U. S. UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,Washington, D.C. 20549

 

FORM 10-Q10-Q/A

(Amendment No. 1)

 

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

(Mark One)

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

 

For the quarterly period ended September 30, 2019ended: March 31, 2020

OR

 

[  ]TRANSITION REPORT UNDER

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

For the transition period from __________________________ to __________________________

Commission File Number 000-55098

 

SynergySYNERGY CHC Corp.CORP.

(Exact name of registrant as specified in its charter)

 

Nevada 000-5509899-0379440
(State or other jurisdiction(Commission of
incorporation or organization)
 (IRS Employer
of Incorporation)File Number)
Identification Number)No.)

 

865 Spring Street,

Westbrook Maine 04092

(Address of principal executive offices)offices and zip code)

 

(615) 939-9004

(Issuer’s Telephone Number)Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec.232.405(Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” ��smaller“smaller reporting company,” and “emerging growth company” in Rule12b-2Rule 12b-2 of the Exchange Act.Act:

 

Large accelerated filer [  ]Accelerated filer [  ]
Non-accelerated filer [  ][X]Smaller reporting company [X]
 
Emerging Growth Companygrowth 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]

 

As of November 12, 2019,June 20, 2020, there were approximately 89,889,074 shares of ourthe registrant’s common stock were issued and outstanding.

 

 

 
 

SYNERGY CHC CORP.

INDEX

Table of Contents

PART IFINANCIAL INFORMATION 
Item 1.Condensed consolidated financial statements3
Condensed consolidated balance sheets as of September 30, 2019 (unaudited) and December 31, 20183
Condensed consolidated statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2019 and 2018 (unaudited)4
Condensed consolidated statements of changes in stockholders’ equity for the three and nine months ended September 30, 2019 and 2018 (unaudited)5
Condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018 (unaudited)6
Notes to unaudited condensed consolidated financial statements7
Item 2.Management’s discussion and analysis of financial condition and results of operations24
Item 3.Quantitative and qualitative disclosures about market risk30
Item 4.Controls and procedures30
PART IIOTHER INFORMATION
Item 1.Legal proceedings31
Item 1A.Risk factors31
Item 2.Unregistered sales of equity securities and use of proceeds31
Item 3.Defaults upon senior securities31
Item 4.Mine Safety Disclosures31
Item 5.Other information31
Item 6.Exhibits31
Signatures32

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Synergy CHC Corp.

Condensed Consolidated Balance Sheets

  September 30, 2019  December 31, 2018 
  (Unaudited)    
Assets        
Current Assets:        
Cash and cash equivalents $1,389,311  $459,736 
Restricted cash  100,000   136,180 
Accounts receivable, net  1,902,130   4,458,225 
Prepaid expenses and other current assets  435,165   828,847 
Income taxes receivable  404,391   386,686 
Inventory, net  2,233,152   2,670,305 
Total Current Assets  6,464,149   8,939,979 
         
Fixed assets, net  166,282   269,771 
Goodwill  7,793,240   7,793,240 
Intangible assets, net  2,199,751   3,007,521 
Total Assets $16,623,422  $20,010,511 
         
Liabilities and Stockholders’ Equity        
Current Liabilities:        
Accounts payable and accrued liabilities $4,497,616  $8,397,220 
Deferred revenue  9,947   49,709 
Current portion of long-term debt, net of debt discount and debt issuance cost, related party  5,937,576   1,963,887 
Total Current Liabilities  10,445,139   10,410,816 
         
Long-term Liabilities:        
Note payable, net of debt discount and debt issuance cost, related party  250,491   5,629,002 
Total Long-term Liabilities  250,491   5,629,002 
Total Liabilities  10,695,630   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  18,980,276   18,817,800 
Accumulated other comprehensive income  80,126   179,116 
Accumulated deficit  (13,133,509)  (15,027,122)
Total stockholders equity  5,927,792   3,970,693 
Total Liabilities and Stockholders’ Equity $16,623,422  $20,010,511 

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

Synergy CHC Corp.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

  For the three months ended  For the nine months ended 
  September 30, 2019  September 30, 2018  September 30, 2019  September 30, 2018 
Revenue $7,364,546  $9,190,377  $23,170,222  $28,619,950 
Cost of sales  2,490,444   2,945,389   6,638,481   8,500,057 
Gross profit  4,874,102   6,244,988   16,531,741   20,119,893 
                 
Operating expenses                
Selling and marketing  2,771,884   3,960,131   8,731,129   13,361,490 
General and administrative  1,437,624   1,189,681   3,997,437   4,425,826 
Depreciation and amortization  301,388   455,579   911,259   1,363,016 
Total operating expenses  4,510,896   5,605,391   13,639,825   19,150,332 
                 
Income from operations  363,206   639,597   2,891,916   969,561 
                 
Other (income) expenses                
Interest income  (105)  (50)  (329)  (121)
Interest expense  180,759   288,479   805,172   864,342 
Other income  -   (27,674)  -   (27,674)
Remeasurement loss on translation of foreign subsidiary  101,289   66,353   112,551   197,674 
Amortization of debt issuance cost  30,820   93,089   103,782   171,824 
                 
Total other expenses  312,763   420,197   1,021,176   1,206,045 
                 
Net income (loss) before income taxes  50,443   219,400   1,870,740   (236,484)
Income tax (benefit) expense  (57,421)  (126,190)  (22,873)  256,812 
Net income (loss) after tax $107,864  $345,590  $1,893,613  $(493,296)
                 
Net income (loss) per share – basic $0.00  $0.00  $0.02  $(0.01)
Net income (loss) per share – diluted $0.00  $0.00  $0.02  $(0.01)
                 
Weighted average common shares outstanding                
Basic  89,889,044   89,862,683   89,881,223   89,862,683 
Diluted  89,889,044   89,862,683   89,881,223   89,862,683 
                 
Comprehensive (loss) income:                
Net income (loss)  107,864   345,590   1,893,613   (493,296)
Foreign currency translation adjustment  47,011   (17,578)  (98,990)  85,826 
Comprehensive income (loss) $154,875  $328,012  $1,794,623  $(407,470)

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

4
 

 

Synergy CHC Corp.

