SMART FOR LIFE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2022 AND 2021
(UNAUDITED)
Note 1 — Description
of Business
Smart for Life, Inc., formerly Bonne Santé
Group, Inc. (“SFL”), is a Delaware corporation which was formed on February 7, 2017. Structured as a global holding
company, it is engaged in the development, marketing, manufacturing, acquisition, operation and sale of a broad spectrum of nutraceutical
and related products with an emphasis on health and wellness.
On March 8, 2018, SFL acquired 51% of Millenium
Natural Manufacturing Corp. and Millenium Natural Health Products, Inc. On October 8, 2019, SFL 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, SFL acquired Doctors Scientific
Organica, LLC d/b/a Smart for Life, Oyster Management Services, Ltd., Lawee Enterprises, L.L.C. and U.S. Medical Care Holdings,
L.L.C (collectively, “DSO”). On August 27, 2021, SFL transferred all of the equity interests of Oyster Management Services,
Ltd., Lawee Enterprises, L.L.C. and U.S. Medical Care Holdings, L.L.C. to Doctors Scientific Organica, LLC. As a result, these
entities are now wholly owned subsidiaries of Doctors Scientific Organica, LLC. Based in Riviera Beach, Florida, DSO operates a 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. SFL Canada
sells retail products through a retail store location in Montreal Canada and the same location also acts as distribution center for international
direct to consumer and big box customers. It maintains inventory and employees at this location.
On November 8, 2021, SFL acquired Nexus Offers,
Inc. (“Nexus”). Nexus is a network platform in the affiliate marketing space. Affiliate marketing is an advertising model
in which a product vendor compensates third-party digital marketers to generate traffic or leads for the product vendor’s products
and services. The third-party digital marketers are referred to as affiliates, and the commission fee incentivizes them to find ways
to promote the products being sold by the product vendor. Based in Miami, Florida, Nexus operates virtually.
On December 6, 2021, SFL acquired GSP Nutrition
Inc. (“GSP”). GSP is a sports nutrition company that offers nutritional supplements for athletes and active lifestyle consumers
under the Sports Illustrated Nutrition brand. Based in Miami, Florida, GSP operates virtually.
On May 19, 2022, SFL acquired Lavi Enterprises,
LLC (“Lavi”) for $100. On the same date, SFL transferred all of the equity interests of Lavi to DSO. As a result, Lavi
is now a wholly owned subsidiary of DSO. Lavi is an operating company associated with DSO and has relationships with various customers
and distributors of DSO’s products.
Note 2 — Summary of
Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements
reflect the consolidated operations of SFL and its wholly owned subsidiaries BSNM, DSO, DSO Canada, Nexus, GSP and Lavi (collectively
the “Company”) and are prepared in the United States Dollars in accordance with generally accepted accounting principles
in the United States of America (“GAAP”). Intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain prior period amounts have been reclassified
to conform with the current year presentation.
SMART
FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2022 AND 2021
(UNAUDITED)
Basis of Presentation
The Company’s fiscal year end is December
31. The Company uses the accrual method of accounting. The accompanying unaudited interim condensed consolidated financial statements
have been prepared on the same basis as the annual consolidated financial statements. The December 31, 2021 balance sheet has been derived
from audited consolidated financial statements.
The accompanying unaudited condensed consolidated
financial statements for the three and six months ended June 30, 2022 and 2021 have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements.
The unaudited financial information included
in this report includes all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary
to reflect a fair statement of the results for the interim periods. The results of operations for the three and six months ended June
30, 2022 are not necessarily indicative of the results of the full fiscal year.
The condensed consolidated financial statements
included in this report should be read in conjunction with the financial statements and notes thereto included in the Company’s
financial statements for the fiscal year ended December 31, 2021.
Liquidity, Capital Resources and Going
Concern
At June 30, 2022, the Company had current liabilities
in excess of current assets in the amount of approximately $3.1 million. During the six months ended June 30, 2022, the Company completed
a series of debt and equity financings and an initial public offering (the “IPO”) resulting in net proceeds of approximately
$12.8 million, but sustained a net loss of approximately $20.0 million and had consumed cash in operating activities of approximately
$6.0 million during the period.
To date, the Company has satisfied its capital
needs with the net proceeds from its issuance of notes payable and bank debt. Company management expects to continue to incur net losses
and have significant cash outflows for at least the next 12 months.
Based on its analysis, the Company concluded that, following the acquisition
of Ceautamed Worldwide, LLC described in Note 14 and with additional debt or equity issuances of approximately $2.5 million, it will have
the ability to continue as a going concern for at least the next 12 months.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting periods. These estimates include, among other items, assessing the collectability
of receivables, the realization of deferred taxes, useful lives and recoverability of tangible and intangible assets, assumptions used
in the valuation of options, the computation of revenue based on the proportional delivery of services, and accruals for commitments
and contingencies. Some of these estimates can be subjective and complex and, consequently, actual results could differ materially from
those estimates.
Cash Equivalents
The Company considers all highly liquid investments
purchased with an original maturity of three (3) months or less to be cash equivalents. At June 30, 2022 and December 31, 2021, there
were no cash equivalents.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2022 AND 2021
(UNAUDITED)
Accounts Receivable and Allowance for Doubtful
Accounts
The Company’s allowance for doubtful accounts
represents the Company’s estimate for uncollectible receivables based on a review of specific accounts and the Company’s
historical collection experience. The Company writes off specific accounts based on an ongoing review of collectability, as well as management’s
past experience with the customers. Accounts receivable are presented net of an allowance for doubtful accounts of $17,596 and $17,170
at June 30, 2022 and December 31, 2021, respectively.
Inventory, net
Inventory consists of raw materials, work in
progress, and finished goods and is valued at the lower of cost (first-in, first-out) or net realizable value. An allowance for inventory
obsolescence is provided for slow moving or obsolete inventory to write down historical cost to net realizable value.
The allowance for obsolescence is an estimate
established through charges to cost of goods sold. Management’s judgment in determining the adequacy of the allowance is based
upon several factors which include, but are not limited to, analysis of slow-moving inventory, analysis of the selling price of inventory,
the predetermined shelf life of the product, and management’s judgment with respect to current economic conditions. Given the nature
of the inventory, it is reasonably possible the Company’s estimate of the allowance for obsolescence will change in the near term.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major
betterments and additions are charged to the asset accounts, while replacements, maintenance and repairs which do not improve or extend
the lives of the respective assets are charged to expense as incurred. The Company provides for depreciation and amortization over the
estimated useful lives of various assets using the straight-line method ranging from 3-7 years.
