UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended:
or
For the transition period from ____________ to _____________
Commission File Number:
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | ||
| Smaller reporting company | |||
| Emerging growth company |
If an emerging growth company, indicate by check
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provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 18, 2023, there were
Smart for Life, Inc.
Quarterly Report on Form 10-Q
Period Ended June 30, 2023
TABLE OF CONTENTS
| PART I | ||
| FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements (Unaudited) | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 39 |
| Item 4. | Controls and Procedures | 39 |
| PART II | ||
| OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 40 |
| Item 1A. | Risk Factors | 40 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 40 |
| Item 3. | Defaults Upon Senior Securities | 40 |
| Item 4. | Mine Safety Disclosures | 40 |
| Item 5. | Other Information | 40 |
| Item 6. | Exhibits | 41 |
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SMART FOR LIFE, INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1
SMART FOR LIFE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2023 AND DECEMBER 31, 2022
June
30, | December 31, 2022 | |||||||
| (Unaudited) | (As adjusted) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Deposits and other assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Accrued expenses, related parties | ||||||||
| Deferred revenue | ||||||||
| Preferred stock dividends payable | ||||||||
| Operating lease liability, current | ||||||||
| Debt, current, net of debt discounts | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Operating lease liability, noncurrent | ||||||||
| Debt, noncurrent, net of debt issuance cost | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $ | ||||||||
| Series A Convertible Preferred Stock, $ | ||||||||
| Series B Preferred Stock, $ | ||||||||
| Common Stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ( | ) | ||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
2
SMART FOR LIFE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | ||||||||||||||||
| Products | $ | $ | $ | $ | ||||||||||||
| Advertising | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Products | ||||||||||||||||
| Advertising | ||||||||||||||||
| Total cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Compensation – administrative | ||||||||||||||||
| Professional services | ||||||||||||||||
| Consulting fees – related parties | ||||||||||||||||
| Impairment of intangible assets | ||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Other income (expense) | ( | ) | ||||||||||||||
| Gain on debt extinguishment | ||||||||||||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Series A preferred stock dividends | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to common stockholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
3
SMART FOR LIFE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(UNAUDITED)
For the Three and Six Months Ended June 30, 2023
| Preferred Stock | Common Stock | Additional Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Conversion of notes and interest | — | |||||||||||||||||||||||||||
| Conversion of preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||
| Stock issued for services | — | |||||||||||||||||||||||||||
| Conversion of board fees | — | |||||||||||||||||||||||||||
| Conversion of accrued compensation | — | |||||||||||||||||||||||||||
| Exercise of warrants | — | |||||||||||||||||||||||||||
| Shares issued for cash, net | — | |||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
For the Three and Six Months Ended June 30, 2022
| Preferred Stock | Common Stock | Additional Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance, January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Stock issued for cash with initial public offering | ||||||||||||||||||||||||||||
| Series A warrants issued in connection with initial public offering | ||||||||||||||||||||||||||||
| Series B warrants in connection with initial public offering | ||||||||||||||||||||||||||||
| Warrants issued in connection with debt | ||||||||||||||||||||||||||||
| Stock issued upon exercise of Series B Warrants | ( | ) | ||||||||||||||||||||||||||
| Stock issued upon conversion of convertible notes | ||||||||||||||||||||||||||||
| Stock issued in connection with acquisition | — | — | ||||||||||||||||||||||||||
| Stock issued for conversion of accounts payable | — | |||||||||||||||||||||||||||
| Stock issued for services | ||||||||||||||||||||||||||||
| Stock issued upon conversion of preferred stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Common stock issued under future equity agreements | ||||||||||||||||||||||||||||
| Preferred stock dividend payable | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2022 | ( | ) | ||||||||||||||||||||||||||
| Common stock issued upon conversion of promissory note | — | |||||||||||||||||||||||||||
| Common stock issued upon option exercise | — | |||||||||||||||||||||||||||
| Preferred stock dividend payable | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Change in derivative liability | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4
SMART FOR LIFE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(UNAUDITED)
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Debt issuance cost | ||||||||
| Discount on debt obtained | ||||||||
| Depreciation and amortization expense | ||||||||
| Gain on extinguishment of debt | ( | ) | ( | ) | ||||
| Impairment on intangible assets | ||||||||
| Stock-based compensation | ||||||||
| Interest expense associated with warrants issued with debt | ||||||||
| Interest expense associated with future equity agreements | ||||||||
| Non-cash financing expenses – stock issued for services | ||||||||
| Non-cash operating lease costs, net | ||||||||
| Change in value of derivative liability | ||||||||
| Provision for bad debt | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Deposits and other assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Accrued expenses, related parties | ||||||||
| Deferred revenue | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Deposit on acquisition | ( | ) | ||||||
| Additions to property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Receipts from related parties | ||||||||
| Payments to related parties | ( | ) | ||||||
| Proceeds from initial public offering | ||||||||
| Proceeds from issuance of common stock, net | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from debt | ||||||||
| Repayments on debt | ( | ) | ( | ) | ||||
| Payment of fees from issuance of common stock | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Interest paid | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Stock issued for conversion of accounts payable | $ | $ | ||||||
| Stock issued for conversion of accrued compensation | $ | $ | ||||||
| Stock issued for conversion of convertible notes and interest | $ | $ | ||||||
| Stock issued for exercise of warrants | $ | $ | — | |||||
| Conversion of notes payable to accrued expenses | $ | $ | ||||||
| Conversion of interest to notes payable | $ | $ | ||||||
| Stock issued for conversion of accrued board fees | $ | $ | ||||||
| Equipment obtained with financing | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
5
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
Note 1 — Description of Business
Smart for Life, Inc., formerly Bonne Santé Group, Inc. (“SMFL”), is a Nevada corporation which was formed on February 2, 2017. Structured as a global holding company, it is engaged in the development, marketing, manufacturing, acquisition, operation and sale of a broad spectrum of nutraceutical and related products with an emphasis on Health & Wellness.
On
March 8, 2018, SMFL acquired
On
July 1, 2021, SMFL acquired
On August 24, 2021, Smart for Life Canada Inc. (“DSO Canada”) was established as a wholly owned subsidiary of Doctors Scientific Organica, LLC in Canada. SMFL Canada sells retail products through a retail store location in Montreal Canada and the same location also acts as distribution center for international direct to consumer and big box customers. It maintains inventory and employees at this location.
On
November 8, 2021, SMFL acquired
On
December 6, 2021, SMFL acquired
On
July 29, 2022, SMFL acquired
On
August 15, 2022, SMFL entered into a joint venture with a seller of Ceautamed to form Smart Acquisition Group, LLC. This subsidiary is
6
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
Note 2 — Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements reflect the consolidated operations of SMFL and its wholly owned subsidiaries BSNM, DSO, DSO Canada, Nexus, GSP, and Ceautamed (collectively the “Company”) and are prepared in the United States Dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
The Company’s fiscal year end is December 31. The Company uses the accrual method of accounting. The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements. The December 31, 2022 balance sheet has been derived from audited consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements for the three and six months ended June 30, 2023 and 2022 have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.
The unaudited financial information included in this report includes all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods. The results of operations for the six months ended June 30, 2023 are not necessarily indicative of the results of the full fiscal year.
The condensed consolidated financial statements included in this report should be read in conjunction with the financial statements and notes thereto included in the Company’s financial statements for the fiscal year ended December 31, 2022.
The December 31, 2022 condensed consolidated
balance sheet reflected within the accompanying condensed consolidated financial statements reflects a change for a correction of an
immaterial error. The error pertains to the classification of assets acquired in the acquisitions of Nexus and Ceautamed. A reclassification
of $
On
April 24, 2023, the Company effected a 1-for-50 reverse stock split. As a result of this reverse split, the Company’s issued and
outstanding common stock decreased from
On August 2, 2023, the Company effected a 1-for-3
reverse stock split. As a result of this reverse split, the Company’s issued and outstanding common stock decreased from
Liquidity, Capital Resources and Going Concern
The accompanying condensed consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. The Company has sustained recurring losses and
has a deficiency in working capital of approximately $
Going concern
The Company’s unaudited condensed consolidated
financial statements have been prepared in accordance with US GAAP applicable to a going concern, which assumes that the Company will
be able to meet its obligations and continue its operations in the normal course of business. At June 30, 2023 the Company has a working
capital deficiency of approximately $
The Company will be dependent upon the raising of additional capital through placement of common shares, and/or debt financing in order to implement its business plan and generating sufficient revenue in excess of costs. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. These unaudited condensed consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
7
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates include, among other items, assessing the collectability of receivables, the realization of deferred taxes, useful lives and recoverability of tangible and intangible assets, assumptions used in the valuation of options, the computation of revenue based on the proportional delivery of services, and accruals for commitments and contingencies. Some of these estimates can be subjective and complex and, consequently, actual results could differ materially from those estimates.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three (3) months or less to be cash equivalents. At June 30, 2023 and December 31, 2022, there were no cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
The
Company’s allowance for doubtful accounts represents the Company’s estimate for uncollectible receivables based on a review
of specific accounts and the Company’s historical collection experience. The Company writes off specific accounts based on an ongoing
review of collectability, as well as management’s past experience with the customers. Accounts receivables are presented net of
an allowance for doubtful accounts of $
Inventory
Inventory consists of raw materials, packaging materials, and finished goods and is valued at the lower of cost (first-in, first-out) (replacement cost or net realizable value). An allowance for inventory obsolescence is provided for slow moving or obsolete inventory to write down historical cost to net realizable value. The Company primarily performs its manufacturing for functional foods and nutraceuticals in the form of bars, cookies, powders, tablets and capsules.
The allowance for obsolescence is an estimate established through charges to cost of goods sold. Management’s judgment in determining the adequacy of the allowance is based upon several factors which include, but are not limited to, analysis of slow-moving inventory, analysis of the selling price of inventory, the predetermined shelf life of the product, and management’s judgment with respect to current economic conditions. Given the nature of the inventory, it is reasonably possible the Company’s estimate of the allowance for obsolescence will change in the near term.
Property and Equipment
Property and equipment are recorded at cost. Expenditures
for major betterments and additions are charged to the asset accounts, while replacements, maintenance and repairs which do not improve
or extend the lives of the respective assets are charged to expense as incurred. The Company provides for depreciation and amortization
over the estimated useful lives of various assets using the straight-line method ranging from
Goodwill
The Company allocates goodwill to reporting units based on the reporting unit expected to benefit from the business combination. The Company evaluates its reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on December 31 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
No goodwill impairments were recognized during the three and six months ended June 30, 2023 and 2022.
