UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30,
2023
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to
_____________
Commission File Number: 001-41290
SMART FOR LIFE, INC.
(Exact name of registrant
as specified in its charter)
Nevada | | 81-5360128 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
990 S Rogers Circle, Suite 3, Boca Raton, FL | | 33487 |
(Address of principal executive offices) | | (Zip Code) |
(786) 749-1221 |
(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 |
Common Stock, par value $0.0001 per share | | SMFL | | The Nasdaq Stock Market LLC |
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. Yes ☒ No ☐
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). Yes ☒
No ☐
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 ☐ |
| Non-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 796,666 shares of the registrant’s
common stock issued and outstanding.
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.
SMART FOR LIFE, INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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 | |
$ | 8,890 | | |
$ | 69,714 | |
Accounts receivable, net | |
| 412,547 | | |
| 561,894 | |
Inventory, net | |
| 1,987,730 | | |
| 2,665,501 | |
Prepaid expenses and other current assets | |
| 139,928 | | |
| 306,867 | |
Total current assets | |
| 2,549,095 | | |
| 3,603,976 | |
| |
| | | |
| | |
Property and equipment, net | |
| 311,472 | | |
| 482,219 | |
Intangible assets, net | |
| 14,341,745 | | |
| 16,462,158 | |
Goodwill | |
| 5,816,100 | | |
| 5,816,100 | |
Deposits and other assets | |
| 98,947 | | |
| 109,638 | |
Operating lease right-of-use assets | |
| 2,421,550 | | |
| 2,672,866 | |
Total other assets | |
| 22,989,814 | | |
| 25,542,981 | |
Total assets | |
$ | 25,538,909 | | |
$ | 29,146,957 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 4,241,956 | | |
$ | 4,123,837 | |
Accrued expenses | |
| 3,420,964 | | |
| 1,888,013 | |
Accrued expenses, related parties | |
| 157,938 | | |
| 947,951 | |
Contract liabilities | |
| 750,739 | | |
| 662,879 | |
Preferred stock dividends payable | |
| 600,750 | | |
| 600,750 | |
Operating lease liability, current | |
| 347,852 | | |
| 303,819 | |
Debt, current, net of unamortized debt discounts | |
| 4,404,462 | | |
| 6,616,273 | |
Total current liabilities | |
| 13,924,661 | | |
| 15,143,522 | |
| |
| | | |
| | |
Long-term liabilities: | |
| | | |
| | |
Operating lease liability, noncurrent | |
| 2,157,344 | | |
| 2,423,446 | |
Debt, noncurrent, net of unamortized debt issuance cost | |
| 8,505,068 | | |
| 13,941,973 | |
Total long-term liabilities | |
| 10,662,412 | | |
| 16,365,419 | |
Total liabilities | |
| 24,587,073 | | |
| 31,508,941 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ Equity (Deficit) | |
| | | |
| | |
Preferred stock, $0.0001 par value, 10,000,000 shares authorized | |
| | | |
| | |
Series A Convertible Preferred Stock, $0.0001 par value, 8,000 shares authorized and 0 and 1,000 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | |
| — | | |
| — | |
Series B Preferred Stock, $0.0001 par value, 5,000,000 shares authorized and 34,818 and 0 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively (liquidation preference of $7,764,414 at September 30, 2023) | |
| 4 | | |
| — | |
Common Stock, $0.0001 par value, 55,555,556 shares authorized, 631,600 and 81,729 issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | |
| 63 | | |
| 8 | |
Additional paid in capital | |
| 58,792,603 | | |
| 42,630,423 | |
Accumulated deficit | |
| (57,840,834 | ) | |
| (44,992,415 | ) |
Total stockholders’ equity (deficit) | |
| 951,836 | | |
| (2,361,984 | ) |
Total liabilities and stockholders’ equity (deficit) | |
$ | 25,538,909 | | |
$ | 29,146,957 | |
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements
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 | |
$ | 2,744,306 | | |
$ | 4,501,657 | | |
$ | 7,077,105 | | |
$ | 11,537,041 | |
Advertising | |
| 5,999 | | |
| 855,328 | | |
| 361,470 | | |
| 2,560,321 | |
Total revenues | |
| 2,750,305 | | |
| 5,356,985 | | |
| 7,438,575 | | |
| 14,097,362 | |
Cost of revenues | |
| | | |
| | | |
| | | |
| | |
Products | |
| 1,688,097 | | |
| 2,094,198 | | |
| 4,528,103 | | |
| 6,281,486 | |
Advertising | |
| 522 | | |
| 630,123 | | |
| 279,037 | | |
| 1,884,479 | |
Total cost of revenues | |
| 1,688,619 | | |
| 2,724,321 | | |
| 4,807,140 | | |
| 8,165,965 | |
Gross profit | |
| 1,061,686 | | |
| 2,632,664 | | |
| 2,631,435 | | |
| 5,931,397 | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative | |
| 1,238,625 | | |
| 1,760,381 | | |
| 3,838,333 | | |
| 5,139,263 | |
Compensation – administrative | |
| 2,046,220 | | |
| 1,479,816 | | |
| 4,929,327 | | |
| 5,120,518 | |
Professional services | |
| 349,098 | | |
| 316,440 | | |
| 1,565,396 | | |
| 1,622,871 | |
Consulting fees – related parties | |
| 19,139 | | |
| — | | |
| 46,686 | | |
| — | |
Impairment of intangible assets | |
| — | | |
| — | | |
| 466,737 | | |
| — | |
Depreciation and amortization expense | |
| 615,810 | | |
| 522,412 | | |
| 1,814,613 | | |
| 1,375,514 | |
Total operating expenses | |
| 4,268,892 | | |
| 4,079,049 | | |
| 12,661,092 | | |
| 13,258,166 | |
Operating loss | |
| (3,207,206 | ) | |
| (1,446,385 | ) | |
| (10,029,657 | ) | |
| (7,326,769 | ) |
Other income (expense) | |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| 19,820 | | |
| (183,189 | ) | |
| 333,498 | | |
| (693,614 | ) |
Gain on debt extinguishment | |
| 16,021 | | |
| — | | |
| 273,058 | | |
| 134,956 | |
Change in fair value of derivative liability | |
| — | | |
| 108,426 | | |
| — | | |
| 146,513 | |
Interest expense | |
| (1,172,742 | ) | |
| (426,573 | ) | |
| (3,425,318 | ) | |
| (14,168,479 | ) |
Total other income (expense) | |
| (1,136,901 | ) | |
| (501,336 | ) | |
| (2,818,762 | ) | |
| (14,580,624 | ) |
Net loss | |
$ | (4,344,107 | ) | |
$ | (1,947,721 | ) | |
$ | (12,848,419 | ) | |
$ | (21,907,393 | ) |
Series A preferred stock dividends | |
| — | | |
| — | | |
| — | | |
| (600,750 | ) |
Net loss attributable to common stockholders | |
| (4,344,107 | ) | |
| (1,947,721 | ) | |
| (12,848,419 | ) | |
| (22,508,143 | ) |
Loss per share, basic and diluted | |
$ | (7.51 | ) | |
$ | (31.29 | ) | |
$ | (42.13 | ) | |
$ | (361.62 | ) |
Weighted average shares outstanding, basic and diluted | |
| 578,686 | | |
| 62,242 | | |
| 304,950 | | |
| 62,242 | |
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements
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 | |
| 1,000 | | |
$ | — | | |
| 81,729 | | |
$ | 8 | | |
$ | 42,630,423 | | |
$ | (44,992,415 | ) | |
$ | (2,361,984 | ) |
Exercise of warrants | |
| — | | |
| — | | |
| 6,833 | | |
| 1 | | |
| 118 | | |
| — | | |
| 119 | |
Stock based compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 52,473 | | |
| — | | |
| 52,473 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (4,284,315 | ) | |
| (4,284,315 | ) |
Balance, March 31, 2023 | |
| 1,000 | | |
| — | | |
| 88,562 | | |
| 9 | | |
| 42,683,014 | | |
| (49,276,730 | ) | |
| (6,593,707 | ) |
Conversion of notes and interest | |
| 29,398 | | |
| 3 | | |
| — | | |
| — | | |
| 6,462,686 | | |
| — | | |
| 6,462,689 | |
Conversion of preferred stock | |
| (1,000 | ) | |
| — | | |
| 3,334 | | |
| — | | |
| — | | |
| — | | |
| — | |
Stock based compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 27,735 | | |
| — | | |
| 27,735 | |
Stock issued for services | |
| — | | |
| — | | |
| 1,112 | | |
| — | | |
| 99,199 | | |
| — | | |
| 99,199 | |
Conversion of board fees | |
| 135 | | |
| — | | |
| — | | |
| — | | |
| 30,000 | | |
| — | | |
| 30,000 | |
Conversion of accrued compensation | |
| 5,285 | | |
| 1 | | |
| — | | |
| — | | |
| 1,178,340 | | |
| — | | |
| 1,178,341 | |
Exercise of warrants | |
| — | | |
| — | | |
| 292,783 | | |
| 29 | | |
| 5,424,964 | | |
| — | | |
| 5,424,993 | |
Shares issued for cash, net | |
| — | | |
| — | | |
| 96,166 | | |
| 10 | | |
| 2,151,300 | | |
| — | | |
| 2,151,310 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (4,219,997 | ) | |
| (4,219,997 | ) |
Balance, June 30, 2023 | |
| 34,818 | | |
$ | 4 | | |
| 481,957 | | |
$ | 48 | | |
$ | 58,057,238 | | |
