U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

  

FORM 10-Q

  

[X]	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2016
[  ]	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ____________ to ____________

  

Synergy CHC Corp.

 

Nevada		000-55098		99-0379440
(State or other jurisdiction		(Commission		(IRS Employer
of Incorporation)		File Number)		Identification Number)
		865 Spring Street
		Westbrook, Maine 04092
		(Address of principal executive offices)
		(615) 939-9004
		(Issuer’s Telephone Number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 and posted on its corporate Web site, if any, every, Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer [  ]

Accelerated filer [  ]

Non-accelerated filer [  ] (Do not check if smaller reporting company)

Smaller reporting company [X]

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of April 14, 2016, 81,692,954 shares of our common stock were issued and outstanding.

 

 

 

SYNERGY CHC CORP.

 

INDEX

 

Table of Contents

  

PART I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated financial statements	3
	Condensed Consolidated balance sheets as of March 31, 2016 (unaudited) and December 31, 2015	3
	Condensed Consolidated statements of operations for the three months ended March 31, 2016 and 2015 (unaudited)	4
	Condensed Consolidated statements of cash flows for the three months ended March 31, 2016 and 2015 (unaudited)	5
	Notes to unaudited condensed consolidated financial statements	6
Item 2.	Management’s discussion and analysis of financial condition and results of operations	22
Item 3.	Quantitative and qualitative disclosures about market risk	32
Item 4.	Controls and procedures	32
PART II	OTHER INFORMATION
Item 1.	Legal proceedings	33
Item 1A.	Risk factors	33
Item 2.	Unregistered sales of equity securities and use of proceeds	33
Item 3.	Defaults upon senior securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other information	33
Item 6.	Exhibits	33
Signatures		34

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Synergy CHC Corp.

Condensed Consolidated Balance Sheets

 

		March 31, 2016				December 31, 2015
		(Unaudited)
Assets
Current Assets:
Cash and cash equivalents		$	3,763,085			$	3,640,893
Restricted cash			158,142				607,084
Accounts Receivable			1,618,650				3,979,857
Prepaid expenses			502,867				422,434
Inventory			676,839				686,655
Total Current Assets			6,719,583				9,336,923
Fixes assets, net			72,497				12,017
Goodwill			11,046,400				11,496,402
Intangible assets, net			6,089,066				5,915,262
Total Assets		$	23,927,546			$	26,760,604
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued liabilities		$	3,175,181			$	5,032,102
Provision for income taxes payable			1,012,783				910,894
Earn out payment			-				2,551,500
Current portion of long-term debt, net of debt discount and debt issuance cost, related party			4,062,639				3,025,669
Current portion of long-term debt			750,000				750,000
Warrant derivative liability			2,009,681				3,096,179
Total Current Liabilities			11,010,284				15,366,344
Long-term Liabilities:
Note payable			-				750,000
Royalty payable			282,601				258,897
Note payable, net of debt discount and debt issuance cost, related party			4,101,833				4,965,650
Total Long-term Liabilities			4,384,434				5,974,547
Total Liabilities			15,394,718				21,340,891
Commitments and contingencies			-				-
Stockholders’ Equity:
Common stock, $0.00001 par value; 300,000,000 shares authorized; 81,692,954 shares issued and outstanding			817				817
Common stock to be issued			68,000				68,000
Additional paid in capital			14,223,376				13,920,735
Accumulated deficit			(5,759,365	)			(8,569,841	)
Total stockholders’ equity			8,532,828				5,419,713
Total Liabilities and Stockholders’ Equity		$	23,927,546			$	26,760,604

 

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

 

  

Synergy CHC Corp.

Unaudited Condensed Consolidated Statements of Operations

 

		For the three months ended
		March 31, 2016				March 31, 2015
Revenue		$	8,267,751			$	1,600,249
Cost of sales			2,036,577				605,282
Gross profit			6,231,174				994,967
Operating expenses
Selling and marketing			1,447,676				733,589
General and administrative			1,868,805				314,820
Depreciation and amortization			278,637				77,242
Total operating expenses			3,595,118				1,125,651
Income (loss) from operations			2,636,056				(130,684	)
Other (income) expenses
Interest income			(3,924	)			-
Interest expense			431,264				171,393
Remeasurement gain on translation of foreign subsidiary			(240,806	)			-
Gain on change in fair value of derivative liability			(1,086,498	)			-
Amortization of debt discount			475,600				2,089,005
Amortization of debt issuance cost			66,039				27,321
Total other (income) expenses			(358,325	)			2,287,719
Net Income (loss) before income taxes			2,994,381				(2,418,404	)
Income tax expense			183,905				-
Net Income (loss) after tax		$	2,810,476			$	(2,418,404	)
Net income (loss) per share – basic		$	0.03			$	(0.04	)
Net income (loss) per share – diluted		$	0.03			$	(0.04	)
Weighted average common shares outstanding
Basic			81,692,954				65,883,030
Diluted			85,380,496				65,883,030

 

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

 

 

Synergy CHC Corp.

Unaudited Condensed Consolidated Statements of Cash Flows

 

		For the three months ended
		March 31, 2016				March 31, 2015
Cash Flows from Operating Activities
Net income (loss)		$	2,810,476			$	(2,418,404	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			278,637				77,242
Amortization of debt issuance cost			66,039				27,321
Stock based compensation expense			302,641				12,000
Change in the fair value of derivative liability			(1,086,498	)			-
Remeasurement gain on translation of foreign subsidiary			(240,806	)			-
Non cash implied interest			42,717				-
Amortization of debt discount			475,600				2,089,005
Changes in operating assets and liabilities:
Accounts receivable			2,361,207				981,574
Inventory			9,815				(48,940	)
Prepaid expense			(80,433	)			(40,272	)
Accounts payable and accrued liabilities			(1,514,226	)			(184,304	)
Net cash provided by operating activities			3,425,171				495,221
Cash Flows from Investing Activities
Payments for acquisition of fixed assets			(62,921	)			(1,654	)
Payments for acquisition of Factor Nutrition Labs			-				(4,500,000	)
Restricted cash			448,942				-
Net cash provided by (used in) investing activities			386,021				(4,501,654	)
Cash Flows from Financing Activities
Proceeds from notes payable			-				6,000,000
Repayment of notes payable			(1,137,500	)			-
Payment of earn out liability			(2,551,500	)			-
Payment of debt issuance cost			-				(289,045	)
Advances from related party note			-				11,184
Proceeds from exercise of warrant			-				1
Net cash (used in) provided by financing activities			(3,689,000	)			5,722,140
Net increase in cash and cash equivalents			122,192				1,715,707
Cash and Cash Equivalents, beginning of period			3,640,893				338
Cash and Cash Equivalents, end of period		$	3,763,085			$	1,716,045
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest		$	407,560			$	-
Income taxes		$	141,447			$	-
Supplemental Disclosure of Non-cash Investing and Financing Activities:
Reallocation of goodwill related to acquisition of Factor Nutrition to intellectual property		$	450,000			$	-
Common stock issued for settlement of debt		$	-			$	100,000
Beneficial conversion feature on warrants issued concurrent with debt		$	-			$	3,415,514
Assumption of assets and liabilities as part of acquisition transaction		$	-			$	9,332,559
Note issued as part of asset purchase agreement		$	-			$	1,500,000

 

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

 

 

Synergy CHC Corp.

