NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Nature of the Business
Synergy
CHC Corp. (“Synergy”, “we”, “us”, “our” or the “Company”) (formerly
Synergy Strips Corp.) was incorporated on December 29, 2010 in Nevada under the name “Oro Capital Corporation.” On
April 21, 2014, the Company changed its fiscal year end from July 31 to December 31. On April 28, 2014, the Company changed its
name to “Synergy Strips Corp.”. On August 5, 2015, the Company changed its name to “Synergy CHC Corp.”
The
Company is a consumer health care company that is in the process of building a portfolio of best-in-class consumer product brands.
Synergy’s strategy is to grow its portfolio both organically and by further acquisition.
Synergy
is the sole owner of six subsidiaries: Neuragen Corp., Breakthrough Products, Inc., NomadChoice Pty Ltd., Synergy CHC Inc., Sneaky
Vaunt Corp and The Queen Pegasus Corp. and the results have been consolidated in these statements.
Note
2 – Summary of Significant Accounting Policies
General
The
accompanying condensed consolidated financial statements as of September 30, 2017 and December 31, 2016 and for the three and
nine months ended September 30, 2017 and 2016 are unaudited. These unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim
financial information and are presented in accordance with the requirements of Rule S-X of the Securities and Exchange Commission
(the “SEC”) and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for
the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2017. 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, 2016 and footnotes thereto included
in the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2017.
Basis
of Presentation
The
unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates are assumptions about collection of accounts receivable, useful life of fixed and intangible assets, goodwill
and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate,
and expected dividend rate.
Cash
and Cash Equivalents
The
Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other
highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. As of September
30, 2017 the Company had no cash equivalents. The Company maintains its cash and cash equivalents in banks insured by the Federal
Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $250,000 per
bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At September 30, 2017, the
uninsured balance amounted to $4,997,278.
Capitalization
of Fixed Assets
The
Company capitalizes expenditures related to property and equipment, subject to a minimum rule, that have a useful life greater
than one year for: (1) assets purchased; (2) existing assets that are replaced, improved or the useful lives have been extended;
or (3) all land, regardless of cost. Acquisitions of new assets, additions, replacements and improvements (other than land) costing
less than the minimum rule in addition to maintenance and repair costs, including any planned major maintenance activities, are
expensed as incurred.
Intangible
Assets
We
evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised
estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization except
intellectual property of $1,450,000 acquired as part of an Asset Purchase Agreement entered into with Factor Nutrition Labs LLC
on January 22, 2015 and $10,000 acquired as part of an Asset Purchase Agreement entered into with Perfekt Beauty Holdings LLC
and CDG Holdings, LLC on June 21, 2017. Intangible assets are amortized on a straight line basis over the useful lives. As of
September 30, 2017, our qualitative analysis of intangible assets with indefinite lives did not indicate any impairment.
Long-lived
Assets
Long-lived
assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived
asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset
is not recoverable when compared to undiscounted cash flows expected to result from the use and eventual disposition of the asset.
Indicators
of impairment include significant underperformance relative to historical or projected future operating results, significant changes
in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry
or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability
of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected,
net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically
a discounted cash flow analysis, and an impairment charge is recorded for the excess of carrying value over fair value. As of
September 30, 2017, our qualitative analysis of long-lived assets did not indicate any impairment.
Goodwill
An
asset purchase is accounted for under the purchase method of accounting. Under that method, assets and liabilities of the business
acquired are recorded at their estimated fair values as of the date of the acquisition, with any excess of the cost of the acquisition
over the estimated fair value of the net tangible and intangible assets acquired recorded as goodwill. As of September 30, 2017,
our qualitative analysis of goodwill did not indicate any impairment. However, as of December 31, 2016, our review of goodwill
related to one of our subsidiaries did indicate that the carrying amount of the asset may not be recoverable. During the year
ended December 31, 2016, the Company fully impaired related goodwill and charged to operations an impairment loss of $1,983,160.
Revenue
Recognition
The
Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting
Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”). ASC 605 requires that four basic
criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred
and/or service has been performed; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured.
The Company believes that these criteria are satisfied upon shipment from its fulfillment centers. Certain of our distributors
may also perform a separate function as a co-packer on our behalf. In such cases, ownership of and title to our products that
are co-packed on our behalf by those co-packers who are also distributors, passes to such distributors when we are notified by
them that they have taken transfer or possession of the relevant portion of our finished goods. Freight billed to customers is
presented as revenues, and the related freight costs are presented as cost of goods sold. Cancelled orders are refunded if not
already dispatched, refunds are only paid if stock is damaged in transit, discounts are only offered with specific promotions
and orders will be refilled if lost in transit.
Accounts
receivable
Accounts
receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of
outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection
efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied
against the allowance for doubtful accounts.
Advertising
Expense
The
Company expenses marketing, promotions and advertising costs as incurred. Such costs are included in selling expense in the accompanying
unaudited condensed consolidated statements of 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.
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 income per share is anti-dilutive.
As of September 30, 2017, options to purchase 6,300,000 shares of common stock and warrants to purchase 1,000,000 shares of common
stock were outstanding.
The
following is a reconciliation of the number of shares used in the calculation of basic earnings per share and diluted earnings
per share for the three and nine months ended September 30, 2017, and 2016:
|
|
For
the three months ended
|
|
|
For
the nine months ended
|
|
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income after tax
|
|
$
|
127,486
|
|
|
$
|
3,050,666
|
|
|
$
|
2,635,959
|
|
|
$
|
5,848,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
|
89,237,683
|
|
|
|
81,272,115
|
|
|
|
88,939,470
|
|
|
|
81,561,017
|
|
Common
stock to be issued
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
125,000
|
|
Incremental
shares from the assumed exercise of dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Incremental
shares from the assumed exercise of dilutive stock warrants
|
|
|
-
|
|
|
|
417,712
|
|
|
|
-
|
|
|
|
1,081,971
|
|
Dilutive
potential common shares
|
|
|
89,362,683
|
|
|
|
81,814,827
|
|
|
|
89,064,470
|
|
|
|
82,767,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
The
following securities were not included in the computation of diluted net earnings per share as their effect would have been antidilutive:
|
|
For
the three months ended
|
|
|
For
the nine months ended
|
|
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
to purchase common stock
|
|
|
6,300,000
|
|
|
|
5,000,000
|
|
|
|
6,300,000
|
|
|
|
5,000,000
|
|
Warrants
to purchase common stock
|
|
|
1,000,000
|
|
|
|
5,547,243
|
|
|
|
1,000,000
|
|
|
|
5,547,243
|
|
|
|
|
7,300,000
|
|
|
|
10,547,243
|
|
|
|
7,300,000
|
|
|
|
10,547,243
|
|
Going
Concern
The
Company’s unaudited condensed consolidated financial statements are prepared using U.S. GAAP applicable to a going concern,
which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company had
an accumulated deficit at September 30, 2017 of $6,730,041. The Company had working capital of $4,861,810 as of September 30,
2017. Due to acquisitions during 2015 of revenue-producing products, the Company believes it has established an ongoing source
of revenue that is sufficient to cover its operating costs and has income from operations of $3,511,270 during the nine months
ended September 30, 2017.