$ | (53,496,727 | ) | |
$ | 4,560,563 | |
Stock issued for services | |
| — | | |
| — | | |
| 15,083 | | |
| 2 | | |
| 49,998 | | |
| — | | |
| 50,000 | |
Exercise of warrants | |
| — | | |
| — | | |
| 129,598 | | |
| 13 | | |
| (13 | ) | |
| — | | |
| — | |
Shares issued in connection with reverse stock split | |
| — | | |
| — | | |
| 4,962 | | |
| — | | |
| — | | |
| — | | |
| — | |
Stock based compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 685,380 | | |
| — | | |
| 685,380 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (4,344,107 | ) | |
| (4,344,107 | ) |
Balance, September 30, 2023 | |
| 34,818 | | |
$ | 4 | | |
| 631,600 | | |
$ | 63 | | |
$ | 58,792,603 | | |
$ | (57,840,834 | ) | |
$ | 951,836 | |
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 | |
| 8,000 | | |
$ | 1 | | |
| 30,973 | | |
$ | 3 | | |
$ | 8,923,858 | | |
$ | (15,014,600 | ) | |
$ | (6,090,738 | ) |
Stock issued for cash with initial public offering | |
| — | | |
| — | | |
| 3,200 | | |
| 1 | | |
| 10,623,491 | | |
| — | | |
| 10,623,492 | |
Series A warrants issued in connection with initial public offering | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,902,689 | | |
| — | | |
| 1,902,689 | |
Series B warrants in connection with initial public offering | |
| — | | |
| — | | |
| — | | |
| — | | |
| 158,558 | | |
| — | | |
| 158,558 | |
Warrants issued in connection with debt | |
| — | | |
| — | | |
| — | | |
| — | | |
| 65,624 | | |
| — | | |
| 65,624 | |
Stock issued upon exercise of Series B Warrants | |
| — | | |
| — | | |
| 3,195 | | |
| — | | |
| — | | |
| — | | |
| — | |
Stock issued upon conversion of convertible notes | |
| — | | |
| — | | |
| 2,755 | | |
| — | | |
| 5,622,885 | | |
| — | | |
| 5,622,885 | |
Stock issued in connection with acquisition | |
| — | | |
| — | | |
| 95 | | |
| — | | |
| — | | |
| — | | |
| — | |
Stock issued for conversion of accounts payable | |
| — | | |
| — | | |
| 33 | | |
| — | | |
| 147,223 | | |
| — | | |
| 147,223 | |
Stock issued for services | |
| — | | |
| — | | |
| 1,949 | | |
| — | | |
| 822,626 | | |
| — | | |
| 822,626 | |
Stock issued upon conversion of preferred stock | |
| (7,000 | ) | |
| (1 | ) | |
| 23,332 | | |
| 2 | | |
| (1 | ) | |
| — | | |
| — | |
Common stock issued under future equity agreements | |
| — | | |
| — | | |
| 4,820 | | |
| 1 | | |
| 10,844,959 | | |
| — | | |
| 10,844,960 | |
Preferred stock dividend payable | |
| — | | |
| — | | |
| — | | |
| — | | |
| (85,417 | ) | |
| — | | |
| (85,417 | ) |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (16,574,477 | ) | |
| (16,574,477 | ) |
Balance, March 31, 2022 | |
| 1,000 | | |
| — | | |
| 70,352 | | |
| 7 | | |
| 39,026,495 | | |
| (31,589,077 | ) | |
| 7,437,425 | |
Common stock issued upon conversion of promissory note | |
| — | | |
| — | | |
| 163 | | |
| — | | |
| 73,727 | | |
| — | | |
| 73,727 | |
Common stock issued upon option exercise | |
| — | | |
| — | | |
| 435 | | |
| — | | |
| — | | |
| — | | |
| — | |
Preferred stock dividend payable | |
| — | | |
| — | | |
| — | | |
| — | | |
| (159,916 | ) | |
| — | | |
| (159,916 | ) |
Change in derivative liability | |
| — | | |
| — | | |
| — | | |
| — | | |
| 32,959 | | |
| — | | |
| 32,959 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (3,385,195 | ) | |
| (3,385,195 | ) |
Balance, June 30, 2022 | |
| 1,000 | | |
$ | — | | |
| 70,950 | | |
$ | 7 | | |
$ | 38,973,265 | | |
$ | (34,974,272 | ) | |
$ | 3,999,000 | |
Common stock issued upon exercise of series B warrants | |
| — | | |
| — | | |
| 4 | | |
| 1 | | |
| — | | |
| (1 | ) | |
| — | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,947,721 | ) | |
| (1,947,721 | ) |
Balance, September 30, 2022 | |
| 1,000 | | |
$ | — | | |
| 70,754 | | |
$ | 8 | | |
$ | 38,973,265 | | |
$ | (36,921,994 | ) | |
$ | 2,051,279 | |
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements
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 | |
$ | (12,848,419 | ) | |
$ | (21,907,393 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Amortization of debt issuance cost | |
| 1,150,800 | | |
| 1,737,976 | |
Discount on debt obtained | |
| — | | |
| (302,045 | ) |
Depreciation and amortization expense | |
| 1,814,613 | | |
| 1,375,514 | |
Gain on extinguishment of debt | |
| (273,058 | ) | |
| (134,956 | ) |
Impairment on intangible assets | |
| 466,737 | | |
| — | |
Stock-based compensation | |
| 765,588 | | |
| 822,626 | |
Interest expense associated with future equity agreements | |
| — | | |
| 10,844,961 | |
Non-cash financing expenses – stock issued for services | |
| 149,200 | | |
| — | |
Non-cash operating lease costs, net | |
| 29,247 | | |
| 17,539 | |
Change in value of derivative liability | |
| — | | |
| 127,214 | |
Provision for bad debt | |
| 195,400 | | |
| 6,731 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable, net | |
| (46,053 | ) | |
| (314,587 | ) |
Inventory | |
| 677,771 | | |
| (2,208,654 | ) |
Prepaid expenses and other current assets | |
| 166,939 | | |
| 53,749 | |
Deposits and other assets | |
| 10,714 | | |
| (1,822 | ) |
Accounts payable | |
| 157,789 | | |
| 1,597,032 | |
Accrued expenses | |
| 2,040,792 | | |
| 48,496 | |
Accrued expenses, related parties | |
| 388,327 | | |
| 449,497 | |
Contract liabilities | |
| 87,860 | | |
| 296,255 | |
Net cash used in operating activities | |
| (5,065,754 | ) | |
| (7,491,867 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Cash paid for acquisition of Ceautamed | |
| — | | |
| (3,000,000 | ) |
Additions to property and equipment | |
| (3,450 | ) | |
| (72,271 | ) |
Net cash used in investing activities | |
| (3,450 | ) | |
| (3,072,271 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Payments to related parties | |
| — | | |
| (1,711,600 | ) |
Receipts from related parties | |
| — | | |
| 390,041 | |
Proceeds from initial public offering | |
| — | | |
| 12,738,288 | |
Proceeds from issuance of common stock, net | |
| 2,151,310 | | |
| — | |
Proceeds from exercise of warrants | |
| 5,425,112 | | |
| — | |
Proceeds from debt | |
| 2,749,791 | | |
| 8,151,889 | |
Repayments on debt | |
| (5,317,833 | ) | |
| (8,852,491 | ) |
Payment of fees from issuance of common stock | |
| — | | |
| (53,549 | ) |
Net cash provided by financing activities | |
| 5,008,380 | | |
| 10,662,578 | |
| |
| | | |
| | |
Net increase (decrease) in cash | |
| (60,824 | ) | |
| 98,440 | |
Cash, beginning of period | |
| 69,714 | | |
| 205,093 | |
Cash, end of period | |
$ | 8,890 | | |
$ | 303,533 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Interest paid | |
$ | 1,661,288 | | |
$ | 3,257,894 | |
Taxes paid | |
$ | — | | |
$ | — | |
| |
| | | |
| | |
Non-cash investing and financing activities: | |
| | | |
| | |
Stock issued for conversion of accounts payable | |
$ | — | | |
$ | 147,223 | |
Stock issued for conversion of accrued compensation | |
$ | 1,178,311 | | |
$ | — | |
Stock issued for conversion of convertible notes and interest | |
$ | 6,462,691 | | |
$ | 5,622,885 | |
Stock issued for exercise of warrants | |
$ | 13 | | |
$ | — | |
Conversion of notes payable to accrued expenses | |
$ | 49,192 | | |
$ | — | |
Conversion of interest to notes payable | |
$ | 334,950 | | |
$ | — | |
Stock issued for conversion of accrued board fees | |
$ | 30,000 | | |
$ | — | |
Debt issued in connection with acquisition of Ceautamed | |
$ | — | | |
$ | 5,600,000 | |
Equipment obtained with financing | |
$ | — | | |
$ | 181,815 | |
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements
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 51% of Millenium
Natural Manufacturing Corp. and Millenium Natural Health Products, Inc. On October 8, 2019, SMFL entered into an agreement to acquire
the remaining 49% of these companies, subject to certain conditions which were subsequently met. On September 30, 2020, the name
of Millenium Natural Manufacturing Corp. was changed to Bonne Sante Natural Manufacturing, Inc. (“BSNM”), and on November 24,
2020, Millenium Natural Health Products Inc. was merged into BSNM. Based in Doral, Florida, BSNM operates a 22,000 square-foot FDA-certified
manufacturing facility. It manufactures nutritional products for a significant number of customers.