Goodwill and Intangible Assets
Goodwill is not amortized but is subject to annual
impairment tests. In addition to the annual impairment review, impairment reviews are performed whenever circumstances indicate a possible
impairment may exist. Impairment testing for goodwill is done at the reporting unit level. The Company compares the fair value of the
reporting unit assets to the carrying amount, on at least an annual basis, to determine if there is potential impairment. If the fair
value of the reporting unit assets is less than their carrying value, an impairment loss will be recognized. No goodwill impairments
were recognized during the three and six months ended June 30, 2022 and 2021.
Intangible
assets consist of customer relationships, non-compete agreements, license agreements, goodwill, and intellectual property acquired in
the acquisitions of BSNM, DSO, Nexus, and GSP. The Company amortizes intangible assets with finite lives on a straight-line basis over
their estimated useful lives which ranges from 3 to 15 years.
Long-Lived Assets
The Company assesses potential impairments to
its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may
not be recovered. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of
assets) is less than its carrying amount. Any required impairment loss is measured as the amount by which the asset’s carrying
value exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results.
The Company had no impairment of long-lived assets at June 30, 2022 and December 31, 2021.
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 AND 2021
(UNAUDITED)
Lease
Right-of-Use Assets and Liabilities
The
Company records a right-of-use (“ROU”) asset and lease liability on the balance sheet for all leases with terms longer than
12 months. Leases are classified either as finance or operating with the classification affecting the pattern of expense recognition.
Lease
liabilities are recognized based on the present value of the remaining lease payments and are discounted using the most reasonable incremental
borrowing rate. The Company uses the implicit rate when it is readily determinable. Since the Company’s lease does not provide
an implicit rate, to determine the present value of lease payments, management uses the Company’s incremental borrowing rate based
on the information available at lease commencement. Leases with a term of 12 months or less at inception are not recorded on our balance
sheet and are expensed on a straight- line basis over the lease term.
Valuation
of Derivative Instruments
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-10, Derivatives and Hedging
(“ASC 815-10”), requires that embedded derivative instruments be bifurcated and assessed, along with freestanding derivative
instruments such as convertible promissory notes, on their issuance date to determine whether they would be considered a derivative liability
and measured at their fair value for accounting purposes. The Company evaluates all of it financial instruments, including stock purchase
warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial
instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued
at each reporting date, with changes in the fair value reported as charges or credits to income.
For
option based simple derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative
instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is reassessed at the end of each reporting period.
Beneficial
Conversion Feature
For
conventional convertible debt issued before the adoption of ASU 2020-06, where the rate of conversion is below market value, the Company
records a “beneficial conversion feature” (“BCF”) discount against the face amount of the respective debt instrument
(offset to additional paid in capital).
When
the Company records a BCF which is not a conventional convertible, the fair value of the BCF is recorded as a derivative liability with
an offset against the face amount of the respective debt instrument which is and amortized to interest expense over the term of the debt.
Debt
Issuance Cost
In
accordance with ASC 835-30, Other Presentation Matters, the Company has reported debt issuance cost as a deduction from the carrying
amount of debt and amortizes these costs using the effective interest method over the term of the debt as interest expense.
Revenue
Recognition
The
Company evaluates and recognize revenue by:
| |
● |
identifying the contract(s)
with the customer, |
| |
|
|
| |
● |
identifying the performance
obligations in the contract, |
| |
|
|
| |
● |
determining the transaction
price, |
| |
|
|
| |
● |
allocating the transaction
price to performance obligations in the contract; and |
| |
|
|
| |
● |
recognizing revenue as
each performance obligation is satisfied through the transfer of a promised good or service to a customer (i.e., “transfer
of control”). |
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 AND 2021
(UNAUDITED)
Products
(BSNM, DSO and GSP)
The
Company generates product revenues by manufacturing and packaging of nutraceutical products as a contract manufacturer for customers.
The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of
its products to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based
on the terms contained within the underlying contracts or agreements. The Company’s general payment terms are short-term in duration.
The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance
obligations at June 30, 2022 or December 31, 2021.
Distribution
expenses to transport the Company’s products, where applicable, and warehousing expense after manufacture are accounted for within
operating expenses.
Advertising/Marketing
(Nexus)
Nexus
generates advertising revenue when sales of listed products are sold by product vendors through its network as a result of the marketing
efforts of digital marketers. The products on the network come from several different customers, which pay Nexus a specific amount per
sale, the amount of which is dictated by the customer. The revenue is recognized upon the sale of a product by the customer, net of fraudulent
traffic or disputed transactions. A portion of the specific amount received by Nexus for that sale is paid out to the digital marketer
as a commission, which is recorded in cost of sales.
Nexus’
general payment terms are short-term in duration. Nexus does not have significant financing components or payment terms. Nexus did not
have any material unsatisfied performance obligations at June 30, 2022 or December 31, 2021.
Freight
For
the six months ended June 30, 2022 and 2021, freight costs amounted to $528,949 and $68,724, respectively, and have been recorded in
cost of revenues, products in the accompanying condensed consolidated statement of operations.
Advertising
Advertising
costs are expensed as incurred. Advertising costs for the six months ended June 30, 2022 and 2021 were $1,254,356 and $5,589, respectively,
and have been recorded in cost of revenues, advertising, in the accompanying condensed consolidated statement of operations.
Paycheck
Protection Program
The
Company records Paycheck Protection Program (“PPP”) loan proceeds in accordance with ASC 470, Debt. Debt is extinguished
when either the debtor pays the creditor or the debtor is legally released from being the primary obligor, either judicially or by the
creditor.
Stock-based
Compensation
The
Company recognizes expense for stock options and warrants granted over the vesting period based on the fair value of the award at the
grant date, are valued using a Black-Scholes option pricing model to determine the fair market value of the stock options. The Company
calculates the amount of tax benefit available by tracking each stock option award on an employee-by-employee basis and on a grant-by-grant
basis. The Company then compares the recorded expense to the tax deduction received for each stock option grant.
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 AND 2021
(UNAUDITED)
Income
Taxes
The
Company accounts for income tax under the provisions of ASC 740, Income Taxes. The Company records a liability for uncertain tax positions
when it is probable that a loss has been incurred and the amount can be reasonably estimated. At June 30, 2022 and December 31, 2021,
the Company has no liabilities for uncertain tax positions. The Company continually evaluates expiring statutes of limitations, audits,
proposed settlements, changes in tax law and new authoritative rulings. The Company’s tax years subject to examination by tax authorities
generally remain open for three (3) years from the date of filing.
