Synergy CHC Corp. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto contained elsewhere in this Annual 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. 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 IND 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 based on our current business and should be read in conjunction with our consolidated financial statements and accompanying notes thereto included elsewhere in this Annual Report. Key factors affecting our results of operations include revenues, cost of revenue, operating expenses and income and taxation. 30 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 U.S. GAAP, provides useful information to investors. Year Ended December 31, 2025 Year Ended December 31, 2024 Net income (loss) $ (12,341,208 ) $ 2,124,976 Interest income (15,065 ) (1,523 ) Interest expense 5,919,742 4,105,198 Taxes 117,471 102,085 Depreciation and amortization 133,334 133,334 EBITDA $ (6,185,726 ) $ 6,464,070 EBITDA is considered a non-GAAP financial measure. 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 Years Ended December 31, 2025 and December 31, 2024 During both 2025 and 2024, we focused on developing our currently owned brands into new markets and by product extensions. Revenue For the year ended December 31, 2025, we had revenues of $30,380,809 from sales of our products, as compared to revenue of $34,834,243 for the year ended December 31, 2024. This is comprised of the following categories: December 31, 2025 December 31, 2024 Nutraceuticals $ 29,731,490 $ 33,392,094 Beverages 631,332 1,425,239 Consumer Goods 17,987 16,910 $ 30,380,809 $ 34,834,243 The decrease in our Nutraceutical category was due to a shift in management focus on developing new products for the Beverages category and an overall decrease in sales. The decrease in our Beverage category was due to limited test during 2024 in Canada. During first and second quarter of 2025, we licensed our FOCUSfactor and Flat Tummy intellectual property for $2,900,000 and we recognized revenue for the license fee at that time. During fourth quarter of 2025, due to the instability in the regions the licensee was expanding to, the entity canceled its license with the Company resulting in a reversal of the revenue of the same $2,900,000. 31 Cost of Sales For the year ended December 31, 2025, our cost of sales was $10,077,992. Our cost of sales for the year ended December 31, 2024 was $11,191,224. The decrease in cost of sales was primarily due to lower revenue. Gross Profit Gross profit was $20,302,817, or 67% of revenue for the year ended December 31, 2025, as compared to gross profit of $23,643,019 or 68% of revenue for the same period in 2024, a decrease of $3,340,202 or 14%. The decrease in gross profit related to lower revenue. Operating Expenses Selling and Marketing Expenses For the year ended December 31, 2025, our selling and marketing expenses were $13,137,779 as compared to $12,991,431 for the year ended December 31, 2024. The increase is related to the mix of advertising utilized. General and Administrative Expenses For the year ended December 31, 2025, our general and administrative expenses were $8,829,803. For the year ended December 31, 2024, our general and administrative expenses were $4,717,006. The increase is largely due to an increase in professional fees, legal expense, board of directors’ expense, the write off of prepaid media credits carried over from 2024 and the increased overhead as we build the beverage division. Reserve for Bad Debts For the year ended December 31, 2025, our reserve for bad debts was $6,660,650 compared to $0 for the year ended December 31, 2024. The increase is due to the write off of a related party loan receivable of $4,403,804, a write off of uncollectible other receivables of $1,654,249, a write off of uncollectible accounts receivable of $225,018 and recognizing an allowance for doubtful accounts of $377,579. Depreciation and Amortization Expenses For both the years ended December 31, 2025 and 2024, our depreciation and amortization expenses were $133,334. Other Income and Expenses For the years ended December 31, 2025 and December 31, 2024, we had other (income) and expense items of the following: Year ended December 31, 2025 Year ended December 31, 2024 Other income $ - $ (510,534 ) Interest income (15,065 ) (1,523 ) Interest expense 5,919,742 4,105,198 Gain on settlement of notes payable (2,154,522 ) - Remeasurement (gain) loss on translation of foreign subsidiary 14,833 (18,954 ) Total $ 3,764,988 $ 3,574,187 The decrease in other income in 2025 was related to Employee Retention Credits and an insurance claim on stolen goods from 2024 that did not repeat. The increase in interest expense in 2025 was primarily due to an advance taken, shares issued related to the modification of notes payable and the amortization of original debt discount on the May 2025 loan. The gain on settlement of notes payable relates to discounts negotiated on loan payoffs during 2025. 