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:
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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.
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| ☒ | Smaller reporting company | |||
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If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for comply
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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As of May 13, 2022, there were
Smart for Life, Inc.
Quarterly Report on Form 10-Q
Period Ended March 31, 2022
TABLE OF CONTENTS
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
MARCH 31, 2022 AND DECEMBER 31, 2021
| March 31, 2022 | December 31, 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Due from related parties, net | ||||||||
| 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 | ||||||||
| Due to related parties, net | ||||||||
| Deferred revenue | ||||||||
| Preferred stock dividends payable | ||||||||
| Operating lease liability, current | ||||||||
| Derivative liability | ||||||||
| Debt, current, net of debt discounts | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Operating lease liability, noncurrent | ||||||||
| Debt, noncurrent | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Series A Convertible Preferred Stock, $ | ||||||||
| Common Stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and stockholders’ equity (deficit) | $ | $ | ||||||
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 MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
| March 31, 2022 | March 31, | |||||||
| Revenues | ||||||||
| Products | $ | $ | ||||||
| Advertising | ||||||||
| Total revenues | ||||||||
| Cost of revenues | ||||||||
| Products | ||||||||
| Advertising | ||||||||
| Total cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| General and administrative | ||||||||
| Depreciation and amortization expense | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other (expense) | ||||||||
| Other (expense) | ( | ) | ( | ) | ||||
| Day 1 loss and changes in fair value of derivative liability | ( | ) | ||||||
| Interest (expense) | ( | ) | ( | ) | ||||
| Total other (expense) | ( | ) | ( | ) | ||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income tax expense | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Preferred stock dividends | ( | ) | ||||||
| Net loss attributable to common stockholders | ( | ) | ( | ) | ||||
| Loss per share, basic and diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares outstanding, basic and diluted | ||||||||
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
FOR THE THREE MONTHS ENDED MARCH 31,
2022 AND 2021
(UNAUDITED)
For the Three Months Ended March 31, 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 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
For the Three Months Ended March 31, 2021
| Preferred Stock | Common Stock | Additional Paid-In |
Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance, January 1, 2021 | — | $ | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance, March 31, 2021 | — | $ | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||||||||
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 THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
| March 31, 2022 | March 31, 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Stock-based compensation | ||||||||
| Debt issuance cost, net | ||||||||
| Interest expense associated to discounts on debt obtained | ||||||||
| Interest expense associated to warrants issued with debt obtained | ||||||||
| Interest expense associated with future equity agreements | ||||||||
| Right of use asset and lease liability | ||||||||
| Change in value of derivative liability | ||||||||
| Change 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: | ||||||||
| Additions to property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from related parties | ||||||||
| Repayments to related parties | ( | ) | ||||||
| Proceeds from initial public offering | ||||||||
| Proceeds from convertible notes and notes payable | ||||||||
| Repayments on convertible notes and notes payable | ( | ) | ||||||
| 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 convertible notes and interest | $ | $ | ||||||
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
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 1 — Description of Business
Smart for Life, Inc., formerly Bonne Santé Group, Inc. (“SFL”), is a Delaware corporation which was formed on February 7, 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 and wellness.
On
March 8, 2018, SFL acquired
On
July 1, 2021, SFL acquired Doctors Scientific Organica, LLC d/b/a Smart for Life, Oyster Management Services, Ltd., Lawee Enterprises,
L.L.C. and U.S. Medical Care Holdings, L.L.C (collectively, “DSO”). On August 27, 2021, SFL 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. As a result, these entities are now wholly owned subsidiaries of Doctors Scientific Organica, LLC. Based
in Riviera Beach, Florida, DSO operates a
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. SFL 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, SFL acquired Nexus Offers, Inc. (“Nexus”). Nexus is 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. Based in Miami, Florida, Nexus operates virtually.
On December 6, 2021, SFL acquired GSP Nutrition Inc. (“GSP”). GSP is a sports nutrition company that offers nutritional supplements for athletes and active lifestyle consumers under the Sports Illustrated Nutrition brand. Based in Miami, Florida, GSP operates virtually.
Note 2 — Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements reflect the consolidated operations of SFL and its wholly owned subsidiaries BSNM, DSO, DSO Canada, Nexus and GSP (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.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current period presentation.
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, 2021 balance sheet has been derived from audited consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2022 and 2021 have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 three months ended March 31, 2022 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, 2021.
6
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 2 — Summary of Significant Accounting Policies (cont.)
Liquidity, Capital Resources and Going Concern
At March 31, 2022, the Company had current liabilities
in excess of current assets in the amount of approximately $
To date, the Company has satisfied its capital needs with the net proceeds from its issuance of notes payable and bank debt. Company management expects to continue to incur net losses and have significant cash outflows for at least the next 12 months.
Based on its analysis, the Company concluded it will have with the financing of a pending acquisition the ability to continue as a going concern for at least the next 12 months.
Use of Estimates
The preparation of the 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 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 March 31, 2022 and December 31, 2021, 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 receivable are presented net of an
allowance for doubtful accounts of $
Inventory, net
Inventory consists of raw materials, work in progress, and finished goods and is valued at the lower of cost (first-in, first-out) 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 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
7
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 2 — Summary of Significant Accounting Policies (cont.)