Intangible Assets
Intangible
assets consist of customer contracts, developed technology, non-compete agreements, license agreements, and intellectual property acquired
in the acquisitions of BSNM, DSO, Nexus, GSP, and Ceautamed. The Company amortizes intangible assets with finite lives on a straight-line
basis over their estimated useful lives which ranges from
8
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
Long-Lived Assets
The Company assesses potential impairments to
its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may
not be recovered. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of
assets) is less than its carrying amount. Any required impairment loss is measured as the amount by which the asset’s carrying value
exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. The
Company recognized an impairment related to the affiliate relationships associated with the Nexus subsidiary of $
Lease Right-of-Use Assets and Liabilities
The Company records a right-of-use (“ROU”) asset and lease liability on the condensed consolidated balance sheets for all leases with terms longer than 12 months. Leases are classified either as finance or operating with the classification affecting the pattern of expense recognition.
Related Parties
The Company follows Accounting Standards Codification (“ASC”) 850, “Related Party Disclosures,” for the identification of related parties and disclosure of related party transactions (see Note 12).
Debt Issuance Costs
In accordance with ASC 835-30, Other Presentation Matters, the Company has reported debt issuance cost as a deduction from the carrying amount of debt and amortizes these costs using the effective interest method over the term of the debt as interest expense.
Fair Value Measurement
Under ASC Topic 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). ASC Topic 820 establishes a hierarchy for inputs to valuation techniques used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that reflect assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. There are three levels to the hierarchy based on the reliability of inputs, as follows:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets and liabilities in markets that are not active.
Level 3 - Unobservable inputs for the asset or liability. The degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3.
The Company’s cash and cash equivalents are measured using Level 1 inputs and include cash on hand, deposits in banks, certificates of deposit and money market funds. Due to their short-term nature, the carrying amounts reported in the consolidated balance sheets approximate the fair value of cash and cash equivalents.
The fair value of debt is classified as Level 2, based on the nature of the debt and terms of the agreements.
The Company has certain assets that are measured at fair value on a non-recurring basis including those described in Note 6 —Intangible Assets, and are adjusted to fair value only when the carrying values are more than the fair values. The categorization of the framework used to price the assets is considered a Level 3 measurement due to the subjective nature of the unobservable inputs used to determine the fair value.
Certain nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The estimated fair value of financial instruments is determined using the best available market information and appropriate valuation methodologies. Considerable judgment is necessary, however, in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange, or the value that ultimately will be realized upon maturity or disposition. In the evaluation of the estimated value of such assets, data for determining the value of the estimates are utilized based on the relevant facts and circumstances. The use of different market assumptions may have a material effect on the estimated fair value amounts.
9
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
Revenue Recognition
The Company evaluates and recognizes revenues by:
| ● | identifying the contract(s) with the customer, |
| ● | identifying the performance obligations in the contract, |
| ● | determining the transaction price, |
| ● | allocating the transaction price to performance obligations in the contract; and |
| ● | recognizing revenue as each performance obligation is satisfied through the transfer of a promised good or service to a customer (i.e., “transfer of control”). |
Products (BSNM, DSO, GSP, and Ceautamed)
The Company generates product revenues by manufacturing and packaging of nutraceutical products as a contract manufacturer for customers. The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company records deferred revenues for prepaid amounts from customers due to no performance obligations being met at such time. The Company did not have any material unsatisfied performance obligations at June 30, 2023 or December 31, 2022.
Distribution expenses to transport the Company’s products, where applicable, and warehousing expense after manufacture are accounted for within operating expenses.
Advertising /Marketing (Nexus)
Nexus generates advertising revenue when sales of listed products are sold by product vendors through its network as a result of the marketing efforts of digital marketers. The products on the network come from several different customers, which pay Nexus a specific amount per sale, the amount of which is dictated by the customer. The revenue is recognized upon the sale of a product by the customer, net of fraudulent traffic or disputed transactions. A portion of the specific amount received by Nexus for that sale is paid out to the digital marketer as a commission, which is recorded in cost of sales.
Nexus’ general payment terms are short-term in duration. Nexus does not have significant financing components or payment terms. Nexus did not have any material unsatisfied performance obligations at June 30, 2023 or December 31, 2022.
Freight
Freight costs are recorded in cost of goods sold
as incurred. Freight costs for the six months ended June 30, 2023 and 2022, freight costs amounted to $
Advertising
Advertising costs are expensed as incurred. Advertising costs for the
six months ended June 30, 2023 and 2022 were $
Paycheck Protection Program
The Company records Paycheck Protection Program (“PPP”) loan proceeds in accordance with ASC 470, Debt. Debt is extinguished when either the debtor pays the creditor or the debtor is legally released from being the primary obligor, either judicially or by the creditor.
Stock-based Compensation
The Company recognizes expense for stock options and warrants granted over the vesting period based on the fair value of the award at the grant date and valued using a Black-Scholes option pricing model to determine the fair market value of the stock options and warrants. Forfeitures are reduced from options and warrants outstanding and the Company calculates the amount of tax benefit available by tracking each stock option award on an employee-by-employee basis and on a grant-by-grant basis. The Company then compares the recorded expense to the tax deduction received for each stock option and warrant grant. The Company’s policy is to recognize forfeitures as they occur.
10
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
Income Taxes
The Company accounts for income taxes under the provisions of ASC 740, Income Taxes. The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. At June 30, 2023 and December 31, 2022, the Company had no liabilities for uncertain tax positions. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. The Company’s tax years subject to examination by tax authorities generally remain open for three (3) years from the date of filing.
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. Due to the continued losses, the Company has recorded a full valuation allowance at the end of June 30, 2023 and December 31, 2022.
Employee Retention Credits
In accordance with the 2022 CARES Act, the Company
filed for Employee Retention Credits for applicable periods in 2020 and 2021. As amounts to be refunded are subject to IRS calculations,
and the timing for processing of the credits are unknown, the Company recognizes as other income amounts refunded upon the receipt of
the payment. During the six months ended June 30, 2023 and 2022 the Company received $
Net Loss Per Share
Basic and diluted net loss per share of common stock for the three
and six months ended June 30, 2023, and 2022 was determined by dividing net loss by the weighted average shares of common stock outstanding
during the period. The Company’s potentially dilutive shares, consisting of
Recent Accounting Standards Not Yet Adopted
On August 5, 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06, “Debt – Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40),” which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in GAAP. This ASU is effective for fiscal years beginning after December 31, 2023. The Company is evaluating the impact the adoption will have on the financial statements.
Note 3 — Correction of Prior Period Immaterial Errors
The Company has identified immaterial errors in the Company’s previously issued consolidated financial statements related to intangible assets and goodwill. The error pertains to the classification of assets acquired in the acquisition of Nexus, whereby intangible assets, and the value of such assets, were overstated and goodwill was understated.
In evaluating whether the previously issued Consolidated Financial Statements were materially misstated for the interim or annual periods prior to December 31, 2022, the Company applied the guidance of ASC 250, Accounting Changes and Error Corrections, SEC Staff Accounting Bulletin (“SAB”) Topic 1.M, Assessing Materiality and SAB Topic 1.N, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements and concluded that the effect of the errors on prior period annual financial statements was immaterial. The guidance states that prior-year misstatements which, if corrected in the current year would materially misstate the current year’s financial statements, must be corrected by adjusting prior year financial statements, even though such correction previously was and continues to be immaterial to the prior-year financial statements. Correcting prior-year financial statements for such immaterial misstatements does not require previously filed reports to be amended.
The adjustments required to correct the misstatement
in the financial statements for the year ended December 31, 2022 are reflected in the consolidated balance sheet. The amount of the reclassification
is $
As a result of the misstatement pertaining to the reclassification of the
intangible assets, the Company noted an immaterial error associated with the recording of amortization expense. The Company recorded an
error $
11
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
The Company also reclassified $
The Company’s consolidated balance sheets have been revised from the amounts previously reported to correct the error and the impact of the purchase price allocation change as shown in the table below. See Note 6.
| As Previously Reported | PPA Finalization | Corrections | As Adjusted | |||||||||||||
| Intangible assets, net | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Goodwill | ||||||||||||||||
| As Previously Reported | PPA Finalization | Corrections | As Adjusted | |||||||||||||
| Intangible assets, net | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Goodwill | ||||||||||||||||
Note 4 — Inventory
| June 30, 2023 | December 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Packaging materials | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
Note 5 — Property and Equipment
| Estimated Useful Lives (in Years) | June 30, 2023 | December 31, 2022 | |||||||||
| Furniture and fixtures | $ | $ | |||||||||
| Equipment – manufacturing | |||||||||||
| Building and equipment | |||||||||||
| Leasehold improvements | |||||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | |||||||
| Property and equipment, net | $ | $ | |||||||||
12
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
Depreciation
and amortization expense for the six months ended June 30, 2023 and 2022 totaled $
Note 6 — Intangible Assets
| Estimated Useful Lives (in Years) |
June 30, 2023 |
December 31, 2022 (Restated) |
||||||||
| Customer contracts | $ | $ | ||||||||
| Developed technology | ||||||||||
| Non-compete agreements | ||||||||||
| Patents | ||||||||||
| Tradename | ||||||||||
| Supplier contracts | ||||||||||
| Licenses agreements | ||||||||||
| Total intangible assets | ||||||||||
| Less: amortization | ( |
) | ( |
) | ||||||
| Intangibles, net | $ | $ | ||||||||
The allocation of the Nexus purchase price in 2021 to intangibles assets,
including customer contracts and non-compete agreements, was based on provisional valuations performed to estimate the fair value of the
assets as of the acquisition date. During the three months ended June 30, 2023, the Company noted that an immaterial error existed in
the recording of the allocation of the intangible assets and has reclassified $
The allocation of the Ceautamed purchase price
in 2022 to intangibles assets, including customer contracts and non-compete agreements, was based on provisional valuations performed
to estimate the fair value of the assets as of the acquisition date. The Company engaged a independent valuation firm to perform a purchase
price allocation, noting differences in the intangible assets and values. The independent valuation resulted in reclassification of the
assets which have been represented in the December 31, 2022 balances. Additionally, $
| December 31, 2022 previously reported | PPA Adjustments | December 31, 2022 (As Adjusted) | ||||||||||
| Customer contracts | ( | ) | ||||||||||
| Developed technology | ||||||||||||
| Non-compete agreements | ( | ) | ||||||||||
| Patents | ||||||||||||
| Tradename | ||||||||||||
| Intellectual property | ( | ) | ||||||||||
| Supplier contracts | ||||||||||||
| Licenses agreements | ||||||||||||
| Total intangible assets | ( | ) | ||||||||||
13
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
As a result of decreased revenues within the Nexus subsidiary during
the six months ended June 30, 2023, which are not expected to recover to similar levels, the Company determined that a triggering event
occurred requiring an impairment analysis in accordance with ASC 360. The impairment analysis resulted in the Company recognizing an impairment
of the affiliate relationship asset associated with Nexus of $
Amortization for the six months ended June 30,
2023 and 2022 was $
| Years Ending December 31: | ||||
| 2023 (remainder of year) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
Note 7 — Leases
Leases Involving Real Estate
Leases
of distribution and manufacturing facilities, customer support centers and the Company’s corporate headquarters have lease terms
that generally range from
Rental payments on these leases typically provide for fixed minimum payments that increase over the lease term at predetermined amounts. Certain leases of real estate provide for rental increases based on the consumer price index (“CPI”), which are included in the Company’s measurement of lease payments based on the rate or index in effect at lease commencement, and are therefore included in the measurement of the lease liabilities.
