Synergy CHC (SNYR) 10-K2019 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

Commission file number: 000-55098

Synergy CHC Corp.

(Exact name of registrant as specified in its charter)

865 Spring St.

Westbrook, ME 04092

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: 615-939-9004

Securities registered pursuant to Section 12(b) of the Act:None

Securities registered pursuant to Section 12(g) of the Act:Common Stock, par value $0.00001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [  ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.[  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

The aggregate market value of the registrant’s common stock held by non-affiliates as of June 30, 2019 was approximately $5.4 million based upon the closing price of the common stock as quoted by the Over-the-Counter Bulletin Board (the “OTC Bulletin Board”)

As of April 7, 2020, there were 89,889,074 shares of the registrant’s common stock, par value $0.00001 per share, outstanding. 

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Information contained in this annual report contains “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are contained principally in the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” and are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. As used herein, “we,” “us,” “our” and the “Company” refers to Synergy CHC Corp. and its wholly owned subsidiaries.

The forward-looking statements herein represent our expectations, beliefs, plans, intentions or strategies concerning future events, including, but not limited to: our future financial performance; the continuation of historical trends; the sufficiency of our cash balances for future needs; our future operations; our sales and revenue levels and gross margins, costs and expenses; the relative cost of our operation as compared to our competitors; new product introduction, entry and expansion into new markets and utilization of new sales channels and sales agents; improvements in, and the relative quality of, our technologies and the ability of our competitors to copy such technologies; our competitive technological advantages over our competitors; brand image, customer loyalty and expanding our customer base; the sufficiency of our resources in funding our operations; and our liquidity and capital needs.

Our forward-looking statements are based on our current expectations and beliefs concerning future developments, and there can be no assurance that any projections or other expectations included in any forward-looking statements will come to pass. Moreover, our forward-looking statements are subject to various known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements.

Except as required by applicable laws, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

PART I

ITEM 1. BUSINESS

Overview

We are a consumer health care and beauty company that is in the process of building a portfolio of best-in-class consumer product brands. Our strategy is to grow both organically and by further acquisition.

Corporate History

We were organized as a corporation under the laws of the State of Nevada on December 29, 2010 under the name “Oro Capital Corporation”. On April 7, 2014, an Agreement and Plan of Merger (the “Merger Agreement”) was entered into by and among us, Synergy Merger Sub, Inc., a Delaware corporation and our wholly owned subsidiary formed for the purpose of the transactions under the Merger Agreement (“Merger Sub”), and Synergy Strips Corp., a Delaware corporation incorporated on January 24, 2012 (“SSC”). The Merger Agreement provided for the merger of Merger Sub with and into SSC (the “Merger”), with SSC surviving the merger as our wholly owned subsidiary. On April 17, 2014, we issued a share dividend to our shareholders in order to effect a 30-for-1 forward stock split. The Merger was consummated on April 21, 2014. On April 21, 2014, we changed our fiscal year end from July 31 to December 31. On April 28, 2014, we changed the name of the Company from “Oro Capital Corporation” to “Synergy Strips Corp.” On August 5, 2015, we changed the name to “Synergy CHC Corp.”

Effective January 1, 2019, the Company’s U.S. subsidiaries, Neuragen Corp., Sneaky Vaunt Corp., The Queen Pegasus Corp. and Breakthrough Products Inc., merged with and into the Company.

2019 Fiscal Year Developments

During 2019 we focused on development and line extensions within our existing brands. We developed product extensions and expanded into new markets.

Description of the Business

FOCUSfactor is sold at America’s leading retailers such as Costco, Walmart, Amazon.com, Walgreens, CVS, The Vitamin Shoppe and online at www.focusfactor.com. FOCUSfactor is a brain-health nutritional supplement that includes a proprietary blend of brain supporting vitamins, minerals, antioxidants and other nutrients. In December 2012, the United States Patent and Trademark Office issued US Patent 8,329,227 covering FOCUSfactor’s proprietary formulation “for enhanced mental function.” The issuance of the patent marked one of the few times a patent has been issued for a nationally branded nutritional supplement. FOCUSfactor is clinically tested with results demonstrating improvements in focus, concentration and memory in healthy adults. FOCUSfactor is a material product to our revenue base, representing 64% of revenue.

The Flat Tummy brand consists of multiple products and accessories including tea, shakes, lollipops, supplements, apparel, a mobile App and exercise accessories. Flat Tummy products are sold online atwww.flattummyco.com, Amazon.com, CVS and at The Vitamin Shoppe. The Flat Tummy brand is a material product to our revenue base, representing 32% of revenue.

Hand MD is the world’s first anti-aging skincare line formulated specifically for the hands. Hand MD is sold online atwww.handmd.comand Amazon.com.

Neuragen is a topical product that works directly at the site of pain as opposed to oral products. Neuragen reduces the spontaneous firing of damaged peripheral nerves. By calming these nerves, Neuragen is clinically shown to reduce shooting and burning pains quickly and without side effects. Neuragen is sold at Walgreens and through various distribution channels.

Sneaky Vaunt is a backless, strapless, stick on, push up bra. Sneaky Vaunt is sold online atwww.sneakyvaunt.com and Amazon.com.

Think Fuel is a line of nootropic supplements designed to enhance brain function. Think Fuel products are sold online atwww.thinkfuel.comand Amazon.com.

Products

Current Products

Development and Commercialization Strategy

We intend to expand on the current retail strategies and build out a strong online sales model.

Research and Development

We currently outsource our research and development to our manufacturers, as they are experienced in the development of new products and line extensions.

Manufacturing

We currently outsource the manufacturing of our products to third parties who have the necessary equipment and technology to provide mass quantities as required. FOCUSfactor is manufactured by Atrium Innovations and Vit-Best Nutrition. Flat Tummy Tea is manufactured by Caraway Tea Company. Neuragen is manufactured by C-Care. Hand MD is manufactured by HealthSpecialty. Sneaky Vaunt is manufactured by Dongguan Jingrui.

Commercialization

We are highly dependent on two retailers for the sale of our retail products: Costco Wholesale Corporation and Sam’s West, Inc./Walmart (a/k/a Sam’s Club), which comprise 78% of our net revenue for retail sales of our products. We intend to diversify our sales network and generate revenue by selling our consumer-ready products to retailers across North America, which retailers may then sell to end consumers through retail distribution channels. We also sell direct to wholesalers and distributors at a reduced cost as a means to grow our revenue base quickly and to penetrate the market more effectively.

Intellectual Property

Our success depends in part upon our ability to protect our core technology and intellectual property. To establish and protect our proprietary rights, we will rely on a combination of patents, patent applications, trademarks, copyrights, trade secrets, including know-how, license agreements, confidentiality procedures, non-disclosure agreements with third parties, employee disclosure and invention assignment agreements, and other contractual rights.

In December 2012, the United States Patent and Trademark Office issued U.S. Patent 8,329,227 covering FOCUSfactor’s proprietary formulation “for enhanced mental function.” The issuance of the patent marked one of the few times a patent has been issued for a nationally branded nutritional supplement. The issuance of the patent for FOCUSfactor came after a 2011 clinical study report which showed that FOCUSfactor improved memory, concentration and focus in healthy adults participating in the study. The clinical study of FOCUSfactor was sponsored by Factor Nutrition Labs, the owner of the Focus Factor Business at the time, and was conducted by Cognitive Research Corporation, a full-service contract research organization that specializes in the effects of nutritional supplements and pharmaceutical products on human cognition. The study was conducted in compliance with all applicable country requirements for the conduct of clinical studies, including those outlined by the International Conference on Harmonization, Consolidated Guidelines on Good Clinical Practices, and the Food and Drug Administration.

In addition to this intellectual property, we also rely on our proprietary knowledge and ongoing technological innovation to develop a competitive position in the market for our products. Each of these patents, patent applications, and know-how are integral to the conduct of our business, the loss of any of which could have a material adverse effect on our business.

Distribution and Marketing

We plan to focus on selling to retailers and distributors who currently are active in the consumer product space with the aim to expedite the penetration of market acceptance of the product. We are currently conducting research with focus groups to find out what the best approach for marketing efforts is and how to do so in the most cost-effective manner. We also plan to develop an online sales channel.

Markets

We sell our products in mostly North American retail locations along with other developed countries with similar retail landscapes to North America.