The
provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities,
and for operating losses and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted
tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The
Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
Recent
Accounting Standard Issued Not Yet Adopted
On
August 5, 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2020-06, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including
convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative,
which aims to reduce unnecessary complexity in GAAP. This ASU is effective for fiscal years beginning after December 31, 2023. The Company
believes that the adoption of this ASU will not have a material impact to the condensed consolidated financial statements.
Accounting
Pronouncement Adopted
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard
simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve
consistent application of and simplify GAAP for areas of ASC 740 by clarifying and amending existing guidance. This standard is effective
for the Company on January 1, 2022, with early adoption permitted. Depending on the amendment, adoption may be applied on a retrospective,
modified retrospective, or prospective basis. The Company has determined that the adoption of this standard does not have an impact on
the condensed consolidated financial statements.
Note
3 — Acquisitions
During
the year ended December 31, 2021, and as discussed in Note 1, the Company acquired DSO, Nexus and GSP.
The
following unaudited supplemental proforma financial information reflects the combined results of operations had the DSO, Nexus and GSP
acquisitions occurred at the beginning of 2021. The proforma information reflects certain adjustments related to the acquisitions including
adjusted amortization and depreciation expense based on the fair values of the assets acquired. The proforma combined results of operations
are as follows:
| |
|
Three
Months Ended
June
30, |
|
|
Six
Months Ended
June
30, |
|
| |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
| Revenues |
|
$ |
4,285,491 |
|
|
$ |
4,595,133 |
|
|
$ |
8,740,377 |
|
|
$ |
9,171,506 |
|
| Operating loss |
|
$ |
(2,608,416 |
) |
|
$ |
(462,702 |
) |
|
$ |
(5,880,283 |
) |
|
$ |
(1,091,634 |
) |
| Loss per share, basic and diluted |
|
$ |
(0.11 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.77 |
) |
|
$ |
(0.08 |
) |
| Weighted average shares outstanding, basic and diluted |
|
|
31,713,687 |
|
|
|
13,818,890 |
|
|
|
26,038,863 |
|
|
|
13,818,890 |
|
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 AND 2021
(UNAUDITED)
Note
4 — Inventory
Inventory
consisted of the following:
| | |
June
30, 2022 | | |
December
31, 2021 | |
| Raw materials | |
$ | 267,887 | | |
$ | 452,583 | |
| Finished goods | |
| 4,672,351 | | |
| 2,939,961 | |
| | |
$ | 4,940,238 | | |
$ | 3,392,544 | |
Note
5 — Property and Equipment
Property
and equipment consisted of the following:
| | |
Estimated
Useful Lives
(in Years) | | |
June
30,
2022 | | |
December
31,
2021 | |
| Furniture and fixtures | |
| 7 | | |
$ | 9,139 | | |
$ | 9,139 | |
| Equipment – Manufacturing | |
| 5 | | |
| 1,294,514 | | |
| 1,102,239 | |
| Building & Equipment | |
| 5 | | |
| 3,840 | | |
| 193 | |
| Leasehold improvements | |
| 2.5 | | |
| 90,099 | | |
| 71,539 | |
| | |
| | | |
| 1,397,592 | | |
| 1,183,110 | |
| Less: accumulated depreciation
and amortization | |
| | | |
| (802,244 | ) | |
| (660,066 | ) |
| Property and equipment,
net | |
| | | |
$ | 595,348 | | |
$ | 523,044 | |
Depreciation
expense for the six months ended June 30, 2022 and 2021 totaled $142,178 and $74,752, respectively, reflected in depreciation and amortization
expense in the accompanying condensed consolidated statement of operations.
Note
6 — Intangible Assets
Intangible
assets consisted of the following:
| | |
Estimated
Useful Lives
(in Years) | | |
June
30, 2022 | | |
December
31,
2021 | |
| Customer contracts | |
| 10 | | |
$ | 9,859,499 | | |
$ | 9,859,499 | |
| Developed technology | |
| 15 | | |
| 1,570,000 | | |
| 1,570,000 | |
| Non-compete agreements | |
| 3 | | |
| 810,000 | | |
| 810,000 | |
| Patents | |
| 5 | | |
| 230,000 | | |
| 230,000 | |
| Tradename | |
| 15 | | |
| 2,010,000 | | |
| 2,010,000 | |
| Licenses agreements | |
| 5 | | |
| 584,220 | | |
| 584,220 | |
| Total intangible assets | |
| | | |
| 15,063,719 | | |
| 15,063,719 | |
| Less: amortization | |
| | | |
| (1,353,746 | ) | |
| (642,819 | ) |
| Intangibles, net | |
| | | |
$ | 13,709,973 | | |
$ | 14,420,900 | |
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 AND 2021
(UNAUDITED)
Amortization
for the six months ended June 30, 2022 and 2021 was $710,927 and $27,245, respectively, reflected in depreciation and amortization expense
in the accompanying condensed consolidated statement of operations.
The
future amortization is as follows:
| Years
Ending December 31: | |
| |
| 2022 (remainder of year) | |
$ | 710,925 | |
| 2023 | |
| 1,421,850 | |
| 2024 | |
| 1,421,850 | |
| 2025 | |
| 1,421,850 | |
| 2026 | |
| 1,367,779 | |
| Thereafter | |
| 7,365,719 | |
| Total | |
$ | 13,709,973 | |
Note
7 — Lease Commitments
The
Company enters into lessee arrangements consisting of operating leases for its operations. The Company had four operating leases as of
June 30, 2022 and December 31, 2021.
Discount
Rate Applied to Property Operating Lease
To
determine the present value of minimum future lease payments for its operating lease at January 1, 2020, the Company was required to
estimate a rate of interest that it would have to pay to borrow on a collateralized basis over a similar term for an amount equal to
the lease payments in a similar economic environment (the “incremental borrowing rate”).
The
lease assets and liabilities were calculated utilizing a discount rate of 12%, according to the Company’s elected policy.