Leases Involving Equipment
Equipment
leases have lease terms that generally range from less than
Financial Information
| Balance Sheet classification | June 30, 2023 | December 31, 2022 | ||||||||
| Right of use assets Operating leases | Operating leases right-of-use asset | $ | $ | |||||||
| Lease liabilities | ||||||||||
| Current | ||||||||||
| Operating leases | Operating lease liabilities, current portion | |||||||||
| Noncurrent | ||||||||||
| Operating leases | Operating lease liabilities, non-current portion | |||||||||
| Total lease liabilities | $ | $ | ||||||||
| Income Statement Classification | June 30, 2023 | June 30, 2022 | ||||||||
| Rent expense | General and administration | $ | $ | |||||||
14
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
| Operating leases |
||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | |||
| Operating leases | ||||
| Weighted average remaining term (in years) | ||||
| Weighted average discount rate | % | |||
| Operating leases | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total payments | ||||
| Less: interest | ( | ) | ||
| Present value of lease liability | ||||
| Less: Current portion of lease liabilities | ( | ) | ||
| Noncurrent portion of lease liabilities | $ | |||
Note 8 — Debt
Original Issue Discount Subordinated Debentures
In June 2022, the Company commenced offerings
of original issue discount subordinated debentures. As of June 30, 2023, the Company has completed multiple closings and issued debentures
in the aggregate principal amount of $
15
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
Original Issue Discount Secured Subordinated Note
On July 29, 2022, the Company entered into a securities
purchase agreement with an accredited investor, pursuant to which it sold an original issue discount secured subordinated note in the
principal amount of $
Acquisition Notes
On July 1, 2021, the Company issued a
On November 8, 2021, the Company issued a
On July 29, 2022, the Company issued secured subordinated
convertible promissory notes in the aggregate principal amount of $
16
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
On
July 29, 2022, the Company issued secured subordinated promissory notes in the aggregate principal amount of $
On
July 29, 2022, the Company issued secured subordinated promissory notes in the aggregate principal amount of $
17
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
Other Promissory Notes and Cash Advances
Promissory Notes
On
July 1, 2021, the Company entered into a loan agreement with Diamond Creek Capital, LLC for a term loan in the principal amount of up
to $
In 2018, the Company entered into an amended loan agreement and convertible
promissory note for $
In October 12, 2022, the Company issued promissory
notes in the principal amount of $
On November 2, 2022, the Company issued a promissory
note to a board member in the principal amount of $
On December 6, 2022, the Company issued a promissory
note to a board member in the principal amount of $
On December 21, 2022, the Company issued a promissory
note to a board member in the principal amount of $
On February 8, 2023, the Company issued a promissory
note to a board member in the principal amount of $
On February 14, 2023, the Company issued a promissory
note to a third party in the principal amount of $
On February 16, 2023, the Company issued a promissory
note to a third party in the principal amount of $
18
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
On March 7, 2023, the Company issued a promissory note to a board member
in the principal amount of $
On April 13, 2023, the Company issued a promissory
note to a third party in the principal amount of $
On April 21, 2023, the Company issued a promissory
note to a board member in the principal amount of $
On June 22, 2023, the Company issued a promissory
note to a board member in the principal amount of $
A note from 2018 with a principal balance of $
Cash Advances
In June 2022, the Company entered into a cash
advance agreement for $
In July 2022, the Company entered into a cash advance agreement for
$
In August 2022, the Company entered into a cash
advance agreement for $
In September 2022, the Company entered into a
cash advance agreement for $
In November 2022, the Company entered into cash
advance agreements for an aggregate of $
In December 2022, the Company entered into cash
advance agreements for $
In January 2023, the Company entered into cash advance agreements for
$
In June 2023, the Company refinanced the January
2023 agreements with balances of $
Equipment Financing Loan
In
May 2022, the Company entered into an equipment financing loan for $
19
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
In
August 2022, the Company entered into an equipment financing loan for $
In
July 2022, the Company entered into an equipment financing loan for $
Revolving Lines of Credit
In 2021, DSO entered into two revolving lines
of credit with a bank, which permit borrowings up to $
In August 2022, Ceautamed entered into a revolving
line of credit with a bank, which permits borrowings up to $
In September 2022, DSO entered into a revolving
line of credit with a bank, which permits borrowings up to $
EIDL Loan
In
June 2020, pursuant to the economic injury disaster loan (“EIDL”) program under the under the provisions of the Coronavirus
Aid, Relief and Economic Security Act (the “CARES Act”), the Company entered into a promissory note with the U.S. Small Business
Administration (the “SBA”) with a principal amount of $
PPP Loans
In
February 2021, the Company received an additional $
Total Debt
| Original issue discount subordinated debentures | $ | |||
| Original issue discount secured subordinated note | ||||
| Acquisition notes | ||||
| Promissory notes and cash advances | ||||
| Revolving lines of credit | ||||
| Equipment financing loan | ||||
| EIDL loan | ||||
| PPP loans | ||||
| Debt issuance costs | ( | ) | ||
| Debt, net | ||||
| Debt, current | ||||
| Debt issuance costs, current | ( | ) | ||
| Current portion of debt, net | ||||
| Debt, non-current | ||||
| Debt issuance costs, non-current | ( | ) | ||
| Non-current portion of debt, net | $ |
The Company was not in compliance will all debt covenants as of June 30, 2023, but waivers of non-compliance were obtained for all such debt, except as disclosed.
20
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
| For the Year Ended December 31: | ||||
| 2023 (remainder of year) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
Note 9 — Concentrations of Credit Risks
Credit Risks
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and accounts receivable. The Company maintains bank accounts with several financial institutions. Concentrations of credit risk with respect to accounts receivable are limited to the dispersion of customers across different industries and geographic regions.
Cash
The
Company places its cash with high credit quality financial institutions. At June 30, 2023 and December 31, 2022, the Company had no cash
balances in excess of the Federal Deposit Insurance Corporation coverage of $
Major Customers
For the six months ended June 30, 2023 and 2022,
the Company had two significant customers representing an aggregate of
For the three months ended June 30, 2023 and 2022,
the Company had three and two significant customers representing an aggregate of
Major Vendors
For the six months ended June 30, 2023 and 2022,
the Company had one major supplier representing
For the three months ended June 30, 2023 and 2022,
the Company had one major supplier representing
Note 10 — Income Taxes
The Company has evaluated the positive and negative evidence in assessing the realizability of its deferred tax assets. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, estimates of projected future taxable income and tax planning strategies to determine which deferred tax assets are more likely than not to be realized in the future.
The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. Interest and penalties related to income tax matters, if any, would be recognized as a component of income tax expense. At June 30, 2023 and December 2022, the Company had liabilities for uncertain tax positions. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. Currently, the tax years subsequent to 2018 are open and subject to examination by the taxing authorities.
At June 30, 2023, the Company had net operating
loss carry forwards for federal income tax purposes of approximately $
21
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
Note 11 — Stockholders’ Equity
Preferred Stock
On June 29, 2021, the Company filed a certificate
of designation with the Delaware Secretary of State to establish its series A convertible preferred stock. The Company designated a total
of
Dividend Rights. Prior to February 14,
2022 (the IPO Date), holders of series A convertible preferred stock were entitled to receive cumulative dividends at a rate of
Liquidation Rights. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or upon a change of control, the holders of series A convertible preferred stock shall be entitled to receive out of the assets of the Company the same amount that a holder of common stock would receive if the series A convertible preferred stock were fully converted (disregarding for such purposes any conversion limitations) to common stock which amounts shall be paid pari passu with all holders of common stock.
Voting Rights. The series A convertible preferred stock has no voting rights except as set forth below. As long as any shares of series A convertible preferred stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the series A convertible preferred stock, (a) alter or change adversely the powers, preferences or rights given to the series A convertible preferred stock or alter or amend the certificate of designation, (b) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to, or otherwise pari passu with, the series A convertible preferred stock, (c) amend the certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of series A convertible preferred stock, or (d) enter into any agreement with respect to any of the foregoing.
Conversion Rights. Each share of series
A convertible preferred stock is convertible, at any time and from time to time from at the option of the holder thereof, into that number
of shares of common stock determined by dividing the stated value of such share of series A convertible preferred stock (plus any accrued
but unpaid dividends thereon) by the conversion price. The conversion price is initially equal to $
During the six months ended June 30, 2023, the
remaining
On May 25, 2023, the Company filed a certificate of designation with
the Nevada Secretary of State to establish its Series B preferred stock. The Company designated a total of
Dividend Rights. Holders of Series B preferred stock are entitled to receive dividends in the same form as dividends paid on shares of the common stock only when and if such dividends are paid on shares of the common stock. No other dividends shall be paid on shares of Series B preferred stock.
Liquidation Rights. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of Series B preferred stock shall be entitled to receive out of the assets of the Company the same amount that a holder of common stock would receive if the Series B preferred stock were fully converted (disregarding for such purposes any conversion limitations) to common stock which amounts shall be paid prior to all holders of common stock.