NOTES TO UNAUDITED CONDENSED 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.

 

Synergy is the sole owner of three subsidiaries: Neuragen Corp., Breakthrough Products, Inc. and NomadChoice Pty Ltd. and the results have been consolidated in these statements.

 

Note 2 – Summary of Significant Accounting Policies

 

General

 

The accompanying condensed consolidated financial statements as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015 are unaudited. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Rule S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2015 and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC.

 

Basis of Presentation

 

The unaudited condensed 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. Significant estimates are assumptions about collection of accounts receivable, useful life of fixed and intangible assets, goodwill and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.

 

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 March 31, 2016 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 March 31, 2016, the uninsured balance amounted to $3,501,952.

 

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. Intangible assets are amortized on a straight line basis over the useful lives.

 

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 March 31, 2016, our qualitative analysis of long-lived assets did not indicate any impairment.

 

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 March 31, 2016, our qualitative analysis of goodwill did not indicate any impairment.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”). ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and/or service has been performed; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. The Company believes that these criteria are satisfied 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.

 

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.

 

Advertising Expense

 

The Company expenses marketing, promotions and advertising costs as incurred. Such costs are included in general and administrative expense in the accompanying unaudited condensed 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 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.

 

 

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 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 loss per share is anti-dilutive. As of March 31, 2016, options to purchase 5,000,000 shares of common stock and warrants to purchase 9,132,002 shares of common stock were outstanding. These potential shares were included in the shares used to calculate diluted earnings per share.

 

Going Concern

 

The Company’s unaudited condensed consolidated financial statements are prepared using U.S. GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company had accumulated deficit at March 31, 2016 of $5,759,365. The Company had a working capital deficit of $4,290,701 as of March 31, 2016. Due to acquisitions during 2015 of revenue-producing products, the Company believes it has established an ongoing source of revenue that is sufficient to cover its operating costs.

 

Management’s plans to continue as a going concern include raising additional capital through borrowing and sales of common stock. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

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 March 31, 2016, the Company has determined that there were no assets or liabilities measured at fair value, except for the warrant derivative liability.

 

 

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 market. Finished goods include the cost of labor to assemble the items.

 

Stock-Based Compensation

 

The Company adopted the provisions of ASC 718. We estimate the fair value of stock options using a binomial model, consistent with the provisions of ASC 718 and SEC Staff Accounting Bulletin No. 107, Share-Based Payment. Option-pricing models require the input of highly subjective assumptions, including the price volatility of the underlying stock. We determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, could reasonably be expected to be a better indicator of our expected volatility than historical volatility. The expected term assumption used in calculating the estimated fair value of our stock-based compensation awards using the Black-Scholes-Merton (BSM) model is based on detailed historical data about employees’ exercise behavior, vesting schedules, and death and disability probabilities. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised and cancelled. We believe the resulting BSM calculation provides a more refined estimate of the fair value of our employee stock options.

 

Foreign Currency Translation

 

The functional currency of the Company’s foreign subsidiary (Nomadchoice Pty Ltd.) is the U.S. Dollar. The Company’s foreign subsidiary maintains its record using local currency (Australian Dollar). All monetary assets and liabilities of the foreign subsidiary were translated into U.S. Dollars at quarter 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.

 

Concentrations of Credit Risk

 

In the normal course of business, the Company provides credit terms to its customers; however, collateral is not required. Accordingly, the Company performs credit evaluations of its customers and maintains 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 exist 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 any additional costs relating to assembly or special pack-outs of the Company products are charged to general and administrative expenses as incurred.

 

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 general and administrative expenses as incurred.

 

Warrant Derivative Liabilities

 

ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as described.

 

 

A Black-Scholes-Merton option-pricing model, with dilution effects, was utilized to estimate the fair value of the Warrant Derivative Liabilities as of March 31, 2016. This model is subject to the significant assumptions discussed below and requires the following key inputs with respect to the Company and/or instrument:

 

Input		March 31, 2016
Stock Price		$	0.45
Exercise Price		$	0.49
Expected Life (in years)			9.0
Stock Volatility			156.96	%
Risk-Free Rate			1.78	%
Dividend Rate			0	%
Outstanding Shares of Common Stock			4,547,243

 

Cost of Sales

 

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

 

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.

 

Impairment of Long-Lived Assets

 

When facts and circumstances indicate that the carrying values of long-lived assets, including fixed assets, may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the assets to projected future cash flows in addition to other quantitative and qualitative analyses. Upon indication that the carrying value of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value, less estimated costs to sell. The Company makes judgments related to the expected useful lives of long-lived assets and its ability to realize undiscounted cash flows in excess of the carrying amounts of such assets which are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions and changes in operating performance. As the Company assesses the ongoing expected cash flows and carrying amounts of its long-lived assets, these factors could cause the Company to realize a material impairment charge.

 

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, 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. All transactions with related parties shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to the related party.

 

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 aggregate basis.

 

Reclassification of Prior Period Presentation

 

Certain reclassifications have been made to conform the prior period data to the current presentations. These reclassifications had no effect on the reported results.

 

 

Recent Accounting Pronouncements

 

ASU 2016-01

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.

 

ASU 2015-17

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. Currently deferred taxes for each tax jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability on the balance sheet. To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with any related valuation allowances be classified as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company has adopted this guidance in the fourth quarter of the year ended December 31, 2015 on a retrospective basis. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations or cash flows, and did not have any effect on prior periods due to the full valuation allowance against the Company’s net deferred tax assets.

 

ASU 2015-16

 

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement –Period Adjustments. Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard is effective for both public and private companies for periods beginning after December 15, 2015. Adoption of this new standard did not have any impact on the Company’s financial position, results of operations or cash flows.

 

ASU 2015-14

 

In August 2015, the FASB issued ASU No. 2015-14, Revenue From Contracts With Customers (Topic 606). The amendments in this ASU defer the effective date of ASU 2014-09. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are still evaluating the effect of the adoption of ASU 2014-09.

 

ASU 2015-11

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330). ASU 2015-11 simplifies the accounting for the valuation of all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing that inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. We do not expect the adoption of ASU 2015-11 to have a material effect on our financial position, results of operations or cash flows.

