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 reflects the high and low bid information for our common stock obtained from OTC Markets and reflects inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions. Quarter Ended High Low December 31, 2018 $ 0.27 $ 0.10 September 30, 2018 $ 0.35 $ 0.26 June 30, 2018 $ 0.40 $ 0.29 March 31, 2018 $ 0.49 $ 0.30 December 31, 2017 $ 0.56 $ 0.40 September 30, 2017 $ 0.55 $ 0.38 June 30, 2017 $ 0.78 $ 0.34 March 31, 2017 $ 0.69 $ 0.45 Shareholders As of March 27, 2019, 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 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this report. Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities There were no unregistered sales of the Company’s equity securities during the period from January 1, 2018 to December 31, 2018 that were not otherwise disclosed in a Current Report on Form 8-K. 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, 2018 Net income $ (6,160,690 ) Interest income (235 ) Interest expense 1,132,763 Taxes (247,694 ) Depreciation 152,522 Amortization 1,883,508 Impairment of Intangible Assets 924,068 EBITDA $ (2,315,758 ) Stock-based compensation 440,999 One-time expenses, net of other income 3,530,764 Loss on foreign currency translation and transaction 303,806 Adjusted EBITDA $ 1,959,811 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, 2018 and December 31, 2017 During 2018, we focused on developing our currently owned brands into new markets and by product extensions. 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 2017, we completed one acquisition and developed two new brands. Revenue For the year ended December 31, 2018, we had revenues of $33,824,495 from sales of our products, as compared to revenue of $35,596,035 for the year ended December 31, 2017. This is comprised of the following categories: December 31, 2018 December 31, 2017 Nutraceuticals $ 31,332,952 $ 29,903,714 Over the Counter (OTC) 427,871 1,203,034 Consumer Goods 987,230 3,614,090 Cosmeceuticals 1,076,442 875,197 $ 33,824,495 $ 35,596,035 The increase in our Nutraceutical category was due to organic growth, and new markets. The decrease in the Over the Counter category was due to a supply issue with one product during the year. The decrease in the consumer goods category is due to normalization of business after the launch year. The increase in the cosmeceuticals category was due to the full year of a new product line and additional products on existing lines. Cost of Revenue For the year ended December 31, 2018, our cost of revenue was $12,474,098. Our cost of revenue for the year ended December 31, 2017, was $9,818,406. This is comprised of the following categories: December 31, 2018 December 31, 2017 Nutraceuticals $ 11,562,697 $ 9,290,854 Over the Counter (OTC) 185,601 89,280 Consumer Goods 107,640 345,926 Cosmeceuticals 618,160 92,346 $ 12,474,098 $ 9,818,406 The increase in our Nutraceutical category was due higher revenue and a write off of inventory. The increase in Over the Counter was due to a write off of inventory. The decrease in Consumer Goods was due to lower sales. The increase in Cosmeceuticals was due to higher sales and a write off of inventory. 10 Gross Profit Gross profit was $21,350,397, or 63% of gross revenue, for the year ended December 31, 2018, as compared to gross profit of $25,777,629, or 72% of gross revenue, for the same period in 2017, a decrease of $4,427,232, or 17%. The decrease in gross profit and gross profit margin is directly related to decrease in net sales and a write off of inventory. Operating Expenses Selling and Marketing Expenses For the year ended December 31, 2018, our selling and marketing expenses were $16,330,365 as compared to $14,043,870 for the year ended December 31, 2017. The increase is primarily due to increased marketing personnel. General and Administrative Expenses For the year ended December 31, 2018, our general and administrative expenses were $7,191,646. For the year ended December 31, 2017, our general and administrative expenses were $8,418,159. The decrease due to better management of operating expenses. Depreciation and Amortization Expenses For the year ended December 31, 2018 our depreciation and amortization expenses were $1,822,064 as compared to $1,493,285 for the year ended December 31, 2017. The increase in 2018 is primarily due to the increase in amortization of two intangible assets acquired in later part of 2017 as compared to for the full year of 2018, before these were impaired during later part of 2018. Impairment of Intangible Assets During the review of intangible assets and goodwill, it was determined that the carrying value of the intangible assets for two of our subsidiaries may not be recoverable, to the assets were fully impaired. For the year ended December 31, 2018, we recorded non-cash intangible asset impairment charges of $924,068. 11 Other Income and Expenses For the year ended December 31, 2018, we had other (income) and expense items of the following: Interest income $ (235 ) Interest expense 1,132,763 Remeasurement loss on translation of foreign subsidiary 171,938 Amortization of debt issuance cost 213,966 Other income (27,794 ) Total $ 1,490,638 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 The increase in interest expense in 2018 was due to the increased percentage rate on our loan. Income tax expense For the years ended December 31, 2018 and 2017 we incurred income tax benefit (expense) of $247,694 and ($316,012), 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, 2018, our net loss was $6,160,690. For the year ended December 31, 2017 our net income was $499,568. This was primarily due to higher operating expenses during 2018 as well as various non-cash expenses and one-time expenses. Liquidity and Capital Resources Overview Our sources of cash have historically consisted of proceeds from issuances of loans and revenues generated from operations. 