Company Quick10K Filing
Synergy CHC
Price0.25 EPS0
Shares90 P/E12
MCap22 P/FCF9
Net Debt5 EBIT2
TEV27 TEV/EBIT14
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-06-29
10-K 2019-12-31 Filed 2020-04-29
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-13
10-Q 2019-03-31 Filed 2019-05-03
10-K 2018-12-31 Filed 2019-03-29
10-Q 2018-09-30 Filed 2018-11-13
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-15
10-K 2017-12-31 Filed 2018-04-02
10-Q 2017-09-30 Filed 2017-11-13
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10-K 2016-12-31 Filed 2017-03-24
10-Q 2016-09-30 Filed 2016-10-26
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10-K 2015-12-31 Filed 2016-03-30
10-Q 2015-09-30 Filed 2015-11-16
10-Q 2015-06-30 Filed 2015-08-13
10-Q 2015-03-31 Filed 2015-05-15
10-K 2014-12-31 Filed 2015-03-31
10-Q 2014-09-30 Filed 2014-10-31
10-Q 2014-06-30 Filed 2014-08-28
10-Q 2014-01-31 Filed 2014-03-03
10-Q 2013-10-31 Filed 2013-12-06
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8-K 2020-06-30
8-K 2020-05-12
8-K 2020-05-08
8-K 2020-05-05
8-K 2020-03-30
8-K 2018-12-10
8-K 2018-08-17

SNYR 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 1 - Nature of The Business
Note 2 - Summary of Significant Accounting Policies
Note 3 - Inventory
Note 4 - Accounts Receivable
Note 5 - Prepaid Expenses
Note 6 - Concentration of Credit Risk
Note 7 - Fixed Assets and Intangible Assets
Note 8 - Related Party Transactions
Note 9 - Accounts Payable and Accrued Liabilities
Note 10 - Notes Payable
Note 11 - Stockholders' Equity
Note 12 - Commitments & Contingencies
Note 13 - Stock Options
Note 14 - Segments
Note 15 - Income Taxes
Note 16 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Default Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

Synergy CHC Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
30231711502012201420172020
Assets, Equity
151050-5-102014201620182020
Rev, G Profit, Net Income
10.07.14.21.2-1.7-4.62012201420172020
Ops, Inv, Fin

10-Q 1 form10-q.htm

 

 

 

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2020

 

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

 

For the transition period from ____________ to ____________

 

Synergy CHC Corp.

 

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

 

865 Spring Street

Westbrook, Maine 04092

(Address of principal executive offices)

 

(615) 939-9004

(Issuer’s Telephone Number)

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

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

 

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

 

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

 

As of June 22, 2020, 89,889,074 shares of our common stock were issued and outstanding.

 

 

 

 

 

 

EXPLANATORY NOTE

 

As previously disclosed in the Current Report on Form 8-K filed by the Company with the SEC on May 12, 2020, the filing of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2020 was delayed due to circumstances related to the COVID-19 pandemic. The Company relied on the SEC’s order pursuant to Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies, as amended (Release No. 34-88465), dated March 25, 2020, to delay the filing of this Form 10-Q.

 

   
   

 

SYNERGY CHC CORP.

 

INDEX

 

Table of Contents

 

PART I FINANCIAL INFORMATION  
     
Item 1. Condensed consolidated financial statements 3
     
  Condensed consolidated balance sheets as of March 31, 2020 (unaudited) and December 31, 2019 3
     
  Condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2020 and 2019 (unaudited) 4
     
  Condensed consolidated statement of changes in stockholders’ equity (deficit) for the three months ended March 31, 2020 and 2019 (unaudited) 5
     
  Condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2019 (unaudited) 6
     
  Notes to unaudited condensed consolidated financial statements 7
     
Item 2. Management’s discussion and analysis of financial condition and results of operations 25
     
Item 3. Quantitative and qualitative disclosures about market risk 28
     
Item 4. Controls and procedures 28
     
PART II OTHER INFORMATION  
     
Item 1. Legal proceedings 29
     
Item 1A. Risk factors 29
     
Item 2. Unregistered sales of equity securities and use of proceeds 29
     
Item 3. Defaults upon senior securities 29
     
Item 4. Mine Safety Disclosures 29
     
Item 5. Other information 25
     
Item 6. Exhibits 25
     
Signatures 30

 

2
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Synergy CHC Corp.

Condensed Consolidated Balance Sheets

 

   March 31, 2020   December 31, 2019 
   (Unaudited)     
Assets          
Current Assets:          
Cash and cash equivalents  $314,933   $1,224,514 
Restricted cash   100,000    100,000 
Accounts receivable, net (including related party receivable of $470,984 and $277,432, respectively)   3,037,441    1,423,786 
Prepaid expenses   191,153    186,143 
Income taxes receivable   -    251,614 
Inventory, net   1,714,096    1,861,038 
Total Current Assets   5,357,623    5,047,095 
           
Fixed assets, net   112,907    135,898 
Intangible assets, net   6,671    7,636 
Total Assets  $5,477,201   $5,190,629 
           
Liabilities and Stockholders’ Deficit          
Current Liabilities:          
Accounts payable and accrued liabilities (including related party payable of $839,124 and $956,438, respectively)  $4,134,020   $4,674,064 
Deferred revenue   17,137    7,887 
Income taxes payable   164,338    - 
Current portion of long-term debt, net of debt discount and debt issuance cost, related party   5,486,377    5,465,113 
Total Current Liabilities   9,801,872    10,147,064 
           
Long-term Liabilities:          
Note payable, net of debt discount and debt issuance cost, related party   243,207    246,916 
Total Long-term Liabilities   243,207    246,916 
Total Liabilities   10,045,079    10,393,980 
           
