UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended:
or
For the transition period from ____________ to _____________
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code) |
N/A |
(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | ||
Smaller reporting company | |||
Emerging growth company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for comply with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No
As of November 17, 2023, there were
Smart for Life, Inc.
Quarterly Report on Form 10-Q
Period Ended September 30, 2023
TABLE OF CONTENTS
PART I | ||
FINANCIAL INFORMATION | ||
Item 1. | Financial Statements (Unaudited) | 1 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 28 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 37 |
Item 4. | Controls and Procedures | 37 |
PART II | ||
OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 38 |
Item 1A. | Risk Factors | 38 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 38 |
Item 3. | Defaults Upon Senior Securities | 38 |
Item 4. | Mine Safety Disclosures | 38 |
Item 5. | Other Information | 38 |
Item 6. | Exhibits | 39 |
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
SEPTEMBER 30, 2023 AND DECEMBER 31, 2022
September 30, 2023 | December 31, 2022 | |||||||
(Unaudited) | (As adjusted) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | $ | ||||||
Accounts receivable, net | ||||||||
Inventory, 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 (DEFICIT) | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Accrued expenses | ||||||||
Accrued expenses, related parties | ||||||||
Contract liabilities | ||||||||
Preferred stock dividends payable | ||||||||
Operating lease liability, current | ||||||||
Debt, current, net of unamortized debt discounts | ||||||||
Total current liabilities | ||||||||
Long-term liabilities: | ||||||||
Operating lease liability, noncurrent | ||||||||
Debt, noncurrent, net of unamortized debt issuance cost | ||||||||
Total long-term liabilities | ||||||||
Total liabilities | ||||||||
Commitments and contingencies | ||||||||
Stockholders’ Equity (Deficit) | ||||||||
Preferred stock, $ | ||||||||
Series A Convertible Preferred Stock, $ | ||||||||
Series B 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 AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Revenues | ||||||||||||||||
Products | $ | $ | $ | $ | ||||||||||||
Advertising | ||||||||||||||||
Total revenues | ||||||||||||||||
Cost of revenues | ||||||||||||||||
Products | ||||||||||||||||
Advertising | ||||||||||||||||
Total cost of revenues | ||||||||||||||||
Gross profit | ||||||||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative | ||||||||||||||||
Compensation – administrative | ||||||||||||||||
Professional services | ||||||||||||||||
Consulting fees – related parties | ||||||||||||||||
Impairment of intangible assets | ||||||||||||||||
Depreciation and amortization expense | ||||||||||||||||
Total operating expenses | ||||||||||||||||
Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other income (expense) | ||||||||||||||||
Other income (expense) | ( | ) | ( | ) | ||||||||||||
Gain on debt extinguishment | ||||||||||||||||
Change in fair value of derivative liability | ||||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Series A preferred stock dividends | ( | ) | ||||||||||||||
Net loss attributable to common stockholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
$ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
3
SMART FOR LIFE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
For the Three and Nine Months Ended September 30, 2023
Preferred Stock | Common Stock | Additional Paid-In | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
Balance, January 1, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
Exercise of warrants | ||||||||||||||||||||||||||||
Stock based compensation | ||||||||||||||||||||||||||||
Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
Balance, March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||
Conversion of notes and interest | ||||||||||||||||||||||||||||
Conversion of preferred stock | ( | ) | ||||||||||||||||||||||||||
Stock based compensation | — | — | ||||||||||||||||||||||||||
Stock issued for services | ||||||||||||||||||||||||||||
Conversion of board fees | ||||||||||||||||||||||||||||
Conversion of accrued compensation | ||||||||||||||||||||||||||||
Exercise of warrants | ||||||||||||||||||||||||||||
Shares issued for cash, net | ||||||||||||||||||||||||||||
Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
Stock issued for services | ||||||||||||||||||||||||||||
Exercise of warrants | ( | ) | ||||||||||||||||||||||||||
Shares issued in connection with reverse stock split | ||||||||||||||||||||||||||||
Stock based compensation | — | — | ||||||||||||||||||||||||||
Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
Balance, September 30, 2023 | $ | $ | $ | $ | ( | ) | $ |
For the Three and Nine Months Ended September 30, 2022
Preferred Stock | Common Stock | Additional Paid-In | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
Balance, January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
Stock issued for cash with initial public offering | ||||||||||||||||||||||||||||
Series A warrants issued in connection with initial public offering | ||||||||||||||||||||||||||||
Series B warrants in connection with initial public offering | ||||||||||||||||||||||||||||
Warrants issued in connection with debt | ||||||||||||||||||||||||||||
Stock issued upon exercise of Series B Warrants | ||||||||||||||||||||||||||||
Stock issued upon conversion of convertible notes | ||||||||||||||||||||||||||||
Stock issued in connection with acquisition | ||||||||||||||||||||||||||||
Stock issued for conversion of accounts payable | ||||||||||||||||||||||||||||
Stock issued for services | ||||||||||||||||||||||||||||
Stock issued upon conversion of preferred stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
Common stock issued under future equity agreements | ||||||||||||||||||||||||||||
Preferred stock dividend payable | ( | ) | ( | ) | ||||||||||||||||||||||||
Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
Balance, March 31, 2022 | ( | ) | ||||||||||||||||||||||||||
Common stock issued upon conversion of promissory note | ||||||||||||||||||||||||||||
Common stock issued upon option exercise | ||||||||||||||||||||||||||||
Preferred stock dividend payable | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
Change in derivative liability | — | — | ||||||||||||||||||||||||||
Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
Balance, June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
Common stock issued upon exercise of series B warrants | ( | ) | ||||||||||||||||||||||||||
Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
Balance, September 30, 2022 | $ | $ | $ | $ | ( | ) | $ |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4
SMART FOR LIFE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Nine Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Amortization of debt issuance cost | ||||||||
Discount on debt obtained | ( | ) | ||||||
Depreciation and amortization expense | ||||||||
Gain on extinguishment of debt | ( | ) | ( | ) | ||||
Impairment on intangible assets | ||||||||
Stock-based compensation | ||||||||
Interest expense associated with future equity agreements | ||||||||
Non-cash financing expenses – stock issued for services | ||||||||
Non-cash operating lease costs, net | ||||||||
Change in value of derivative liability | ||||||||
Provision for bad debt | ||||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | ( | ) | ( | ) | ||||
Inventory | ( | ) | ||||||
Prepaid expenses and other current assets | ||||||||
Deposits and other assets | ( | ) | ||||||
Accounts payable | ||||||||
Accrued expenses | ||||||||
Accrued expenses, related parties | ||||||||
Contract liabilities | ||||||||
Net cash used in operating activities | ( | ) | ( | ) | ||||
Cash flows from investing activities: | ||||||||
Cash paid for acquisition of Ceautamed | ( | ) | ||||||
Additions to property and equipment | ( | ) | ( | ) | ||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Payments to related parties | ( | ) | ||||||
Receipts from related parties | ||||||||
Proceeds from initial public offering | ||||||||
Proceeds from issuance of common stock, net | ||||||||
Proceeds from exercise of warrants | ||||||||
Proceeds from debt | ||||||||
Repayments on debt | ( | ) | ( | ) | ||||
Payment of fees from issuance of common stock | ( | ) | ||||||
Net cash provided by financing activities | ||||||||
Net increase (decrease) in cash | ( | ) | ||||||
Cash, beginning of period | ||||||||
Cash, end of period | $ | $ | ||||||
Supplemental disclosure of cash flow information: | ||||||||
Interest paid | $ | $ | ||||||
Taxes paid | $ | $ | ||||||
Non-cash investing and financing activities: | ||||||||
Stock issued for conversion of accounts payable | $ | $ | ||||||
Stock issued for conversion of accrued compensation | $ | $ | ||||||
Stock issued for conversion of convertible notes and interest | $ | $ | ||||||
Stock issued for exercise of warrants | $ | $ | ||||||
Conversion of notes payable to accrued expenses | $ | $ | ||||||
Conversion of interest to notes payable | $ | $ | ||||||
Stock issued for conversion of accrued board fees | $ | $ | ||||||
Debt issued in connection with acquisition of Ceautamed | $ | $ | ||||||
Equipment obtained with financing | $ | $ |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
5
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Note 1 — Description of Business
Smart for Life, Inc., formerly Bonne Santé Group, Inc. (“SMFL”), is a Nevada corporation which was formed on February 2, 2017. Structured as a global holding company, it is engaged in the development, marketing, manufacturing, acquisition, operation and sale of a broad spectrum of nutraceutical and related products with an emphasis on Health & Wellness.
On March 8, 2018, SMFL acquired
On July 1, 2021, SMFL acquired
On August 24, 2021, Smart for Life Canada Inc. (“DSO Canada”) was established as a wholly owned subsidiary of Doctors Scientific Organica, LLC in Canada. SMFL Canada sells retail products through a retail store location in Montreal Canada and the same location also acts as distribution center for international direct to consumer and big box customers. It maintains inventory and employees at this location.
