The following discussion and analysis of the results of operations and financial
condition of Synergy for the three months ended March 31, 2020 and 2019, should
be read in conjunction with the unaudited condensed consolidated financial
statements of Synergy, and the notes to those unaudited condensed consolidated
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 caption,
"Cautionary Note Regarding Forward-Looking Statements" and the "Business"
section in our Form 10-K filed on April 29, 2020. 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 our current business and should be read in
conjunction with our unaudited condensed consolidated financial statements. 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.
For the three
months ended
March 31, 2020
Net income after tax $ 262,303
Interest income (66 )
Interest expense 158,522
Taxes 285,540
Depreciation 26,152
Amortization 21,450
EBITDA $ 753,901
One Time Expenses - Listing Fees 15,077
Bad debts recovery (170,309 )
Accounts payable write off (180,000 )
Stock-based compensation 38,679
Loss on foreign currency translation and transaction 389,845
Adjusted EBITDA $ 847,193
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 other activity and certain expenses and
transactions that we believe are not representative of our core operating
results, including stock-based compensation; one-time expenses/incomes; and the
gain/loss on foreign currency translation and transaction. The Company's
definitions of EBITDA and adjusted EBITDA might not be comparable to similarly
titled measures reported by other companies.
Results of Operations for the Three months Ended March 31, 2020 and 2019
Revenue
For the three months ended March 31, 2020, we had revenue of $6,117,286 from
sales of our products, as compared to revenue of $9,468,955 for the same period
in 2019. We had a decrease in Nutraceuticals in 2020 as compared to 2019 due to
lower online sales due to the shift from online to retail and 2019 being the
launch year of some new products. We had an increase in Over the Counter in 2020
as compared to 2019 due to regular business fluctuations. We had an increase in
Consumer Goods in 2020 as compared to 2019 due to a shift in business focus. We
had a decrease in Cosmeceuticals in 2020 as compared to 2019 due to a shift in
business focus. The revenue is comprised of the following categories:
March 31, 2020 March 31, 2019
Nutraceuticals $ 5,766,691 $ 9,055,444
Over the Counter (OTC) 22,310 8,332
Consumer Goods 302,897 157,623
Cosmeceuticals 25,388 247,556
$ 6,117,286 $ 9,468,955
25
Cost of Revenue
For the three months ended March 31, 2020, our cost of revenue was $1,497,779.
Our cost of revenue for the three months ended March 31, 2019, was $2,540,450.
We had a decrease in Nutraceuticals in 2020 as compared to 2019 due to lower
sales and a different mix of products being sold. We had an increase in Consumer
Goods in 2020 as compared to 2019 due to an increase in revenue. We had a
decrease in Cosmeceuticals in 2020 as compared to 2019 due to a shift in
business focus. The cost of revenue is comprised of the following categories:
March 31, 2020 March 31, 2019
Nutraceuticals $ 1,425,274 $ 2,472,115
Over the Counter (OTC) - -
Consumer Goods 69,047 13,784
Cosmeceuticals 3,458 54,551
$ 1,497,779 $ 2,540,450
Gross Profit
Gross profit was $4,619,507, or 76% for the three months ended March 31, 2020,
as compared to gross profit of $6,928,505, or 73% for the same period in 2019, a
decrease of $2,308,998, or 33%. The decrease in gross profit margin is directly
related to the mix of products being sold.
Operating Expenses
Selling and Marketing Expenses
For the three months ended March 31, 2020, our selling and marketing expenses
were $2,253,956 as compared to $3,311,867 for the same period in 2019, which is
primarily due to decreased personnel in our advertising and marketing
departments.
General and Administrative Expenses
For the three months ended March 31, 2020, our general and administrative
expenses were $1,333,524. For the three months ended March 31, 2019, our general
and administrative expenses were $1,487,107. The decrease is primarily due to
better management of operating costs.
Depreciation and Amortization Expenses
For the three months ended March 31, 2020, our depreciation and amortization
expenses were $26,845 as compared to $306,275 for the same period in 2019. The
decrease is due to impairment of intangible assets in 2019.
Other Income and Expenses
For the three months ended March 31, 2020 and 2019 we had other (income) and
expense items of the following:
Three months Three months
ended ended
March 31, 2020 March 31, 2019
Interest income $ (66 ) $ (111 )
Interest expense 158,522 340,128
Remeasurement loss (gain) on translation of
foreign subsidiary 278,126 (16,508 )
Amortization of debt issuance cost 20,757 38,368
Total other expense $ 457,339 $ 361,877
For the three months ended March 31, 2020, we had interest expense of $158,522
as compared to $340,128 for the same period in 2019. The decrease was due to
decrease in the interest rate of Loan 3 from 15.5% to 13% and decrease in the
outstanding principal balance.
Net Income
For the three months ended March 31, 2020, our net income was $262,303 as
compared to a net income of $1,467,287 for the same period in 2019.
Liquidity and Capital Resources
Overview
As of March 31, 2020, we had $314,933 cash on hand and a $4,444,249 working
capital deficit. In addition, we also had restricted cash of $100,000 which is
held for credit card collateral.
26
Presentation of Financial Statements - Going Concern
Going Concern Evaluation
In connection with preparing unaudited condensed consolidated financial
statements for the three months ended March 31, 2020, management evaluated
whether there were conditions and events, considered in the aggregate, that
raised substantial doubt about the Company's ability to continue as a going
concern within one year from the date that the financial statements are issued.
The Company considered the following:
? At March 31, 2020, the Company had an accumulated deficit of $23,972,266.
? At March 31, 2020, the Company had working capital deficit of $4,444,249.
? Revenue decline in 2020 as compared to 2019 of $3,351,669.