Commitments and contingencies          
           
Stockholders’ Deficit:          
Common stock, $0.00001 par value; 300,000,000 shares authorized; 89,889,074 shares issued and outstanding   899    899 
Additional paid in capital   19,057,634    19,018,955 
Accumulated other comprehensive income   345,855    11,364 
Accumulated deficit   (23,972,266)   (24,234,569)
Total stockholders deficit   (4,567,878)   (5,203,351)
Total Liabilities and Stockholders’ Deficit  $5,477,201   $5,190,629 

 

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

 

3
 

 

Synergy CHC Corp.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income

 

   For the three months ended 
   March 31, 2020   March 31, 2019 
Revenue  $6,117,286   $9,468,955 
Cost of sales (including related party purchases of $124,008 and $819,633, respectively)   1,497,779    2,540,450 
Gross profit   4,619,507    6,928,505 
           
Operating expenses          
Selling and marketing   2,253,956    3,311,867 
General and administrative   1,333,524    1,487,107 
Depreciation and amortization   26,845    306,275 
Total operating expenses   3,614,325    5,105,249 
           
Income from operations   1,005,182    1,823,256 
           
Other (income) expenses          
Interest income   (66)   (111)
Interest expense   158,522    340,128 
Remeasurement loss (gain) on translation of foreign subsidiary   278,126    (16,508)
Amortization of debt issuance cost   20,757    38,368 
           
Total other expenses   457,339    361,877 
           
Net income before income taxes   547,843    1,461,379 
Income tax expense (benefit)   285,540    (5,908)
Net income after tax  $262,303   $1,467,287 
           
Net income per share – basic  $0.00   $0.02 
Net income per share – diluted  $0.00   $0.02 
           
Weighted average common shares outstanding          
Basic   89,889,074    89,865,319 
Diluted   89,899,074    89,865,319 
           
Comprehensive income:          
Net income   262,303    1,467,287 
Foreign currency translation adjustment   334,491    (70,940)
Comprehensive income  $596,794   $1,396,347 

 

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

 

4
 

 

Synergy CHC Corp.

Unaudited Condensed Consolidated Statement of Stockholders’ Equity (Deficit)

 

   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             45,533              45,533 
Foreign currency translation loss                  (70,940)   -    (70,940)
Common stock issued for Per-fekt settlement   26,391    -    39,586              39,586 
Net income                       1,467,287    1,467,287 
Balance as of March 31, 2019   89,889,074   $899   $18,902,919   $108,176  $(13,559,835)  $5,452,159 

 

   Common stock   Additional Paid in   Accumulated Other Comprehensive   Accumulated   Total Stockholders’ 
   Shares   Amount   Capital   Income   Deficit   Deficit 
Balance as of December 31, 2019   89,889,074   $899   $19,018,955   $11,364   $(24,234,569)  $(5,203,351)
                               
Fair value of vested stock options             38,679              38,679 
Foreign currency translation gain                  334,491         334,491 
Net income                       262,303    262,303 
Balance as of March 31, 2020   89,889,074   $899   $19,057,634   $345,855   $(23,972,266)  $(4,567,878)

 

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

 

5
 

 

Synergy CHC Corp.

Unaudited Condensed Consolidated Statements of Cash Flows 

 

   For the three months ended 
   March 31, 2020   March 31, 2019 
Cash Flows from Operating Activities          
Net income  $262,303   $1,467,287 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:          
Depreciation and amortization   26,845    306,275 
Amortization of debt issuance cost   20,756    38,368 
Stock based compensation expense   38,679    85,119 
Remeasurement loss (gain) on translation of foreign subsidiary   275,237    (16,508)
Foreign currency transaction loss   114,608    98,357 
Non cash implied interest   9,299    9,737 
Reversal of allowance for doubtful accounts   (170,309)   - 
Gain on write-off of payables   (180,000)   - 
Changes in operating assets and liabilities:          
Accounts receivable   (1,259,338)   120,802 
Accounts receivable, related party   (193,552)   - 
Inventory   146,942    1,810 
Prepaid expense   4,534   405,766 
Income taxes receivable   251,614    - 
Income tax payable   164,338    - 
Accounts payable and accrued liabilities   (635,464)   (2,035,676)
Accounts payable, related party   (187,804)   296,710 
Deferred revenue   9,250    34,664 
Net cash (used in) provided by operating activities   (1,302,062)   813,711 
           
Cash Flows from Investing Activities   -    - 
           
Cash Flows from Financing Activities          
Advances from related party   70,490    - 
Repayment of notes payable   (12,500)   (512,500)
Net cash provided by (used in) financing activities   57,990    (512,500)
           
Effect of exchange rate on cash, cash equivalents and restricted cash   334,491    (70,940)
           
Net (decrease) increase in cash, cash equivalents and restricted cash   (909,581)   230,271 
           
Cash, Cash Equivalents and restricted cash, beginning of period   1,324,514    595,916 
           
Cash, Cash Equivalents and restricted cash, end of period  $414,933   $826,187 
           
Supplemental Disclosure of Cash Flow Information:          
Cash paid during the period for:          
Interest  $145,434   $289,598 
Income taxes  $-   $38,919 
           
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

 

General

 

The accompanying condensed consolidated financial statements as of March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019 are unaudited. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Rule S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020. 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, 2019 and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on April 29, 2020.

 

Basis of Presentation

 

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

 

All amounts referred to in the notes to the consolidated financial statements are in United States Dollars ($) unless stated otherwise.

 

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

 

7
 

 

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, current income taxes, deferred income taxes valuation allowance, useful life of fixed and intangible assets, and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary.

