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 June 30, 2019 and December 31, 2018 and for the three and six months
ended June 30, 2019 and 2018 are unaudited. These unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States (“GAAP”) 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
six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December
31, 2019. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated
financial statements as of and for the year ended December 31, 2018 and footnotes thereto included in the Company’s Annual
Report on Form 10-K filed with the SEC on March 29, 2019.
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 June
30, 2019, the Company had no cash equivalents. The Company maintains its cash and cash equivalents in banks insured by the Federal
Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $250,000 per
bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At June 30, 2019, the uninsured
balance amounted to $770,545.
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.
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,064,301
|
|
|
$
|
459,736
|
|
|
$
|
865,812
|
|
Restricted cash
|
|
|
136,966
|
|
|
|
136,180
|
|
|
|
138,023
|
|
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
|
|
$
|
1,201,267
|
|
|
$
|
595,916
|
|
|
$
|
1,003,835
|
|
Amounts
included in restricted cash represent amounts held for credit card collateral.
Capitalization
of Fixed Assets
The
Company capitalizes expenditures related to property and equipment, subject to a minimum rule, that have a useful life greater
than one year for: (1) assets purchased; (2) existing assets that are replaced, improved or the useful lives have been extended;
or (3) all land, regardless of cost. Acquisitions of new assets, additions, replacements and improvements (other than land) costing
less than the minimum rule in addition to maintenance and repair costs, including any planned major maintenance activities, are
expensed as incurred.
Intangible
Assets
We
evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised
estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization except
intellectual property of $1,450,000 acquired as part of an Asset Purchase Agreement entered into with Factor Nutrition Labs LLC
on January 22, 2015, $10,000 acquired as part of an Asset Purchase Agreement entered into with Perfekt Beauty Holdings LLC and
CDG Holdings, LLC (“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. As of June 30, 2019, our qualitative analysis of intangible assets with indefinite lives did not indicate any impairment.
Long-lived
Assets
Long-lived
assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived
asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset
is not recoverable when compared to undiscounted cash flows expected to result from the use and eventual disposition of the asset.
Indicators
of impairment include significant underperformance relative to historical or projected future operating results, significant changes
in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry
or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability
of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected,
net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically
a discounted cash flow analysis, and an impairment charge is recorded for the excess of carrying value over fair value. However,
as of December 31, 2018 our review of intangible assets related to two of our subsidiaries did indicate that the carrying amount
of the asset may not be recoverable. During the year ended December 31, 2018, the Company fully impaired related intangible assets
and charged to operations impairment loss of $864,067. As of June 30, 2019, our qualitative analysis of long-lived assets did
not indicate any impairment.
Goodwill
An
asset purchase is accounted for under the purchase method of accounting. Under that method, assets and liabilities of the business
acquired are recorded at their estimated fair values as of the date of the acquisition, with any excess of the cost of the acquisition
over the estimated fair value of the net tangible and intangible assets acquired recorded as goodwill. As of June 30, 2019, our
qualitative analysis of goodwill did not indicate any impairment.
Revenue
Recognition
The
Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting
Standards Codification (“ASC”) ASC 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are
recognized when control is transferred to customers in amounts that reflect the consideration the Company expects to be entitled
to receive in exchange for those goods. Revenue recognition is evaluated through the following five steps: (i) identification
of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination
of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition
of revenue when or as a performance obligation is satisfied.
The
Company recognizes revenue upon shipment from its fulfillment centers. Certain of our distributors may also perform a separate
function as a co-packer on our behalf. In such cases, ownership of and title to our products that are co-packed on our behalf
by those co-packers who are also distributors, passes to such distributors when we are notified by them that they have taken transfer
or possession of the relevant portion of our finished goods. Freight billed to customers is presented as revenues, and the related
freight costs are presented as cost of goods sold. Cancelled orders are refunded if not already dispatched, refunds are only paid
if stock is damaged in transit, discounts are only offered with specific promotions and orders will be refilled if lost in transit.
Contract
Assets
The
Company does not have any contract assets such as work-in-process. All trade receivables on the Company’s condensed consolidated
balance sheet are from contracts with customers.
Contract
Costs
Costs
incurred to obtain a contract are capitalized unless short term in nature. As a practical expedient, costs to obtain a contract
that are short term in nature are expensed as incurred. The Company does not have any contract costs capitalized as of June 30,
2019.
Contract
Liabilities - Deferred Revenue
The
Company’s contract liabilities consist of advance customer payments and deferred revenue. Deferred revenue results from
transactions in which the Company has been paid for products by customers, but for which all revenue recognition criteria have
not yet been met. Once all revenue recognition criteria have been met, the deferred revenues are recognized.
Accounts
receivable
Accounts
receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of
outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection
efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied
against the allowance for doubtful accounts. As of both June 30, 2019 and December 31, 2018, allowance for doubtful accounts was
$0.
Advertising
Expense
The
Company expenses marketing, promotions and advertising costs as incurred. Such costs are included in selling expense in the accompanying
unaudited condensed consolidated statements of operations.
Research
and Development
Costs
incurred in connection with the development of new products and processing methods are charged to general and administrative expenses
as incurred.
Income
Taxes
The
Company utilizes FASB ASC 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities
and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation allowance is recorded when it is “more likely-than-not”
that a deferred tax asset will not be realized.
