Synergy CHC Corp. 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Only a sporadic and limited market exists for our securities. There is no assurance that a regular trading market will develop, or if one develops, that it will be sustained. Therefore, a shareholder in all likelihood will be unable to resell his, her or its securities in our Company. Furthermore, it is unlikely that a lending institution will accept our securities as pledged collateral for loans unless a regular trading market develops. Our securities are traded on the OTCQB operated by OTCMarkets.com under the symbol “SNYR”. Quarter Ended High Low 12/31/16 $ 0.74 $ 0.46 9/30/16 $ 0.70 $ 0.40 6/30/16 $ 1.00 $ 0.35 3/31/16 $ 0.43 $ 0.30 12/31/15 $ 0.74 $ 0.46 9/30/15 $ 0.70 $ 0.40 6/30/15 $ 1.00 $ 0.35 3/31/15 $ 0.43 $ 0.30 12/31/14 $ 0.55 $ 0.31 9/30/14 $ 0.60 $ 0.31 6/30/14 $ 2.00 $ 0.30 3/31/14 $ 0.33 $ 0.33 Shareholders As of March 21, 2017, we had 39 shareholders of record of our common stock. Dividend Policy We have not declared any cash dividends. We do not intend to pay dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations. The payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors our board deems relevant. Equity Compensation Plans The information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated herein by reference to “Item 11. Executive Compensation” in this report. ITEM 6. SELECTED FINANCIAL DATA. As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information. 8 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion is an overview of the important factors that management focuses on in evaluating our business; financial condition and operating performance should be read in conjunction with the financial statements included in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth in the Company’s reports filed with the SEC on Form 10-K, 10-Q and 8-K as well as in this Annual Report on Form 10-K. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements. Overview The Company is in the business of marketing and distributing consumer branded products through various distribution channels primarily in the health and wellness industry. The Company’s strategy is to grow both organically and by future acquisition. Our management’s discussion and analysis of our financial condition and results of operations are only based on our current business and should be read in conjunction with our audited Consolidated Financial Statements and accompanying notes thereto included elsewhere in this Annual Report Form 10-K. Key factors affecting our results of operations include revenues, cost of revenues, operating expenses and income and taxation. Non-GAAP Financial Measures We currently focus on Adjusted EBITDA to evaluate our business relationships and our resulting operating performance and financial position. Adjusted EBITDA is defined as EBITDA (net income plus interest expense, income tax expense, depreciation and amortization), further adjusted to exclude certain non-cash expenses and other adjustments as set forth below. We present Adjusted EBITDA because we consider it an important measure of our performance and it is a meaningful financial metric in assessing our operating performance from period to period by excluding certain items that we believe are not representative of our core business, such as certain non-cash items and other adjustments. We believe that Adjusted EBITDA, viewed in addition to, and not in lieu of, our reported results in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), provides useful information to investors. December 31, 2016 Net loss $ (796,161 ) Interest income (5,107 ) Interest expense 1,567,867 Taxes 944,358 Depreciation 44,480 Amortization 2,961,751 EBITDA $ 4,717,188 Loss on change in fair value of derivative liability (1,380,600 ) Stock-based compensation 2,200,160 One-time expenses for 2015 acquisitions 109,163 Stock issued for services 50,000 Settlement Expenses 56,250 Directors Fees 40,000 Loss on extinguishment of debt 657,180 Focus Factor Kids return 1,249,487 Impairment of Intangible Assets 2,176,910 Loss on foreign currency translation and transaction 40,842 Write off of obsolete inventory 300,187 Non-cash implied interest 114,213 Adjusted EBITDA $ 10,330,980 9 EBITDA and Adjusted EBITDA are considered non-GAAP financial measures. EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA, further adjusted to exclude the impact of higher-than-normal revenue change order activity and certain expenses and transactions that we believe are not representative of our core operating results, including loss on change in fair value of derivative liability; stock-based compensation; one-time expenses for acquisitions; loss on foreign currency translation and transaction; and the write off of obsolete inventory. The Company’s definitions of EBITDA and adjusted EBITDA might not be comparable to similarly titled measures reported by other companies. Results of Operations for the Years Ended December 31, 2016 and December 31, 2015 During 2015, we completed five acquisitions, with at least one in each of the three targeted verticals of Nutraceuticals, Cosmeceuticals and Over the Counter (OTC). Our objective is to grow all three verticals to provide a balanced and synergistic portfolio that drives consumer demand via multiple channels. During 2016 we focused on growing and managing our existing brands. Revenue For the year ended December 31, 2016, we had revenues of $34,840,394 from sales of our products, as compared to revenue of $13,456,377 for the year ended December 31, 2015. This is primarily due to having a full year of operations of the acquisitions we