Management’s
plans to continue as a going concern include growing sales revenue on our existing brands, raising additional capital through
borrowing and sales of common stock. However, management cannot provide any assurances that the Company will be successful in
accomplishing any of its plans.
The
ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described
in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying
unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is
unable to continue as a going concern.
Fair
Value Measurements
The
Company measures and discloses the fair value of assets and liabilities required to be carried at fair value in accordance with
ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value,
and enhances fair value measurement disclosure.
ASC
825 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities
required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it
would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent
risk, transfer restrictions, and risk of nonperformance. ASC 825 establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825 establishes
three levels of inputs that may be used to measure fair value:
Level
1 - Quoted prices for identical assets or liabilities in active markets to which we have access at the measurement date.
Level
2 - Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level
3 - Unobservable inputs for the asset or liability.
The
determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant
to the fair value measurement.
As
of September 30, 2017, 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 market. Finished goods include the cost of labor to assemble the items.
Stock-Based
Compensation
ASC
718, “Compensation – Stock Compensation,” prescribes accounting and reporting standards for all share-based
payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering
to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based
payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements
based on their fair values. That expense is recognized over the period during which an employee is required to provide services
in exchange for the award, known as the requisite service period (usually the vesting period).
The
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC
505-50, “Equity – Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees
is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments
issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance
completion date.
Foreign
Currency Translation
The
functional currency of one of the Company’s foreign subsidiaries (Nomadchoice Pty Ltd.) is the U.S. Dollar. The Company’s
foreign subsidiary maintains its records using local currency (Australian Dollar). All monetary assets and liabilities of the
foreign subsidiary were translated into U.S. Dollars at quarter end exchange rates, non-monetary assets and liabilities of the
foreign subsidiary were translated into U.S. Dollars at transaction day exchange rates. Income and expense items related to non-monetary
items were translated at exchange rates prevailing during the transaction date and other incomes and expenses were translated
using average exchange rate for the period. The resulting translation adjustments, net of income taxes, were recorded in statements
of operations as Remeasurement gain or loss on translation of foreign subsidiary.
The
functional currency of the Company’s other foreign subsidiary (Synergy CHC Inc.) is the Canadian Dollar (CAD). The Company’s
foreign subsidiary maintains its records using local currency (CAD). All assets and liabilities of the foreign subsidiary were
translated into U.S. Dollars at period end exchange rates and stockholders’ equity is translated at the historical rates.
Income and expense items were translated using average exchange rate for the period. The resulting translation adjustments, net
of income taxes, are reported as other comprehensive income and accumulated other comprehensive income in the stockholder’s
equity in accordance with ASC 220 – Comprehensive Income.
Translation
gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional
currency are translated into either Australian Dollars or Canadian Dollars, as the case may be, at the rate on the date of the
transaction and included in the results of operations as incurred.
Concentrations
of Credit Risk
In
the normal course of business, the Company provides credit terms to its customers; however, collateral is not required. Accordingly,
the Company performs credit evaluations of its customers and maintains allowances for possible losses which, when realized, were
within the range of management’s expectations. From time to time, a higher concentration of credit risk exists on outstanding
accounts receivable for a select number of customers due to individual buying patterns.
Warehousing
costs
Warehouse
costs include all third party warehouse rent fees and are charged to selling and marketing expenses as incurred. Any additional
costs relating to assembly or special pack-outs of the Company’s products are charged to cost of sales.
Product
display costs
All
displays manufactured and purchased by the Company are for placement of product in retail stores. This also includes all costs
for display execution and setup and retail services are charged to cost of sales and expensed as incurred.
Cost
of Sales
Cost
of sales includes the purchase cost of products sold and all costs associated with getting the products into the retail stores
including buying and transportation costs.
Debt
Issuance Costs
Debt
issuance costs consist primarily of arrangement fees, professional fees and legal fees. These costs are netted off with the related
loan and are being amortized to interest expense over the term of the related debt facilities.
Shipping
Costs
Shipping
and handling costs billed to customers are recorded in sales. Shipping costs incurred by the company are recorded in selling and
marketing expenses.
Related
parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. All transactions
with related parties shall be recorded at fair value of the goods or services exchanged.
Segment
Reporting
Segment
identification and selection is consistent with the management structure used by the Company’s chief operating decision
maker to evaluate performance and make decisions regarding resource allocation, as well as the materiality of financial results
consistent with that structure. Based on the Company’s management structure and method of internal reporting, the Company
has one operating segment. The Company’s chief operating decision maker does not review operating results on a disaggregated
basis; rather, the chief operating decision maker reviews operating results on an aggregate basis.
Recent
Accounting Pronouncements
ASU
2017-13
In
September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606),
Leases (Topic 840), and Leases (Topic 842). The effective date for ASU 2017-13 is for fiscal years beginning after December 15,
2018. We are currently evaluating the impact of adopting ASU 2017-13 on our consolidated financial statements.
ASU
2017-04
In
January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), which simplifies the goodwill impairment
test. The effective date for ASU 2017-04 is for fiscal years beginning after December 15, 2019. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the
impact of adopting ASU 2017-04 on our consolidated financial statements.
ASU
2017-01
In
January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This
new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities
is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed
of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This
new standard will be effective for the Company on January 1, 2018; however, early adoption is permitted with prospective application
to any business development transaction. We are currently evaluating the impact of adopting ASU 2017-04 on our consolidated financial
statements.
ASU
2016-18
In
November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires that restricted cash and restricted
cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash
amounts shown on the statement of cash flows. The effective date for ASU 2016-18 is for fiscal years beginning after December
15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. We are currently
evaluating the impact of adopting ASU 2016-18 on our consolidated financial statements.
ASU
2016-15
In
August 2016, the FASB issued AS 2016-15, Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain
cash receipts and cash payments are presented and classified in the statement of cash flows. The effective date for ASU 2016-15
is for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.
Early adoption is permitted. We are currently evaluating the impact of adopting ASU 2016-18 on our consolidated financial statements.
ASU
2016-10
In
April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing, which provides further guidance on identifying performance obligations and improves the operability and understandability
of licensing implementation guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU 2014-09 as amended
by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within those years.
The Company has not yet determined the impact of ASU 2016-10 on its consolidated financial statements.