The
Company generated a deferred tax asset through net operating loss carry-forward. However, a valuation allowance of 100% has been
established due to the uncertainty of the Company’s realization of the net operating loss carry forward prior to its expiration.
NomadChoice
Pty Ltd, the Company’s wholly-owned foreign subsidiary, is subject to income taxes in the jurisdictions in which it operates.
Significant judgment is required in determining the provision for income tax. There are many transactions and calculations undertaken
during the ordinary course of business for which the ultimate tax determination is uncertain. The company recognizes liabilities
for anticipated tax audit issues based on the Company’s current understanding of the tax law. Where the final tax outcome
of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions
in the period in which such determination is made.
Synergy
CHC Inc., is a wholly-owned foreign subsidiary, is subject to income taxes in the jurisdictions in which it operates. Significant
judgment is required in determining the provision for income tax. There are many transactions and calculations undertaken during
the ordinary course of business for which the ultimate tax determination is uncertain. The company recognizes liabilities for
anticipated tax audit issues based on the Company’s current understanding of the tax law. Where the final tax outcome of
these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in
the period in which such determination is made.
Net
Earnings (Loss) Per Common Share
The
Company computes earnings per share under ASC subtopic 260-10, Earnings Per Share. Basic earnings (loss) per share is computed
by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average number of shares
of common stock outstanding (the denominator) during the reporting periods. Diluted earnings per share is computed by increasing
the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible
into common stock (using the “treasury stock” method), unless their effect on net loss per share is anti-dilutive.
As of June 30, 2019, and 2018, options to purchase 6,166,667 and 8,666,667 shares of common stock, respectively, were outstanding.
As of June 30, 2018, warrants to purchase 1,000,000 shares of common stock were outstanding.
The
following is a reconciliation of the number of shares used in the calculation of basic earnings per share and diluted earnings
per share for the three and six months ended June 30, 2019, and 2018:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) after tax
|
|
$
|
318,462
|
|
|
$
|
(783,393
|
)
|
|
$
|
1,785,748
|
|
|
|
(838,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
89,889,044
|
|
|
|
89,862,683
|
|
|
|
89,877,247
|
|
|
|
89,862,683
|
|
Incremental shares from the assumed exercise of dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Incremental shares from the assumed exercise of dilutive stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Dilutive potential common shares
|
|
|
89,889,044
|
|
|
|
89,862,683
|
|
|
|
89,877,247
|
|
|
|
89,862,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
The
following securities were not included in the computation of diluted net earnings per share as their effect would have been antidilutive:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
6,166,667
|
|
|
|
8,666,667
|
|
Warrants to purchase common stock
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
|
6,166,667
|
|
|
|
9,666,667
|
|
Fair
Value Measurements
The
Company measures and discloses the fair value of assets and liabilities required to be carried at fair value in accordance with
ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value,
and enhances fair value measurement disclosure.
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 June 30, 2019, the Company has determined that there were no assets or liabilities measured at fair value.
Inventory
Inventory
consists of raw materials, components and finished goods. The Company’s inventory is stated at the lower of cost (FIFO cost
basis) or net realizable value. Finished goods include the cost of labor to assemble the items.
Stock-Based
Compensation
ASC
718, “Compensation – Stock Compensation,” prescribes accounting and reporting standards for all share-based
payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering
to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based
payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements
based on their fair values. That expense is recognized over the period during which an employee is required to provide services
in exchange for the award, known as the requisite service period (usually the vesting period).
The
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC
515-50, “Compensation – Stock Compensation.” Measurement of share-based payment transactions with non-employees
is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments
issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance
completion date.
Foreign
Currency Translation
The
functional currency of one of the Company’s foreign subsidiaries (NomadChoice Pty Ltd.) is the U.S. Dollar. The Company’s
foreign subsidiary maintains its records using local currency (Australian Dollar). All monetary assets and liabilities of the
foreign subsidiary were translated into U.S. Dollars at quarter end exchange rates, non-monetary assets and liabilities of the
foreign subsidiary were translated into U.S. Dollars at transaction day exchange rates. Income and expense items related to non-monetary
items were translated at exchange rates prevailing during the transaction date and other incomes and expenses were translated
using average exchange rate for the period. The resulting translation adjustments, net of income taxes, were recorded in statements
of operations as Remeasurement gain or loss on translation of foreign subsidiary.
The
functional currency of the Company’s other foreign subsidiary (Synergy CHC Inc.) is the Canadian Dollar (CAD). The Company’s
foreign subsidiary maintains its records using local currency (CAD). All assets and liabilities of the foreign subsidiary were
translated into U.S. Dollars at period end exchange rates and stockholders’ equity is translated at the historical rates.
Income and expense items were translated using average exchange rate for the period. The resulting translation adjustments, net
of income taxes, are reported as other comprehensive income and accumulated other comprehensive income in the stockholder’s
equity in accordance with ASC 220 – Comprehensive Income.
The
exchange rates used to translate amounts in AUD and CAD into USD for the purposes of preparing the consolidated financial statements
were as follows:
Balance
sheet:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Period-end AUD: USD exchange rate
|
|
$
|
0.7023
|
|
|
$
|
0.7046
|
|
Period-end CAD: USD exchange rate
|
|
$
|
0.7641
|
|
|
$
|
0.7330
|
|
Income
statement:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
Average Quarterly AUD: USD exchange rate
|
|
$
|
0.7064
|
|
|
$
|
0.7714
|
|
Average Quarterly CAD: USD exchange rate
|
|
$
|
0.7499
|
|
|
$
|
0.7827
|
|
Translation
gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional
currency are translated into either Australian Dollars or Canadian Dollars, as the case may be, at the rate on the date of the
transaction and included in the results of operations as incurred.