Competition

Although there are many competing products on the market, in all our current product categories, FOCUSfactor is the only product in its category with both a patent and clinical study to support its claims. FOCUSfactor’s competitors include a wide range of products, from targeted brain-enhancement supplements to indirect competitors such as energy drinks that claim to improve concentration.

Government Regulation

The products that we sell, and those that we are developing for future sale, may be subject to U.S. Food and Drug Administration (“FDA”) approval for packaging compliance. With respect to the products we currently sell, our regulatory counsel has reviewed all of our products and we believe we are compliant with the current rules. Since the current products sold are considered nutraceuticals, cosmeceuticals and over the counter products, minimal regulations are placed on the product with the exception of the appropriate labeling and warnings on the packaging.

We will rely on legal and operational compliance programs, as well as local counsel, to guide our compliance with applicable laws and regulations of the jurisdictions in which we do business.

We do not anticipate, at this time, that the cost of compliance with U.S. and foreign laws will have a material financial impact on operations, business or financial condition. There are, however, no guarantees that new regulatory and tariff legislation will not have a material negative effect on our business in the future.

Employees

As of April 13, 2020, we had 36 full-time employees. We intend to grow our employee base in response to the demands and requirements of the business. We believe that the employer-employee relationships in our Company are positive. We have no labor union contracts.

Impact of COVID-19

Therecent 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.

Available Information

Our website address is https://synergychc.com/. We do not intend our website address to be an active link or to otherwise incorporate by reference the contents of the website into this Report. The U.S. Securities and Exchange Commission (the “SEC”) maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

ITEM 1A. RISK FACTORS.

As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES

The following table describes our principal properties leased as of April 13, 2020:

(1) Monthly rental payments are $22,086 CDN per month on a month to month basis.

(2) Monthly rental payments are $4,290 per month on a month to month basis.

ITEM 3. LEGAL PROCEEDINGS 

During March 2019 we received a 60 day Proposition 65 letter that one of our products did not have California’s Proposition 65 label. We settled the matter and made a one-time payment of $85,000 in full satisfaction of the matter.

We are not a party to any legal proceedings and we are not aware of any claims or actions pending or threatened against us. In the future, we might from time to time become involved in litigation relating to claims arising from our ordinary course of business.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

PART II

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.

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.

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.

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:

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:

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.

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.

Other Income and Expenses

For the year ended December 31, 2019, we had other (income) and expense items of the following:

For the year ended December 31, 2018 we had other (income) and expense items of the following:

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.

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:

For 2018, the $1,304,632 consists of our net loss of $6,160,690 adjusted by:

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:

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:

Financing activities during 2018:

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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The information required by this Item is set forth in the consolidated financial statements and notes thereto beginning at page F-1 of this Form 10-K.

CONSOLIDATED FINANCIAL STATEMENTS

Synergy CHC Corp.

Report of Independent Registered Public Accounting Firm 

To the Board of Directors and Shareholders of

Synergy CHC Corp. and subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Synergy CHC Corp. and subsidiaries (the Company) as of December 31, 2019 and 2018, and the related statements of operations, comprehensive loss, stockholders’ (deficit) equity, and cash flows for each of the years in the two year period ended December 31, 2019, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Synergy CHC Corp.

Consolidated Balance Sheets

The accompanying notes are an integral part of these consolidated financial statements

Synergy CHC Corp.

Consolidated Statements of Operations and Comprehensive Loss

The accompanying notes are an integral part of these consolidated financial statements

Synergy CHC Corp.

Consolidated Statements of Stockholders’ (Deficit) Equity

The accompanying notes are an integral part of these consolidated financial statements

Synergy CHC Corp.

Consolidated Statements of Cash Flows

The accompanying notes are an integral part of these consolidated financial statements

The accompanying notes are an integral part of these consolidated financial statements

SYNERGY CHC CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Nature of the Business

Synergy CHC Corp. (“Synergy”, “we”, “us”, “our” or the “Company”) (formerly Synergy Strips Corp.) was incorporated on December 29, 2010 in Nevada under the name “Oro Capital Corporation.” On April 21, 2014, the Company changed its fiscal year end from July 31 to December 31. On April 28, 2014, the Company changed its name to “Synergy Strips Corp.”. On August 5, 2015, the Company changed its name to “Synergy CHC Corp.”

The Company is a consumer health care company that is in the process of building a portfolio of best-in-class consumer product brands. Synergy’s strategy is to grow its portfolio both organically and by further acquisition.

Effective January 1, 2019 the Company has merged the U.S. Subsidiaries (Neuragen Corp., Breakthrough Products Inc., Sneaky Vaunt Corp., and The Queen Pegasus Corp.) into the parent company.

Synergy is the sole owner of two subsidiaries: NomadChoice Pty Ltd. And Synergy CHC Inc. and the results have been consolidated in these statements.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).

All amounts referred to in the notes to the consolidated financial statements are in United States Dollars ($) unless stated otherwise.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management 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. At December 31, 2019 and 2018 significant estimates included are assumptions about collection of accounts receivable, current income taxes, deferred income taxes valuation allowance, useful life of fixed and intangible assets, impairment analysis of goodwill and 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. 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.

Reclassification

Certain amounts in prior periods have been reclassified to conform to current period presentation. These reclassifications had no effect on the previously reported net loss.

Cash and Cash Equivalents

The Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. As of December 31, 2019, and 2018, the Company had no cash equivalents. The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At December 31, 2019 and 2018, the uninsured balances amounted to $947,312  and $162,729, respectively.

Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows.

Amounts included in restricted cash represent amount held for credit card collateral.

Capitalization of Fixed Assets

The Company capitalizes expenditures related to property and equipment, subject to a minimum rule, that have a useful life greater than one year for: (1) assets purchased; (2) existing assets that are replaced, improved or the useful lives have been extended; or (3) all land, regardless of cost. Acquisitions of new assets, additions, replacements and improvements (other than land) costing less than the minimum rule in addition to maintenance and repair costs, including any planned major maintenance activities, are expensed as incurred.

Intangible Assets

We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization except intellectual property of $1,450,000 acquired as part of an Asset Purchase Agreement entered into with Factor Nutrition Labs LLC on January 22, 2015, $10,000 acquired as part of an Asset Purchase Agreement entered into with Perfekt Beauty Holdings LLC and CDG Holdings, LLC (“Perfekt”) on June 21, 2017 and $50,000 acquired as an Asset Purchase entered into with Cocowhite on May 22, 2018. Intangible assets are amortized on a straight line basis over the useful lives. During the year ended December 31, 2018, the Company fully impaired intangible assets related to Perfekt and Cocowhite and charged to operations impairment loss of $60,000. During the year ended December 31, 2019, the Company fully impaired intellectual property related to Focus Factor and charged to operations impairment loss of $1,450,000.

Long-lived Assets

Long-lived assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable when compared to undiscounted cash flows expected to result from the use and eventual disposition of the asset.

Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically a discounted cash flow analysis, and an impairment charge is recorded for the excess of carrying value over fair value. As of December 31, 2018 our review of intangible assets related to two of our subsidiaries did indicate that the carrying amount of the asset may not be recoverable. During the year ended December 31, 2018, the Company fully impaired related intangible assets and charged to operations impairment loss of $864,067. During the year ended December 31, 2019, the Company fully impaired intangible assets and charged to operations impairment loss of $471,897.

Goodwill

An asset purchase is accounted for under the purchase method of accounting. Under that method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of the acquisition, with any excess of the cost of the acquisition over the estimated fair value of the net tangible and intangible assets acquired recorded as goodwill. As of December 31, 2018 our qualitative analysis of goodwill did not indicate any impairment. As of December 31, 2019 our qualitative analysis of goodwill indicated potential impairment, thus the Company chose to fully impair goodwill and charged to operations impairment loss of $7,793,240.