? During the three months ended March 31, 2020, the Company used cash in
operating activities of $1,302,062.
? The Company is required to make repayment of loans payable of $500,000 and
accrued interest during the three months ended March 31, 2020.
Ordinarily, conditions or events that raise substantial doubt about an entity's
ability to continue as a going concern relate to the entity's ability to meet
its obligations as they become due.
The Company evaluated its ability to meet its obligations as they become due
within one year from the date that the financial statements are issued by
considering the following:
? The Company raised $10.0 million via debt financing during the year ended
December 31, 2017.
? Subsequent to March 31, 2020, the Company raised $2.5 million via debt
financing.
? During the three months ended March 31, 2020, the Company repaid $12,500 of
loans. Subsequent to March 31, 2020, the Company repaid $500,000 of loans.
? The Company generated net income of $262,303 for the three months ended March
31, 2020.
? Working capital deficit of $4,444,249 at March 31, 2020, includes loans
payables to related party of $5,486,377, payables to related party of $839,124
and deferred revenue of $17,137.
? The Company has line of credit facility of $20 million available from its
current lender for future mergers and acquisition.
? Subsequent to March 31, 2020, the Company has secured distribution of a new
hand sanitizer product under its Hand MD brand in Canada.
Management concluded that above factors alleviates doubts about the Company's
ability to generate enough cash from operations and other available sources to
satisfy its obligations for the next twelve months from the issuance date.
The Company will take the following actions if it starts to trend unfavorably to
its internal profitability and cash flow projections, in order to mitigate
conditions or events that would raise substantial doubt about its ability to
continue as a going concern:
? Raise additional capital through line of credit and/or loans financing for
future mergers and acquisition, which may be impacted by the recent outbreak of
COVID-19.
? Implement additional restructuring and cost reductions.
? Raise additional capital through a private placement, which may be impacted by
the recent outbreak of COVID-19.
As of June 29 , 2020 and March 31, 2020, the Company had $2,098,237 and
$414,933, respectively, in cash and cash equivalents.
Three months ended March 31, 2020 and 2019
Net Cash Used in Operating Activities
Net cash used in operating activities for the three months ended March 31, 2020
was $(1,302,062), compared to net cash provided by operating activities of
$813,711 for the same period in 2019. This decrease in net cash provided by
operating activities for the three months ended March 31, 2020 was primarily
attributable to an increase in accounts receivable and decrease in accounts
payable and accrued expenses.
The $(1,302,062) consists of our net income of $262,303 adjusted by:
Amortization of debt issuance cost $ 20,756
Depreciation and amortization 26,845
Stock based compensation 38,679
Non cash implied interest 9,299
Remeasurement loss on translation of foreign subsidiary 275,237
Foreign currency transaction loss 114,608
Reversal of allowance for doubtful accounts (170,309 )
Gain on write-off of payables (180,000 )
Increase in accounts receivable (1,259,338 )
Increase in accounts receivable, related party (193,552 )
Decrease in inventory 146,942
Decrease in prepaid expenses 4,534
Decrease in income tax receivable 251,614
Increase in income tax payable 164,338
Decrease in accounts payable and accrued liabilities (635,464 )
Decrease in accounts payable and accrued liabilities, related party (187,804 )
Increase in deferred revenue 9,250
Net Cash Used in Investing Activities
Net cash used in investing activities for the three months ended March 31, 2020
was $0, compared to net cash used of $0 for the same period in 2019.
Net Cash Used in Financing Activities
Net cash provided by financing activities for the three months ended March 31,
2020 was $57,990, compared to net cash used of $512,500 for the same period in
2019.
Repayment of notes payable $ (12,500 )
Advances from related party 70,490
Key 2020 Initiatives
During 2020, 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.
The recent outbreak of COVID-19, which has been declared by the World Health
Organization to be a pandemic, has spread across the globe and is impacting
worldwide economic activity. A pandemic, including COVID-19, or other public
health epidemic poses the risk that the Company or its employees, suppliers, and
other partners may be prevented from conducting business activities at full
capacity for an indefinite period of time, including due to spread of the
disease within these groups or due to shutdowns that may be requested or
mandated by governmental authorities. While it is not possible at this time to
estimate the impact that COVID-19 could have on the Company's business, the
continued spread of COVID-19 and the measures taken by the governments of
countries affected and in which the Company operates could disrupt the operation
of the Company's business. The COVID-19 outbreak and mitigation measures may
also have an adverse impact on global economic conditions, which could have an
adverse effect on the Company's business and financial condition, including on
its potential to conduct financings on terms acceptable to the Company, if at
all. In addition, the Company may take temporary precautionary measures intended
to help minimize the risk of the virus to its employees, including temporarily
requiring all employees to work remotely, and discouraging employee attendance
at in-person work-related meetings, which could negatively affect the Company's
business. The extent to which the COVID-19 outbreak impacts the Company's
results will depend on future developments that are highly uncertain and cannot
be predicted, including new information that may emerge concerning the severity
of the virus and the actions to contain its impact.
27
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
None.
Off-Balance Sheet Arrangements
None.
Inflation
The effect of inflation on the Company's operating results was not significant.
Summary of Significant Accounting Policies
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities, the disclosure of contingent assets and liabilities and
the reported amounts of revenue and expenses during the reported periods. The
more critical accounting estimates include estimates related to revenue
recognition and accounts receivable allowances. We also have other key
accounting policies, which involve the use of estimates, judgments and
assumptions that are significant to understanding our results, which are
described in Note 2 to our unaudited condensed consolidated financial statements
appearing elsewhere in this report.
Recent Accounting Pronouncements
Note 2 to our unaudited condensed consolidated financial statements appearing
elsewhere in this report includes Recent Accounting Pronouncements.
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