Unaudited Condensed Consolidated Statements of Changes in 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 
Fair value of vested stock options          119,769           119,769 
Foreign currency translation gain              42,891       42,891 
                         
Net loss                  (783,393)  (783,393)
Balance as of June 30, 2018  89,862,683  $899  $18,616,187  $25,415  $(9,705,322) $8,937,179 
Fair value of vested stock options          (90,396)          (90,396)
Foreign currency translation gain              (17,577)      (17,577)
                         
Net income                  345,590   345,590 
Balance as of September 30, 2018  89,862,683  $899  $18,525,791  $7,838  $(9,359,732) $9,174,796 

  Common stock  Additional Paid in  Accumulated Other Comprehensive  Accumulated  Total Stockholders’ 
  Shares  Amount  Capital  Income  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          45,534           45,534 
Foreign currency translation loss              (70,940)      (70,940)
Common stock issued for Per-fekt settlement  26,391       39,585           39,585 
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 
                         
Fair value of vested stock options          38,679           38,679 
Foreign currency translation loss              (75,061)      (75,061)
Net income                  318,462   318,462 
Balance as of June 30, 2019  89,889,074  $899  $18,941,597  $33,115  $(13,241,373) $5,734,238 
Fair value of vested stock options          38,679           38,679 
Foreign currency translation gain              47,011       47,011 
Net income                  107,864   107,864 
Balance as of September 30, 2019  89,889,074  $899  $18,980,276  $80,126  $(13,133,509) $5,927,792 

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

Synergy CHC Corp.

Unaudited Condensed Consolidated Statements of Cash Flows

  For the nine months ended 
  September 30, 2019  September 30, 2018 
Cash Flows from Operating Activities        
Net income (loss) $1,893,613  $(493,296)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:        
Depreciation and amortization  911,259   1,363,016 
Amortization of debt issuance cost  103,782   171,824 
Stock based compensation expense  162,476   148,990 
Remeasurement loss on translation of foreign subsidiary  112,551   197,674 
Foreign currency transaction gain  (4,878)  (47,887)
Non cash implied interest  28,895   58,014 
Changes in operating assets and liabilities:        
Accounts receivable  2,556,095   2,309,350 
Inventory  437,155   (539,438)
Other current assets  393,683   375,795 
Accounts payable and accrued liabilities  (4,024,983)  (1,545,260)
Deferred revenue  (39,763)  44,983 
Net cash provided by operating activities  2,529,885   2,043,765 
         
Cash Flows from Investing Activities        
Payments for acquisition of fixed assets  -   (129,087)
Payment for acquisition of domain name  -   (15,213)
Purchase of intangible assets  -   (50,000)
Net cash used in investing activities  -   (194,300)
         
Cash Flows from Financing Activities        
Repayment of notes payable  (1,537,500)  (2,287,500)
Net cash used in financing activities  (1,537,500)  (2,287,500)
         
Effect of exchange rate on cash, cash equivalents and restricted cash  (98,990)  85,827 
         
Net increase (decrease) in cash, cash equivalents and restricted cash  893,395   (352,208)
         
Cash, Cash Equivalents and restricted cash, beginning of period  595,916   2,094,685 
         
Cash, Cash Equivalents and restricted cash, end of period $1,489,311  $1,742,477 
         
Supplemental Disclosure of Cash Flow Information:        
Cash paid during the period for:        
Interest $723,892  $983,130 
Income taxes $38,919  $224,114 
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 two subsidiaries: NomadChoice Pty Ltd., and Synergy CHC Inc. and the results have been consolidated in these statements.

Note 2 – Summary of Significant Accounting Policies

GeneralEXPLANATORY NOTE

 

The accompanying condensed consolidated financial statements assole purpose of September 30, 2019 and December 31, 2018 and forthis Amendment No. 1 (the “Amendment”) to the three and nine months ended September 30, 2019 and 2018 are unaudited. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”Quarterly Report on Form 10-Q of Synergy CHC Corp. (the “Company”) for interim financial information and are presented in accordancethat was filed with the requirements of Rule S-X of theU.S. Securities and Exchange Commission (the “SEC”) and with the instructionson June 29, 2020 (the “Quarterly Report”) is to Form 10-Q. Accordingly, they do not include all the information and footnotes requiredadd this Explanatory Note regarding our reliance on SEC Release No. 34-88465 (the “SEC Order”) issued by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 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, 2018 and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2019.

Basis25, 2020, under Section 36 of Presentation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are assumptions about collection of accounts receivable, useful life of fixed and intangible assets, goodwill and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.