Goodwill and Intangible Assets
Goodwill is not amortized but is subject to annual impairment tests. In addition to the annual impairment review, impairment reviews are performed whenever circumstances indicate a possible impairment may exist. Impairment testing for goodwill is done at the reporting unit level. The Company compares the fair value of the reporting unit assets to the carrying amount, on at least an annual basis, to determine if there is potential impairment. If the fair value of the reporting unit assets is less than their carrying value, an impairment loss will be recognized. No goodwill impairments were recognized during the three months ended March 31, 2022 and 2021.
Intangible assets consist of customer relationships,
non-compete agreements, license agreements, goodwill, and intellectual property acquired in the acquisitions of BSNM, DSO, Nexus, and
GSP. The Company amortizes intangible assets with finite lives on a straight-line basis over their estimated useful lives which ranges
from
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 had no impairment of long-lived assets at March 31, 2022 and December 31, 2021.
Lease Right-of-Use Assets and Liabilities
The
Company records a right-of-use (“ROU”) asset and lease liability on the balance sheet for all leases with terms longer than
Lease
liabilities are recognized based on the present value of the remaining lease payments and are discounted using the most reasonable incremental
borrowing rate. The Company uses the implicit rate when it is readily determinable. Since the Company’s lease does not provide an
implicit rate, to determine the present value of lease payments, management uses the Company’s incremental borrowing rate based
on the information available at lease commencement. Leases with a term of
Valuation of Derivative Instruments
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-10, Derivatives and Hedging (“ASC 815-10”), requires that embedded derivative instruments be bifurcated and assessed, along with freestanding derivative instruments such as convertible promissory notes, on their issuance date to determine whether they would be considered a derivative liability and measured at their fair value for accounting purposes. The Company evaluates all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported as charges or credits to income.
For option based simple derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period.
Beneficial Conversion Feature
For conventional convertible debt issued before the adoption of ASU 2020-06, where the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”) discount against the face amount of the respective debt instrument (offset to additional paid in capital).
When the Company records a BCF which is not a conventional convertible, the fair value of the BCF is recorded as a derivative liability with an offset against the face amount of the respective debt instrument which is and amortized to interest expense over the term of the debt.
Debt Issuance Cost
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.
8
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 2 — Summary of Significant Accounting Policies (cont.)
Revenue Recognition
The Company evaluates and recognize revenue 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 and GSP)
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 did not have any material unsatisfied performance obligations at March 31, 2022 or December 31, 2021.
Distribution expenses to transport the Company’s products, where applicable, and warehousing expense after manufacture are accounted for within operating expenses.
9
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 2 — Summary of Significant Accounting Policies (cont.)
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 March 31, 2022 or December 31, 2021.
Freight
For the three months ended March 31, 2022 and 2021, freight costs amounted
to $
Advertising
Advertising costs are expensed as incurred. Advertising costs for the
three months ended March 31, 2022 and 2021 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, are valued using a Black-Scholes option pricing model to determine the fair market value of the stock options. 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 grant.
Income Taxes
The Company accounts for income tax 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 March 31, 2022 and December 31, 2021, the Company has 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.
Recent Accounting Standards Issued Not Yet Adopted
On August 5, 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, 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 believes that the adoption of this ASU will not have a material impact to the consolidated financial statements.
10
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 2 — Summary of Significant Accounting Policies (cont.)
Accounting Pronouncement Adopted
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify GAAP for areas of ASC 740 by clarifying and amending existing guidance. This standard is effective for the Company on January 1, 2022, with early adoption permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. The Company has determined that the adoption of this standard does not have an impact on the consolidated financial statements.
Note 3 — Acquisitions
During the year ended December 31, 2021, and as discussed in Note 1, the Company acquired DSO, Nexus and GSP.
The following unaudited supplemental proforma financial information reflects the combined results of operations had the DSO, Nexus and GSP acquisitions occurred at the beginning of 2021. The proforma information reflects certain adjustments related to the acquisitions including adjusted amortization and depreciation expense based on the fair values of the assets acquired. The proforma combined results of operations are as follows:
| Three Months Ended March 31, 2022 |
Three Months Ended March 31, 2021 |
|||||||
| Net sales | $ | $ | ||||||
| Operating income (loss) | $ | ( |
) | $ | ( |
) | ||
| Earnings (loss) per share, basic and diluted | $ | ( |
) | $ | ( |
) | ||
| Weighted average shares outstanding, basic and diluted | ||||||||
Note 4 — Inventory
Inventory consisted of the following:
| March 31, 2022 |
December 31, 2021 |
|||||||
| Raw materials | $ | $ | ||||||
| Work in Progress | ||||||||
| Finished goods | ||||||||
| Less: allowance for obsolescence | ||||||||
| $ | $ | |||||||
Note 5 — Property and Equipment
Property and equipment consisted of the following:
| Estimated Useful Lives (in Years) | March 31, 2022 | December 31, 2021 | ||||||||
| Furniture and fixtures | $ | $ | ||||||||
| Equipment – Manufacturing | ||||||||||
| Building & Equipment | ||||||||||
| Leasehold improvements | ||||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||||
| Property and equipment, net | $ | $ | ||||||||
Depreciation and amortization expense for the
three months ended March 31, 2022 and 2021 totaled $
11
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 6 — Intangible Assets
Intangible assets consisted of the following:
| Estimated Useful Lives (in Years) | March 31, 2022 | December 31, 2021 | ||||||||
| Customer contracts | $ | $ | ||||||||
| Developed technology | ||||||||||
| Non-compete agreements | ||||||||||
| Patents | ||||||||||
| Tradename | ||||||||||
| Licenses agreements | ||||||||||
| Total intangible assets | ||||||||||
| Less: amortization | ( | ) | ( | ) | ||||||
| Intangibles, net | $ | $ | ||||||||
Amortization
(included in depreciation and amortization expense) for the three months ended March 31, 2022 and 2021 was $
The future amortization is as follows:
| Years Ending December 31: | ||||
| 2022 (remainder of year) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ | |||
12
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 7 — Lease Commitments
The Company enters into lessee arrangements consisting of operating leases for its operations. The Company had four operating leases as of March 31, 2022 and December 31, 2021.