On July 1, 2021, SMFL acquired 100% of Doctors
Scientific Organica, LLC d/b/a Smart for Life, Oyster Management Services, Ltd., Lawee Enterprises, L.L.C. and U.S. Medical Care
Holdings, L.L.C. On August 27, 2021, SMFL 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 May 19, 2022, SMFL acquired 100% of Lavi
Enterprises, LLC. On the same date, SMFL transferred all of the equity interests of Lavi Enterprises, LLC to Doctors Scientific Organica,
LLC. On December 13, 2022, Oyster Management Services, Ltd. was converted to a limited liability company known as Oyster Management Services,
L.L.C. As a result of the foregoing, Oyster Management Services, L.L.C., Lawee Enterprises, L.L.C., U.S. Medical Care Holdings,
L.L.C. and Lavi Enterprises, LLC are now wholly owned subsidiaries of Doctors Scientific Organica, LLC (collectively, “DSO”).
Based in Riviera Beach, Florida, DSO operates a 30,000 square-foot FDA-certified manufacturing facility. DSO manufactures and sells weight
management foods and related products. Additionally, DSO provides manufacturing services for other customers.
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 100% of Nexus
Offers, Inc. (“Nexus”). Nexus is a network platform in the affiliate marketing space. Affiliate marketing is an advertising
model in which a product vendor compensates third-party digital marketers to generate traffic or leads for the product vendor’s
products and services. The third-party digital marketers are referred to as affiliates, and the commission fee incentivizes them to find
ways to promote the products being sold by the product vendor. Based in Miami, Florida, Nexus operates virtually.
On December 6, 2021, SMFL acquired 100% of GSP
Nutrition Inc. (“GSP”). GSP is a sports nutrition company that offers nutritional supplements for athletes and active lifestyle
consumers under the Sports Illustrated Nutrition brand. Based in Miami, Florida, GSP operates virtually.
On July 29, 2022, SMFL acquired 100% of Ceautamed
Worldwide, LLC and its wholly-owned subsidiaries Wellness Watchers Global, LLC and Greens First Female LLC (collectively, “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.
On August 15, 2022, SMFL entered into a joint
venture with a seller of Ceautamed to form Smart Acquisition Group, LLC. This subsidiary is 50% owned by the Company and 50% owned by
Stuart Benson, the former owner and principal of Ceautamed. This company was formed to expand M&A growth initiatives through
the identification, negotiation, financing and acquisition of companies by SMFL. As of September 30, 2023, there are no assets or activity
associated with this joint venture.
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 $4,464,100 from intangible assets to goodwill is reflected within these condensed consolidated financial statements.
On April 24, 2023, the Company effected a 1-for-50
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.
On August 2, 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 166,666,667 shares.
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 55,555,556 shares.
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 $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 its 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.
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.
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 $78,947 and $57,581
at September 30, 2023 and December 31, 2022, respectively.
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 3-7 years.
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 3 to 15 years.
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 $466,737, and $0 for the nine months ended
September 30, 2023 and 2022, respectively.
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.
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 $231,897 and $754,909, respectively. Freight
costs for the three months ended September 30, 2023 and 2022 were $61,952 and $226,063, respectively.
Advertising
Advertising costs are expensed as incurred. Advertising
costs for the nine months ended September 30, 2023 and 2022 were $1,369,031 and $1,618,467, respectively. Advertising costs for the three
months ended September 30, 2023 and 2022 were $501,874 and $621,841, respectively.
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.
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 $586,556 and $0, respectively.
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 974,513 warrants and 304,511
stock options, have not been included in the computation of dilutive net loss per share for the 2023 periods as the result would be antidilutive.
The Company’s potentially dilutive shares, consisting of 483,174 warrants and 8,334 stock options, have not been included in the
computation of dilutive net loss per share for the 2022 periods as the result would be antidilutive.
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 $4,134,000.
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 $279,575 of amortization during the year ended December 31, 2022, and $67,075 for the three months
ended March 31, 2023, respectively, collectively $346,768 that should not have been expensed. In accordance with ASC 250, Accounting
Changes and Error Correction, the change in estimate for the fiscal year 2023 and beyond is reported on a prospective basis and the prior
financial statements are not restated.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
The Company also reclassified $340,100 from intangible
assets to goodwill as the result of the obtained independent professional purchase price allocation related to the acquisition of Ceautamed.
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.
Consolidated Balance Sheet as of December 31, 2022
| |
As Previously Reported | | |
PPA Finalization | | |
Corrections | | |
As Adjusted | |
Intangible assets, net | |
$ | 20,936,258 | | |
$ | (340,100 | ) | |
$ | (4,134,000 | ) | |
$ | 16,462,158 | |
Goodwill | |
| 1,342,000 | | |
| 340,100 | | |
| 4,134,000 | | |
| 5,816,100 | |
Condensed Consolidated Balance Sheet as of March 31, 2023
| |
As Previously Reported | | |
PPA Finalization | | |
Corrections | | |
As Adjusted | |
Intangible assets, net | |
$ | 20,326,040 | | |
$ | (340,100 | ) | |
$ | (4,134,000 | ) | |
$ | 15,851,940 | |
Goodwill | |
| 1,342,000 | | |
| 340,100 | | |
| 4,134,000 | | |
| 5,816,100 | |
Note 4 — Inventory
Inventory consisted of the following:
| |
September 30, 2023 | | |
December 31, 2022 | |
Raw materials | |
$ | 541,520 | | |
$ | 644,202 | |
Packaging materials | |
| 906,386 | | |
| 946,884 | |
Finished goods | |
| 438,476 | | |
| 1,074,415 | |
Inventory in transit | |
| 101,348 | | |
| — | |
| |
$ | 1,987,730 | | |
$ | 2,665,501 | |
Note 5 — Property and Equipment
Property and equipment consisted of the following:
| |
Estimated Useful Lives (in Years) | |
September 30, 2023 | | |
December 31, 2022 | |
Furniture and fixtures | |
7 | |
$ | 9,139 | | |
$ | 9,139 | |
Equipment – manufacturing | |
5 | |
| 1,346,152 | | |
| 1,342,702 | |
Building and equipment | |
5 | |
| 3,839 | | |
| 3,840 | |
Leasehold improvements | |
3.5 | |
| 90,099 | | |
| 90,099 | |
| |
| |
| 1,449,229 | | |
| 1,445,780 | |
Less: accumulated depreciation and amortization | |
| |
| (1,137,757 | ) | |
| (963,561 | ) |
Property and equipment, net | |
| |
$ | 311,472 | | |
$ | 482,219 | |
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 $174,174 and $222,184, respectively, which is included in depreciation and amortization expense. Depreciation
and amortization expense for the three months ended September 30, 2023 and 2022 totaled $46,271 and $80,006, respectively, which is included
in depreciation and amortization expense.
Note 6 — Intangible Assets
Intangible assets consisted of the following:
| |
Estimated Useful Lives (in Years) | |
September 30, 2023 | | |
December 31, 2022 (As adjusted) | |
Customer contracts | |
7-10 | |
$ | 6,375,525 | | |
$ | 6,842,262 | |
Developed technology | |
15 | |
| 1,660,000 | | |
| 1,660,000 | |
Non-compete agreements | |
3 | |
| 840,000 | | |
| 840,000 | |
Patents | |
5-10 | |
| 2,950,000 | | |
| 2,950,000 | |
Tradename | |
10-15 | |
| 4,170,000 | | |
| 4,170,000 | |
Supplier contracts | |
10 | |
| 1,800,000 | | |
| 1,800,000 | |
Licenses agreements | |
5 | |
| 584,220 | | |
| 584,220 | |
Total intangible assets | |
| |
| 18,379,745 | | |
| 18,846,482 | |
Less: amortization | |
| |
| (4,038,000 | ) | |
| (2,384,324 | ) |
Intangibles, net | |
| |
$ | 14,341,745 | | |
$ | 16,462,158 | |
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 $4,134,000 from intangible assets to goodwill.
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, $340,100 was reclassified from intangible assets
to goodwill.
The table below identifies the changes to each
of the intangible assets as a result of the PPAs obtained related to the Nexus and Ceautamed acquisitions.
| |
December 31, 2022 previously reported | | |
PPA Adjustments | | |
December 31, 2022 (As Adjusted) | |
Customer contracts | |
$ | 17,046,076 | | |
$ | (10,203,814 | ) | |
$ | 6,842,262 | |
Developed technology | |
| 1,570,000 | | |
| 90,000 | | |
| 1,660,000 | |
Non-compete agreements | |
| 1,595,530 | | |
| (755,530 | ) | |
| 840,000 | |
Patents | |
| 230,000 | | |
| 2,720,000 | | |
| 2,950,000 | |
Tradename | |
| 2,010,000 | | |
| 2,160,000 | | |
| 4,170,000 | |
Intellectual property | |
| 385,199 | | |
| (385,199 | ) | |
| — | |
Supplier contracts | |
| — | | |
| 1,800,000 | | |
| 1,800,000 | |
Licenses agreements | |
| 584,220 | | |
| — | | |
| 584,220 | |
Total intangible assets | |
$ | 23,421,025 | | |
$ | (4,574,543 | ) | |
$ | 18,846,482 | |
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 $466,737.
Amortization for the three months ended September
30, 2023 and 2022 was $569,539 and $442,405, respectively, which is included in depreciation and amortization expense.
Amortization for the nine months ended September 30, 2023 and 2022
was $1,640,439 and $1,148,603, respectively, which is included in depreciation and amortization expense.