completed during 2015 and is comprised of the following categories: December 31, 2016 December 31, 2015 Nutraceuticals $ 33,877,529 $ 13,030,006 Over the Counter (OTC) 907,401 416,417 Cosmeceuticals 55,464 9,954 $ 34,840,394 $ 13,456,377 Cost of Revenue For the year ended December 31, 2016, our cost of revenue was $10,205,324. Our cost of revenue for the year ended December 31, 2015, was $5,308,130. This increase is also due to having a full year of operations of the acquisitions we completed during 2015 and is comprised of the following categories: December 31, 2016 December 31, 2015 Nutraceuticals $ 10,020,273 $ 5,194,831 Over the Counter (OTC) 167,784 110,637 Cosmeceuticals 17,267 2,662 $ 10,205,324 $ 5,308,130 10 Gross Profit Gross profit was $24,635,070, or 71%, for the year ended December 31, 2016, as compared to gross profit of $8,148,247, or 61%, for the same period in 2015, an increase of $16,486,825, or 202%. The increase in gross profit and gross profit margin is directly related to increase in sales and better negotiated deals with manufacturers, utilizing volume purchasing to avail lower prices and purchasing finished goods instead of buying components. Operating Expenses Selling and Marketing Expenses For the year ended December 31, 2016, our selling and marketing expenses were $10,334,075 as compared to $3,685,727 for the year ended December 31, 2015, which is primarily due to marketing our various products in multiple media channels including print, television and online. This increase is also due to having a full year of operations of the acquisitions we completed during 2015. General and Administrative Expenses For the year ended December 31, 2016, our general and administrative expenses were $8,019,722. For the year ended December 31, 2015, our general and administrative expenses were $3,368,495, the change in which was primarily due to having a full year of operations of the acquisitions we completed in 2015. Depreciation and Amortization Expenses For the year ended December 31, 2016 our depreciation and amortization expenses were $1,170,778 as compared to $608,002 for the year ended December 31, 2015. The increase in 2016 is due to the acquisitions completed during 2015. Impairment of Intangible Assets and Goodwill During review of intangible assets and goodwill, it was determined that the carrying value of the intangible assets and goodwill for one of our subsidiaries may not be recoverable, so the assets were fully impaired. For the year ended December 31, 2016, we recorded non-cash intangible asset and goodwill impairment charges of $2,176,910 related to a subsidiary. 11 Other Income and Expenses For the year ended December 31, 2016 we had other (income) and expense items of the following: Interest income $ (5,107 ) Interest expense 1,567,867 Remeasurement loss on translation of foreign subsidiary 54,345 Gain on change in fair value of derivative liability (1,380,600 ) Amortization of debt discount 1,620,151 Amortization of debt issuance cost 215,302 Settlement expense 56,250 Loss on extinguishment of debt 657,180 Total $ 2,785,388 For the year ended December 31, 2015 we had other (income) and expense items of the following: Interest income $ (1,460 ) Interest expense 958,740 Remeasurement gain on translation of foreign subsidiary (7,740 ) Loss on change in fair value of derivative liability 1,028,921 Amortization of debt discount 5,499,640 Amortization of debt issuance cost 154,525 Total $ 7,632,626 The increase in interest expense in 2016 was due to the loans issued for the purpose of acquisitions of various companies’ during 2015. We also issued warrants along with the loans and paid debt issuance cost in 2015 which lead to the amortization of debt discount and debt issuance cost during 2015. We issued warrants with a reset provision in 2015 which lead to the calculation of warrant derivative liability and hence we recorded a loss on change in fair value of derivative liability. In 2016, we cancelled those warrants and issued shares, which resulted in a loss on extinguishment of debt. Income tax expense For the years ended December 31, 2016 and 2015 we incurred income tax expense of $944,358 and $389,945, respectively, primarily related to our subsidiary, NomadChoice Pty Limited (NomadChoice), located in Australia and which we acquired in 2015. Net Loss For the year ended December 31, 2016, our net loss was $796,161. For the year ended December 31, 2015 our net loss was $7,536,548. This was primarily due to non-operating expenses such as amortization of debt discounts and the change in the fair value of derivative liabilities in 2015. In 2016, we had a full year of operations of the companies we acquired in 2015. Liquidity and Capital Resources Overview As of December 31, 2016, we had $2,517,642 cash on hand and a $4,944,587 working capital deficit. In addition, we also have restricted cash of $100,000 which is held for credit card collateral. As of December 31, 2015, we had $3,640,893 cash on hand and a $6,029,421 working capital deficit. The deficit is largely due to the future liability we’ve accrued for in relation to an earn-out payment of $2,551,500 in which payments are due based solely on future earnings and a derivative liability for stock warrants outstanding of $3,096,179. In addition, we also had restricted cash of $607,084 which was comprised of $510,605 for the earn-out payment held in escrow account, $46,479 for a rolling reserve with Paypal and $50,000 for credit card collateral. 