On November 8, 2021, SMFL acquired
On December 6, 2021, SMFL acquired
On July 29, 2022, SMFL acquired
On August 15, 2022, SMFL entered into a joint
venture with a seller of Ceautamed to form Smart Acquisition Group, LLC. This subsidiary is
6
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Note 2 — Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements reflect the consolidated operations of SMFL and its wholly owned subsidiaries BSNM, DSO, DSO Canada, Nexus, GSP, and Ceautamed (collectively the “Company”) and are prepared in the United States Dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
The Company’s fiscal year end is December 31. The Company uses the accrual method of accounting. The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements. The December 31, 2022 balance sheet has been derived from audited consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023 and 2022 have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.
The unaudited financial information included in this report includes all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods. The results of operations for the nine months ended September 30, 2023 are not necessarily indicative of the results of the full fiscal year.
The condensed consolidated financial statements included in this report should be read in conjunction with the financial statements and notes thereto included in the Company’s financial statements for the fiscal year ended December 31, 2022.
The December 31, 2022 condensed consolidated
balance sheet reflected within the accompanying condensed consolidated financial statements reflects a change for a correction of an
immaterial error. The error pertains to the classification of assets acquired in the acquisitions of Nexus and Ceautamed. A reclassification
of $
On April 24, 2023, the Company effected a
On August 2, 2023, the Company effected a
On October 27, 2023, the Company effected a 1-for-3
reverse stock split. The impact of this transaction is reflected within all common stock, options, and warrant information retrospectively
in these condensed consolidated financial statements. As a result of the reverse stock split, the Company’s authorized common stock
decreased to
Liquidity, Capital Resources and Going Concern
The accompanying unaudited condensed consolidated
financial statements have been prepared assuming that the Company will continue as a going concern. The Company has sustained recurring
losses and has a deficiency in working capital of approximately $
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with GAAP applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations in the normal course of business. Management believes that current available resources will not be sufficient to fund the Company’s planned expenditures over the next 12 months. These factors, individually and collectively indicate that a material uncertainty exists that raises substantial doubt about the Company’s ability to continue as a going concern for one year from the date of issuance of these condensed interim consolidated financial statements.
The Company will be dependent upon the raising of additional capital through placement of common shares, and/or debt financing in order to implement its business plan and generating sufficient revenue in excess of costs. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. There is no assurance that the Company will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on the Company’s financial condition. These unaudited condensed consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
7
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates include, among other items, assessing the collectability of receivables, the realization of deferred taxes, useful lives and recoverability of tangible and intangible assets, assumptions used in the valuation of options and warrants, 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 September 30, 2023 and December 31, 2022, there were no cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
The Company’s allowance for doubtful accounts
represents the Company’s estimate for uncollectible receivables based on a review of specific accounts and the Company’s
historical collection experience. The Company writes off specific accounts based on an ongoing review of collectability, as well as management’s
past experience with the customers. Accounts receivables are presented net of an allowance for doubtful accounts of $
Inventory
Inventory consists of raw materials, packaging materials, and finished goods and is valued at the lower of cost (first-in, first-out) (replacement cost or net realizable value). An allowance for inventory obsolescence is provided for slow moving or obsolete inventory to write down historical cost to net realizable value. The Company primarily performs its manufacturing for functional foods and nutraceuticals in the form of bars, cookies, powders, tablets and capsules.
The allowance for obsolescence is an estimate established through charges to cost of goods sold. Management’s judgment in determining the adequacy of the allowance is based upon several factors which include, but are not limited to, analysis of slow-moving inventory, analysis of the selling price of inventory, the predetermined shelf life of the product, and management’s judgment with respect to current economic conditions. Given the nature of the inventory, it is reasonably possible the Company’s estimate of the allowance for obsolescence will change in the near term.
Property and Equipment
Property and equipment are recorded at cost.
Expenditures for major betterments and additions are charged to the asset accounts, while replacements, maintenance and repairs which
do not improve or extend the lives of the respective assets are charged to expense as incurred. The Company provides for depreciation
and amortization over the estimated useful lives of various assets using the straight-line method ranging from
Goodwill
The Company allocates goodwill to reporting units based on the reporting unit expected to benefit from the business combination. The Company evaluates its reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on December 31 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
No goodwill impairments were recognized during the three and nine months ended September 30, 2023 and 2022.
Intangible Assets
Intangible assets consist of customer contracts,
developed technology, non-compete agreements, license agreements, patents, tradenames, supplier contracts, and intellectual property acquired
in the acquisitions of BSNM, DSO, Nexus, GSP, and Ceautamed. The Company amortizes intangible assets with finite lives on a straight-line
basis over their estimated useful lives which ranges from
8
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets
when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An
impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of assets) is less than
its carrying amount. Any required impairment loss is measured as the amount by which the asset’s carrying value exceeds its fair
value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. The Company recognized
an impairment related to the affiliate relationships associated with the Nexus subsidiary of $
Lease Right-of-Use Assets and Liabilities
The Company records a right-of-use (“ROU”) asset and lease liability on the condensed consolidated balance sheets for all leases with terms longer than 12 months. Leases are classified either as finance or operating with the classification affecting the pattern of expense recognition.
Related Parties
The Company follows Accounting Standards Codification (“ASC”) 850, “Related Party Disclosures,” for the identification of related parties and disclosure of related party transactions (see Note 13).
Debt Issuance Costs
In accordance with ASC 835-30, Other Presentation Matters, the Company has reported debt issuance cost as a deduction from the carrying amount of debt and amortizes these costs using the effective interest method over the term of the debt as interest expense.
Fair Value Measurement
Under ASC Topic 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). ASC Topic 820 establishes a hierarchy for inputs to valuation techniques used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that reflect assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. There are three levels to the hierarchy based on the reliability of inputs, as follows:
Level 1 - | Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
Level 2 - | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets and liabilities in markets that are not active. |
Level 3 - | Unobservable inputs for the asset or liability. The degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. |
The Company’s cash and cash equivalents are measured using Level 1 inputs and include cash on hand, deposits in banks, certificates of deposit and money market funds. Due to their short-term nature, the carrying amounts reported in the consolidated balance sheets approximate the fair value of cash and cash equivalents.
The Company has certain assets that are measured at fair value on a non-recurring basis including those described in Note 6 —Intangible Assets, and are adjusted to fair value only when the carrying values are more than the fair values. The categorization of the framework used to price the assets is considered a Level 3 measurement due to the subjective nature of the unobservable inputs used to determine the fair value.
Certain nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The estimated fair value of financial instruments is determined using the best available market information and appropriate valuation methodologies. Considerable judgment is necessary, however, in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange, or the value that ultimately will be realized upon maturity or disposition. In the evaluation of the estimated value of such assets, data for determining the value of the estimates are utilized based on the relevant facts and circumstances. The use of different market assumptions may have a material effect on the estimated fair value amounts.
9
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Revenue Recognition
The Company evaluates and recognizes revenues by:
● | identifying the contract(s) with the customer, |
● | identifying the performance obligations in the contract, |
● | determining the transaction price, |
● | allocating the transaction price to performance obligations in the contract; and |
● | recognizing revenue as each performance obligation is satisfied through the transfer of a promised good or service to a customer (i.e., “transfer of control”). |
Products (BSNM, DSO, GSP, and Ceautamed)
The Company generates product revenues by manufacturing and packaging of nutraceutical products as a contract manufacturer for customers. The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company records deferred revenues for prepaid amounts from customers due to no performance obligations being met at such time. The Company did not have any material unsatisfied performance obligations at September 30, 2023 or December 31, 2022.
Distribution expenses to transport the Company’s products, where applicable, and warehousing expense after manufacture are accounted for within operating expenses.
Advertising /Marketing (Nexus)
Nexus generates advertising revenue when sales of listed products are sold by product vendors through its network as a result of the marketing efforts of digital marketers. The products on the network come from several different customers, which pay Nexus a specific amount per sale, the amount of which is dictated by the customer. The revenue is recognized upon the sale of a product by the customer, net of fraudulent traffic or disputed transactions. A portion of the specific amount received by Nexus for that sale is paid out to the digital marketer as a commission, which is recorded in cost of sales.
Nexus’ general payment terms are short-term in duration. Nexus does not have significant financing components or payment terms. Nexus did not have any material unsatisfied performance obligations at September 30, 2023 or December 31, 2022.
Freight
Freight costs are recorded in cost of goods sold
as incurred. Freight costs for the nine months ended September 30, 2023 and 2022 amounted to $
Advertising
Advertising costs are expensed as incurred. Advertising
costs for the nine months ended September 30, 2023 and 2022 were $
Paycheck Protection Program
The Company records Paycheck Protection Program (“PPP”) loan proceeds in accordance with ASC 470, Debt. Debt is extinguished when either the debtor pays the creditor or the debtor is legally released from being the primary obligor, either judicially or by the creditor.
Stock-based Compensation
The Company recognizes expense for stock options and warrants granted over the vesting period based on the fair value of the award at the grant date and valued using a Black-Scholes option pricing model to determine the fair market value of the stock options and warrants. Forfeitures are reduced from options and warrants outstanding and the Company calculates the amount of tax benefit available by tracking each stock option award on an employee-by-employee basis and on a grant-by-grant basis. The Company then compares the recorded expense to the tax deduction received for each stock option and warrant grant. The Company’s policy is to recognize forfeitures as they occur.