Operating
Right of Use Assets and Liabilities
The
right of uses asset and liabilities is included in the accompanying condensed consolidated balance sheets as follows:
| | |
June
30, 2022 | | |
December
31,
2021 | |
| Asset | |
| | | |
| | |
| Operating lease right of use assets | |
$ | 2,095,600 | | |
$ | 1,923,082 | |
| | |
| | | |
| | |
| Liabilities | |
| | | |
| | |
| Operating lease liabilities, current portion | |
$ | 308,325 | | |
$ | 384,530 | |
| Operating liabilities,
net of current portion | |
| 1,830,739 | | |
| 1,570,388 | |
| Total lease liabilities | |
$ | 2,139,064 | | |
$ | 1,954,918 | |
Minimum
lease payments under the operating lease are recognized on a straight-line basis over the term of the lease.
| For
the Year Ended December 31: | |
| |
| 2022 (remainder of year) | |
$ | 314,079 | |
| 2023 | |
| 465,164 | |
| 2024 | |
| 478,141 | |
| 2025 | |
| 491,508 | |
| 2026 | |
| 505,277 | |
| Thereafter | |
| 746,597 | |
| Total payments | |
| 3,000,766 | |
| Less: amount representing
interest | |
| (861,702 | ) |
| Lease obligation, net | |
| 2,139,064 | |
| Less: current portion | |
| (308,325 | ) |
| Lease obligation –
long-term | |
$ | 1,830,739 | |
Rent
expense for the six months ended June 30, 2022 and 2021 was $326,658 and $172,507, respectively, reflected in general and administrative
in the accompanying condensed consolidated statement of operations.
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 AND 2021
(UNAUDITED)
Note
8 — Fair Value Measurement
The
following are the hierarchical levels of inputs to measure fair value:
| · | Level
1 – Observable inputs that reflect quoted market prices in active markets for identical
assets or liabilities. |
| · | Level
2 – Inputs reflect quoted prices for identical assets or liabilities in markets that
are not active; quoted prices for similar assets or liabilities in active markets;
inputs other than quoted prices that are observable for the assets or liabilities; or
inputs that are derived principally from or corroborated by observable market data by correlation
or other means. |
| · | Level
3 – Unobservable inputs reflecting the Company’s assumptions incorporated in
valuation techniques used to determine fair value. These assumptions are required to be consistent
with market participant assumptions that are reasonably available. |
The
carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts
payable and accrued expenses, certain notes payable and notes payable – related party, approximate their fair values because of
the short maturity of these instruments.
The
Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed below. While the Company
believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair
value at the reporting date. The primary assumptions that would significantly affect the fair values using terms in the notes that are
subject to volatility and market price of the underlying common stock of the Company.
As
of June 30, 2022, and December 31, 2021, the Company did not have any derivative instruments that were designated as hedges.
The
derivative liability as of June 30, 2022 in the amount of $202,681 is related to conversion feature on the outstanding convertible notes
not converted by the noteholders as of June 30, 2022.
Fluctuations
in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. Generally,
as the stock price decreases for each of the related convertible notes that have an embedded derivative liability, the value of the derivative
liability decreases. Stock price is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s
convertible notes with an embedded derivative liability.
The
Company used the Black-Scholes Model to measure the fair value of the derivative liabilities as $202,681 and will subsequently remeasure
the fair value at the end of each period, and record the change of fair value in the consolidated statement of operation during the corresponding
period.
The
following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the period ended
June 30, 2022:
| Derivative Liability, December 31,2021 | |
$ | — | |
| Day 1 Loss | |
| 41,933 | |
| Discount from derivatives | |
| 273,727 | |
| Resolution of derivative liability | |
| (32,959 | ) |
| Mark to market adjustment | |
| (80,020 | ) |
| Derivative Liability, June 30, 2022 | |
$ | 202,681 | |
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 AND 2021
(UNAUDITED)
Note
9 — Debt
12%
Unsecured Subordinated Convertible Debentures
On
November 5, 2021, the Company entered into a securities purchase agreement with certain investors, pursuant to which it sold 12% unsecured
subordinated convertible debentures in the aggregate principal amount of $2,250,000 to such investors for gross proceeds of $2,214,000,
the proceeds of which were used to fund the acquisition of Nexus. Interest at a rate of 12% per annum accrued on the principal balance
of the debentures from the date of issuance until February 14, 2022, the date that the registration statement related to the IPO was
declared effective by the Securities and Exchange Commission (the “IPO Date”). The debentures are due and payable on the
earliest of the maturity date, November 30, 2022, or upon their earlier conversion or redemption. As of June 30, 2022, the outstanding
principal balance of the debentures was $2,250,000 and debt issuance cost was $67,250.
At
any time after August 14, 2022, the sixth month anniversary of the IPO Date, the holders may convert the principal amount of the debentures
into shares of common stock at a conversion price that is equal to the lower of $2.50 and the lowest volume weighted average price during
the 10 trading days immediately following the IPO; provided further, that the conversion price shall not be less than $1.00. The conversion
price is subject to standard equitable adjustments for stock splits, stock combinations, recapitalizations, and similar transactions.
The debentures contain beneficial ownership limitations which limit the holders’ beneficial ownership to 9.99% of the Company’s
outstanding common stock. The Company may redeem some or all of the outstanding principal amount of the debentures for cash in an amount
equal to 115% of the outstanding principal amount of the debentures, plus accrued but unpaid interest and any other amounts due under
the debentures. The securities purchase agreement and the debentures contain customary representations,
warranties, affirmative and negative covenants, and events of default for loans of this type. The debentures are guaranteed by each of
the Company’s subsidiaries.
Original
Issue Discount Subordinated Debentures
On
June 9, 2022, the Company entered into a debenture purchase agreement with certain investors, pursuant to which it sold original issue
discount subordinated debentures in the aggregate principal amount of $1,755,883 to such investors. The debentures contain an original
issue discount of 15%, or an aggregate original issue discount of $255,883. As a result, the total purchase price was $1,500,000. The
debentures bear interest at a rate of 17.5% per annum. 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) June 9, 2024 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
debenture purchase agreement and the debentures contain customary representations and warranties and 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 June 30, 2022, the outstanding principal balance of the debentures was $1,764,707 and debt issuance cost was $264,707.
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 AND 2021
(UNAUDITED)
Acquisition
Notes
On
November 8, 2021, the Company issued a 5% secured subordinated convertible promissory note in the principal amount of $1,900,000 to Justin
Francisco and Steven Rubert in connection with the acquisition of Nexus. This note accrued interest at 5% per annum and was to mature
on November 8, 2024. As of December 31, 2021, the outstanding principal balance of this note was $1,900,000. This note and accrued interest
automatically converted into 386,460 shares of common stock concurrent with the closing of the IPO on February 18, 2022.