Revenue Recognition

Adoption of ASU 2014-09, Revenue from Contracts with Customers

On January 1, 2018, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606) using the modified retrospective (cumulative effect) transition method. Under this transition method, results for reporting periods beginning January 1, 2018 or later are presented under ASC 606, while prior period results continue to be reported in accordance with previous guidance. The cumulative effect of the initial application of ASC 606 was immaterial, no adjustment was recorded to the opening balance of retained earnings. The timing of revenue recognition for our various revenue streams was not materially impacted by the adoption of this standard. The Company believes its business processes, systems, and controls are appropriate to support recognition and disclosure under ASC 606. In addition, the adoption has led to increased footnote disclosures. Overall, the adoption of ASC 606 did not have a material impact on the Company’s consolidated balance sheet, statement of operations and comprehensive income and statement of cash flows for the year ended December 31, 2018. ASC 606 also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. As described below, the analysis of contracts under ASC 606 supports the recognition of revenue at a point in time, resulting in revenue recognition timing that is materially consistent with the Company’s historical practice of recognizing product revenue when title and risk of loss pass to the customer.

Policy

The Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting Standards Codification (“ASC”) ASC 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are recognized when control is transferred to customers in amounts that reflect the consideration the Company expects 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.

The Company recognizes revenue upon shipment from its 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 as cost of goods sold. 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.  The Company recognizes revenue for its digital products in the month the download by the customer occurs. 

Contract Assets

The Company does not have any contract assets such as work-in-process. All trade receivables on the Company’s consolidated balance sheet are from contracts with customers.

Contract Costs

Costs incurred to obtain a contract are capitalized unless short term in nature. As a practical expedient, costs to obtain a contract that are short term in nature are expensed as incurred. The Company does not have any contract costs capitalized as of December 31, 2019.

Contract Liabilities - Deferred Revenue

The Company’s contract liabilities consist of advance customer payments and deferred revenue. Deferred revenue results from transactions in which the Company has 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 deferred revenues are recognized.

Accounts receivable

Accounts receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied against the allowance for doubtful accounts. As of December 31, 2019 and 2018, allowance for doubtful accounts was $283,971 and $0, respectively.

Advertising Expense

The Company expenses marketing, promotions and advertising costs as incurred. Such costs are included in selling and marketing expense in the accompanying consolidated statements of operations.

Research and Development

Costs incurred in connection with the development of new products and processing methods are charged to general and administrative expenses as incurred.

Income Taxes

The Company utilizes FASBASC 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.

The Company 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 the Company’s realization of the net operating loss carry forward prior to its expiration.

NomadChoice Pty Ltd, the Company’s wholly-owned 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. The company recognizes liabilities for anticipated tax audit issues based on the Company’s 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. is a wholly-owned foreign 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. The company recognizes liabilities for anticipated tax audit issues based on the Company’s 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.

Net Earnings (Loss) Per Common Share

The Company computes earnings per share under ASC subtopic 260-10, Earnings Per Share. Basic earnings (loss) per share is computed by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the reporting periods. Diluted earnings per share is computed by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into common stock (using the “treasury stock” method), unless their effect on net income per share is anti-dilutive. As of December 31, 2019, and 2018, options to purchase 6,166,667 and 7,166,667 shares of common stock, respectively, were outstanding.

The following is a reconciliation of the number of shares used in the calculation of basic and diluted loss per share for the years ending December 31, 2019, and 2018:

Fair Value Measurements

The Company measures and discloses the fair value of assets and liabilities required to be carried at fair value in accordance with ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure.

ASC 825 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825 establishes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices for identical assets or liabilities in active markets to which we have access at the measurement date.

Level 2 - Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 - Unobservable inputs for the asset or liability.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

As of December 31, 2019, the Company has determined that there were no assets or liabilities measured at fair value.

Inventory

Inventory consists of raw materials, components and finished goods. The Company’s inventory is stated at the lower of cost (FIFO cost basis) or net realizable value. Finished goods include the cost of labor to assemble the items.

Stock-Based Compensation

ASC 718, “Compensation – Stock Compensation,” prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

Foreign Currency Translation

The functional currency of one of the Company’s foreign subsidiaries (Nomadchoice Pty Ltd.) is the U.S. Dollar. The Company’s 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, net of income taxes, were recorded in statements of operations as Remeasurement gain or loss on translation of foreign subsidiary.

The functional currency of the Company’s other foreign subsidiary (Synergy CHC Inc.) is the Canadian Dollar (CAD). The Company’s 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 exchange rates used to translate amounts in AUD and CAD into USD for the purposes of preparing the consolidated financial statements were as follows:

Balance sheet:

Income statement:

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 or Canadian Dollars, as the case may be, at the rate on the date of the transaction and included in the results of operations as incurred.

Concentrations of Credit Risk

In the normal course of business, the Company provides credit terms to its customers; however, collateral was not required. Accordingly, the Company performed credit evaluations of its customers and maintained allowances for possible losses which, when realized, were within the range of management’s expectations. From time to time, a higher concentration of credit risk existed on outstanding accounts receivable for a select number of customers due to individual buying patterns.

Warehousing costs

Warehouse costs include all third party warehouse rent fees and are charged to selling and marketing expenses as incurred. Any additional costs relating to assembly or special pack-outs of the Company’s products are charged to cost of sales.

Product display costs

All displays manufactured and purchased by the Company are for placement of product in retail stores. This also includes all costs for display execution and setup and retail services are charged to cost of sales   and expensed as incurred.

Cost of Sales

Cost of sales includes the purchase cost of products sold, all costs associated with getting the products into the retail stores including buying and transportation costs and the hosting of our online Application.

Debt Issuance Costs

Debt issuance costs consist primarily of arrangement fees, professional fees and legal fees. These costs are netted off with the related loan and are being amortized to interest expense over the term of the related debt facilities.

Shipping Costs

Shipping and handling costs billed to customers are recorded in sales. Shipping costs incurred by the company are recorded in selling and marketing expenses.

Related parties

Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.

Segment Reporting

Segment identification and selection is consistent with the management structure used by the Company’s chief operating decision maker to evaluate performance and make decisions regarding resource allocation, as well as the materiality of financial results consistent with that structure. Based on the Company’s management structure and method of internal reporting, the Company has one operating segment. The Company’s chief operating decision maker does not review operating results on a disaggregated basis; rather, the chief operating decision maker reviews operating results on an aggregated basis.

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.

Recent Accounting Pronouncements 

ASU 2018-13

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes in Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds certain disclosure requirements in Topic 820 “Fair Value Measurement”. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2018-13 is not expected to have any impact on the Company’s consolidated financial statements.

ASU 2018-07

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Adoption of this new standard did not have any impact on the Company’s consolidated financial statements.

ASU 2017 - 04, Intangibles - Goodwill and other (Topic 350)

In January 2017, the FASB issued Accounting Standards Update ("ASU") 2017-04 Intangibles - Goodwill and other, which simplifies the test for goodwill impairment. This Update eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of the assets acquired and liabilities assumed in a business combination. Instead an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, however the loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is in the process of evaluating the impact of this standard update on its consolidated financial statements and related disclosures.

ASU 2016-15

In August 2016, the FASB issued AS 2016-15, Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The effective date for ASU 2016-15 is for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. Adoption of this new standard did not have any impact on the Company’s consolidated financial statements.

ASU 2016-13

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendment to the initial guidance: ASU 2018-19 (collectively, Topic 326). ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the potential impact of ASU 2016-13 on its consolidated financial statements.

ASU 2016-02

In February 2016, the FASB issued ASU 201602, “Leases” (“ASU 201602”). This guidance, as amended by subsequent ASU’s on the topic, improves transparency and comparability among companies by recognizing right of use (ROU) assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. We adopted ASU No. 2016-02 in our fiscal year beginning January 1, 2019 and used the optional transition method provided by the FASB in ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, with no restatement of comparative periods. The Company notes there was no impact on adoption as the leases entered into by the Company were for less than 12 month terms.

The new standard provides optional practical expedients in transition. We will only elect the package of practical expedients where, under the new standard, prior conclusions about lease identification, lease classification and initial direct costs do not need to be reassessed. The new standard also provides practical expedients for ongoing accounting where we elected the practical expedients on adoption and did not record any ROU asset with terms of less than 12 months.

There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s financial position, results of operations or cash flows.

Note 3 – Income Taxes

The Company utilizes 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.

On December 22, 2017, the Tax Cuts and Jobs Act (the TCJA), which significantly modified U.S. corporate income tax law, was signed into law by President Trump. The TCJA contains significant changes to corporate income taxation, including but not limited to the reduction of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and generally eliminating net operating loss carrybacks, allowing net operating losses to carryforward without expiration, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including changes to the orphan drug tax credit and changes to the deductibility of research and experimental expenditures that will be effective in the future). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain, including to what extent various states will conform to the newly enacted federal tax law.