12 Going Concern The Company’s consolidated financial statements are prepared using U.S. GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company had an accumulated deficit at December 31, 2016 of $9,366,000. The Company had a working capital deficit of $4,944,587 as of December 31, 2016. During the year ended December 31, 2016, the Company incurred net loss of $796,161. Due to acquisitions during 2015 of revenue producing products, the Company believes it has established an ongoing source of revenue that is sufficient to cover its operating costs and has income from operations of $2,933,585. The ability of the Company to continue as a going concern is dependent on the Company continuing to execute the sales of their products. Due to acquisitions during 2015 of revenue-producing products, the Company believes it has established an ongoing source of revenue that is sufficient to cover its operating costs. Management’s plans to continue as a going concern include raising additional capital through borrowing and/or sales of equity and debt securities. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. In their report accompanying our audited financial statements, our independent registered public accounting firm expressed substantial doubt as to our ability to continue as a going concern. Year Ended December 31, 2016 and 2015 Net Cash Provided by (Used in) Operating Activities For the year ended December 31, 2016, we had net cash provided by operating activities of $6,038,620, as compared to $644,316 used in operating activities for the year ended December 31, 2015. The decrease was primarily attributable to a change in the business due to acquisitions during 2015. For 2016, the $6,038,620 consists of our net loss of $796,161 increased by: Amortization of debt issuance cost $ 215,302 Depreciation and amortization 1,170,778 Stock based compensation 2,200,160 Amortization of debt discount 1,620,151 Stock issued for services 50,000 Settlement expense 56,250 Foreign currency transaction gain (13,503 ) Loss on extinguishment of debt 657,180 Change in the fair value of derivative liability (1,380,600 ) Remeasurement loss on translation of foreign subsidiary 54,345 Impairment of goodwill and intangible assets 2,176,910 Non cash implied interest 114,213 Write-off of inventory 180,122 Decrease in accounts receivable 1,734,466 Increase in inventory (547,295 ) Increase in prepaid expenses (1,051,168 ) Increase in deferred revenue 36,000 Decrease in accounts payable and accrued expenses (438,530 ) 13 For 2015, the $644,316 consists of our net loss of $7,536,548 reduced by: Amortization of debt issuance cost $ 154,525 Depreciation and amortization 608,002 Stock based compensation 551,714 Amortization of debt discount 5,499,640 Foreign currency transaction loss 54,600 Change in the fair value of derivative liability 1,028,921 Remeasurement gain on translation of foreign subsidiary (7,740 ) Bad debt allowance 50,000 Increase in accounts receivable (1,317,050 ) Increase in inventory (19,632 ) Increase in prepaid expenses (194,889 ) Increase in accounts payable and accrued expenses 484,141 Net Cash Used in Investing Activities For the year ended December 31, 2016, we used net cash of $2,346,643 in investing activities, as compared to $4,399,856 used in investing activities for the year ended December 31, 2015. The decrease was primarily attributable to the acquisitions during 2015. Investing activities during 2016: Payments for acquisition of fixed assets $ (302,227 ) Restricted cash 507,084 Payment of earn out liability (2,551,500 ) Investing activities during 2015: Payments for acquisition of fixed assets $ (7,833 ) Restricted cash (607,084 ) Payments for acquisition of Focus Factor assets (4,500,000 ) Payments for acquisition of Neuragen assets (250,000 ) Payments for acquisition of NomadChoice Pty Ltd (2,918,200 ) Cash acquired in acquisitions 3,883,261 Net Cash (Used in) Provided by Financing Activities For the year ended December 31, 2016, financing activities used $4,831,250, as compared to $8,684,727 provided by financing activities for the year ended December 31, 2015. The decrease was primarily attributable to payments of notes payable issued in connection with the acquisitions during 2016. Financing activities during 2016: Repayment of notes payable $ (4,831,250 ) Financing activities during 2015: Advances from related party $ 16,077 Proceeds from notes payable 11,500,000 Repayment of notes payable (1,150,000 ) Payment of debt issuance costs (533,377 ) Payment of dividends on subsidiary (1,173,975 ) Proceeds from exercise of warrants 2 Proceeds from issuance of common stock 26,000 14 Key 2017 Initiatives During 2017, we have plans for organic growth within our current product lines by developing and launching new products and brands. Our technology center in Halifax, Nova Scotia will be in full operations for all of our brands. We have new marketing campaigns in process and intend to expand our online presence for each product. While we intend to grow further through additional acquisitions, we feel it is important to also develop our existing products. Contractual Obligations and Off-Balance Sheet Arrangements Contractual Obligations None. Off-Balance Sheet Arrangements None. Inflation The effect of inflation on the Company’s operating results was not significant. Summary of Significant Accounting Policies The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition and accounts receivable allowances. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our audited consolidated financial statements appearing elsewhere in this report. Recent Accounting Pronouncements Note 2 to our audited consolidated financial statements appearing elsewhere in this report includes Recent Accounting Pronouncements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.