Discount Rate Applied to Property Operating Lease
To determine the present value of minimum future lease payments for its operating leases at January 1, 2020, the Company was required to estimate a rate of interest that it would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments in a similar economic environment (the “incremental borrowing rate”).
The lease assets and liabilities were calculated
utilizing a discount rate of
Operating Right of Use Assets and Liabilities
The right of use assets and liabilities is included in the accompanying condensed consolidated balance sheets as follows at:
| March 31, 2022 | December 31, 2021 | |||||||
| Asset | ||||||||
| Operating lease right of use assets | $ | $ | ||||||
| Liabilities | ||||||||
| Operating lease liabilities, current portion | $ | $ | ||||||
| Operating liabilities, net of current portion | ||||||||
| Total lease liabilities | $ | $ | ||||||
Minimum lease payments under the operating lease are recognized on a straight-line basis over the term of the lease.
| For the Year Ended December 31: | ||||
| 2022 (remainder of year) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total payments | ||||
| Less: amount representing interest | ( | ) | ||
| Lease obligation, net | ||||
| Less: current portion | ( | ) | ||
| Lease obligation – long-term | $ | |||
Rent
expense for the three months ended March 31, 2022 and 2021 was $
13
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 8 — Fair Value Measurement
The following are the hierarchical levels of inputs to measure fair value:
| ● | Level 1 – Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities. | |
| ● | Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. | |
| ● | Level 3 – Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. |
The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable and accrued expenses, certain notes payable and notes payable – related party, approximate their fair values because of the short maturity of these instruments.
The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using terms in the notes that are subject to volatility and market price of the underlying common stock of the Company.
As of March 31, 2022, and December 31, 2021, the Company did not have any derivative instruments that were designated as hedges.
The derivative liability as of March 31, 2022 in the amount of $
Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. Generally, as the stock price decreases for each of the related convertible notes that have an embedded derivative liability, the value of the derivative liability decreases. Stock price is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s convertible notes with an embedded derivative liability.
The Company used the Black-Scholes Model to measure the fair value
of the derivative liabilities as $
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the period ended March 31, 2022:
| Derivative Liability, December 31,2021 | $ | |||
| Day 1 Loss | ||||
| Discount from derivatives | ||||
| Resolution of derivative liability | ||||
| Mark to market adjustment | ( | ) | ||
| Derivative Liability, March 31, 2022 | $ |
14
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 9 — Debt
Debentures
On November 5, 2021, the Company entered into a securities purchase
agreement with certain investors, pursuant to which it sold
At any time after August 14, 2022, the sixth month
anniversary of the IPO Date, the holders may convert the principal amount of the debentures into shares of common stock at a conversion
price that is equal to the lower of $
Acquisition Notes
On November 8, 2021, the Company issued a
On
November 8, 2021, the Company issued a
On July 1, 2021, the Company issued a
On
July 1, 2021, the Company issued a
15
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 9 — Debt (cont.)
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 $
On May 10, 2021, the Company issued a convertible
promissory note in the principal amount of $
On December 18, 2020, the Company entered into
a loan and security agreement with Peah Capital, LLC for a term loan in the principal amount of up to $
Since inception, the Company has issued other
promissory notes to various lenders. These notes accrued interest at rates between
On February 25, 2021, the Company issued a convertible
promissory note in the principal amount of $
Other
In
2021, DSO entered into two revolving lines of credit with a bank, which permitted borrowings up to $
Cash Advances
In December 2021,
16
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 9 — Debt (cont.)
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
May 2020, the Company received $
In
February 2021, the Company received an additional $
The PPP provides that the PPP loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company plans to file for forgiveness during 2022.
Total Debt
Debt is comprised of the following components as of March 31, 2022:
| Debenture notes | $ | |||
| Acquisition notes | ||||
| Promissory notes | ||||
| Other | ||||
| SBA loans | ||||
| PPP loans | ||||
| Debt discount | ( | ) | ||
| Total | $ |
The future contractual maturities of the debt are as follows:
| For the Year Ended December 31: | ||||
| 2022 (remainder of year) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ | |||
17
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 10 — 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 March 31, 2022 and December 31, 2021, the Company had cash
balances of $
Major Customers
For
the three months ended March 31, 2022, the Company had two significant customers representing an aggregate of
Major Vendors
For the three months ended March 31, 2022, the Company
had two major suppliers representing an aggregate of
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.
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.
18
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 11 — Stockholders’ Equity (cont.)
Voting Rights. The series A convertible preferred stock have 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 $
On
July 1, 2021, the Company completed a private placement in which it sold an aggregate of
During
the three months ended March 31, 2022, the holders converted an aggregate of
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
19
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 11 — Stockholders’ Equity (cont.)