32 Income tax expense For the year ended December 31, 2025, we incurred income tax expense of $117,471. For the year ended December 31, 2024 we incurred income tax expense of $102,085. Net Income (Loss) For the year ended December 31, 2025, our net loss was $12,341,208. For the year ended December 31, 2024 our net income was $2,124,976. This decrease was due to lower revenue, higher expenses, the write off of other receivables and the write off of the loan receivable. Liquidity and Capital Resources Overview As of December 31, 2025, we had $2,622,313 cash and cash equivalents and restricted cash of $100,000 which is held for credit card collateral. In connection with preparing consolidated financial statements for the year ended December 31, 2025, 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 consolidated financial statements are issued. The Company considered the following: ● At December 31, 2025, the Company had an accumulated deficit of $56,441,021. ● At December 31, 2025, the Company had a decrease in revenue of $4,453,434. ● At December 31, 2025, the Company had a decrease in net income of $14,466,184. ● During the year ended December 31, 2025, the Company used $2,585,022 in operating activities. 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 consolidated financial statements are issued by considering the following: ● At December 31, 2025, the Company had a working capital surplus of $1,778,308. ● During 2025, the Company raised additional capital of $3.7 million through sale of its common stock. ● The Company has restructured its debt agreements in 2025 which extends the terms into 2029. ● The Company entered into a second amendment with its current lender during 2026 which adjusts various covenants and payment terms. ● The Company has laid off 13 employees in order to right size its overhead expenses. ● The Company has established an at-the-market (“ATM”) equity offering program pursuant to which we may issue and sell shares of our common stock from time to time, subject to market conditions and other factors. Management concluded that the above factors alleviate doubts about the Company’s ability to generate enough cash from operations and other available sources to satisfy its obligations for the next twelve months from the issuance date. 33 Short- and Long-Term Borrowings On May 30, 2025, we entered into a term credit loan agreement of $17,500,000 with ACP Agency, LLC. We received $15,000,000 in May 2025 on the initial draw and $2,500,000 in June 2025 on a delayed draw. The proceeds of the loan were used to repay existing debt, including the payoff of the Company’s indebtedness to Knight Therapeutics. We recorded $2,385,954 as original debt discount and is being amortized to interest expense over the term of the loan. We recognized $360,511 as amortization during the year ended December 31, 2025. The unamortized balance amounts to $2,025,443 at December 31, 2025. The note bears interest at Term SOFR rate, plus 8.5%, currently 12.5% and matures on May 31, 2029. We recognized total interest expense of $1,326,732 as of December 31, 2025. The outstanding loan balance at December 31, 2025 was $17,500,000 (See Note 11). We previously had secured indebtedness with Knight Therapeutics (Barbados) Inc. and related arrangements. During 2025, this indebtedness was repaid in full in connection with the Company’s refinancing transactions, including the ACP term loan described above. For additional information regarding our prior Knight indebtedness and the related repayment, see the notes to our consolidated financial statements. On February 10, 2022, we entered into a promissory note for $2,000,000 with an individual which was to be repaid with subsequent financing. On March 31, 2024, we entered into a Modification Agreement in relation to this loan. Effective March 31, 2024, the interest rate is 12%, compounded quarterly. Cash payments of interest shall be made monthly, on the final day of each month commencing in April 2024. We are required to make principal payments of $1,000,000 each quarter starting from March 31, 2025 until December 31, 2025. The remaining principal and unpaid interest is fully due on March 31, 2026. In addition, a loan renegotiation fee of $500,000 shall be earned and payable on March 31, 2026 or at such time the loan is paid in full. Upon closing of a sale transaction, as defined in the agreement, a bonus success fee of $1,800,000 will be earned and payable. An event of default, as defined in the agreement, will trigger a default interest rate increase by 5% to 17%. An incentive fee of a maximum of $563,092 will be paid, prorated if the loan is paid off early. There is a cross-default clause in the agreement which states that if Knight triggers an event of default on its own loan facility, this loan will also be under default. This Agreement consolidates this $2,000,000 loan and the $6,000,000 March 8, 2022 loan as detailed below. On March 8, 2022, we entered into Securities Purchase Agreements with debenture holders for the Senior Subordinated Debentures in the amount of $6,000,000 with an original maturity date of September 8, 2022 and warrants equal to the principal amount with a term of 3 years. The Senior Subordinated Debentures were modified on June 14, 2023 and consolidated with the promissory note dated February 10, 2022. The modification included the exercise of a $1,500,000 cash payment in lieu of the exercise of warrants. Pursuant to ASC 480 warrants were liability classified and we accrued the warrant liability of $1,500,000 on March 8, 2022, the date of issuance. On September 8, 2022, the date of exercise of the warrants, we offset this warrant liability and added the $1,500,000 balance to the