On
November 8, 2021, the Company issued a 5% secured subordinated promissory note in the principal amount of $1,900,000 to Justin Francisco
and Steven Rubert in connection with the acquisition of Nexus. This note accrues interest at 5% per annum and the outstanding principal
and interest will be amortized on a straight-line basis and are payable quarterly in accordance with the amortization schedule attached
to the note, with all amounts due and payable on November 8, 2024. The Company may prepay all or any portion of this note any time prior
to maturity without premium or penalty. The Note contains customary covenants and events of default
for a loan of this type, including if a default occurs under any senior secured indebtedness to banks and other financial institutions
or private equity funds, and is secured by a security interest in all of the Company’s assets; provided that such security interest
is subordinate to the rights of the lenders under any such senior secured indebtedness. As of June 30, 2022, the outstanding principal
balance of this note was $1,900,000.
On
July 1, 2021, the Company issued a 6% secured subordinated convertible promissory note in the principal amount of $3,000,000 to Sasson
E. Moulavi in connection with the acquisition of DSO. This note accrued interest at 6% per annum and was to mature on July 1, 2024. As
of December 31, 2021, the outstanding principal balance of this note was $3,000,000. This note and accrued interest automatically converted
into 623,200 shares of common stock concurrent with the closing of the IPO on February 18, 2022.
On
July 1, 2021, the Company issued a 6% secured subordinated promissory note in the principal amount of $3,000,000 to Sasson E. Moulavi
in connection with the acquisition of DSO. This note accrues interest at 6% per annum and the outstanding principal and interest will
be amortized on a straight-line basis and are payable quarterly in accordance with the amortization schedule attached to the note, with
all amounts due and payable on July 1, 2024. 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. As of June 30, 2022, the outstanding principal balance of this
note was $3,000,000.
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 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 January 1, 2023. The loan is secured by all of the
Company’s assets and contains customary events of default. As of June 30, 2022, the outstanding principal balance of this note
was $1,175,000.
On
May 10, 2021, the Company issued a convertible promissory note in the principal amount of $73,727 to Bevilacqua PLLC, the Company’s
outside securities counsel. This note accrues interest at 15% per annum and matures on May 10, 2022. The note is convertible at the option
of the holder into shares of common stock at a conversion price that is equal to forty percent (40%) of either (i) the price per share
paid by investors in the Company’s next priced equity financing or (ii) the volume weighted average price of the common stock for
the five trading days from and including the date that the conversion notice is given. As of December 31, 2021, the outstanding principal
balance of this note was $73,727. On April 8, 2022, the holder converted the outstanding balance of this note into 73,267 shares of common
stock.
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 AND 2021
(UNAUDITED)
On
December 18, 2020, the Company entered into a loan and security agreement with Peah Capital, LLC for a term loan in the principal amount
of up to $1,500,000, which was amended on April 27, 2021 to increase the loan amount to $1,625,000. In connection with such amendment,
on April 27, 2021, the Company issued a second amended and restated promissory note to Peah Capital, LLC in the principal amount of $1,625,000.
The loan bears interest at a rate of 17.5% per annum, provided that upon an event of default, such rate shall increase to 25% per annum.
The loan is due and payable on November 11, 2022. The loan is secured by all of the Company’s assets and contains customary events
of default. As of June 30, 2022, the outstanding principal balance of this note was $464,906.
Since
inception, the Company has issued other promissory notes to various lenders. These notes accrued interest at rates between 12-17%. These
notes were unsecured and contain customary events of default. As of December 31, 2021, the outstanding principal balance of these notes
was $5,993,720. These notes were repaid in full upon closing of the IPO with the exception of a note which has an outstanding balance
of $200,000 at June 30, 2022. This note accrues interest at 12% and is due and payable on April 1, 2023.
On
February 25, 2021, the Company issued a convertible promissory note in the principal amount of $500,000. This note accrued interest at
15% per annum and was to mature on March 31, 2023. As of December 31, 2021, the outstanding principal balance of this note was $500,000.
This note automatically converted into 229,834 shares of common stock concurrent with the closing of the IPO on February 18, 2022.
In
May 2022, the Company issued a promissory note in the principal amount of $346,000. This note bears interest at a rate of 10% and matures
on April 1, 2023. At June 30, 2022, the outstanding amount was $257,100.
Revolving
Lines of Credit
In
2021, DSO entered into two revolving lines of credit with a bank, which permitted borrowings up to $1,176,000, and bears interest at
8.99% and 7.99%. As of June 30, 2022, the outstanding principal balance of this lines of credit was $914,000.
Cash
Advances
In
December 2021, the Company entered into a cash advance agreement for $340,000 with a required repayment amount of $493,500, which requires
weekly payments of approximately $20,562. At June 30, 2022, the outstanding amount was $0.
In June 2022, the Company entered into a cash advance agreement for
$350,000 with a required repayment amount of $490,000, which requires weekly payments of approximately $19,738. At June 30, 2022, the
outstanding amount was $252,600.
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 June 30, 2022, the outstanding amount was $144,877.
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 June 30, 2022, the outstanding principal balance of this loan
was $300,000.
PPP
Loans
In
May 2020, the Company received $239,262 in paycheck protection program (“PPP”) loans under the CARES Act. This loan bears
interest at a rate of 1% per annum and matures in April 2022. As of June 30, 2022, the outstanding principal balance of this loan
was $168,013.
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022 AND 2021
(UNAUDITED)
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 January 2023. As of June 30, 2022, the outstanding balance of this loan was $197,457.
The
PPP provides that the PPP loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described
in the CARES Act. The Company has filed for forgiveness during 2022, and has received notice of forgiveness on some of the loans in the
amount of $134,956 and is awaiting notice of forgiveness on the remainder.
Total
Debt
Debt
is comprised of the following components as of June 30, 2022:
| 12% unsecured subordinated convertible debentures | |
$ | 2,250,000 | |
| Original issue discount subordinated debentures | |
| 1,764,707 | |
| Acquisition notes | |
| 4,900,000 | |
| Promissory notes | |
| 2,097,006 | |
| Revolving lines of credit | |
| 914,000 | |
| Equipment financing loan | |
| 144,877 | |
| EIDL loan | |
| 300,000 | |
| PPP loans | |
| 365,470 | |
| | |
| 12,736,060 | |
| Debt discount | |
| (104,816 | ) |
| Total | |
$ | 12,631,244 | |
The
future contractual maturities of the debt are as follows:
| For the Year Ended December 31: | |
| |
| 2022 (remainder of year) | |
$ | 3,752,448 | |
| 2023 | |
| 3,199,829 | |
| 2024 | |
| 5,120,419 | |
| 2025 | |
| 88,282 | |
| 2026 | |
| 91,598 | |
| Thereafter | |
| 378,668 | |
| Total | |
$ | 12,631,244 | |
Note
10 — Concentrations of Credit Risks
Credit
Risks
Financial
instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and accounts receivable.