2017 Loan Financing In 2017, we raised loans in the aggregate of $10 million, exclusive of issuance costs and expenses paid by us. Sufficiency of Cash Balances and Potential Sources of Additional Capital Our capital requirements depend on many factors, including, among others: the acceptance of, and demand for, our products and services; our levels of net product revenues and any other revenues we may receive; the extent and timing of any investments in developing, marketing and launching new or enhanced products or technologies; the costs associated with maintaining, defending and enforcing our intellectual property rights; and the nature and timing of acquisitions and other strategic transactions or relationships in which we engage, if any. We believe our existing cash balance, together with cash provided by our operations and taking into account cash expected to be used in our operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our estimates of our operating revenues and expenses and working capital requirements could be incorrect and we may use our cash resources faster than we anticipate. Further, some or all of our ongoing or planned investments may not be successful and could further deplete our capital without immediate, or any, cash returns. Until we can generate sufficient revenues to finance our cash requirements from our operations, which we may never do, we may need to increase our liquidity and capital resources by one or more measures, which may include, among others, reducing operating expenses, restructuring our balance sheet by negotiating with creditors and vendors, entering into strategic partnerships or alliances, raising additional financing through the issuance of debt, equity or convertible securities or other alternative financing arrangements. Further, even if our near-term liquidity expectations prove correct, we may still seek to raise capital through one or more of these financing alternatives. However, we may not be able to obtain capital when needed or desired, on terms acceptable to us or at all. Inadequate working capital would have a material adverse effect on our business and operations and could cause us to fail to execute our business plan, fail to take advantage of future opportunities or fail to respond to competitive pressures or customer requirements. A lack of sufficient funding may also require us to significantly modify our business model and/or reduce or cease our operations, which could include implementing cost-cutting measures or delaying, scaling back or eliminating some or all of our ongoing and planned investments in corporate infrastructure, business development initiatives and sales and marketing activities, among other activities. Modification of our business model and operations could result in an impairment of assets, the effects of which cannot be determined. Furthermore, if we continue to issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience significant dilution, and the new equity or debt securities may have rights, preferences and privileges that are superior to those of our existing stockholders. As of December 31, 2018, we had $459,736 cash on hand and a $1,470,837 working capital deficit. In addition, we also had restricted cash of $136,180 which is held for credit card collateral. 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. 12 Year Ended December 31, 2018 and 2017 Net Cash Provided by (Used in) Operating Activities For the year ended December 31, 2018, we had net cash provided by operating activities of $1,304,632 as compared to $831,070 used in operating activities for the year ended December 31, 2017. The increase was primarily attributable to the write off of inventory, impairment of intangible assets, decrease in accounts receivable and an increase in accounts payable. For 2018, the $1,304,632 consists of our net loss of $6,160,690 adjusted by: Amortization of debt issuance cost $ 213,966 Depreciation and amortization 1,822,064 Stock based compensation 440,999 Foreign currency transaction loss 131,868 Remeasurement loss on translation of foreign subsidiary 171,938 Non cash implied interest 68,688 Bad debts 69,070 Impairment of intangible Assets 924,067 Write-off of Inventory 1,056,209 Increase in accounts receivable (193,687 ) Increase in inventory (884,141 ) Decrease in prepaid expenses 314,404 Increase in deferred revenue 46,652 Increase in accounts payable and accrued expenses 3,283,225 13 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 ) Net Cash Used in Investing Activities For the year ended December 31, 2018, we used net cash of $198,007 in investing activities, as compared to $1,908,757 used in investing activities for the year ended December 31, 2017. The decrease was primarily due to the payment of brand development fees in 2017. Investing activities during 2018: Payments for acquisition of fixed assets $ (129,087 ) Payments for domain name (18,920 ) Payments for brand development fees (50,000 ) Investing activities during 2017: Payments for acquisition of fixed assets $ (153,021 ) Cash received from sale of assets 6,199 Payments for brand development fees (1,761,935 ) Net Cash (Used in) Provided by Financing Activities For the year ended December 31, 2018, financing activities used $2,862,500, as compared to $2,310,881 provided in financing activities for the year ended December 31, 2017. The decrease was primarily attributable to the receipt of cash pursuant to a new loan which was received in 2017. Financing activities during 2018: Repayment of notes payable $ (2,862,500 ) 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 14 Key 2019 Initiatives During 2019, we have plans for organic growth within our current product lines by developing and launching new products and expanding into new markets. Our technology center in Halifax, Nova Scotia is in full operation providing marketing services to 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 our operating results was not significant in either 2018 or 2017. 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.