The Company has not recorded the necessary provisional adjustments in the financial statements in accordance with its current understanding of the TCJA and guidance currently available as of this filing. But is reviewing the TCJA’s potential ramifications.

The Company generated a deferred tax asset through net operating loss carry-forwards. Based upon Management’s evaluation, a valuation allowance of 100% has been established due to the uncertainty of the Company’s realization of the benefit derived from net operating loss carry-forwards.

Deferred income taxes arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or noncurrent depending on the periods in which the temporary differences are expected to reverse. The Company does not have any uncertain tax positions.

For U.S. purposes, the Company has not completed its evaluation of NOL utilization limitations under Internal Revenue Code, as amended (the “Code”) Section 382/383, change of ownership rules. If the Company has had a change in ownership, the NOL’s would be limited or eliminated, as to the amount that could be utilized each year, based on the Code. NOL’s attributable to Breakthrough Products, Inc., which are the majority of the Company’s domestic NOL’s are Separate Return Limitation Year (SRLY) NOL’s. Such losses may generally not be available for use (limited or eliminated).

The Company has not filed its State & Local Income/Franchise tax returns in States it is required to file for the last several years, so such returns and liability remain open.

The table below summarizes the differences between the U.S. statutory federal rate and the Company’s estimated effective tax rate for the years ended December 31, 2019 and 2018:

The Company has deferred tax assets, which have been fully reserved, as follows as of December 31, 2019 and 2018:

Tax expense (benefit) was $131,537 and $(247,694) for 2019 and 2018, respectively. The effective tax rate is attributable to the Company’s world wide income/(loss) as it relates to the income tax expense due in the United States and Australia.

The “TCJA” added a one-time taxation of offshore earnings for the period ending December 31, 2017 (IRC Sec. 965), regardless of whether they are repatriated (“Deemed Repatriation”). The Company anticipates the one-time taxation of offshore earnings relating to its foreign subsidiaries is applicable for the 2017 year end. The Company is reviewing its potential tax liability at December 31, 2017, but has not fully completed the review. It is anticipated that such amount will reduce the foreign tax credits (Australia), as well as United States NOL’ at December 31, 2017.

The Company also has net operating loss carryforwards of approximately $27,000,000 and $30,000,000 (United States and Canada) included in the deferred tax asset table above for 2019 and 2018, respectively, the majority attributable to the acquisition of Breakthrough Products, Inc. However, due to limitations of carryover attributes and separate return limitation year rules, it is unlikely the company will benefit from the NOL’s and thus Management has determined a 100% valuation reserved is required. Further, the Company has not completed an evaluation of the NOL’s attributable to Breakthrough Products, Inc. at the date of this report.

The total deferred tax asset is calculated by multiplying a domestic federal (US) 21 percent marginal tax rate for 2019 and 21 percent marginal tax rate for 2018 by the cumulative Net Operating Loss Carryforwards (“NOL”). The Company currently has net operating loss carryforwards approximately aggregating $27,000,000 and $30,000,000 for 2019 and 2018, respectively, which expire through 2035 (estimated). The deferred tax asset related to the NOL carryforwards Management has determined based on all the available information that a 100% Valuation reserve is required.

Note 4 – Accounts Receivable

Accounts receivable, net of allowances for doubtful accounts, consisted of the following:

During the years ended December 31, 2019 and 2018, the Company charged $283,972 and $69,070, respectively to bad debt expense.

Note 5 – Prepaid Expenses

At December 31, 2019 and 2018, prepaid expenses consisted of the following:

Note 6 – Concentration of Credit Risk

Cash and cash equivalents

The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At December 31, 2019 and 2018, the uninsured balance amounted to $947,312  and $162,729, respectively.

Accounts receivable

As of December 31, 2019 and 2018, two and three customers accounted for 52% and 83%, respectively, of the Company’s accounts receivable.

Major customers

For the year ended December 31, 2019, two customers accounted for approximately 51% of   the Company’s net revenue. For the year ended December 31, 2018, two customers accounted for approximately 41% of the Company’s net revenue. Substantially all of the Company’s business is with companies in the United States.

Accounts payable

As of December 31, 2019 and 2018, two vendors accounted for 73% and 77%, respectively, of the Company’s accounts payable. This includes a related party vendor.

Major suppliers

For the year ended December 31, 2019, two suppliers accounted for approximately 40% of the Company’s purchases. For the year ended December 31, 2018, two suppliers accounted for approximately 45% of the Company’s purchases. Substantially all of the Company’s business is with suppliers in the United States. This includes purchases from related party supplier.

Note 7 – Inventory

Inventory consists of finished goods, components and raw materials. The Company’s inventory is stated at the lower of cost (FIFO cost basis) or net realizable value.

The carrying value of inventory consisted of the following:

As of January 22, 2015, inventory was pledged to Knight under the Loan Agreement (see note 12). As of December 31, 2019, and 2018, $42,507 and $256,051, respectively, of the Company’s inventory was in transit. During the years ended December 31, 2019 and 2018, $257,111 and $1,056,209, respectively, of expiring and slow-moving inventory was written off to cost of sales.

Note 8 – Fixed Assets and Intangible Assets

As of December 31, 2019 and 2018, fixed assets and intangible assets consisted of the following:

Depreciation expense for the years ended December 31, 2019 and 2018 was $133,873 and $152,522, respectively.

Amortization expense for the years ended December 31, 2019 and 2018 was $1,077,987 and $1,669,542, respectively. Impairment of intangible assets for the year ended December 31, 2018 related to branding payments made during 2017. Impairment of intangible assets for the year ended December 31, 2019 related to intangible assets from brands purchased in 2015.

During the year ended December 31, 2019, the Company fully impaired goodwill of $7,793,240.

The estimated aggregate amortization expense over each of the next five years is as follows:

Note 9 – Related Party Transactions 

The Company accrued and paid consulting fees of $57,917 per month through December 2019 to a company owned by Mr. Jack Ross, Chief Executive Officer of the Company. The Company also paid thirteen months of a vehicle allowance of $1,500 per month. The Company expensed $824,413 and $648,944, respectively during 2019 and 2018 as consulting fees, and made payments totaling $852,626 and $648,944 towards services to an entity owned and controlled by an officer and shareholder of the Company for the year ended December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, the total outstanding balance was $0 and $28,213, respectively.

On January 22, 2015, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party (owner of greater than 10% shares of the Company) (“Knight”), for the purchase of the Focus Factor assets. At December 31, 2017, the Company owed Knight $559,243 on this loan, net of discount, which was paid-off during 2018 (see Note 11).

On June 26, 2015, the Company entered into a Security Agreement with Knight Therapeutics, Inc., through its wholly owned subsidiary Neuragen Corp., for the purchase of Knight Therapeutics, Inc.’s assets. At December 31, 2019 and 2018, the Company owed Knight $475,000 and $525,000 in relation to this agreement (see Note 11). The Company recorded present value of future payments of $260,461 and $272,151 as of December 31, 2019 and 2018, respectively.

On August 18, 2015, the Company entered into a Consulting Agreement with Kara Harshbarger, the co-founder of Hand MD, LLC, pursuant to which she will provide marketing and sales related service. The Company will pay Ms. Harshbarger $10,000 a month for one year unless the Consulting Agreement is terminated earlier by either party. The Company decided to extend the contract on a month to month basis. Hand MD, LLC is a 50% owner in Hand MD Corp. The Company expensed $120,000 through payroll for each of the years ended December 31, 2019 and 2018. As of December 31, 2019 and 2018, the total outstanding balance was $0.

On August 9, 2017, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party, for a working capital loan. At December 31, 2019 and 2018, the Company owed Knight $5,451,568 and $7,320,739, respectively, on this loan, net of debt issuance cost (see Note 11).

On December 23, 2016, we entered into an agreement with Knight Therapeutics for the distribution rights of FOCUSFactor in Canada. In conjunction with this agreement, we are required to pay Knight a distribution fee equal to 30% of gross sales for sales achieved through a direct sales channel and 5% of gross sales for sales achieved through retail sales. The minimum due to Knight under this agreement is $100,000 Canadian dollars. As of December 31, 2019 and 2018, the total outstanding balance was $100,000 and $200,000 Canadian dollars, respectively. In US Dollars, the total outstanding balance was $70,295 and $152,834 as of December 31, 2019 and 2018, respectively.