On February 18, 2022, the Company issued
On February 18, 2022, the Company issued an aggregate of
On March 10, 2022,
During
the three months ended March 31, 2022, a total of
During
the three months ended March 31, 2022, the Company issued an aggregate of
Stock Options and Warrants
In
September 2020,
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
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
The
Company recognized $
The following is a summary of options and warrants granted, exercised, forfeited and outstanding during the three months ended March 31, 2022:
| 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 March 31 | $ | $ | ||||||||||||||
| Exercisable at March 31 | ||||||||||||||||
20
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
Note 11 — Stockholders’ Equity (cont.)
Valuation Assumptions for Stock Options and Warrants
The fair value of each option and warrant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| 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.
Note 12 — Commitments and Contingencies
COVID-19 Pandemic
On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of these consolidated financial statements. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s consolidated financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its consolidated financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of consolidated financial condition, liquidity or operations for 2022.
Legal Matters
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 is party to a management services agreement with Trilogy Capital Group, LLC, a company controlled by the Company’s Executive
Chairman. As of March 31, 2022 and December 31, 2021, the amounts due from the related party are $
Note 14 — Subsequent Events
In accordance with ASC 855-10, the Company has reviewed its operations subsequent to March 31, 2022 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.
On
April 8, 2022, the Company issued
21
| 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 “the Company” are to Smart for Life, Inc., a Delaware 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, 2021 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.
22
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.
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 within the next thirty-six months. 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. (“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 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. 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 Nexus Offers, Inc. (“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.
23
On December 6, 2021, we acquired GSP Nutrition Inc. (“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.
Impact of Coronavirus Pandemic
Starting in late 2019, a novel strain of the coronavirus, or COVID-19, began to rapidly spread around the world and every state in the United States. At this time, there continues to be significant volatility and uncertainty relating to the full extent to which the COVID-19 pandemic and the various responses to it will impact our business, operations and financial results.
Most states and cities have at various times instituted quarantines, restrictions on travel, “stay at home” rules, social distancing measures and restrictions on the types of businesses that could continue to operate, as well as guidance in response to the pandemic and the need to contain it. Based on the nature of the business in our facilities in Doral and Riviera Beach, neither facility closed or operated at reduced capacity for our production and packaging operations. However, the situation surrounding COVID-19 remains fluid, and we may be required to close or limit capacity in our facilities in response to guidance from applicable government and public health officials, which could adversely affect our operations and revenues.
In addition, we are dependent upon certain contract manufacturers and suppliers and their ability to reliably and efficiently fulfill our orders is critical to our business success. The COVID-19 pandemic has impacted and may continue to impact certain of our manufacturers and suppliers. As a result, we have faced and may continue to face delays or difficulty sourcing certain products and raw materials, which could negatively affect our business and financial results. Even if we are able to find alternate sources for such raw materials, they may cost more, which could adversely impact our profitability and financial condition.
The global deterioration in economic conditions, which may have an adverse impact on discretionary consumer spending, could also impact our business and demand for our products. For instance, consumer spending may be negatively impacted by general macroeconomic conditions, including a rise in unemployment, and decreased consumer confidence resulting from the pandemic. Changing consumer behaviors as a result of the pandemic may also have a material impact on our revenue.
The spread of COVID-19 has also adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The pandemic has resulted, and may continue to result, in a significant disruption of global financial markets, which may reduce our ability to access capital in the future, which could negatively affect our liquidity.
If the COVID-19 pandemic does not continue to slow and the spread of COVID-19 is not contained, our business operations, including those of our contract manufacturers and suppliers, could be further delayed or interrupted. We expect that government and health authorities may announce new or extend existing restrictions, which could require us to make further adjustments to our operations in order to comply with any such restrictions. We may also experience limitations in employee resources. In addition, our operations could be disrupted if any of our employees were suspected of having COVID-19, which could require quarantine of some or all such employees or closure of our facilities for disinfection. The duration of any business disruption cannot be reasonably estimated at this time but may materially affect our ability to operate our business and result in additional costs.
The extent to which the COVID-19 pandemic may impact our results will depend on future developments, which are highly uncertain and cannot be predicted as of the date of this report, including the effectiveness of vaccines and other treatments for COVID-19, and other new information that may emerge concerning the severity of the pandemic and steps taken to contain the pandemic or treat its impact, among others. Nevertheless, the pandemic and the current financial, economic and capital markets environment, and future developments in the global supply chain and other areas present material uncertainty and risk with respect to our performance, financial condition, results of operations and cash flows.
24
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 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.
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.
