Synergy CHC Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations References in this report (the “Quarterly Report”) to “we,” “us” or the “Company” refer to Synergy CHC Corp. References to our “management” or our “management team” refer to our officers and directors. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results, expectations and plans discussed in these forward-looking statements. Special Note Regarding Forward-Looking Statements This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and variations thereof and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of our final prospectus for our initial public offering filed with the SEC on October 23, 2024 (the “Prospectus”) and the “Risk Factors” section of this report. Our securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, we disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto contained elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Overview We are a provider of consumer health care, beauty, and lifestyle products. Our current brand portfolio consists of two core brands: FOCUSfactor, a clinically-tested brain health supplement (this study was performed independently and is not related to any FDA-approved Investigational New Drug application) that has been shown to improve memory, concentration and focus and Flat Tummy, a lifestyle brand that provides a suite of nutritional products to help women achieve their weight management goals. Our management’s discussion and analysis of our financial condition and results of operations are only based on our current business and should be read in conjunction with our unaudited interim condensed consolidated financial statements and audited consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report. Key factors affecting our results of operations include revenues, cost of revenue, operating expenses and income and taxation. 31 Non-GAAP Financial Measures We currently focus on EBITDA to evaluate our business relationships and our resulting operating performance and financial position. EBITDA is defined as net income plus interest expense, income tax expense, depreciation and amortization. We believe that EBITDA, viewed in addition to, and not in lieu of, our reported results in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), provides useful information to investors. Three Months Ended September 30, 2024 Three Months Ended September 30, 2023 (Unaudited) (Unaudited) Net income (loss) $ 783,593 $ 1,284,187 Interest income (381 ) (413 ) Interest expense 705,088 885,961 Income taxes benefit (192,299 ) (13,366 ) Depreciation and amortization 33,333 — EBITDA $ 1,329,334 $ 2,156,369 Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023 (Unaudited) (Unaudited) Net income (loss) $ 2,019,309 $ 3,747,444 Interest income (1,142 ) (1,202 ) Interest expense 2,560,596 2,606,522 Taxes 114,272 38,896 Depreciation and amortization 100,000 — EBITDA $ 4,793,035 $ 6,391,660 EBITDA is considered non-GAAP financial measures. EBITDA represents earnings before interest, taxes, depreciation and amortization. Our definition of EBITDA might not be comparable to similarly titled measures reported by other companies. Results of Operations for the Three Months Ended September 30, 2024 and September 30, 2023 During both the three months ended September 30, 2024 and 2023, we focused on developing our currently owned brands into new markets and by product extensions. Our objective is to grow our two targeted verticals (Nutraceuticals and Ready To Drinks (RTDs)) to provide a balanced and synergistic portfolio that drives consumer demand via multiple channels. Our Nutraceuticals vertical consists of FOCUSfactor, including RTDs, and Flat Tummy consumables. 32 Revenue For the three months ended September 30, 2024, we had revenue of $7,126,333 from sales of our products, as compared to revenue of $10,805,735 for the three months ended September 30, 2023. The revenue is comprised of the following categories: September 30, 2024 September 30, 2023 Nutraceuticals $ 7,126,333 $ 10,799,535 Consumer Goods — 6,200 $ 7,126,333 $ 10,805,735 We had a decrease in Nutraceuticals revenue in the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 due to a delay in a significant shipment of FOCUSfactor supplements due to packaging upgrade. We had a decrease in Consumer Goods revenue in 2024 as compared to 2023 due to no longer selling consumer goods products. Cost of Revenue For the three months ended September 30, 2024, our cost of revenue was $2,335,901. Our cost of revenue for the three months ended September 30, 2023, was $3,028,023. The decrease in cost of sales was primarily due to the decrease in revenue. Gross Profit Gross profit was $4,790,432, or 67% of revenue, for the three months ended September 30, 2024, as compared to gross profit of $7,777,712, or 72% of revenue, for the same period in 2023, a decrease of $2,987,280, or 38%. The decrease in gross profit is directly related to the decrease