 

ASU 2015-05

 

In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). ASU 2015-05 provides guidance regarding the accounting for a customer’s fees paid in a cloud computing arrangement; specifically about whether a cloud computing arrangement includes a software license, and if so, how to account for the software license. ASU 2015-05 is effective for public companies’ annual periods, including interim periods within those fiscal years, beginning after December 15, 2015 on either a prospective or retrospective basis. Early adoption is permitted. Adoption of this new standard did not have any impact on the Company’s financial position, results of operations or cash flows.

 

 

ASU 2015-07

 

In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) This guidance eliminates the requirement to categorize investments within the fair value hierarchy if their fair value is measured using the net asset value (“NAV”) per share practical expedient in the FASB’s fair value measurement guidance. The new standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Adoption of this new standard did not have any impact on the Company’s financial position, results of operations or cash flows.

 

ASU 2015-03

 

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments are to be applied on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance. The Company reclassified debt issuance cost of $312,812 and $378,852 from other assets to liabilities and netted off with the related loans in the liabilities as of March 31, 2016 and December 31, 2015, respectively.

 

ASU 2015-02

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification and improves current U.S. GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (“VIE”), and changing consolidation conclusions for companies in several industries that typically make use of limited partnerships or VIEs. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. Adoption of this new standard did not have any impact on the Company’s financial position, results of operations or cash flows.

 

ASU 2015-01

 

In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates from U.S. GAAP the concept of extraordinary items. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. Adoption of this new standard did not have any impact on the Company’s financial position, results of operations or cash flows.

 

ASU 2014-17

 

In November 2014, the FASB issued ASU No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting. This ASU provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. ASU 2014-17 was effective on November 18, 2014. The adoption of ASU 2014-17 did not have any effect on our financial position, results of operations or cash flows.

 

ASU 2014-16

 

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815). ASU 2014-16 addresses whether the host contract in a hybrid financial instrument issued in the form of a share should be accounted for as debt or equity. ASU 2014-16 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We do not currently have issued, nor are we investors in, hybrid financial instruments. Adoption of this new standard did not have any impact on the Company’s financial position, results of operations or cash flows.

 

 

ASU 2014-15

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). ASU 2014-15 provides guidance related to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosure. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for interim and annual periods thereafter. Early application is permitted. We do not expect the adoption of ASU 2014-15 to have a material effect on our financial position, results of operations or cash flows.

 

ASU 2014-12

 

In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Adoption of this new standard did not have any impact on the Company’s financial position, results of operations or cash flows.

 

ASU 2014-09

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. We are still evaluating the effect of the adoption of ASU 2014-09. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 by one year for all entities and permits early adoption on a limited basis. ASU 2014-09 will be effective for the Company in the first quarter of 2018, and early adoption is permitted in the first quarter of 2017. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.

 

ASU 2014-08

 

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) and Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 amends the definition for what types of asset disposals are to be considered discontinued operations, as well as amending the required disclosures for discontinued operations and assets held for sale. ASU 2014-08 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2014. The adoption of ASU 2014-08 did not have any effect on our financial position, results of operations or cash flows.

 

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 condensed financial position, results of operations or cash flows.

 

Note 3 – 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 market.

 

The carrying value of inventory consisted of the following:

 

		March 31, 2016				December 31, 2015
Finished goods		$	513,536			$	535,908
Components			127,897				115,340
Raw Materials			35,406				35,406
Total inventory		$	676,839			$	686,654

 

As of January 22, 2015, inventory was pledged to Knight Therapeutics under the Loan Agreement (see note 10).

 

 

Note 4 – Accounts Receivable

 

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

 

		March 31, 2016				December 31, 2015
Trade accounts receivable		$	1,715,349			$	4,101,148
Less allowances			(96,699	)			(121,291	)
Total accounts receivable, net		$	1,618,650			$	3,979,857

 

During the year ended December 31, 2015, the Company charged $50,000 to bad debt expense in setting up an allowance.

 

Note 5 – Prepaid Expenses

 

Prepaid expenses consisted of the following:

 

		March 31, 2016				December 31, 2015
Advances for inventory		$	266,388			$	171,494
Media production			70,587				55,849
Insurance			42,078				54,519
Trade shows			28,800				45,700
Deposits			41,228				41,228
Consultants			4,000				24,000
Rent			10,786				16,216
Media			20,650				-
Miscellaneous			18,350				13,428
Total		$	502,867			$	422,434

 

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 March 31, 2016 and December 31, 2015, the uninsured balances amounted to $3,501,592 and $3,453,290, respectively.

 

Accounts receivable

 

As of March 31, 2016, four customers accounted for 77% of the Company’s accounts receivable. As of December 31, 2015, one customer accounted for 78% of the Company’s accounts receivable.

 

Major customers

 

For the three months ended March 31, 2016, two customers accounted for approximately 26% of the Company’s gross revenue. For the year ended December 31, 2015, two customers accounted for approximately 71% of the Company’s gross revenues. Substantially all of the Company’s business is with companies in the United States.

 

Major suppliers

 

For the period ended March 31, 2016 and the year ended December 31, 2015, our products were made by the following suppliers:

 

FOCUSfactor	Pittsburgh, PA	Tustin, CA
Flat Tummy Tea	Highland, NY	-
Neuragen	Linthicum Heights, MD	-
UrgentRx	Ogden, UT	-

 

It is the opinion of management that the products can be produced by other manufacturers and the choice to utilize these suppliers is not a significant concentration.

 

 

Note 7 – Fixed Assets and Intangible Assets

 

As of March 31, 2016 and December 31, 2015, fixed assets and intangible assets consisted of the following:

 

		March 31, 2016				December 31, 2015
Property and equipment		$	24,395			$	18,187
Less accumulated depreciation			(8,397	)			(6,170	)
Construction in progress			56,499				-
Fixed assets, net		$	72,497			$	12,017

 

Depreciation expense for the three months ended March 31, 2016 and 2015 was $2,227 and $75, respectively

 

		March 31, 2016				December 31, 2015
FOCUSfactor intellectual property		$	1,450,000			$	1,000,000
Intangible assets subject to amortization			5,523,017				5,521,751
Less accumulated amortization			(883,950	)			(606,489	)
Intangible assets, net		$	6,089,067			$	5,915,262

 

Amortization expense for the three months ended March 31, 2016 and 2015 was $276,410 and $77,167, respectively. These intangible assets were acquired through Asset Purchase Agreement and Stock Purchase Agreements entered into during 2015.

 

Note 8 – Related Party Transactions

 

The Company accrued and paid consulting fees of $25,000 per month to a company owned by Mr. Jack Ross, Chief Executive Officer of the Company. As of March 31, 2016, the total outstanding balance was $0.