The future amortization is as follows:
Years Ending December 31: |
|
|
|
2023 (remainder of year) |
|
$ |
569,537 |
|
2024 |
|
|
2,278,242 |
|
2025 |
|
|
1,918,440 |
|
2026 |
|
|
1,354,076 |
|
2027 |
|
|
1,236,022 |
|
Thereafter |
|
|
6,985,428 |
|
Total |
|
$ |
14,341,745 |
|
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 5 to 7 years.
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 4 years to 5 years. Rental payments on these leases typically provide for fixed minimum payments that increase over
the lease term at predetermined amounts, are included in the measurement of lease payments, and are included in the measurement of lease
liabilities. Certain leases involving equipment have purchase options. When those options are reasonably certain of being exercised,
the Company reflects such purchase options when measuring the lease term and lease payments for those leases.
Financial Information
The following provides information about the
Company’s right of use assets and lease liabilities for its operating and finance leases as of September 30, 2023 and December
31, 2022:
|
|
Balance Sheet classification |
|
September 30,
2023 |
|
|
December 31,
2022 |
|
Right of use assets Operating leases |
|
Operating leases right-of-use asset |
|
$ |
2,421,550 |
|
|
$ |
2,672,866 |
|
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities |
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
Operating lease liabilities, current portion |
|
|
347,852 |
|
|
|
303,819 |
|
Noncurrent |
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
Operating lease liabilities, non-current portion |
|
|
2,157,344 |
|
|
|
2,423,446 |
|
Total lease liabilities |
|
|
|
$ |
2,505,196 |
|
|
$ |
2,727,265 |
|
The components of the Company’s lease costs
for the nine months ended September 30, 2023 and 2022 are as follows:
|
|
Income Statement Classification |
|
September 30,
2023 |
|
|
September 30,
2022 |
|
Rent expense |
|
General and administration |
|
$ |
431,227 |
|
|
$ |
492,142 |
|
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Supplemental cash flow information related to
Company’s leases for the nine months ended September 30, 2023:
| |
Operating leases | |
Cash paid for amounts included in the measurement of lease liabilities | |
$ | 431,227 | |
Weighted average remaining lease term and weighted
average discount rate for the Company’s leases as of September 30, 2023:
| |
Operating leases | |
Weighted average remaining term (in years) | |
| 4.84 | |
Weighted average discount rate | |
| 12.00 | % |
Annual maturity analysis of the Company’s
lease liabilities as of September 30, 2023:
| |
Operating leases | |
2023 | |
$ | 156,089 | |
2024 | |
| 633,037 | |
2025 | |
| 651,828 | |
2026 | |
| 671,213 | |
2027 | |
| 658,622 | |
Thereafter | |
| 636,776 | |
Total payments | |
| 3,407,565 | |
Less: interest | |
| (902,369 | ) |
Present value of lease liability | |
| 2,505,196 | |
Less: Current portion of lease liabilities | |
| (347,852 | ) |
Noncurrent portion of lease liabilities | |
$ | 2,157,344 | |
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 $5,142,040, of which $1,229,413 was issued with issuance costs of $184,413 for
the nine months ended September 30, 2023. The debentures contain an original issue discount of 15%, or an aggregate original issue discount
of $771,183. As a result, the total purchase price was $4,370,858. The debentures bear interest at a rate of 17.5% per annum and are due
from January through November 2024. The outstanding principal amount and all accrued interest is due and payable on the earlier of (i)
the completion of the Company’s next equity financing in which it receives gross proceeds in excess of $20 million, (ii) twenty-four
months after the date of issuance or (iii) within 30 days after election of repayment from the holder so long as the election is after
the 6-month anniversary of the debenture. The Company may voluntarily prepay the debentures in whole or in part without premium or penalty.
The debentures contain customary events of default for a loan of this type. The debentures are unsecured and are subordinated in right
of payment to the prior payment in full of all senior indebtedness and are pari passu in right of payment to any other
unsecured indebtedness incurred by the Company in favor of any third party. As of September 30, 2023, the outstanding principal balance
of the debentures was $4,252,947, the unamortized debt issuance cost was $173,423 and accrued interest was $866,272. On May 30, 2023,
two of the debenture agreements totaling $250,000 were converted into 1,121 shares of the Company’s series B preferred stock, at
a conversion price of $223.01. During the nine months ended September 30, 2023, an aggregate of $1,045,000 was raised via these debentures.
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
$2,272,727 to such investor. The note contains an original issue discount of 12%, or $272,727. As a result, the total purchase price was
$2,000,000, the proceeds of which were used to fund the acquisition of Ceautamed. The note shall bear interest at the rate of 16% per
annum and matures on July 29, 2027. The outstanding principal and all accrued interest shall be amortized on a 60-month straight-line
basis. The Company may prepay the principal and all accrued and unpaid interest on the note without penalty, in whole or in part; provided
however, in no event before January 15, 2023, unless with the explicit prior written approval of the holder. The note contains customary
events of default for a loan of this type. The note is guaranteed by BSNM, DSO, Nexus, GSP and Ceautamed and is secured by a security
interest in all of the assets of the Company and such guarantors; provided that such security interest is subordinate to the rights of
the lenders under any senior indebtedness (as defined in the note). As of September 30, 2023 the outstanding principal balance of the
note was $2,217,853 the unamortized debt issuance cost was $186,548 and accrued interest was $413,189. During the nine months ended September
30, 2023, the Company recognized $63,477 of interest expense associated with the amortization of the debt issuance cost.
Acquisition Notes
On July 1, 2021, the Company issued a 6% secured
subordinated promissory note in the principal amount of $3,000,000 to a related party, Sasson E. Moulavi (“Dr. Moulavi”),
in connection with the acquisition of DSO. This note accrues interest at 6% per annum and the outstanding principal and interest will
be amortized on a straight-line basis and are payable quarterly in accordance with the amortization schedule, with all amounts due and
payable on July 1, 2024. On November 29, 2022, the Company entered into a letter agreement with Sasson E. Moulavi to amend the terms of
the note. Pursuant to the letter agreement, the parties agreed to amend and restate the note to amend the amortization schedule, with
the first payment deferred until February 15, 2023 and all amounts due and payable on August 15, 2024. In exchange for the agreement of
Dr. Moulavi to enter into the letter agreement, the Company agreed to (i) issue to Dr. Moulavi 100,000 shares of common stock under the
Company’s 2022 Equity Incentive Plan and (ii) pay to Dr. Moulavi a fee of $50,000 in cash, which shall be paid upon completion of
the Company’s anticipated debt financing and is included in debt balance. The Company may prepay all or any portion of this note
any time prior to maturity without premium or penalty. This note contains customary covenants and events of default for a loan of this
type, including if a default occurs under any senior secured indebtedness to banks and other financial institutions or private equity
funds, and is secured by a security interest in all of the assets of DSO; provided that such security interest is subordinate to the rights
of the lenders under any such senior secured indebtedness. During the nine months ended September 30, 2023, the Company made principal
cash payments of $150,000 and $196,000 for the new note. On May 25, 2023 the note was modified whereby $1,500,000 in principal amount
of the note was converted to 6,727 shares of the Company’s series B preferred stock. The remaining $1,400,000 of principal plus
accrued interest of $334,950 was converted into a new note with the same interest rate and maturity date. As of September 30, 2023, the
outstanding principal balance of this note was $1,538,950 and accrued interest was $32,574.
On November 8, 2021, the Company issued a 5% secured subordinated promissory
note in the principal amount of $1,900,000 to related parties, Justin Francisco and Steven Rubert, in connection with the acquisition
of Nexus. This note accrued interest at 5% per annum and the outstanding principal and interest was amortized on a straight-line basis
and are payable quarterly in accordance with the amortization schedule attached to the note, with all amounts due and payable on November
8, 2024. On May 25, 2023, the note and accrued interest $12,966 was converted to 8,579 shares of the Company’s series B preferred
stock which resulted in the note being fully paid at September 30, 2023.
On July 29, 2022, the Company issued secured subordinated convertible
promissory notes in the aggregate principal amount of $2,150,000 in connection with the acquisition of Ceautamed, which are partially
with a related party. The notes bore interest at the rate of 5% per annum with all principal and accrued interest being due and payable
in one lump sum on July 29, 2025; provided that upon an event of default (as defined in the notes), such interest rate shall increase
to 10%. On May 25, 2023, the note and accrued interest of $89,584 was converted to 10,458 shares of the Company’s series B preferred
stock which resulted in the note being fully paid at September 30, 2023.
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 $2,150,000 in connection with the acquisition of Ceautamed, which
are partially with a related party. The notes shall bear interest at the rate of 5% per annum and mature on July 29, 2025; provided that
upon an event of default (as defined in the notes), such interest rate shall increase to 10%. The outstanding principal and all accrued
interest shall be amortized on a five-year straight-line basis and payable quarterly in accordance with the amortization schedule to
the notes. The Company may redeem all or any portion of the notes at any time without premium or penalty. The notes contain customary
covenants and events of default for loans of this type, including upon any default under the senior indebtedness (as defined in the notes).
The notes are guaranteed by Ceautamed and are secured by a security interest in all of the assets of such guarantors; provided that such
security interest is subordinate to the rights of the lenders under any such senior indebtedness. As of September 30, 2023, the outstanding
principal balance of these notes was $2,203,993, unamortized debt issuance cost was $0 and accrued interest was $196,552.