ASU
2016-09
In
March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, or ASU No. 2016-09. The areas for simplification
in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities,
the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods. Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim
period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity
that elects early adoption must adopt all of the amendments in the same period. Amendments related to the timing of when excess
tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using
a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period
in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows
when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments
requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating
expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess
tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method.
We are currently evaluating the impact of adopting ASU No. 2016-09 on our consolidated financial statements.
ASU
2016-08
In
March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net) that clarifies how to apply revenue recognition guidance related to whether an entity is
a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or
services before they are transferred to the customer and provides additional guidance about how to apply the control principle
when services are provided and when goods or services are combined with other goods or services. The effective date for ASU 2016-08
is the same as the effective date of ASU 2014-09 as amended by ASU 2015-14, for annual reporting periods beginning after December
15, 2017, including interim periods within those years. The Company has not yet determined the impact of ASU 2016-08 on its consolidated
financial statements.
ASU
2016-01
In
January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the
current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and
the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the
valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt
securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption,
an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the
first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record
fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other
comprehensive income. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
ASU
2015-17
In
November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. Currently deferred taxes for each
tax jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability on the balance sheet.
To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with
any related valuation allowances be classified as noncurrent in a classified statement of financial position. This guidance is
effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company
adopted this guidance in the fourth quarter of the year ended December 31, 2015 on a retrospective basis. The adoption of this
guidance did not have a material impact on the Company’s consolidated financial statements, and did not have any effect
on prior periods due to the full valuation allowance against the Company’s net deferred tax assets.
ASU
2015-16
In
September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement –Period Adjustments. Changes to
the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required
to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment
to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after
the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally
up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and,
instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard
is effective for both public and private companies for periods beginning after December 15, 2015. Adoption of this new standard
did not have any impact on the Company’s consolidated financial statements.
ASU
2015-14
In
August 2015, the FASB issued ASU No. 2015-14, Revenue From Contracts With Customers (Topic 606). The amendments in this ASU defer
the effective date of ASU 2014-09. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods
beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted
only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting
period. We are still evaluating the effect of the adoption of ASU 2014-09 on our consolidated financial statements.
ASU
2015-11
In
July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330). ASU 2015-11 simplifies the accounting
for the valuation of all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing that
inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for financial statements issued for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. We do not
expect the adoption of ASU 2015-11 to have a material effect on our consolidated financial statements.
ASU
2015-05
In
April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). ASU 2015-05
provides guidance regarding the accounting for a customer’s fees paid in a cloud computing arrangement; specifically about
whether a cloud computing arrangement includes a software license, and if so, how to account for the software license. ASU 2015-05
is effective for public companies’ annual periods, including interim periods within those fiscal years, beginning after
December 15, 2015 on either a prospective or retrospective basis. Early adoption is permitted. Adoption of this new standard did
not have any impact on the Company’s consolidated financial statements.
ASU
2015-07
In
May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent) This guidance eliminates the requirement to categorize investments
within the fair value hierarchy if their fair value is measured using the net asset value (“NAV”) per share practical
expedient in the FASB’s fair value measurement guidance. The new standard is effective for fiscal years and interim periods
within those fiscal years, beginning after December 15, 2015. Adoption of this new standard did not have any impact on the Company’s
consolidated financial statements.
ASU
2015-02
In
February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is
intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability
corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed
security transactions). The ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate
whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to
two, the new standard simplifies the FASB Accounting Standards Codification and improves current U.S. GAAP by placing more emphasis
on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party
guidance when determining a controlling financial interest in a variable interest entity (“VIE”), and changing consolidation
conclusions for companies in several industries that typically make use of limited partnerships or VIEs. The ASU will be effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted,
including adoption in an interim period. Adoption of this new standard did not have any impact on the Company’s consolidated
financial statements.
ASU
2015-01
In
January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying
Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates from U.S. GAAP the concept
of extraordinary items. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2015. A reporting entity may apply the amendments prospectively. Adoption of this new standard did not have any impact
on the Company’s consolidated financial statements.
ASU
2014-17
In
November 2014, the FASB issued ASU No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting. This ASU provides an acquired
entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an
acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting
period in which the change-in-control event occurs. If pushdown accounting is applied to an individual change-in-control event,
that election is irrevocable. ASU 2014-17 was effective on November 18, 2014. The adoption of this new standard did not have any
effect on our consolidated financial statements.
ASU
2014-16
In
November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815). ASU 2014-16 addresses whether the host contract
in a hybrid financial instrument issued in the form of a share should be accounted for as debt or equity. ASU 2014-16 is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We have not previously and
do not currently have issued, nor were we or are we investors in, hybrid financial instruments. Adoption of this new standard
did not have any impact on the Company’s consolidated financial statements.
ASU
2014-15
In
August 2014, the FASB issued ASU No. 2014-15 Presentation of Financial Statements-Going Concern. The amendments in this update
apply to all reporting entities and require an entity’s management, in connection with preparing financial statements for
each annual and interim reporting period, to evaluate whether there are conditions or events, considered in the aggregate, that
raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the
financial statements are issued (or within one year after the date that the financial statements are available to be issued when
applicable). This ASU is effective for annual periods ending after December 15, 2016. We adopted this standard for the year ended
December 31, 2016. Based on the results of our analysis, no additional disclosures were required.
ASU
2014-12
In
June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments
When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires
that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance
condition. ASU 2014-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2015. Adoption of this new standard did not have any impact on the Company’s consolidated financial statements.
ASU
2014-09
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 affects any entity using
U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer
of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts).
ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. In
August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 by one year for all entities and permits
early adoption on a limited basis. ASU 2014-09 will be effective for the Company in the first quarter of 2018, and early adoption
is permitted in the first quarter of 2017. We are still evaluating the effect of the adoption of the new standard on our consolidated
financial statements.
ASU
2014-08
In
April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment
(Topic 360) and Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 amends
the definition for what types of asset disposals are to be considered discontinued operations, as well as amending the required
disclosures for discontinued operations and assets held for sale. ASU 2014-08 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2014. The adoption of the new standard did not have any effect on
our consolidated financial statements.
There
were various updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to a have a material impact on the Company’s unaudited condensed consolidated
financial statements.
Note
3 – Inventory
Inventory
consists of finished goods, components and raw materials. The Company’s inventory is stated at the lower of cost (FIFO cost
basis) or market.
The
carrying value of inventory consisted of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Finished
goods
|
|
$
|
901,310
|
|
|
$
|
474,420
|
|
Components
|
|
|
1,109,058
|
|
|
|
431,241
|
|
Inventory
in transit
|
|
|
-
|
|
|
|
104,500
|
|
Raw
materials
|
|
|
92,617
|
|
|
|
92,616
|
|
Total
inventory
|
|
$
|
2,102,985
|
|
|
$
|
1,102,777
|
|
On
January 22, 2015, inventory was pledged to Knight Therapeutics under the Loan Agreement (see note 10).