Senior Subordinated Debentures, for a combined outstanding balance of $7,500,000. The terms of the warrants were, at the sole option of the holder, to convert the warrant at a 25% discount in the event we consummated an IPO, a cash option whereby the holder could convert the warrants at a cash value of $1,500,000 or convert the warrants into the private entity valued by an independent third-party appraiser. On March 31, 2024, we entered into a Modification Agreement in relation to this loan, which consolidates it with the $2,000,000 February 10, 2022 loan above. We have utilized various short-term working capital arrangements from time to time (including merchant financing and settlement-related payment arrangements) to support liquidity and working capital needs. Substantially all of these arrangements were repaid prior to December 31, 2025. As of December 31, 2025, the primary short-term amount outstanding relates to the Cedar Advance LLC receivables purchase arrangement described below. For additional information, see the notes to our consolidated financial statements. On November 12, 2025, we entered into a cash advance agreement of $3,024,000 with Cedar Advance LLC for an advancement of working capital via the sale of receivables. We received $2,000,000 and recorded $1,024,000 as original issue discount. The loan bears a repayment rate of $84,000 per week. In conjunction with the advance, we issued 52,000 shares of common stock to the consultant who facilitated the facility and thus recognized $103,220 as financing cost. We recognized total interest expense of $349,435 as of December 31, 2025. The outstanding loan balance at December 31, 2025 was $1,658,215. As of the date of filing of this Annual Report, we are in compliance with the material terms, conditions and covenants applicable to our outstanding debt arrangements. Operating Activities For the year ended December 31, 2025, we had net cash used in operating activities of $2,585,022 as compared to $4,803,390 of net cash used in operating activities for the year ended December 31, 2024. The decrease was primarily due to decreases in accounts receivable, other receivables and related party loan receivable. 34 For 2025, net cash used in operating activities of $2,585,022 consisted of our net loss of $12,341,208 adjusted by: Amortization of debt discount and debt issuance cost $ 1,633,776 Depreciation and amortization 133,334 Stock based compensation 136,247 Stock issued for modification of notes payable 847,062 Stock issued for services 127,200 Foreign currency transaction loss 5,531 Remeasurement gain on translation of foreign subsidiary 14,833 Bad debts 2,256,846 Bad debt, related party 4,403,804 Gain on settlement of debt (2,154,522 ) Write-off of inventory 894,341 Changes in operating assets and liabilities: Accounts receivable 1,514,935 Other receivables 345,388 Inventory (2,915,298 ) Prepaid expenses 1,306,351 Prepaid expense, related party 202,163 Income taxes payable (84,271 ) Contract liabilities (22,726 ) Accounts payable and accrued liabilities 622,099 Accounts payable, related party 489,093 For 2024, net cash used in operating activities of $4,803,390 consisted of our net income of $2,124,976 adjusted by: Amortization of debt issuance cost $ 56,796 Depreciation and amortization 133,334 Foreign currency transaction loss 54,321 Remeasurement gain on translation of foreign subsidiary (18,954 ) Non cash implied interest 4,799 Write-off of inventory 125,364 Stock issued for loan financing 97,920 Income from employee retention credits (252,405 ) Income from insurance on stolen goods (258,129 ) Changes in operating assets and liabilities: Accounts receivable (3,214,943 ) Other receivables (1,489,103 ) Loan receivable, related party 84,937 Inventory 1,884,324 Prepaid expenses (1,250,023 ) Prepaid expense, related party (145,092 ) Income taxes payable 57,312 Contract liabilities 10,050 Accounts payable and accrued liabilities (2,870,633 ) Accounts payable, related party 61,759 Investing Activities For the years ended December 31, 2025 and 2024, we used net cash of $0 in investing activities. 35 Financing Activities For the year ended December 31, 2025, net cash provided by financing activities was $4,654,664, as compared to $4,804,086 provided by financing activities for the year ended December 31, 2024. The decrease was attributable to the issuance of common stock and proceeds from notes payable offset by repayment on notes payable. Financing activities during 2025: Proceeds from issuing common stock $ 3,719,547 Advances from related party 235,000 Repayments of advances to related party (135,000 ) Repayment of notes payable, shareholder (10,000,000 ) Proceeds from notes payable 20,996,250 Payment of loan financing fees (2,024,287 ) Repayment of notes payable (8,136,846 ) Financing activities during 2024: Proceeds from issuance of common stock $ 8,397,044 Advances from related party 3,528,003 Repayments of advances to related party (3,200,000 ) Proceeds from notes payable 1,360,000 Repayment of notes payable (5,196,461 ) Repayment of notes payable, related party (84,500 ) Key Near-Term Initiatives During 2026, 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 years ended December 31, 2025 and 2024, we had no off-balance sheet arrangements. Inflation The effect of inflation on our operating results was not significant in the years ended December 31, 2025 and 2024. Critical Accounting Policies Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition and allowance for doubtful accounts. