As filed with the Securities
and Exchange Commission on December 21, 2022
Registration No. 333-268830
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
SMART FOR LIFE, INC.
(Exact name of registrant as specified in its
charter)
Delaware | | 2833 | | 81-5360128 |
(State or other jurisdiction of incorporation or organization) | | (Primary Standard Industrial Classification Code Number) | | (I.R.S. Employer
Identification Number) |
990 S Rogers Circle, Suite 3
Boca Raton, Florida 33487
(786) 749-1221
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
Alfonso J. Cervantes, Jr.
Executive Chairman
990 S Rogers Circle, Suite 3
Boca Raton, Florida 33487
(786) 749-1221
Copies to:
Louis A. Bevilacqua,
Esq.
Bevilacqua PLLC
1050 Connecticut Avenue,
NW, Suite 500
Washington, DC 20036
(202) 869-0888
(Names, address, including zip code, and telephone
number, including area code, of agent for service)
Approximate date of commencement of proposed
sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on
this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following
box. ☒
If this Form is filed to register additional
securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same offering.☐
If this Form is a post-effective amendment filed
pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed
pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 7(a)(2)(B) of Securities Act. ☐
The registrant
hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission,
acting pursuant to such Section 8(a), may determine.
The
information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not
soliciting offers to buy these securities in any state where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED DECEMBER 21, 2022
58,853,719
Shares of Common Stock
This
prospectus relates to 58,853,719 shares of common stock, par value $0.0001 per share, of Smart for Life, Inc. that may be sold from time
to time by the selling stockholders named in this prospectus, which includes:
| ● | 1,282,896 shares of common stock; |
| ● | 6,296,035 shares of common stock issuable upon the exercise of prefunded warrants issued to the selling
stockholders at an exercise price of $0.0001 per share; |
| ● | 48,369,076 shares of common stock
issuable upon the exercise of amended and restated warrants issued to the selling stockholders
at an exercise price of $0.35 per share; and |
| ● | up to an additional 2,905,712 shares of common stock that may be issuable to the selling stockholders
upon the occurrence of certain adjustments to the prefunded warrants. |
We will not receive any proceeds from the sales
of outstanding common stock by the selling stockholders, but we may receive funds from the exercise of the warrants held by the selling
stockholders.
Our
common stock is listed on the Nasdaq Capital Market, or Nasdaq, under the symbol “SMFL.” As of December 20, 2022, the last
report sales price of our common stock on Nasdaq was $0.2331.
We are an “emerging growth company,”
as that term is used in the Jumpstart Our Business Startups Act of 2012, and as such, have elected to comply with certain reduced public
company reporting requirements for this prospectus and future filings. See “Prospectus Summary—Implications of Being an
Emerging Growth Company” and “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock.”
The selling stockholders may offer and sell the
common stock being offered by this prospectus from time to time in public or private transactions, or both. These sales will occur at
fixed prices, at market prices prevailing at the time of sale, at prices related to prevailing market prices, or at negotiated prices.
The selling stockholders may sell shares to or through underwriters, broker-dealers or agents, who may receive compensation in the form
of discounts, concessions or commissions from the selling stockholders, the purchasers of the shares, or both. Any participating broker-dealers
and any selling stockholders who are affiliates of broker-dealers may be deemed to be “underwriters” within the meaning of
the Securities Act of 1933, as amended, and any commissions or discounts given to any such broker-dealer or affiliates of a broker-dealer
may be regarded as underwriting commissions or discounts under the Securities Act of 1933, as amended. The selling stockholders have informed
us that they do not have any agreement or understanding, directly or indirectly, with any person to distribute their common stock. See
“Plan of Distribution” for a more complete description of the ways in which the shares may be sold.
Investing in our securities is highly speculative
and involves a significant degree of risk. See “Risk Factors” beginning on page 21 of this prospectus for a discussion
of information that should be considered before making a decision to purchase our securities.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
The date of this prospectus is
, 2022.
TABLE OF CONTENTS
Please read this prospectus carefully. It describes
our business, financial condition, results of operations and prospects, among other things. We are responsible for the information contained
in this prospectus. We have not authorized anyone to provide you with different information, and we take no responsibility for any other
information others may give you. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not
permitted. The information contained in this prospectus is accurate only as of the date on the front of this prospectus, regardless of
the time of delivery of this prospectus or any sale of securities. You should not assume that the information contained in this prospectus
is accurate as of any date other than its date.