Concentrations
of Credit Risk
In
the normal course of business, the Company provides credit terms to its customers; however, collateral is not required. Accordingly,
the Company performs credit evaluations of its customers and maintains allowances for possible losses which, when realized, were
within the range of management’s expectations. From time to time, a higher concentration of credit risk exists on outstanding
accounts receivable for a select number of customers due to individual buying patterns.
Warehousing
costs
Warehouse
costs include all third party warehouse rent fees and are charged to selling and marketing expenses as incurred. Any additional
costs relating to assembly or special pack-outs of the Company’s products are charged to cost of sales.
Product
display costs
All
displays manufactured and purchased by the Company are for placement of product in retail stores. This also includes all costs
for display execution and setup and retail services are charged to cost of sales and expensed as incurred.
Cost
of Sales
Cost
of sales includes the purchase cost of products sold and all costs associated with getting the products into the retail stores
including buying and transportation costs.
Debt
Issuance Costs
Debt
issuance costs consist primarily of arrangement fees, professional fees and legal fees. These costs are netted off with the related
loan and are being amortized to interest expense over the term of the related debt facilities.
Shipping
Costs
Shipping
and handling costs billed to customers are recorded in sales. Shipping costs incurred by the company are recorded in selling and
marketing expenses.
Related
parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. All transactions
with related parties are recorded at fair value of the goods or services exchanged.
Segment
Reporting
Segment
identification and selection is consistent with the management structure used by the Company’s chief operating decision
maker to evaluate performance and make decisions regarding resource allocation, as well as the materiality of financial results
consistent with that structure. Based on the Company’s management structure and method of internal reporting, the Company
has one operating segment. The Company’s chief operating decision maker does not review operating results on a disaggregated
basis; rather, the chief operating decision maker reviews operating results on an aggregate basis.
Presentation
of Financial Statements – Going Concern
Going
Concern Evaluation
In
connection with preparing unaudited condensed consolidated financial statements for the three and six months ended June 30, 2019,
management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about
the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.
The
Company considered the following:
●
At June 30, 2019, the Company had an accumulated deficit of $13,241,374.
●
At June 30, 2019, the Company had working capital deficit of $46,078.
●
Revenue decline in 2019 as compared to 2018 of $3,623,897.
Ordinarily,
conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern relate to the
entity’s ability to meet its obligations as they become due.
The
Company evaluated its ability to meet its obligations as they become due within one year from the date that the financial statements
are issued by considering the following:
●
The Company raised $10.0 million via debt financing during the year ended December 31, 2017.
●
In 2019, the Company repaid $1,025,000 of loans.
●
The Company generated net income of $318,462 for the three months ended June 30, 2019 and $1,785,748 for the six months ended
June 30, 2019.
●
In 2019, the Company generated $1,776,352 of cash from operating activities.
●
Working capital deficit of $46,078 at June 30, 2019, includes loans payables to related party of $1,979,876, royalty payable to
related party of $312,568 and deferred revenue of $37,051.
●
The Company has line of credit facility of $20 million available from its current lender for future mergers and acquisition.
Management
concluded that above factors alleviates doubts about the Company’s ability to generate enough cash from operations and other
available sources to satisfy its obligations for the next twelve months from the issuance date.
The
Company will take the following actions if it starts to trend unfavorably to its internal profitability and cash flow projections,
in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:
●
Raise additional capital through line of credit and/or loans financing for future mergers and acquisition.
●
Implement additional restructuring and cost reductions.
●
Raise additional capital through a private placement.
As
of August 12, 2019 and June 30, 2019, the Company had $875,154 and $1,201,267, respectively, in cash and cash equivalents.
Recent
Accounting Pronouncements
ASU
2018-13
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes in Disclosure
Requirements for Fair Value Measurement, which removes, modifies and adds certain disclosure requirements in Topic 820 “Fair
Value Measurement”. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. Early adoption is permitted. The adoption of ASU 2018-13 is not expected to have any impact on the
Company’s unaudited condensed consolidated financial statements.
ASU
2018-07
In
June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting
for share-based payments to employees, with certain exceptions. ASU 2018-07 is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2018-07 did not
have any impact on the Company’s unaudited condensed consolidated financial statements.
ASU
2018-05
This
Accounting Standards Update adds SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 118, which expresses the view
of the staff regarding application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017 - the date
on which the Tax Cuts and Jobs Act (H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent
Resolution on the Budget for Fiscal Year 2018) was signed into law. We are currently evaluating the impact of adopting ASU 2018-05
on our unaudited condensed consolidated financial statements.
ASU
2018-02
On
December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles
II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act of 2017). Stakeholders raised
a narrow-scope financial reporting issue that arose as a consequence of the Tax Cuts and Jobs Act of 2017. The amendments in this
Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting
from the Tax Cuts and Jobs Act of 2017. The amendments in this Update affect any entity that is required to apply the provisions
of Topic 220, Income Statement-Reporting Comprehensive Income, and has items of other comprehensive income for which the related
tax effects are presented in other comprehensive income as required by GAAP. The amendments in this update is effective for all
entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of
the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting
periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which
financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in
the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate
income tax rate in the Tax Cuts and Jobs Act is recognized.