 

On January 22, 2015, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc. (“Knight”), a related party, for the purchase of the Focus Factor assets. At March 31, 2016, the Company owed Knight $4,110,521 on this loan, net of discount (see Note 10).

 

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 March 31, 2016, the Company owed Knight $538,102 in relation to this agreement (see Note 10).

 

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. Hand MD, LLC is a 50% owner in Hand MD Corp. The Company expensed $30,000 through payroll for the three months ended March 31, 2016. As of March 31, 2016, the total outstanding balance was $0.

 

On November 12, 2015, the Company entered into a Loan Agreement with Knight Therapeutics (Barbados) Inc., a related party, for the purchase of NomadChoice Pty Limited and Breakthrough Products, Inc. At March 31, 2016, the Company owed Knight $3,828,660 on this loan, net of discount (see Note 10).

 

At March 31, 2016 NomadChoice Pty Ltd., a subsidiary of the Company, owed Knight Therapeutics $46,323 in connection with a royalty distribution agreement.

 

 

Note 9 – Accounts Payable and Accrued Liabilities

 

As of March 31, 2016 and December 31, 2015, accounts payable and accrued liabilities consisted of the following:

 

		March 31, 2016				December 31, 2015
Accrued payroll		$	35,099			$	128,237
Accrued legal fees			50,955				38,752
Accounting fees			67,248				-
Manufacturers			1,082,696				1,527,333
Inventory			34,548				-
Promotions			353,050				1,213,021
Returns allowance			883,668				1,128,133
Customers			411,033				411,033
Interest			45,206				110,754
Royalties			46,323				71,573
Warehousing			7,298				31,748
Others			158,057				371,518
Total		$	3,175,181			$	5,032,102

 

Note 10 –Notes Payable

 

The Company’s loans payable at March 31, 2016 and December 31, 2015 are as follows:

 

		March 31, 2016				December 31, 2015
Loans payable		$	11,288,103			$	12,406,589
Unamortized debt discount			(2,060,819	)			(2,536,418	)
Unamortized debt issuance cost			(312,812)				(378,852)
Total			8,914,472				9,491,319
Less: Current portion			(4,812,639	)			(3,775,669	)
Long-term portion		$	4,101,833			$	5,715,650

 

$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 is 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. 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.

 

Subject to certain restrictions, the Company may prepay the outstanding principal of the Loan (in whole but not in part) at any time if the Company pays a concurrent prepayment fee equal to the greater of (i) the total unpaid annual interest that would have been payable during the year in which the prepayment is made if the prepayment is made prior to the first anniversary of the closing, and (ii) $300,000. The Company’s obligations under the Loan Agreement are secured by a first priority security interest in all present and future assets of the Company. The Company also agreed to not pledge or otherwise encumber its intellectual property assets, subject to certain customary exceptions.

 

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 the aggregate consideration to be paid does not exceed $100,000) or make capital expenditures in excess of $100,000 over the Company’s annual business plan in any year. The Loan Agreement also includes customary events of default, including payment defaults, breaches of covenants, change of control and material adverse effect default. Upon the occurrence of an event of default and during the continuation thereof, the principal amount of the Loan will bear a default interest rate of an additional 5%.

 

 

In connection with the Loan Agreement, the Company issued to Knight a warrant that entitled Knight to purchase 4,595,187 shares of common stock of the Company (“Common Stock”) on or prior to close of business on January 30, 2015 (the “ST Warrant”). The aggregate exercise price of the Common Stock under the ST Warrant is $1.00. Knight exercised the ST Warrant on January 22, 2015. Also in connection with the Loan Agreement, the Company issued to Knight a warrant to purchase 3,584,759 shares of Common Stock on or prior to the close of business of January 22, 2025 (the “LT Warrant”). The exercise price per share of the Common Stock under the LT Warrant is $0.34. The LT Warrant provides for cashless exercise. The LT Warrant also provides that in the event the closing price of the Common Stock remains above $1.00 for six consecutive months, Knight will forfeit the difference between the number of shares acquired under the LT Warrant prior to 90 days after such six-month period, and 25% of the shares purchasable under the LT Warrant.

 

The beneficial conversion feature of the warrants issued to the noteholders amounted to $1,952,953 (ST warrants) and $1,462,560 (LT warrants), respectively, and was recorded as debt discount of the corresponding debt.

 

The Company recognized amortization of debt discount of $218,253 (LT warrants) during the three months ended March 31, 2016. Unamortized debt discount as of March 31, 2016 amounted to $389,479.

 

The Company also recorded deferred financing costs of $289,045 with respect to the above loan in 2015. The Company recognized amortization of deferred financing costs of $35,636 during the three months ended March 31, 2016.

 

The Company recognized and paid interest expense of $181,814 during the three months ended March 31, 2016. Accrued interest expense was $0 as of March 31, 2016. Loan payable balance was $4,500,000 as of March 31, 2016.

 

$1,500,000 January 22, 2015 Loan:

 

On January 22, 2015, the Company issued a 0% promissory note in a principal amount of $1,500,000 in connection with an Asset Purchase Agreement. The note has a maturity date of January 20, 2017, with $750,000 to be paid on or before January 20, 2016 and an additional $750,000 to be paid on or before January 20, 2017. Loan payable balance was $750,000 as of March 31, 2016.

 

$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 ended 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.

 

The Company also recorded deferred financing costs of $10,486 with respect to the above agreement in 2015. The Company recognized amortization of deferred financing costs of $1,293 during the three months ended March 31, 2016. The Company has recorded present value of future payments of $538,102 and $515,854 as of March 31, 2016 and December 31, 2015, respectively. The Company has recorded interest expense of $19,013 for the three months ended March 31, 2016.

 

$5,500,000 November 12, 2015 Loan:

 

On November 12, 2015, we entered into a First Amendment to Loan Agreement (“First Amendment”) with Knight, pursuant to which Knight agreed to loan us an additional $5.5 million, and which amount was borrowed at closing (the “Financing”) for the purpose of acquiring Breakthrough Products, Inc. and NomadChoice Pty Limited through Stock Purchase Agreements. At closing, we paid Knight an origination fee of $110,000 and a work fee of $55,000 and also paid $24,000 of Knight’s expenses associated with the Loan. The Loan bears interest at a rate of 15% per year. The interest rate will decrease to 13% if we meet certain equity-fundraising targets. The New Loan Agreement matures on November 11, 2017.

 

In connection with the New Loan Agreement, we issued Knight a warrant that entitles Knight to purchase 5,550,625 shares of our common stock (“Knight Warrant Shares”) representing approximately 6.5% of our fully diluted capital, which Knight exercised in full on November 12, 2015. Knight also received a 10-year warrant entitling Knight to purchase up to 4,547,243 shares of our common stock at $0.49 per share (“Knight Warrants”).