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. 36 Use of Estimates In preparing the consolidated financial statements, management is required 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 included are assumptions about collection of accounts receivable, current income taxes, deferred income taxes valuation allowance, useful life of intangible assets, impairment analysis of intangible assets, estimates used in the fair value calculation of stock based compensation, assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate and expected dividend rate, accrual of sales returns, and accrual of legal expense. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary. Revenue recognition We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are recognized when control is transferred to customers in amounts that reflect the consideration we expect 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. We recognize revenue upon shipment from our 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 in selling and marketing expense. 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. We recognize revenue for our digital products in the month the download by the customer occurs. We account for our IP license revenue, which provides our customers with rights to use our IP, in accordance with ASC 606. A license may be perpetual or time limited in its application. In accordance with ASC 606, we continue to recognize revenue from IP license at the time of delivery when the customer accepts control of the IP, as the IP is functional without professional services, updates and technical support. We have concluded that its IP license is distinct as the customer can benefit from the functional IP on its own. Therefore, we have determined the right to use its IP was satisfied at a point in time (on the date the rights to the IP were granted). All product sales were initiated based upon the retailer’s purchase orders at a fixed transaction price and revenues recognized when the products were shipped to our customers. Contract Liabilities Our contract liabilities consist of advance customer payments. Contract liability results from transactions in which we have 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 contract liabilities are recognized. Income Taxes We utilize 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. We 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 our realization of the net operating loss carry forward prior to its expiration. 37 NomadChoice Pty Ltd, our wholly-owned Australian 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. We recognize liabilities for anticipated tax audit issues based on our 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., our wholly-owned Canadian 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. We recognize liabilities for anticipated tax audit issues based on our 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 Mexico, our wholly-owned Mexican 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. We recognize liabilities for anticipated tax audit issues based on our 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. Effect of Exchange Rate on Results The functional currency of one of our foreign subsidiaries (NomadChoice Pty Ltd.) is the U.S. Dollar. This foreign subsidiary maintains its records using local currency (Australian Dollar–“AUD”). All monetary assets and liabilities of the foreign subsidiary were translated into U.S. Dollars at period 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 were recorded in statements of operations as Remeasurement gain or loss on translation of foreign subsidiary. The functional currency of one of our foreign subsidiaries (Synergy CHC Inc.) is the Canadian Dollar (CAD). This 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 functional currency of our other foreign subsidiary (Synergy CHC Mexico) is the Mexican Peso (MXN). This foreign subsidiary maintains its records using local currency (MXN). 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, CAD and MXN into USD for the purposes of preparing the consolidated financial statements were as follows: Balance sheet: December 31, 2025 December 31, 2024 Period-end AUD: USD exchange rate $ 0.6696 $ 0.6183 Period-end CAD: USD exchange rate $ 0.7296 $ 0.6950 Period-end MXN: USD exchange rate $ 0.0555 $ - Income statement: December 31, 2025 December 31, 2024 Average Yearly AUD: USD exchange rate $ 0.6447 $ 0.6599 Average Yearly CAD: USD exchange rate $ 0.7157 $ 0.7301 Average Period MXN: USD exchange rate $ 0.0555 $ - 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, Canadian Dollars or Mexican Pesos, as the case may be, at the rate on the date of the transaction and included in the results of operations as incurred. 38 Item 7A. Quantitative and Qualitative Disclosure About Market Risk As a smaller reporting company, we have elected not to provide the disclosure required by this item. Item 8. Financial Statements and Supplementary Data Reference is made to pages F-1 through F-27 comprising a portion of this Annual Report on Form 10-K, which are incorporated by reference under this Item. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.