This
Accounting Standards Update is the final version of Proposed Accounting Standards Update 2018-210—Income Statement—Reporting
Comprehensive Income (Topic 220), which has been deleted. The adoption of ASU 2018-02 did not have any impact on the Company’s
unaudited condensed consolidated financial statements.
ASU
2018-01
The
amendments in this Update provide an optional transition practical expedient to not evaluate under Topic 842 existing or expired
land easements that were not previously accounted for as leases under Topic 840, Leases. An entity that elects this practical
expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842.
An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with
the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date
and transition requirements for the amendments are the same as the effective date and transition requirements in Update 2016-02.
The adoption of ASU 2018-01 did not have any 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 net realizable value.
The
carrying value of inventory consisted of the following:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Finished goods
|
|
$
|
2,072,233
|
|
|
$
|
1,956,942
|
|
Components
|
|
|
403,873
|
|
|
|
441,282
|
|
Inventory in transit
|
|
|
-
|
|
|
|
256,051
|
|
Raw materials
|
|
|
16,030
|
|
|
|
16,030
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
2,492,136
|
|
|
$
|
2,670,305
|
|
On
January 22, 2015, inventory was pledged to Knight Therapeutics under the Loan Agreement (see note 10).
Note
4 – Accounts Receivable
Accounts
receivable, net of allowances for sales returns and doubtful accounts, consisted of the following:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Trade accounts receivable
|
|
$
|
2,366,078
|
|
|
$
|
4,458,225
|
|
Less allowances
|
|
|
-
|
|
|
|
-
|
|
Total accounts receivable, net
|
|
$
|
2,366,078
|
|
|
$
|
4,458,225
|
|
Note
5 – Other Current Assets
Other
current assets consisted of the following:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Advances for inventory
|
|
$
|
41,645
|
|
|
$
|
25,170
|
|
Media production
|
|
|
-
|
|
|
|
20,791
|
|
Insurance
|
|
|
23,947
|
|
|
|
13,302
|
|
Deposits
|
|
|
8,417
|
|
|
|
45,144
|
|
Trademarks
|
|
|
39,413
|
|
|
|
78,826
|
|
Rent
|
|
|
87,384
|
|
|
|
103,912
|
|
Promotions
|
|
|
106,539
|
|
|
|
342,220
|
|
License agreement
|
|
|
8,333
|
|
|
|
58,333
|
|
Software subscriptions
|
|
|
83,925
|
|
|
|
34,440
|
|
Rebranding
|
|
|
18,538
|
|
|
|
40,783
|
|
Clinical Research
|
|
|
27,702
|
|
|
|
35,617
|
|
Miscellaneous
|
|
|
45,111
|
|
|
|
30,309
|
|
Related Party Receivable
|
|
|
120,660
|
|
|
|
-
|
|
Total
|
|
$
|
611,614
|
|
|
$
|
828,847
|
|
Note
6 – Concentration of Credit Risk
Cash
and cash equivalents
The
Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts
that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing
its cash deposits with major financial institutions. At June 30, 2019 and December 31, 2018, the uninsured balances amounted to
$770,545 and $162,729, respectively.
Accounts
receivable
As
of June 30, 2019, 4 customers accounted for 67% of the Company’s accounts receivable. As of December 31, 2018, three
customers accounted for 83% of the Company’s accounts receivable.
Major
customers
For
the six months ended June 30, 2019, two customers accounted for approximately 42% of the Company’s net revenue. For the
six months ended June 30, 2018, three customers accounted for approximately 44% of the Company’s net revenue. For the three
months ended June 30, 2019, two customers accounted for approximately 44% of the Company’s net revenue. For the three months
ended June 30, 2018, three customers accounted for approximately 47% of the Company’s net revenue. For the year ended December
31, 2018, two customers accounted for approximately 41% of the Company’s net revenues. Substantially all of the Company’s
business is with companies in the United States.
Accounts
payable
As
of June 30, 2019 and December 31, 2018, two vendors accounted for 72% and 77%, respectively, of the Company’s accounts payable.
Major
suppliers
For
the six months ended June 30, 2019, two suppliers accounted for approximately 36% of the Company’s purchases. For the six
months ended June 30, 2018, three suppliers accounted for approximately 46% of the Company’s purchases. For the three months
ended June 30, 2019, two suppliers accounted for approximately 27% of the Company’s purchases. For the three months ended
June 30, 2018, two suppliers accounted for approximately 32% of the Company’s purchases. Substantially all of the Company’s
business is with suppliers in the United States.
Note
7 – Fixed Assets and Intangible Assets
As
of June 30, 2019, and December 31, 2018, fixed assets and intangible assets consisted of the following:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
566,445
|
|
|
$
|
566,445
|
|
Less accumulated depreciation
|
|
|
(368,997
|
)
|
|
|
(296,674
|
)
|
Fixed assets, net
|
|
$
|
197,448
|
|
|
$
|
269,771
|
|
Depreciation
expense for the three months ended June 30, 2019 and 2018 was $34,263 and $39,754, respectively. Depreciation expense for the
six months ended June 30, 2019 and 2018 was $72,323 and $76,162, respectively.