On December 23, 2016, we entered into an agreement with Knight Therapeutics for the distribution rights of Hand MD into Canada. In conjunction with this agreement, we are required to pay Knight a distribution fee equal to 60% of gross sales for sales achieved through a direct sales channel until the sales in the calendar year equal the threshold amount and then 40% of all such gross sales in such calendar year in excess of the threshold amount and 5% of gross sales for sales achieved through retail sales. The minimum due to Knight under this agreement is $25,000 Canadian dollars. As of December 31, 2019 and 2018, the total outstanding balance was $25,000 and $25,000 Canadian dollars, respectively. In US Dollars, the total outstanding balance was $17,574 and $18,325 as of December 31, 2019 and 2018, respectively.

The Company expensed royalty of $4,867 and $16,066 for the years ended December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the Company owed Knight Therapeutics $246 and $5,906, respectively in connection with a royalty distribution agreement.

The Company expensed commissions of $9,065 and $43,374 for the years ended December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the Company owed Founded Ventures, owned by a shareholder in the Company, $0 and $10,579, respectively in connection with a commission agreement.

The Company expensed commissions of $644 and $10,016 for the years ended December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the Company owed Founded Ventures $0 and $3,547, respectively in connection with a commission agreement.

The Company expensed royalty of $0 and $2,361 for the years ended December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the Company owed Knight Therapeutics $0 and $193, respectively in connection with a royalty distribution agreement.

The Company paid $14,801   and $250,000 for the years ended December 31, 2019 and 2018, respectively, to Hand MD, Corp, related to a royalty agreement. As of both December 31, 2019 and 2018, the Company owed Hand MD Corp. $0 in minimum future royalties.

The Company expensed royalty of $192,700 and $392,589 for the years ended December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the Company owed Knight Therapeutics $5,528 and $109,329, respectively, in connection with a royalty distribution agreement.

A member of the Company’s Board of Directors is an executive officer of a supplier to the Company. During the years ended December 31, 2019 and 2018, the Company acquired $4,847,626 and $4,392,245, of products from the supplier, respectively, and included in cost of sales. The Company owed the supplier $956,438 and $1,775,617, respectively at December 31, 2019 and 2018.

The Company entered into transactions with a related party controlled by the CEO during the year ended December 31, 2019. The transactions were a pass through of expenses and reimbursements. During the year ended December 31, 2019, the Company received advances of $324,102 ($430,000 Canadian Dollars), which were fully repaid. As of December 31, 2019, there was $0 due or payable.

The Company entered into transactions with a related party controlled by the CEO during the year ended December 31, 2019. The transactions were a pass through and allocation of expenses and reimbursements.  As of December 31, 2019 the Company was owed $277,432.

Note 10 – Accounts Payable and Accrued Liabilities

As of December 31, 2019 and 2018, accounts payable and accrued liabilities consisted of the following:

The Company has accounted for a severance accrual in the amount of $506,250 as of December 31, 2018 relating to the termination of an employee. This liability was paid out in three remaining equal installments of $168,750, net of taxes, during 2019.  

The Company has not filed its State & Local Income/Franchise tax returns in States it is required to file for the last few years, so such returns and liability remain open. The Company has estimated and accrued for its sales tax liability at $273,855 for the parent entity as of December 31, 2019.

Note 11 – Notes Payable

The Company’s loans payable at December 31, 2019 and 2018 are as follows:

$6,000,000 January 22, 2015 Loan:

On January 22, 2015, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Knight Therapeutics (Barbados) Inc. (“Knight”), pursuant to which Knight agreed to loan the Company $6.0 million (the “Loan”), and which amount was borrowed at closing (the “Financing”) for the purpose of acquiring the Focus Factor Business (defined below). At closing, the Company paid Knight an origination fee of $120,000 and a work fee of $60,000 and also paid $40,000 of Knight’s expenses associated with the Loan. The Loan bears interest at a rate of 15% per year; provided, however, that upon the occurrence of an equity or convertible equity offering by the Company of at least $1.0 million, the interest rate will drop to 13% per year. Interest accrues quarterly and is payable in arrears on March 31, June 30, September 30 and December 31 in each year, beginning on March 31, 2015.

All outstanding principal and accrued and unpaid interest was due on the earliest to occur of either January 20, 2017 (the “Maturity Date”), or the date that Knight, in its discretion, accelerates the Company’s obligations due to an event of default. The Company may extend the Maturity Date for two successive additional 12-month periods if at March 31, 2016 and March 31, 2017, respectively, the Company’s revenues exceed $13.0 million and its EBITDA exceeds $2.0 million for the respective 12-month period then ending. These covenants were achieved, therefore the Company chose to extend the loan for the first 12-month period to January 20, 2018. Principal payments under the Loan Agreement commenced on June 30, 2015 and continue quarterly as set forth on the Repayment Schedule to the Loan Agreement. This loan was repaid in full on January 20, 2018.

The Company also recorded deferred financing costs of $289,045 with respect to the above loan. The Company recognized amortization of deferred financing costs of $3,257 during the year ended December 31, 2018. Unamortized debt issuance costs were fully amortized as of December 31, 2018.

The Company recognized and paid interest expense of $0 and $4,611 during the years ended December 31, 2019 and 2018, respectively. Accrued interest expense was $0 as of both December 31, 2019 and 2018. Loan payable balance was $0 as of December 31, 2019 and 2018.

$950,000 June 26, 2015 Security Agreement:

On June 26, 2015, the Company, through its wholly owned subsidiary, Neuragen Corp. (“Neuragen”), issued a 0% promissory note in a principal amount of $950,000 in connection with an Asset Purchase Agreement. The note requires $250,000 to be paid on or before June 30, 2016, and $700,000 to be paid in quarterly installments (beginning with the quarter ending September 30, 2015) equal to the greater of $12,500 or 5% of U.S. net sales, and 2% of U.S. net sales of Neuragen for 60 months thereafter. The payment of such amounts is secured by a security interest in certain assets, undertakings and property (“Collateral”) pursuant to the Security Agreement, which will be released upon receipt of total payments of $1.2 million.

Company recorded present value of future payments of $260,461 and $272,151 as of December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the Company owed Knight $475,000 and $525,000 in relation to this agreement. The Company recorded interest expense of $38,310 and $39,911 for the year ended December 31, 2019 and 2018, respectively. The Company made payments of $50,000 during both 2019 and 2018.

$10,000,000 August 9, 2017 Loan:

On August 9, 2017, we entered into a Second Amendment to Loan Agreement (“Second Amendment”) with Knight, pursuant to which Knight agreed to loan us an additional $10 million, and an ongoing credit facility of up to $20 million, and which amount was borrowed at closing (the “Financing”) for working capital purposes. At closing, we paid Knight an origination fee of $200,000 and a work fee of $100,000 and also paid $100,000 of Knight’s expenses associated with the Loan.

Additional Tranches under the Loan Agreement are available to the Company until August 9, 2022 provided that no event of default exists. Each Additional Tranche must be for a minimum amount of $1.0 million, may only be used to finance qualified acquisitions (as defined in the Loan Agreement), and can be denied in Knight’s absolute discretion. If an Additional Tranche is denied, the Company can effect a qualified acquisition through a special purpose entity with such special purpose entity being entitled to obtain financing from third parties so long as such financing does not adversely affect Knight or Knight’s rights under the Loan Agreement. Upon the closing of any Additional Tranche, the Company will pay Knight an origination fee equal to 2% of the Additional Tranche, a work fee equal to 1% of the amount of the Additional Tranche, and reimburse Knight for its expenses incurred in connection with its consideration of any Additional Tranche (whether or not advanced).

The Loan bears interest at 10.5% per annum. The amended Loan Agreement matures on August 8, 2020 and (b) the date that Knight, in its discretion, accelerates the Company’s obligations due to an event of default.

On the Maturity Date of the Third Tranche and every Additional Tranche (or upon the acceleration of each such loan), the Company must pay Knight a success fee (the “Success Fee”) of that number of Company common shares equal to 10% of the loan, divided by the lesser of (a) $1.50, (b) the lowest price at which any common shares were issued by the Company in any offering or equity financing or other transaction between the Closing Date and the date the Success Fee is due, and (c) the current market price on the date the Success Fee is due. The Company may also pay the Success Fee in cash pursuant to the terms of the Loan Agreement.