INDUSTRY AND MARKET DATA
We are responsible for the disclosure in this
prospectus. However, this prospectus includes industry data that we obtained from internal surveys, market research, publicly available
information and industry publications. We did not fund and are not otherwise affiliated with any of the sources cited in this prospectus.
The market research, publicly available information and industry publications that we use generally state that the information contained
therein has been obtained from sources believed to be reliable. The information therein represents the most recently available data from
the relevant sources and publications and we believe remains reliable. However, this data involves
a number of assumptions and limitations regarding our industry which are necessarily subject to a high degree of uncertainty and risk
due to a variety of factors, including those described in the section titled “Risk Factors.” Forward-looking
information obtained from these sources is also subject to the same qualifications and additional uncertainties regarding the other forward-looking
statements in this prospectus.
TRADEMARKS AND COPYRIGHTS
We own or have rights to various trademarks, service
marks and trade names that we use in connection with the operation of our business. This prospectus may also contain trademarks, service
marks and trade names of third parties, which are the property of their respective owners. Our use or display of third parties’
trademarks, service marks and trade names or products in this prospectus is not intended to, and does not imply a relationship with, or
endorsement or sponsorship by us. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus
may appear without the ®, TM or SM symbols, but the omission of such references is not intended to indicate, in any way, that we will
not assert, to the fullest extent under applicable law, our rights or the right of the applicable owner of these trademarks, service marks
and trade names.
PROSPECTUS SUMMARY
This summary highlights selected information
contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider
before deciding whether to invest in our securities. You should carefully read the entire prospectus, including the risks associated with
an investment in our company discussed in the “Risk Factors” section of this prospectus, before making an investment decision.
Some of the statements in this prospectus are forward-looking statements. See the section titled “Cautionary Statement Regarding
Forward-Looking Statements.”
Unless otherwise indicated by the context,
reference in this prospectus to “we,” “us,” “our,” “our company” and similar references
are to the combined business of Smart for Life, Inc. and its consolidated subsidiaries.
Our Company
Overview
We are engaged in the development, marketing,
manufacturing, acquisition, operation and sale of a broad spectrum of nutritional and related products with an emphasis on health and
wellness. Structured as a global holding company, we are executing a buy-and-build strategy with serial accretive acquisitions creating
a vertically integrated company with an objective of aggregating companies generating a minimum
of $300 million in revenues within the next thirty-six months. To drive growth and earnings, we are developing proprietary products
as well as acquiring other profitable companies, encompassing brands, manufacturing and distribution channels.
We also operate a network platform in the affiliate
marketing space. Affiliate marketing is an advertising model in which a product vendor compensates third-party digital marketers to generate
traffic or leads for the product vendor’s products and services. The third-party digital marketers are referred to as affiliates,
and the commission fee incentivizes them to find ways to promote the products being sold by the product vendor.
Our Business Model
We are engaged in a comprehensive program to develop
a robust pipeline of prospective acquisitions in addition to the companies currently operated by us. Our management has significant experience
in locating and evaluating prospective target operating companies. We have also entered into buy-side agreements with certain advisers
and consultants to assist management in identifying and evaluating prospective target operating companies. The nutritional products industry
is highly fragmented with a large pool of companies generating less than $20 million in revenues representing significant opportunity
for industry consolidation.
We plan to acquire target companies utilizing
a combination of cash, promissory notes, earnouts and public company stock, generally at 4x to 6x trailing adjusted EBITDA (earnings before
interest, taxes, depreciation, and amortization). Aside from our first acquisition described below, we intend on paying no more than 60%
cash on any acquisition that we execute with a target of 50%. The remainder is allocated between stock and a note and/or earnout with
a heavier weighting toward the former. Although the acquisition consideration is structured, we believe that our acquisitions will provide
three distinct benefits to the principals of an acquisition. First, a significant liquidity event. Second, the creation of a significant
equity position in an emerging growth public company. Third, ongoing employment at customary industry compensation.
Over the
next 24 months, we plan to acquire multiple companies aggregating a minimum of $100 million in annualized revenues with the number
of prospective acquisitions in the pipeline representing over $50 million in additional revenue. We do not currently have sufficient
capital to complete these acquisitions. We intend to raise capital for additional acquisitions primarily through debt financing at our
operating company level, additional equity offerings by our company, or by undertaking a combination of any of the above. The sale of
additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt
service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all.