in net sales. Operating Expenses Selling and Marketing Expenses For the three months ended September 30, 2024, our selling and marketing expenses were $2,509,440 as compared to $4,302,034 for the three months ended September 30, 2023, which is primarily due to an improved management of promotions in 2024. General and Administrative Expenses For the three months ended September 30, 2024, our general and administrative expenses were $1,196,784. For the three months ended September 30, 2023, our general and administrative expenses were $1,326,864. The decrease is primarily due to improved management of operating costs. Depreciation and Amortization Expenses For the three months ended September 30, 2024, our depreciation and amortization expenses were $33,333 as compared to $0 for the three months ended September 30, 2023. The increase is due to amortization of a license fee recorded in the fourth quarter of 2023. 33 Other Income and Expenses For the three months ended September 30, 2024 and 2023 we had other income and expense items as follows: Three months ended September 30, 2024 Three months ended September 30, 2023 Interest expense, net $ 704,707 $ 885,548 Other income (252,405 ) - Remeasurement loss (gain) on translation of foreign subsidiary 7,279 (7,555 ) Total other expense $ 459,581 $ 877,993 For the three months ended September 30, 2024, we had net interest expense of $704,707 as compared to $885,548 for the three months ended September 30, 2023. The decrease is primarily due to a reduction in the interest rate effective with the sixth amended loan agreement. Net Income For the three months ended September 30, 2024, our net income was $783,593 as compared to a net income of $1,284,187 for the three months ended September 30, 2023 due to lower revenue. Results of Operations for the Nine Months Ended September 30, 2024 and September 30, 2023 During both the nine months ended September 30, 2024 and 2023, we focused on developing our currently owned brands into new markets and by product extensions. Our objective is to grow our two targeted verticals (Nutraceuticals and RTDs) to provide a balanced and synergistic portfolio that drives consumer demand via multiple channels. Our Nutraceuticals vertical consists of FOCUSfactor, including RTDs, and Flat Tummy consumables. 34 Revenue For the nine months ended September 30, 2024, we had revenue of $24,563,036 from sales of our products, as compared to revenue of $29,559,440 for the nine months ended September 30, 2023. The revenue is comprised of the following categories: September 30, 2024 September 30, 2023 Nutraceuticals $ 24,563,036 $ 29,538,763 Consumer Goods — 20,704 $ 24,563,036 $ 29,559,440 We had a decrease in Nutraceuticals revenue in the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 due to: (i) the launch of our FOCUSfactor vision product line to some of our major retailers in 2023, and (ii) a delay in a significant shipment of FOCUSfactor supplements due to packaging upgrade in the third quarter of 2024. The decrease was due primarily to sales volume increases in 2023, as prices for our products did not decrease year-over-year. We had a decrease in Consumer Goods revenue in 2024 as compared to 2023 due to no longer selling consumer goods products. Cost of Revenue For the nine months ended September 30, 2024, our cost of revenue was $7,421,930. Our cost of revenue for the nine months ended September 30, 2023, was $8,351,645. The decrease in cost of sales was primarily due to the decrease in revenue. Gross Profit Gross profit was $17,141,106, or 70% of revenue, for the nine months ended September 30, 2024, as compared to gross profit of $21,207,795, or 72% of revenue, for the same period in 2023, a decrease of $4,066,689, or 19%. The decrease in gross profit is directly related to the decrease in net sales. Operating Expenses Selling and Marketing Expenses For the nine months ended September 30, 2024, our selling and marketing expenses were $9,149,303 as compared to $10,533,217 for the nine months ended September 30, 2023, which is primarily due to a an improved management of promotions in 2024. General and Administrative Expenses For the nine months ended September 30, 2024, our general and administrative expenses were $3,449,007. For the nine months ended September 30, 2023, our general and administrative expenses were $4,294,634. The decrease is primarily due to improved management of operating costs. Depreciation and Amortization Expenses For the nine months ended September 30, 2024, our depreciation and amortization expenses were $100,000 as compared to $0 for the nine months ended September 30, 2023. The increase is due to amortization of a license fee recorded in the fourth quarter of 2023. Other Income and Expenses For the nine months ended September 30, 2024 and 2023 we had other income and expense items as follows: Nine months ended September 30, 2024 Nine months ended September 30, 2023 Interest expense, net $ 2,5559,454 $ 2,605,320 Other income (252,405 ) - Remeasurement loss (gain) on translation of foreign subsidiary 2,166 (11,716 ) Total other expense $ 2,309,215 $ 2,593,604 For the nine months ended September 30, 2024, we had net interest expense of $2,559,454 as compared to $2,605,320 for the nine months ended September 30, 2023. The decrease is primarily due to a reduction in the interest rate effective with the sixth amended loan agreement. 