25
Results of Operations
Comparison of Three Months Ended March 31, 2022 and 2021
The following table sets forth key components of our results of operations during the three months ended March 31, 2022 and 2021, both in dollars and as a percentage of our revenues.
| March 31, 2022 | March 31, 2021 | |||||||||||||||
| Amount | % of Revenues | Amount | % of Revenues | |||||||||||||
| Revenues | ||||||||||||||||
| Products | $ | 3,575,459 | 80.26 | % | $ | 571,508 | 100.00 | % | ||||||||
| Advertising | 879,427 | 19.74 | % | — | — | |||||||||||
| Total revenues | 4,454,886 | 100.00 | % | 571,508 | 100.00 | % | ||||||||||
| Cost of revenues | ||||||||||||||||
| Products | 2,297,010 | 51.56 | % | 550,150 | 96.26 | % | ||||||||||
| Advertising | 640,313 | 14.37 | % | — | — | |||||||||||
| Total cost of revenues | 2,937,323 | 65.93 | % | 550,150 | 96.26 | % | ||||||||||
| Gross profit | 1,517,563 | 34.07 | % | 21,358 | 3.74 | % | ||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | 4,366,421 | 98.01 | % | 665,354 | 116.42 | % | ||||||||||
| Depreciation and amortization expense | 423,010 | 9.50 | % | 54,008 | 9.45 | % | ||||||||||
| Total operating expenses | 4,789,431 | 107.51 | % | 719,362 | 125.87 | % | ||||||||||
| Operating loss | (3,271,868 | ) | (73.44 | )% | (698,004 | ) | (122.13 | )% | ||||||||
| Other expense | ||||||||||||||||
| Other expense | (506,133 | ) | (11.36 | )% | (7,797 | ) | (1.36 | )% | ||||||||
| Day 1 loss and changes in fair value of derivative liability | (38,997 | ) | (0.88 | )% | — | — | ||||||||||
| Interest expense | (12,757,479 | ) | (286.37 | )% | (74,840 | ) | (13.10 | )% | ||||||||
| Total other expense | (13,302,609 | ) | (298.61 | )% | (82,637 | ) | (14.46 | )% | ||||||||
| Net loss | $ | (16,574,477 | ) | (372.05 | )% | $ | (780,641 | ) | (136.59 | )% | ||||||
Revenues. Our total revenues were $4,454,886 for the three months ended March 31, 2022, as compared to $571,508 for the three months ended March 31, 2021, an increase of $3,883,378, or 679.50%. Such increase was primarily due to the acquisitions of DSO, Nexus and GSP that were completed in 2021.
Our nutraceutical business generates revenue from the sales of nutritional and related products. Revenues from our nutraceutical business (products) were $3,575,459 for the three months ended March 31, 2022, which included $2,982,825 from DSO and GSP, as compared to $571,508 for the three months ended March 31, 2021. Excluding these acquisitions, revenues from our nutraceutical business increased by $21,125, or 3.70%. This increase was primarily due to increased sales of our contract manufacturing services following the easing of pandemic related restrictions. The increase was the result of an increase 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) were $879,427 for the three months ended March 31, 2022, all of which were from Nexus, which was acquired in November of 2021.
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Cost of revenues. Our total cost of revenues were $2,937,323 for the three months ended March 31, 2022, as compared to $550,150 for the three months ended March 31, 2021, an increase of $2,387,173, or 433.91%. Such increase was primarily due to the acquisitions of DSO, Nexus and GSP.
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) were $2,297,010 for the three months ended March 31, 2022, which included $1,763,035 from DSO and GSP, as compared to $550,150 for the three months ended March 31, 2021. Excluding these acquisitions, cost of revenues for our nutraceutical business decreased by $16,175, or 2.94%. As a percentage of product revenues, cost of revenues for product sales decreased from 96.26% in the 2021 period to 64.2% in the 2022 period (or 90.10% excluding the acquisitions) due to reduced costs of materials based on purchasing power.
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) were $640,313 for the three months ended March 31, 2022, all of which were from Nexus, which was acquired in November of 2021. As a percentage of advertising revenues, cost of revenues for advertising sales was 72.81% for the three months ended March 31, 2022.
Gross profit. As a result of the foregoing, our gross profit was $1,517,563 for the three months ended March 31, 2022, as compared to $21,358 for the three months ended March 31, 2021, an increase of $1,496,205, or 7,005.36%. Such increase was primarily due to the acquisitions of DSO, Nexus and GSP that were completed in 2021. Excluding these acquisitions, our gross profit increased by $37,300, or 174.64%. As a percentage of revenues, our gross profit increased from 3.74% in the 2021 period to 34.07% in the 2022 period (or 9.90% excluding the acquisitions).
General and administrative expenses. Our general and administrative expenses consist primarily of personnel expenses, including employee salaries and bonuses plus related payroll taxes, advertising expenses, professional advisor fees, bad debts, rent expense, insurance and other expenses incurred in connection with general operations. Our general and administrative expenses were $4,366,421 for the three months ended March 31, 2022, which included $4,360,094 from DSO, Nexus and GSP, as compared to $665,354 for the three months ended March 31, 2021, an increase of $3,701,067, or 556.26%. Excluding the acquisitions, our general and administrative expenses increased by $2,169,878, or 326.12%. Such increase was primarily due to the engagement of additional professionals associated with our audits, acquisitions, and costs associated with our initial public offering (the “IPO”). As a percentage of revenues, general and administrative expenses decreased from 116.42% in the 2021 period to 92.01% in the 2022 period (or 478.41% excluding the acquisitions).
Depreciation and amortization. Depreciation and amortization was $423,010, or 9.50% of revenues, for the three months ended March 31, 2022, which included $367,972 from DSO, Nexus and GSP, as compared to $54,008, or 9.45% of revenues, for the three months ended March 31, 2021. The increase in amortization is associated with intangible assets resulting from the acquisitions.