10
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Income Taxes
The Company accounts for income taxes under the provisions of ASC 740, Income Taxes. The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. At September 30, 2023 and December 31, 2022, the Company had no liabilities for uncertain tax positions. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. The Company’s tax years subject to examination by tax authorities generally remain open for three (3) years from the date of filing.
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. Due to the continued losses, the Company has recorded a full valuation allowance at the end of September 30, 2023 and December 31, 2022.
Employee Retention Credits
In accordance with the 2022 CARES Act, the Company
filed for Employee Retention Credits for applicable periods in 2020 and 2021. As amounts to be refunded are subject to IRS calculations,
and the timing for processing of the credits are unknown, the Company recognizes as other income amounts refunded upon the receipt of
the payment. During the nine months ended September 30, 2023 and 2022 the Company received $
Net Loss Per Share
Basic and diluted net loss per share of common
stock for the three and nine months ended September 30, 2023, and 2022 was determined by dividing net loss by the weighted average shares
of common stock outstanding during the period. The Company’s potentially dilutive shares, consisting of
Recent Accounting Standards Not Yet Adopted
On August 5, 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06, “Debt – Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40),” which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in GAAP. This ASU is effective for fiscal years beginning after December 31, 2023. The Company is evaluating the impact the adoption will have on the financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326)—Measurement of Credit Losses on Financial Instruments”, which has been subsequently amended (“ASU 2016-13”). This updated accounting guidance significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on trade receivables, loans and other financial instruments. This update is effective for the Company’s fiscal year beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted this new standard on January 1, 2023, and the adoption had no material impact on the Company's consolidated financial statements.
Note 3 — Correction of Prior Period Immaterial Errors
The Company has identified immaterial errors in the Company’s previously issued consolidated financial statements related to intangible assets and goodwill. The error pertains to the classification of assets acquired in the acquisition of Nexus, whereby intangible assets, and the value of such assets, were overstated and goodwill was understated.
In evaluating whether the previously issued Consolidated Financial Statements were materially misstated for the interim or annual periods prior to December 31, 2022, the Company applied the guidance of ASC 250, Accounting Changes and Error Corrections, SEC Staff Accounting Bulletin (“SAB”) Topic 1.M, Assessing Materiality and SAB Topic 1.N, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements and concluded that the effect of the errors on prior period annual financial statements was immaterial. The guidance states that prior-year misstatements which, if corrected in the current year would materially misstate the current year’s financial statements, must be corrected by adjusting prior year financial statements, even though such correction previously was and continues to be immaterial to the prior-year financial statements. Correcting prior-year financial statements for such immaterial misstatements does not require previously filed reports to be amended.
The adjustments required to correct the misstatement
in the financial statements for the year ended December 31, 2022 are reflected in the consolidated balance sheet. The amount of the reclassification
is $
As a result of the misstatement pertaining to
the reclassification of the intangible assets, the Company noted an immaterial error associated with the recording of amortization expense.
The Company recorded an error totaling $
11
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
The Company also reclassified $
The Company’s consolidated balance sheets have been revised from the amounts previously reported to correct the error and the impact of the purchase price allocation change as shown in the table below. See Note 6.
As Previously Reported | PPA Finalization | Corrections | As Adjusted | |||||||||||||
Intangible assets, net | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
Goodwill |
As Previously Reported | PPA Finalization | Corrections | As Adjusted | |||||||||||||
Intangible assets, net | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
Goodwill |
Note 4 — Inventory
September 30, 2023 | December 31, 2022 | |||||||
Raw materials | $ | $ | ||||||
Packaging materials | ||||||||
Finished goods | ||||||||
Inventory in transit | ||||||||
$ | $ |
Note 5 — Property and Equipment
Estimated Useful Lives (in Years) | September 30, 2023 | December 31, 2022 | ||||||||
Furniture and fixtures | $ | $ | ||||||||
Equipment – manufacturing | ||||||||||
Building and equipment | ||||||||||
Leasehold improvements | ||||||||||
Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||||
Property and equipment, net | $ | $ |
12
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Depreciation and amortization expense for the nine months ended September
30, 2023 and 2022 totaled $
Note 6 — Intangible Assets
Estimated Useful Lives (in Years) | September 30, 2023 | December 31, 2022 (As adjusted) | ||||||||
Customer contracts | $ | $ | ||||||||
Developed technology | ||||||||||
Non-compete agreements | ||||||||||
Patents | ||||||||||
Tradename | ||||||||||
Supplier contracts | ||||||||||
Licenses agreements | ||||||||||
Total intangible assets | ||||||||||
Less: amortization | ( | ) | ( | ) | ||||||
Intangibles, net | $ | $ |
The allocation of the Nexus purchase price in 2021 to intangibles assets,
including customer contracts and non-compete agreements, was based on provisional valuations performed to estimate the fair value of the
assets as of the acquisition date. During the three months ended June 30, 2023, the Company noted that an immaterial error existed in
the recording of the allocation of the intangible assets and has reclassified $
The allocation of the Ceautamed purchase price
in 2022 to intangibles assets, including customer contracts and non-compete agreements, was based on provisional valuations performed
to estimate the fair value of the assets as of the acquisition date. The Company engaged an independent valuation firm to perform a purchase
price allocation, noting differences in the intangible assets and values. The independent valuation resulted in reclassification of the
assets which have been represented in the December 31, 2022 balances. Additionally, $
December 31, 2022 previously reported | PPA Adjustments | December 31, 2022 (As Adjusted) | ||||||||||
Customer contracts | $ | $ | ( | ) | $ | |||||||
Developed technology | ||||||||||||
Non-compete agreements | ( | ) | ||||||||||
Patents | ||||||||||||
Tradename | ||||||||||||
Intellectual property | ( | ) | ||||||||||
Supplier contracts | ||||||||||||
Licenses agreements | ||||||||||||
Total intangible assets | $ | $ | ( | ) | $ |
13
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
As a result of decreased revenues within the Nexus
subsidiary during the six months ended June 30, 2023, which are not expected to recover to similar levels, the Company determined that
a triggering event occurred requiring an impairment analysis in accordance with ASC 360. The impairment analysis resulted in the Company
recognizing an impairment of the affiliate relationship asset associated with Nexus of $
Amortization for the three months ended September
30, 2023 and 2022 was $
Amortization for the nine months ended September 30, 2023 and 2022
was $
Years Ending December 31: | ||||
2023 (remainder of year) | $ | |||
2024 | ||||
2025 | ||||
2026 | ||||
2027 | ||||
Thereafter | ||||
Total | $ |
Note 7 — Leases
Leases Involving Real Estate
Leases of distribution and manufacturing facilities,
customer support centers and the Company’s corporate headquarters have lease terms that generally range from
Rental payments on these leases typically provide for fixed minimum payments that increase over the lease term at predetermined amounts. Certain leases of real estate provide for rental increases based on the consumer price index, which are included in the Company’s measurement of lease payments based on the rate or index in effect at lease commencement and are therefore included in the measurement of the lease liabilities.