35 Net Income For the nine months ended September 30, 2024, our net income was $2,019,309 as compared to a net income of $3,747,444 for the nine months ended September 30, 2023 due to lower revenue. Liquidity and Capital Resources Overview As of September 30, 2024, we had $259,375 cash on hand and restricted cash of $100,000 which is held for credit card collateral. Cash Flows from Operating Activities For the nine months ended September 30, 2024, net cash used by operating activities was $1,377,479 compared to net cash used in operating activities of $2,737,849 for the nine months ended September 30, 2023. This decrease in net cash used by operating activities for the nine months ended September 30, 2024 was primarily attributable to a decrease in accounts payable and accrued expenses offset by increase in accounts receivable and inventory. For the nine months ended September 30, 2024, net cash used in operating activities of $1,377,479 consisted of our net income of $2,019,309 adjusted by: Amortization of debt issuance cost $ 47,519 Depreciation and amortization 100,000 Foreign currency transaction loss 23,777 Stock based compensation expense 9,224 Remeasurement gain on translation of foreign subsidiary 2,166 Non cash implied interest 4,799 Changes in operating assets and liabilities: Accounts receivable (1,965,936 ) Loan receivable, related party 21,269 Inventory 1,815,725 Prepaid expense (205,975 ) Prepaid expense, related party (396,683 ) Income taxes payable 68,607 Contract liabilities (12,102 ) Accounts payable and accrued liabilities (3,011,384 ) Accounts payable, related party 102,206 For the nine months ended September 30, 2023, net cash used by operating activities of $2,737,849 consisted of our net income of $3,747,444 adjusted by: Amortization of debt issuance cost $ 37,838 Foreign currency transaction loss 16,146 Remeasurement loss on translation of foreign subsidiary (11,716 ) Non cash implied interest 21,994 Changes in operating assets and liabilities: Accounts receivable 102,649 Loan receivable, related party 118,192 Inventory 3,829,729 Prepaid expense (1,029,858 ) Prepaid expense, related party (143,106 ) Income taxes receivable 5,381 Contract liabilities 3,434 Accounts payable and accrued liabilities (9,335,734 ) Accounts payable, related party (100,242 ) 36 Cash Flows from Investing Activities For the nine months ended September 30, 2024 and 2023, we used net cash of $0 in investing activities. Cash Flows from Financing Activities For the nine months ended September 30, 2024, net cash provided by financing activities was $895,972 compared to net cash provided by financing activities of $553,490 for the nine months ended September 30, 2023. The increase was attributable to an advance from a related party and repayment of notes payable. Financing activities during the nine months ended September 30, 2024 and September 30, 2023: Nine months ended September 30, 2024 Nine months ended September 30, 2023 Advances from related party $ 3,395,587 $ 1,000,000 Repayment of advances from related party (157,425 ) - Repayment of notes payable, related party (84,500 ) (73,500 ) Proceeds from notes payable 600,000 360,000 Repayment of notes payable (2,857,690 ) (733,010 ) Key Near-Term Initiatives We intend to organically grow our current product lines by developing and launching new products and expanding into new markets. Specifically, for FOCUSfactor, we are working on increased distribution for our recently launched ready-to-drink beverage. Lastly, we intend to grow further through additional strategic acquisitions and we continue to evaluate opportunities and candidates that we believe fit well with our brand portfolio. Off-Balance Sheet Arrangements During the nine months ended September 30, 2024, and during the year ended December 31, 2023, we had no off-balance sheet arrangements. Inflation The effect of inflation on our operating results was not significant in the nine months ended September 30, 2024 or 2023. Critical Accounting Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition and accounts receivable allowances. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our unaudited condensed consolidated financial statements appearing elsewhere in this report. Recent Accounting Pronouncements Note 2 to our unaudited condensed consolidated financial statements appearing elsewhere in this report includes Recent Accounting Pronouncements. 37 Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, we have elected not to provide the disclosure required by this item.