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, 2019 $ 0.19 $ 0.05 September 30, 2019 $ 0.27 $ 0.15 June 30, 2019 $ 0.29 $ 0.15 March 31, 2019 $ 0.24 $ 0.14 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 Shareholders As of April 7, 2020, 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, 2019 to December 31, 2019 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, 2019 Net loss $ (9,207,447 ) Interest income (414 ) Interest expense 981,105 Taxes 131,537 Depreciation 133,873 Amortization 1,208,816 Impairment of intangible assets 9,715,137 EBITDA $ 2,962,607 Stock-based compensation 201,155 One-time expenses, net of other income 751,035 Bad debts 283,972 Loss on foreign currency translation and transaction 6,972 Adjusted EBITDA $ 4,205,741 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, 2019 and December 31, 2018 During 2019, 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 2018, we focused on developing our currently owned brands into new markets and by product extensions. Revenue For the year ended December 31, 2019, we had revenues of $29,357,546 from sales of our products, as compared to revenue of $33,824,495 for the year ended December 31, 2018. This is comprised of the following categories: December 31, 2019 December 31, 2018 Nutraceuticals $ 28,149,938 $ 31,332,952 Over the Counter (OTC) 62,359 427,871 Consumer Goods 706,688 987,230 Cosmeceuticals 438,561 1,076,442 $ 29,357,546 $ 33,824,495 The decrease in our Nutraceutical category was due to shifting product sales from online to retail. 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 decrease in the cosmeceuticals category was due to the discontinuation of a product line. Cost of Revenue For the year ended December 31, 2019, our cost of revenue was $9,137,602. Our cost of revenue for the year ended December 31, 2018, was $11,036,587. This is comprised of the following categories: December 31, 2019 December 31, 2018 Nutraceuticals $ 8,943,967 $ 10,125,186 Over the Counter (OTC) - 185,601 Consumer Goods 78,109 107,640 Cosmeceuticals 115,526 618,160 $ 9,137,602 $ 11,036,587 The decrease in our Nutraceutical category was due to lower revenue. The decrease in Over the Counter was due to a write off of inventory. The decrease in Consumer Goods was due to lower sales. The decrease in Cosmeceuticals was due to lower sales and a write off of inventory in 2018. 10 Gross Profit Gross profit was $20,219,944, or 69% of revenue for the year ended December 31, 2019, as compared to gross profit of $22,787,908 or 67% of revenue for the same period in 2018, a decrease of $2,567,964 or 11%. The decrease in gross profit is directly related to decrease in net sales and write off of inventory in 2019. The increase in gross profit margin is directly related to the mix of products being sold. Operating Expenses Selling and Marketing Expenses For the year ended December 31, 2019, our selling and marketing expenses were $11,471,652 as compared to $17,698,806 for the year ended December 31, 2018. The decrease is primarily due to better management of expenses and decreased personnel. Bad debts For the year ended December 31, 2019, our bad debts expenses were $283,971. For the year ended December 31, 2018, our bad debts expenses were $69,070. The increase is due to one customer. General and Administrative Expenses For the year ended December 31, 2019, our general and administrative expenses were $5,493,433. For the year ended December 31, 2018, our general and administrative expenses were $7,191,646. The decrease is due to better management of operating expenses. Impairment of Intangible Assets For the year ended December 31, 2019 our impairment of intangible assets expenses were $9,715,137 as compared to $924,068 for the year ended December 31, 2018. The increase is primarily due to the impairment of goodwill and indefinite life intangible assets in 2019. Depreciation and Amortization Expenses For the year ended December 31, 2019 our depreciation and amortization expenses were $1,211,861 as compared to $1,822,064 for the year ended December 31, 2018. The decrease is primarily due to the impairment of intangible assets during 2018, thus lower amortization costs during 2019. 11 Other Income and Expenses For the year ended December 31, 2019, we had other (income) and expense items of the following: Interest income $ (414 ) Interest expense 981,105 Remeasurement loss on translation of foreign subsidiary 8,280 Amortization of debt issuance cost 130,829 Total $ 1,119,800 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 The decrease in interest expense in 2019 was due to the decreased percentage rate on our loan and lower loan balance due to principal payments made. Income tax expense For the year ended December 31, 2019 we incurred income tax expense of $131,537. For the year ended December 31, 2018 we incurred income tax benefit of $247,694 primarily related to our subsidiary, NomadChoice Pty Limited (NomadChoice), located in Australia, which we acquired in 2015. Net Loss For the year ended December 31, 2019, our net loss was $9,207,447. For the year ended December 31, 2018 our net loss was $6,160,690. This was primarily due to increase in impairment of intangible assets during 2019 offset by lower operating expenses during 2019. Liquidity and Capital Resources Overview Our sources of cash have historically consisted of proceeds from issuances of loans and revenues generated from operations. Presentation of Financial Statements – Going Concern Going Concern Evaluation In connection with preparing consolidated financial statements for the year ended December 31, 2019, 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 financial statements are issued. The Company considered the following: ● At December 31, 2019, the Company had an accumulated deficit of $24,234,569. ● At December 31, 2019, the Company had working capital deficit of $5,099,969. ● Revenue declined in 2019 by $4,466,949. ● The Company had net loss of $9,207,447 in 2019 as opposed to a net loss of $6,160,690 in 2018. ● The Company obtained waiver against not meeting financial covenants related to loans payable (minimum EBITDA). ● The Company is required to make repayment of loans payable of $500,000 and accrued interest during the three months ended March 31, 2020. 