Cash and Cash Equivalents

The Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. As of September 30, 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 September 30, 2019, the uninsured balance amounted to $981,699.

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.

  September 30, 2019  December 31, 2018  September 30, 2018 
          
Cash and cash equivalents $1,389,311  $459,736  $1,605,381 
Restricted cash  100,000   136,180   137,096 
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows $1,489,311  $595,916  $1,742,477 

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

Capitalization of Fixed Assets

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

Intangible Assets

We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization except intellectual property of $1,450,000 acquired as part of an Asset Purchase Agreement entered into with Factor Nutrition Labs LLC on January 22, 2015, $10,000 acquired as part of an Asset Purchase Agreement entered into with Perfekt Beauty Holdings LLC and CDG Holdings, LLC on June 21, 2017 and $50,000 acquired as part of an Asset Purchase Agreement 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 September 30, 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 September 30, 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 September 30, 2019, our qualitative analysis of goodwill did not indicate any impairment.

Revenue Recognition

The Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting Standards Codification (“ASC”) 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 September 30, 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 September 30, 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 operations.

Research and Development

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

Income Taxes

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

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

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

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 September 30, 2019, and 2018, options to purchase 6,166,667 and 7,166,667 shares of common stock, respectively, were outstanding. As of September 30, 2018, 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 and nine months ended September 30, 2019, and 2018:

  For the three months ended  For the nine months ended 
  September 30, 2019  September 30, 2018  September 30, 2019  September 30, 2018 
             
Net income (loss) after tax $107,864  $345,590  $1,893,613  $(493,296)
                 
Weighted average common shares outstanding  89,889,044   89,862,683   89,881,223   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  89,889,044   89,862,683   89,881,223   89,862,683 
                 
Net earnings (loss) per share:                
Basic $0.00  $0.00  $0.02  $(0.01)
Diluted $0.00  $0.00  $0.02  $(0.01)

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

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

Fair Value Measurements

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

ASC 825 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825 establishes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices for identical assets or liabilities in active markets to which we have access at the measurement date.

Level 2 - Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 - Unobservable inputs for the asset or liability.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

As of September 30, 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 average exchange rate for the period. The resulting translation adjustments, net of income taxes, were recorded in statements of operations as Remeasurement gain or loss on translation of foreign subsidiary.

The functional currency of the Company’s other foreign subsidiary (Synergy CHC Inc.) is the Canadian Dollar (CAD). The Company’s foreign subsidiary maintains its records using local currency (CAD). All assets and liabilities of the foreign subsidiary were translated into U.S. Dollars at period end exchange rates and stockholders’ equity is translated at the historical rates. Income and expense items were translated using average exchange rate for the period. The resulting translation adjustments, net of income taxes, are reported as other comprehensive income and accumulated other comprehensive income in the stockholder’s equity in accordance with ASC 220 – Comprehensive Income.

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

Balance sheet:

  September 30, 2019  December 31, 2018 
Period-end AUD: USD exchange rate $0.6746  $0.7046 
Period-end CAD: USD exchange rate $0.7551  $0.7330 

Income statement:

  September 30, 2019  September 30, 2018 
Average Quarterly AUD: USD exchange rate $0.6994  $0.7579 
Average Quarterly CAD: USD exchange rate $0.7524  $0.7768 

Translation gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are translated into either Australian Dollars or Canadian Dollars, as the case may be, at the rate on the date of the transaction and included in the results of operations as incurred.

Concentrations of Credit Risk

In the normal course of business, the Company provides credit terms to its customers; however, collateral is not required. Accordingly, the Company performs credit evaluations of its customers and maintains allowances for possible losses which, when realized, were within the range of management’s expectations. From time to time, a higher concentration of credit risk 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 and nine months ended September 30, 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 September 30, 2019, the Company had an accumulated deficit of $13,133,509.

● At September 30, 2019, the Company had working capital deficit of $3,980,990.

● Revenue decline in 2019 as compared to 2018 of $5,449,728.

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 $1,537,500 of loans.

● The Company generated net income of $107,864 for the three months ended September 30, 2019 and $1,893,613 for the nine months ended September 30, 2019.

● In 2019, the Company has generated $2,529,885 of cash from operating activities.

● Working capital deficit of $3,980,990 at September 30, 2019, includes loans payable to related party of $5,937,576, payables to related party of $370,939 and deferred revenue of $9,947.

● 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 alleviate 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 loan financing for future mergers and acquisition.

Implement additional restructuring and cost reductions.

Raise additional capital through a private placement.

As of November 14, 2019 and September 30, 2019, the Company had $684,916 and $1,489,311, respectively, in cash and cash equivalents.

Recent Accounting Pronouncements

ASU 2018-13

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes in Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds certain disclosure requirements in Topic 820 “Fair Value Measurement”. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2018-13 is not expected to have any impact on the Company’s 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 2017-13 on our consolidated financial statements.

ASU 2018-02

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

This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2018-210—Income Statement—Reporting Comprehensive Income (Topic 220), which has been deleted. We are currently evaluating the impact of adopting ASU 2017-13 on our consolidated financial statements.

ASU 2018-01

The amendments in this Update provide an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under Topic 840, Leases. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. We are currently evaluating the impact of adopting ASU 2017-13 on our consolidated financial statements.