Voting Rights. The Series B preferred stock shall vote together with the common stock on an as-converted basis.
Conversion
Rights. Each share of Series B preferred stock is convertible, at any time and from time to time from at the option of the holder
thereof, into that number of shares of common stock determined by dividing the stated value of such share of Series B preferred stock
by the conversion price. The conversion price is $
22
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
Common Stock
On February 16, 2022,
On February 18, 2022, the closing of the IPO was completed. At the
closing, the underwriters partially exercised the option and purchased
On
February 18, 2022, the Company issued
On
February 18, 2022, the Company issued
On
February 18, 2022, the Company issued
On
February 18, 2022, the Company issued
On
February 18, 2022, the Company issued an aggregate of
In
February through March 2022, the Company issued
On
April 17, 2023, the Company issued
On
May 4, 2023, a shareholder converted
On
May 2, 2023, the Company entered into a securities purchase agreement with an institutional investor, pursuant to which the Company agreed
to issue and sell, in a registered direct offering,
H.C.
Wainwright & Co., LLC (the “Placement Agent”) acted as the exclusive placement agent in connection with this offering
and received a cash fee equal to
23
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
On
May 17, 2023, the Company entered into a securities purchase agreement with an institutional investor, pursuant to which the Company
agreed to issue and sell, in a registered direct offering
The
Placement Agent acted as the exclusive placement agent in connection with this offering and received a cash fee equal to
On
May 24, 2023, the Company issued
During the six months ended June 30, 2023, the Company issued
Stock Options and Warrants
In
September 2020, the Company adopted its 2020 Incentive Plan (the “2020 Plan”) under which the Company is authorized to issue
awards for up to
At
June 30, 2023 and December 2022, there were
In
January 2022, the Company adopted its 2022 Equity Inventive Plan (the “2022 Plan”) under which the Company is authorized
to issue awards for up to
On
August 12, 2022, the Company issued stock options to employees under the 2022 Plan for an aggregate of
The Company recognized $
The Series A warrants sold in the IPO are exercisable until the fifth
anniversary of the issuance date at an exercise price equal to $
The Series B warrants sold in the IPO are exercisable until the fifth
anniversary of the issuance date at an exercise price equal to $
In the six months ended June 30, 2023 and 2022,
warrant holders exercised an aggregate of
24
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
| 2023-Stock Options | 2023-Warrants | |||||||||||||||
| Number of Options | Weighted Average Exercise Price | Number of Warrants | Weighted Average Exercise Price | |||||||||||||
| Outstanding at January 1, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at June 30 | $ | $ | ||||||||||||||
| Exercisable at June 30 | ||||||||||||||||
| 2022-Stock Options | 2022-Warrants | |||||||||||||||
| Number of Options | Weighted Average Exercise Price | Number of Warrants | Weighted Average Exercise Price | |||||||||||||
| Outstanding at January 1, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at June 30, | $ | $ | ||||||||||||||
| Exercisable at June 30, | ||||||||||||||||
Valuation Assumptions for Stock Options and Warrants
| Risk-free interest rate | % | |||
| Expected volatility | % | |||
| Expected life (years) | ||||
| Dividend yield | % |
The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns. The risk-free rate is based on the U.S. Treasury yield constant maturity in effect at the time of grant for periods corresponding with the expected life of the option.
25
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023 AND 2022
(UNAUDITED)
Note 12 — Commitments and Contingencies
From time to time, the Company may become subject to threatened and/or asserted claims arising in the ordinary course of business. Management is not aware of any matters, either individually or in the aggregate, that are reasonably likely to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.
Note 13 — Related Party Transactions
The Company entered into debt with related parties which are reflected in Note 7.
The Company is party to a management services
agreement with Trilogy Capital Group, LLC (“Trilogy”), a company controlled by the Company’s Executive Chairman. For
the six months ended June 30, 2023 and 2022, the Company paid Trilogy $
Note 14 — Subsequent Events
In accordance with ASC 855, Subsequent Events, the Company has reviewed its operations subsequent to June 30, 2023 to the date these condensed consolidated financial statements were issued, and has determined that, except as set forth below, it does not have any material subsequent events to disclose in these financial statements.
Reverse Stock Split
On
August 2, 2023, the Company effected a 1-for-3 reverse stock split of its authorized and issued and outstanding common stock. As a result
of this reverse split, the Company’s authorized common stock decreased from
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this report. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report.
Use of Terms
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our” and “our company” are to Smart for Life, Inc., a Nevada corporation, and its consolidated subsidiaries.
Special Note Regarding Forward Looking Statements
This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
| ● | our goals and strategies; |
| ● | our future business development, financial condition and results of operations; |
| ● | expected changes in our revenue, costs or expenditures; |
| ● | growth of and competition trends in our industry; |
| ● | our expectations regarding demand for, and market acceptance of, our products; |
| ● | our expectations regarding our relationships with investors, institutional funding partners and other parties we collaborate with; |
| ● | fluctuations in general economic and business conditions in the markets in which we operate; and |
| ● | relevant government policies and regulations relating to our industry. |
In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022 elsewhere in this report. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
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The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
Overview
We are engaged in the development, marketing, manufacturing, acquisition, operation and sale of a broad spectrum of nutritional and related products with an emphasis on health and wellness. Structured as a global holding company, we are executing a buy-and-build strategy with serial accretive acquisitions creating a vertically integrated company with an objective of aggregating companies generating a minimum of $300 million in revenues by the fourth quarter of 2026. To drive growth and earnings, we are developing proprietary products as well as acquiring other profitable companies, encompassing brands, manufacturing and distribution channels.
We also operate a network platform in the affiliate marketing space. Affiliate marketing is an advertising model in which a product vendor compensates third-party digital marketers to generate traffic or leads for the product vendor’s products and services. The third-party digital marketers are referred to as affiliates, and the commission fee incentivizes them to find ways to promote the products being sold by the product vendor.
On March 8, 2018, we acquired 51% of Millenium Natural Manufacturing Corp. and Millenium Natural Health Products Inc. and on October 9, 2019, we acquired the remaining 49% of these companies. On September 30, 2020, we changed the name of Millenium Natural Manufacturing Corp. to Bonne Sante Natural Manufacturing, Inc., or BSNM, and on November 24, 2020, we merged Millenium Natural Health Products Inc. into BSNM to better reflect our vertical integration. BSNM is a nutraceutical contract manufacturer. It specializes in a wide variety of products, from the private labeling of vitamins, dietary supplements, nutraceuticals, sport nutrition and broad-spectrum nutritional supplements, and sells them throughout the United States and around the world, including South America, Central America and Europe.
On July 1, 2021, we acquired 100% of Doctors Scientific Organica, LLC, Oyster Management Services, Ltd., Lawee Enterprises, L.L.C. and U.S. Medical Care Holdings, L.L.C. On August 27, 2021, we transferred all of the equity interests of Oyster Management Services, Ltd., Lawee Enterprises, L.L.C. and U.S. Medical Care Holdings, L.L.C. to Doctors Scientific Organica, LLC. On December 13, 2022, we converted Oyster Management Services, Ltd. to a limited liability company known as Oyster Management Services, L.L.C. On May 19, 2022, we acquired 100% of Lavi Enterprises, LLC, an affiliate of these companies. On the same date, we transferred all of the equity interests of Lavi Enterprises, LLC to Doctors Scientific Organica, LLC. As a result, these entities are now wholly owned subsidiaries of Doctors Scientific Organica, LLC. In this report, we collectively refer to Doctors Scientific Organica, LLC and its consolidated subsidiaries as DSO. DSO manufactures, sells and owns the Smart for Life brand of natural health and wellness meal replacement products. The brand includes proprietary hunger suppressing functional foods that are designed to work with the body’s natural ability to lose weight. It also develops premium supplements and commodities that will promote optimal health and wellness. DSO has over 15 years of experience providing high-quality products to premium retail locations and companies. Its branded vitamins and supplements are also being sold through Amazon, and this sales channel is becoming a major contributor to the growth of the brand online.
On August 24, 2021, we established Smart for Life Canada Inc. as a wholly owned subsidiary of DSO in Canada. This subsidiary sells retail products through a retail store location in Montreal Canada and the same location also acts as distribution center for our international direct to consumer and big box customers. We maintain inventory and employees at this location.
On November 8, 2021, we acquired 100% of Nexus Offers, Inc., or Nexus. Nexus operates a cost per action/cost per acquisition network. This network consists of hundreds of digital marketers who stand ready to market products introduced to the Nexus network. The cost per action/cost per acquisition model is where digital marketers are paid for an action (e.g., a product sale or lead generation) that is taken as a direct result of their marketing efforts. Through the digital marketer’s method of marketing, the digital marketer sends traffic to one of the product vendor’s offers listed on the network.
On December 6, 2021, we acquired 100% of GSP Nutrition Inc., or GSP. GSP is a sports nutrition company. It offers nutritional supplements for athletes and active lifestyle consumers through a variety of wellness solutions and delivery methods, including powders, tablets and soft gels that are formulated to support energy and performance; nutrition and wellness; and focus and clarity. GSP’s initial line of nutritional products are marketed under the Sports Illustrated Nutrition brand. GSP has a license for the exclusive use of the Sports Illustrated brand (excluding the Sports Illustrated Swimsuit brand for which it has a right of first offer under the license) for certain dietary and nutritional supplements, in each case to be sold to/through certain approved accounts in the United States and Canada. The product line currently consists of whey protein isolate powder, tablet supplements for joint health, nitric oxide, post workout blends, Omega-3 supplements, and pre-workout supplements, among others.
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On July 29, 2022, we acquired 100% of Ceautamed Worldwide, LLC and its wholly-owned subsidiaries Wellness Watchers Global, LLC and Greens First Female LLC (which we collectively refer to as Ceautamed). Ceautamed is based in Boca Raton, Florida and owns the Greens First line of branded products which have been specifically marketed to the healthcare provider sector. These vitamins and supplements have been sold on a business-to-business basis, direct-to-consumer as well as sold utilizing an international medical distribution company pursuant to a long-term contract. Ceautamed has historically utilized third-party contract manufacturing that will migrate to BSNM.
Recent Developments
On August 2, 2023, we effected a 1-for-3 reverse stock split of our authorized and issued and outstanding common stock. As a result of this reverse split, our authorized common stock decreased from 500,000,000 shares to 166,666,667 shares and the issued and outstanding common stock decreased from 4,737,589 shares to 1,594,082 shares. The impact of this transaction is reflected within all common stock, options, and warrant information retrospectively in this report.