The Company maintains bank accounts with several financial institutions. Concentrations of credit risk with respect to accounts receivable
are limited to the dispersion of customers across different industries and geographic regions.
Cash
The
Company places its cash with high credit quality financial institutions. At June 30, 2022 and December 31, 2021, the Company had cash
balances of $0 and $734,335, respectively, in excess of the Federal Deposit Insurance Corporation coverage of $250,000 per institution.
The Company has not experienced any losses in such accounts.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022 AND 2021
(UNAUDITED)
Major Customers
For the three months ended June 30, 2022, the
Company had two significant customers representing an aggregate of 41% of revenues and one that makes up 71% of the accounts receivable
balance. For the three months ended June 30, 2021, the Company had one significant customer representing 62% of revenues and one that
makes up 92% of the accounts receivable balance. For the six months ended June 30, 2022, the Company had two significant customers representing
an aggregate of 41% of revenues and one customer that makes up 71% of the accounts receivable balance. For the six months ended June 30,
2021, the Company had one significant customer representing 59% of revenues and one customer that makes up 92% of the accounts receivable
balance. The Company’s officers are closely monitoring the relationships with all significant customers.
Major Vendors
For the three months ended June 30, 2022, the
Company had one major supplier representing 13% of purchases. For the six months ended June 30, 2022, the Company had one major supplier
representing 12% of purchases. The Company’s officers are closely monitoring the relationships with all significant suppliers.
Note 11 — Stockholders’
Equity
Preferred Stock
On June 29, 2021, the Company filed a certificate
of designation with the Delaware Secretary of State to establish its series A convertible preferred stock. The Company designated a total
of 8,000 shares of its preferred stock as series A convertible preferred stock. The series A convertible preferred stock has the following
voting powers, designations, preferences and relative rights, qualifications, limitations, or restrictions:
Dividend Rights. Prior to February 14,
2022 (the IPO Date), holders of series A convertible preferred stock were entitled to receive cumulative dividends at a rate of 7.5% of
the stated value per share ($1,000, subject to adjustment) per annum, which increased to 15% per annum after November 23, 2021 and 24%
per annum after December 31, 2021. Holders of series A convertible preferred stock are no longer entitled to dividends.
Liquidation Rights. Upon any liquidation,
dissolution or winding-up of the Company, whether voluntary or involuntary, or upon a change of control, the holders of series A convertible
preferred stock shall be entitled to receive out of the assets of the Company the same amount that a holder of common stock would receive
if the series A convertible preferred stock were fully converted (disregarding for such purposes any conversion limitations) to common
stock which amounts shall be paid pari passu with all holders of common stock.
Voting Rights. The series A convertible
preferred stock have no voting rights except as set forth below. As long as any shares of series A convertible preferred stock are outstanding,
the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the series A convertible
preferred stock, (a) alter or change adversely the powers, preferences or rights given to the series A convertible preferred stock or
alter or amend the certificate of designation, (b) authorize or create any class of stock ranking as to dividends, redemption or distribution
of assets upon a liquidation senior to, or otherwise pari passu with, the series A convertible preferred stock, (c) amend the certificate
of incorporation or other charter documents in any manner that adversely affects any rights of the holders of series A convertible preferred
stock, or (d) enter into any agreement with respect to any of the foregoing.
Conversion Rights. Each share of series
A convertible preferred stock is convertible, at any time and from time to time from at the option of the holder thereof, into that number
of shares of common stock determined by dividing the stated value of such share of series A convertible preferred stock (plus any accrued
but unpaid dividends thereon) by the conversion price. The conversion price is initially equal $0.6667 (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
A convertible 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.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022 AND 2021
(UNAUDITED)
On July 1, 2021, the Company completed a private
placement in which it sold an aggregate of 6,000 shares of series A convertible preferred stock and warrants for the purchase of an aggregate
of 8,999,552 shares of common stock to certain investors for gross proceeds of $6,000,000. On August 18, 2021, the completed an additional
closing of this private placement in which it sold 2,000 shares of series A convertible preferred stock and warrants for the purchase
of 2,999,852 shares of common stock for gross proceeds of $2,000,000.
During the first quarter of 2022, the holders
converted an aggregate of 7,000 shares of series A convertible preferred stock into 10,499,469 shares of common stock.
Common Stock
On April 21, 2021, the Company issued 45,000 shares
of common stock for compensation valued at $4 per share.
On April 21, 2021, the Company issued 20,000 shares
of common stock for services rendered valued at $2 per share.
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 1,440,000 units to the underwriters, at a purchase price per unit of $9.10 (the offering price to the public of $10.00
per unit minus the underwriters’ discount), and also agreed to grant to the underwriters a 45-day option to purchase up to 216,000
additional shares of common stock, up to 216,000 additional series A warrants, and/or up to 216,000 additional series B warrants, in any
combination thereof, at a purchase price to the public of $9.98 per share and $0.01 per warrant, less underwriting discounts and commissions,
solely to cover over-allotments, if any.
On February
18, 2022, the closing of the IPO was completed. At the closing, the underwriters partially exercised the option and purchased 206,390
series A warrants and 206,390 series B warrants. Therefore, the Company sold 1,440,000 shares of common stock, 1,646,390 series A warrants
and 1,646,390 series B warrants for total gross proceeds of $14,404,128. After deducting the underwriting commission and expenses, the
Company received net proceeds of $12,738,288.
On February 18, 2022, the Company issued 386,460
shares of common stock upon the conversion of the 5% secured subordinated convertible promissory note in the principal amount of $1,900,000
issued to Justin Francisco and Steven Rubert in connection with the acquisition of Nexus.
On February 18, 2022, the Company issued 623,200
shares of common stock upon the conversion of the 6% secured subordinated convertible promissory note in the principal amount of $3,000,000
issued to Sasson E. Moulavi in connection with the acquisition of DSO.
On February 18, 2022, the Company issued 229,834
shares of common stock upon the conversion of the convertible promissory note in the principal amount of $500,000 issued to East West
Capital LLC.