 

Reclassification

 

Certain amounts in prior periods have been reclassified to conform to current period presentation. These reclassifications had no effect on the previously reported net loss.

 

Cash and Cash Equivalents

 

The Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. As of March 31, 2020, the Company had no cash equivalents. The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At March 31, 2020, the uninsured balance amounted to $94,869.

 

Restricted Cash

 

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

 

   March 31, 2020   December 31, 2019   March 31, 2019 
             
Cash and cash equivalents  $314,933   $1,224,514   $688,836 
Restricted cash   100,000    100,000    137,351 
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows  $414,933   $1,324,514   $826,187 

 

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.

 

8
 

 

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 (“Perfekt”) on June 21, 2017 and $50,000 acquired as an Asset Purchase entered into with Cocowhite on May 22, 2018. Intangible assets are amortized on a straight line basis over the useful lives. During the year ended December 31, 2018, the Company fully impaired intangible assets related to Perfekt and Cocowhite and charged to operations impairment loss of $60,000. During the year ended December 31, 2019, the Company fully impaired intellectual property related to Focus Factor and charged to operations impairment loss of $1,450,000.

 

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. During the year ended December 31, 2019, the Company fully impaired intangible assets and charged to operations impairment loss of $471,897.

 

Goodwill

 

An asset purchase is accounted for under the purchase method of accounting. Under that method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of the acquisition, with any excess of the cost of the acquisition over the estimated fair value of the net tangible and intangible assets acquired recorded as goodwill. As of December 31, 2019 our qualitative analysis of goodwill indicated potential impairment, thus the Company chose to fully impair goodwill and charged to operations impairment loss of $7,793,240.

 

9
 

 

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 March 31, 2020.

 

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 March 31, 2020 and December 31, 2019, allowance for doubtful accounts was $113,662 and $283,972, respectively. During the three months ended March 31, 2020, the Company reversed allowance for doubtful accounts of $170,309.

 

Advertising Expense

 

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

 

Research and Development

 

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

 

Income Taxes

 

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

 

10
 

 

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

 

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

 

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

 

Net Earnings (Loss) Per Common Share

 

The Company computes earnings per share under ASC subtopic 260-10, Earnings Per Share. Basic earnings (loss) per share is computed by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the reporting periods. Diluted earnings per share is computed by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into common stock (using the “treasury stock” method), unless their effect on net loss per share is anti-dilutive. As of March 31, 2020, and 2019, options to purchase 5,666,667 and 7,166,667 shares of common stock, respectively, were outstanding.

 

The following is a reconciliation of the number of shares used in the calculation of basic earnings per share and diluted earnings per share for the three months ended March 31, 2020, and 2019:

 

   For the three months ended 
   March 31, 2020   March 31, 2019 
         
Net income after tax  $262,303   $1,467,287 
           
Weighted average common shares outstanding   89,889,074    89,865,319 
Incremental shares from the assumed exercise of dilutive stock options   -    - 
Dilutive potential common shares   89,889,074    89,865,319 
           
Net earnings (loss) per share:          
Basic  $0.00   $0.02 
Diluted  $0.00   $0.02 

 

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

 

   2020   2019 
Options to purchase common stock   5,666,667    7,166,667 

 

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.

 

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

 

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

 

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

 

Level 3 - Unobservable inputs for the asset or liability.

 

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

 

As of March 31, 2020, 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).

 

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:

 

   March 31, 2020   December 31, 2019 
Period-end AUD: USD exchange rate  $0.6141   $0.7030 
Period-end CAD: USD exchange rate  $0.7049   $0.7699 

 

Income statement:

 

   March 31, 2020   March 31, 2019 
Average Quarterly AUD: USD exchange rate  $0.6585   $0.7126 
Average Quarterly CAD: USD exchange rate  $0.7445   $0.7522 

 

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

 

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Concentrations of Credit Risk

 

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

 

Warehousing costs

 

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

 

Product display costs

 

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

 

Cost of Sales

 

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

 

Debt Issuance Costs

 

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

 

Shipping Costs

 

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

 

Related parties

 

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

 

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.

 

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Presentation of Financial Statements – Going Concern

 

Going Concern Evaluation

 

In connection with preparing unaudited condensed consolidated financial statements for the three months ended March 31, 2020, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.

 

The Company considered the following:

 

● At March 31, 2020, the Company had an accumulated deficit of $23,972,266.

● At March 31, 2020, the Company had working capital deficit of $4,444,249.

● Revenue decline in 2020 as compared to 2019 of $3,351,669. 

● During the three months ended March 31, 2020, the Company used cash in operating activities of $1,302,062.

● The Company was required to make repayment of loans payable of $500,000 and accrued interest during the three months ended March 31, 2020.

 

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.

● Subsequent to March 31, 2020, the Company raised $2.5 million via debt financing.

● During the three months ended March 31, 2020, the Company repaid $12,500 of loans. Subsequent to March 31, 2020, the Company repaid $500,000 of loans.

● The Company generated net income of $262,303 for the three months ended March 31, 2020.

● Working capital deficit of $4,444,249 at March 31, 2020, includes loans payables to related party of $5,486,377, payables to related party of $839,124 and deferred revenue of $17,137.

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

● Subsequent to March 31, 2020, the Company has secured distribution of a new hand sanitizer product under its Hand MD brand in Canada.

 

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

 

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

 

● Raise additional capital through line of credit and/or loans financing for future mergers and acquisition, which may be impacted by the recent outbreak of COVID-19.

● Implement additional restructuring and cost reductions.

● Raise additional capital through a private placement, which may be impacted by the recent outbreak of COVID-19.