There is no guarantee that we will be able to
acquire additional businesses under the terms outlined above or that we will be able to find additional acquisition candidates should
we terminate our plans for any of our current acquisition targets.
Our Corporate History
Our company was incorporated in the State of Delaware
on February 2, 2017 under the name Bonne Santé Group, Inc. On August 4, 2021, we changed our name to Smart for Life, Inc. in connection
with the acquisition of DSO described below.
On March 8, 2018, we acquired 51% of Millenium
Natural Manufacturing Corp. and Millenium Natural Health Products Inc. for a purchase price of $2,140,272. On October 8, 2019, we entered
into an agreement to acquire the remaining 49% of these companies for a purchase price of $100,000, which was completed on October 8,
2019. 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.
On February 11, 2020, we entered into securities
purchase agreement, which was amended on July 7, 2020 and June 4, 2021, to acquire all of the issued and outstanding equity interests
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 July 1, 2021, the acquisition was completed. 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 Lavi Enterprises, LLC. 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 prospectus, we collectively refer to Doctors Scientific Organica, LLC and its consolidated subsidiaries as DSO.
On August 24, 2021, we established Smart for Life
Canada Inc. as a wholly owned subsidiary of Doctors Scientific Organica, LLC 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 July 21, 2021, we entered into a securities
purchase agreement, which was amended on November 8, 2021, to acquire all of the issued and outstanding capital stock of Nexus Offers,
Inc., or Nexus. On November 8, 2021, the acquisition was completed.
On November 29, 2021, we entered into a contribution
and exchange agreement to acquire all of the issued and outstanding capital stock of GSP Nutrition Inc., or GSP. On December 6, 2021,
the acquisition was completed.
On
March 14, 2022, we entered into securities purchase agreement, which was
amended on July 29, 2022, to acquire all of the issued and outstanding equity interests of Ceautamed
Worldwide LLC and its wholly-owned subsidiaries Wellness Watchers Global, LLC and Greens First Female LLC,
which we collectively refer to in this prospectus as Ceautamed. On July 29, 2022, the acquisition was completed.
Our Opportunity
The nutraceutical industry focuses on nutritional
supplements intended to improve longevity, sports fitness and provide health benefits in addition to the basic nutritional value present
in food. Most people are familiar with various nutraceutical products—and have likely used them—even if they are unfamiliar
with the industry name. Nutraceuticals comprise such commonly used items as herbal products, specific diet products, vitamins, processed
foods and beverages, functional foods, isolated nutrients and other dietary products.
Functional foods are foods that have a potentially
positive effect on health beyond basic nutrition. A familiar example of a functional food is oatmeal because it contains soluble fiber
that can help lower cholesterol levels. Some foods are also modified to have health benefits. An example is orange juice that has been
fortified with calcium for bone health.
The nutraceutical industry has experienced significant
growth across the globe, propelled by the increasing age expectancies and associated increases in diseases of aging and lifestyle. A shift
in demographics has also allowed manufacturers to benefit in recent years. The number of Americans ages 65 and older is projected
to nearly double from 52 million in 2018 to 95 million by 2060, and the 65-and-older age group’s share of the total population
will rise from 16% to 23%. Moreover, the Council for Responsible Nutrition, or CRN, reported 77% of U.S. adults take dietary supplements.
According to a study by Grand View Research, Inc.,
amid the COVID-19 crisis, the global market for nutraceuticals is projected to grow from $412.7 billion in the year 2020 and reach $722.5
billion by 2027, growing at a compound annual growth rate, or CAGR, of 8.3% over the analysis period. The nutraceuticals market in the
United States is estimated at $104.5 billion in the year 2021 according to Global Industry Analysts Inc. The U.S. currently accounts for
a 34.57% share in the global market. Among the other noteworthy geographic markets are China, Japan and Canada, each forecast to grow
at 9.6%, 6.3% and 6.7%, respectively, over the analysis period. Within Europe, Germany is forecast to grow at approximately 7.1% CAGR.
As a result of our acquisition of Nexus, we have
also entered the digital marketing industry as a way to promote the products and brands that we sell. Digital marketing is a component
of marketing that uses internet and online based digital technologies such as desktop computers, mobile phones and other digital media
and platforms to promote products and services.
