on translation of foreign subsidiary  10,698 
Remeasurement gain on translation of foreign subsidiary  (16,508)
Foreign currency transaction loss  112,876   98,357 
Decrease in accounts receivable  485,627   120,802 
Increase in inventory  (405,779)
Decrease in inventory  1,810 
Decrease in prepaid expenses  335,760   405,766 
Increase in deferred revenue  3,735   34,664 
Decrease in accounts payable and accrued expenses  (178,084)  (1,737,966)

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities for the three months ended March 31, 20182019 was $137,093,$0, compared to net cash used of $85,583$136,725 for the same period in 2017.2018. The increasedecrease in cash used in investing activities during 20182019 is attributable to the purchase of fixed assets.assets in 2018.

Payments for acquisition of fixed assets $(121,512)
Payment for acquisition of domain name  (15,213)
Increase in restricted cash  (368)

 

Net Cash Used in Financing Activities

 

Net cash used in financing activities for the three months ended March 31, 20182019 was $1,137,500,$512,500, compared to net cash used of $2,387,500$1,137,500 for the same period in 2017.2018. This is attributable to the repaymentpayoff of notes.a loan in 2018.

 

Repayment of notes payable $(1,137,500512,500)

 

Key 20182019 Initiatives

 

During 2018,2019, we have plans for organic growth within our current product lines by developing and launching new products. Our technology center in Halifax, Nova Scotia is in full operation providing marketing services to all of our brands. We have new marketing campaigns in process and intend to expand our online presence for each product. While we intend to grow further through additional acquisitions, we feel it is important to also develop our existing products.

25

Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual Obligations

 

None.

 

Off-Balance Sheet Arrangements

 

None.

 

Inflation

 

The effect of inflation on the Company’s operating results was not significant.

 

Summary of Significant Accounting Policies

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition and accounts receivable allowances. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.

 

Recent Accounting Pronouncements

 

Note 2 to our unaudited condensed consolidated financial statements appearing elsewhere in this report includes Recent Accounting Pronouncements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information required by this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer (principal executive officer), andwho is also our Chief Financial Officer (principal financial officer), reviewed the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and concluded that as of March 31, 2018,2019, (i) the Company’s disclosure controls and procedures were not effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “Commission”), and (ii) the Company’s controls and procedures have not been designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Effectiveness of Controls

 

The Company’s management does not expect that its disclosure controls or its internal control over financial reporting, when and if effective, will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

26

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

ITEM 1A. RISK FACTORS

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULT UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit

Number

 Description
   
31.1 Section 302 Certification by the Corporation’s Chief Executive Officer *
   
31.2 Section 302 Certification by the Corporation’s Chief Financial Officer *
   
32.1 Section 906 Certification by the Corporation’s Chief Executive Officer *
   
32.2 Section 906 Certification by the Corporation’s Chief Financial Officer *
   
101.INS XBRL Instance Document* **
   
101.SCH XBRL Taxonomy Extension Schema Document* **
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document* **
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document* **
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document* **
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document* **

 

 *Filed herewith
   
 **Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

27

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Signatures Title Date
     
/s/ Jack Ross Chief Executive Officer May 15, 20183, 2019
 
/s/ Jeffrey Kadanoff Chief Financial Officer May 15, 2018

28