 

The beneficial conversion feature of the warrants issued to the noteholders amounted to $2,553,287 (5,550,625 warrants) and $2,067,258 (4,547,243 warrants), respectively, and was recorded as debt discount of the corresponding debt in 2015. For derivative liability calculation on 4,547,243 warrants, refer to Note 15.

 

The Company recognized amortization of debt discount of $257,347 (4,547,243 warrants) during the three months ended March 31, 2016. Unamortized debt discount as of March 31, 2016 amounted to $1,671,339.

 

The Company also recorded deferred financing costs of $233,847 with respect to the above loan in 2015. The Company recognized amortization of deferred financing costs of $29,111 during the three months ended March 31, 2015.

 

 

The Company recognized interest expense of $206,250 during the three months ended March 31, 2016. Accrued interest expense was $45,206 as of March 31, 2016. The balance at March 31, 2016 was $5,500,000.

 

Note 11 – 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.

 

As of both March 31, 2016 and December 31, 2015, there were 81,692,954 shares of the Company’s common stock issued and outstanding.

 

Note 12 – Commitments & 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.

 

Operating leases

 

In April 2014, a subsidiary entered into an extension of a non-cancellable operating lease for office space that expires on March 31, 2017. Rent expense under this lease for the three months ended March 31, 2016 was $8,923 per month less a $3,010 per month sublease through March 2017.

 

In December 2015, a subsidiary entered into a non-cancellable operating lease for office space through November 2016. Rental payments under this lease are $5,500 Australian dollars per month, which is approximately $4,200.

 

In December 2015, the Company entered into a non-cancellable operating lease for office space through December 2016. Rental payments under this lease are $5,500 per month.

 

The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2016:

 

Year ending December 31:
2016 – remaining nine months		$	163,407
2017			26,769
Total		$	190,176

 

On December 8, 2014, a subsidiary entered into a non-cancellable 36 month phone lease with an estimated cost of $894 a month.

 

The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2016:

 

Year ending December 31:
2016 – remaining nine months		$	8,046
2017			9,834
Total		$	17,880

 

Note 13 – Stock Options

 

On July 30, 2014, the Company’s board of directors approved the Company’s 2014 Equity Incentive Plan and the reservation of 15,525,000 shares of common stock for issuance under such plan. Such plan was approved by the Company’s shareholders and became effective on August 5, 2015.

 

On April 2, 2014, the Company granted 1,000,000 options with an exercise price of $0.25 per share to a company owned by Mr. Jack Ross, Chief Executive Officer of the Company.

 

On December 14, 2015, the Company granted 1,000,000 options each with an exercise price of $0.25 per share to two Board Members of the Company.

 

On December 14, 2015, the Company granted 1,000,000 options each with an exercise price of $0.65 per share to two employees of the Company.

 

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 March 31, 2016:

 

 

				Options Outstanding												Options Exercisable
Exercise Prices ($)				Number Outstanding				Weighted Average Remaining Contractual Life (Years)				Weighted Average Exercise Price ($)				Number Exercisable				Weighted Average Exercise Price ($)
$	0.25 - $0.65				5,000,000				8.4			$	0.41				3,000,000			$	0.25

 

The stock option activity for the three months ended March 31, 2016 is as follows:

 

		Options Outstanding				Weighted Average Exercise Price
Outstanding at December 31, 2015			5,000,000			$	0.41
Granted			-				-
Exercised			-				-
Expired or canceled			-				-
Outstanding at March 31, 2016			5,000,000			$	0.41

 

Stock-based compensation expense related to vested options was $302,641 during the three months ended March 31, 2016. The Company determined the value of share-based compensation for options vesting during the period using the Black-Scholes fair value option-pricing model with the following weighted average assumptions: estimated fair value of Company’s common stock of $0.74, risk-free interest rate of 2.23%, volatility of 154%, expected lives of 10 years, and dividend yield of 0%. Stock options outstanding as of March 31, 2016, as disclosed in the above table, have an intrinsic value of $600,000.

 

Note 14 – Stock Warrants

 

The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s common stock at March 31, 2016:

 

				Warrants Outstanding												Warrants Exercisable
Exercise Prices ($)				Number Outstanding				Weighted Average Remaining Contractual Life (Years)				Weighted Average Exercise Price ($)				Number Exercisable				Weighted Average Exercise Price ($)
$	0.34				3,584,759				8.85			$	0.34				3,584,759			$	0.34
	0.49				4,547,243				9.65				0.49				4,547,243				0.49
	5.00				1,000,000				2.75				5.00				1,000,000				5.00

 

The warrant activity for the three months ended March 31, 2016 is as follows:

 

		Options Outstanding				Weighted Average Exercise Price
Outstanding at December 31, 2015		$	9,132,002			$	0.92
Granted			-				-
Exercised			-				-
Expired or canceled			-				-
Outstanding at March 31, 2016		$	9,132,002			$	0.92

  

Note 15 – Derivatives

 

The Company has incurred a liability for the estimated fair value of a derivative warrant instrument. The estimated fair value of the derivative warrant instruments has been calculated using the Black-Scholes fair value option-pricing model with key input variables provided by management, as of the issue date, with the valuation offset against additional paid in capital, and at each reporting date, with changes in fair value recorded as gains or losses on revaluation in non-operating income (expense).

 

 

The Company identified embedded derivatives related to the warrants issued along with loan payable entered into in November 2015. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the warrants and to adjust the fair value as of each subsequent balance sheet date. At the inception of the warrants, the Company determined a fair value of $2,067,258 of the embedded derivative. The fair value of the embedded derivative was determined using the Black-Scholes Model based on the following assumptions:

 

		November 12, 2015
Risk-free interest rate			2.32	%
Expected remaining term			10 Years
Expected volatility			157.56	%
Dividend yield			0	%

 

The initial fair values of the embedded derivative of $2,067,258 was allocated as a debt discount $2,067,258.

 

Fair value at December 31, 2015 was estimated to be $3,096,179 and based on the following assumptions:

 

		December 31, 2015
Risk-free interest rate			2.27	%
Expected remaining term			9.75 Years
Expected volatility			152.07	%
Dividend yield			0	%

 

During the year ended December 31, 2015, the increase in the fair value of the warrant derivative liability of $1,028,921 was recorded as a loss on change in fair value of derivative liability.

 

Fair value at March 31, 2016 was estimated to be $2,009,681 and based on the following assumptions:

 

		March 31, 2016
Risk-free interest rate			1.78	%
Expected remaining term			9.5 Years
Expected volatility			156.96	%
Dividend yield			0	%

 

During the period ended March 31, 2016, the decrease in the fair value of the warrant derivative liability of $1,086,498 was recorded as a gain on change in fair value of derivative liability.

 

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 aggregate basis.