Note
4 – Accounts Receivable
Accounts
receivable, net of allowances for sales returns and doubtful accounts, consisted of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Trade
accounts receivable
|
|
$
|
2,580,966
|
|
|
$
|
2,195,391
|
|
Less
allowances
|
|
|
-
|
|
|
|
-
|
|
Total
accounts receivable, net
|
|
$
|
2,580,966
|
|
|
$
|
2,195,391
|
|
Note
5 – Prepaid Expenses and Other Current Asset
Prepaid
expenses consisted of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Advances
for inventory
|
|
$
|
192,804
|
|
|
$
|
188,980
|
|
Media
production
|
|
|
139,487
|
|
|
|
207,555
|
|
Insurance
|
|
|
12,769
|
|
|
|
70,392
|
|
Trade
shows
|
|
|
-
|
|
|
|
46,700
|
|
Deposits
|
|
|
54,474
|
|
|
|
6,228
|
|
Consultants
|
|
|
-
|
|
|
|
15,000
|
|
Rent
|
|
|
19,500
|
|
|
|
15,452
|
|
Promotion
- Bloggers
|
|
|
562,030
|
|
|
|
426,220
|
|
License
agreement
|
|
|
183,333
|
|
|
|
258,333
|
|
Software
subscriptions
|
|
|
30,359
|
|
|
|
88,782
|
|
Clinical
Research
|
|
|
70,590
|
|
|
|
-
|
|
Advertising
|
|
|
116,470
|
|
|
|
-
|
|
Miscellaneous
|
|
|
45,437
|
|
|
|
24,960
|
|
Total
|
|
$
|
1,427,253
|
|
|
$
|
1,348,602
|
|
Note
6 – Concentration of Credit Risk
Cash
and cash equivalents
The
Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts
that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing
its cash deposits with major financial institutions. At September 30, 2017 and December 31, 2016, the uninsured balances amounted
to $4,997,278 and $2,038,985, respectively.
Accounts
receivable
As
of September 30, 2017, four customers accounted for 88% of the Company’s accounts receivable. As of December 31, 2016, three
customers accounted for 91% of the Company’s accounts receivable.
Major
customers
For
the nine months ended September 30, 2017, two customers accounted for approximately 34% of the Company’s net revenue. For
the three months ended September 30, 2017, two customers accounted for approximately 50% of the Company’s net revenue. For
the nine months ended September 30, 2016, four customers accounted for approximately 37% of the Company’s net revenue. For
the three months ended September 30, 2016, three customers accounted for approximately 53% of the Company’s net revenue.
For the year ended December 31, 2016, three customers accounted for approximately 34% of the Company’s net revenues. Substantially
all of the Company’s business is with companies in the United States.
Major
suppliers
For
the three and nine months ended September 30, 2017 and the year ended December 31, 2016, our products were made by the following
suppliers:
FOCUSfactor
|
Atrium
Innovations - Pittsburgh, PA
|
Vit-Best
Nutrition, Inc. - Tustin, CA
|
Flat
Tummy Tea
|
Caraway
Tea Company, LLC - Highland, NY
|
-
|
Neuragen
|
C-Care,
LLC - Linthicum Heights, MD
|
-
|
UrgentRx
|
Capstone
Nutrition - Ogden, UT
|
-
|
Hand
MD
|
HealthSpecialty
- Santa Fe Springs, CA
|
|
Sneaky
Vaunt
|
Dongguan
Jingrui - China
|
|
The
Queen Pegasus
|
Skin
Actives - Gilbert, AZ
|
|
The
Queen Pegasus
|
Ningbo
Beautiful Daily Cosmetics - Zhejiang, China
|
|
It
is the opinion of management that the products can be produced by other manufacturers and the choice to utilize these suppliers
is not a significant concentration.
Note
7 – Fixed Assets and Intangible Assets
As
of September 30, 2017 and December 31, 2016, fixed assets and intangible assets consisted of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
$
|
388,717
|
|
|
$
|
308,084
|
|
Less
accumulated depreciation
|
|
|
(113,472
|
)
|
|
|
(50,698
|
)
|
Fixed
assets, net
|
|
$
|
275,245
|
|
|
$
|
257,386
|
|
Depreciation
expense for the three months ended September 30, 2017 and 2016 was $27,134 and $16,089, respectively. Depreciation expense for
the nine months ended September 30, 2017 and 2016 was $77,445 and $26,783, respectively. During the nine months ended September
30, 2017, we sold fixed assets with an aggregate carrying value of $9,076 for $6,199 which resulted in loss on sale of fixed assets
of $2,877.
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
FOCUSfactor
intellectual property
|
|
$
|
1,450,000
|
|
|
$
|
1,450,000
|
|
Perfekt
intellectual property
|
|
|
10,000
|
|
|
|
-
|
|
Intangible
assets subject to amortization
|
|
|
7,134,952
|
|
|
|
5,373,017
|
|
Less
accumulated amortization
|
|
|
(2,646,424
|
)
|
|
|
(1,677,583
|
)
|
Intangible
assets, net
|
|
$
|
5,948,528
|
|
|
$
|
5,145,434
|
|
Amortization
expense for the three months ended September 30, 2017 and 2016 was $369,722 and $281,990, respectively. Amortization expense for
the nine months ended September 30, 2017 and 2016 was $968,841 and $844,306, respectively. These intangible assets were acquired
through an Asset Purchase Agreement and Stock Purchase Agreements.
Note
8 – Related Party Transactions
The
Company accrued and paid consulting fees of $41,250 per month through April 2017 and $57,917 per month through September 2017,
accounting fees of $12,500 per month and rent of $1,500 per month to a company owned by Mr. Jack Ross, Chief Executive Officer
of the Company. The Company expensed $215,751 during the three months ended September 30, 2017 and $580,585 during the nine months
ended September 30, 2017. The Company also paid out a bonus of $525,000 during the nine months ended September 30, 2017. As of
September 30, 2017, the total outstanding balance was $0.
On
January 22, 2015, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc. (“Knight”), a
related party, for the purchase of the Focus Factor assets. At September 30, 2017, the Company owed Knight $1,107,476 on this
loan, net of debt issuance cost (see Note 10).
On
June 26, 2015, the Company entered into a Security Agreement with Knight Therapeutics, Inc., through its wholly owned subsidiary
Neuragen Corp., for the purchase of Knight Therapeutics, Inc.’s assets. At September 30, 2017, the Company owed Knight $587,500
in relation to this agreement (see Note 10).