Total other expense. We had $13,302,609 in total other expense, net, for the three months ended March 31, 2022, as compared to total other expense, net, of $82,637 for the three months ended March 31, 2021. Total other expense, net, for the three months ended March 31, 2022 consisted of interest expense of $12,757,479, related to interest expense in connection with common stock issued with future equity agreements and amortization of debt issuance cost, other expense of $506,133 and day 1 loss and changes in fair value of derivative liability of $38,997, while other expense, net, for the three months ended March 31, 2021 consisted of interest expense of $74,840 and other expense of $7,797.
Net loss. As a result of the cumulative effect of the factors described above, we had a net loss of $16,574,477 for the three months ended March 31, 2022, which included $1,016,660 from DSO, Nexus and GSP, as compared to $780,641 for the three months ended March 31, 2021, an increase of $15,793,836, or 2,023.19%. Excluding the acquisitions, our loss increased by $13,993,469, or 1,792.56%.
Liquidity and Capital Resources
As of March 31, 2022, we had cash of $1,551,055. To date, we have financed our operations primarily through revenue generated from operations, bank borrowings and private placements 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.
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Although we believe that our current levels of cash and the financing associated with a pending acquisition will be sufficient to meet our anticipated cash needs for our operations for at least the next 12 months, we do believe additional funds are required to execute our business plan and our strategy of acquiring additional companies. As noted elsewhere in this report, over the next 24 months, we plan to acquire multiple companies aggregating a minimum of $100 million in annualized revenues with the number of prospective acquisitions in the pipeline representing over $50 million in additional revenue. The funds required to execute this business plan will depend on the size, capital structure and purchase price consideration that the seller of a target business deems acceptable in a given transaction. The amount of funds needed to execute our business plan also depends on what portion of the purchase price of a target business the seller of that business is willing to take in the form of seller notes or our equity or equity in one of our subsidiaries. As noted elsewhere in this report, we intend on paying no more than 60% cash on any acquisition that we execute with a target of 50%. Given these factors, we believe that the amount of outside additional capital necessary to execute our business plan for the next 24 months ranges from $20 million to $60 million. With respect to the prospective acquisitions in the pipeline representing over $50 million in additional revenue, the amount of capital needed ranges from $10 million to $30 million.
We intend to raise capital for additional acquisitions primarily through debt financing at our operating company level, additional equity offerings by the Company, or by undertaking a combination of any of the above. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all.
There is no guarantee that we will be able to acquire additional businesses under the terms outlined above or that we will be able to find additional acquisition candidates should we terminate our plans for any of our current acquisition targets.
Summary of Cash Flow
The following table provides detailed information about our net cash flow for the three months ended March 31, 2022 and 2021.
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (4,212,202 | ) | $ | (712,105 | ) | ||
| Net cash used in investing activities | (15,963 | ) | (2,749 | ) | ||||
| Net cash provided by financing activities | 5,574,127 | 293,679 | ||||||
| Net change in cash | 1,345,962 | (421,175 | ) | |||||
| Cash and cash equivalents at beginning of period | 205,093 | 484,949 | ||||||
| Cash and cash equivalents at end of period | $ | 1,551,055 | $ | 63,774 | ||||
Our net cash used in operating activities was $4,212,202 for the three months ended March 31, 2022, as compared to $712,105 for the three months ended March 31, 2021. For the three months ended March 31, 2022, our net loss of $16,574,477 and non-cash finance expense associated with future equity agreements of approximately $10,844,961, were the primary drivers for cash used in operations. For the three months ended March 31, 2021, our net loss of $780,641 and the decrease in deferred revenue of $117,491 were the primary drivers for cash used in operations.
Our net cash used in investing activities was $15,963 for the three months ended March 31, 2022, as compared to $2,749 for the three months ended March 31, 2021. Net cash used in investing activities for the three months ended March 31, 2022 and 2021 consisted of equipment purchases.
Our net cash provided by financing activities was $5,574,127 for the three months ended March 31, 2022, as compared to $293,679 for the three months ended March 31, 2021. Net cash provided by financing activities for the three months ended March 31, 2022 consisted of net proceeds from the IPO of $12,738,288, proceeds from convertible notes and notes payable of $783,738 and proceeds from related parties of $344,873, offset by repayments of convertible notes and notes payable of $6,924,841, repayments to related parties of $1,314,382 and payment of fees from issuance of common stock of $53,549, while net cash provided by financing activities for the three months ended March 31, 2021 consisted of proceeds from convertible notes and notes payable of $293,679 and proceeds from related parties of $87,617.
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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 the 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 1,440,000 units to the underwriters, at a purchase price per unit of $9.10 (the offering price to the public of $10.00 per unit minus the underwriters’ discount), and also agreed to grant to the underwriters a 45-day option to purchase up to 216,000 additional shares of common stock, up to 216,000 additional series A warrants, and/or up to 216,000 additional series B warrants, in any combination thereof, at a purchase price to the public of $9.98 per share and $0.01 per warrant, less underwriting discounts and commissions, solely to cover over-allotments, if any.
On February 18, 2022, the closing of the IPO was completed. At the closing, the underwriters partially exercised the option and purchased 206,390 series A warrants and 206,390 series B warrants. Therefore, we sold 1,440,000 shares of common stock, 1,646,390 series A warrants and 1,646,390 series B warrants for total gross proceeds of $14,404,128. After deducting the underwriting commission and expenses, we received net proceeds of approximately $12,763,000. We used to 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 $7.00 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 exercise price and number of shares of common stock issuable upon exercise of the series A warrants may be adjusted in certain circumstances, including in the event of a stock dividend, extraordinary dividend on or recapitalization, reorganization, merger or consolidation.