The Loan Agreement includes customary representations, warranties, and affirmative and restrictive covenants, including covenants to attain and maintain certain financial metrics, and to not merge or dispose of assets, acquire other businesses (except for businesses substantially similar or complementary to the Company’s business, and provided that the aggregate consideration to be paid does not exceed $100,000 and the acquired business guarantees the Company’s obligations under the Loan Agreement) or make capital expenditures in excess of $500,000. The Loan Agreement also includes customary events of default, including payment defaults, breaches of covenants, change of control and material adverse effect defaults. Upon the occurrence of an event of default and during the continuation thereof, the principal amount of all loans under the Loan Agreement will bear a default interest rate of an additional 5%.

The Company’s obligations and liabilities under the Loan Agreement are secured and unconditionally guaranteed by certain of the Company’s wholly-owned subsidiaries as provided in the Loan Agreement.

We have met all the covenants except for the TTM EBITDA of $5 million during the period ending March 31, 2018. Default Interest rate of 5% (from 10.5% to 15.5%) applies in accordance to our current agreement and will be in effect starting April 1, 2018 and will be in effect until the $5 million TTM EDITDA covenant is achieved. We entered into Loan Amendment Agreement on May 14, 2018, the interest rate was reduced to 13% due to reducing payroll expenses. Also, Synergy will maintain Focus Factor Net Sales as measured on a year-end basis of at least USD $15 million for each fiscal year starting with December 31, 2017.

We have amended our covenants under our loan agreement on March 27, 2019. The new covenants are as follows: we will maintain a minimum EBITDA of $1,900,000 for the twelve months ending on December 31, 2018, $2,500,000 for the twelve months ending March 31, 2019, $3,500,000 for the twelve months ending June 30, 2019 and $5,000,000 for the twelve months period ending on last day of each fiscal quarters thereafter. We shall maintain a net debt to TTM EBITDA ratio of no more than 8:1 for the twelve month period ending on December 31, 2018 until March 31, 2019 and shall maintain a net debt to TTM EBITDA ratio of no more than 6:1 thereafter. We shall maintain at all times a positive cash balance of $575,000 for the three month period ending December 31, 2018, $750,000 for the three month period ending March 31, 2019 and $1,000,000 thereafter. The default interest rate of 2.5% applies (from 13% to 15.5%) in accordance to our current agreement and was in effect as of October 1, 2018 to June 30, 2019. Effective June 30, 2019 the interest rate referred back to 10.5%.

The Company also recorded deferred financing costs of $452,869 with respect to the above loan. The Company recognized amortization of deferred financing costs of $130,829 and $210,710 during the years ended December 31, 2019 and 2018, respectively. Unamortized debt issuance cost as of December 31, 2019 and 2018 amounted to $48,432 and $179,261, respectively.

The Company recognized interest expense of $912,486 and $1,057,833 during the years ended December 31, 2019 and 2018, respectively. Accrued interest was $0 as of both December 31, 2019 and 2018. The loan balance at December 31, 2019 and 2018 was $5,500,000 and $7,500,000, respectively.

Note 12 – Stockholders’ Equity

The total number of shares of all classes of capital stock which the Company is authorized to issue is 300,000,000 shares of common stock with $0.00001 par value.

During the year ended December 31, 2019, the Company issued 26,391 shares of its common stock valued at $39,585 in full and final settlement on the Perfekt transaction.

As of December 31, 2019, and 2018, there were 89,889,074 and 89,862,683, respectively, shares of the Company’s common stock issued and outstanding.

Note 13 – Commitments and Contingencies

Litigation:

From time to time the Company may become a party to litigation in the normal course of business. Management believes that there are no current legal matters that would have a material effect on the Company’s financial position or results of operations.

Employee Commitments

The Company and Mr. McCullough entered into an employment agreement on October 17, 2017 (the “Employment Agreement”) with an initial term of 3 years. In exchange for his service as President, Mr. McCullough will receive an annual base salary of $340,000. He received a cash signing bonus of $37,500 paid on January 1, 2018, and an additional cash signing bonus of $37,500, paid on July 1, 2018. Mr. McCullough will be eligible for an annual bonus of up to twenty-five percent (25%) of his base salary. The annual bonus will be determined at the discretion of our Board or compensation committee based upon the achievement of financial goals established by the Company’s Chief Executive Officer. Mr. McCullough will also be eligible for additional bonus compensation based on the Company’s achievement of certain annual earnings and retail sales goals established each year by the Company’s Chief Executive Officer. Subject to the Company’s achievement of an annual overall earnings goal and certain adjustments in the event of future acquisitions by the Company, Mr. McCullough will be eligible to receive five percent (5%) of all retail sales by the Company in excess of the annual retail sales goal set by the Chief Executive Officer.

The Company granted Mr. McCullough an option to purchase 1,000,000 shares of the Company’s common stock, subject to the approval of the Company’s Board of Directors (the “Option Grant”). The Option Grant will vest in three (3) equal annual installments on the first three anniversaries of Mr. McCullough’s start date with the Company, provided that Mr. McCullough remains employed by the Company on each such date. The Option Grant will be granted under the Company’s 2014 Stock Incentive Plan pursuant to a stock grant agreement between the Company and Mr. McCullough.

Operating leases

On August 16, 2017, the Company entered into a sublease for office space, effective October 1, 2017 through May 2021. Rent expense under this lease was $19,500 per month, and increasing annually on June 1. Effective January 31, 2019 this sublease was cancelled.

Other Commitments

During the year ended December 31, 2019 the Company received a 60 day Proposition 65 letter that one of its products did not have California’s Proposition 65 label. The Company has settled the matter and made a one-time payment of $85,000 in full satisfaction of the matter. 

Note 14 – Stock Options

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees and consultants under a stock option plan at December 31, 2019:

The stock option activity for the year ended December 31, 2019 is as follows:

Stock-based compensation expense related to vested options was $161,570 and $440,999 during the years ended December 31, 2019 and 2018, respectively. The Company determined the value of share-based compensation for options vesting during the year ended December 31, 2017 using the Black-Scholes fair value option-pricing model with the following weighted average assumptions: estimated fair value of Company’s common stock of $0.48-0.50, risk-free interest rate of 1.95-1.99%, volatility of 116-117%, expected lives of 10 years, and dividend yield of 0%. Stock options outstanding as of December 31, 2019, as disclosed in the above table, have an intrinsic value of $0. As of December 31, 2019, unamortized stock-based compensation costs related to options was $128,929, and will be recognized over a period of one year.

Note 15 – Stock Warrants

The warrant activity for the year ended December 31, 2019 is as follows:

Note 16 – Segments

Segment identification and selection is consistent with the management structure used by the Company’s chief operating decision maker to evaluate performance and make decisions regarding resource allocation, as well as the materiality of financial results consistent with that structure. Based on the Company’s management structure and method of internal reporting, the Company has one operating segment. The Company’s chief operating decision maker does not review operating results on a disaggregated basis; rather, the chief operating decision maker reviews operating results on an aggregated basis.

Net sales attributed to customers in the United States and foreign countries for the years ended December 31, 2019 and 2018 were as follows:

Foreign countries primarily consist of Australia and Canada.

The Company’s net sales by product group for the years ended December 31, 2019 and 2018 were as follows:

(1) Net sales for any other product group of similar products are less than 10% of consolidated net sales.

The Company’s net sales by major sales channel for the years ended December 31, 2019 and 2018 were as follows:

Long-lived assets (net) attributable to operations in the United States and foreign countries as of December 31, 2019 and 2018 were as follows:

Note 17 – Subsequent Events 

The Company evaluated its December 31, 2019 consolidated financial statements for subsequent events through the date the consolidated financial statements were issued.

During 2020, the Company received an advance of $100,000 Canadian Dollars from a related party.

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. 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Exchange Act, our management, with the participation of our chief executive officer (our principal executive officer) and our chief financial officer (our principal financial officer and principal accounting officer) evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report, being December 31, 2019.