 

As of June 29, 2020 and March 31, 2020, the Company had $2,098,237 and $414,933, respectively, in cash and cash equivalents.

 

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Recent Accounting Pronouncements  

 

ASU 2016-13

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendment to the initial guidance: ASU 2018-19 (collectively, Topic 326). ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Adoption of this new standard did not have any impact on the Company’s unaudited condensed consolidated financial statements.

 

ASU 2016-02

 

In February 2016, the FASB issued ASU 201602, “Leases” (“ASU 201602”). This guidance, as amended by subsequent ASU’s on the topic, improves transparency and comparability among companies by recognizing right of use (ROU) assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. We adopted ASU No. 2016-02 in our fiscal year beginning January 1, 2019 and used the optional transition method provided by the FASB in ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, with no restatement of comparative periods. The Company notes there was no impact on adoption as the leases entered into by the Company were for less than 12 month terms.

 

The new standard provides optional practical expedients in transition. We will only elect the package of practical expedients where, under the new standard, prior conclusions about lease identification, lease classification and initial direct costs do not need to be reassessed. The new standard also provides practical expedients for ongoing accounting where we elected the practical expedients on adoption and did not record any ROU asset with terms of less than 12 months.

 

There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s financial position, results of operations or cash flows.

 

Note 3 – Inventory

 

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

 

The carrying value of inventory consisted of the following:

 

   March 31, 2020   December 31, 2019 
Finished goods  $1,375,944   $1,554,013 
Components   269,501    264,518 
Inventory in transit   451    42,507 
Raw materials   68,200    - 
Total inventory  $1,714,096   $1,861,038 

 

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

 

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Note 4 – Accounts Receivable

 

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

 

   March 31, 2020   December 31, 2019 
Trade accounts receivable (including related party receivable of $470,984 and $277,432, respectively – see note 8)  $3,151,103   $1,707,758 
Less allowances   113,662    283,972 
Total accounts receivable, net  $3,037,441   $1,423,786 

 

During the year ended December 31, 2019, the Company charged $283,972 to bad debt expense. During the three months ended March 31, 2020, the Company reversed allowance for doubtful accounts of $170,309.

 

Note 5 – Prepaid Expenses

 

Prepaid expenses consisted of the following:

 

   March 31, 2020   December 31, 2019 
Advances for inventory  $24,082   $9,071 
Insurance   14,589    16,763 
Deposits   6,500    10,234 
Promotion - Bloggers   84,674    - 
Software subscriptions   -    9,536 
Promotions   44,455    122,626 
Miscellaneous   16,853    17,913 
Total  $191,153   $186,143 

 

Note 6 – Concentration of Credit Risk

 

Cash and cash equivalents

 

The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At March 31, 2020 and December 31, 2019, the uninsured balances amounted to $94,869 and $947,312, respectively.

 

Accounts receivable

 

As of March 31, 2020, five customers accounted for 83% of the Company’s accounts receivable. As of December 31, 2019, two customers accounted for 52% of the Company’s accounts receivable.

 

Major customers

 

For the three months ended March 31, 2020, three customers accounted for approximately 60% of the Company’s net revenue. For the three months ended March 31, 2019, two customers accounted for approximately 40% of the Company’s net revenue. For the year ended December 31, 2019, two customers accounted for approximately 51% of the Company’s net revenues. Substantially all of the Company’s business is with companies in the United States.

 

Accounts payable

 

As of March 31, 2020 and December 31, 2019, two vendors accounted for 72% and 73%, respectively, of the Company’s accounts payable. This includes a related party vendor.

 

Major suppliers

 

For the three months ended March 31, 2020, one supplier accounted for approximately 33% of the Company’s purchases. For the three months ended March 31, 2019, two suppliers accounted for approximately 41% of the Company’s purchases. For the year ended December 31, 2019, two suppliers accounted for approximately 40% of the Company’s purchases. Substantially all of the Company’s business is with suppliers in the United States. This includes purchases from a related party supplier.

 

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Note 7 – Fixed Assets and Intangible Assets

 

As of March 31, 2020, and December 31, 2019, fixed assets and intangible assets consisted of the following:

 

   March 31, 2020   December 31, 2019 
         
Property and equipment  $569,681   $566,445 
Less accumulated depreciation   (456,774)   (430,547)
Fixed assets, net  $112,907   $135,898 

 

Depreciation expense for the three months ended March 31, 2020 and 2019 was $26,152 and $38,060, respectively.

 

   March 31, 2020   December 31, 2019 
         
FOCUSfactor intellectual property  $-   $1,450,000 
Perfekt intellectual property   -    - 
Cocowhite intellectual property   -    - 
Intangible assets subject to amortization   19,259    5,388,230 
Less accumulated amortization   (12,588)   (4,908,696)
Less accumulated impairment   -    (1,921,898)
Intangible assets, net  $6,671   $7,636 

 

Amortization expense for the three months ended March 31, 2020 and 2019 was $694 and $268,215, respectively.

 

Note 8 – Related Party Transactions

 

The Company accrued and paid consulting fees of $82,917 per month to a company owned by Mr. Jack Ross, Chief Executive Officer of the Company. The Company expensed $258,750 during the three months ended March 31, 2020. As of March 31, 2020, the total outstanding balance was $82,917 for consulting fees and reimbursements.

 

On June 26, 2015, the Company entered into a Security Agreement with Knight Therapeutics, Inc., (owner of greater than 10% shares of the Company) through its wholly owned subsidiary Neuragen Corp., for the purchase of Knight Therapeutics, Inc.’s assets. At March 31, 2020 and December 31, 2019, the Company owed Knight $462,500 and $475,000 in relation to this agreement. The Company recorded present value of future payments of $257,259 as of March 31, 2020 (see Note 10).