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:

  September 30, 2019  December 31, 2018 
Finished goods $1,825,086  $1,956,942 
Components  290,056   441,282 
Inventory in transit  101,980   256,051 
Raw materials  16,030   16,030 
Total inventory $2,233,152  $2,670,305 

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

Note 4 – Accounts Receivable

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

  September 30, 2019  December 31, 2018 
Trade accounts receivable $1,902,130  $4,458,225 
Less allowances  -   - 
Total accounts receivable, net $1,902,130  $4,458,225 

Note 5 – Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

  September 30, 2019  December 31, 2018 
Advances for inventory $14,571  $25,170 
Media production  -   20,791 
Insurance  29,183   13,302 
Deposits  10,257   45,144 
Trademarks  19,707   78,826 
Rent  86,354   103,912 
Promotion  114,018   342,220 
License agreement  -   58,333 
Software subscriptions  48,962   34,440 
Rebranding  7,415   40,783 
Clinical research  23,745   35,617 
Miscellaneous  33,286   30,309 
Related party receivables  9,467   - 
Capital asset deposit  38,200   - 
Total $435,165  $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 September 30, 2019 and December 31, 2018, the uninsured balances amounted to $981,699 and $162,729, respectively.

Accounts receivable

As of September 30, 2019, three customers accounted for 57% of the Company’s accounts receivable. As of December 31, 2018, three customers accounted for 83% of the Company’s accounts receivable.

Major customers

For the nine months ended September 30, 2019, two customers accounted for approximately 47% of the Company’s net revenue. For the three months ended September 30, 2019, two customers accounted for approximately 58% of the Company’s net revenue. For the nine months ended September 30, 2018, three customers accounted for approximately 50% of the Company’s net revenue. For the three months ended September 30, 2018, two customers accounted for approximately 58% of the Company’s net revenue. For the year ended December 31, 2018, two customers accounted for approximately 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 September 30, 2019 and December 31, 2018, two vendors accounted for 73% and 77%, respectively, of the Company’s accounts payable.

Major suppliers

For the nine months ended September 30, 2019, two suppliers accounted for approximately 39% of the Company’s purchases. For the nine months ended September 30, 2018, three suppliers accounted for approximately 49% of the Company’s purchases. For the three months ended September 30, 2019, two suppliers accounted for approximately 46% of the Company’s purchases. For the three months ended September 30, 2018, two suppliers accounted for approximately 48% of the Company’s purchases. Substantially all of the Company’s business is with suppliers in the United States.

Note 7 – Fixed Assets and Intangible Assets

As of September 30, 2019, and December 31, 2018, fixed assets and intangible assets consisted of the following:

  September 30, 2019  December 31, 2018 
       
Property and equipment $566,445  $566,445 
Less accumulated depreciation  (400,163)  (296,674)
Fixed assets, net $166,282  $269,771 

Depreciation expense for the three months ended September 30, 2019 and 2018 was $31,166 and $38,299, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 was $103,489 and $114,461, respectively.

  September 30, 2019  December 31, 2018 
       
FOCUS factor intellectual property $1,450,000  $1,450,000 
Perfekt intellectual property  -   10,000 
Cocowhite intellectual property  -   50,000 
Intangible assets subject to amortization  5,388,230   7,150,165 
Less accumulated amortization  (4,638,479)  (4,728,576)
Less accumulated impairment  -   (924,068)
Intangible assets, net $2,199,751  $3,007,521 

Amortization expense for the three months ended September 30, 2019 and 2018 was $270,222 and $417,280, respectively. Amortization expense for the nine months ended September 30, 2019 and 2018 was $807,770 and $1,248,555, respectively. These intangible assets were acquired through an Asset Purchase Agreement and Stock Purchase Agreements.

Note 8 – Related Party Transactions

The Company accrued and paid consulting fees of $57,917 per month and management fees of $129,478 to a company owned by Mr. Jack Ross, Chief Executive Officer of the Company. The Company expensed $226,515 during the three months ended September 30, 2019 and $650,728 during the nine months ended September 30, 2019. As of September 30, 2019, the total outstanding balance was $0 for consulting fees and reimbursements.

On June 26, 2015, the Company entered into a Security Agreement with Knight Therapeutics, Inc., through its wholly owned subsidiary Neuragen Corp., for the purchase of Knight Therapeutics, Inc.’s assets. At September 30, 2019, the Company owed Knight $487,500 in relation to this agreement (see Note 10). The Company recorded present value of future payments of $263,546 and $272,151 as of September 30, 2019 and December 31, 2018, respectively.

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 September 30, 2019 and $90,000 for the nine months ended September 30, 2019. As of September 30, 2019, the total outstanding balance was $0.

On August 9, 2017, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party, for a working capital loan. At September 30, 2019, the Company owed Knight $5,924,522 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 September 30, 2019, the total outstanding balance was $200,000 Canadian dollars (approximately $152,834 USD).

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 September 30, 2019, the total outstanding balance was $25,000 Canadian dollars (approximately $18,325 USD).

The Company expensed royalty of $36,082 during the three months ended September 30, 2019 and $175,391 during the nine months ended September 30, 2019. At September 30, 2019 NomadChoice Pty Ltd., a subsidiary of the Company, owed Knight Therapeutics $36,082 in connection with a royalty distribution agreement.

The Company expensed royalty of $1,067 during the three months ended September 30, 2019 and $4,252 for the nine months ended September 30, 2019. At September 30, 2019 the Company owed Knight Therapeutics $1,067 in connection with a royalty distribution agreement for Sneaky Vaunt.