The COVID-19 pandemic resulted in people staying
at home and/or working remotely from home, resulting in huge increase in online traffic. Clicks and display ads are among the most prominent
forms of digital marketing initiatives. Clicks are expensive compared to display ads, as clicks ensure the customer is directed to the
advertiser’s website. However, clicks provide a better return on investment.
According to Global Industry Analysis, Inc., the
global market for digital advertising and marketing is estimated at $350 billion in the year 2020, and is projected to reach
$786.2 billion by 2026, growing at a CAGR of 13.9% over the analysis period. The digital advertising and marketing market in
the U.S. is estimated at $155.3 billion in the year 2021. We believe that our market share is currently less than 1%.
The markets
in which we operate are characterized by rapid technological changes, frequent new product introductions, established and emerging competition,
extensive intellectual property disputes and litigation, price competition, aggressive marketing practices, evolving industry standards
and changing customer preferences. Accordingly, our prospects must be considered in light of the uncertainties, risks, expenses, and difficulties
frequently encountered by companies operating in rapidly changing and competitive markets.
Our Operating Subsidiaries
BSNM
BSNM is a nutraceutical contract manufacturer.
Since 1998, our strong manufacturing capabilities and dedication to our clients has enabled us to build relationships with hundreds of
customers throughout the United States and around the world, including South America, Central America and Europe. We specialize in a wide
variety of products to fill our client’s needs, from the private labeling of vitamins, dietary supplements, nutraceuticals, sport
nutrition and broad-spectrum nutritional supplements. Our experienced team of scientists, formulators, and manufacturing experts have
the years of knowledge necessary to take our client’s concepts all the way from initial idea to finished product. In addition, we
can provide the support for a simple and cost-effective “turn key” solution to manufacturing existing formulations.
To meet the specific demands of any order, we
have state-of-the-art manufacturing and packaging lines to decrease cost and maximize efficiencies. We certify that all products and labels
meet stringent U.S. Food and Drug Administration, or FDA, requirements and our quality control associates will continually monitor the
entire process until products are delivered. Our goal is to exceed our customer’s expectations with respect to product quality,
service and price.
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. The program uses an exact protein-to-sugar ratio, a low
glycemic index and glycemic load as well as multiple small meals throughout the day to deliver specific amounts of protein, super fibers
and complex carbs to suppress hunger, keep sugar and insulin low and trigger the body’s release of the fat releasing hormone glucagon.
Our Smart for Life products deliver:
| ● | Hunger controlling protein mix |
| ● | No toxins or preservatives |
| ● | The right amount of protein per calorie ratio |
| ● | No insulin spike, lets glucagon do its job |
| ● | A small amount of essential good fats |
| ● | Right amount of complex carbs |
DSO also develops premium supplements and commodities
that will promote optimal health and wellness. This natural product line uses simple quality ingredients to help create a more sustainable
lifestyle. DSO has over 15 years of experience providing high-quality products to premium retail locations and companies. DSO 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. All products are packaged in eco-friendly and bio-degradable packaging.
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. 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.
We believe that the Sports Illustrated brand is
one of the most recognized brands in sports and athletics. GSP Nutrition 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. See “Business—Intellectual
Property” for additional details regarding this license.
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. Ceautamed sells
a wide variety of nutritional products, including antioxidant rich supplements, plant-based protein, alkalizing nutrients and products
designed for weight management.
Ceautamed has historically utilized third-party
contract manufacturing that will migrate to BSNM.
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.
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.
Nexus’ has relationships with both product
vendors and digital marketers. A product vendor is a Nexus customer that has products, whether digital
or physical, for sale and is looking for increased sales through digital marketing avenues from digital marketers. Digital marketers are
Nexus contractors that engage in digital marketing. An example of a digital marketer is someone who has a strong Facebook following,
or a strong knowledge of Facebook ad marketing. Other examples include google ad marketing or email marketers who send marketing messages
to an opted in list of subscribers. Historically, Nexus’ customers consisted exclusively of owners of digital products that were
also delivered digitally. Following our acquisition of Nexus, BSNM, DSO, GSP and Ceautamed, as well as any additional nutraceutical
companies that we acquire in the future, will also become customers of Nexus. Nexus will use its online marketplace to market our nutraceutical
products through its network of digital marketers. Our nutraceutical product companies will then sell and physically deliver the nutraceutical
products to the end users identified through the efforts of the digital marketers. Nexus has the ability to “plug and play”
with any of the products sold by companies that we may acquire in the future as we can take the consumer facing products being sold by
those companies and seamlessly add them to the Nexus network to generate sales.