On
August 18, 2015, the Company entered into a Consulting Agreement with Kara Harshbarger, the co-founder of Hand MD, LLC, pursuant
to which she will provide marketing and sales related service. The Company pays Ms. Harshbarger $10,000 a month for one year unless
the Consulting Agreement is terminated earlier by either party. The Company has extended this agreement on a month to month basis.
Hand MD, LLC is a 50% owner in Hand MD Corp. The Company expensed $30,000 through payroll for the three months ended September
30, 2017 and $90,000 for the nine months ended September 30, 2017. As of September 30, 2017, the total outstanding balance was
$0.
On
November 12, 2015, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party, for the
purchase of NomadChoice Pty Limited and Breakthrough Products, Inc. At September 30, 2017, the Company owed Knight $673,744 on
this loan, net of debt issuance cost (see Note 10).
On
August 9, 2017, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party, for a working
capital loan. At September 30, 2017, the Company owed Knight $9,572,290 on this loan, net of debt issuance cost (see Note 10).
The
Company expensed royalty of $83,079 during the three months ended September 30, 2017 and $318,342 during the nine months ended
September 30, 2017. At September 30, 2017 NomadChoice Pty Ltd., a subsidiary of the Company, owed Knight Therapeutics $33,040
in connection with a royalty distribution agreement.
The
Company expensed royalty of $11,169 during the three months ended September 30, 2017 and $113,387 during the nine months ended
September 30, 2017. At September 30, 2017 Sneaky Vaunt Corp., a subsidiary of the Company, owed Knight Therapeutics $3,223 in
connection with a royalty distribution agreement.
The
Company expensed commissions of $27,171 during the three months ended September 30, 2017 and $159,992 during the nine months ended
September 30, 2017. At September 30, 2017 Sneaky Vaunt Corp., a subsidiary of the Company, owed Founded Ventures, owned by a shareholder
in the Company, $4,217 in connection with a commission agreement. The Company paid a development fee for the brand, Sneaky Vaunt,
in the amount of $761,935 during the nine months ended September 30, 2017.
The
Company expensed commissions of $8,010 during the three and nine months ended September 30, 2017. The Company paid a development
fee for the brand, The Queen Pegasus, in the amount of $1,000,000 during the three months ended September 30, 2017. At September
30, 2017, The Queen Pegasus, a subsidiary of the Company, owed Founded Ventures $3,814 in connection with a commission agreement.
The
Company paid $31,250 and $93,750 during the three and nine months ended September 30, 2017 to Hand MD, Corp, related to a royalty
agreement. At September 30, 2017, the Company owed Hand MD Corp. $245,762 in minimum future royalties.
Note
9 – Accounts Payable and Accrued Liabilities
As
of September 30, 2017 and December 31, 2016, accounts payable and accrued liabilities consisted of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Accrued
payroll
|
|
$
|
198,772
|
|
|
$
|
275,913
|
|
Accrued
legal fees
|
|
|
76,385
|
|
|
|
37,546
|
|
Commissions
|
|
|
66,170
|
|
|
|
-
|
|
Manufacturers
|
|
|
1,994,627
|
|
|
|
1,459,460
|
|
Promotions
|
|
|
27,055
|
|
|
|
1,244,480
|
|
Returns
allowance
|
|
|
-
|
|
|
|
860,126
|
|
Customers
|
|
|
17,278
|
|
|
|
401,594
|
|
Interest
|
|
|
159,002
|
|
|
|
31,079
|
|
Royalties,
related party
|
|
|
31,414
|
|
|
|
87,677
|
|
Warehousing
|
|
|
23,478
|
|
|
|
19,080
|
|
Others
|
|
|
149,623
|
|
|
|
141,964
|
|
Total
|
|
$
|
2,743,804
|
|
|
$
|
4,558,919
|
|
Note
10 – Notes Payable
The
Company’s loans payable at September 30, 2017 and December 31, 2016 are as follows:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Loans
payable
|
|
$
|
12,097,038
|
|
|
$
|
7,634,697
|
|
Unamortized
debt issuance cost
|
|
|
(458,989
|
)
|
|
|
(163,549
|
)
|
Total
|
|
|
11,638,049
|
|
|
|
7,471,148
|
|
Less:
Current portion
|
|
|
(3,705,403
|
)
|
|
|
(6,640,903
|
)
|
Long-term
portion
|
|
$
|
7,932,646
|
|
|
$
|
830,245
|
|
$6,000,000
January 22, 2015 Loan:
On
January 22, 2015, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Knight Therapeutics
(Barbados) Inc. (“Knight”), pursuant to which Knight agreed to loan the Company $6.0 million (the “Loan”),
and which amount was borrowed at closing (the “Financing”) for the purpose of acquiring the Focus Factor Business
(defined below). At closing, the Company paid Knight an origination fee of $120,000 and a work fee of $60,000 and also paid $40,000
of Knight’s expenses associated with the Loan. The Loan bears interest at a rate of 15% per year; provided, however, that
upon the occurrence of an equity or convertible equity offering by the Company of at least $1.0 million, the interest rate will
drop to 13% per year. Interest accrues quarterly and is payable in arrears on March 31, June 30, September 30 and December 31
in each year, beginning on March 31, 2015.
All
outstanding principal and accrued and unpaid interest is due on the earliest to occur of either January 20, 2017 (the “Maturity
Date”), or the date that Knight, in its discretion, accelerates the Company’s obligations due to an event of default.
The Company may extend the Maturity Date for two successive additional 12-month periods if at March 31, 2016 and March 31, 2017,
respectively, the Company’s revenues exceed $13.0 million and its EBITDA exceeds $2.0 million for the respective 12-month
period then ending. These covenants were achieved, therefore the Company chose to extend the loan for the first 12-month period
to January 20, 2018. Principal payments under the Loan Agreement commenced on June 30, 2015 and continue quarterly as set forth
on the Repayment Schedule to the Loan Agreement.
Subject
to certain restrictions, the Company may prepay the outstanding principal of the Loan (in whole but not in part) at any time if
the Company pays a concurrent prepayment fee equal to the greater of (i) the total unpaid annual interest that would have been
payable during the year in which the prepayment is made if the prepayment is made prior to the first anniversary of the closing,
and (ii) $300,000. The Company’s obligations under the Loan Agreement are secured by a first priority security interest
in all present and future assets of the Company. The Company also agreed to not pledge or otherwise encumber its intellectual
property assets, subject to certain customary exceptions.
The
Loan Agreement includes customary representations, warranties, and affirmative and restrictive covenants, including covenants
to attain and maintain certain financial metrics, and to not merge or dispose of assets, acquire other businesses (except for
businesses substantially similar or complementary to the Company’s business and the aggregate consideration to be paid does
not exceed $100,000) or make capital expenditures in excess of $100,000 over the Company’s annual business plan in any year.