 

Net sales attributed to customers in the United States and foreign countries for the period ended March 31, 2016 and 2015 were as follows:

 

		March 31, 2016				March 31, 2015
United States		$	8,198,083			$	1,600,249
Foreign countries			69,668				-
		$	8,267,751			$	1,600,249

 

The Company’s net sales by product group for the period ended March 31, 2016 and 2015 were as follows:

 

		March 31, 2016				March 31, 2015
Nutraceuticals		$	7,865,915			$	1,600,249
Over the Counter (OTC)			377,063				-
Cosmeceuticals			24,773				-
		$	8,267,751			$	1,600,249

 

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

 

 

Long-lived assets (net) attributable to operations in the United States and foreign countries as of March 31, 2016 and December 31, 2015 were as follows:

 

		March 31, 2016				December 31, 2015
United States		$	17,191,578			$	17,411,598
Foreign countries			16,385				12,081
		$	17,207,963			$	17,423,679

 

Note 17 – Acquisitions

 

In the Company’s Annual Report on Form 10-K, the following disclosure was made with regard to the Company’s initial allocation of the fair value of the assets and liabilities acquired in the FOCUSfactor acquisition.

 

“Note 3 – Acquisitions

 

Asset Purchase Agreement with Factor Nutrition Labs:

 

The Company has accounted for this transaction under the acquisition method of accounting. Under the acquisition method of accounting, the total acquisition consideration price is allocated to the assets acquired and liabilities assumed based on their preliminary estimated fair values based on the management’s estimates as of the date of the acquisition. The Company expects to retain the services of independent valuation firm to determine the fair value of these identifiable intangible assets. Once determined, the Company will reallocate the purchase price of the acquisition based on the results of the independent evaluation if they are materially different from the allocations as recorded on January 22, 2015. The Company expects the purchase price allocations for the acquisition of Focus Factor Business to be completed by the filing of first quarter 2016 statements.”

 

The Company has consulted with a valuation professional to assist in determining the fair value of the identifiable FOCUSfactor intangible assets. As a result of this work, the Company has increased the amount allocated to the FOCUSfactor indefinite-lived brand and patent by $450,000 and reduced the amount recorded to goodwill by an identical amount. This adjustment had no effect on the income statement. The Company believes that the restated amount of $1,450,000 properly states the fair value of the FOCUSfactor brand and patent.

 

Note 18 – Income Taxes

 

Income tax expense was $183,905 for the three months ended March 31, 2016, compared to $0 for the same period in 2015. The current provision is attributable to Australian operations and the current tax rate in effect in that country.

 

The total deferred tax asset is calculated by multiplying a domestic (US) 34% marginal tax rate by the cumulative net operating loss carryforwards (“NOL”). The Company currently has NOLs, which expire through 2035. The deferred tax asset related to the NOLs. Management has determined based on all the available information that a 100% valuation reserve is required.

 

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, change of ownership rules. If the Company has had a change in ownership the NOL’s would be limited as to the amount that could be utilized each year, based on the Code.

 

Note 19 – Subsequent Events

 

Management evaluated all activities of the Company through the issuance date of the Company’s unaudited condensed consolidated financial statements and concluded that no subsequent events have occurred that would require adjustments or disclosure into the unaudited condensed consolidated financial statements.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the results of operations and financial condition of Synergy for the three months ended March 31, 2016 and 2015, should be read in conjunction with the financial statements of Synergy, and the notes to those financial statements that are included elsewhere in this Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in our Form 10-K filed on March 31, 2016. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

Overview

 

The Company is in the business of marketing and distributing consumer branded products through various distribution channels primarily in the health and wellness industry. The Company’s strategy is to grow both organically and by future acquisition.

 

Our management’s discussion and analysis of our financial condition and results of operations are only based on Synergy’s current business. Our previous shell company’s results of operations are immaterial and will not be included in the discussion below. 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.

 

		March 31, 2016
Net income		$	2,810,476
Interest income			(3,924	)
Interest expense			431,264
Taxes			183,905
Depreciation			2,227
Amortization			818,049
EBITDA		$	4,241,997
Gain on change in fair value of derivative liability			(1,086,498	)
Stock-based compensation			302,641
One-time expenses for acquisitions			59,163
Gain on foreign currency translation and transaction			(94,084	)
Adjusted EBITDA		$	3,423,219

 

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 gain on change in fair value of derivative liability; stock-based compensation; one-time expenses for acquisitions; and the gain 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 Three months Ended March 31, 2016 and 2015

 

Revenue

 

For the three months ended March 31, 2016, we had revenue of $8,267,751 from sales of our products, as compared to revenue of $1,600,249 for the same period in 2015. This is primarily due to the acquisitions we completed during 2015.

 

Cost of Revenue

 

For the three months ended March 31, 2016, our cost of revenue was $2,036,577. Our cost of revenue for the three months ended March 31, 2015, was $605,282. This increase is also due to the acquisitions we completed during 2015.

 

 

Gross Profit

 

Gross profit was $6,231,174 for the three months ended March 31, 2016, as compared to gross profit of $994,967 for the same period in 2015.

 

Operating Expenses

 

Selling and Marketing Expenses

 

For the three months ended March 31, 2016, our selling and marketing expenses were $1,447,676 as compared to $733,589 for the same period in 2015, which is primarily due to marketing our various products in multiple media channels including print, television and online.

 

General and Administrative Expenses

 

For the three months ended March 31, 2016, our general and administrative expenses were $1,868,805. For the three months ended March 31, 2015, our operating expenses were $314,820. The increase is primarily due to the acquisitions completed during 2015 and having general costs now to run and manage each brand.

 

Depreciation and Amortization Expenses

 

For the three months ended March 31, 2016, our depreciation and amortization expenses were $278,637 as compared to $77,242 for the same period in 2015. The increase in 2016 is due to the acquisitions completed during 2015.

 

Other Income and Expenses

 

For the three months ended March 31, 2016 and 2015 we had other (income) and expense items of the following:

 

		Three months ended March 31, 2016				Three months ended March 31, 2015
Interest income		$	(3,924	)		$	-
Interest expense			431,264				171,393
Remeasurement gain on translation of foreign subsidiary			(240,806	)			-
Gain on change in fair value of derivative liability			(1,086,498	)			-
Amortization of debt discount			475,600				2,089,005
Amortization of debt issuance cost			66,039				27,321
Total		$	(358,325	)		$	2,287,719

 

For the three months ended March 31, 2016, we had interest expense of $431,264 as compared to $171,393 for the same period in 2015. The increase was due to the issuance of loans for the purpose of acquisitions of various companies during 2015. We also issued warrants along with the loans and paid debt issuance cost in 2015 which lead to the amortization of debt discount and debt issuance costs. We issued warrants with a reset provision in 2015 which lead to the calculation of warrant derivative liability and hence we recorded a gain on change in fair value of derivative liability. During 2015, we acquired a foreign subsidiary and thus recorded a remeasurement gain on the foreign currency translation.