Leases Involving Equipment
Equipment leases have lease terms that generally
range from less than
Financial Information
Balance Sheet classification | September 30, 2023 |
December 31, 2022 |
||||||||
Right of use assets Operating leases | Operating leases right-of-use asset | $ | $ | |||||||
Lease liabilities | ||||||||||
Current | ||||||||||
Operating leases | Operating lease liabilities, current portion | |||||||||
Noncurrent | ||||||||||
Operating leases | Operating lease liabilities, non-current portion | |||||||||
Total lease liabilities | $ | $ |
Income Statement Classification | September 30, 2023 |
September 30, 2022 |
||||||||
Rent expense | General and administration | $ | $ |
14
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Operating leases | ||||
Cash paid for amounts included in the measurement of lease liabilities | $ |
Operating leases | ||||
Weighted average remaining term (in years) | ||||
Weighted average discount rate | % |
Operating leases | ||||
2023 | $ | |||
2024 | ||||
2025 | ||||
2026 | ||||
2027 | ||||
Thereafter | ||||
Total payments | ||||
Less: interest | ( | ) | ||
Present value of lease liability | ||||
Less: Current portion of lease liabilities | ( | ) | ||
Noncurrent portion of lease liabilities | $ |
Note 8 — Debt
Original Issue Discount Subordinated Debentures
In June 2022, the Company commenced offerings of original issue discount
subordinated debentures. As of September 30, 2023, the Company has completed multiple closings and
issued debentures in the aggregate principal amount of $
15
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Original Issue Discount Secured Subordinated Note
On July 29, 2022, the Company entered into a securities purchase agreement
with an accredited investor, pursuant to which it sold an original issue discount secured subordinated note in the principal amount of
$
Acquisition Notes
On July 1, 2021, the Company issued a
On November 8, 2021, the Company issued a
On July 29, 2022, the Company issued secured subordinated convertible
promissory notes in the aggregate principal amount of $
16
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
On July 29, 2022, the Company issued secured
subordinated promissory notes in the aggregate principal amount of $
On July 29, 2022, the Company issued secured
subordinated promissory notes in the aggregate principal amount of $
17
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Other Promissory Notes and Cash Advances
Promissory Notes
On July 1, 2021, the Company entered into a loan
agreement with Diamond Creek Capital, LLC for a term loan in the principal amount of up to $
In 2018, the Company entered into an amended
loan agreement and convertible promissory note for $
On October 12, 2022, the Company issued promissory
notes in the principal amount of $
On November 2, 2022, the Company issued a promissory
note to a board member in the principal amount of $
On December 6, 2022, the Company issued a promissory
note to a board member in the principal amount of $
On December 21, 2022, the Company issued a promissory
note to a board member in the principal amount of $
On February 8, 2023, the Company issued a promissory
note to a board member in the principal amount of $
On February 14, 2023, the Company issued a promissory note to a third
party in the principal amount of $
On February 16, 2023, the Company issued a promissory
note to a third party in the principal amount of $
18
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
On March 7, 2023, the Company issued a promissory
note to a board member in the principal amount of $
On April 13, 2023, the Company issued a promissory
note to a third party in the principal amount of $
On April 21, 2023, the Company issued a promissory
note to a board member in the principal amount of $
On June 22, 2023, the Company issued a promissory
note to a board member in the principal amount of $
On July 12, 2023, the Company issued a promissory
note to a third party in the principal amount of $
On July 25, 2023, the Company issued a promissory
note to a board member in the principal amount of $
On August 10, 2023, the Company issued a promissory
note to a board member in the principal amount of $
On August 15, 2023, the Company issued a promissory
note to a board member in the principal amount of $
On August 24, 2023, the Company issued a promissory
note to a third party in the principal amount of $
On September 7, 2023, the Company issued a promissory
note to a board member in the principal amount of $
On September 14, 2023, the Company issued a promissory
note to a third party in the principal amount of $
On September 29, 2023, the Company issued a promissory
note to a board member in the principal amount of $
19
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
A note from 2018 with a principal balance of $
Cash Advances
In June 2022, the Company entered into a cash
advance agreement for $
In July 2022, the Company entered into a cash
advance agreement for $
In August 2022, the Company entered into a cash
advance agreement for $
In September 2022, the Company entered into a
cash advance agreement for $
In November 2022, the Company entered into cash
advance agreements for an aggregate of $
In December 2022, the Company entered into cash
advance agreements for $
In January 2023, the Company entered into cash
advance agreements for $
In June 2023, the Company refinanced the January
2023 agreements with balances of $
In July 2023, the Company entered into cash advance
agreements for $
In August 2023, the Company refinanced an agreement
from June 2023, as a result the Company received an additional $
Equipment Financing Loan
In May 2022, the Company entered into an equipment
financing loan for $
In August 2022, the Company entered into an equipment
financing loan for $
In July 2022, the Company entered into an equipment
financing loan for $
20
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Revolving Lines of Credit
In 2021, DSO entered into two revolving lines
of credit with a bank, which permit borrowings up to $
In August 2022, Ceautamed entered into a revolving
line of credit with a bank, which permits borrowings up to $
In September 2022, DSO entered into a revolving
line of credit with a bank, which permits borrowings up to $
In September 2023, DSO entered into a merchant
loan agreement for $
EIDL Loan
In June 2020, pursuant to the economic injury
disaster loan (“EIDL”) program under the under the provisions of the Coronavirus Aid, Relief and Economic Security Act (the
“CARES Act”), the Company entered into a promissory note with the U.S. Small Business Administration (the “SBA”)
with a principal amount of $
PPP Loans
In February 2021, the Company received an additional
$
Total Debt
Original issue discount subordinated debentures | $ | |||
Original issue discount secured subordinated note | ||||
Acquisition notes | ||||
Promissory notes and cash advances | ||||
Revolving lines of credit | ||||
Equipment financing loan | ||||
EIDL loan | ||||
PPP loans | ||||
Debt issuance costs | ( | ) | ||
Debt, net | ||||
Debt, current | ||||
Debt issuance costs, current | ( | ) | ||
Current portion of debt, net | ||||
Debt, non-current | ||||
Debt issuance costs, non-current | ( | ) | ||
Non-current portion of debt, net | $ |
Balance at December 31, 2022 | $ | |||
Proceeds from new debt issued in 2023 | ||||
Repayment of principal during 2023 | ( | ) | ||
Amortization of debt discounts | ||||
Stock issued for conversion of principal of debt | ( | ) | ||
Gain on extinguishment of debt in 2023 | ( | ) | ||
Conversion of interest to notes payable | ||||
Conversion of principal to accrued expenses | ( | ) | ||
Balance at September 30, 2023 | $ |
21
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
For the Year Ended December 31: | ||||
2023 (remainder of year) | $ | |||
2024 | ||||
2025 | ||||
2026 | ||||
2027 | ||||
Thereafter | ||||
Total | $ |
Note 9 — Concentrations of Credit Risks
Credit Risks
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and accounts receivable. The Company maintains bank accounts with several financial institutions. Concentrations of credit risk with respect to accounts receivable are limited to the dispersion of customers across different industries and geographic regions.
Cash
The Company places its cash with high credit
quality financial institutions. At September 30, 2023 and December 31, 2022, the Company had no cash balances in excess of the Federal
Deposit Insurance Corporation coverage of $
Major Customers
For the nine months ended September 30, 2023 and
2022, the Company had two significant customers representing an aggregate of
For the three months ended September 30, 2023
and 2022, the Company had two and two significant customers representing an aggregate of
Major Vendors
For the nine months ended September 30, 2023,
the Company had one major supplier representing
For the three months ended September 30, 2023
and 2022, the Company had one major supplier representing
Note 10 — Income Taxes
The Company has evaluated the positive and negative evidence in assessing the realizability of its deferred tax assets. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, estimates of projected future taxable income and tax planning strategies to determine which deferred tax assets are more likely than not to be realized in the future.
The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. Interest and penalties related to income tax matters, if any, would be recognized as a component of income tax expense. At September 30, 2023 and December 2022, the Company had
liabilities for uncertain tax positions. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. Currently, the tax years subsequent to 2018 are open and subject to examination by the taxing authorities.
At September 30, 2023, the Company had net operating
loss carry forwards for federal income tax purposes of approximately $
22
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Note 11 — Stockholders’ Equity
Series A Preferred Stock
During the nine months ended September 30, 2023,
the remaining
Series B Preferred Stock
On May 25, 2023, the Company filed a certificate
of designation with the Nevada Secretary of State to establish its series B preferred stock. The Company designated a total of
Dividend Rights. Holders of series B preferred stock are entitled to receive dividends in the same form as dividends paid on shares of the common stock only when and if such dividends are paid on shares of the common stock. No other dividends shall be paid on shares of series B preferred stock.
Liquidation Rights. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of series B preferred stock shall be entitled to receive out of the assets of the Company the same amount that a holder of common stock would receive if the series B preferred stock were fully converted (disregarding for such purposes any conversion limitations) to common stock which amounts shall be paid prior to all holders of common stock.
Voting Rights. The series B preferred stock shall vote together with the common stock on an as-converted basis.
Conversion Rights. Each share of series
B preferred stock is convertible, at any time and from time to time from at the option of the holder thereof, into that number of shares
of common stock determined by dividing the stated value of such share of series B preferred stock
In May 2023, the Company issued
In June 2023, the Company issued
23
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Common Stock
On February 16, 2022,
On February 18, 2022, the closing of the IPO was
completed. At the closing, the underwriters partially exercised the option and purchased
On
February 18, 2022, the Company issued
On
February 18, 2022, the Company issued
On
February 18, 2022, the Company issued
On
February 18, 2022, the Company issued
On
February 18, 2022, the Company issued an aggregate of
In
February through March 2022, the Company issued
On
April 17, 2023, the Company issued
On May 4, 2023, a shareholder converted
On
May 2, 2023, the Company entered into a securities purchase agreement with an institutional investor, pursuant to which the Company agreed
to issue and sell, in a registered direct offering,
H.C.
Wainwright & Co., LLC (the “Placement Agent”) acted as the exclusive placement agent in connection with this offering
and received a cash fee equal to
24
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
On May 17, 2023, the Company entered into a securities
purchase agreement with an institutional investor, pursuant to which the Company agreed to issue and sell, in a registered direct offering
The
Placement Agent acted as the exclusive placement agent in connection with this offering and received a cash fee equal to
On
May 24, 2023, the Company issued
On
August 29, 2023, the Company issued
During the nine months ended September 30, 2023,
the Company issued
Stock Options and Warrants
In
September 2020, the Company adopted its 2020 Incentive Plan (the “2020 Plan”) under which the Company is authorized to issue
awards for up to
At
September 30, 2023 and December 2022, there were
In January 2022, the Company adopted its 2022
Equity Inventive Plan (the “2022 Plan”) under which the Company is authorized to issue awards for up to
On
August 12, 2022, the Company issued stock options to employees under the 2022 Plan for an aggregate of
The Company recognized $
The series A warrants sold in the IPO are exercisable
until the fifth anniversary of the issuance date at an exercise price equal to $
The series B warrants sold in the IPO are exercisable
until the fifth anniversary of the issuance date at an exercise price equal to $
In the nine months ended September 30, 2023 and
2022, warrant holders exercised an aggregate of
The warrant terms include a fundamental transaction clause whereby there is a change in control of the ownership of the company outside the control of the company – such as an unsolicited takeover of the company by an outsider – the holder of the warrant can demand either the fair value of the warrants in cash ( using a Black Scholes formula ) or common stock in the successor entity.