The Loan Agreement also includes customary events of default, including payment defaults, breaches of covenants, change of control
and material adverse effect default. Upon the occurrence of an event of default and during the continuation thereof, the principal
amount of the Loan will bear a default interest rate of an additional 5%.
In
connection with the Loan Agreement, the Company issued to Knight a warrant that entitled Knight to purchase 4,595,187 shares of
common stock of the Company (“Common Stock”) on or prior to close of business on January 30, 2015 (the “ST Warrant”).
The aggregate exercise price of the Common Stock under the ST Warrant is $1.00. Knight exercised the ST Warrant on January 22,
2015. Also in connection with the Loan Agreement, the Company issued to Knight a warrant to purchase 3,584,759 shares of Common
Stock on or prior to the close of business of January 22, 2025 (the “LT Warrant”). The exercise price per share of
the Common Stock under the LT Warrant is $0.34. The LT Warrant provides for cashless exercise. The LT Warrant also provides that
in the event the closing price of the Common Stock remains above $1.00 for six consecutive months, Knight will forfeit the difference
between the number of shares acquired under the LT Warrant prior to 90 days after such six-month period, and 25% of the shares
purchasable under the LT Warrant.
The
beneficial conversion feature of the warrants issued to Knight amounted to $1,952,953 (ST warrants) and $1,462,560 (LT warrants),
respectively, and was recorded as debt discount of the corresponding debt.
During
2016, this debt discount was fully expensed in conjunction with the cancellation of all warrants and options held by Knight.
The
Company also recorded deferred financing costs of $289,045 with respect to the above loan. The Company recognized amortization
of deferred financing costs of $14,267 and $42,337 during the three and nine months ended September 30, 2017, respectively. Unamortized
debt issuance cost as of September 30, 2017 amounted to $17,524.
The
Company recognized and paid interest expense of $63,627 and $251,281 during the three and nine months ended September 30, 2017,
respectively. Accrued interest expense was $0 as of September 30, 2017. Loan payable balance was $1,125,000 as of September 30,
2017.
$1,500,000
January 22, 2015 Loan:
On
January 22, 2015, the Company issued a 0% promissory note in a principal amount of $1,500,000 in connection with an Asset Purchase
Agreement. The note has a maturity date of January 20, 2017, with $750,000 to be paid on or before January 20, 2016 and an additional
$750,000 to be paid on or before January 20, 2017. This loan was paid in full in January 2017.
$950,000
June 26, 2015 Security Agreement:
On
June 26, 2015, the Company, through its wholly owned subsidiary, Neuragen Corp. (“Neuragen”), issued a 0% promissory
note in a principal amount of $950,000 in connection with an Asset Purchase Agreement. The note requires $250,000 to be paid on
or before June 30, 2016, and $700,000 to be paid in quarterly installments (beginning with the quarter ended September 30, 2015)
equal to the greater of $12,500 or 5% of U.S. net sales, and 2% of U.S. net sales of Neuragen for 60 months thereafter. The payment
of such amounts is secured by a security interest in certain assets, undertakings and property (“Collateral”) pursuant
to the Security Agreement, which will be released upon receipt of total payments of $1.2 million.
The
Company also recorded deferred financing costs of $10,486 with respect to the above agreement. The Company recognized amortization
of deferred financing costs of $0 and $2,600 during the three and nine months ended September 30, 2017, respectively. Unamortized
debt issuance cost as of September 30, 2017 amounted to $0. The Company recorded present value of future payments of $284,538
and $290,947 as of September 30, 2017 and December 31, 2016, respectively. The Company recorded imputed interest expense of $10,284
and $31,091 for the three and nine months ended September 30, 2017, respectively.
During
the three and nine months ended September 30, 2017, the Company made payments of $12,500 and $37,500, respectively, in connection
with this Security Agreement.
$5,500,000
November 12, 2015 Loan:
On
November 12, 2015, we entered into a First Amendment to Loan Agreement (“First Amendment”) with Knight, pursuant to
which Knight agreed to loan us an additional $5.5 million, and which amount was borrowed at closing (the “Financing”)
for the purpose of acquiring Breakthrough Products, Inc. and NomadChoice Pty Limited through Stock Purchase Agreements. At closing,
we paid Knight an origination fee of $110,000 and a work fee of $55,000 and also paid $24,000 of Knight’s expenses associated
with the Loan. The Loan bears interest at a rate of 15% per year. The interest rate will decrease to 13% if we meet certain equity-fundraising
targets. The New Loan Agreement matures on November 11, 2017.
In
connection with the First Amendment, we issued Knight a warrant that entitles Knight to purchase 5,550,625 shares of our common
stock (“Knight Warrant Shares”) representing approximately 6.5% of our fully diluted capital, which Knight exercised
in full on November 12, 2015. Knight also received a 10-year warrant entitling Knight to purchase up to 4,547,243 shares of our
common stock at $0.49 per share (“Knight Warrants”).
The
beneficial conversion feature of the warrants issued to Knight amounted to $2,553,287 (5,550,625 warrants) and $2,067,258 (4,547,243
warrants), respectively, and was recorded as debt discount of the corresponding debt in 2015.
During
2016, this debt discount was fully expensed in conjunction with the cancellation of all warrants and options held by Knight.
The
Company also recorded deferred financing costs of $233,847 with respect to the above loan. The Company recognized amortization
of deferred financing costs of $29,431 and $87,333 during the three and nine months ended September 30, 2017, respectively. Unamortized
debt issuance cost as of September 30, 2017 amounted to $13,756.
The
Company recognized interest expense of $57,213 and $259,402 during the three and nine months ended September 30, 2017, respectively.
During the three and nine months ended September 30, 2017, the Company paid interest of $65,689 and $284,830, respectively. Accrued
interest was $5,651 as of September 30, 2017. Loan balance at September 30, 2017 was $687,500.
$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. The Loan
bears interest at a rate of 10.5% per year. The New Loan Agreement matures on August 8, 2020.
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 $25,159 during the three and nine months ended September 30, 2017. Unamortized debt issuance cost
as of September 30, 2017 amounted to $427,710.
The
Company recognized interest expense of $153,352 during the three and nine months ended September 30, 2017. Accrued interest was
$153,352 as of September 30, 2017. Loan balance at September 30, 2017 was $10,000,000.
Note
11 – Stockholders’ Equity
The
total number of shares of all classes of capital stock which the Company is authorized to issue is 300,000,000 shares of common
stock with $0.00001 par value.
During
the nine months ended September 30, 2017, the Company issued 473,326 shares of its common stock valued at $0.51 per share in accordance
with an asset purchase agreement entered into with Perfekt Beauty Holdings, LLC and CDG Holdings, LLC, in exchange for assets
and liabilities related to the Per-fekt brand.
As
of September 30, 2017 and December 31, 2016, there were 89,237,683 and 88,764,357 shares of the Company’s common stock issued
and outstanding, respectively.