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
FOCUSfactor intellectual property
|
|
$
|
1,450,000
|
|
|
$
|
1,450,000
|
|
Perfekt intellectual property
|
|
|
-
|
|
|
|
10,000
|
|
Cocowhite intellectual property
|
|
|
-
|
|
|
|
50,000
|
|
Intangible assets subject to amortization
|
|
|
5,388,230
|
|
|
|
7,150,165
|
|
Less accumulated amortization
|
|
|
(4,368,257
|
)
|
|
|
(4,728,576
|
)
|
Less accumulated impairment
|
|
|
-
|
|
|
|
(924,068
|
)
|
Intangible assets, net
|
|
$
|
2,469,973
|
|
|
$
|
3,007,521
|
|
Amortization
expense for the three months ended June 30, 2019 and 2018 was $269,333 and $416,197, respectively. Amortization expense for the
six months ended June 30, 2019 and 2018 was $537,548 and $831,275, respectively. These intangible assets were acquired through
an Asset Purchase Agreement and Stock Purchase Agreements.
Note
8 – Related Party Transactions
The
Company accrued and paid consulting fees of $57,917 per month and a management fee of $76,461 to a company owned by Mr. Jack Ross,
Chief Executive Officer of the Company. The Company expensed $185,000 during the three months ended June 30, 2019 and $423,961
during the six months ended June 30, 2019. As of June 30, 2019, the total outstanding balance was $0 for consulting fees and reimbursements.
As of June 30, 2019, the Company has a receivable of $120,660 related to services the Company performed for a company owned by
Mr. Jack Ross.
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 June 30, 2019, the Company owed Knight $500,000
in relation to this agreement (see Note 10). The Company recorded present value of future payments of $266,521 and $272,151 as
of June 30, 2019 and December 31, 2018, respectively.
On
August 18, 2015, the Company entered into a Consulting Agreement with Kara Harshbarger, the co-founder of Hand MD, LLC, pursuant
to which she will provide marketing and sales related service. The Company pays Ms. Harshbarger $10,000 a month for one year unless
the Consulting Agreement is terminated earlier by either party. The Company has extended this agreement on a month to month basis.
Hand MD, LLC is a 50% owner in Hand MD Corp. The Company expensed $30,000 through payroll for the three months ended June 30,
2019 and $60,000 for the six months ended June 30, 2019. As of June 30, 2019, the total outstanding balance was $0.
On
August 9, 2017, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party, for a working
capital loan. At June 30, 2019, the Company owed Knight $6,393,702 on this loan, net of debt issuance cost (see Note 10).
On
December 23, 2016, we entered into an agreement with Knight Therapeutics for the distribution rights of FOCUSFactor in Canada.
In conjunction with this agreement, we are required to pay Knight a distribution fee equal to 30% of gross sales for sales achieved
through a direct sales channel and 5% of gross sales for sales achieved through retail sales. The minimum due to Knight under
this agreement is $100,000 Canadian dollars. As of June 30, 2019, the total outstanding balance was $200,000 Canadian dollars (approximately
$152,834 USD).
On
December 23, 2016, we entered into an agreement with Knight Therapeutics for the distribution rights of Hand MD into Canada. In
conjunction with this agreement, we are required to pay Knight a distribution fee equal to 60% of gross sales for sales achieved
through a direct sales channel until the sales in the calendar year equal the threshold amount and then 40% of all such gross
sales in such calendar year in excess of the threshold amount and 5% of gross sales for sales achieved through retail sales. The
minimum due to Knight under this agreement is $25,000 Canadian dollars. As of June 30, 2019 the total outstanding balance was
$25,000 Canadian dollars (approximately $18,325 USD).
The
Company expensed royalty of $50,445 during the three months ended June 30, 2019 and $139,309 for the six months ended June 30,
2019. At June 30, 2019 the Company, owed Knight Therapeutics $139,309 in connection with a royalty distribution agreement.
The
Company expensed royalty of $2,100 during the three months ended June 30, 2019 and $3,185 for the six months ended June 30, 2019.
At June 30, 2019 the Company owed Knight Therapeutics $2,100 in connection with a royalty distribution agreement for Sneaky Vaunt.
The
Company expensed commissions of $4,887 during the three months ended June 30, 2019 and $9,065 for the six months ended June 30,
2019. At June 30, 2019, the Company, owed Founded Ventures, owned by a shareholder in the Company, $4,887 in connection with a
commission agreement for Sneaky Vaunt.
The
Company expensed commissions of $259 during the three months ended June 30, 2019 and $644 for the six months ended June 30, 2019.
At June 30, 2019, the Company owed Founded Ventures $259 in connection with a commission agreement for The Queen Pegasus.
The
Company paid $5,826 during the three months ended June 30, 2019 and $8,621 for the six months ended June 30, 2019 to Hand MD,
Corp, related to a royalty agreement. At June 30, 2019, the Company owed Hand MD Corp. $0 in minimum future royalties.