 

Net Income (Loss)

 

For the three months ended March 31, 2016, our net income was $2,810,476, as compared to a net loss of ($2,418,404) for the same period in 2015.

 

Liquidity and Capital Resources

 

Overview

 

As of March 31, 2016, we had $3,763,085 cash on hand and a $4,446,866 working capital deficit. The deficit is largely due to a derivative liability for stock warrants outstanding of $2,009,681. In addition, we also had restricted cash of $158,142 which is comprised of $104,488 for a rolling reserve with Paypal, $3,693 in an escrow account and $50,000 for credit card collateral.

 

 

Going Concern

 

The Company’s unaudited condensed consolidated financial statements are prepared using U.S. GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company had accumulated deficit at March 31, 2016 of $5,759,365. The Company had a working capital deficit of $4,290,701 as of March 31, 2016. Due to acquisitions during 2015 of revenue-producing products, the Company believes it has established an ongoing source of revenue that is sufficient to cover its operating costs.

 

Management’s plans to continue as a going concern include raising additional capital through borrowing and sales of common stock. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Three months ended March 31, 2016 and 2015

 

Net Cash Provided by Operating Activities

 

Net cash provided by operating activities for the three months ended March 31, 2016 was $3,425,171, compared to $495,221 for the same period in 2015. This increase in net cash provided by operating activities for the three months ended March 31, 2016 was primarily attributable to an increase in net income due to the acquisitions in 2015 as well as the changes in operating assets and liabilities.

 

The $3,425,171 consists of our net income of $2,810,476 increased by:

 

Amortization of debt issuance cost		$	66,039
Depreciation and amortization			278,637
Stock based compensation			302,641
Amortization of debt discount			475,600
Change in fair value of derivative liability			(1,086,498	)
Remeasurement gain on translation of foreign subsidiary			(240,806	)
Non cash implied interest			42,717
Decrease in accounts receivable			2,361,207
Decrease in inventory			9,815
Increase in prepaid expenses			(80,433	)
Decrease in accounts payable and accrued expenses			(1,514,226	)

 

Net Cash Provided by (Used in) Investing Activities

 

Net cash provided by investing activities for the three months ended March 31, 2016 was $386,021, compared to net cash used of $4,501,654 for the same period in 2015. The increase in cash during 2016 is attributable to the release of restricted cash and the cash used in 2015 is attributable to the purchase of the Focus Factor assets.

 

Payments for acquisition of fixed assets		$	(62,921	)
Restricted cash			448,942

 

Net Cash (Used in) Provided by Financing Activities

 

Net cash used in financing activities for the three months ended March 31, 2016 was $3,689,000, compared to net cash provided of $5,722,140 for the same period in 2015. This is attributable to the repayment of notes during 2016 and the proceeds of the notes in 2015.

 

Repayment of notes payable		$	(1,137,500	)
Payment of earn out liability			(2,551,500	)

 

Key 2016 Initiatives

 

During 2016, we have plans for organic growth within our current product lines by developing and launching new products. We have new marketing campaigns in process and intend to expand our online presence for each product. While we intend to grow further through additional acquisitions, we feel it is important to also develop our existing products.

 

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual Obligations

 

None.

 

Off-Balance Sheet Arrangements

 

None.

 

Summary of Significant Accounting Policies

 

Basis of Presentation

 

The unaudited condensed 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. Significant estimates are assumptions about collection of accounts receivable, useful life of fixed and intangible assets, goodwill and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.

 

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 March 31, 2016, the Company had no cash equivalents.

 

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. Intangible assets are amortized on a straight line basis over the useful lives.

 

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 March 31, 2016, our qualitative analysis of long-lived assets did not indicate any impairment.

 

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 March 31, 2016, our qualitative analysis of goodwill did not indicate any impairment.

 

 

Revenue Recognition

 

The Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”). ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and/or service has been performed; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. The Company believes that these criteria are satisfied 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.

 

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.

 

Advertising Expense

 

The Company expenses marketing, promotions and advertising costs as incurred. Such costs are included in general and administrative 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 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.

 

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 foreign 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.

 

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 loss per share is anti-dilutive. As of March 31, 2016, options to purchase 5,000,000 shares of common stock and warrants to purchase 9,132,002 shares of common stock were outstanding. These potential shares were included in the shares used to calculate diluted earnings per share.

 

Going Concern

 

The Company’s unaudited condensed consolidated financial statements are prepared using U.S. GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company had accumulated deficit at March 31, 2016 of $5,759,365. The Company had a working capital deficit of $4,290,701 as of March 31, 2016. Due to acquisitions during 2015 of revenue-producing products, the Company believes it has established an ongoing source of revenue that is sufficient to cover its operating costs.

 

 

Management’s plans to continue as a going concern include raising additional capital through borrowing and sales of common stock. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

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 March 31, 2016, the Company has determined that there were no assets or liabilities measured at fair value, except for the warrant derivative liability.

 

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 market. Finished goods include the cost of labor to assemble the items.

 

Stock-Based Compensation

 

The Company adopted the provisions of ASC 718. We estimate the fair value of stock options using a binomial model, consistent with the provisions of ASC 718 and SEC Staff Accounting Bulletin No. 107, Share-Based Payment. Option-pricing models require the input of highly subjective assumptions, including the price volatility of the underlying stock. We determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, could reasonably be expected to be a better indicator of our expected volatility than historical volatility. The expected term assumption used in calculating the estimated fair value of our stock-based compensation awards using the Black-Scholes-Merton (BSM) model is based on detailed historical data about employees’ exercise behavior, vesting schedules, and death and disability probabilities. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised and cancelled. We believe the resulting BSM calculation provides a more refined estimate of the fair value of our employee stock options.

 

Foreign Currency Translation

 

The functional currency of each of the Company’s foreign subsidiary (Nomadchoice Pty Ltd.) is the U.S. Dollar. The Company’s foreign subsidiary maintains its record using local currency (Australian Dollar). All monetary assets and liabilities of the foreign subsidiary were translated into U.S. Dollars at quarter 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.

 

 

Concentrations of Credit Risk

 

In the normal course of business, the Company provides credit terms to its customers; however, collateral is not required. Accordingly, the Company performs credit evaluations of its customers and maintains 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 exists 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 any additional costs relating to assembly or special pack-outs of the Company products are charged to general and administrative expenses as incurred.

 

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 general and administrative expenses as incurred.

 

Warrant Derivative Liabilities

 

ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as described.