Based on this evaluation, these officers concluded that, as of December 31, 2019, these disclosure controls and procedures were not effective to ensure that the information required to be disclosed by our company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The conclusion that our disclosure controls and procedures were not effective was due to the presence of material weaknesses in internal control over financial reporting as identified below under the heading “Management’s Report on Internal Control over Financial Reporting.” Management anticipates that such disclosure controls and procedures will not be effective until the material weaknesses are remediated.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, an issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Under the supervision of our chief executive officer (our principal executive officer) and, our chief financial officer (our principal financial officer and principal accounting officer), we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2019 using the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, our management concluded our internal control over financial reporting was not effective as at December 31, 2019.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019, we determined that there were control deficiencies that constituted material weaknesses which are indicative of many small companies with small staff, such as:

These control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements could not have been prevented or detected on a timely basis. As a result of the material weaknesses described above, we concluded that we did not maintain effective internal control over financial reporting as of December 31, 2019, based on criteria established inInternal Control Integrated Framework issued by COSO. Our management is currently evaluating remediation plans for the above deficiencies. During the period covered by this annual report on Form 10-K, we have not been able to remediate the remaining weaknesses described above. However, we plan to take steps to enhance and improve the design of our internal control over financial reporting.

Changes in Internal Control

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the year ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

As a “smaller reporting company,” as defined by Item 10 of the Regulation S-K, we are not required to include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Directors and Executive Officers

The following table sets forth the names of the members of our Board of Directors and executive officers, and the position with the Company held by each.

Each director is elected to hold office until the next annual meeting of shareholders and until his/her successor has been qualified and elected. Our President, Chief Executive Officer and Chief Financial Officer serve at the discretion of our Board of Directors. There are no understandings between any of our directors or executive officer or any other person pursuant to which any executive officer or director was or is to be selected as an executive officer or director. Furthermore, there are no family relationships between any director, executive officer, or person nominated or chosen by us to become a director or executive officer.

Background of Executive Officer and Board of Directors

The following is a brief account of the business experience of each director, director nominee and executive officer of the Company.

Jack Ross - Chief Executive Officer, Chief Financial Officer and Director

Mr. Ross serves as our Chief Executive Officer and Chief Financial Officer and prior to October 2017 served as our President. Mr. Ross is currently the sole officer and director of Pure Sports Inc., positions he has held since February 2009, the sole officer and director of Gowan Capital Inc., positions he has held since May 2011, the sole officer and director of Synergy Energy Strips World Wide Inc., positions he has held since August 2011, the sole officer and director of Rio e Cigs Inc., positions he has held since December 2011, and the sole officer and director of Kenek Brands Inc., positions he has held since May 2014. From January 2012 to April 2014, Mr. Ross served as the sole officer and director of Synergy Strips Corp., which was acquired by and became a wholly owned subsidiary of the Company in April 2014 (the “Subsidiary”) in connection with the Merger. Other than the Subsidiary, none of these companies are related to or affiliated with the Company. Mr. Ross’s significant leadership experience at various private and public companies led to the conclusion that he should serve as a member of our Board of Directors, in light of our business and structure.

Mr. Stephen Fryer - Director

Since April 2003, Mr. Fryer has been the Chief Executive Officer and Managing Partner of SC Capital Partners, Inc., a private micro-market investment banking and private equity intermediary. Prior to joining SC Capital Partners, Inc., Mr. Fryer was a consulting investment banker with Grant Bettingen, Inc., a broker-dealer based in California, from January 2001 to March 2003. From May 1989 to August 1997, Mr. Fryer was the Principal and Managing Director of Ventana International, Ltd., a venture capital and private investment banking firm with operations and investors in the United States, Latin America, Europe and Asia. Mr. Fryer earned a B.S. in Mechanical Engineering, with a minor in Economics, from the University of Southern California. Mr. Fryer’s substantial experience in the investment banking industry, and his demonstrated skill in corporate finance, led to the conclusion that he should serve as a member of our Board of Directors, in light of our business and structure.

Mr. Paul SoRelle - Director

Since November 1999, Mr. SoRelle has been the Chief Executive Officer and Managing Partner of Pioneer Press of Greeley, Inc., a commercial offset printing company. Prior to joining Pioneer Press, Mr. SoRelle worked in the gaming business as well as the retail gasoline and convenience store business. Mr. SoRelle’s significant leadership experience at Pioneer Press of Greeley, Inc. led to the conclusion that he should serve as a member of our Board of Directors, in light of our business and structure.

Mr. Gale Bensussen - Director

On October 12, 2017, our Board of Directors appointed Gale Bensussen as an independent member of the Board of Directors. Since October 2017, Mr. Bensussen has served as a director of Kingdomway U.S.A. Corp, a wholly-owned subsidiary of Kingdomway Group Companies publicly traded on the Shenzen stock exchange. Since January 2017, Mr. Bensussen has served as Chairman of Vit-Best, and from September 2017 to January 2017 he served as President and CEO. Mr. Bensussen has served as President and CEO, and Chairman of Doctor’s Best since November 2013 and May 2016, respectively. Since January 2012, Mr. Bensussen has served as Advisor to North Castle Partners, LLC. Mr. Bensussen holds a Bachelor’s degree from the University of Southern California and a Juris Doctor degree from Southwestern University School of Law. Mr. Bensussen’s considerable experience in one of our main industries led to the conclusion that he should serve as a member of our Board of Directors.

Patrick S. McCullough - President

From 2014 to October 2017, Mr. McCullough served as Chief Commercial Officer of InterHealth Nutraceuticals, Inc., a supplier of nutritional ingredient for use in dietary supplements, which was acquired in September of 2016 by Lonza Group Ltd, a multinational chemicals and biotechnology company based in Switzerland. From 2013 to 2014, Mr. McCullough was a Senior Vice President of Sales for Corr-Jensen Inc., a manufacturer of exercise and weight-loss products and dietary supplements. Prior to Corr-Jensen, Mr. McCullough was the President of Unique Nutritional Supplements, LLC, a dietary supplements company. From 2008 to 2011, Mr. McCullough served as President, Chief Operating Officer, and Vice President of Sales for Natrol LLC, a manufacturer of vitamins and dietary supplements.

Legal Proceedings

No director, director nominee, executive officer, or control person of the Company has been involved in any legal proceeding listed in Item 401(f) of Regulation S-K in the past 10 years.

CORPORATE GOVERNANCE

Director Independence

As of April 7, 2020, we have four directors. Each director is elected to hold office for a one year period or until the next Annual Meeting of Shareholders and until his/her successor has been qualified and elected following the one year of service. Our common stock is not listed on any exchange. Consequently, no exchange rules regarding director independence are applicable to us. However, we have applied the director independence test of The NASDAQ Capital Market and Mr. Fryer and Mr. SoRelle are independent directors. Officers serve at the discretion of the Company’s directors. There are no understandings between the director of the Company or any other person pursuant to which any officer or director was or is to be selected as an officer or director.

Code of Ethics

The Company does not have a code of ethics for our principal executive or principal financial officers, due to our size and current stage of development. The Company’s management intends to promote honest and ethical conduct, full and fair disclosure in our reports to the SEC, and compliance with applicable governmental laws and regulations.

Committees

The Company does not have any standing committees and the Board of Directors performs the duties of an audit committee, nominating committee and compensation committee. Since the Company has no standing committees, the Company does not have any written charters governing such committees’ conduct.

Nominating Committee

We do not have a nominating committee, as we believe the Company is too small to warrant a separate standing nominating committee. Director Jack Ross is responsible for selecting individuals to stand for election as members of our Board of Directors. The Company does not have a policy with regards to the consideration of any director candidates recommended by our stockholders. Our Board of Directors has determined that it is in the best position to evaluate our Company’s requirements as well as the qualifications of each candidate when it considers a nominee for a position on our Board of Directors. If stockholders wish to recommend candidates directly to our Board of Directors, they may do so by communicating directly with Jack Ross, our Chief Executive Officer and the Chairman of our Board of Directors by mail, at Synergy CHC Corp., Attn: CEO, 865 Spring Street, Westbrook, ME 04092, or by telephone at (615) 939-9004.

Audit Committee

We do not have an audit committee currently serving and, as a result, our Board of Directors performs the duties of an audit committee. We also do not have an “audit committee financial expert,” as such term is defined in Item 407(d)(5)(ii) of Regulation S-K, however we feel that our directors’ backgrounds and financial sophistication is sufficient to fulfill the duties of the audit committee.

Compensation Committee

We do not have a compensation committee, as we believe the Company is too small to warrant a separate standing compensation committee. As a result, our Board of Directors performs the duties of a compensation committee. While the Company believes that its current size does not warrant a separate standing compensation committee, it will reassess that need if and when additional directors are appointed and/or elected.