Note
9 – Accounts Payable and Accrued Liabilities
As
of June 30, 2019, and December 31, 2018, accounts payable and accrued liabilities consisted of the following:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Accrued payroll
|
|
$
|
189,728
|
|
|
$
|
217,069
|
|
Legal fees
|
|
|
94,511
|
|
|
|
71,236
|
|
Commissions
|
|
|
185,811
|
|
|
|
134,784
|
|
Manufacturers
|
|
|
2,808,325
|
|
|
|
3,898,896
|
|
Promotions
|
|
|
157,217
|
|
|
|
1,262,503
|
|
Returns allowance
|
|
|
-
|
|
|
|
850,627
|
|
Accounting fees
|
|
|
146,963
|
|
|
|
104,198
|
|
Rent
|
|
|
-
|
|
|
|
61,738
|
|
Customers
|
|
|
77,345
|
|
|
|
76,617
|
|
Interest
|
|
|
49,305
|
|
|
|
-
|
|
Royalties, related party
|
|
|
326,294
|
|
|
|
304,434
|
|
Warehousing
|
|
|
30,207
|
|
|
|
64,289
|
|
Sales taxes
|
|
|
286,189
|
|
|
|
180,222
|
|
Taxes
|
|
|
-
|
|
|
|
178,069
|
|
Severance Accrual
|
|
|
350,869
|
|
|
|
506,250
|
|
Charitable Donation
|
|
|
25,000
|
|
|
|
-
|
|
Related Party Reimbursements
|
|
|
178,825
|
|
|
|
178,825
|
|
Others
|
|
|
155,221
|
|
|
|
307,463
|
|
Total
|
|
$
|
5,061,810
|
|
|
$
|
8,397,220
|
|
Note
10 – Notes Payable
The
Company’s loans payable at June 30, 2019 and December 31, 2018 are as follows:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Loans payable
|
|
$
|
6,766,520
|
|
|
$
|
7,772,150
|
|
Unamortized debt issuance cost
|
|
|
(106,298
|
)
|
|
|
(179,261
|
)
|
Total
|
|
|
6,660,222
|
|
|
|
7,592,889
|
|
Less: Current portion
|
|
|
(1,979,876
|
)
|
|
|
(1,963,887
|
)
|
Long-term portion
|
|
$
|
4,680,346
|
|
|
$
|
5,629,002
|
|
$950,000
June 26, 2015 Security Agreement:
On
June 26, 2015, the Company issued a 0% promissory note in a principal amount of $950,000 in connection with an Asset Purchase
Agreement. The note requires $250,000 to be paid on or before June 30, 2016, and $700,000 to be paid in quarterly installments
(beginning with the quarter ended September 30, 2015) equal to the greater of $12,500 or 5% of U.S. net sales, and 2% of U.S.
net sales of Neuragen for 60 months thereafter. The payment of such amounts is secured by a security interest in certain assets,
undertakings and property (“Collateral”) pursuant to the Security Agreement, which will be released upon receipt of
total payments of $1.2 million.
The
Company recorded present value of future payments of $266,521 and $272,151 as of June 30, 2019 and December 31, 2018, respectively.
The Company recorded imputed interest expense of $9,633 for the three months ended June 30, 2019 and $19,370 for the six months
ended June 30, 2019.
During
the three and six months ended June 30, 2019, the Company made payments of $12,500 and $25,000, respectively, in connection with
this Security Agreement.
$10,000,000
August 9, 2017 Loan:
On
August 9, 2017, we entered into a Second Amendment to Loan Agreement (“Second Amendment”) with Knight, pursuant to
which Knight agreed to loan us an additional $10 million, and an ongoing credit facility of up to $20 million, and which amount
was borrowed at closing (the “Financing”) for working capital purposes. At closing, we paid Knight an origination
fee of $200,000 and a work fee of $100,000 and also paid $100,000 of Knight’s expenses associated with the Loan.
Additional
Tranches under the Loan Agreement are available to the Company until August 9, 2022 provided that no event of default exists.
Each Additional Tranche must be for a minimum amount of $1.0 million, may only be used to finance qualified acquisitions (as defined
in the Loan Agreement), and can be denied in Knight’s absolute discretion. If an Additional Tranche is denied, the Company
can effect a qualified acquisition through a special purpose entity with such special purpose entity being entitled to obtain
financing from third parties so long as such financing does not adversely affect Knight or Knight’s rights under the Loan
Agreement. Upon the closing of any Additional Tranche, the Company will pay Knight an origination fee equal to 2% of the Additional
Tranche, a work fee equal to 1% of the amount of the Additional Tranche, and reimburse Knight for its expenses incurred in connection
with its consideration of any Additional Tranche (whether or not advanced).
The
Loan bears interest at 10.5% per annum. The amended Loan Agreement matures on August 8, 2020 and (b) the date that Knight, in
its discretion, accelerates the Company’s obligations due to an event of default.
On
the Maturity Date of the Third Tranche and every Additional Tranche (or upon the acceleration of each such loan), the Company
must pay Knight a success fee (the “Success Fee”) of that number of Company common shares equal to 10% of the loan,
divided by the lesser of (a) $1.50, (b) the lowest price at which any common shares were issued by the Company in any offering
or equity financing or other transaction between the Closing Date and the date the Success Fee is due, and (c) the current market
price on the date the Success Fee is due. The Company may also pay the Success Fee in cash pursuant to the terms of the Loan Agreement.
The
Loan Agreement includes customary representations, warranties, and affirmative and restrictive covenants, including covenants
to attain and maintain certain financial metrics, and to not merge or dispose of assets, acquire other businesses (except for
businesses substantially similar or complementary to the Company’s business, and provided that the aggregate consideration
to be paid does not exceed $100,000 and the acquired business guarantees the Company’s obligations under the Loan Agreement)
or make capital expenditures in excess of $500,000. The Loan Agreement also includes customary events of default, including payment
defaults, breaches of covenants, change of control and material adverse effect defaults. Upon the occurrence of an event of default
and during the continuation thereof, the principal amount of all loans under the Loan Agreement will bear a default interest rate
of an additional 5%.