25
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
2023-Stock Options | 2023-Warrants | |||||||||||||||
Number of Options | Weighted Average Exercise Price | Number of Warrants | Weighted Average Exercise Price | |||||||||||||
Outstanding at January 1, 2023 | $ | $ | ||||||||||||||
Granted | ||||||||||||||||
Exercised | ||||||||||||||||
Forfeited | ||||||||||||||||
Outstanding at September 30, 2023 | $ | $ | ||||||||||||||
Exercisable at September 30, 2023 |
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 September 30, 2022 | $ | $ | ||||||||||||||
Exercisable at September 30, 2022 |
Valuation Assumptions for Stock Options and Warrants
Risk-free interest rate | % | |||
Expected volatility | % | |||
Expected life (years) | ||||
Dividend yield | % |
The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns. The risk-free rate is based on the U.S. Treasury yield constant maturity in effect at the time of grant for periods corresponding with the expected life of the option.
26
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Note 12 — Commitments and Contingencies
From time to time, the Company may become subject to threatened and/or asserted claims arising in the ordinary course of business. Management is not aware of any matters, either individually or in the aggregate, that are reasonably likely to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.
Note 13 — Related Party Transactions
The Company entered into debt with related parties which are reflected in Note 8.
The Company is party to a management services
agreement with Trilogy Capital Group, LLC (“Trilogy”), a company controlled by the Company’s Executive Chairman. For
the nine months ended September 30, 2023 and 2022, the Company paid Trilogy $
Note 14 — Subsequent Events
In accordance with ASC 855, Subsequent Events, the Company has reviewed its operations subsequent to September 30, 2023 to the date these condensed consolidated financial statements were issued, and has determined that, except as set forth below, it does not have any material subsequent events to disclose in these financial statements.
On October 18, 2023, the Company issued
On October 23, 2023, the Company issued an aggregate
of
On October 30, 2023, the Company issued
Following the reverse stock split on October 27, 2023, the
Company issued
27
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this report. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report.
Use of Terms
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our” and “our company” are to Smart for Life, Inc., a Nevada corporation, and its consolidated subsidiaries.
Special Note Regarding Forward Looking Statements
This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
● | our goals and strategies; |
● | our future business development, financial condition and results of operations; |
● | expected changes in our revenue, costs or expenditures; |
● | growth of and competition trends in our industry; |
● | our expectations regarding demand for, and market acceptance of, our products; |
● | our expectations regarding our relationships with investors, institutional funding partners and other parties we collaborate with; |
● | fluctuations in general economic and business conditions in the markets in which we operate; and |
● | relevant government policies and regulations relating to our industry. |
In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022 elsewhere in this report. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
28
The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
Overview
We are engaged in the development, marketing, manufacturing, acquisition, operation and sale of a broad spectrum of nutritional and related products with an emphasis on health and wellness. Structured as a global holding company, we are executing a buy-and-build strategy with serial accretive acquisitions creating a vertically integrated company with an objective of aggregating companies generating a minimum of $300 million in revenues by the fourth quarter of 2026. To drive growth and earnings, we are developing proprietary products as well as acquiring other profitable companies, encompassing brands, manufacturing and distribution channels.
We also operate a network platform in the affiliate marketing space. Affiliate marketing is an advertising model in which a product vendor compensates third-party digital marketers to generate traffic or leads for the product vendor’s products and services. The third-party digital marketers are referred to as affiliates, and the commission fee incentivizes them to find ways to promote the products being sold by the product vendor.
On March 8, 2018, we acquired 51% of Millenium Natural Manufacturing Corp. and Millenium Natural Health Products Inc. and on October 9, 2019, we acquired the remaining 49% of these companies. On September 30, 2020, we changed the name of Millenium Natural Manufacturing Corp. to Bonne Sante Natural Manufacturing, Inc., or BSNM, and on November 24, 2020, we merged Millenium Natural Health Products Inc. into BSNM to better reflect our vertical integration. BSNM is a nutraceutical contract manufacturer. It specializes in a wide variety of products, from the private labeling of vitamins, dietary supplements, nutraceuticals, sport nutrition and broad-spectrum nutritional supplements, and sells them throughout the United States and around the world, including South America, Central America and Europe.
On July 1, 2021, we acquired 100% of Doctors Scientific Organica, LLC, Oyster Management Services, Ltd., Lawee Enterprises, L.L.C. and U.S. Medical Care Holdings, L.L.C. On August 27, 2021, we transferred all of the equity interests of Oyster Management Services, Ltd., Lawee Enterprises, L.L.C. and U.S. Medical Care Holdings, L.L.C. to Doctors Scientific Organica, LLC. On December 13, 2022, we converted Oyster Management Services, Ltd. to a limited liability company known as Oyster Management Services, L.L.C. On May 19, 2022, we acquired 100% of Lavi Enterprises, LLC, an affiliate of these companies. On the same date, we transferred all of the equity interests of Lavi Enterprises, LLC to Doctors Scientific Organica, LLC. As a result, these entities are now wholly owned subsidiaries of Doctors Scientific Organica, LLC. In this report, we collectively refer to Doctors Scientific Organica, LLC and its consolidated subsidiaries as DSO. DSO manufactures, sells and owns the Smart for Life brand of natural health and wellness meal replacement products. The brand includes proprietary hunger suppressing functional foods that are designed to work with the body’s natural ability to lose weight. It also develops premium supplements and commodities that will promote optimal health and wellness. DSO has over 15 years of experience providing high-quality products to premium retail locations and companies. Its branded vitamins and supplements are also being sold through Amazon, and this sales channel is becoming a major contributor to the growth of the brand online.
On August 24, 2021, we established Smart for Life Canada Inc. as a wholly owned subsidiary of DSO in Canada. This subsidiary sells retail products through a retail store location in Montreal Canada and the same location also acts as distribution center for our international direct to consumer and big box customers. We maintain inventory and employees at this location.
On November 8, 2021, we acquired 100% of Nexus Offers, Inc., or Nexus. Nexus operates a cost per action/cost per acquisition network. This network consists of hundreds of digital marketers who stand ready to market products introduced to the Nexus network. The cost per action/cost per acquisition model is where digital marketers are paid for an action (e.g., a product sale or lead generation) that is taken as a direct result of their marketing efforts. Through the digital marketer’s method of marketing, the digital marketer sends traffic to one of the product vendor’s offers listed on the network.
On December 6, 2021, we acquired 100% of GSP Nutrition Inc., or GSP. GSP is a sports nutrition company. It offers nutritional supplements for athletes and active lifestyle consumers through a variety of wellness solutions and delivery methods, including powders, tablets and soft gels that are formulated to support energy and performance; nutrition and wellness; and focus and clarity. GSP’s initial line of nutritional products are marketed under the Sports Illustrated Nutrition brand. GSP has a license for the exclusive use of the Sports Illustrated brand (excluding the Sports Illustrated Swimsuit brand for which it has a right of first offer under the license) for certain dietary and nutritional supplements, in each case to be sold to/through certain approved accounts in the United States and Canada. The product line currently consists of whey protein isolate powder, tablet supplements for joint health, nitric oxide, post workout blends, Omega-3 supplements, and pre-workout supplements, among others.
29
On July 29, 2022, we acquired 100% of Ceautamed Worldwide, LLC and its wholly-owned subsidiaries Wellness Watchers Global, LLC and Greens First Female LLC (which we collectively refer to as Ceautamed). Ceautamed is based in Boca Raton, Florida and owns the Greens First line of branded products which have been specifically marketed to the healthcare provider sector. These vitamins and supplements have been sold on a business-to-business basis, direct-to-consumer as well as sold utilizing an international medical distribution company pursuant to a long-term contract. Ceautamed has historically utilized third-party contract manufacturing that will migrate to BSNM.
Recent Developments
On October 27, 2023, we effected a 1-for-3 reverse stock split of our authorized and issued and outstanding common stock. As a result of this reverse split, our authorized common stock decreased from 166,666,667 shares to 55,555,556 shares. The impact of this transaction is reflected within all common stock, options, and warrant information retrospectively in this report.
Principal Factors Affecting Our Financial Performance
Our operating results are primarily affected by the following factors:
● | our ability to acquire new customers or retain existing customers; |
● | our ability to access capital needed for operations including purchasing raw materials; |
● | our ability to offer competitive product pricing; |
● | our ability to broaden product offerings; |
● | industry demand and competition; and |
● | market conditions and our market position. |
Emerging Growth Company
We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, we will be permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
● | have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; |
● | comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis); |
● | submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and |
● | disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. |
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
30
We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of our initial public offering, (ii) the last day of the first fiscal year in which our total annual gross revenues are $1.07 billion or more, (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iv) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
Results of Operations
Comparison of Three Months Ended September 30, 2023 and 2022
The following table sets forth key components of our results of operations during the three months ended September 30, 2023 and 2022, both in dollars and as a percentage of our revenues.