The Company expensed commissions of $0 during the three months ended September 30, 2019 and $9,065 for the nine months ended September 30, 2019. At September 30, 2019, the Company owed Founded Ventures, owned by a shareholder in the Company, $0 in connection with a commission agreement for Sneaky Vaunt.

The Company expensed commissions of $0 during the three months ended September 30, 2019 and $644 for the nine months ended September 30, 2019. At September 30, 2019, the Company owed Founded Ventures $0 in connection with a commission agreement for The Queen Pegasus.

The Company paid $6,180 during the three months ended September 30, 2019 and $14,801 for the nine months ended September 30, 2019 to Hand MD, Corp, related to a royalty agreement. At September 30, 2019, the Company owed Hand MD Corp. $0 in minimum future royalties.

Note 9 – Accounts Payable and Accrued Liabilities

As of September 30, 2019, and December 31, 2018, accounts payable and accrued liabilities consisted of the following:

  September 30, 2019  December 31, 2018 
Accrued payroll $243,730  $217,069 
Legal fees  116,769   71,236 
Commissions  255,170   134,784 
Manufacturers  2,529,037   3,898,896 
Promotions  140,359   1,262,503 
Returns allowance  -   850,627 
Accounting fees  97,714   104,198 
Rent  -   61,738 
Customers  1,800   76,617 
Interest  49,306   - 
Royalties, related party  191,211   304,434 
Warehousing  11,106   64,289 
Sales taxes  302,870   180,222 
Taxes  -   178,069 
Severance Accrual  270,333   506,250 
Related Party Reimbursements  131,650   178,825 
Others  156,561   307,463 
Total $4,497,616  $8,397,220 

Note 10 – Notes Payable

The Company’s loans payable at September 30, 2019 and December 31, 2018 are as follows:

  September 30, 2019  December 31, 2018 
       
Loans payable $6,263,545  $7,772,150 
Unamortized debt issuance cost  (75,478)  (179,261)
Total  6,188,067   7,592,889 
Less: Current portion  (5,937,576)  (1,963,887)
Long-term portion $250,491  $5,629,002 

$950,000 June 26, 2015 Security Agreement:

On June 26, 2015, the Company 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 recorded present value of future payments of $263,546 and $272,151 as of September 30, 2019 and December 31, 2018, respectively. The Company recorded imputed interest expense of $9,526 for the three months ended September 30, 2019 and $28,896 for the nine months ended September 30, 2019.

During the three and nine months ended September 30, 2019, the Company made payments of $12,500 and $37,500, respectively, in connection with this Security Agreement.

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

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

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

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

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

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

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

We have met all the covenants except for the TTM EBITDA of $5 million during the period ending March 31, 2018. Default Interest rate of 5% (from 10.5% to 15.5%) applies in accordance to our current agreement and will be in effect starting April 1, 2018 and will be in effect until the $5 million TTM EDITDA covenant is achieved. When 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 September 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 from October 1, 2018 to June 30, 2019. Effective June 30, 2019 the interest rate referred back to 10.5%.

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 $30,820 and $103,782 during the three and nine months ended September 30, 2019, respectively. Unamortized debt issuance cost as of September 30, 2019 amounted to $75,478.

The Company recognized interest expense of $166,833 and paid $166,833 during the three months ended September 30, 2019 and $759,069 and paid $709,763 during the nine months ended September 30, 2019. Accrued interest was $49,306 as of September 30, 2019. The loan balance at September 30, 2019 was $6,000,000.

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 nine months ended September 30, 2019, the Company issued 26,391 shares of its common stock valued at $39,585 in full and final settlement on the Perfekt transaction.

As of September 30, 2019 and December 31, 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. McCullough entered into an employment agreement on October 17, 2017 (the “Employment Agreement”) with an initial term of 3 years. In exchange for his service as President, Mr. McCullough will receive an annual base salary of $340,000. He received a cash signing bonus of $37,500 paid on January 1, 2018, and an additional cash signing bonus of $37,500 paid on July 1, 2018. Mr. McCullough will be eligible for an annual bonus of up to twenty-five percent (25%) of his base salary. The annual bonus will be determined at the discretion of our Board or compensation committee based upon the achievement of financial goals established by the Company’s Chief Executive Officer. Mr. McCullough will also be eligible for additional bonus compensation based on the Company’s achievement of certain annual earnings and retail sales goals established each year by the Company’s Chief Executive Officer. Subject to the Company’s achievement of an annual overall earnings goal and certain adjustments in the event of future acquisitions by the Company, Mr. McCullough will be eligible to receive five percent (5%) of all retail sales by the Company in excess of the annual retail sales goal set by the Chief Executive Officer.

The Company granted Mr. McCullough an option to purchase 1,000,000 shares of the Company’s common stock (the “Option Grant”). The Option Grant vests 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 was granted under the Company’s 2014 Stock Incentive Plan pursuant to a stock grant agreement between the Company and Mr. McCullough.

Other Commitments

During the nine months ended September 30, 2019 the Company received a 60 day Proposition 65 letter that one of its products did not have California’s Proposition 65 label. The Company has settled the matter and made a one-time payment of $85,000 in full satisfaction of the matter.