On July 29, 2022, the Company issued secured
subordinated promissory notes in the aggregate principal amount of $1,300,000 in connection with the acquisition of Ceautamed, which
are partially with a related party. The notes bear interest at the rate of 5% per annum with all principal and accrued interest being
due and payable in one lump sum ninety (90) days from the date of the note; provided that upon an event of default (as defined in the
notes), such interest rate shall increase to 10%. On November 28, 2022, the Company entered into letter agreements with the holders of
most of the notes to amend the terms of these notes. Pursuant to letter agreements, the parties agreed to extend the maturity date to
June 1, 2023 and agreed to a seven month payment schedule, with the first payment due December 1, 2022. The parties also agreed to increase
the default interest rate from 10% to 15%. The Company also agreed that if an event of default (as defined in the notes) has occurred
and is continuing, then the Company shall not create any senior indebtedness (as defined in the notes) without the consent of the holders
of a majority of the principal amount of the notes. In exchange for the agreement of the holders to enter into the letter agreements,
the Company agreed to pay certain amendment fees as more particularly described in the letter agreements. On April 1, 2023, the Company
entered into letter agreements with the holders of most of the notes, pursuant to which the Company agreed to pay the remaining
balance of the notes in two payments on May 1, 2023 and June 1, 2023. One of the note holders agreed to settle the amount due to the
holder for a lesser amount, resulting in a gain on extinguishment of debt of $60,764. In addition, the Company agreed to prepay a portion
of the outstanding principal and accrued interest on the notes upon the occurrence of any of the following events: (i) in the event the
Company receives any tax refunds claimed with respect to an “employee retention credit” pursuant to Section 2301 of the CARES
Act (or any corresponding or similar provisions of state or local law) or receives any cash from factoring or assigning the right
to receive such tax refunds, the Company must prepay $150,000 of the outstanding principal and accrued interest on the notes; (ii)
in the event the Company or any its subsidiaries raise capital through the issuance of any convertible debentures, the Company must
prepay the outstanding principal and accrued interest on the notes in an amount equal to one-third (1/3) of the net proceeds from such
financing; and (iii) in the event the Company or any of its subsidiaries consummates an equity or equity-linked capital raise with the
assistance of an investment bank, the Company must prepay the outstanding principal and accrued interest on the notes in an amount equal
to one-third (1/3) of the proceeds raised by the Company or any of its subsidiaries, up to an aggregate amount of $350,000, plus any
then overdue principal payments. The Company is in the process of negotiating a similar extension of one remaining note in the principal
amount of $100,000. The Company may redeem all or any portion of the notes at any time without premium or penalty. The notes contain
customary covenants and events of default for loans of this type, including upon any default under the senior indebtedness (as defined
in the notes). The notes are guaranteed by Ceautamed and are secured by a security interest in all of the assets of such guarantors;
provided that such security interest is subordinate to the rights of the lenders under any such senior indebtedness. As of September
30, 2023, the outstanding principal balance of these notes was $90,000, unamortized debt issuance cost was $0 and accrued interest was
$5,350.
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 $3,000,000. The loan bears interest at a rate
of 15.0% per annum, provided that upon an event of default, such rate shall increase by 5%. The loan was due and payable on the earlier
of July 1, 2022 or upon completion of the Company’s initial public offering (the “IPO”). The Company repaid $1,325,000
of the principal balance and $27,604 of the interest from the proceeds of the IPO. In connection with such repayment, the lender agreed
that the remaining loan is due and payable on July 1, 2023. On April 20, 2023, the Company entered into a third amendment to the loan
agreement, which provides that the Company shall make a payment towards the reduction of principal in the amount of $250,000 within
two business days of the earlier to occur of the following events: (i) the Company receives any tax refunds claimed with respect to an
“employee retention credit” pursuant to Section 2301 of the CARES Act (or any corresponding or similar provisions of state
or local law) or receives any cash from factoring or assigning the right to receive such tax refunds, or (ii) the completion of a public
offering of securities pursuant to a Registration Statement on Form S-3. In addition, within two business days following the completion
of a public offering of securities pursuant to a Registration Statement on Form S-1, the Company agreed to pay in full all outstanding
amounts owing under the loan agreement. The amendment also provides that following the payment of $250,000 described above, monthly
payments of principal and interest pursuant to shall be an aggregate of $30,000 per month, until the amounts owing under the loan
agreement are paid in full. The loan is secured by all of the Company’s assets and contains customary events of default. As
of September 30, 2023, the outstanding principal balance of this note was $638,062 and accrued interest was $0. As of September 30, 2023,
the Company was in compliance with the covenants related to this note.
In 2018, the Company entered into an amended
loan agreement and convertible promissory note for $200,000 with a third party. On September 30, 2023, the outstanding amount was $100,000
and accrued interest was $158,518. The amended loan agreement and convertible promissory note (convertible at fair value of shares) was
in default at September 30, 2023.
On October 12, 2022, the Company issued promissory
notes in the principal amount of $258,000 to third parties. These promissory notes bear interest of 15% to 20% and are payable on December
2022 and January 2023. During the nine months ended September 30, 2023, the Company made various principal and interest payments on the
notes. On May 26, 2023, only the remaining principal balance of $105,000 was converted into 489 shares of the Company’s series B
preferred stock, the accrued interest was not converted. As of September 30, 2023, the outstanding principal balance was $0 and accrued
interest was $14,329.
On November 2, 2022, the Company issued a promissory
note to a board member in the principal amount of $50,000. This note bears interest at a rate of 12% and is due on demand. During the
nine months ended September 30, 2023 the principal balance was paid in full, however the accrued interest was not paid. At September
30, 2023, the outstanding amount was $0 and accrued interest was $2,387.
On December 6, 2022, the Company issued a promissory
note to a board member in the principal amount of $30,000. This note bore interest at a rate of 12% and was due on demand. The remaining
principal balance of $30,000 as of May 26, 2023 was converted into 142 shares of the Company’s series B preferred stock which resulted
in the note being fully paid at September 30, 2023.
On December 21, 2022, the Company issued a promissory
note to a board member in the principal amount of $100,000. This note bore interest at a rate of 12% and was due on demand. The remaining
principal balance of $100,000 as of May 26, 2023 was converted into 472 shares of the Company’s series B preferred stock which resulted
in the note being fully paid at September 30, 2023.
On February 8, 2023, the Company issued a promissory
note to a board member in the principal amount of $50,000. This note bore interest at a rate of 12% and was due on demand. The remaining
principal balance as of May 26, 2023 was converted into 232 shares of the Company’s series B preferred stock which resulted in the
note being fully paid at September 30, 2023.
On February 14, 2023, the Company issued a promissory note to a third
party in the principal amount of $50,000. This note bore interest at a rate of 12% and was due on demand. During the nine months ended
September 30, 2023, the Company made various principal and interest payments on the notes. The remaining principal balance of $20,000
as of May 26, 2023 was converted into 93 shares of the Company’s series B preferred stock. At September 30, 2023, the outstanding
amount was $0 and accrued interest was $992.
On February 16, 2023, the Company issued a promissory
note to a third party in the principal amount of $50,000. This note bore interest at a rate of 12% and was due on August 26, 2023. The
remaining principal balance as of May 26, 2023 was converted into 224 shares of the Company’s series B preferred stock which resulted
in the note being fully paid at September 30, 2023. At September 30, 2023, the outstanding amount was $0 and accrued interest was $2,153.
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 $137,000. This note bears interest at a rate of 12% and is due on demand. During the
nine months ended September 30, 2023, the Company made various principal and interest payments on the notes. On May 26, 2023, $50,000
of principal and $1,137 of interest was converted 230 shares of into the Company’s series B preferred stock. At September 30, 2023,
the outstanding amount was $51,294 and accrued interest was $4,086.
On April 13, 2023, the Company issued a promissory
note to a third party in the principal amount of $59,000. This note bore interest at a rate of 12% and was due on demand. The remaining
principal balance as of May 26, 2023, was converted into 273 shares of the Company’s series B preferred stock which resulted in
the note being fully paid at September 30, 2023.
On April 21, 2023, the Company issued a promissory
note to a board member in the principal amount of $53,000. This note bears interest at a rate of 12% and is due on demand. At September
30, 2023, the outstanding amount was $30,000 and accrued interest was $800.
On June 22, 2023, the Company issued a promissory
note to a board member in the principal amount of $118,000. This note bears interest at a rate of 17.5% and is due on demand. At September
30, 2023, the outstanding amount was $118,000 and accrued interest was $5,658.
On July 12, 2023, the Company issued a promissory
note to a third party in the principal amount of $25,000. This note bears interest at a rate of 12% and is due on demand. At September
30, 2023, the outstanding amount was $25,000 and accrued interest was $658.
On July 25, 2023, the Company issued a promissory
note to a board member in the principal amount of $100,000. This note bears interest at a rate of 12% and is due on demand. At September
30, 2023, the outstanding amount was $100,000 and accrued interest was $2,203.
On August 10, 2023, the Company issued a promissory
note to a board member in the principal amount of $50,000. This note bears interest at a rate of 12% and is due on demand. At September
30, 2023, the outstanding amount was $50,000 and accrued interest was $838.
On August 15, 2023, the Company issued a promissory
note to a board member in the principal amount of $30,000. This note bears interest at a rate of 12% and is due on demand. At September
30, 2023, the outstanding amount was $30,000 and accrued interest was $454.
On August 24, 2023, the Company issued a promissory
note to a third party in the principal amount of $60,000. This note bears interest at a rate of 12% and is due on demand. At September
30, 2023, the outstanding amount was $60,000 and accrued interest was $0.
On September 7, 2023, the Company issued a promissory
note to a board member in the principal amount of $35,000. This note bears interest at a rate of 12% and is due on demand. At September
30, 2023, the outstanding amount was $35,000 and accrued interest was $265.