 

On August 18, 2015, the Company entered into a Consulting Agreement with Kara Harshbarger, the co-founder of Hand MD, LLC, pursuant to which she will provide marketing and sales related service. The Company pays Ms. Harshbarger $10,000 a month for one year unless the Consulting Agreement is terminated earlier by either party. The Company has extended this agreement on a month to month basis. Hand MD, LLC is a 50% owner in Hand MD Corp. The Company expensed $30,000 through payroll for the three months ended March 31, 2020. As of March 31, 2020, 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 March 31, 2020, the Company owed Knight $5,472,325 on this loan, net of debt issuance cost (see Note 10).

 

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On December 23, 2016, we entered into an agreement with Knight Therapeutics for the distribution rights of FOCUSFactor in Canada. In conjunction with this agreement, we are required to pay Knight a distribution fee equal to 30% of gross sales for sales achieved through a direct sales channel and 5% of gross sales for sales achieved through retail sales. The minimum due to Knight under this agreement is $100,000 Canadian dollars. As of March 31, 2020, the total outstanding balance was $100,000 Canadian dollars. In US Dollars, the total outstanding balance was $70,295 as of March 31, 2020.

 

On December 23, 2016, we entered into an agreement with Knight Therapeutics for the distribution rights of Hand MD into Canada. In conjunction with this agreement, we are required to pay Knight a distribution fee equal to 60% of gross sales for sales achieved through a direct sales channel until the sales in the calendar year equal the threshold amount and then 40% of all such gross sales in such calendar year in excess of the threshold amount and 5% of gross sales for sales achieved through retail sales. The minimum due to Knight under this agreement is $25,000 Canadian dollars. As of March 31, 2020 the total outstanding balance was $25,000 Canadian dollars. In US Dollars, the total outstanding balance was $17,574.

 

The Company expensed royalty of $35,821   during the three months ended March 31, 2020. At March 31, 2020 NomadChoice Pty Ltd., a subsidiary of the Company, owed Knight Therapeutics $35,821 in connection with a royalty distribution agreement.

 

The Company expensed royalty of $410   during the three months ended March 31, 2020. At March 31, 2020 the Company owed Knight Therapeutics $410 in connection with a royalty distribution agreement for Sneaky Vaunt.

 

The Company paid $934 during the three months ended March 31, 2020 to Hand MD, Corp, related to a royalty agreement. At March 31, 2020, the Company owed Hand MD Corp. $0 in minimum future royalties.

 

A member of the Company’s Board of Directors is an executive officer of a supplier to the Company. During the three months ended March 31, 2020 the Company acquired $124,008 of products from the supplier and included in cost of sales. The Company owed the supplier $559,584 at March 31, 2020.

 

The Company entered into transactions with a related party controlled by the CEO during the three months ended March 31, 2020. The transactions were a pass through of expenses and reimbursements. During the three months ended March 31, 2020, the Company received advances of $70,490 ($100,000 Canadian Dollars). As of March 31, 2020, there were $70,490 payable and $30,640 receivable.

 

The Company entered into transactions with a related party controlled by the CEO during the three months ended March 31, 2020. The transactions were a pass through and allocation of expenses and reimbursements. As of March 31, 2020 the Company was owed $440,343.

 

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Note 9 – Accounts Payable and Accrued Liabilities

 

As of March 31, 2020, and December 31, 2019, accounts payable and accrued liabilities consisted of the following:

 

   March 31, 2020   December 31, 2019 
Accrued payroll (included related party payable of $82,916 and $0, respectively)  $173,795   $110,536 
Legal fees   27,047    68,098 
Commissions   324,283    229,657 
Manufacturers (including related parties of $559,584 and $956,438, respectively)   2,311,659    2,082,256 
Promotions   289,621    1,312,541 
Accounting fees   30,101    10,873 
Customers   23,994    26,206 
Royalties, related party   125,720    93,643 
Warehousing   5,977    13,746 
Taxes   654,119    674,818 

Related party loan and reimbursements

   70,904    1,135 
Others   96,800    50,555 
Total  $4,134,020   $4,674,064 

 

 

During the three months ended March 31, 2020, the Company recorded a gain on write-off of payables of $180,000.

 

The Company has not filed its State & Local Income/Franchise tax returns in States it is required to file for the last few years, so such returns and liability remain open. The Company has estimated and accrued for its sales tax liability at $245,717 for the parent entity as of March 31, 2020.

 

Note 10 – Notes Payable

 

The Company’s loans payable at March 31, 2020 and December 31, 2019 are as follows:

 

   March 31, 2020   December 31, 2019 
         
Loans payable  $5,757,259   $5,760,461 
Unamortized debt issuance cost   (27,675)   (48,432)
Total   5,729,584    5,712,029 
Less: Current portion   (5,486,377)   (5,465,113)
Long-term portion  $243,207   $246,916 

 

$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 $257,259 and $260,461 as of March 31, 2020 and December 31, 2019, respectively. The Company recorded imputed interest expense of $9,299 for the three months ended March 31, 2020.

 

During the three months ended March 31, 2020, the Company made a payment of $12,500 in connection with this Security Agreement.