The
Company’s obligations and liabilities under the Loan Agreement are secured and unconditionally guaranteed by certain of
the Company’s wholly owned subsidiaries as provided in the Loan Agreement.
We
have met all the covenants except for the TTM EBITDA of $5 million during the period ending March 31, 2018. Default Interest rate
of 5% (from 10.5% to 15.5%) applies in accordance to our current agreement and will be in effect starting April 1, 2018 and will
be in effect until the $5 million TTM EDITDA covenant is achieved. We entered into Loan Amendment Agreement on May 14, 2018, the
interest rate was reduced to 13% due to reducing payroll expenses. Also, Synergy will maintain Focus Factor Net Sales as measured
on a year-end basis of at least USD $15 million for each fiscal year starting with December 31, 2017.
We
have amended our covenants under our loan agreement on March 27, 2019 and are currently in compliance with all covenants. The
new covenants are as follows: we will maintain a minimum EBITDA of $1,900,000 for the twelve months ending on December 31, 2018,
$2,500,000 for the twelve months ending March 31, 2019, $3,500,000 for the twelve months ending June 30, 2019 and $5,000,000 for
the twelve months period ending on last day of each fiscal quarters thereafter. We shall maintain a net debt to TTM EBITDA ratio
of no more than 8:1 for the twelve month period ending on December 31, 2018 until March 31, 2019 and shall maintain a net debt
to TTM EBITDA ratio of no more than 6:1 thereafter. We shall maintain at all times a positive cash balance of $575,000 for the
three month period ending December 31, 2018, $750,000 for the three month period ending March 31, 2019 and $1,000,000 thereafter.
The default interest rate of 2.5% applies (from 13% to 15.5%) in accordance to our current agreement and will be in effect as
of October 1, 2018.
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 $34,594 and $72,962 during the three and six months ended June 30, 2019, respectively. Unamortized
debt issuance cost as of June 30, 2019 amounted to $106,298.
The
Company recognized interest expense of $263,069 and paid $263,069 during the three months ended June 30, 2019 and $592,236 and
paid $542,930 during the six months ended June 30, 2019. Accrued interest was $49,306 as of June 30, 2019. The loan balance at
June 30, 2019 was $6,500,000.
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 six months ended June 30, 2019, the Company issued 26,391 shares of its common stock valued at $39,585 in full and final settlement
on the Per-fekt transaction.
As
of June 30, 2019 and December 31, 2018, there were 89,889,074 and 89,862,683, respectively, shares of the Company’s common
stock issued and outstanding.
Note
12 – Commitments & Contingencies
Litigation:
From
time to time the Company may become a party to litigation in the normal course of business. Management believes that there are
no current legal matters that would have a material effect on the Company’s financial position or results of operations.
Employee
Commitments
The
Company and Mr. McCullough entered into an employment agreement on October 17, 2017 (the “Employment Agreement”) with
an initial term of 3 years. In exchange for his service as President, Mr. McCullough will receive an annual base salary of $340,000.
He received a cash signing bonus of $37,500 paid on January 1, 2018, and an additional cash signing bonus of $37,500 paid on July
1, 2018. Mr. McCullough will be eligible for an annual bonus of up to twenty-five percent (25%) of his base salary. The annual
bonus will be determined at the discretion of our Board or compensation committee based upon the achievement of financial goals
established by the Company’s Chief Executive Officer. Mr. McCullough will also be eligible for additional bonus compensation
based on the Company’s achievement of certain annual earnings and retail sales goals established each year by the Company’s
Chief Executive Officer. Subject to the Company’s achievement of an annual overall earnings goal and certain adjustments
in the event of future acquisitions by the Company, Mr. McCullough will be eligible to receive five percent (5%) of all retail
sales by the Company in excess of the annual retail sales goal set by the Chief Executive Officer.
The
Company granted Mr. McCullough an option to purchase 1,000,000 shares of the Company’s common stock, 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.
Other
Commitments
During
the six months ended June 30, 2019 the Company received a 60 day Proposition 65 letter that one of its products did not have California’s
prop 65 label. The Company is in the process of finalizing the settlement of this case and should be notified on our about
August 15, 2019.
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 June 30, 2019:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Exercise
Prices ($)
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price ($)
|
|
$
|
0.25
- $0.70
|
|
|
|
6,166,667
|
|
|
|
6.06
|
|
|
$
|
0.54
|
|
|
|
5,666,667
|
|
|
$
|
0.52
|
|
The
stock option activity for the six months ended June 30, 2019 is as follows:
|
|
Options
Outstanding
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at December 31, 2018
|
|
|
7,166,667
|
|
|
$
|
0.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired or canceled
|
|
|
(1,000,000
|
)
|
|
|
0.25
|
|
Outstanding at June 30, 2019
|
|
|
6,166,667
|
|
|
$
|
0.54
|
|
Stock-based
compensation expense related to vested options was $38,679 and $84,212 during the three and six months ended June 30, 2019, respectively,
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-.050, 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 June 30, 2019, as disclosed in the above table, have an intrinsic value of $0. As of June 30, 2019, unamortized stock-based
compensation costs related to options was $206,287, and will be recognized over a period of 1.33 years.