On September 14, 2023, the Company issued a promissory
note to a third party in the principal amount of $100,000. This note bears interest at a rate of 12% and is due on demand. At September
30, 2023, the outstanding amount was $100,000 and accrued interest was $526.
On September 29, 2023, the Company issued a promissory
note to a board member in the principal amount of $35,000. This note bears interest at a rate of 12% and is due on demand. At September
30, 2023, the outstanding amount was $35,000 and accrued interest was $12.
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 $55,000
plus accrued interest of $24,776 was converted into 358 of the Company’s series B preferred stock which resulted in the note being
fully paid at September 30, 2023.
Cash Advances
In June 2022, the Company entered into a cash
advance agreement for $341,150 with a required repayment amount of $490,000, which required weekly payments of approximately $19,738.
The cash advance agreement was fully paid at September 30, 2023.
In July 2022, the Company entered into a cash
advance agreement for $650,000 with a required repayment amount of $897,750, which requires weekly payments of approximately $40,806.
In May 2023, the Company agreed to a settlement for a lesser amount resulting in a gain on extinguishment of $50,814. At September 30,
2023, the outstanding amount was $147,500.
In August 2022, the Company entered into a cash
advance agreement for $100,000 with a required repayment amount of $146,260, which requires weekly payments of approximately $6,200.
At September 30, 2023, the outstanding amount was $4,360.
In September 2022, the Company entered into a
cash advance agreement for $243,750 with a required repayment amount of $372,500, which requires weekly payments of approximately $15,000.
In May 2023, the Company agreed to a settlement for a lesser amount resulting in a gain on extinguishment of $37,500. At September 30,
2023, the outstanding amount was $24,979.
In November 2022, the Company entered into cash
advance agreements for an aggregate of $592,236 with an aggregated required repayment amount of $994,460, which requires weekly payments
of approximately $52,422. In June 2023, the Company agreed to a settlement with one of the agreements for a lesser amount resulting in
a gain on extinguishment of $63,968. At September 30, 2023, the outstanding amount was $83,037.
In December 2022, the Company entered into cash
advance agreements for $293,000 with a required repayment amount of $439,207, which requires weekly payments of approximately $39,905.
At September 30, 2023, the outstanding amount was $8,271.
In January 2023, the Company entered into cash
advance agreements for $387,000 with a required repayment amount of $593,604, which required weekly payments of approximately $39,980.
The cash advance agreements were fully satisfied with payments and a settlement resulting in a gain on extinguishment of $33,579 at September
30, 2023.
In June 2023, the Company refinanced the January
2023 agreements with balances of $284,029 and entered into cash advance agreements and received an additional $107,071 with a required
repayment amount of $652,065, which requires weekly payments of approximately $48,625. At September 30, 2023, the outstanding amount
was $76,670 and unamortized debt issuance cost of $20,994.
In July 2023, the Company entered into cash advance
agreements for $74,950 with a required repayment amount of $74,950 which requires weekly payments of approximately $7,495. At September
30, 2023, the outstanding amount was $38,974.
In August 2023, the Company refinanced an agreement
from June 2023, as a result the Company received an additional $48,030. At September 30, 2023, the outstanding amount was $514,670 and
unamortized debt issuance cost of $219,172.
Equipment Financing Loan
In May 2022, the Company entered into an equipment
financing loan for $146,765 used for the purchase of equipment within BSNM’s operations. The loan bears interest at 10.18% and
matures on April 1, 2027. At September 30, 2023, the outstanding amount was $114,511.
In August 2022, the Company entered into an equipment
financing loan for $35,050 used for the purchase of equipment within BSNM’s operations. The loan bears interest at 10.18% and matures
on August 1, 2027. At September 30, 2023, the outstanding amount was $29,495.
In July 2022, the Company entered into an equipment
financing loan for $8,463 used for the purchase of equipment within Ceautamed’s operations. At September 30, 2023, the outstanding
amount was $4,873.
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 $958,000 and bear interest at 9.49% with no expiration date. As of September 30,
2023, the outstanding principal balance of these lines of credit was $124,051.
In August 2022, Ceautamed entered into a revolving
line of credit with a bank, which permits borrowings up to $50,000 and bears interest at 45.09% with no expiration date. In 2023, the
Company borrowed an additional $43,000. As of September 30, 2023, the outstanding principal balance of these lines of credit was $50,337.
In September 2022, DSO entered into a revolving
line of credit with a bank, which permits borrowings up to $70,000 and bears interest at 9.49% with no expiration date. As of September
30, 2023, the outstanding principal balance of this line of credit was $16,544.
In September 2023, DSO entered into a merchant
loan agreement for $110,740. Repayment amounts are 17% of the daily account credits processed through the provider until the loan amount
is paid in full. As of September 30, 2023, the outstanding principal balance was $110,740.
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 $300,000. This loan matures in 30 years and bears interest at a rate of 3.75%. The loan is secured by all
of the Company’s assets. As of September 30, 2023, the outstanding principal balance of this loan was $300,000 and accrued interest
was $36,781.
PPP Loans
In February 2021, the Company received an additional
$261,164 in PPP loans under the CARES Act. This loan bears interest at a rate of 1% per annum and matures in April 2025. As of September
30, 2023, the outstanding balance of this loan was $197,457 and accrued interest was $9,927.
Total Debt
Debt is comprised of the following components
as of September 30, 2023:
Original issue discount subordinated debentures | |
$ | 4,252,947 | |
Original issue discount secured subordinated note | |
| 2,217,853 | |
Acquisition notes | |
| 3,832,943 | |
Promissory notes and cash advances | |
| 2,270,917 | |
Revolving lines of credit | |
| 301,672 | |
Equipment financing loan | |
| 148,879 | |
EIDL loan | |
| 300,000 | |
PPP loans | |
| 197,457 | |
| |
| 13,522,668 | |
Debt issuance costs | |
| (613,138 | ) |
Debt, net | |
| 12,909,530 | |
Debt, current | |
| 4,878,552 | |
Debt issuance costs, current | |
| (474,090 | ) |
Current portion of debt, net | |
| 4,404,462 | |
Debt, non-current | |
| 8,644,116 | |
Debt issuance costs, non-current | |
| (139,048 | ) |
Non-current portion of debt, net | |
$ | 8,505,068 | |
The Company was not in compliance will all debt covenants as of September
30, 2023, but waivers of non-compliance were obtained for all such debt, except as disclosed.
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 | ) |
Gain on extinguishment of debt in 2023 | |
| (273,058 | ) |
Conversion of interest to notes payable | |
| 334,950 | |
Conversion of principal to accrued expenses | |
| (26,471 | ) |
| |
| | |
Balance at September 30, 2023 | |
$ | 12,909,530 | |
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
The future contractual maturities of the debt
are as follows:
For the Year Ended December 31: | |
| |
2023 (remainder of year) | |
$ | 4,404,462 | |
2024 | |
| 5,197,804 | |
2025 | |
| 2,046,449 | |
2026 | |
| 517,178 | |
2027 | |
| 531,356 | |
Thereafter | |
| 212,281 | |
Total | |
$ | 12,909,530 | |
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 $250,000 per institution. The Company has not experienced any losses in such accounts.
Major Customers
For the nine months ended September 30, 2023 and
2022, the Company had two significant customers representing an aggregate of 54% and 41% of revenues and three that make up 52% and 66%
of the accounts receivable balance, respectively.
For the three months ended September 30, 2023
and 2022, the Company had two and two significant customers representing an aggregate of 64% and 41% of revenues and three that make up
52% and 66% of the accounts receivable balance, respectively. The Company’s officers are closely monitoring the relationships with
all customers.
Major Vendors
For the nine months ended September 30, 2023,
the Company had one major supplier representing 16% of purchases, respectively. The Company had no major suppliers for the nine months
ended September 30, 2022.
For the three months ended September 30, 2023
and 2022, the Company had one major supplier representing 17% and 10% of purchases, respectively. The Company’s officers are closely
monitoring the relationships with all significant suppliers.
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 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. 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 $17.2 million, which will be available to offset future taxable income.
The tax carryforwards have an indefinite life.
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 1,000 shares of the series A preferred stock was converted into 3,334 shares of the Company’s common stock.
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 5,000,000
shares of its preferred stock as series B preferred stock. The series B preferred stock has the following voting powers, designations,
preferences and relative rights, qualifications, limitations or restrictions:
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 ($223) by the conversion price. The
conversion price is $20.07 (subject to adjustments). Notwithstanding the foregoing, the Company shall not effect any conversion, and a
holder shall not have the right to convert, any portion of the series B preferred stock to the extent that, after giving effect to the
conversion, such holder (together with such holder’s affiliates) would beneficially own in excess of 4.99% of the number of shares
of common stock outstanding immediately after giving effect to the issuance of shares issuable upon the conversion. This limitation may
be waived (up to a maximum of 9.99%) by the holder and in its sole discretion, upon not less than sixty-one (61) days’ prior notice
to the Company.
In May 2023, the Company issued 34,001 shares
of series B preferred stock as settlement of debt, accrued interest, accrued compensation, and accrued board fees for a total value of
$7,488,877.
In June 2023, the Company issued 817 shares of
series B preferred stock as settlement of accrued interest totaling $182,153.
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Common
Stock
On February 16, 2022, the Company entered into
an underwriting agreement with Dawson James Securities, Inc., as representative of the several underwriters named on Schedule I thereto,
relating to its 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, the Company 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 the IPO was
completed. At the closing, the underwriters partially exercised the option and purchased 459 series A warrants and 459 series B warrants.
Therefore, the Company 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, the Company received net proceeds of $12,738,288.