Principal Factors Affecting Our Financial Performance
Our operating results are primarily affected by the following factors:
| ● | our ability to acquire new customers or retain existing customers; |
| ● | our ability to access capital needed for operations including purchasing raw materials; |
| ● | our ability to offer competitive product pricing; |
| ● | our ability to broaden product offerings; |
| ● | industry demand and competition; and |
| ● | market conditions and our market position. |
Emerging Growth Company
We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, we will be permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
| ● | have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; |
| ● | comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis); |
| ● | submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and |
| ● | disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. |
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
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We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of our initial public offering, (ii) the last day of the first fiscal year in which our total annual gross revenues are $1.07 billion or more, (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iv) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
Results of Operations
Comparison of Three Months Ended June 30, 2023 and 2022
The following table sets forth key components of our results of operations during the three months ended June 30, 2023 and 2022, both in dollars and as a percentage of our revenues.
| June 30, 2023 | June 30, 2022 | |||||||||||||||
| Amount | % of Revenues | Amount | % of Revenues | |||||||||||||
| Revenues | ||||||||||||||||
| Products | $ | 2,273,087 | 99.54 | % | $ | 3,459,926 | 80.74 | % | ||||||||
| Advertising | 10,616 | 0.46 | % | 825,565 | 19.26 | % | ||||||||||
| Total revenues | 2,283,703 | 100.00 | % | 4,285,491 | 100.00 | % | ||||||||||
| Cost of revenues | ||||||||||||||||
| Products | 1,532,561 | 67.11 | % | 1,890,278 | 44.11 | % | ||||||||||
| Advertising | 9,121 | 0.40 | % | 614,042 | 14.33 | % | ||||||||||
| Total cost of revenues | 1,541,682 | 67.51 | % | 2,504,320 | 58.44 | % | ||||||||||
| Gross profit | 742,021 | 32.49 | % | 1,781,171 | 41.56 | % | ||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | 1,504,499 | 65.88 | % | 1,660,773 | 38.75 | % | ||||||||||
| Compensation – administrative | 1,410,735 | 61.77 | % | 1,633,022 | 38.11 | % | ||||||||||
| Professional services | 912,302 | 39.95 | % | 665,700 | 15.53 | % | ||||||||||
| Impairment on intangible assets | 466,737 | 20.44 | % | — | — | % | ||||||||||
| Depreciation and amortization expense | 507,593 | 22.23 | % | 430,092 | 10.04 | % | ||||||||||
| Total operating expenses | 4,801,866 | 210.27 | % | 4,389,587 | 102.43 | % | ||||||||||
| Operating loss | (4,059,845 | ) | (177.77 | )% | (2,608,416 | ) | (60.87 | )% | ||||||||
| Other income (expense) | ||||||||||||||||
| Other income (expense) | 290,526 | 12.72 | % | 111,599 | 2.60 | % | ||||||||||
| Gain on debt extinguishment | 257,037 | 11.26 | % | 134,956 | 3.15 | % | ||||||||||
| Change in fair value of derivative liability | — | — | (38,997 | ) | (0.91 | )% | ||||||||||
| Interest expense | (707,714 | ) | (30.99 | )% | (984,427 | ) | (22.97 | )% | ||||||||
| Total other income (expense) | (160,151 | ) | (7.01 | )% | (776,869 | ) | (18.13 | )% | ||||||||
| Net loss | $ | (4,219,996 | ) | (184.79 | )% | $ | (3,385,285 | ) | (78.99 | )% | ||||||
Revenues. Our total revenues decreased by $2,001,788, or 46.71%, to $2,283,703 for the three months ended June 30, 2023 from $4,285,491 for the three months ended June 30, 2022.
Our nutraceutical business generates revenue from the sales of nutritional and related products. Revenues from our nutraceutical business (products) decreased by $1,186,839, or 34.30%, to $2,273,087 for the three months ended June 30, 2023 from $3,459,926 for the three months ended June 30, 2022. This decrease was primarily due to our cash constraints and our inability to pay for raw materials used in the production of both branded and contract manufacturing products. The decreased revenues were the result of a decrease in the volume of products sold and not due to pricing changes.
Our digital marketing business generates revenues when sales of listed products are sold by product vendors through our network as a result of the marketing efforts of digital marketers. Revenues from our digital marketing business (advertising) decreased by $814,949, or 98.71%, to $10,616 for the three months ended June 30, 2023 from $825,565 for the three months ended June 30, 2022. The decrease in revenue is attributable to our cash constraints and our inability to pay affiliates which provide revenue producing customers.
Cost of revenues. Our total cost of revenues decreased by $962,638, or 38.44%, to $1,541,682 for the three months ended June 30, 2023 from $2,504,320 for the three months ended June 30, 2022. Such decrease is directly related to the decrease in revenues.
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Cost of revenues for our nutraceutical business consist of ingredients, packaging materials, freight, and labor associated with the production of various products. Cost of revenues for our nutraceutical business (products) decreased by $357,717, or 18.92%, to $1,532,561 for the three months ended June 30, 2023 from $1,890,278 for the three months ended June 30, 2022. As a percentage of product revenues, cost of revenues for product sales were 67.42% and 54.63% for the three months ended June 30, 2023, and 2022, respectively. The increased percentage is due to increased labor rates associated with production. Although we were not able to produce at capacity as in the prior year, we continued to compensate our production workforce.
Cost of revenues for our digital marketing business consist of commissions and bonuses paid to digital marketers. Cost of revenues from our digital marketing business (advertising) decreased by $604,921, or 98.51%, to $9,121 for the three months ended June 30, 2023 from $614,042 for the three months ended June 30, 2022. As a percentage of advertising revenues, cost of revenues for advertising sales was 85.92% and 74.38% for the three months ended June 30, 2023 and 2022, respectively.
Gross profit. As a result of the foregoing, our gross profit decreased by $1,039,150, or 58.34%, to $742,021 for the three months ended June 30, 2023 from $1,781,171 for the three months ended June 30, 2022. As a percentage of revenues, our gross profit was 34.49% and 41.56% for the three months ended June 30, 2023 and 2022, respectively.
General and administrative expenses. Our general and administrative expenses consist primarily of advertising expenses, bad debts, rent expense, insurance and other expenses incurred in connection with general operations. Our general and administrative expenses decreased by $156,274, or 9.41%, to $1,504,499 for the three months ended June 30, 2023 from $1,660,773 for the three months ended June 30, 2022. Such decrease was primarily due to decreased rates for D&O insurance and reduced advertising in 2023. As a percentage of revenues, general and administrative expenses was 65.88% and 38.75% for the three months ended June 30, 2023 and 2022, respectively.
Compensation - administrative. Our compensation expenses include both cash and non-cash items, including salaries plus related payroll taxes. Our compensation expenses decreased by $222,287, or 13.61%, to $1,410,735 for the three months ended June 30, 2023 from $1,633,022 for the three months ended June 30, 2022. Such decrease was primarily due to a reduction of headcount. As a percentage of revenues, compensation expenses was 61.77% and 38.11% for the three months ended June 30, 2023 and 2022, respectively.
Professional services. Our professional services expenses consist primarily of investor relations, consulting, advisory, legal and audit expenses incurred in connection with general operations. Our professional services expenses increased by $246,602, or 37.04%, to $912,302 for the three months ended June 30, 2023 from $665,700 for the three months ended June 30, 2022. Such increase was primarily due to increased legal fees associated with our NASDAQ compliance, and sales and marketing consultants. As a percentage of revenues, professional services expenses was 39.95% and 15.53% for the three months ended June 30, 2023 and 2022, respectively.
Impairment of intangible assets. Due to a significant decrease in advertising revenues, we performed an impairment analysis on the affiliate relationships associated with our Nexus subsidiary and recognized an impairment of $466,737 during the three months ended June 30, 2023. No impairment was recognized in the three months ended June 30, 2022.
Depreciation and amortization. Depreciation and amortization was $507,593, or 22.23% of revenues, for the three months ended June 30, 2023, as compared to $430,092, or 10.04% of revenues, for the three months ended June 30, 2023. The increase in amortization is associated with intangible assets resulting from acquisitions.
Total other expense. We had $160,151 in total other expense, net, for the three months ended June 30, 2023, as compared to total other expense, net, of $776,869 for the three months ended June 30, 2022. Total other expense, net, for the three months ended June 30, 2023 consisted of interest expense of $707,714, offset by a gain on debt extinguishment of $257,037 and other income of $290,526, while other expense, net, for the three months ended June 30, 2022 consisted of interest expense of $984,427 and a change in fair value of derivative liability of $38,997, offset by a gain on debt extinguishment of $134,956 and other income of $111,599.
Net loss. As a result of the cumulative effect of the factors described above, we had a net loss of $4,219,996 for the three months ended June 30, 2023, as compared to $3,385,285 for the three months ended June 30, 2022, an increase of $834,711, or 24.66%.