Note 13 – Stock Options

The following table summarizes the options outstanding, option exercisability and the related prices for the shares of the Company’s common stock issued to employees and consultants under the Plan at September 30, 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   6,166,667   5.8  $0.54   5,750,000  $0.53 

The stock option activity for the nine months ended September 30, 2019 is as follows:

  Options
Outstanding
  Weighted
Average
Exercise Price
 
Outstanding at December 31, 2018  7,166,667  $0.50 
Granted  -   - 
Exercised  -   - 
Expired or canceled  (1,000,000)  0.25 
Outstanding at September 30, 2019  6,166,667  $0.54 

Stock-based compensation expense related to vested options was $38,679 and $122,891 during the three and nine months ended September 30, 2019, respectively, which is a component of general and administrative expense in the statement of income. 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 $0.48-0.50, risk-free interest rate of 1.95-1.99%, volatility of 116-117%, expected lives of 10 years, and dividend yield of 0%. Stock options outstanding as of September 30, 2019, as disclosed in the above table, have an intrinsic value of $0. As of September 30, 2019, unamortized stock-based compensation costs related to options was $167,608, and will be recognized over a period of 1 year.

Note 14 – Segments

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

Net sales attributed to customers in the United States and foreign countries for the three months ended September 30, 2019 and 2018 were as follows:

  September 30, 2019  September 30, 2018 
United States $6,785,123  $8,944,970 
Foreign countries  579,423   245,407 
  $7,364,546  $9,190,377 

Foreign countries primarily consist of Australia and Canada.

The Company’s net sales by product group for the three months ended September 30, 2019 and 2018 were as follows:

  September 30, 2019  September 30, 2018 
Nutraceuticals $7,094,211  $8,540,044 
Over the Counter (OTC)  9,055   125,878 
Consumer Goods  224,724   260,027 
Cosmeceuticals  36,556   264,428 
  $7,364,546  $9,190,377 

(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 September 30, 2019 and 2018 were as follows:

  September 30, 2019  September 30, 2018 
Online $2,318,455  $4,902,161 
Retail  5,046,091   4,288,216 
  $7,364,546  $9,190,377 

Net sales attributed to customers in the United States and foreign countries for the nine months ended September 30, 2019 and 2018 were as follows:

  September 30, 2019  September 30, 2018 
United States $21,377,182  $27,215,818 
Foreign countries  1,793,040   1,404,132 
  $23,170,222  $28,619,950 

The Company’s net sales by product group for the nine months ended September 30, 2019 and 2018 were as follows:

  September 30, 2019  September 30, 2018 
Nutraceuticals $22,151,047  $26,450,312 
Over the Counter (OTC)  38,121   459,980 
Consumer Goods  576,754   822,959 
Cosmeceuticals  404,300   886,699 
  $23,170,222  $28,619,950 

(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 nine months ended September 30, 2019 and 2018 were as follows:

  September 30, 2019  September 30, 2018 
Online $8,841,272  $13,926,758 
Retail  14,328,950   14,693,192 
  $23,170,222  $28,619,950 

Long-lived assets (net) attributable to operations in the United States and foreign countries as of September 30, 2019 and December 31, 2018 were as follows:

  September 30, 2019  December 31, 2018 
United States $10,150,670  $11,058,528 
Foreign countries  8,603   12,004 
  $10,159,273  $11,070,532 

Note 15 – Income Taxes

Income tax (benefit) expense was ($57,421) and ($22,873) for the three and nine months ended September 30, 2019, respectively, compared to ($126,190) and $256,812, respectively, for the same periods in 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. The Company is reviewing the TCJA’s potential 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, but the Company does not believe such amounts are material

Note 16 – Subsequent Events

Management evaluated all activities of the Company through the issuance date of the Company’s unaudited condensed consolidated financial statements and concluded that no subsequent events have occurred that would require adjustments or disclosure into the unaudited condensed consolidated financial statements.

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 and nine months ended September 30, 2019 and 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 Notice Regarding Forward-Looking Statements” and the “Business” section in our Form 10-K filed on 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 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
September 30, 2019
 
Net income after tax $107,864 
Interest income  (105)
Interest expense  180,759 
Taxes  (57,421)
Depreciation  31,166 
Amortization  301,042 
EBITDA $563,305 
Stock-based compensation  38,679 
One-time expenses  116,194 
Loss on foreign currency translation and transaction  69,097 
Adjusted EBITDA $

787,275

 

  For the nine
months ended
September 30, 2019
 
Net income after taxes $1,893,613 
Interest income  (329)
Interest expense  805,172 
Taxes  (22,873)
Depreciation  103,489 
Amortization  911,552 
EBITDA $3,690,624 
Stock-based compensation  162,476 
One-time expenses  325,189 
Loss on foreign currency translation and transaction  107,673 
Adjusted EBITDA $4,285,962 

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 certain expenses and transactions that we believe are not representative of our core operating results, including stock-based compensation; one-time expenses; and the gain 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 September 30, 2019 and 2018

Revenue

For the three months ended September 30, 2019, we had revenue of $7,364,546 from sales of our products, as compared to revenue of $9,190,377 for the same period in 2018. We had a decrease in Nutraceuticals in 2019 as compared to 2018 due to not overspending on marketing. 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 focus. We had a decrease in Cosmeceuticals in 2019 as compared to 2018 due to a shift in business focus. The revenue is comprised of the following categories:

  September 30, 2019  September 30, 2018 
Nutraceuticals $7,094,211  $8,540,044 
Over the Counter (OTC)  9,055   125,878 
Consumer Goods  224,724   260,027 
Cosmeceuticals  36,556   264,428 
  $7,364,546  $9,190,377 