 

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$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. 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. The new covenants are as follows: we will maintain a minimum EBITDA of $1,900,000 for the twelve months ending on December 31, 2018, $2,500,000 for the twelve months ending March 31, 2019, $3,500,000 for the twelve months ending June 30, 2019 and $5,000,000 for the twelve months period ending on last day of each fiscal quarters thereafter. We shall maintain a net debt to TTM EBITDA ratio of no more than 8:1 for the twelve month period ending on December 31, 2018 until March 31, 2019 and shall maintain a net debt to TTM EBITDA ratio of no more than 6:1 thereafter. We shall maintain at all times a positive cash balance of $575,000 for the three month period ending December 31, 2018, $750,000 for the three month period ending March 31, 2019 and $1,000,000 thereafter. The default interest rate of 2.5% applies (from 13% to 15.5%) in accordance to our current agreement and will be in effect as of October 1, 2018 to June 30, 2019. Effective June 30, 2019 the interest rate referred back to 10.5%. (See note 16)

 

20
 

 

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 $20,756 during the three months ended March 31, 2020. Unamortized debt issuance cost as of March 31, 2020 amounted to $27,675.

 

The Company recognized interest expense of $138,542 and paid $138,542 during the three months ended March 31, 2020. Accrued interest was $0 as of March 31, 2020. The loan balance at March 31, 2020 was $5,500,000.

 

Note 11 – Stockholders’ Equity

 

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

 

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

 

As of both March 31, 2020 and December 31, 2019, there were 89,889,074 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, subject to the approval of the Company’s Board of Directors (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 will be granted under the Company’s 2014 Stock Incentive Plan pursuant to a stock grant agreement between the Company and Mr. McCullough. (See note 16)

 

21
 

 

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 a stock option plan at March 31, 2020:

 

    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   5,666,667   5.8   $0.52   5,416,666  $0.52 
                         

 

The stock option activity for the three months ended March 31, 2020 is as follows:

 

   Options
Outstanding
   Weighted Average
Exercise Price
 
Outstanding at December 31, 2019   6,166,667   $0.54 
Granted   -    - 
Exercised   -    - 
Expired or canceled   (500,000)   (0.70)
Outstanding at March 31, 2020   5,666,667   $0.52 

 

Stock-based compensation expense related to vested options was $38,679 during the three months ended March 31, 2020, which is a component of general and administrative expense in the statement of operations. The Company determined the value of share-based compensation for options vesting during the period using the Black-Scholes fair value option-pricing model with the following weighted average assumptions: estimated fair value of Company’s common stock of $0.48-0.50, 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 March 31, 2020, as disclosed in the above table, have an intrinsic value of $0. As of March 31, 2020, unamortized stock-based compensation costs related to options was $90,251, and will be recognized over a period of 0.5 years.

 

22
 

 

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 March 31, 2020 and 2019 were as follows:

 

   March 31, 2020   March 31, 2019 
United States  $5,963,815   $8,612,521 
Foreign countries   153,471    856,434 
   $6,117,286   $9,468,955 

 

Foreign countries primarily consist of Australia and Canada.

 

The Company’s net sales by product group for the three months ended March 31, 2020 and 2019 were as follows:

 

   March 31, 2020   March 31, 2019 
Nutraceuticals  $5,766,691   $9,055,444 
Over the Counter (OTC)   22,310    8,332 
Consumer Goods   302,897    157,623 
Cosmeceuticals   25,388    247,556 
   $6,117,286   $9,468,955 

 

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

 

The Company’s net sales by major sales channel for the three months ended March 31, 2020 and 2019 were as follows:

 

    March 31, 2020   March 31, 2019 
Online   $2,671,221   $3,853,024 
Retail    3,446,065    5,615,931 
    $6,117,286   $9,468,955 

 

23
 

 

Long-lived assets (net) attributable to operations in the United States and foreign countries as of March 31, 2020 and December 31, 2019 were as follows:

 

   March 31, 2020   December 31, 2019 
United States  $-   $- 
Foreign countries   6,671    7,636 
   $6,671   $7,636 

 

Note 15 – Income Taxes

 

Income tax expense (benefit) was $285,540 for the three months ended March 31, 2020, compared to $(5,908) for the same periods in 2019. The current provision is attributable to Australian operations and the current tax rate in effect in that country.

 

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, deferment of employer’s social security payments, net operating loss utilization and carryback periods and modifications to the net interest deduction limitations. At this time, the Company does not believe that the CARES Act will have a material impact on its income tax provision for 2020. The Company will continue to evaluate the impact of the CARES Act on its financial position, results of operations and cash flows.

 

The total deferred tax asset is calculated by multiplying a domestic federal (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.

 

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 except as noted below, no subsequent events have occurred that would require adjustment or disclosure into the unaudited condensed consolidated financial statements.

 

On May 8, 2020, the Company entered into a Third Amendment Agreement (the “Third Amendment”) to the Amended and Restated Loan Agreement (the “Loan Agreement”) with Knight Therapeutics (Barbados) Inc. (“Knight”), pursuant to which Knight agreed to loan the Company an additional $2.5 million (the “Additional Loan”). That same day (the “Closing”), the Company paid Knight a work fee of $36,000, and $25,000 for Knight’s legal costs and expenses incurred in connection with the Third Amendment. The Third Amendment amends the original loan agreement that the Company and Knight entered into in January 2015 and subsequently amended (as amended, the “Original Loan Agreement”). The Additional Loan matures on May 8, 2021 (the “TA Maturity Date”) and bears interest at 12.5% per annum compounding quarterly. On the TA Maturity Date, the Company will pay Knight a success fee (the “Success Fee”) of $83,250. The Success Fee is payable in cash or stock as set forth in the Loan Agreement. The Third Amendment includes customary representations, warranties, and affirmative and restrictive covenants, including covenants to attain and maintain certain financial metrics, including an undertaking to maintain at all times a cash balance of $600,000 and EBITDA of $3,000,000.