September 30, 2023 | September 30, 2022 | |||||||||||||||
Amount | % of Revenues | Amount | % of Revenues | |||||||||||||
Revenues | ||||||||||||||||
Products | $ | 2,744,306 | 99.78 | % | $ | 4,501,657 | 84.03 | % | ||||||||
Advertising | 5,999 | 0.22 | % | 855,328 | 15.97 | % | ||||||||||
Total revenues | 2,750,305 | 100.00 | % | 5,356,985 | 100.00 | % | ||||||||||
Cost of revenues | ||||||||||||||||
Products | 1,688,097 | 61.38 | % | 2,094,198 | 39.09 | % | ||||||||||
Advertising | 522 | 0.02 | % | 630,123 | 11.76 | % | ||||||||||
Total cost of revenues | 1,688,619 | 61.40 | % | 2,724,321 | 50.86 | % | ||||||||||
Gross profit | 1,061,686 | 38.60 | % | 2,632,664 | 49.14 | % | ||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative | 1,238,625 | 45.04 | % | 1,760,381 | 32.86 | % | ||||||||||
Compensation – administrative | 2,046,220 | 74.40 | % | 1,479,816 | 27.62 | % | ||||||||||
Professional services | 349,098 | 12.69 | % | 316,440 | 5.91 | % | ||||||||||
Consulting fees related party | 19,139 | 0.70 | % | — | — | |||||||||||
Depreciation and amortization expense | 615,810 | 22.39 | % | 522,412 | 9.75 | % | ||||||||||
Total operating expenses | 4,268,892 | 155.22 | % | 4,079,049 | 76.14 | % | ||||||||||
Operating loss | (3,207,206 | ) | (116.61 | )% | (1,446,385 | ) | (27.00 | )% | ||||||||
Other income (expense) | ||||||||||||||||
Other income (expense) | 19,820 | 0.72 | % | (183,189 | ) | (3.42 | )% | |||||||||
Gain on debt extinguishment | 16,021 | 0.58 | % | — | — | % | ||||||||||
Change in fair value of derivative liability | — | — | 108,426 | 2.02 | % | |||||||||||
Interest expense | (1,172,742 | ) | (42.64 | )% | (426,573 | ) | (7.96 | )% | ||||||||
Total other income (expense) | (1,136,901 | ) | (41.34 | )% | (501,336 | ) | (9.36 | )% | ||||||||
Net loss | $ | (4,344,107 | ) | (157.95 | )% | $ | (1,947,721 | ) | (36.36 | )% |
Revenues. Our total revenues decreased by $2,606,680, or 48.66%, to $2,750,305 for the three months ended September 30, 2023 from $5,356,985 for the three months ended September 30, 2022.
Our nutraceutical business generates revenue from the sales of nutritional and related products. Revenues from our nutraceutical business (products) decreased by $1,757,351, or 39.04%, to $2,744,306 for the three months ended September 30, 2023 from $4,501,657 for the three months ended September 30, 2022. This decrease was primarily due to our cash constraints and our inability to pay for raw materials used in the production of both branded and contract manufacturing products. The decreased revenues were the result of a decrease in the volume of products sold and not due to pricing changes.
Our digital marketing business generates revenues when sales of listed products are sold by product vendors through our network as a result of the marketing efforts of digital marketers. Revenues from our digital marketing business (advertising) decreased by $849,329, or 99.30%, to $5,999 for the three months ended September 30, 2023 from $855,328 for the three months ended September 30, 2022. The decrease in revenue is attributable to our cash constraints and our inability to pay affiliates which provide revenue producing customers.
Cost of revenues. Our total cost of revenues decreased by $1,035,702, or 38.02%, to $1,688,619 for the three months ended September 30, 2023 from $2,724,321 for the three months ended September 30, 2022. Such decrease is directly related to the decrease in revenues.
31
Cost of revenues for our nutraceutical business consist of ingredients, packaging materials, freight, and labor associated with the production of various products. Cost of revenues for our nutraceutical business (products) decreased by $406,101, or 19.39%, to $1,688,097 for the three months ended September 30, 2023 from $2,094,198 for the three months ended September 30, 2022. As a percentage of product revenues, cost of revenues for product sales were 61.51% and 46.52% for the three months ended September 30, 2023 and 2022, respectively. The increased percentage is due to increased labor rates associated with production. Although we were not able to produce at capacity as in the prior year, we continued to compensate our production workforce.
Cost of revenues for our digital marketing business consist of commissions and bonuses paid to digital marketers. Cost of revenues from our digital marketing business (advertising) decreased by $629,601, or 99.92%, to $522 for the three months ended September 30, 2023 from $630,123 for the three months ended September 30, 2022. As a percentage of advertising revenues, cost of revenues for advertising sales was 8.70% and 73.67% for the three months ended September 30, 2023 and 2022, respectively. Such decrease in in line with the decrease in revenues from our digital marketing business.
Gross profit. As a result of the foregoing, our gross profit decreased by $1,570,978, or 59.67%, to $1,061,686 for the three months ended September 30, 2023 from $2,632,664 for the three months ended September 30, 2022. As a percentage of revenues, our gross profit was 38.60% and 49.14% for the three months ended September 30, 2023 and 2022, respectively.
Selling, general and administrative expenses. Our selling, general and administrative expenses consist primarily of advertising expenses, bad debts, rent expense, insurance and other expenses incurred in connection with general operations. Our selling, general and administrative expenses decreased by $521,756, or 29.64%, to $1,238,625 for the three months ended September 30, 2023 from $1,760,381 for the three months ended September 30, 2022. Such decrease was primarily due to decreased rates for D&O insurance and reduced advertising in 2023. As a percentage of revenues, selling, general and administrative expenses was 45.04% and 32.86% for the three months ended September 30, 2023 and 2022, respectively.
Compensation - administrative. Our compensation expenses include both cash and non-cash items, including salaries plus related payroll taxes. Our compensation expenses increased by $566,404, or 38.28%, to $2,046,220 for the three months ended September 30, 2023 from $1,479,816 for the three months ended September 30, 2022. Such increase was primarily due to a non-cash $685,380 expense for the issuance and amortization of stock options. As a percentage of revenues, compensation expense was 79.40% and 27.62% for the three months ended September 30, 2023 and 2022, respectively.
Professional services. Our professional services expenses consist primarily of investor relations, consulting, advisory, legal and audit expenses incurred in connection with general operations. Our professional services expenses increased by $32,658 or 10.32%, to $349,098 for the three months ended September 30, 2023 from $316,440 for the three months ended September 30, 2022. Such increase was primarily due to increased legal fees associated with our NASDAQ compliance, and sales and marketing consultants. As a percentage of revenues, professional services expense was 12.69% and 5.91% for the three months ended September 30, 2023 and 2022, respectively.
Consulting fees - related parties. For the three months ended September 30, 2023 and 2022, we paid Trilogy Capital Group, LLC, a company controlled by our Executive Chairman, $19,139 and $0, respectively, for services rendered under a consulting agreement.
Depreciation and amortization. Depreciation and amortization was $615,810, or 22.39% of revenues, for the three months ended September 30, 2023, as compared to $522,412, or 9.75% of revenues, for the three months ended September 30, 2023. The increase in amortization is associated with intangible assets resulting from acquisitions.
Total other expense. We had $1,136,901 in total other expense, net, for the three months ended September 30, 2023, as compared to total other expense, net, of $501,336 for the three months ended September 30, 2022. Total other expense, net, for the three months ended September 30, 2023 consisted of interest expense of $1,172,742, offset by a gain on debt extinguishment of $16,021 and other income of $19,820, while other expense, net, for the three months ended September 30, 2022 consisted of interest expense of $426,573 and other expense of $183,189, offset by a change in fair value of derivative liability of $108,426.
Net loss. As a result of the cumulative effect of the factors described above, we had a net loss of $4,344,107 for the three months ended September 30, 2023, as compared to $1,947,721 for the three months ended September 30, 2022, an increase of $2,396,386, or 123.04%.
32
Comparison of Nine Months Ended September 30, 2023 and 2022
The following table sets forth key components of our results of operations during the nine months ended September 30, 2023 and 2022, both in dollars and as a percentage of our revenues.