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 financial statements are issued by considering the following: ● The Company raised $10.0 million via debt financing during the year ended December 31, 2017. ● In 2019, the Company repaid $2.05 million of loans. ● In 2019, the Company generated $2.9 million of cash from operating activities. ● Working capital deficit of $5,099,969 at December 31, 2019, includes loans payables to related party of $5,465,113, royalty payable to related party of $94,778 and deferred revenue of $7,887. ● Revenue declines were largely the result of not overspending in marketing in 2019. ● The Company has line of credit facility of $20 million available from its current lender for future mergers and acquisition. Management concluded that above factors alleviates 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. The Company will take the following actions if it starts to trend unfavorably to its internal profitability and cash flow projections, in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern: ● Raise additional capital through line of credit and/or loans financing for future mergers and acquisition, which may be impacted by the recent outbreak of COVID-19. ● Implement additional restructuring and cost reductions. ● Raise additional capital through a private placement, which may be impacted by the recent outbreak of COVID-19. At April 13, 2020 and December 31, 2019, the Company had $949,812 and $1,324,514, respectively in cash and cash equivalents. As of December 31, 2019, we had $1,224,514 cash on hand and a $5,099,969 working capital deficit. In addition, we also have restricted cash of $100,000 which is held for credit card collateral. 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. 12 Year Ended December 31, 2019 and 2018 Net Cash Provided by Operating Activities For the year ended December 31, 2019, we had net cash provided by operating activities of $2,946,350 as compared to $1,304,632 provided in operating activities for the year ended December 31, 2018. 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 in 2018. For 2019, the $2,946,350 consists of our net loss of $9,207,447 adjusted by: Amortization of debt issuance cost $ 130,829 Depreciation and amortization 1,211,860 Stock based compensation 201,155 Impairment of intangible assets 9,715,137 Foreign currency transaction loss (1,308 ) Bad debts 283,972 Remeasurement loss on translation of foreign subsidiary 8,280 Non cash implied interest 38,310 Write-off of Inventory 257,111 Decrease in accounts receivable 3,027,900 Increase in accounts receivable, related party (277,432) Decrease in inventory 552,158 Decrease in prepaid expenses 642,704 Decrease in income taxes receivable 135,072 Decrease in deferred revenue (41,823 ) Decrease in accounts payable and accrued expenses (2,910,949 ) Decrease in accounts payable, related party (819,179 ) 13 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 2,385,196 Increase in accounts payable, related party 898,029 Net Cash Used in Investing Activities For the year ended December 31, 2019, we used net cash of $0 in investing activities, as compared to $198,007 used in investing activities for the year ended December 31, 2018. The decrease was primarily due to acquisition of fixed and intangible assets in 2018. 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 ) Net Cash Used in Financing Activities For the year ended December 31, 2019, financing activities used $2,050,000, as compared to $2,862,500 used in financing activities for the year ended December 31, 2018. The decrease was primarily attributable to the payoff of a note in 2018. Financing activities during 2019: Repayment of notes payable $ (2,050,000 ) Advances from related party 324,102 Repayments of advances to related party (324,102) Financing activities during 2018: Repayment of notes payable $ (2,862,500 ) 14 Key 2020 Initiatives During 2020, we have plans for organic growth within our current product lines by developing and launching new products and expanding into new markets. 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. The recent outbreak of COVID-19, which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemic poses the risk that the Company or its employees, suppliers, and other partners may be prevented from conducting business activities at full capacity for an indefinite period of time, including due to spread of the disease within these groups or due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that COVID-19 could have on the Company’s business, the continued spread of COVID-19 and the measures taken by the governments of countries affected and in which the Company operates could disrupt the operation of the Company’s business. The COVID-19 outbreak and mitigation measures may also have an adverse impact on global economic conditions, which could have an adverse effect on the Company’s business and financial condition, including on its potential to conduct financings on terms acceptable to the Company, if at all. In addition, the Company may take temporary precautionary measures intended to help minimize the risk of the virus to its employees, including temporarily requiring all employees to work remotely, and discouraging employee attendance at in-person work-related meetings, which could negatively affect the Company’s business. The extent to which the COVID-19 outbreak impacts the Company’s results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact. 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 2019 or 2018. 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.