On February 18, 2022, the Company issued 42,500
additional shares of common stock to the stockholders of GSP and 14,723 additional shares of common stock to certain vendors of GSP in
accordance with the terms of the contribution and exchange agreement described above. The number of shares issued in the prior year was
based on an expected IPO value of $10.00 per share. Based on the actual IPO share allocation of the unit, it was determined that the Company
would issue the additional 42,500 shares.
On February 18, 2022, the Company issued an aggregate
of 2,168,492 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.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022 AND 2021
(UNAUDITED)
On March 10, 2022, the Company granted restricted
stock awards for an aggregate of 877,000 shares of common stock to certain directors, officers, and consultants. A total of 677,000 of
these shares vested in full on the date of grant. The remaining 200,000 shares, which were granted to independent directors, vest monthly
over a one-year period which were recorded as a prepaid of $140,700 at June 30, 2022. A total of 547,000 of these shares were granted
under the 2020 Stock Incentive Plan described below. The remaining 330,000 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 $0.938 on the date of the grant.
On April 8, 2022, the Company issued 73,267 shares
of common stock to Bevilacqua PLLC upon conversion of its convertible promissory note in the principal amount of $73,727 (see Note 9).
On June 9, 2022, the Company issued 195,495 shares
of common stock to a director upon a cashless exercise of a stock option.
During the
six months ended June 30, 2022, a total of 1,437,730 of the series B warrants were exercised on a cashless basis and the Company issued
1,437,730 shares of common stock upon such exercise.
During the
six months ended June 30, 2022, the Company issued an aggregate of 10,499,469 shares of common stock upon the conversion of 7,000
shares of series A convertible preferred stock.
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 2,000,000 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 June 30, 2022 and December 31, 2021, there were 7,505
and 550,000 shares of common stock available for issuance under the 2020 Plan, respectively. On April 13, 2021, the Company granted an
option for the purchase of 200,000 shares of common stock at an exercise price of $0.01 to Ronald Altbach, a director. On June 9, 2022,
Mr. Altbach exercised this option on a cashless basis and the Company issued 195,495 shares of common stock to Mr. Altbach. The Company
did not issue any other stock options under the 2020 Plan during the six months ended June 30, 2022 and 2021.
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 2,000,000 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
June 30, 2022, there were 1,670,000 shares of common stock available for issuance under the 2022 Plan. The Company did not issue any stock
options under the 2022 Plan during the six months ended June 30, 2022.
The Company recognized $0 of compensation expense
related to the vesting of options during the six months ended June 30, 2022 and 2021.
The series A warrants sold in the IPO are exercisable
until the fifth anniversary of the issuance date at an exercise price equal to $7.00 per share and may be exercised on a cashless basis
if the issuance of common stock upon exercise of the warrants is not covered by an effective registration statement. The exercise price
and number of shares of common stock issuable upon exercise of the series A warrants may be adjusted in certain circumstances, including
in the event of a stock dividend, extraordinary dividend on or recapitalization, reorganization, merger, or consolidation.
The series B warrants sold in the IPO are exercisable
until the fifth anniversary of the issuance date at an exercise price equal to $10.00 per share and may be exercised on a cashless basis,
whereby the holder will receive one share of common stock for each series B warrant exercised. As of June 30, 2022, 1,437,730 of the series
B warrants were exercised on a cashless basis and we issued 1,437,730 shares of common stock upon such exercise.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022 AND 2021
(UNAUDITED)
The following is a summary of options and warrants
granted, exercised, forfeited and outstanding during the six months ended June 30, 2022:
| | |
Stock Options | | |
Warrants | |
| | |
Number of
Options | | |
Weighted
Average
Exercise
Price | | |
Number of
Warrants | | |
Weighted
Average
Exercise
Price | |
| Outstanding at January 1, 2022 | |
| 1,450,000 | | |
$ | 0.01 | | |
| 14,802,006 | | |
$ | 5.18 | |
| Granted | |
| — | | |
| — | | |
| 3,382,780 | | |
| 3.95 | |
| Exercised | |
| 195,495 | | |
| 0.01 | | |
| 1,437,730 | | |
| — | |
| Forfeited | |
| 4,505 | | |
| 0.01 | | |
| 275,988 | | |
| — | |
| Outstanding at June 30, 2022 | |
| 1,250,000 | | |
$ | 0.01 | | |
| 16,471,068 | | |
$ | 4.52 | |
| Exercisable at June 30, 2022 | |
| 1,250,000 | | |
| | | |
| 4,351,664 | | |
| | |
Valuation Assumptions for Stock Options
and Warrants
The fair value of each option and warrant was
estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| Risk-free interest rate | |
| 2.90 | % |
| Expected volatility | |
| 80 | % |
| Expected life (years) | |
| 5 | |
| 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.
Note 12 — Commitments
and Contingencies
COVID-19 Pandemic
On March 11, 2020, the World Health Organization
classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak
continues to evolve as of the date of these consolidated financial statements. As such, it is uncertain as to the full magnitude that
the pandemic will have on the Company’s consolidated financial condition, liquidity, and future results of operations. Management
is actively monitoring the impact of the global situation on its consolidated financial condition, liquidity, operations, suppliers, industry,
and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able
to estimate the effects of the COVID-19 outbreak on its results of consolidated financial condition, liquidity, or operations for 2022.
Legal Matters
From time to time, the Company may become subject
to threatened and/or asserted claims arising in the ordinary course of business. Management is not aware of any matters, either individually
or in the aggregate, that are reasonably likely to have a material adverse effect on the Company’s financial condition, results
of operations or liquidity.
Note 13 — Related Party
Transactions
The Company is party to a management services
agreement with Trilogy Capital Group, LLC, a company controlled by the Company’s Executive Chairman. As of June 30, 2022 and December
31, 2021, the amounts due from the related party are $1,184,113 and $0, respectively. Additionally, as of June 30, 2022 and December 31,
2021, the amounts due to the related party are $0 and $325,966, respectively, which are presented net of amounts due from Trilogy Capital
Group, LLC.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022 AND 2021
(UNAUDITED)
Note 14 — Subsequent
Events
In accordance with ASC 855-10, the Company has
reviewed its operations subsequent to June 30, 2022 to the date these condensed consolidated financial statements were issued, and has
determined that, except as set forth below, it does not have any material subsequent events to disclose in these financial statements.