September 30, 2023 | September 30, 2022 | |||||||||||||||
Amount | % of Revenues | Amount | % of Revenues | |||||||||||||
Revenues | ||||||||||||||||
Products | $ | 7,077,105 | 95.14 | % | $ | 11,537,041 | 81.84 | % | ||||||||
Advertising | 361,470 | 4.86 | % | 2,560,321 | 18.16 | % | ||||||||||
Total revenues | 7,438,575 | 100.00 | % | 14,097,362 | 100.00 | % | ||||||||||
Cost of revenues | ||||||||||||||||
Products | 4,528,103 | 60.87 | % | 6,281,486 | 44.56 | % | ||||||||||
Advertising | 279,037 | 3.75 | % | 1,884,479 | 13.37 | % | ||||||||||
Total cost of revenues | 4,807,140 | 64.62 | % | 8,165,965 | 57.93 | % | ||||||||||
Gross profit | 2,631,435 | 35.38 | % | 5,931,397 | 42.07 | % | ||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative | 3,838,333 | 51.60 | % | 5,139,263 | 36.46 | % | ||||||||||
Compensation - administrative | 4,929,327 | 66.27 | % | 5,120,518 | 36.32 | % | ||||||||||
Professional services | 1,565,396 | 21.04 | % | 1,622,871 | 11.51 | % | ||||||||||
Consulting fees - related parties | 46,686 | 0.63 | % | — | — | |||||||||||
Impairment of intangible assets | 466,737 | 6.27 | % | — | — | |||||||||||
Depreciation and amortization expense | 1,814,613 | 24.39 | % | 1,375,514 | 9.76 | % | ||||||||||
Total operating expenses | 12,661,092 | 170.21 | % | 13,258,166 | 94.05 | % | ||||||||||
Operating loss | (10,029,657 | ) | (134.83 | )% | (7,326,769 | ) | (51.97 | )% | ||||||||
Other income (expense) | ||||||||||||||||
Other income (expense) | 333,498 | 4.48 | % | (693,614 | ) | (4.92 | )% | |||||||||
Gain on debt extinguishment | 273,058 | 3.67 | % | 134,956 | 0.96 | % | ||||||||||
Change in fair value of derivative liability | — | — | 146,513 | 1.04 | % | |||||||||||
Interest expense | (3,425,318 | ) | (46.05 | )% | (14,168,479 | ) | (100.50 | )% | ||||||||
Total other income (expense) | (2,818,762 | ) | (37.89 | )% | (14,580,624 | ) | (103.43 | )% | ||||||||
Net loss | $ | (12,848,419 | ) | (172.73 | )% | $ | (21,907,393 | ) | (155.40 | )% |
Revenues. Our total revenues decreased by $6,658,787, or 47.23%, to $7,438,575 for the nine months ended September 30, 2023 from $14,097,362 for the nine months ended September 30, 2022.
Revenues from our nutraceutical business (products) decreased by $4,459,936, or 38.66%, to $7,077,105 for the nine months ended September 30, 2023 from $11,537,041 for the nine months ended September 30, 2022. This decrease was primarily due to our cash constraints and our inability to pay for raw materials used in the production of both branded and contract manufacturing products. The decreased revenues were the result of a decrease in the volume of products sold and not due to pricing changes.
Revenues from our digital marketing business (advertising) decreased by $2,198,851, or 85.88%, to $361,470 for the nine months ended September 30, 2023 from $2,560,321 for the nine months ended September 30, 2022. The decrease in revenue is attributable to our cash constraints and the impact it had with our affiliate advertisers.
Cost of revenues. Our total cost of revenues decreased by $3,358,825, or 41.13%, to $4,807,140 for the nine months ended September 30, 2023 from $8,165,965 for the nine months ended September 30, 2022. Such decrease is directly related to the decrease in revenues.
Cost of revenues for our nutraceutical business (products) decreased by $1,753,383, or 27.91%, to $4,528,103 for the nine months ended September 30, 2023 from $6,281,486 for the nine months ended September 30, 2022. As a percentage of product revenues, cost of revenues for product sales were 63.98% and 54.45% for the nine months ended September 30, 2023 and 2022, respectively. The increased percentage is due to increased labor rates associated with production. Although we were not able to produce at capacity as in the prior year, we continued to compensate our production workforce.
Cost of revenues from our digital marketing business (advertising) decreased by $1,605,442, or 85.19%, to $279,037 for the nine months ended September 30, 2023 from $1,884,479 for the nine months ended September 30, 2022. Such decrease in in line with the decrease in revenues from our digital marketing business. As a percentage of advertising revenues, cost of revenues for advertising sales was 77.20% and 73.60% for the nine months ended September 30, 2023 and 2022, respectively.
Gross profit. As a result of the foregoing, our gross profit decreased by $3,299,962, or 55.64%, to $2,631,435 for the nine months ended September 30, 2023 from $5,931,397 for the nine months ended September 30, 2022. As a percentage of revenues, our gross profit was 35.38% and 42.07% for the nine months ended September 30, 2023 and 2022, respectively.
33
Selling, general and administrative expenses. Our selling, general and administrative expenses decreased by $1,300,930, or 25.31%, to $3,838,333 for the nine months ended September 30, 2023 from $5,139,263 for the nine months ended September 30, 2022. Such decrease was primarily due to decreased rates for D&O insurance, initial public offering, or IPO, related expenses in February 2022 and reduced advertising in 2023. As a percentage of revenues, selling, general and administrative expenses was 51.60% and 36.46% for the nine months ended September 30, 2023 and 2022, respectively.
Compensation - administrative. Our compensation expenses decreased by $191,191, or 3.73%, to $4,929,327 for the nine months ended September 30, 2023 from $5,120,518 for the nine months ended September 30, 2022. Such decrease was primarily due to a reduction in headcount. As a percentage of revenues, compensation expenses was 66.27% and 36.32% for the nine months ended September 30, 2023 and 2022, respectively.
Professional services. Our professional services expenses decreased by $57,475, or 3.54%, to $1,565,396 for the nine months ended September 30, 2023 from $1,622,871 for the nine months ended September 30, 2022. Such decrease was primarily related to NASDAQ listing and compliance year over year. As a percentage of revenues, professional services expense was 21.04% and 11.51% for the nine months ended September 30, 2023 and 2022, respectively.
Consulting fees - related parties. For the nine months ended September 30, 2023 and 2022, we paid Trilogy Capital Group, LLC, a company controlled by our Executive Chairman, $46,686 and $0, respectively, for services rendered under a consulting agreement.
Impairment of intangible assets. Due to a significant decrease in advertising revenues, we performed an impairment analysis on the affiliate relationships associated with our Nexus subsidiary and recognized an impairment of $466,737 during the nine months ended September 30, 2023. No impairment was recognized in the nine months ended September 30, 2022.
Depreciation and amortization. Depreciation and amortization was $1,814,613, or 24.39% of revenues, for the nine months ended September 30, 2023, as compared to $1,375,514, or 9.76% of revenues, for the nine months ended September 30, 2022. The increase in amortization is associated with intangible assets resulting from acquisitions.
Total other expense. We had $2,818,762 in total other expense, net, for the nine months ended September 30, 2023, as compared to total other expense, net, of $14,580,624 for the nine months ended September 30, 2022. Total other expense, net, for the nine months ended September 30, 2023 consisted of interest expense of $3,425,318, offset by a gain on extinguishment of debt of $273,058 and other income of $333,948, while other expense, net, for the nine months ended September 30, 2022 consisted of interest expense of $14,168,479 related to interest expense in connection with common stock issued with future equity agreements and amortization of debt issuance cost and other expense of $693,614, offset by a change in fair value of derivative liability of $146,513 and a gain on extinguishment of debt of $134,956.
Net loss. As a result of the cumulative effect of the factors described above, we had a net loss of $12,848,419 for the nine months ended September 30, 2023, as compared to $21,907,393 for the nine months ended September 30, 2022, a decrease of $9,058,974, or 41.35%.
Liquidity and Capital Resources
As of September 30, 2023, we had cash of $8,890. To date, we have financed our operations primarily through revenue generated from operations, bank borrowings and sales of our securities. Since our inception in 2017, we have experienced losses and as a result have continued to use cash in our operations. We have been dependent upon financing activities as we implement our acquisition strategy.
Our unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have sustained recurring losses and have a deficiency in working capital of approximately $11.4 million at September 30, 2023, a net loss for the nine months ended September 30, 2023 of $12.8 million, and cash used in operating activities of $5.1 million, which raises substantial doubt about our ability to continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
It is management’s opinion that current available resources will not be sufficient to fund our planned expenditures over the next 12 months from the date hereof. Accordingly, we will be dependent on the raising of additional capital through the placement of common and preferred stock as well as debt financing in order to implement our business plan. To facilitate the raising of capital we have engaged a middle market investment banking firm which has completed two equity raises on our behalf during the second quarter of 2023 and anticipates additional rounds in the near future.
We are also engaged with a debt placement firm which has raised capital for prior acquisitions and is anticipated to raise debt capital for pending and prospective transactions. We are currently finalizing a previously announced acquisition, the financing for which will exceed the required purchase amount, providing additional working capital. In addition, we are in the process of arranging additional substantial debt financing for general working capital purposes.
There is no assurance that we will be successful with future financings, and the inability to secure financings may have a material adverse effect on our financial condition.
34
Summary of Cash Flow
The following table provides detailed information about our net cash flow for the nine months ended September 30, 2023 and 2022.
Nine Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Net cash used in operating activities | $ | (5,065,754 | ) | $ | (7,491,867 | ) | ||
Net cash used in investing activities | (3,450 | ) | (3,072,271 | ) | ||||
Net cash provided by financing activities | 5,008,380 | 10,662,578 | ||||||
Net change in cash | (60,824 | ) | 98,440 | |||||
Cash and cash equivalents at beginning of period | 69,714 | 205,093 | ||||||
Cash and cash equivalents at end of period | $ | 8,890 | $ | 303,533 |
Our net cash used in operating activities was $5,065,754 for the nine months ended September 30, 2023, as compared to $7,491,867 for the nine months ended September 30, 2022. For the nine months ended September 30, 2023, our net loss of $12,848,419, offset by an increase in accrued expenses of $2,040,792, depreciation and amortization of $1,814,613, stock based compensation of $765,588, a decrease in inventory of $677,771 and an impairment of intangible assets of $466,737, were the primary drivers for cash used in operations. For the nine months ended September 30, 2022, our net loss of $21,907,393 and decreased inventory of $2,208,654, offset by $10,844,961 for interest expense on future equity agreements, amortization of debt issuance costs of $1,737,976, increased accounts payable of $1,597,032, depreciation and amortization of $1,375,514 and stock-based compensation of $822,626, were the primary drivers for cash used in operations.