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 June 30, 2019 and 2018 were
as follows:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
United
States
|
|
$
|
5,979,538
|
|
|
$
|
9,242,986
|
|
Foreign
countries
|
|
|
357,183
|
|
|
|
485,726
|
|
|
|
$
|
6,336,721
|
|
|
$
|
9,728,712
|
|
Foreign
countries primarily consist of Australia and Canada.
The
Company’s net sales by product group for the three months ended June 30, 2019 and 2018 were as follows:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
Nutraceuticals
|
|
$
|
6,001,392
|
|
|
$
|
8,895,489
|
|
Over the Counter (OTC)
|
|
|
20,734
|
|
|
|
171,918
|
|
Consumer Goods
|
|
|
194,407
|
|
|
|
290,641
|
|
Cosmeceuticals
|
|
|
120,188
|
|
|
|
370,664
|
|
|
|
$
|
6,336,721
|
|
|
$
|
9,728,712
|
|
(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 June 30, 2019 and 2018 were as follows:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
Online
|
|
$
|
2,669,794
|
|
|
$
|
3,611,997
|
|
Retail
|
|
|
3,666,927
|
|
|
|
6,116,715
|
|
|
|
$
|
6,336,721
|
|
|
$
|
9,728,712
|
|
Net
sales attributed to customers in the United States and foreign countries for the six months ended June 30, 2019 and 2018 were
as follows:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
United States
|
|
$
|
14,592,059
|
|
|
$
|
18,270,848
|
|
Foreign countries
|
|
|
1,213,617
|
|
|
|
1,158,725
|
|
|
|
$
|
15,805,676
|
|
|
$
|
19,429,573
|
|
Foreign
countries primarily consist of Australia and Canada.
The
Company’s net sales by product group for the six months ended June 30, 2019 and 2018 were as follows:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
Nutraceuticals
|
|
$
|
15,056,836
|
|
|
$
|
17,910,268
|
|
Over the Counter (OTC)
|
|
|
29,066
|
|
|
|
334,102
|
|
Consumer Goods
|
|
|
352,030
|
|
|
|
562,932
|
|
Cosmeceuticals
|
|
|
367,744
|
|
|
|
622,271
|
|
|
|
$
|
15,805,676
|
|
|
$
|
19,429,573
|
|
(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 six months ended June 30, 2019 and 2018 were as follows:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
Online
|
|
$
|
6,522,818
|
|
|
$
|
9,024,597
|
|
Retail
|
|
|
9,282,858
|
|
|
|
10,404,976
|
|
|
|
$
|
15,805,676
|
|
|
$
|
19,429,573
|
|
Long-lived
assets (net) attributable to operations in the United States and foreign countries as of June 30, 2019 and December 31, 2018 were
as follows:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
United States
|
|
$
|
10,451,087
|
|
|
$
|
11,058,528
|
|
Foreign countries
|
|
|
9,574
|
|
|
|
12,004
|
|
|
|
$
|
10,460,661
|
|
|
$
|
11,070,532
|
|
Note
15 – Income Taxes
Income
tax expense was $40,456 and $34,548 for the three and six months ended June 30, 2019, respectively, compared to $222,389 and $383,002,
respectively for the same periods in 2018. The current provision is attributable to Australian operations and the current tax
rate in effect in that country.
On
December 22, 2017, the Tax Cuts and Jobs Act (the TCJA), which significantly modified U.S. corporate income tax law, was signed
into law by President Trump. The TCJA contains significant changes to corporate income taxation, including but not limited to
the reduction of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction
for interest expense to 30% of earnings (except for certain small businesses), limitation of the deduction for net operating losses
to 80% of current year taxable income and generally eliminating net operating loss carrybacks, allowing net operating losses to
carryforward without expiration, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated,
elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments
instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including
changes to the orphan drug tax credit and changes to the deductibility of research and experimental expenditures that will be
effective in the future). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal
tax law is uncertain, including to what extent various states will conform to the newly enacted federal tax law.
The
Company has not recorded the necessary provisional adjustments in the financial statements in accordance with its current understanding
of the TCJA and guidance currently available as of this filing. But is reviewing the TCJA’s potential ramifications.
The
total deferred tax asset is calculated by multiplying a domestic (US) 21% marginal tax rate by the cumulative net operating loss
carryforwards (“NOL”). The domestic marginal tax rate does not include any state & local marginal tax rate attributable
to the Company. The Company currently has estimated NOLs, which expire through 2035. Management has determined based on all the
available information that a 100% valuation reserve is required.
For
U.S. purposes, the Company has not completed its evaluation of NOL utilization limitations under Internal Revenue Code, as amended
(the “Code”) Section 382/383, change of ownership rules. If the Company has had a change in ownership, the NOL’s
would be limited or eliminated, as to the amount that could be utilized each year, based on the Code. NOL’s attributable
to Breakthrough Products, Inc., which are the majority of the Company’s domestic NOL’s are Separate Return Limitation
Year (SRLY) NOL’s. Such losses may generally not be available for use (limited or eliminated).
The
Company has not filed its State & Local Income/Franchise tax returns in States it is required to file for the last few years,
so such returns and liability remain open.
Note
16 – Subsequent Events
Management
evaluated all activities of the Company through the issuance date of the Company’s unaudited condensed consolidated financial
statements and concluded that no subsequent events have occurred that would require adjustments or disclosure into the unaudited
condensed consolidated financial statements.