 

Terms of the $10,000,000 August 9, 2017 loan (Third Tranche) (see note 10) was modified in the Third amendment. Third tranche shall bear interest from May 8, 2020 at a rate equal to 12.5% per annum compounded quarterly. The Company shall pay success fee in the amount of $1,000,000 with respect to the Third Tranche, which shall be fully earned on May 8, 2020 and payable no later than August 31, 2022. Third Tranche success fee shall bear interest at 12.5% per annum compounding quarterly.

 

Patrick McCullough, and the Company are in a contractual services relationship till November 2020. On May 5, 2020, Patrick McCullough and the Company mutually agreed that Mr. McCullough would step down as President but remain a consultant under such contract with the Company. This mutual decision was not due to any disagreement on any matter relating to the Company’s operations, policies or practices.

 

Immediately thereafter, the Company’s Chief Executive Officer, assumed the role as President of the Company.

 

Subsequent to March 31, 2020 the Company has secured distribution of a new hand sanitizer product under its Hand MD brand in Canada.

 

The recent outbreak of COVID-19, which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemic poses the risk that the Company or its employees, suppliers, and other partners may be prevented from conducting business activities at full capacity for an indefinite period of time, including due to spread of the disease within these groups or due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that COVID-19 could have on the Company’s business, the continued spread of COVID-19 and the measures taken by the governments of countries affected and in which the Company operates could disrupt the operation of the Company’s business. The COVID-19 outbreak and mitigation measures may also have an adverse impact on global economic conditions, which could have an adverse effect on the Company’s business and financial condition, including on its potential to conduct financings on terms acceptable to the Company, if at all. In addition, the Company may take temporary precautionary measures intended to help minimize the risk of the virus to its employees, including temporarily requiring all employees to work remotely, and discouraging employee attendance at in-person work-related meetings, which could negatively affect the Company’s business. The extent to which the COVID-19 outbreak impacts the Company’s results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.

 

24
 

 

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

 

The following discussion and analysis of the results of operations and financial condition of Synergy for the three months ended March 31, 2020 and 2019, 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 Note Regarding Forward-Looking Statements” and the “Business” section in our Form 10-K filed on April 29, 2020. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

Overview

 

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

 

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

 

Non-GAAP Financial Measures

 

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

 

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

 

   For the three
months ended
March 31, 2020
 
Net income after tax  $262,303 
Interest income   (66)
Interest expense   158,522 
Taxes   285,540 
Depreciation   26,152 
Amortization   21,450 
EBITDA  $

753,901

 
One Time Expenses – Listing Fees   15,077 
Bad debts recovery   

(170,309

)
Accounts payable write off   

(180,000

)
Stock-based compensation   38,679 
Loss on foreign currency translation and transaction   389,845 
Adjusted EBITDA  $847,193  

 

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

 

Results of Operations for the Three months Ended March 31, 2020 and 2019

 

Revenue

 

For the three months ended March 31, 2020, we had revenue of $6,117,286 from sales of our products, as compared to revenue of $9,468,955 for the same period in 2019. We had a decrease in Nutraceuticals in 2020 as compared to 2019 due to lower online sales due to the shift from online to retail and 2019 being the launch year of some new products. We had an increase in Over the Counter in 2020 as compared to 2019 due to regular business fluctuations. We had an increase in Consumer Goods in 2020 as compared to 2019 due to a shift in business focus. We had a decrease in Cosmeceuticals in 2020 as compared to 2019 due to a shift in business focus. The revenue is comprised of the following categories:

 

   March 31, 2020   March 31, 2019 
Nutraceuticals  $5,766,691   $9,055,444 
Over the Counter (OTC)   22,310    8,332 
Consumer Goods   302,897    157,623 
Cosmeceuticals   25,388    247,556 
   $6,117,286   $9,468,955 

 

25
 

 

Cost of Revenue

 

For the three months ended March 31, 2020, our cost of revenue was $1,497,779. Our cost of revenue for the three months ended March 31, 2019, was $2,540,450. We had a decrease in Nutraceuticals in 2020 as compared to 2019 due to lower sales and a different mix of products being sold. We had an increase in Consumer Goods in 2020 as compared to 2019 due to an increase in revenue. We had a decrease in Cosmeceuticals in 2020 as compared to 2019 due to a shift in business focus. The cost of revenue is comprised of the following categories:

 

   March 31, 2020   March 31, 2019 
Nutraceuticals  $1,425,274   $2,472,115 
Over the Counter (OTC)   -    - 
Consumer Goods   69,047    13,784 
Cosmeceuticals   3,458    54,551 
   $1,497,779   $2,540,450 

 

Gross Profit

 

Gross profit was $4,619,507, or 76% for the three months ended March 31, 2020, as compared to gross profit of $6,928,505, or 73% for the same period in 2019, a decrease of $2,308,998, or 33%. 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 March 31, 2020, our selling and marketing expenses were $2,253,956 as compared to $3,311,867 for the same period in 2019, which is primarily due to decreased personnel in our advertising and marketing departments.

 

General and Administrative Expenses

 

For the three months ended March 31, 2020, our general and administrative expenses were $1,333,524. For the three months ended March 31, 2019, our general and administrative expenses were $1,487,107. The decrease is primarily due to better management of operating costs.

 

Depreciation and Amortization Expenses

 

For the three months ended March 31, 2020, our depreciation and amortization expenses were $26,845 as compared to $306,275 for the same period in 2019. The decrease is due to impairment of intangible assets in 2019.