Shareholder Communications

Shareholders may send written communications on the Company’s web site:www.synergychc.com

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company’s executive officers, directors, and persons who beneficially own more than 10% of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of the Company’s common stock and other equity securities. These executive officers, directors, and greater than 10% beneficial owners are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms filed by such reporting persons. Based solely upon the Company’s review of such forms furnished to it, the Company believes that during the fiscal year ended December 31, 2019, all of its executive officers, directors, and every person who is directly or indirectly the beneficial owner of more than 10% of any class of the Company’s securities, complied with the filing requirements of Section 16(a) of the Exchange Act.

ITEM 11. EXECUTIVE COMPENSATION.

The following table sets forth certain information about compensation paid, earned or accrued for services for each executive officer for the past two fiscal years.

Summary Compensation Table

We have not made provisions for paying cash or non-cash compensation to our directors. No salary is being paid to Mr. Ross for serving as our Chief Executive Officer and no fees are being paid at the present time to our directors.

Employment Agreements

On October 17, 2017, we entered into an employment agreement with Patrick S. McCullough to serve as our President. Mr. McCullough receives an annual base salary of $340,000. He received a cash signing bonus of $37,500, paid on January 1, 2018, and an additional cash signing bonus of $37,500, paid on July 1, 2018. Mr. McCullough will be eligible for an annual bonus of up to 25% of his base salary. The annual bonus will be determined at the discretion of our Board or compensation committee based upon the achievement of financial goals established by our Chief Executive Officer. Mr. McCullough will also be eligible for additional bonus compensation based on our achievement of certain annual earnings and retail sales goals established each year by our Chief Executive Officer. Subject to our achievement of an annual overall earnings goal and certain adjustments in the event of future acquisitions we make, Mr. McCullough will be eligible to receive 5% of all of our retail sales in excess of the annual retail sales goal set by the Chief Executive Officer. The Employment Agreement has a three-year initial term ending on November 6, 2020 that will automatically renew for additional one-year terms unless terminated by us or by Mr. McCullough. If we terminate Mr. McCullough’s employment for cause or due to his disability, as each term is defined in the employment agreement, Mr. McCullough will be entitled to receive only the accrued compensation due to him as of the date of such termination. If Mr. McCullough resigns for any reason he will be entitled only to payment of his accrued compensation as of such date. If we terminate Mr. McCullough’s employment without cause, then conditioned upon Mr. McCullough executing a release following such termination, Mr. McCullough will continue to receive his base salary and certain benefits for a period of time following the effective date of the termination of his employment (i) for a period of 12 months if Mr. McCullough is terminated within one year of his start date or (ii) for the remainder of the then-current term of the employment agreement if Mr. McCullough is terminated after the first anniversary of his start date. In addition, Mr. McCullough’s eligibility for his annual bonus and retail sales bonus will be pro-rated for the time before his termination. If more than 50% of the equity ownership interest in our company is sold or transferred to a third party who is not an affiliate of an existing stockholder during the initial term of the employment agreement, Mr. McCullough will be entitled to all base salary and car allowance payments for the remainder of the term of the employment agreement. In addition, the unvested portion of the options granted upon execution of the employment agreement will immediately vest and become exercisable.

On October 10, 2017, we entered into an employment agreement with Jeffrey Kadanoff to serve as our Chief Financial Officer, effective as of October 16, 2017. Mr. Kadanoff will receive an annual base salary of $450,000. He received a signing bonus consisting of: (i) 100,000 shares of our common stock, and (ii) a cash payment equal to the value of 100,000 shares of our common stock based on a price of $0.55 per share. He received an agreed upon annual bonus for 2017 of $37,500. Beginning with calendar year 2018, Mr. Kadanoff will be eligible for an annual target bonus of up to half his base salary. The target bonus will be determined at the discretion of our Board or compensation committee based upon the achievement of financial and other performance-related goals and may be paid in cash or shares of our common stock. Subject to the approval by the Board, during each calendar year of Mr. Kadanoff’s employment beginning with 2018, we will grant him an option to purchase 500,000 shares of our common stock, with an exercise price equal to the fair market value of the common stock on the date of each respective grant and that will vest in three equal annual installments on the first three anniversaries of the respective date of grant, provided that Mr. Kadanoff remains employed on each such date. Upon the occurrence of a change in control a defined in the agreement, the vesting of stock options granted to Mr. Kadanoff will be accelerated subject to his continued service on such date and provided further that Mr. Kadanoff’s stock options will be treated no less favorably than those of any other senior executive officer or our Chairman. If we terminate Mr. Kadanoff’s employment for Cause, death or Disability, or Mr. Kadanoff resigns for a purpose other than Good Reason (all as defined in the agreement), Mr. Kadanoff will be entitled to receive only the accrued compensation due to him as of the date of such termination. If we terminate Mr. Kadanoff’s employment without Cause, or if Mr. Kadanoff resigns for Good Reason, and conditioned upon Mr. Kadanoff executing a Release following such termination, Mr. Kadanoff will be entitled to receive separation benefits equal to the sum of his then current annual base salary plus his target annual bonus and a pro-rated rated amount of the target annual bonus for the year in which termination occurs. All unvested stock options granted to Mr. Kadanoff which would otherwise have vested had Mr. Kadanoff remained employed for 12 additional months beyond the date of termination will be accelerated and deemed to have vested as of the effective date of the termination of his employment under such circumstances. If we terminate Mr. Kadanoff’s employment without Cause, or if Mr. Kadanoff resigns for Good Reason, in either case at the time of or within 24 months following a Change in Control, and conditioned upon Mr. Kadanoff executing a Release following such termination, Mr. Kadanoff will be entitled to receive CIC Separation Benefits equal to the greater of: (i) two times the sum of Mr. Kadanoff’s then-current annual base salary plus his target annual bonus, or (ii) two times the sum of (A) Mr. Kadanoff’s average base salary actually paid over the preceding two years, plus (B) the average annual bonus actually paid over the preceding two years. In addition to the foregoing benefits, all stock and options granted to Mr. Kadanoff will be accelerated subject to his continued employment as of such date and provided further that Mr. Kadanoff’s stock options will be treated no less favorably than those of any other senior executive or our chairman.

On October 23, 2018 we entered into a release agreement with Mr. Kadanoff whereby the Company agreed to pay $675,000 in four equal installments payable on November 30, 2018, February 28, 2019, May 31, 2019 and August 30, 2019. If the Company completes a financing or asset sale resulting in proceeds to the Company greater than $10,000,000 or an acquisition with financing resulting in an increase of greater than $3,000,000 in working capital before the final installment is made, the Company will accelerate any remaining installments and will pay Mr. Kadanoff within ten days of closing such transaction. The Company immediately vested 500,000 of Mr. Kadanoff’s unvested stock options, however they expired on December 28, 2018. Within ten days of execution of the release, the Company paid to Mr. Kadanoff a one-time fee of $74,189.

Equity Compensation Plans

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees and consultants under a stock option plan at December 31, 2019:

The stock option activity for the year ended December 31, 2019 is as follows:

Stock-based compensation expense related to vested options was $161,570 and $440,999 during the years ended December 31, 2019 and 2018, respectively. The Company determined the value of share-based compensation for options vesting during the year ended December 31, 2017 using the Black-Scholes fair value option-pricing model with the following weighted average assumptions: estimated fair value of Company’s common stock of $0.48-0.50, risk-free interest rate of 1.95-1.99%, volatility of 116-117%, expected lives of 10 years, and dividend yield of 0%. Stock options outstanding as of December 31, 2019, as disclosed in the above table, have an intrinsic value of $0.

Outstanding Equity Awards at Fiscal Year-End

The following table contains certain information concerning unexercised options for our executive officers as of December 31, 2019.

Director Compensation

The following table provides information regarding all compensation paid to non-employee directors during the fiscal year ended December 31, 2019.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information regarding our common stock beneficially owned as of April 7, 2020, for (i) each stockholder known to be the beneficial owner of 5% or more of our outstanding common stock, (ii) each executive officer and director, and (iii) all executive officers and directors as a group. To the best of our knowledge, subject to community and marital property laws, all persons named have sole voting and investment power with respect to such shares, except as otherwise noted.