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”. The table below provides the high and low prices for the periods presented. Quarter Ended High Low 12/31/17 $ 0.56 $ 0.40 9/30/17 $ 0.55 $ 0.38 6/30/17 $ 0.78 $ 0.34 3/31/17 $ 0.69 $ 0.45 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 Shareholders As of March 30, 2018, we had 37 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 and 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 Forms 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 We are in the business of marketing and distributing consumer branded products through various distribution channels primarily in the health and wellness industry. Our 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, 2017 Net income $ 499,568 Interest income (20 ) Interest expense 1,044,277 Taxes 316,012 Depreciation 108,126 Amortization 1,608,350 EBITDA $ 3,576,313 Stock-based compensation 1,458,850 One-time expenses, net of other income 170 ,895 Loss on foreign currency translation and transaction 69,724 Adjusted EBITDA $ 5,275,782 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; and loss on foreign currency translation and transaction. 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, 2017 and December 31, 2016 During 2017, we completed one acquisition and developed two new brands. Our objective is to grow all four of our targeted verticals (Nutraceuticals, Over the Counter (OTC), Consumer Goods and Cosmeceuticals) 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, 2017, we had revenues of $35,596,035 from sales of our products, as compared to revenue of $34,840,394 for the year ended December 31, 2016. This is comprised of the following categories: December 31, 2017 December 31, 2016 Nutraceuticals $ 29,903,714 $ 33,877,529 Over the Counter (OTC) 1,203,034 907,401 Consumer Goods 3,614,090 - Cosmeceuticals 875,197 55,464 $ 35,596,035 $ 34,840,394 The decrease in our Nutraceutical category was due to the shift of resources to new brands. The increase in both the consumer goods and cosmeceuticals categories was due to a new product line. Cost of Revenue For the year ended December 31, 2017, our cost of revenue was $9,818,406. Our cost of revenue for the year ended December 31, 2016, was $10,205,324. This is comprised of the following categories: December 31, 2017 December 31, 2016 Nutraceuticals $ 9,290,854 $ 10,020,273 Over the Counter (OTC) 89,280 167,784 Consumer Goods 345,926 - Cosmeceuticals 92,346 17,267 $ 9,818,406 $ 10,205,324 The decrease in our Nutraceutical category was due lower revenue due to a shift in focus to new brands. The increase in both the consumer goods and cosmeceuticals categories was due to a new product line. 10 Gross Profit Gross profit was $25,777,629, or 72% of gross revenue, for the year ended December 31, 2017, as compared to gross profit of $24,635,070, or 71% of gross revenue, for the same period in 2016, an increase of $1,142,559, or 5%. 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, 2017, our selling and marketing expenses were $14,043,870 as compared to $10,334,075 for the year ended December 31, 2016. The increase is primarily due to marketing our various products in multiple media channels including print, television and online. General and Administrative Expenses For the year ended December 31, 2017, our general and administrative expenses were $8,418,159. For the year ended December 31, 2016, our general and administrative expenses were $8,019,722. The increase is a modest due to normal operating expenses and increased personnel. Depreciation and Amortization Expenses For the year ended December 31, 2017 our depreciation and amortization expenses were $1,493,285 as compared to $1,170,778 for the year ended December 31, 2016. The increase in 2017 is due to the acquisitions completed during 2017. Impairment of Intangible Assets and Goodwill During review of intangible assets and goodwill as of December 31, 2016, 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. As a result, 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, 2017, we had other (income) and expense items of the following: Interest income $ (20 ) Interest expense 1,044,277 Remeasurement gain on translation of foreign subsidiary (50,825 ) Amortization of debt issuance cost 223,191 Loss on the sale of assets 2,877 Other income (212,765 ) Total $ 1,006,735 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 The decrease in interest expense in 2017 was due to the pay down of 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 2016. 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, 2017 and 2016 we incurred income tax expense of $316,012 and $944,358, respectively, primarily related to our subsidiary, NomadChoice Pty Limited (NomadChoice), located in Australia, which we acquired in 2015. Net Income (Loss) For the year ended December 31, 2017, our net income was $499,568. For the year ended December 31, 2016 our net loss was $796,161. This was primarily due to non-operating expenses such as amortization of debt discounts and the loss on extinguishment of debt during 2016. Liquidity and Capital Resources Overview As of December 31, 2017, we had $1,955,614 cash on hand and a $3,278,903 working capital surplus. In addition, we also have restricted cash of $139,071 which is held for credit card collateral. 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 had restricted cash of $100,000 which is held for credit card collateral. 12 Year Ended December 31, 2017 and 2016 Net Cash (Used in) Provided by Operating Activities For the year ended December 31, 2017, we had net cash used in operating activities of $831,070, as compared to $6,038,620 provided by operating activities for the year ended December 31, 2016. The decrease was primarily attributable to purchases of inventory and an increase in accounts receivable. For 2017, the $831,070 consists of our net income of $499,568 adjusted by: Amortization of debt issuance cost $ 223,191 Depreciation and amortization 1,493,285 Stock based compensation 1,458,850 Foreign currency transaction loss 120,549 Remeasurement gain on translation of foreign subsidiary (50,825 ) Non cash implied interest 73,763 Loss on sale of assets 2,877 Increase in accounts receivable (2,085,778 ) Increase in inventory (1,449,425 ) Decrease in prepaid expenses 205,351 Decrease in deferred revenue (32,942 ) Decrease in accounts payable and accrued expenses (1,289,534 ) 13 For 2016, the $6,038,620 consists of our net loss of $796,161 adjusted 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 ) Net Cash Used in Investing Activities For the year ended December 31, 2017, we used net cash of $1,947,828 in investing activities, as compared to $2,346,643 used in investing activities for the year ended December 31, 2016. The increase was primarily due to the payment of brand development fees. Investing activities during 2017: Payments for acquisition of fixed assets $ (153,021 ) Restricted cash (39,071 ) Cash received from sale of assets 6,199 Payments for brand development fees (1,761,928 ) Investing activities during 2016: Payments for acquisition of fixed assets $ (302,227 ) Restricted cash 507,084 Payment of earn out liability (2,551,500 ) Net Cash (Used in) Provided by Financing Activities For the year ended December 31, 2017, financing activities provided $2,310,881, as compared to $4,831,250 used in financing activities for the year ended December 31, 2016. The increase was primarily attributable to the receipt of cash pursuant to a new loan. Financing activities during 2017: Proceeds from notes payable $ 10,000,000 Repayment of notes payable (7,456,250 ) Payment of debt issuance cost (452,869 ) Proceeds from sale of common stock 220,000 Financing activities during 2016: Repayment of notes payable $ (4,831,250 ) 14 Key 2018 Initiatives During 2018, we have plans for organic growth within our current product lines by developing and launching new products and 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 our operating results was not significant in either 2017 or 2016. 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.