On
February 18, 2022, the Company issued 859 shares of common stock upon the conversion of the 5% secured subordinated convertible promissory
note in the principal amount of $1,900,000 along with interest of $32,500 issued to Justin Francisco and Steven Rubert in connection
with the acquisition of Nexus.
On
February 18, 2022, the Company issued 1,385 shares of common stock upon the conversion of the 6% secured subordinated convertible promissory
note in the principal amount of $3,000,000 along with interest of $116,000 issued to Sasson E. Moulavi in connection with the acquisition
of DSO.
On
February 18, 2022, the Company issued 511 shares of common stock upon the conversion of the convertible promissory note in the principal
amount of $500,000 along with interest of $74,583 issued to East West Capital LLC.
On
February 18, 2022, the Company issued 95 additional shares of common stock to the stockholders of GSP and 33 additional shares of common
stock to certain vendors of GSP in accordance with the terms of the contribution and exchange agreement described above. Based on the
IPO share allocation of the unit, it was determined that the Company would issue the additional 95 shares.
On
February 18, 2022, the Company issued an aggregate of 4,820 shares of common stock to various lenders pursuant to future equity agreements
which required the Company to issue shares of common stock upon closing of the IPO, which resulted in an interest expense of $10,844,960.
In
February through March 2022, the Company issued 2,755 shares of common stock upon the conversion of the convertible promissory note in
the principal amount of $2,250,000 along with interest of $292,500 issued to several debt holders.
On
March 10, 2022, the Company granted restricted stock awards for an aggregate of 1,949 shares of common stock to certain directors, officers,
and consultants. A total of 1,505 of these shares vested in full on the date of grant. The remaining 445 shares, which were granted to
independent directors, vest monthly over a one-year period which were recorded as a prepaid of $46,900 at December 31, 2022. A total
of 520 of these shares were granted under the 2020 Stock Incentive Plan described below. The remaining 734 were granted under the 2022
Equity Incentive Plan described below. The shares, valued at $822,626, were based on the closing trading price per share of $422.10 on
the date of the grant.
On
April 17, 2023, the Company issued 556 shares of common stock as compensation for amending the license agreement associated with Sports
Illustrated Nutrition.
On May 4, 2023, a shareholder converted 1,000
shares of series A preferred stock into 3,334 shares of common stock.
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, 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 $28.844, respectively.
In addition, under the securities purchase agreement, the Company 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. At closing, the investor exercised
the pre-funded warrant in full. Accordingly, the Company 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
$776,933.
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 7.5% of the gross proceeds of the offering and a management fee equal to 1% of the gross proceeds of
the offering. The Company 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, the Company issued to the Placement Agent warrants to purchase
up to 2,339 shares of common stock at an exercise price of $36.0564 per share (or 125% of the offering price).
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
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, the Company 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. At closing, the investor exercised the pre-funded warrant in full. Accordingly,
the Company 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 $1,374,367.
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. The Company 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, the Company issued to the Placement Agent warrants to purchase up to 4,875 shares of common stock
at an exercise price of $30.4875 per share (or 125% of the offering price).
On
May 24, 2023, the Company issued 556 shares of common stock to a note holder as compensation for amending the note.
On
August 29, 2023, the Company issued 15,083 shares of common stock to a note holder as compensation for amending the note.
During the nine months ended September 30, 2023,
the Company issued 429,214 shares of common stock upon exercise of warrants.
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 4,445 shares of common stock to directors, officers, employees, and consultants who provide services to the Company.
Awards that may be granted include incentive stock options, non-qualified stock options and awards of restricted stock.
At
September 30, 2023 and December 2022, there were 10 shares of common stock available for issuance under the 2020 Plan. The Company did
not issue any other stock options under the 2020 Plan during the nine months ended September 30, 2023.
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 333,334 shares of
common stock to directors, officers, employees, and consultants who provide services to the Company. Awards that may be granted include
incentive stock options, non-qualified stock options, stock appreciation rights, restricted awards, performance share awards and performance
compensation awards. At September 30, 2023, there were 31,250 shares of common stock available for issuance under the 2022 Plan.
On
August 12, 2022, the Company issued stock options to employees under the 2022 Plan for an aggregate of 2,518 shares of common stock.
The stock options have an exercise price of $283.50 per share, will vest quarterly over a three-year period and expire ten (10) years
after the date of issuance; provided that an option granted to Alfonso J. Cervantes, Jr., the Company’s Executive Chairman, for
the purchase of 667 shares of common stock has an exercise price of $311.85 per share and expires five (5) years after the date of issuance.
The Company did not issue any other stock options under the 2022 Plan during the nine months ended September 30, 2023.
The Company recognized $765,588 and $0 of compensation
expense related to the vesting of options based on the service period during the nine months ended September 30, 2023 and 2022, respectively.
The compensation expense recognized for the three months ended September 30, 2023 and 2022 was $685,380 and $0, respectively.
The series A warrants sold in the IPO are exercisable
until the fifth anniversary of the issuance date at an exercise price equal to $1,050.00 per share and may be exercised on a cashless
basis if the issuance of common stock upon exercise of the warrants is not covered by an effective registration statement. The exercise
price and number of shares of common stock issuable upon exercise of the series A warrants may be adjusted in certain circumstances, including
in the event of a stock dividend, extraordinary dividend on or recapitalization, reorganization, merger, or consolidation.
The series B warrants sold in the IPO are exercisable
until the fifth anniversary of the issuance date at an exercise price equal to $1,500.00 per share and may be exercised on a cashless
basis, whereby the holder will receive one share of common stock for each series B warrant exercised. As of September 30, 2023, 3,199
of the series B warrants were exercised on a cashless basis and the Company issued 3,199 shares of common stock upon such exercise.
In the nine months ended September 30, 2023 and
2022, warrant holders exercised an aggregate of 429,214 and 3,199 shares, respectively. In the three months ended September 30, 2023 and
2022 warrant holders exercised an aggregate of 129,598 and 4, respectively.
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.
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
The
following is a summary of options and warrants granted, exercised, forfeited and outstanding during the nine months ended September 30,
2023:
| |
2023-Stock Options | | |
2023-Warrants | |
| |
Number of Options | | |
Weighted Average Exercise Price | | |
Number of Warrants | | |
Weighted Average Exercise Price | |
Outstanding at January 1, 2023 | |
| 5,729 | | |
$ | 150.93 | | |
| 502,009 | | |
$ | 184.23 | |
Granted | |
| 299,167 | | |
| 3.14 | | |
| 918,363 | | |
| 15.93 | |
Exercised | |
| — | | |
| — | | |
| 429,214 | | |
| 1.53 | |
Forfeited | |
| 385 | | |
| 0.36 | | |
| 16,645 | | |
| 0.09 | |
Outstanding at September 30, 2023 | |
| 304,511 | | |
$ | 6.29 | | |
| 974,513 | | |
$ | 110.59 | |
Exercisable at September 30, 2023 | |
| 147,942 | | |
| | | |
| 974,513 | | |
| | |
| |
2022-Stock Options | | |
2022-Warrants | |
| |
Number of Options | | |
Weighted Average Exercise Price | | |
Number of Warrants | | |
Weighted Average Exercise Price | |
Outstanding at January 1, 2022 | |
| 3,223 | | |
$ | 4.50 | | |
| 32,894 | | |
$ | 52.11 | |
Granted | |
| 2,951 | | |
| 283.50 | | |
| 7,517 | | |
| 63.00 | |
Exercised | |
| 435 | | |
| 4.50 | | |
| 3,198 | | |
| — | |
Forfeited | |
| 10 | | |
| 4.50 | | |
| 613 | | |
| — | |
Outstanding at September 30, 2022 | |
| 5,729 | | |
$ | 148.50 | | |
| 36,599 | | |
$ | 59.76 | |
Exercisable at September 30, 2022 | |
| 2,778 | | |
| | | |
| 36,599 | | |
| | |
Valuation
Assumptions for Stock Options and Warrants
The
fair value of each option and warrant issued in 2023 was estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
Risk-free interest rate | |
| 2.86 – 4.30 | % |
Expected volatility | |
| 53 | % |
Expected life (years) | |
| 5-10 | |
Dividend yield | |
| 0 | % |
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.
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 $46,686 and $0, respectively, and for the three months ended
September 30, 2023 and 2022, the Company paid Trilogy $19,139 and $0, respectively, for services rendered under a consulting agreement
which are reflected in the statements of operations as consulting fees – related parties.
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 29,130
shares of common stock upon the cashless exercise of warrants.
On October 23, 2023, the Company issued an aggregate
of 95,234 shares of common stock upon the conversion of an aggregate of 8,579 shares of series B preferred stock.
On October 30, 2023, the Company issued 21,631
shares of common stock upon the cashless exercise of warrants.
Following the reverse stock split on October 27, 2023, the
Company issued 19,071 shares of common stock related to the rounding of fractional shares.
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.
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.
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.
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.
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%.
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.
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.
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.
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 | |
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.
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.