Note
12 – Commitments & Contingencies
Litigation:
From
time to time the Company may become a party to litigation in the normal course of business. Management believes that there are
no current legal matters that would have a material effect on the Company’s financial position or results of operations.
Operating
leases
In
April 2014, a subsidiary entered into an extension of a non-cancellable operating lease for office space that expired on March
31, 2017. Rent expense under this lease for the period from acquisition until March 31, 2017 was $8,923 per month less a $3,010
per month sublease through March 2017 and expired.
In
December 2015, a subsidiary entered into a non-cancellable operating lease for office space through November 2016. This lease
was extended until April 2017 and expired.
On
December 8, 2014, a subsidiary entered into a non-cancellable 36 month phone lease with an estimated cost of $894 a month.
On
August 16, 2017, the Company entered into a sublease for office space, effective October 1, 2017 through May 2021. Rent expense
under this lease will be $19,500 per month, and increasing annually on June 1.
The
following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of September 30, 2017:
Year
ending December 31:
|
|
|
|
2017
– remaining three months
|
|
$
|
58,500
|
|
2018
–
|
|
|
238,095
|
|
2019
–
|
|
|
245,234
|
|
2020
–
|
|
|
252,591
|
|
2021
–
|
|
|
106,540
|
|
Total
|
|
$
|
900,960
|
|
Note
13 – Stock Options
On
July 30, 2014, the Company’s board of directors approved the Company’s 2014 Equity Incentive Plan (the “Plan”)
and the reservation of 15,525,000 shares of common stock for issuance under the Plan. The Plan was approved by the Company’s
shareholders and became effective on August 5, 2015.
On
April 2, 2014, the Company granted 1,000,000 options with an exercise price of $0.25 per share to a company owned by Mr. Jack
Ross, Chief Executive Officer of the Company.
On
December 14, 2015, the Company granted 1,000,000 options each with an exercise price of $0.25 per share to two Board members of
the Company.
On
December 14, 2015, the Company granted 1,000,000 options each with an exercise price of $0.65 per share to two employees of the
Company.
On
February 18, 2016, the Company granted 300,000 options with an exercise price of $0.70 per share to an employee of the Company.
On
April 18, 2016, the Company granted 500,000 options with an exercise price of $0.70 per share to an employee of the Company.
On
July 4, 2016, the Company granted 500,000 options with an exercise price of $0.70 per share to an employee of the Company.
The
following table summarizes the options outstanding, option exercisability and the related prices for the shares of the Company’s
common stock issued to employees and consultants under the Plan at September 30, 2017:
|
|
|
|
Options
Outstanding
|
|
|
|
Options
Exercisable
|
|
|
Exercise
Prices ($)
|
|
|
Number
Outstanding
|
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
|
Weighted
Average
Exercise
Price
($)
|
|
|
|
Number
Exercisable
|
|
|
|
Weighted
Average
Exercise
Price
($)
|
|
$
|
0.25
- $0.70
|
|
|
6,300,000
|
|
|
|
6.22
|
|
|
$
|
0.47
|
|
|
|
4,150,000
|
|
|
$
|
0.43
|
|
The
stock option activity for the nine months ended September 30, 2017 is as follows:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
at December 31, 2016
|
|
|
6,300,000
|
|
|
$
|
0.47
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
or canceled
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at September 30, 2017
|
|
|
6,300,000
|
|
|
$
|
0.47
|
|
Stock-based
compensation expense related to vested options was $343,952 and $1,024,631 during the three and nine months ended September 30,
2017, respectively, which is a component of general and administrative expense in the statement of income. The Company determined
the value of share-based compensation for options vesting during the period using the Black-Scholes fair value option-pricing
model with the following weighted average assumptions: estimated fair value of Company’s common stock of $0.40-0.74, risk-free
interest rate of 0.90-2.23%, volatility of 135-160%, expected lives of 3-10 years, and dividend yield of 0%. Stock options outstanding
as of September 30, 2017, as disclosed in the above table, have an intrinsic value of $840,000.
As
of September 30, 2017, unrecognized compensation costs related to non–vested stock–based compensation arrangements
were $514,328, and is expected to be recognized over a weighted average period of 1 year.
Note
14 – Stock Warrants
The
following table summarizes the warrants outstanding, warrant exercisability and the related prices for the shares of the Company’s
common stock at September 30, 2017:
|
|
|
Warrants
Outstanding
|
|
|
|
Warrants
Exercisable
|
|
Exercise
Prices ($)
|
|
|
Number
Outstanding
|
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
|
Weighted
Average
Exercise
Price
($)
|
|
|
|
Number
Exercisable
|
|
|
|
Weighted
Average
Exercise
Price
($)
|
|
5.00
|
|
|
1,000,000
|
|
|
|
1.21
|
|
|
|
5.00
|
|
|
|
1,000,000
|
|
|
|
5.00
|
|
The
warrant activity for the six months ended June 30, 2017 is as follows:
|
|
Warrants
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
at December 31, 2016
|
|
|
1,000,000
|
|
|
$
|
5
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
or canceled
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at September 30, 2017
|
|
|
1,000,000
|
|
|
$
|
5
|
|
Warrants
outstanding as of September 30, 2017, as disclosed in the above table, have an intrinsic value of $0.
Note
15 – Segments
Segment
identification and selection is consistent with the management structure used by the Company’s chief operating decision
maker to evaluate performance and make decisions regarding resource allocation, as well as the materiality of financial results
consistent with that structure. Based on the Company’s management structure and method of internal reporting, the Company
has one operating segment. The Company’s chief operating decision maker does not review operating results on a disaggregated
basis; rather, the chief operating decision maker reviews operating results on an aggregate basis.
Net
sales attributed to customers in the United States and foreign countries for the three months ended September 30, 2017 and 2016
were as follows:
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
United
States
|
|
$
|
8,472,498
|
|
|
$
|
10,771,707
|
|
Foreign
countries
|
|
|
703,175
|
|
|
|
797,861
|
|
|
|
$
|
9,175,673
|
|
|
$
|
11,569,568
|
|
The
Company’s net sales by product group for the three months ended September 30, 2017 and 2016 were as follows:
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
Nutraceuticals
|
|
$
|
7,961,616
|
|
|
$
|
11,341,036
|
|
Over
the Counter (OTC)
|
|
|
169,403
|
|
|
|
222,390
|
|
Consumer
Goods
|
|
|
733,744
|
|
|
|
-
|
|
Cosmeceuticals
|
|
|
310,910
|
|
|
|
6,142
|
|
|
|
$
|
9,175,673
|
|
|
$
|
11,569,568
|
|
(1)
Net sales for any other product group of similar products are less than 10% of consolidated net sales.