 

Other Income and Expenses

 

For the three months ended March 31, 2020 and 2019 we had other (income) and expense items of the following:

 

   Three months
ended
March 31, 2020
   Three months
ended
March 31, 2019
 
Interest income  $(66)  $(111)
Interest expense   158,522    340,128 

Remeasurement loss (gain) on translation of foreign subsidiary

   278,126    (16,508)
Amortization of debt issuance cost   20,757    38,368 
Total other expense  $457,339   $361,877 

 

For the three months ended March 31, 2020, we had interest expense of $158,522 as compared to $340,128 for the same period in 2019. The decrease was due to decrease in the interest rate of Loan 3 from 15.5% to 13% and decrease in the outstanding principal balance.

 

Net Income

 

For the three months ended March 31, 2020, our net income was $262,303 as compared to a net income of $1,467,287 for the same period in 2019.

 

Liquidity and Capital Resources

 

Overview

 

As of March 31, 2020, we had $314,933 cash on hand and a $4,444,249 working capital deficit. In addition, we also had restricted cash of $100,000 which is held for credit card collateral.

 

26
 

 

Presentation of Financial Statements – Going Concern

 

Going Concern Evaluation

 

In connection with preparing unaudited condensed consolidated financial statements for the three months ended March 31, 2020, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.

 

The Company considered the following:

 

● At March 31, 2020, the Company had an accumulated deficit of $23,972,266.

● At March 31, 2020, the Company had working capital deficit of $4,444,249.

● Revenue decline in 2020 as compared to 2019 of $3,351,669.

● During the three months ended March 31, 2020, the Company used cash in operating activities of $1,302,062.

● The Company is required to make repayment of loans payable of $500,000 and accrued interest during the three months ended March 31, 2020.

 

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.

● Subsequent to March 31, 2020, the Company raised $2.5 million via debt financing.

● During the three months ended March 31, 2020, the Company repaid $12,500 of loans. Subsequent to March 31, 2020, the Company repaid $500,000 of loans.

● The Company generated net income of $262,303 for the three months ended March 31, 2020.

● Working capital deficit of $4,444,249 at March 31, 2020, includes loans payables to related party of $5,486,377, payables to related party of $839,124   and deferred revenue of $17,137.

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

● Subsequent to March 31, 2020, the Company has secured distribution of a new hand sanitizer product under its Hand MD brand in Canada.

 

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

 

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

 

● Raise additional capital through line of credit and/or loans financing for future mergers and acquisition, which may be impacted by the recent outbreak of COVID-19.

● Implement additional restructuring and cost reductions.

● Raise additional capital through a private placement, which may be impacted by the recent outbreak of COVID-19.

 

As of June 29 , 2020 and March 31, 2020, the Company had $2,098,237  and $414,933, respectively, in cash and cash equivalents.

 

Three months ended March 31, 2020 and 2019

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities for the three months ended March 31, 2020 was $(1,302,062), compared to net cash provided by operating activities of $813,711 for the same period in 2019. This decrease in net cash provided by operating activities for the three months ended March 31, 2020 was primarily attributable to an increase in accounts receivable and decrease in accounts payable and accrued expenses.

 

The $(1,302,062) consists of our net income of $262,303 adjusted by:

 

 

Amortization of debt issuance cost  $20,756 
Depreciation and amortization   26,845 
Stock based compensation   38,679 
Non cash implied interest   9,299 
Remeasurement loss on translation of foreign subsidiary   275,237 
Foreign currency transaction loss   114,608 
Reversal of allowance for doubtful accounts   (170,309)
Gain on write-off of payables   (180,000)
Increase in accounts receivable   (1,259,338)
Increase in accounts receivable, related party   (193,552)
Decrease in inventory   146,942 
Decrease in prepaid expenses   4,534 
Decrease in income tax receivable   251,614 
Increase in income tax payable   164,338 
Decrease in accounts payable and accrued liabilities   (635,464)
Decrease in accounts payable and accrued liabilities, related party   (187,804)
Increase in deferred revenue   9,250 

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities for the three months ended March 31, 2020 was $0, compared to net cash used of $0 for the same period in 2019.

 

Net Cash Used in Financing Activities

 

Net cash provided by financing activities for the three months ended March 31, 2020 was $57,990, compared to net cash used of $512,500 for the same period in 2019.

 

Repayment of notes payable  $(12,500)
Advances from related party   

70,490

 

 

Key 2020 Initiatives

 

During 2020, we have plans for organic growth within our current product lines by developing and launching new products. 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.

 

The recent outbreak of COVID-19, which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemic poses the risk that the Company or its employees, suppliers, and other partners may be prevented from conducting business activities at full capacity for an indefinite period of time, including due to spread of the disease within these groups or due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that COVID-19 could have on the Company’s business, the continued spread of COVID-19 and the measures taken by the governments of countries affected and in which the Company operates could disrupt the operation of the Company’s business. The COVID-19 outbreak and mitigation measures may also have an adverse impact on global economic conditions, which could have an adverse effect on the Company’s business and financial condition, including on its potential to conduct financings on terms acceptable to the Company, if at all. In addition, the Company may take temporary precautionary measures intended to help minimize the risk of the virus to its employees, including temporarily requiring all employees to work remotely, and discouraging employee attendance at in-person work-related meetings, which could negatively affect the Company’s business. The extent to which the COVID-19 outbreak impacts the Company’s results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.

 

27
 

 

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 March 31, 2020, (i) the Company’s disclosure controls and procedures were not effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “Commission”), and (ii) the Company’s controls and procedures have not been designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls Over Financial Reporting

 

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

 

Inherent Limitations on Effectiveness of Controls

 

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

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

None.

 

ITEM 3. DEFAULT UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit

Number

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

 

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

 

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Signatures

 

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

 

Signatures   Title   Date
         
/s/ Jack Ross   Chief Executive Officer   June 29, 2020
    Chief Financial Officer    

 

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