ITEM
6. EXHIBITS.
Exhibit
No. |
|
Description |
3.1 |
|
Articles of Incorporation of Smart for Life, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on April 13, 2023) |
3.2 |
|
Certificate of Amendment to Articles of Incorporation of Smart for Life, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on April 28, 2023) |
3.3 |
|
Certificate of Change of Articles of Incorporation of Smart for Life, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on August 8, 2023) |
3.4 |
|
Certificate of Change of Articles of Incorporation of Smart for Life, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on November 2, 2023) |
3.5 |
|
Certificate of Designation of Series B Preferred Stock (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on May 30, 2023) |
3.6 |
|
Bylaws of Smart for Life, Inc. (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K filed on April 13, 2023) |
4.1 |
|
Common Stock Purchase Warrant issued by Smart for Life, Inc. to Anson East Master Fund LP on May 31, 2023 (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-3 filed on June 5, 2023) |
4.2 |
|
Common Stock Purchase Warrant issued by Smart for Life, Inc. to Anson Investments Master Fund LP on May 31, 2023 (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-3 filed on June 5, 2023) |
4.3 |
|
Common Stock Purchase Warrant issued by Smart for Life, Inc. to District 2 Capital Fund LP on May 31, 2023 (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-3 filed on June 5, 2023) |
4.4 |
|
Common Stock Purchase Warrant issued by Smart for Life, Inc. to Ionic Ventures, LLC on May 31, 2023 (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-3 filed on June 5, 2023) |
4.5 |
|
Common Stock Purchase Warrant issued by Smart for Life, Inc. to Sabby Volatility Warrant Master Fund, Ltd. on May 31, 2023 (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-3 filed on June 5, 2023) |
4.6 |
|
Placement Agent Common Stock Purchase Warrant issued by Smart for Life, Inc. to Charles Worthman on May 31, 2023 (incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-3 filed on June 5, 2023) |
4.7 |
|
Placement Agent Common Stock Purchase Warrant issued by Smart for Life, Inc. to Craig Schwabe on May 31, 2023 (incorporated by reference to Exhibit 4.7 to the Registration Statement on Form S-3 filed on June 5, 2023) |
4.8 |
|
Placement Agent Common Stock Purchase Warrant issued by Smart for Life, Inc. to Michael Vasinkevich on May 31, 2023 (incorporated by reference to Exhibit 4.8 to the Registration Statement on Form S-3 filed on June 5, 2023) |
4.9 |
|
Placement Agent Common Stock Purchase Warrant issued by Smart for Life, Inc. to Noam Rubinstein on May 31, 2023 (incorporated by reference to Exhibit 4.9 to the Registration Statement on Form S-3 filed on June 5, 2023) |
4.10 |
|
Common Stock Purchase Warrant issued by Smart for Life, Inc. to Armistice Capital Master Fund Ltd. on May 19, 2023 (incorporated by reference to Exhibit 4.10 to the Registration Statement on Form S-3 filed on June 5, 2023) |
4.11 |
|
Placement Agent Common Stock Purchase Warrant issued by Smart for Life, Inc. to Charles Worthman on May 19, 2023 (incorporated by reference to Exhibit 4.11 to the Registration Statement on Form S-3 filed on June 5, 2023) |
4.12 |
|
Placement Agent Common Stock Purchase Warrant issued by Smart for Life, Inc. to Craig Schwabe on May 19, 2023 (incorporated by reference to Exhibit 4.12 to the Registration Statement on Form S-3 filed on June 5, 2023) |
4.13 |
|
Placement Agent Common Stock Purchase Warrant issued by Smart for Life, Inc. to Michael Vasinkevich on May 19, 2023 (incorporated by reference to Exhibit 4.13 to the Registration Statement on Form S-3 filed on June 5, 2023) |
4.14 |
|
Placement Agent Common Stock Purchase Warrant issued by Smart for Life, Inc. to Noam Rubinstein on May 19, 2023 (incorporated by reference to Exhibit 4.14 to the Registration Statement on Form S-3 filed on June 5, 2023) |
4.15 |
|
Common Stock Purchase Warrant issued by Smart for Life, Inc. to Armistice Capital Master Fund Ltd. on May 5, 2023 (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-3 filed on May 5, 2023) |
4.16 |
|
Placement Agent Common Stock Purchase Warrant issued by Smart for Life, Inc. to H.C. Wainwright & Co., LLC on May 5, 2023 (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-3 filed on May 5, 2023) |
4.17 |
|
Common Stock Purchase Warrant issued by Smart for Life, Inc. to Dawson James Securities, Inc. on December 8, 2022 (incorporated by reference to Exhibit 4.21 to the Current Report on Form 8-K filed on December 9, 2022) |
4.18 |
|
Common Stock Purchase Warrant issued by Smart for Life, Inc. to Dawson James Securities, Inc. on December 8, 2022 (incorporated by reference to Exhibit 4.22 to the Current Report on Form 8-K filed on December 9, 2022) |
4.19 |
|
Common Stock Purchase Warrant issued by Smart for Life, Inc. to Robert D. Keyser, Jr. on December 8, 2022 (incorporated by reference to Exhibit 4.23 to the Current Report on Form 8-K filed on December 9, 2022) |
4.20 |
|
Common Stock Purchase Warrant issued by Smart for Life, Inc. to James Hopkins on December 8, 2022 (incorporated by reference to Exhibit 4.24 to the Current Report on Form 8-K filed on December 9, 2022) |
4.21 |
|
Warrant Agent Agreement, dated February 16, 2022, between Smart for Life, Inc. and VStock Transfer, LLC and Forms of Warrants (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on February 23, 2022) |
4.22 |
|
Warrant issued by Smart for Life, Inc. to Joseph Xiras on January 13, 2022 (incorporated by reference to Exhibit 4.21 to Amendment No. 2 to Registration Statement on Form S-1/A filed on January 21, 2022) |
4.23 |
|
Warrant issued by Smart for Life, Inc. to Leonite Fund I, LP on January 13, 2022 (incorporated by reference to Exhibit 4.22 to Amendment No. 2 to Registration Statement on Form S-1/A filed on January 21, 2022) |
4.24 |
|
Warrant issued by Smart for Life, Inc. to Laurie Rosenthal on January 7, 2022 (incorporated by reference to Exhibit 4.20 to Amendment No. 2 to Registration Statement on Form S-1/A filed on January 21, 2022) |
4.25 |
|
Warrant issued by Smart for Life, Inc. to Robert Rein on January 3, 2022 (incorporated by reference to Exhibit 4.19 to Amendment No. 2 to Registration Statement on Form S-1/A filed on January 21, 2022) |
4.26 |
|
Warrant issued by Smart for Life, Inc. to Thomas L Calkins II and Diane M Calkins JTIC on December 27, 2021 (incorporated by reference to Exhibit 4.18 to Amendment No. 2 to Registration Statement on Form S-1/A filed on January 21, 2022) |
4.27 |
|
Warrant issued by Smart for Life, Inc. to Ryan Hazel on December 23, 2021 (incorporated by reference to Exhibit 4.17 to Amendment No. 2 to Registration Statement on Form S-1/A filed on January 21, 2022) |
4.28 |
|
Amended and Restated Warrant issued by Smart for Life, Inc. to Dawson James Securities, Inc. on February 1, 2022 (incorporated by reference to Exhibit 4.25 to Amendment No. 3 to Registration Statement on Form S-1/A filed on February 2, 2022) |
4.29 |
|
Warrant issued by Smart for Life, Inc. to Dawson James Securities, Inc. on July 1, 2021 (incorporated by reference to Exhibit 4.23 to Amendment No. 3 to Registration Statement on Form S-1/A filed on February 2, 2022) |
4.30 |
|
Warrant issued by Smart for Life, Inc. to Dawson James Securities, Inc. on July 1, 2021 (incorporated by reference to Exhibit 4.24 to Amendment No. 3 to Registration Statement on Form S-1/A filed on February 2, 2022) |
4.31 |
|
Common Stock Purchase Warrant issued by Smart for Life, Inc. to Peah Capital, LLC on December 18, 2020 (incorporated by reference to Exhibit 4.14 to the Registration Statement on Form S-1 filed on December 16, 2021) |
4.32 |
|
Amendment No 1 to Common Stock Purchase Warrant, dated June 30, 2021, between Smart for Life, Inc. and Peah Capital, LLC (incorporated by reference to Exhibit 4.15 to the Registration Statement on Form S-1 filed on December 16, 2021) |
31.1* |
|
Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2* |
|
Certifications of Principal Financial and Accounting Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1** |
|
Certifications of Principal Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2** |
|
Certifications of Principal Financial and Accounting Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS |
|
Inline XBRL Instance
Document |
101.SCH |
|
Inline XBRL Taxonomy Extension
Schema Document |
101.CAL |
|
Inline XBRL Taxonomy Extension
Calculation Linkbase Document |
101.DEF |
|
Inline XBRL Taxonomy Extension
Definition Linkbase Document |
101.LAB |
|
Inline XBRL Taxonomy Extension
Label Linkbase Document |
101.PRE |
|
Inline XBRL Taxonomy Extension
Presentation Linkbase Document |
104 |
|
Cover Page Interactive
Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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
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I, Darren C. Minton, certify that:
I, Alan B. Bergman, certify that:
The undersigned Chief Executive
Officer of SMART FOR LIFE, INC. (the “Company”), DOES HEREBY CERTIFY that:
IN WITNESS WHEREOF, the undersigned
has executed this statement on November 20, 2023.
A signed original of this written statement required
by Section 906 has been provided to Smart for Life, Inc. and will be retained by Smart for Life, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.
The forgoing certification is being furnished
to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether
made before or after the date hereof, regardless of any general incorporation language in such filing.
The undersigned Chief Financial
Officer of SMART FOR LIFE, INC. (the “Company”), DOES HEREBY CERTIFY that:
IN WITNESS WHEREOF, the undersigned
has executed this statement on November 20, 2023.
A signed original of this written statement required
by Section 906 has been provided to Smart for Life, Inc. and will be retained by Smart for Life, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.
The forgoing certification is being furnished
to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18
of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether
made before or after the date hereof, regardless of any general incorporation language in such filing.