Closing of Ceautamed Acquisition
On March 14, 2022, the Company entered into a
securities purchase agreement with Ceautamed Worldwide, LLC (“Ceautamed”) and RMB Industries, Inc., RTB Childrens Trust and
D&D Hayes, LLC, pursuant to which the Company agreed to acquire all of the issued and outstanding membership interests of Ceautamed,
a vitamin and supplement company.
On July 29, 2022, the parties entered into a first
amendment to securities purchase agreement to amend certain terms of the securities purchase agreement. On the same date, closing of the
acquisition was completed.
Pursuant to the terms of the securities purchase
agreement, as amended, the Company acquired Ceautamed for an aggregate purchase price of $8,600,000, subject
to adjustments as described below. The purchase price consists of (i) $3,000,000 in cash, of which $1,000,000 was previously paid by the
Company and $2,000,000 was paid at closing, (ii) secured subordinated convertible promissory notes in the aggregate principal amount
of $2,150,000; (iii) secured subordinated promissory notes in the aggregate principal amount of $2,150,000 and (iv) secured subordinated
promissory notes in the aggregate principal amount of $1,300,000.
The purchase price is subject to a post-closing working
capital adjustment provision. Within ninety (90) days after the closing, the Company is required to deliver to the sellers an unaudited
balance sheet of Ceautamed and its subsidiaries as of the closing date and its calculation of the closing working capital (as defined
in the securities purchase agreement). If such closing working capital exceeds a minimum working capital equal to the average monthly
working capital of Ceautamed for the twelve-month period ended December 31, 2021 by more than $150,000, then the Company must promptly
(and, in any event, within five (5) business days) pay to the sellers an amount that is equal to such excess. If such minimum working
capital exceeds the closing working capital, then the sellers must promptly (and, in any event, within five (5) business days) pay
to the Company an amount that is equal to the deficiency. Such adjustments shall be paid as follows: (i) fifty percent (50%) shall be
paid in cash, (ii) twenty-five percent (25%) shall be paid through an increase or reduction in the principal amount of the secured subordinated
convertible promissory notes and (iii) twenty-five percent (25%) shall be paid through an increase or reduction in the principal amount
of the secured subordinated promissory notes in the aggregate principal amount of $2,150,000.
The secured subordinated convertible promissory
notes shall bear interest at the rate of five percent (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
ten percent (10%). The notes are convertible at the option of the holder into the Company’s common stock at a conversion price of
$6.25; provided that the holder may not elect to convert a portion of the outstanding principal in an amount less than the lesser of $200,000
or the remaining outstanding principal. The notes contain customary “piggyback” registration rights with respect to the common
stock issuable upon conversion of the notes.
The secured subordinated promissory notes in the
aggregate principal amount of $2,150,000 shall bear interest at the rate of five percent (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 ten percent (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 set forth on Exhibit A to the notes. The Company may redeem all or any portion of the notes at any time without premium or penalty.
The secured subordinated promissory notes in the
aggregate principal amount of $1,300,000 shall bear interest at the rate of five percent (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 notes; provided that upon an event of default (as
defined in the notes), such interest rate shall increase to ten percent (10%). The Company may redeem all or any portion of the notes
at any time without premium or penalty.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022 AND 2021
(UNAUDITED)
All of the
foregoing notes contain customary covenants and events of default for loans of this type, including upon any default under the senior
indebtedness (as defined below). In the event of a change of control (as defined in the notes) with respect to the Company or any guarantor
(as identified below), all obligations of the Company under the notes shall become immediately due and payable. The notes are guaranteed
by Ceautamed and its subsidiaries Wellness Watchers Global, LLC and Greens First Female, LLC and are secured by a security interest in
all of the assets of such guarantors. The notes are subordinated in right of payment to the prior payment in full of all senior indebtedness.
For purposes of the notes, “senior indebtedness” means all senior secured indebtedness of the Company, whether outstanding
or thereafter created, to banks, insurance companies, other financial institutions, private equity funds, hedge funds or other similar
funds, and the original issue discount subordinated note described below; provided that any
seller notes or other seller financing in connection with any acquisitions by the Company shall not constitute senior indebtedness.
Note Purchase Agreement
On July 29, 2022, the Company entered into a note
purchase agreement with an accredited investor, pursuant to which the Company issued to such investor an original issue discount subordinated
note in the principal amount of $2,272,727. The note contains an original issue discount of 12%, or $272,727, resulting in a purchase
price of $2,000,000.
The note shall bear interest at the rate of sixteen
percent (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 and payable in accordance with the amortization schedule set forth on Exhibit A to the note. 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
purchase agreement and the note contain customary representations and warranties and events of default for a loan of this type. The note
is guaranteed by the Company’s subsidiaries BSNM, DSO, Nexus, GSP, and Ceautamed and is secured by a security interest in all of
the assets of the Company and such guarantors. For purposes of the note, “senior indebtedness” means all indebtedness of the
Company, whether outstanding on the date of execution of the note or thereafter created, to Diamond Creek Capital, LLC, pursuant to that
certain loan agreement dated, as of July 1, 2021, with Diamond Creek Capital, LLC.
Debenture Purchase Agreement
On July 29, 2022, the Company entered into a debenture
purchase agreement with eight investors, pursuant to which the Company issued to such investors original issue discount subordinated debentures
in the aggregate principal amount of $735,294. The debentures contain an original issue discount of 15%, or an aggregate original issue
discount of $110,294, resulting in a total purchase price of $625,000.
The debentures bear interest at a rate of 17.5%
per annum. 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, (ii) July 29, 2024 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. For purposes hereof, “next equity financing” means a bona fide transaction
or series of transactions with the principal purpose of raising capital in which the Company receives gross proceeds in excess of $20
million. The Company may also voluntarily prepay the debentures in whole or in part without premium or penalty.
The debenture
purchase agreement and the debentures contain customary representations and warranties and 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. For purposes of the debentures, “senior indebtedness” means all indebtedness of the Company
to banks, insurance companies and other financial institutions or funds, unless in the instrument creating or evidencing such indebtedness
it is provided that such indebtedness is not senior in right of payment to the debentures or otherwise indicates that it is pari passu
with other unsecured indebtedness of the Company.
Option Grants
On August 12, 2022, the Company issued stock
options to employees under the 2022 Plan for an aggregate of 1,360,000 shares of common stock. The
stock options have an exercise price of $0.63 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 300,000 shares of common stock has an exercise price of $0.693 per share and expires five (5) years after the date of
issuance.