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Comparison of Six Months Ended June 30, 2023 and 2022
The following table sets forth key components of our results of operations during the six months ended June 30, 2023 and 2022, both in dollars and as a percentage of our revenues.
| June 30, 2023 | June 30, 2022 | |||||||||||||||
| Amount | % of Revenues | Amount | % of Revenues | |||||||||||||
| Revenues | ||||||||||||||||
| Products | $ | 4,332,799 | 92.42 | % | $ | 7,035,384 | 80.49 | % | ||||||||
| Advertising | 355,471 | 7.58 | % | 1,704,993 | 19.51 | % | ||||||||||
| Total revenues | 4,688,270 | 100.00 | % | 8,740,377 | 100.00 | % | ||||||||||
| Cost of revenues | ||||||||||||||||
| Products | 2,840,006 | 60.58 | % | 4,187,287 | 47.91 | % | ||||||||||
| Advertising | 278,515 | 5.94 | % | 1,254,356 | 14.35 | % | ||||||||||
| Total cost of revenues | 3,118,521 | 66.52 | % | 5,441,643 | 62.26 | % | ||||||||||
| Gross profit | 1,569,749 | 33.48 | % | 3,298,734 | 37.74 | % | ||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | 2,599,707 | 55.45 | % | 3,385,121 | 38.73 | % | ||||||||||
| Compensation - administrative | 2,883,107 | 61.50 | % | 3,634,453 | 41.61 | % | ||||||||||
| Professional services | 1,216,298 | 25.94 | % | 1,306,431 | 14.95 | % | ||||||||||
| Consulting fees - related parties | 27,547 | 0.59 | % | — | — | |||||||||||
| Impairment of intangible assets | 466,737 | 9.96 | % | — | — | |||||||||||
| Depreciation and amortization expense | 1,198,803 | 25.57 | % | 853,102 | 9.76 | % | ||||||||||
| Total operating expenses | 8,392,199 | 179.00 | % | 9,179,107 | 105.02 | % | ||||||||||
| Operating loss | (6,822,450 | ) | (145.52 | )% | (5,880,373 | ) | (67.28 | )% | ||||||||
| Other income (expense) | ||||||||||||||||
| Other income (expense) | 313,678 | 6.69 | % | (433,441 | ) | (4.96 | )% | |||||||||
| Gain on debt extinguishment | 257,037 | 5.48 | % | 134,956 | 1.54 | % | ||||||||||
| Change in fair value of derivative liability | — | — | (38,997 | ) | (0.45 | )% | ||||||||||
| Interest expense | (2,252,576 | ) | (48.05 | )% | (13,741,907 | ) | (157.22 | )% | ||||||||
| Total other income (expense) | (1,681,861 | ) | (35.87 | )% | (14,079,389 | ) | (161.08 | )% | ||||||||
| Net loss | $ | (8,504,311 | ) | (181.40 | )% | $ | (19,959,762 | ) | (228.36 | )% | ||||||
Revenues. Our total revenues decreased by $4,052,107, or 46.36%, to $4,688,270 for the six months ended June 30, 2023 from $8,740,377 for the six months ended June 30, 2022.
Revenues from our nutraceutical business (products) decreased by $2,702,585, or 38.41%, to $4,332,799 for the six months ended June 30, 2023 from $7,035,384 for the six months ended June 30, 2022. This decrease was primarily due to our cash constraints and our inability to pay for raw materials used in the production of both branded and contract manufacturing products. The decreased revenues were the result of a decrease in the volume of products sold and not due to pricing changes.
Revenues from our digital marketing business (advertising) decreased by $1,349,522, or 79.15%, to $355,471 for the six months ended June 30, 2023 from $1,704,993 for the six months ended June 30, 2022. The decrease in revenue is attributable to our cash constraints and the impact it had with our affiliate advertisers.
Cost of revenues. Our total cost of revenues decreased by $2,323,122, or 42.69%, to $3,118,521 for the six months ended June 30, 2023 from $5,441,643 for the six months ended June 30, 2022. Such decrease is directly related to the decrease in revenues.
Cost of revenues for our nutraceutical business (products) decreased by $1,347,281, or 32.18%, to $2,840,006 for the six months ended June 30, 2023 from $4,187,287 for the six months ended June 30, 2022. As a percentage of product revenues, cost of revenues for product sales were 65.55% and 59.52% for the six months ended June 30, 2023 and 2022, respectively.
Cost of revenues from our digital marketing business (advertising) decreased by $975,841, or 77.80%, to $278,515 for the six months ended June 30, 2023 from $1,254,356 for the six months ended June 30, 2022. As a percentage of advertising revenues, cost of revenues for advertising sales was 78.35% and 73.57% for the six months ended June 30, 2023 and 2022, respectively.
Gross profit. As a result of the foregoing, our gross profit decreased by $1,728,985, or 52.41%, to $1,569,749 for the six months ended June 30, 2023 from $3,298,734 for the six months ended June 30, 2022. As a percentage of revenues, our gross profit was 33.48% and 37.74% for the six months ended June 30, 2023 and 2022, respectively.
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General and administrative expenses. Our general and administrative expenses decreased by $785,414, or 23.20%, to $2,599,707 for the six months ended June 30, 2023 from $3,385,121 for the six months ended June 30, 2022. Such decrease was primarily due to decreased rates for D&O insurance, IPO related expenses in February 2022 and reduced advertising in 2023. As a percentage of revenues, general and administrative expenses was 55.45% and 38.73% for the six months ended June 30, 2023 and 2022, respectively.
Compensation - administrative. Our compensation expenses decreased by $751,346, or 20.67%, to $2,883,107 for the six months ended June 30, 2023 from $3,634,453 for the six months ended June 30, 2022. Such decrease was primarily due to reduced stock compensation expense in 2023 of approximately $401,000 combined with a reduction in headcount. As a percentage of revenues, compensation expenses was 61.50% and 41.58% for the six months ended June 30, 2023 and 2022, respectively.
Professional services. Our professional services expenses decreased by $90,133, or 6.90%, to $1,216,298 for the six months ended June 30, 2023 from $1,306,431 for the six months ended June 30, 2022. Such decrease was primarily due to IPO expenses in 2022. As a percentage of revenues, professional services expenses was 25.94% and 14.95% for the six months ended June 30, 2023 and 2022, respectively.
Consulting fees - related parties. For the six months ended June 30, 2023 and 2022, we paid Trilogy Capital Group, LLC, a company controlled by our Executive Chairman, $27,547 and $0, respectively, for services rendered under a consulting agreement.
Impairment of intangible assets. Due to a significant decrease in advertising revenues, we performed an impairment analysis on the affiliate relationships associated with our Nexus subsidiary and recognized an impairment of $466,737 during the six months ended June 30, 2023. No impairment was recognized in the six months ended June 30, 2022.
Depreciation and amortization. Depreciation and amortization was $1,198,803, or 25.57% of revenues, for the six months ended June 30, 2023, as compared to $853,102, or 9.76% of revenues, for the six months ended June 30, 2022. The increase in amortization is associated with intangible assets resulting from acquisitions.
Total other expense. We had $1,681,861 in total other expense, net, for the six months ended June 30, 2023, as compared to total other expense, net, of $14,079,389 for the six months ended June 30, 2022. Total other expense, net, for the six months ended June 30, 2023 consisted of interest expense of $2,252,576, offset by a gain on extinguishment of debt of $257,037 and other income of $313,678, while other expense, net, for the six months ended June 30, 2022 consisted of interest expense of $13,741,907 related to interest expense in connection with common stock issued with future equity agreements and amortization of debt issuance cost, other expense of $433,441 and change in fair value of derivative liability of $38,997, offset by a gain on extinguishment of debt of $134,956.
Net loss. As a result of the cumulative effect of the factors described above, we had a net loss of $8,504,311 for the six months ended June 30, 2023, as compared to $19,959,762 for the three months ended June 30, 2022, a decrease of $11,455,451, or 57.39%.
Liquidity and Capital Resources
As of June 30, 2023, we had cash of $0.4 million. To date, we have financed our operations primarily through revenue generated from operations, bank borrowings and sales of our securities. Since our inception in 2017, we have experienced losses and as a result have continued to use cash in our operations. We have been dependent upon financing activities as we implement our acquisition strategy.
Our condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have suffered recurring losses from operations and have a working capital deficiency of $9.6 million at June 30, 2023. These conditions raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
It is management’s opinion that current available resources will not be sufficient to fund our planned expenditures over the next 12 months from the date hereof. Accordingly, we will be dependent on the raising of additional capital through the placement of common and preferred stock as well as debt financing in order to implement our business plan. To facilitate the raising of capital we have engaged a middle market investment banking firm which has completed two equity raises on our behalf during the second quarter of 2023 and anticipates additional rounds in the near future.
We are also engaged with a debt placement firm which has raised capital for prior acquisitions and is anticipated to raise debt capital for pending and prospective transactions. We are currently finalizing a previously announced acquisition, the financing for which will exceed the required purchase amount, providing additional working capital. In addition, we are in the process of arranging additional substantial debt financing for general working capital purposes.
There is no assurance that we will be successful with future financings, and the inability to secure financings may have a material adverse effect on our financial condition.
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Summary of Cash Flow
The following table provides detailed information about our net cash flow for the six months ended June 30, 2023 and 2022.
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (4,502,620 | ) | $ | (5,996,785 | ) | ||
| Net cash used in investing activities | (3,450 | ) | (1,067,717 | ) | ||||
| Net cash provided by financing activities | 4,812,038 | 6,996,774 | ||||||
| Net change in cash | 305,968 | (97,758 | ) | |||||
| Cash and cash equivalents at beginning of period | 69,714 | 205,093 | ||||||
| Cash and cash equivalents at end of period | $ | 375,682 | $ | 107,335 | ||||
Our net cash used in operating activities was $4,502,620 for the six months ended June 30, 2023, as compared to $5,996,785 for the six months ended June 30, 2022. For the six months ended June 30, 2023, our net loss of $8,504,311, offset by depreciation and amortization of $1,198,808, a decrease in inventory of $772,689, an impairment of intangible assets of $466,737, a gain on extinguishment of debt of $352,261, were the primary drivers for cash used in operations. For the six months ended June 30, 2022, our net loss of $19,959,762 and an increase in inventory $1,547,694, offset by a decrease in accounts payable of $1,030,027, depreciation and amortization expense of $853,105, interest expense associated with warrants issued with debt of $822,626, debt issuance costs of $753,929 and a discount on debt obtained of $667,012, were the primary drivers for cash used in operations.
Our net cash used in investing activities was $3,450 for the six months ended June 30, 2023, which consisted of equipment purchases. For the six months ended June 30, 2022, our net cash used in investing activities was $1,067,717, which consisted of a deposit of $1,000,000 towards the acquisition of Ceautamed and $67,717 in equipment purchases.
Our net cash provided by financing activities was $4,812,038 for the six months ended June 30, 2023, as compared to $6,966,744 for the six months ended June 30, 2022. Net cash provided by financing activities for the six months ended June 30, 2023 consisted of proceeds from the exercise of warrants of $5,425,140, proceeds from the issuance of common stock of $2,151,310 and proceeds from debt of $2,053,071, offset by repayments on debt of $4,817,483, while net cash provided by financing activities for the six months ended June 30, 2022 consisted of net proceeds from the IPO of $12,738,288, proceeds from convertible notes and notes payable of $3,230,546 and proceeds from related parties of $358,004, offset by repayments on debt of $7,438,462, payments to related parties of $1,868,083 and payment of fees from issuance of common stock of $53,549.