Cost of Revenue

For the three months ended September 30, 2019, our cost of revenue was $2,490,444. Our cost of revenue for the three months ended September 30, 2018, was $2,945,389. We had a decrease in Nutraceuticals in 2019 as compared to 2018 due to lower sales and a different mix of products being sold. 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 decrease in revenue. We had a decrease in Cosmeceuticals in 2019 as compared to 2018 due to a decrease in revenue. The cost of revenue is comprised of the following categories:

  September 30, 2019  September 30, 2018 
Nutraceuticals $2,469,205  $2,850,628 
Over the Counter (OTC)  -   23,906 
Consumer Goods  12,040   33,481 
Cosmeceuticals  9,199   37,374 
  $2,490,444  $2,945,389 

Gross Profit

Gross profit was $4,874,102, or 66% for the three months ended September 30, 2019, as compared to gross profit of $6,244,988, or 68% for the same period in 2018, a decrease of $1,370,886, or 22%. The decrease in gross profit margin is directly related to the mix of products being sold.

Operating Expenses

Selling and Marketing Expenses

For the three months ended September 30, 2019, our selling and marketing expenses were $2,771,884 as compared to $3,960,131 for the same period in 2018, which is primarily due to decreased personnel in our advertising and marketing departments and decreased advertising.

General and Administrative Expenses

For the three months ended September 30, 2019, our general and administrative expenses were $1,437,624. For the three months ended September 30, 2018, our general and administrative expenses were $1,189,681. The increase is primarily due to one-time expenses and listing fees.

Depreciation and Amortization Expenses

For the three months ended September 30, 2019, our depreciation and amortization expenses were $301,388 as compared to $455,579 for the same period in 2018. The decrease is due to the impairment of assets owned at the end of 2018.

Other Income and Expenses

For the three months ended September 30, 2019 and 2018 we had other (income) and expense items of the following:

  Three months
ended
September 30, 2019
  Three months
ended
September 30, 2018
 
Interest income $(105) $(50)
Interest expense  180,759   288,479 
Other income  -   (27,674)
Remeasurement loss on translation of foreign subsidiary  101,289   66,353 
Amortization of debt issuance cost  30,820   93,089 
Total other expense $312,763  $420,197 

For the three months ended September 30, 2019, we had interest expense of $180,759 as compared to $288,479 for the same period in 2018. The decrease was due to decrease in the interest rate of one of the loans from 13% to 10.5% offset by repayment of certain other indebtedness.

Net Income

For the three months ended September 30, 2019, our net income was $107,864 as compared to a net income of $345,590 for the same period in 2018.

26

Results of Operations for the Nine months Ended September 30, 2019 and 2018

Revenue

For the nine months ended September 30, 2019, we had revenue of $23,170,222 from sales of our products, as compared to revenue of $28,619,950 for the same period in 2018. We had a decrease in Nutraceuticals in 2019 as compared to 2018 due to not overspending on marketing. 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 focus. We had an decrease in Cosmeceuticals in 2019 as compared to 2018 due to a shift in business focus. The revenue is comprised of the following categories:

  September 30, 2019  September 30, 2018 
Nutraceuticals $22,151,047  $26,450,312 
Over the Counter (OTC)  38,121   459,980 
Consumer Goods  576,754   822,959 
Cosmeceuticals  404,300   886,699 
  $23,170,222  $28,619,950 

Cost of Revenue

For the nine months ended September 30, 2019, our cost of revenue was $6,638,481. Our cost of revenue for the nine months ended September 30, 2018, was $8,500,057. We had a decrease in Nutraceuticals in 2019 as compared to 2018 due to lower sales and a different mix of products being sold. 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 decrease in revenue. We had a decrease in Cosmeceuticals in 2019 as compared to 2018 due to decreased revenue. The cost of revenue is comprised of the following categories:

  September 30, 2019  September 30, 2018 
Nutraceuticals $6,512,546  $8,178,988 
Over the Counter (OTC)  -   71,076 
Consumer Goods  44,063   91,479 
Cosmeceuticals  81,872   158,514 
  $6,638,481  $8,500,057 

Gross Profit

Gross profit was $16,531,741, or 71% for the nine months ended September 30, 2019, as compared to gross profit of $20,119,893, or 70% for the same period in 2018, a decrease of $3,588,152, or 18%. The increase in gross profit margin is directly related to the mix of products being sold.

Operating Expenses

Selling and Marketing Expenses

For the nine months ended September 30, 2019, our selling and marketing expenses were $8,731,129 as compared to $13,361,490 for the same period in 2018, which is primarily due to decreased personnel in our advertising and marketing departments and decreased advertising.

General and Administrative Expenses

For the nine months ended September 30, 2019, our general and administrative expenses were $3,997,437. For the nine months ended September 30, 2018, our general and administrative expenses were $4,425,826. The decrease is primarily due to better management of operating costs.

Depreciation and Amortization Expenses

For the nine months ended September 30, 2019, our depreciation and amortization expenses were $911,259 as compared to $1,363,016 for the same period in 2018. The decrease is due to the impairment of intangible assets in 2018.