Net
sales attributed to customers in the United States and foreign countries for the nine months ended September 30, 2017 and 2016
were as follows:
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
United
States
|
|
$
|
26,926,114
|
|
|
$
|
26,144,435
|
|
Foreign
countries
|
|
|
2,356,796
|
|
|
|
1,967,459
|
|
|
|
$
|
29,282,910
|
|
|
$
|
28,111,894
|
|
The
Company’s net sales by product group for the nine months ended September 30, 2017 and 2016 were as follows:
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
Nutraceuticals
|
|
$
|
24,126,323
|
|
|
$
|
27,281,476
|
|
Over
the Counter (OTC)
|
|
|
1,245,096
|
|
|
|
780,265
|
|
Consumer
Goods
|
|
|
3,506,378
|
|
|
|
-
|
|
Cosmeceuticals
|
|
|
405,113
|
|
|
|
50,153
|
|
|
|
$
|
29,282,910
|
|
|
$
|
28,111,894
|
|
(1)
Net sales for any other product group of similar products are less than 10% of consolidated net sales.
Long-lived
assets (net) attributable to operations in the United States and foreign countries as of September 30, 2017 and December 31, 2016
were as follows:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
United
States
|
|
$
|
14,005,762
|
|
|
$
|
13,174,461
|
|
Foreign
countries
|
|
|
11,251
|
|
|
|
21,599
|
|
|
|
$
|
14,017,013
|
|
|
$
|
13,196,060
|
|
Note
16 – Income Taxes
Income
tax expense was $97,713 and $221,424 for the three and nine months ended September 30, 2017, respectively, compared to $264,376
and $659,462, respectively, for the same periods in 2016. The current provision is attributable to Australian operations and the
current tax rate in effect in that country. The Company also has operations in Canada that started at the beginning of 2016 and
is currently evaluating its tax position as it pertains to the 2017 year end.
The
total deferred tax asset is calculated by multiplying a domestic (US) 34% marginal tax rate by the cumulative net operating loss
carryforwards (“NOL”). The Company currently has NOLs, which expire through 2035. Management has determined based
on all the available information that a 100% valuation reserve is required.
For
U.S. purposes, the Company has not completed its evaluation of NOL utilization limitations under Internal Revenue Code, as amended
(the “Code”) Section 382, change of ownership rules. If the Company has had a change in ownership, the NOL’s
would be limited as to the amount that could be utilized each year, based on the Code.
Note
17 – Asset Purchase
On
June 21, 2017, the Company entered into and simultaneously closed on an Asset Purchase Agreement with Perfekt Beauty Holdings
LLC and CDG Holdings, LLC, which owns 92.3% of the issued and outstanding equity interests of Perfekt Beauty. Perfekt Beauty is
engaged in the business of developing and selling skincare and cosmetics products under the brand Per-fekt.
The
Company has accounted for this transaction under the acquisition method of accounting. Under the acquisition method of accounting,
the total acquisition consideration price is allocated to the assets acquired and liabilities assumed based on their estimated
fair values. The Company has allocated the purchase price to the assets acquired and liabilities assumed as follows:
Accounts
Receivable
|
|
$
|
52,439
|
|
Inventory
|
|
|
290,174
|
|
Intellectual
Property
|
|
|
10,000
|
|
Accounts
Payable
|
|
|
(111,217
|
)
|
Consideration
paid in 473,326 shares of common stock
|
|
$
|
241,396
|
|
As
additional consideration, the Company will pay quarterly royalties equal to 5% of net sales for 10 years following the closing
date. The purchase price is subject to adjustment as provided in the Purchase Agreement, based on the final amounts of accounts
payable, accounts receivable and new and unsold inventory.
Note
18 – Subsequent Events
Management
evaluated all activities of the Company through the issuance date of the Company’s unaudited condensed consolidated financial
statements and concluded that no subsequent events except as disclosed below have occurred that would require adjustments or disclosure
into the unaudited condensed consolidated financial statements.
During
October 2017, the Company paid $352,344 in principal and accrued interest on the second loan (November 12, 2015) to Knight Therapeutics
(Barbados) Inc.
During
October 2017, the Company hired a new Chief Financial Officer, Jeffrey Kadanoff, with an employment date of November 1, 2017.
In exchange for his service as Chief Financial Officer, Mr. Kadanoff will receive an annual base salary of $450,000. He will receive
a signing bonus consisting of: (i) 100,000 shares of the Company’s common stock, and (ii) a cash payment equal to the value
of 100,000 shares of the Company’s common stock based on a price of $0.55 per share. He will receive an annual bonus for
calendar year 2017 of $37,500. Beginning with calendar year 2018, Mr. Kadanoff will be eligible for an annual target bonus of
up to half his base salary. The target bonus will be determined at the discretion of our Board or compensation committee based
upon the achievement of financial and other performance-related goals and may be paid in cash or shares of the Company’s
common stock. In conjunction with the employment agreement, Mr. Kadanoff purchased 400,000 shares of the Company’s stock
at $0.55 per share. Mr. Kadanoff was also awarded an option to purchase 1,500,000 shares of stock at an exercise price of $0.55
per share. The Initial Option will vest in three (3) equal annual installments on the first three anniversaries of Mr. Kadanoff’s
Start Date with the Company, provided that Mr. Kadanoff remains employed by the Company on each such date. The Initial Option
will expire on the tenth anniversary of the grant date. Subject to the approval by the Board, during each calendar year of Mr.
Kadanoff’s employment with the Company beginning with 2018, the Company will grant to him an option to purchase 500,000
shares of the Company’s common stock (such options collectively the “Additional Options”). The exercise price
of each Additional Option will be the Fair Market Value of the common stock on the date each such Additional Option is granted.
Each Additional Option will expire on the tenth anniversary of the date of grant of such Additional Option. The Additional Options
will vest in three (3) equal annual installments on the first three anniversaries of the date of grant of such Additional Option,
provided that Mr. Kadanoff remains employed by the Company on each such date. Upon the occurrence of a Change in Control , the
vesting of stock options granted to Mr. Kadanoff will be accelerated subject to his continued service to the Company as of such
date and provided further that Mr. Kadanoff’s stock options will be treated no less favorably than those of any other senior
executive or Chairman of the Company.
During
October 2017, the Company hired a new President, Patrick McCullough, with an employment date of November 6, 2017 and a three-year
initial term. In exchange for his service as President, Mr. McCullough will receive an annual base salary of $340,000. He will
receive a cash signing bonus of $37,500, to be paid on January 1, 2018, and an additional cash signing bonus of $37,500, to be
paid on July 1, 2018, provided that he is employed by the Company through such dates. 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. In conjunction with the employment agreement, Mr. McCullough was awarded an option to
purchase 1,000,000 shares of stock with an exercise price of $0.70 per share. The Option Grant will vest 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.
During
October 2017, the Company appointed a new board member, Gale Bensussen.