Initial Public Offering
On February 16, 2022, we entered into an underwriting agreement with Dawson James Securities, Inc., as representative of the several underwriters named on Schedule I thereto, relating to our IPO of units, each unit consisting of one share of common stock, a Series A warrant to purchase one share of common stock and a Series B warrant to purchase one share of common stock. Pursuant to the underwriting agreement, we agreed to sell 9,600 units to the underwriters, at a purchase price per unit of $1,365.00 (the offering price to the public of $1,500.00 per unit minus the underwriters’ discount), and also agreed to grant to the underwriters a 45-day option to purchase up to 1,440 additional shares of common stock, up to 1,440 additional Series A warrants, and/or up to 1,440 additional Series B warrants, in any combination thereof, at a purchase price to the public of $1,497.00 per share and $1.50 per warrant, less underwriting discounts and commissions, solely to cover over-allotments, if any.
On February 18, 2022, the closing of our IPO was completed. At the closing, the underwriters partially exercised the option and purchased 1,376 Series A warrants and 1,376 Series B warrants. Therefore, we sold 9,600 shares of common stock, 10,976 Series A warrants and 10,976 Series B warrants for total gross proceeds of $14,404,128. After deducting the underwriting commission and expenses, we received net proceeds of approximately $12,684,739. We used the proceeds of the offering to pay off certain debt and plan to use the remaining net proceeds for working capital and general corporate purposes.
The Series A warrants are exercisable until the fifth anniversary of the issuance date at an exercise price equal to $1,050.00 per share and may be exercised on a cashless basis if the issuance of common stock upon exercise of the warrants is not covered by an effective registration statement.
The Series B warrants are exercisable until the fifth anniversary of the issuance date at an exercise price equal to $1,500.00 per share and may be exercised on a cashless basis, whereby the holder will receive one share of common stock for each Series B warrant exercised. As of June 30, 2023, 9,595 of the Series B warrants were exercised on a cashless basis and we issued 9,595 shares of common stock upon such exercise.
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Registered Direct Offering and Related Private Placement
On May 2, 2023, we entered into a securities purchase agreement with an institutional investor, pursuant to which we agreed to issue and sell, in a registered direct offering, 31,534 shares of common stock and a pre-funded warrant to purchase up to 62,001 shares of common stock at an exercise price of $0.0003, at an offering price per share and pre-funded warrant of $9.6150 and $9.6147, respectively. In addition, under the securities purchase agreement, we agreed to issue to the investor a warrant to purchase up to 93,534 shares of common stock at an exercise price of $9.24 per share in a concurrent private placement.
On May 5, 2023, the offering was completed. At closing, the investor exercised the pre-funded warrant in full. Accordingly, we issued to the investor 93,534 shares of common stock and a warrant to purchase up to 93,534 shares of common stock at an exercise price of $9.24 per share for total gross proceeds of $899,326 and net proceeds of $751,933.
H.C. Wainwright & Co., LLC, or the Placement Agent, acted as the exclusive placement agent in connection with this offering and received a cash fee equal to 7.5% of the gross proceeds of the offering and a management fee equal to 1% of the gross proceeds of the offering. We also agreed to reimburse the Placement Agent $30,000 for fees and expenses of its legal counsel and other out-of-pocket expenses and $15,950 for certain closing costs. In addition to the cash fees, we issued to the Placement Agent warrants to purchase up to 7,015 shares of common stock at an exercise price of $12.0188 per share (or 125% of the offering price).
Second Registered Direct Offering and Related Private Placement
On May 17, 2023, we entered into a securities purchase agreement with an institutional investor, pursuant to which we agreed to issue and sell, in a registered direct offering 68,667 shares of common stock and a pre-funded warrant to purchase up to 126,298 shares of common stock at an exercise price of $0.0003, at an offering price per share and pre-funded warrant of $8.13 and $8.1297, respectively. In addition, under the securities purchase agreement, we agreed to issue to the investor a warrant to purchase up to 194,964 shares of common stock at an exercise price of $7.77 per share in a concurrent private placement.
On May 19, 2023, the offering was completed. At closing, the investor exercised the pre-funded warrant in full. Accordingly, we issued to the investor 194,964 shares of common stock and a warrant to purchase up to 194,964 shares of common stock at an exercise price of $7.77 per share for total gross proceeds of $1,585,057 and net proceeds of $1,074,377.
The Placement Agent acted as the exclusive placement agent in connection with this offering and received a cash fee equal to 7.5% of the gross proceeds of the offering and a management fee equal to 1% of the gross proceeds of the offering. We also agreed to reimburse the Placement Agent $60,000 for fees and expenses of its legal counsel and other out-of-pocket expenses and $15,950 for certain closing costs. In addition to the cash fees, we issued to the Placement Agent warrants to purchase up to 14,623 shares of common stock at an exercise price of $10.625 per share (or 125% of the offering price).
Outstanding Debt
Original Issue Discount Subordinated Debentures
In June 2022, we commenced offerings of original issue discount subordinated debentures. As of June 30, 2023, we have completed multiple closings and issued debentures in the aggregate principal amount of $5,146,452, of which $1,234,413 was issued with issuances costs of $184,413 for the six months ended June 30, 2023. The debentures contain an original issue discount of 15%, or an aggregate original issue discount of $771,183. As a result, the total purchase price was $4,375,269. The debentures bear interest at a rate of 17.5% per annum and are due from January through November 2024. The outstanding principal amount and all accrued interest is due and payable on the earlier of (i) the completion of our next equity financing in which it receives gross proceeds in excess of $20 million, (ii) twenty-four months after the date of issuance or (iii) within 30 days after election of repayment from the holder so long as the election is after the 6-month anniversary of the debenture. We may voluntarily prepay the debentures in whole or in part without premium or penalty. The debentures contain customary events of default for a loan of this type. The debentures are unsecured and are subordinated in right of payment to the prior payment in full of all senior indebtedness and are pari passu in right of payment to any other unsecured indebtedness incurred by us in favor of any third party. As of June 30, 2023, the outstanding principal balance of the debentures was $4,402,947, the unamortized debt issuance cost was $396,811 and accrued interest was $675,197. Two of the debenture agreements totaling $250,000 as of May 30, 2023 were converted into 1,121 shares of our Series B preferred stock. During the six months ended June 30, 2023, an aggregate of $1,045,000 was raised via these debentures.
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Original Issue Discount Secured Subordinated Note
On July 29, 2022, we entered into a securities purchase agreement with an accredited investor, pursuant to which it sold an original issue discount secured subordinated note in the principal amount of $2,272,727 to such investor. The note contains an original issue discount of 12%, or $272,727. As a result, the total purchase price was $2,000,000, the proceeds of which were used to fund the acquisition of Ceautamed. The note shall bear interest at the rate of 16% per annum and matures on July 29, 2027. The outstanding principal and all accrued interest shall be amortized on a 60-month straight-line basis. We may prepay the principal and all accrued and unpaid interest on the note without penalty, in whole or in part; provided however, in no event before January 15, 2023, unless with the explicit prior written approval of the holder. The note contains customary events of default for a loan of this type. The note is guaranteed by BSNM, DSO, Nexus, GSP and Ceautamed and is secured by a security interest in all of the assets of our company and such guarantors; provided that such security interest is subordinate to the rights of the lenders under any senior indebtedness (as defined in the note). As of June 30, 2023 the outstanding principal balance of the note was $2,242,853, the unamortized debt issuance cost was $223,141, and accrued interest was $179,428.
Acquisition Notes
On July 1, 2021, we issued a 6% secured subordinated promissory note in the principal amount of $3,000,000 to a related party, Sasson E. Moulavi, in connection with the acquisition of DSO. This note accrues interest at 6% per annum and the outstanding principal and interest will be amortized on a straight-line basis and are payable quarterly in accordance with the amortization schedule, with all amounts due and payable on July 1, 2024. On November 29, 2022, we entered into a letter agreement with Sasson E. Moulavi to amend the terms of the note. Pursuant to the letter agreement, the parties agreed to amend and restate the note to amend the amortization schedule, with the first payment deferred until February 15, 2023 and all amounts due and payable on August 15, 2024. We may prepay all or any portion of this note any time prior to maturity without premium or penalty. This note contains customary covenants and events of default for a loan of this type, including if a default occurs under any senior secured indebtedness to banks and other financial institutions or private equity funds, and is secured by a security interest in all of the assets of DSO; provided that such security interest is subordinate to the rights of the lenders under any such senior secured indebtedness. During the six months ended June 30, 2023, we made principal cash payments of $150,000. On May 25, 2023, the note was modified whereby $1,500,000 in principal amount of the note was converted in exchange for 6,727 shares of our Series B preferred stock. The remaining $1,400,000 of principal plus accrued interest of $334,950 was modified into a new note with the same interest rate and maturity date. As of June 30, 2023, the outstanding principal balance of this note was $1,548,950 and accrued interest was $9,036.
On July 29, 2022, we issued secured subordinated promissory notes in the aggregate principal amount of $2,150,000 in connection with the acquisition of Ceautamed, which are partially with a related party. The notes shall bear interest at the rate of 5% per annum and mature on July 29, 2025; provided that upon an event of default (as defined in the notes), such interest rate shall increase to 10%. The outstanding principal and all accrued interest shall be amortized on a five-year straight-line basis and payable quarterly in accordance with the amortization schedule to the notes. We may redeem all or any portion of the notes at any time without premium or penalty. The notes contain customary covenants and events of default for loans of this type, including upon any default under the senior indebtedness (as defined in the notes). The notes are guaranteed by Ceautamed and are secured by a security interest in all of the assets of such guarantors; provided that such security interest is subordinate to the rights of the lenders under any such senior indebtedness. As of June 30, 2023, the outstanding principal balance of these notes was $2,204,993, unamortized debt issuance cost was $0 and accrued interest was $102,900.