 

A Black-Scholes-Merton option-pricing model, with dilution effects, was utilized to estimate the fair value of the Warrant Derivative Liabilities as of March 31, 2016. This model is subject to the significant assumptions discussed below and requires the following key inputs with respect to the Company and/or instrument:

 

Input		March 31, 2016
Stock Price		$	0.45
Exercise Price		$	0.49
Expected Life (in years)			9.0
Stock Volatility			156.96	%
Risk-Free Rate			1.78	%
Dividend Rate			0	%
Outstanding Shares of Common Stock			4,547,243

 

Cost of Sales

 

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

 

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.

 

Impairment of Long-Lived Assets

 

When facts and circumstances indicate that the carrying values of long-lived assets, including fixed assets, may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the assets to projected future cash flows in addition to other quantitative and qualitative analyses. Upon indication that the carrying value of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value, less estimated costs to sell. The Company makes judgments related to the expected useful lives of long-lived assets and its ability to realize undiscounted cash flows in excess of the carrying amounts of such assets which are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions and changes in operating performance. As the Company assesses the ongoing expected cash flows and carrying amounts of its long-lived assets, these factors could cause the Company to realize a material impairment charge.

 

 

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, 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. All transactions with related parties shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to the related party.

 

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 aggregate basis.

 

Reclassification of Prior Period Presentation

 

Certain reclassifications have been made to conform the prior period data to the current presentations. These reclassifications had no effect on the reported results.

 

Recent Accounting Pronouncements

 

ASU 2016-01

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.

 

ASU 2015-17

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. Currently deferred taxes for each tax jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability on the balance sheet. To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with any related valuation allowances be classified as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company has adopted this guidance in the fourth quarter of the year ended December 31, 2015 on a retrospective basis. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations or cash flows, and did not have any effect on prior periods due to the full valuation allowance against the Company’s net deferred tax assets.

 

ASU 2015-16

 

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement –Period Adjustments. Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard is effective for both public and private companies for periods beginning after December 15, 2015. Adoption of this new standard did not have any material on the Company’s financial position, results of operations or cash flows.

 

 

ASU 2015-14

 

In August 2015, the FASB issued ASU No. 2015-14, Revenue From Contracts With Customers (Topic 606). The amendments in this ASU defer the effective date of ASU 2014-09. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are still evaluating the effect of the adoption of ASU 2014-09.

 

ASU 2015-11

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330). ASU 2015-11 simplifies the accounting for the valuation of all inventory not accounted for using the last-in, first-out (“LIFO”) method by prescribing that inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. We do not expect the adoption of ASU 2015-11 to have a material effect on our financial position, results of operations or cash flows.

 

ASU 2015-05

 

In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). ASU 2015-05 provides guidance regarding the accounting for a customer’s fees paid in a cloud computing arrangement; specifically about whether a cloud computing arrangement includes a software license, and if so, how to account for the software license. ASU 2015-05 is effective for public companies’ annual periods, including interim periods within those fiscal years, beginning after December 15, 2015 on either a prospective or retrospective basis. Early adoption is permitted. Adoption of this new standard did not have any impact on the Company’s financial position, results of operations or cash flows.

 

ASU 2015-07

 

In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”). This guidance eliminates the requirement to categorize investments within the fair value hierarchy if their fair value is measured using the net asset value (“NAV”) per share practical expedient in the FASB’s fair value measurement guidance. The new standard is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Adoption of this new standard did not have any impact on the Company’s financial position, results of operations or cash flows.

 

ASU 2015-03

 

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments are to be applied on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance. The Company reclassified debt issuance cost of $312,812 and $378,852 from other assets to liabilities and netted off with the related loans in the liabilities as of March 31, 2016 and December 31, 2015, respectively.

 

ASU 2015-02

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification and improves current U.S. GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (“VIE”), and changing consolidation conclusions for companies in several industries that typically make use of limited partnerships or VIEs. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. Adoption of this new standard did not have any impact on the Company’s financial position, results of operations or cash flows.

 

 

ASU 2015-01

 

In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates from U.S. GAAP the concept of extraordinary items. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. Adoption of this new standard did not have any impact on the Company’s financial position, results of operations or cash flows.

 

ASU 2014-17

 

In November 2014, the FASB issued ASU No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting. This ASU provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. ASU 2014-17 was effective on November 18, 2014. The adoption of ASU 2014-17 did not have any effect on our financial position, results of operations or cash flows.

 

ASU 2014-16

 

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815). ASU 2014-16 addresses whether the host contract in a hybrid financial instrument issued in the form of a share should be accounted for as debt or equity. ASU 2014-16 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We do not currently have issued, nor are we investors in, hybrid financial instruments. Accordingly, we do not expect the adoption of ASU 2014-16 to have any effect on our financial position, results of operations or cash flows.

 

ASU 2014-15

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). ASU 2014-15 provides guidance related to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosure. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for interim and annual periods thereafter. Early application is permitted. We do not expect the adoption of ASU 2014-15 to have a material effect on our financial position, results of operations or cash flows.

 

ASU 2014-12

 

In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Adoption of this new standard did not have any impact on the Company’s financial position, results of operations or cash flows.

 

ASU 2014-09

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. We are still evaluating the effect of the adoption of ASU 2014-09. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 by one year for all entities and permits early adoption on a limited basis. ASU 2014-09 will be effective for the Company in the first quarter of 2018, and early adoption permitted in the first quarter of 2017. The Company does not believe the adoption of this ASU will have a material impact on its financial position, results of operations or cash flows.

 

ASU 2014-08

 

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) and Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 amends the definition for what types of asset disposals are to be considered discontinued operations, as well as amending the required disclosures for discontinued operations and assets held for sale. ASU 2014-08 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2014. The adoption of ASU 2014-08 did not have any effect on our financial position, results of operations or cash flows.

 

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 condensed financial position, results of operations or cash flows.

 

 

ITEM 3. 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 the information required by this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) reviewed the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and concluded that as of March 31, 2016, (i) the Company’s disclosure controls and procedures were not effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “Commission”), and (ii) the Company’s controls and procedures have not been designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls Over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in connection with our evaluation of these controls as of the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Effectiveness of Controls

 

The Company’s management does not expect that its disclosure controls or its internal control over financial reporting, if effective, will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the 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. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

ITEM 1A. RISK FACTORS

 

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

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULT UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit Number		Description
31.1		Section 302 Certification by the Corporation’s Chief Executive Officer *
31.2		Section 302 Certification by the Corporation’s Chief Financial Officer *
32.1		Section 906 Certification by the Corporation’s Chief Executive Officer *
32.2		Section 906 Certification by the Corporation’s Chief Financial Officer *
101.INS		XBRL Instance Document* **
101.SCH		XBRL Taxonomy Extension Schema Document* **
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document* **
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document* **
101.LAB		XBRL Taxonomy Extension Label Linkbase Document* **
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document* **

 

	*	Filed herewith
	**	Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Signatures		Title		Date
/s/ Jack Ross		Chief Executive Officer and Chief Financial Officer		April 25, 2016