The series B warrants are exercisable until the fifth anniversary of the issuance date at an exercise price equal to $10.00 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 March 31, 2022, 1,437,730 of the series B warrants were exercised on a cashless basis and we issued 1,437,730 shares of common stock upon such exercise.
Private Placement of Series A Convertible Preferred Stock
On July 1, 2021, we completed a private placement in which we sold an aggregate of 6,000 shares of series A convertible preferred stock and warrants for the purchase of an aggregate of 8,999,552 shares of common stock to certain investors for gross proceeds of $6,000,000. On August 18, 2021, we completed an additional closing of this private placement in which we sold 2,000 shares of series A convertible preferred stock and warrants for the purchase of 2,999,852 shares of common stock for gross proceeds of $2,000,000.
During the three months ended March 31, 2022, the holders converted an aggregate of 7,000 shares of series A convertible preferred stock into 10,499,469 shares of common stock.
Outstanding Debt
Debentures
On November 5, 2021, we entered into a securities purchase agreement with certain investors, pursuant to which we sold 12% unsecured subordinated convertible debentures in the aggregate principal amount of $2,250,000 to such investors for gross proceeds of $2,214,000, the proceeds of which were used to fund the acquisition of Nexus. In January 2022, the Company received an additional $36,000, bringing the gross proceeds to a total $2,250,000. Interest at a rate of 12% per annum accrued on the principal balance of the debentures from the date of issuance until February 14, 2022, the date that the registration statement related to the IPO was declared effective by the Securities and Exchange Commission (the “IPO Date”). The debentures are due and payable on the earliest of the maturity date, November 30, 2022, or upon their earlier conversion or redemption. As of March 31, 2021, the outstanding principal balance of the debentures was $2,250,000 and debt issuance costs was $117,875.
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At any time after August 14, 2022, the sixth month anniversary of the IPO Date, the holders may convert the principal amount of the debentures into shares of common stock at a conversion price that is equal to the lower of $2.50 and the lowest volume weighted average price during the 10 trading days immediately following the IPO; provided further, that the conversion price shall not be less than $1.00. The conversion price is subject to standard equitable adjustments for stock splits, stock combinations, recapitalizations and similar transactions. The debentures contain beneficial ownership limitations which limit the holders’ beneficial ownership to 9.99% of our outstanding common stock. We may redeem some or all of the outstanding principal amount of the debentures for cash in an amount equal to 115% of the outstanding principal amount of the debentures, plus accrued but unpaid interest and any other amounts due under the debentures. The securities purchase agreement and the debentures contain customary representations, warranties, affirmative and negative covenants and events of default for loans of this type. The debentures are guaranteed by each of our subsidiaries.
Acquisition Notes
On November 8, 2021, we issued a 5% secured subordinated promissory note in the principal amount of $1,900,000 to Justin Francisco and Steven Rubert in connection with the acquisition of Nexus. This note accrues interest at 5% 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 attached to the note, with all amounts due and payable on November 8, 2024. We may prepay all or any portion of this note any time prior to maturity without premium or penalty. The 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 our assets; provided that such security interest is subordinate to the rights of the lenders under any such senior secured indebtedness. As of March 31, 2022, the outstanding principal balance of this note was $1,900,000.
On July 1, 2021, we issued a 6% secured subordinated promissory note in the principal amount of $3,000,000 to 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 attached to the note, with all amounts due and payable on July 1, 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. As of March 31, 2022, the outstanding principal balance of this note was $3,000,000.
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, 2022. The loan is secured by all of our assets and contains customary events of default. As of March 31, 2022, the outstanding principal balance of this note was $1,325,000.
On May 10, 2021, we issued a convertible promissory note in the principal amount of $73,727 to Bevilacqua PLLC, our outside securities counsel. This note accrued interest at 15% per annum and was to mature on May 10, 2022. As of March 31, 2022, the outstanding principal balance of this note was $73,727. On April 8, 2022, the holder converted this note into 73,267 shares of common stock.
On December 18, 2020, we entered into a loan and security agreement with Peah Capital, LLC for a term loan in the principal amount of up to $1,500,000, which was amended on April 27, 2021 to increase the loan amount to $1,625,000. In connection with such amendment, on April 27, 2021, we issued a second amended and restated promissory note to Peah Capital, LLC in the principal amount of $1,625,000. The loan bears interest at a rate of 17.5% per annum, provided that upon an event of default, such rate shall increase to 25% per annum. The loan is due and payable on the earlier of: (i) eighteen (18) months from the date of the note or (ii) upon completion of the IPO. The loan is secured by all of our assets and contains customary events of default. As of March 31, 2022, the outstanding principal balance of this note was $614,906.
Since inception, the Company has issued other promissory notes to various lenders, most of which were repaid in full upon closing of the IPO, with the exception of a note which has an outstanding balance of $200,000 at March 31, 2022. This note accrues interest at rate of 12%. The note is unsecured and contain customary events of default.
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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”), we entered into a promissory note with the U.S. Small Business Administration (the “SBA”) 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 March 31, 2022, the outstanding principal balance of this loan was $300,000.
PPP Loans
In May 2020, we received $239,262 in paycheck protection program (“PPP”) loans under the CARES Act. This loan bears interest at a rate of 1% per annum and matures in April 2022. As of March 31, 2022, the outstanding principal balance of this loan was $239,262.