On July 29, 2022, we issued secured subordinated promissory notes in the aggregate principal amount of $1,300,000 in connection with the acquisition of Ceautamed, which are partially with a related party. The notes bear interest at the rate of 5% per annum with all principal and accrued interest being due and payable in one lump sum ninety (90) days from the date of the note; provided that upon an event of default (as defined in the notes), such interest rate shall increase to 10%. On November 28, 2022, we entered into letter agreements with the holders of most of the notes to amend the terms of these notes. Pursuant to letter agreements, the parties agreed to extend the maturity date to June 1, 2023 and agreed to a seven month payment schedule, with the first payment due December 1, 2022. The parties also agreed to increase the default interest rate from 10% to 15%. We also agreed that if an event of default (as defined in the notes) has occurred and is continuing, then we shall not create any senior indebtedness (as defined in the notes) without the consent of the holders of a majority of the principal amount of the notes. On April 1, 2023, we entered into letter agreements with the holders of most of the notes, pursuant to which we agreed to pay the remaining balance of the notes in two payments on May 1, 2023 and June 1, 2023. One of the note holders agreed to settle the amount due to the holder for a lesser amount, resulting in a gain on extinguishment of debt of $60,764. In addition, we agreed to prepay a portion of the outstanding principal and accrued interest on the notes upon the occurrence of any of the following events: (i) in the event we receive any tax refunds claimed with respect to an “employee retention credit” pursuant to Section 2301 of the CARES Act (or any corresponding or similar provisions of state or local law) or receives any cash from factoring or assigning the right to receive such tax refunds, we must prepay $150,000 of the outstanding principal and accrued interest on the notes; (ii) in the event we or any our subsidiaries raise capital through the issuance of any convertible debentures, we must prepay the outstanding principal and accrued interest on the notes in an amount equal to one-third (1/3) of the net proceeds from such financing; and (iii) in the event we or any of our subsidiaries consummate an equity or equity-linked capital raise with the assistance of an investment bank, we must prepay the outstanding principal and accrued interest on the notes in an amount equal to one-third (1/3) of the proceeds raised by us, up to an aggregate amount of $350,000, plus any then overdue principal payments. We are in the process of negotiating a similar extension of one remaining note in the principal amount of $100,000. We may redeem all or any portion of the notes at any time without premium or penalty. The notes contain customary covenants and events of default for loans of this type, including upon any default under the senior indebtedness (as defined in the notes). The notes are guaranteed by Ceautamed and are secured by a security interest in all of the assets of such guarantors; provided that such security interest is subordinate to the rights of the lenders under any such senior indebtedness. As of June 30, 2023, the outstanding principal balance of these notes was $90,000, unamortized debt issuance cost was $0 and accrued interest was $4,200.
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Other Promissory Notes and Cash Advances
Promissory Notes
On July 1, 2021, we entered into a loan agreement with Diamond Creek Capital, LLC for a term loan in the principal amount of up to $3,000,000. The loan bears interest at a rate of 15.0% per annum, provided that upon an event of default, such rate shall increase by 5%. The loan was due and payable on the earlier of July 1, 2022 or upon completion of the IPO. We repaid $1,325,000 of the principal balance and $27,604 of the interest from the proceeds of the IPO. In connection with such repayment, the lender agreed that the remaining loan is due and payable on July 1, 2023. On April 20, 2023, we entered into a third amendment to the loan agreement, which provides that we shall make a payment towards the reduction of principal in the amount of $250,000 within two business days of the earlier to occur of the following events: (i) we receive any tax refunds claimed with respect to an “employee retention credit” pursuant to Section 2301 of the CARES Act (or any corresponding or similar provisions of state or local law) or receive any cash from factoring or assigning the right to receive such tax refunds, or (ii) the completion of a public offering of securities pursuant to a Registration Statement on Form S-3. In addition, within two business days following the completion of a public offering of securities pursuant to a Registration Statement on Form S-1, we agreed to pay in full all outstanding amounts owing under the loan agreement. The amendment also provides that following the payment of $250,000 described above, monthly payments of principal and interest pursuant to shall be an aggregate of $30,000 per month, until the amounts owing under the loan agreement are paid in full. The loan is secured by all of our assets and contains customary events of default. As of June 30, 2023, the outstanding principal balance of this note was $750,000 and accrued interest was $52,864. As of June 30, 2023, the Company was in compliance with the covenants related to this note.
In 2018, we entered into an amended loan agreement and convertible promissory note for $200,000 with a third party. On June 30, 2023, the outstanding amount was $100,000 and accrued interest was $155,451.
On March 7, 2023, we issued a promissory note to a board member in the principal amount of $137,000. This note bears interest at a rate of 12% and is due on demand. During the six months ended June 30, 2023, we made various principal and interest payments on the notes. On May 26, 2023, $50,000 of principal and $1,317 of interest was converted into 230 shares of our Series B preferred stock. At June 30, 2023, the outstanding amount was $51,294 and accrued interest was $2,859.
On April 21, 2023, we issued a promissory note to a board member in the principal amount of $53,000. This note bears interest at a rate of 12% and is due on demand. At June 30, 2023, the outstanding amount was $30,000 and accrued interest was $800.
On June 22, 2023, we issued a promissory note to a board member in the principal amount of $118,000. This note bears interest at a rate of 17.5% and is due on demand. At June 30, 2023, the outstanding amount was $118,000 and accrued interest was $453.
A note from 2018 with a principal balance of $55,000 plus accrued interest of $24,776 was converted into 358 of the Company’s Series B preferred stock which resulted in the note being fully paid at June 30, 2023.
Cash Advances
In July 2022, we entered into a cash advance agreement for $650,000 with a required repayment amount of $897,750, which requires weekly payments of approximately $40,806. In May 2023, the Company agreed to a settlement for a lesser amount resulting in a gain on extinguishment of $50,814. At June 30, 2023, the outstanding amount was $207,500.
In August 2022, we entered into a cash advance agreement for $100,000 with a required repayment amount of $146,260, which requires weekly payments of approximately $6,200. At June 30, 2023, the outstanding amount was $4,360.
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In September 2022, we entered into a cash advance agreement for $243,750 with a required repayment amount of $372,500, which requires weekly payments of approximately $15,000. In May 2023, the Company agreed to a settlement for a lesser amount resulting in a gain on extinguishment of $37,500. At June 30, 2023, the outstanding amount was $80,000.
In November 2022, the Company entered into cash advance agreements for an aggregate of $592,236 with an aggregated required repayment amount of $994,460, which requires weekly payments of approximately $52,422. In June 2023, the Company agreed to a settlement with one of the agreements for a lesser amount resulting in a gain on extinguishment of $63,968. At June 30, 2023, the outstanding amount was $139,540.
In June 2023, we refinanced existing agreements with balances of $284,029 and entered into cash advance agreements and received an additional $107,071 with a required repayment amount of $652,065, which requires weekly payments of approximately $48,625. At June 30, 2023, the outstanding amount was $597,065 and unamortized debt issuance cost of $234,484.
Equipment Financing Loan
In May 2022, we entered into an equipment financing loan for $146,765 used for the purchase of equipment within BSNM’s operations. The loan bears interest at 10.18% and matures on April 1, 2027. At June 30, 2023, the outstanding amount was $120,938.
In August 2022, we entered into an equipment financing loan for $35,050 used for the purchase of equipment within BSNM’s operations. The loan bears interest at 10.18% and matures on August 1, 2027. At June 30, 2023, the outstanding amount was $30,858.
In July 2022, we entered into an equipment financing loan for $8,463 used for the purchase of equipment within Ceautamed’s operations. At June 30, 2023, the outstanding amount was $5,642.
Revolving Lines of Credit
In 2021, we entered into two revolving lines of credit with a bank, which permit borrowings up to $958,000 and bear interest at 9.49% with no expiration date. As of June 30, 2023, the outstanding principal balance of these lines of credit was $167,110.
In August 2022, we entered into a revolving line of credit with a bank, which permits borrowings up to $50,000 and bears interest at 45.09% with no expiration date. In January 2023, the Company borrowed an additional $15,000. As of June 30, 2023, the outstanding principal balance of these lines of credit was $35,003.
In September 2022, we entered into a revolving line of credit with a bank, which permits borrowings up to $70,000 and bears interest at 9.49% with no expiration date. As of June 30, 2023, the outstanding principal balance of this line of credit was $22,907.
EIDL Loan
In June 2020, pursuant to the economic injury disaster loan program under the under the provisions of the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, we entered into a promissory note with the U.S. Small Business Administration with a principal amount of $300,000. This loan matures in 30 years and bears interest at a rate of 3.75%. The loan is secured by all of our assets. As of June 30, 2023, the outstanding principal balance of this loan was $300,000 and accrued interest was $33,906.
PPP Loans
In February 2021, we received an additional $261,164 in Paycheck Protection Program loans under the CARES Act. This loan bears interest at a rate of 1% per annum and matures in April 2025. As of June 30, 2023, the outstanding balance of this loan was $197,457 and accrued interest was $9,422.
Contractual Obligations
Our principal commitments consist mostly of obligations under the loans described above and pricing/margin structures for products established with our clients. We do not have any purchase obligations with any suppliers.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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Critical Accounting Policies
The preparation of our unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
We assess potential impairments to long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of assets) is less than its carrying amount. Any required impairment loss is measured as the amount by which the asset’s carrying value exceeds its fair value and is recorded as a reduction in the carrying value of the related asset. Therefore, as a result of decreased revenues within the Nexus subsidiary during the six months ended June 30, 2023, which are not expected to recover to similar levels, we determined that a triggering event occurred requiring an impairment analysis in accordance with ASC 360. The impairment analysis resulted in the Company recognizing an impairment of the affiliate relationship asset associated with Nexus of $466,737.
For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission, or the SEC, on March 31, 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2023. The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, because of certain material weaknesses in our internal controls over financial reporting, our disclosure controls and procedures were not effective as of June 30, 2023. The material weaknesses relate to a lack of segregation of duties between accounting and other functions and the absence of sufficient depth of in-house accounting personnel with the ability to properly account for complex transactions. The material weaknesses related to none routine transactions related to debt, business combinations and impairment of intangible assets.
In response to the material weaknesses described above, during the quarter ended June 30, 2023, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with U.S. GAAP. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting or in any other factors that could significantly affect these controls during the three and six months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We have not sold any equity securities during the three months ended June 30, 2023 that were not previously disclosed in a current report on Form 8-K that was filed during the quarter, except as follows:
| ● | On April 17, 2023, we issued 1,667 shares of common stock as compensation for amending a license agreement associated with Sports Illustrated Nutrition. |
| ● | On May 24, 2023, we issued 1,667 shares of common stock to a note holder as compensation for amending the note. |
We did not repurchase any shares of our common stock during the three months ended June 30, 2023.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
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| * | Filed herewith |
| ** | Furnished herewith |
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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.
| Date: August 23, 2023 | SMART FOR LIFE, INC. | |
| /s/ Darren C. Minton | ||
| Name: | Darren C. Minton | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| /s/ Alan B. Bergman | ||
| Name: | Alan B. Bergman | |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
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