Our net cash used in investing activities was $3,450 for the nine months ended September 30, 2023, which consisted of equipment purchases. For the nine months ended September 30, 2022, our net cash used in investing activities was $3,072,271, which consisted of cash paid for the acquisition of Ceautamed of $3,000,000 and $72,271 in equipment purchases.
Our net cash provided by financing activities was $5,008,380 for the nine months ended September 30, 2023, as compared to $10,662,578 for the nine months ended September 30, 2022. Net cash provided by financing activities for the nine months ended September 30, 2023 consisted of proceeds from the exercise of warrants of $5,425,112, proceeds from debt of $2,749,791 and proceeds from the issuance of common stock of $2,151,310, offset by repayments on debt of $5,317,833, while net cash provided by financing activities for the nine months ended September 30, 2022 consisted of net proceeds from the IPO of $12,738,288, proceeds from convertible notes and notes payable of $8,151,889 and proceeds from related parties of $390,041, offset by repayments on debt of $8,852,491, payments to related parties of $1,711,600 and payment of fees from issuance of common stock of $53,549.
Initial Public Offering
On February 16, 2022, we entered into an underwriting agreement with Dawson James Securities, Inc., as representative of the several underwriters named on Schedule I thereto, relating to our IPO of units, each unit consisting of one share of common stock, a series A warrant to purchase one share of common stock and a series B warrant to purchase one share of common stock. Pursuant to the underwriting agreement, we agreed to sell 3,200 units to the underwriters, at a purchase price per unit of $4,095.00 (the offering price to the public of $4,500.00 per unit minus the underwriters’ discount), and also agreed to grant to the underwriters a 45-day option to purchase up to 480 additional shares of common stock, up to 480 additional series A warrants, and/or up to 480 additional series B warrants, in any combination thereof, at a purchase price to the public of $4,491.00 per share and $4.50 per warrant, less underwriting discounts and commissions, solely to cover over-allotments, if any.
On February 18, 2022, the closing of our IPO was completed. At the closing, the underwriters partially exercised the option and purchased 459 series A warrants and 459 series B warrants. Therefore, we sold 3,200 shares of common stock, 3,659 series A warrants and 3,659 series B warrants for total gross proceeds of $14,404,128. After deducting the underwriting commission and expenses, we received net proceeds of approximately $12,684,739. We used the proceeds of the offering to pay off certain debt and plan to use the remaining net proceeds for working capital and general corporate purposes.
The series A warrants are exercisable until the fifth anniversary of the issuance date at an exercise price equal to $3,150.00 per share and may be exercised on a cashless basis if the issuance of common stock upon exercise of the warrants is not covered by an effective registration statement.
The series B warrants are exercisable until the fifth anniversary of the issuance date at an exercise price equal to $4,500.00 per share and may be exercised on a cashless basis, whereby the holder will receive one share of common stock for each series B warrant exercised. As of September 30, 2023, 3,195 of the series B warrants were exercised on a cashless basis and we issued 3,195 shares of common stock upon such exercise.
35
Registered Direct Offering and Related Private Placement
On May 2, 2023, we entered into a securities purchase agreement with an institutional investor, pursuant to which we agreed to issue and sell, in a registered direct offering, 10,512 shares of common stock and a pre-funded warrant to purchase up to 20,667 shares of common stock at an exercise price of $0.0009, at an offering price per share and pre-funded warrant of $28.845 and $28.8441, respectively. In addition, under the securities purchase agreement, we agreed to issue to the investor a warrant to purchase up to 31,178 shares of common stock at an exercise price of $27.72 per share in a concurrent private placement.
On May 5, 2023, the offering was completed. At closing, the investor exercised the pre-funded warrant in full. Accordingly, we issued to the investor 31,178 shares of common stock and a warrant to purchase up to 31,178 shares of common stock at an exercise price of $27.72 per share for total gross proceeds of $899,326 and net proceeds of $751,933.
H.C. Wainwright & Co., LLC, or the Placement Agent, acted as the exclusive placement agent in connection with this offering and received a cash fee equal to 7.5% of the gross proceeds of the offering and a management fee equal to 1% of the gross proceeds of the offering. We also agreed to reimburse the Placement Agent $30,000 for fees and expenses of its legal counsel and other out-of-pocket expenses and $15,950 for certain closing costs. In addition to the cash fees, we issued to the Placement Agent warrants to purchase up to 2,339 shares of common stock at an exercise price of $36.046 per share (or 125% of the offering price).
Second Registered Direct Offering and Related Private Placement
On May 17, 2023, we entered into a securities purchase agreement with an institutional investor, pursuant to which we agreed to issue and sell, in a registered direct offering 22,889 shares of common stock and a pre-funded warrant to purchase up to 42,100 shares of common stock at an exercise price of $0.0009, at an offering price per share and pre-funded warrant of $24.39 and $24.3891, respectively. In addition, under the securities purchase agreement, we agreed to issue to the investor a warrant to purchase up to 64,988 shares of common stock at an exercise price of $23.31 per share in a concurrent private placement.
On May 19, 2023, the offering was completed. At closing, the investor exercised the pre-funded warrant in full. Accordingly, we issued to the investor 64,988 shares of common stock and a warrant to purchase up to 64,988 shares of common stock at an exercise price of $23.31 per share for total gross proceeds of $1,585,057 and net proceeds of $1,074,377.
The Placement Agent acted as the exclusive placement agent in connection with this offering and received a cash fee equal to 7.5% of the gross proceeds of the offering and a management fee equal to 1% of the gross proceeds of the offering. We also agreed to reimburse the Placement Agent $60,000 for fees and expenses of its legal counsel and other out-of-pocket expenses and $15,950 for certain closing costs. In addition to the cash fees, we issued to the Placement Agent warrants to purchase up to 4,875 shares of common stock at an exercise price of $31.88 per share (or 125% of the offering price).
Outstanding Debt
The Company has historically funded its acquisitions and operations through debt agreements. The Company has outstanding debt of $12,909,530 at September 30, 2023. The Company has $4,404,462 of principal payments due within the next 12 months. The Company’s has not generated cash flow from operations and the repayment of debt is dependent on raising new equity transactions and new debt financings. There is no assurance that we will be successful with future financings, and the inability to secure financings may have a material adverse effect on our financial condition.
The following is a roll-forward of the debt balances for the nine months ended September 30, 2023:
Balance at December 31, 2022 | $ | 20,558,246 | ||
Proceeds from new debt issued in 2023 | 2,749,791 | |||
Repayment of principal during 2023 | (5,317,833 | ) | ||
Amortization of debt discounts | 1,150,800 | |||
Stock issued for conversion of principal of debt | (6,266,895 | ) | ||
Conversion of interest to notes payable | 334,950 | |||
Gain on extinguishment of debt in 2023 | (273,058 | ) | ||
Conversion of principal to accrued expenses | (26,471 | ) | ||
Balance at September 30, 2023 | $ | 12,909,530 |
36
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 preparation of our unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
We assess potential impairments to long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of assets) is less than its carrying amount. Any required impairment loss is measured as the amount by which the asset’s carrying value exceeds its fair value and is recorded as a reduction in the carrying value of the related asset. Therefore, as a result of decreased revenues within the Nexus subsidiary during the nine months ended September 30, 2023, which are not expected to recover to similar levels, we determined that a triggering event occurred requiring an impairment analysis in accordance with ASC 360. The impairment analysis resulted in the Company recognizing an impairment of the affiliate relationship asset associated with Nexus of $466,737.
For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission, or the SEC, on March 31, 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures As of September 30, 2023. The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, despite a certain deficiency in our internal controls over financial reporting, our disclosure controls and procedures were effective as of September 30, 2023. The deficiency related to non-routine transactions related to business combinations and impairment of intangible assets.
In response to the deficiency described above, during the quarter ended September 30, 2023, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with United States generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting or in any other factors that could significantly affect these controls during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
37
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We have not sold any equity securities during the three months ended September 30, 2023 that were not previously disclosed in a current report on Form 8-K that was filed during the quarter, except that on August 29, 2023, we issued 15,083 shares of common stock to a note holder as compensation for amending the note.
We did not repurchase any shares of our common stock during the three months ended September 30, 2023.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
38
ITEM 6. EXHIBITS.
39
* | Filed herewith |
** | Furnished herewith |
40
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: November 20, 2023 |
SMART FOR LIFE, INC. | |
/s/ Darren C. Minton | ||
Name: | Darren C. Minton | |
Title: | Chief Executive Officer | |
(Principal Executive Officer) | ||
/s/ Alan B. Bergman | ||
Name: | Alan B. Bergman | |
Title: | Chief Financial Officer | |
(Principal Financial and Accounting Officer) |
41