Other Income and Expenses

For the nine months ended September 30, 2019 and 2018 we had other (income) and expense items of the following:

  Nine months
ended
September 30, 2019
  Nine months
ended
September 30, 2018
 
Interest income $(329) $(121)
Interest expense  805,172   864,342 
Other income  -   (27,674)
Remeasurement loss on translation of foreign subsidiary  112,551   197,674 
Amortization of debt issuance cost  103,782   171,824 
Total other expense $1,021,176  $1,206,045 

For the nine months ended September 30, 2019, we had interest expense of $805,172 as compared to $864,342 for the same period in 2018. The decrease was due to decrease in the interest rate of one of our loans from 13% to 10% offset by repayment of certain other indebtedness.

Net Income (Loss)

For the nine months ended September 30, 2019, our net income was $1,893,613 as compared to a net loss of $(493,296) for the same period in 2018.

Liquidity and Capital Resources

Overview

As of September 30, 2019, we had $1,389,311 cash on hand and a $3,980,990 working capital deficit, which includes a balloon payment on our loan of $4,500,000. In addition, we also had restricted cash of $100,000 which is held for credit card collateral.

Nine months ended September 30, 2019 and 2018

Net Cash Provided by Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2019 was $2,529,885, compared to $2,043,765 for the same period in 2018. This increase in net cash provided by operating activities for the nine months ended September 30, 2019 was primarily attributable to having net income, a decrease in accounts payable and accrued expenses and fewer inventory purchases.

The $2,529,885 consists of our net income of $1,893,613 adjusted by:

Amortization of debt issuance cost $103,782 
Depreciation and amortization  911,259 
Stock based compensation  162,476 
Non cash implied interest  28,895 
Remeasurement loss on translation of foreign subsidiary  112,551 
Foreign currency transaction gain  (4,878)
Decrease in accounts receivable  2,556,095 
Decrease in inventory  437,155 
Decrease in other current assets  393,683 
Decrease in deferred revenue  (39,763)
Decrease in accounts payable and accrued expenses  (4,024,983)

Net Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2019 was $0, compared to net cash used of $194,300 for the same period in 2018. The decrease in cash used in investing activities during 2019 is attributable to the purchase of assets in 2018.

Net Cash Used in Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2019 was $1,537,500, compared to net cash used of $2,287,500 for the same period in 2018. This is attributable to the payoff of a loan in 2018.

Repayment of notes payable$(1,537,500)

Key 2019 Initiatives

During 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.

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), who 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 September 30, 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(the “Exchange Act”), in connection with the filing of the Quarterly Report. The SEC Order provides conditional relief to public companies that are unable to timely comply with their filing obligations as a result of the novel coronavirus (“COVID-19”) outbreak by extending, subject to the Company’s management, including its principal executive and principal financial officers,conditions of the SEC Order, the filing deadline by up to 45 days for certain Exchange Act reports due on or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.before July 1, 2020.

 

ChangesAs previously disclosed in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter coveredCompany’s Current Report on Form 8-K filed with the SEC on May 12, 2020, the Company determined to rely on the relief provided by this report that has materially affected, or is reasonably likelythe SEC Order to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectivenessdelay the filing of Controlsthe Quarterly Report due to circumstances related to the COVID-19 pandemic.

 

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 thatunprecedented outbreak of COVID-19 in the control system’s objectives will be met. The design of a control system must reflectUnited States caused the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, becauseclosing of the inherent limitationsCompany’s offices and required the Company’s internal staff, outside accountants and independent registered public accounting firm to work remotely, resulting in all control systems, no evaluationthe disruption of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issuesthe Company’s operations and instances of fraud, if any, withinbusiness. Thus, the Company have been detected. These inherent limitations includewas unable to timely prepare and file the realitiesQuarterly Report that judgments in decision making can be faultywas due May 15, 2020 (the “Original Due Date”), and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented bytherefore the individual acts of some persons, by collusion of two or more people, or management override ofCompany elected to rely on the controls. The design of any system of controls is based in part on certain assumptions aboutconditional filing relief provided under 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.

PART II – OTHER INFORMATIONSEC Order.

 

ITEM 1. LEGAL PROCEEDINGSNo other changes have been made to the Quarterly Report, except that Part II, Item 6 of the Quarterly Report is also being amended to refer to the updated Exhibit Index that is included herein for the purpose of including abbreviated officer certifications that are being filed herewith. This Form 10-Q/A speaks as of the original filing date of the Quarterly Report and has not been updated to reflect events occurring subsequent to the original filing date.

 

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

   

Item 6. Exhibits.

EXHIBIT INDEX

ExhibitIncorporated by Reference
(Unless Otherwise Indicated)
NumberExhibit DescriptionFormFile No.ExhibitFiling Date
31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Filed herewith
31.2 Section 302 Certification by the Corporation’sof Chief Financial Officer *pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Filed herewith

   
32.2Section 906 Certification by the Corporation’s Chief Financial Officer *
101.INSXBRL Instance Document* **
101.SCHXBRL Taxonomy Extension Schema Document* **
101.CALXBRL Taxonomy Extension Calculation Linkbase Document* **
101.DEFXBRL Taxonomy Extension Definition Linkbase Document* **
101.LABXBRL Taxonomy Extension Label Linkbase Document* **
101.PREXBRL 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.

SignaturesSIGNATURES

 

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 TitleDateSYNERGY CHC CORP.
   
Date: June 30, 2020By:
/s/ Jack Ross
 Chief Executive Officer November 14, 2019Jack Ross
Jack Ross Principal Financial and Chief FinancialAccounting Officer