In February 2021, we received an additional $261,164 in PPP loans under the CARES Act. This loan bears interest at a rate of 1% per annum and matures in January 2023. As of March 31, 2022, the outstanding balance of this loan was $261,164.
The PPP provides that the PPP loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company plans to file for forgiveness during 2022.
Other
In 2021, DSO entered into two revolving lines of credit with a bank, which permitted borrowings up to $1,176,000, and bear interest at 8.99% and 7.99%. As of March 31, 2022, the outstanding principal balance of these lines of credit was $431,525.
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.
Critical Accounting Policies
The following discussion relates to critical accounting policies. The preparation of financial statements in conformity with United States generally accepted accounting principles requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:
Revenue Recognition. We evaluate and recognize revenue 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”).
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Products (BSNM, DSO and GSP)
We primarily generate product revenues by manufacturing and packaging of nutraceutical products as a contract manufacturer for customers. The majority of our revenue is recognized when we satisfy a single performance obligation by transferring control of products to a customer. Control is generally transferred when our products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. Our general payment terms are short-term in duration. We do not have significant financing components or payment terms. We did not have any material unsatisfied performance obligations at March 31, 2022 or December 31, 2021.
Distribution expenses to transport our products, where applicable, and warehousing expense after manufacture are accounted for within operating expenses.
Advertising/Marketing (Nexus)
Nexus generates advertising revenues 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. To illustrate the revenue process, a digital marketer logs onto the platform and selects an offer to promote for the day. The platform generates a unique link which the digital marketer distributes either via email or a banner ad. As the link is distributed to the consumer via the marketing efforts of the digital marketer, the consumer visits that link to make a purchase from the customer’s website, and when such purchase is complete, revenue is recognized by Nexus and the sale is credited to the digital marketer’s Nexus account. The benefit to the digital marketer operating on Nexus’ network is that the digital marketer receives a commission without the possibility of a claw back or refund. The customer benefits through increased sales of its products as a result of the marketing efforts of the digital marketers. Nexus’ platform acts as the transaction ledger, keeping track of clicks, sales and commissions.
Nexus’ general payment terms are short-term in duration. Insertion orders are utilized between Nexus and the customer for each campaign related to a particular product being marketed. The insertion order remains in effect until the customer or Nexus terminates the order, and either party may terminate the order at any time upon 14 days’ written notice. The customer is billed weekly for the sales digital marketers have generated for the week. Nexus does not have significant financing components or payment terms. Nexus did not have any material unsatisfied performance obligations at March 31, 2022 or December 31, 2021.
Inventory, net. Inventory consists of raw materials, work in progress, and finished goods and is valued at the lower of cost (first-in, first-out) 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 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 our 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. We provide for depreciation and amortization over the estimated useful lives of various assets using the straight-line method ranging from 3-15 years.
Goodwill and Intangible Assets. Goodwill is not amortized but is subject to annual impairment tests. In addition to the annual impairment review, impairment reviews are performed whenever circumstances indicate a possible impairment may exist. Impairment testing for goodwill is done at the reporting unit level. We compare the fair value of the reporting unit assets to the carrying amount, on at least an annual basis, to determine if there is potential impairment. If the fair value of the reporting unit assets is less than their carrying value, an impairment loss will be recognized. No goodwill impairments were recognized during three months ended March 31, 2022 and 2021. Intangible assets consist of customer relationships, non-compete agreements, license agreements, goodwill, and intellectual property acquired in the acquisitions of BSNM, DSO, Nexus, and GSP. We amortize intangible assets with finite lives on a straight-line basis over their estimated useful lives which ranges from 3 to 15 years.
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Long-Lived Assets. We assess 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. We had no impairment of long-lived assets at March 31, 2022 and December 31, 2021.
Lease Right-of-Use Assets and Liabilities. We record a right-of-use asset and lease liability on the balance sheet 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. Lease liabilities are recognized based on the present value of the remaining lease payments and are discounted using the most reasonable incremental borrowing rate. We use the implicit rate when it is readily determinable. Since our lease does not provide an implicit rate, to determine the present value of lease payments, management uses our incremental borrowing rate based on the information available at lease commencement. Leases with a term of 12 months or less at inception are not recorded on our balance sheet and are expensed on a straight- line basis over the lease term.
Stock-based Compensation. We recognize expense for stock options and warrants granted over the vesting period based on the fair value of the award at the grant date, are valued using a Black-Scholes option pricing model to determine the fair market value of the stock options. We calculate 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. We then compare the recorded expense to the tax deduction received for each stock option grant.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not applicable.
| ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
We have adopted and maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this report, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission (the “SEC”). Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, our management, including our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure
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 months ended March 31, 2022 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. |
On March 10, 2022, we granted restricted stock awards for an aggregate of 877,000 shares of common stock to certain directors, officers and consultants under our 2020 Stock Incentive Plan and 2022 Equity Incentive Plan. Except for the foregoing, we have not sold any equity securities during three months ended March 31, 2022 that were not previously disclosed in a current report on Form 8-K that was filed during the quarter.
We did not repurchase any shares of our common stock during the three months ended March 31, 2022.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
| ITEM 5. | OTHER INFORMATION. |
We have no information to disclose that was required to be in a report on Form 8-K during the first quarter of fiscal 2022 but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.
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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: May 16, 2022 | 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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