Product vendors come to Nexus to increase sales
of their products and digital marketers come to Nexus to receive a commission in exchange for their marketing efforts, which are designed
to generate sales for the product vendors. When a digital marketer’s marketing efforts results in a sale of a product by a product
vendor, the digital marketer is then credited with a commission. The product vendor is billed weekly for the sales that the product vendor
makes during the week as the result of such digital marketers’ marketing efforts. The product vendor pays Nexus and Nexus pays the
digital marketer. This is an anonymous transaction as digital marketers and product vendors are only defined inside the marketplace by
an offer name (product vendor) and an affiliate number (digital marketer).
We believe
that Nexus is accretive to our other subsidiary companies and allows us access to a broad spectrum of marketing tools to be utilized across
the entire spectrum of our products.
Our Competitive Strengths
Based on management’s belief and experience
in the industry, we believe that the following competitive strengths enable us to compete effectively.
| ● | Proprietary manufacturing facilities. BSNM and DSO own and operate proprietary manufacturing
facilities, which allow for a high level of managerial control over all aspects of production, including sourcing, logistics and maintaining
the highest levels of quality during the manufacturing process. Through direct ownership, we are able to optimize our sales and marketing
practices and provide a completely integrated approach, all solidified by a single manufacturing platform for capsules, tablets, powders
and various other delivery methods for all vitamins and supplements. In addition, as a private label contract manufacturer for third parties,
we can provide a turnkey solution for brands and retailers who want to minimize their supply chain disruption and maximize their control
over product flow to end customers. In addition, as a middle market-sized contract manufacturer, we are not encumbered by the often overly
complex processes that our larger competitors may have. We can be nimble and highly adaptable, “flexing” with our customers’
needs as they change over time, which allows us to better service our ever-expanding international client base. We are able to maintain
a competitive advantage due to our vertically integrated operational control. This vertical integration also allows us to minimize intellectual
property and data security risks, while also eliminating costs, improving focus, optimizing quality and launching with a faster time-to-market
for new products. We retain control over every step of the manufacturing processes, allowing us to establish our own institutional advantages
and maximize efficiencies. |
| ● | Established and trusted brands. Smart for Life, Doctors Scientific Organica, Sports Illustrated
Nutrition and Greens First are well-established brands in the in the health and wellness industry. In particular, Smart for Life products
are currently sold in many of the largest big-box retailers in the United States and Canada, including Costco, Walmart, Sam’s Club,
BJ’s and Publix, as well as through online channels such as Amazon. DSO has established a dedicated following of consumers that
are strong believers in the high-quality vitamins and supplements it sells to its customers, along with the eco-friendly and bio-degradable
packaging, with Amazon sales numbers continuing to increase as a result. We believe that the Sports Illustrated brand is one of the most
recognized brands in sports and athletics. In connection with our acquisition of GSP, we acquired a license for the exclusive use of the
Sports Illustrated brand (excluding the Sports Illustrated Swimsuit brand for which we have 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. |
| ● | Client focused innovative research and development. We believe that our research and development
team adds significant value to our company and our customers and is a differentiating factor for our company. We strive to be technology
driven leveraging technology, science, and innovation in our research and development efforts. We work closely with our clients to create
and develop new and exciting products. We frequently work directly with our customers in our research and development labs to create innovative
solutions that create value for our customers in a timely manner. Our team works closely with physicians to create novel wholesome products
that add nutritional and functional value. |
| ● | Ability to market through captive marketing subsidiary. We believe that our subsidiary,
Nexus, allows us access to a broad spectrum of marketing tools to be utilized across the entire spectrum of our products. We believe that
having an experienced management team and existing customer base accessible to all of our other brands in our portfolio will allow us
to drive sales and revenue of existing products as well as test new product offerings generated
through our research and development. |
| ● | Referral only network based on long term relationships. Nexus operates a referral only network,
meaning that all of its digital marketers are referred. There is no way to get a Nexus account other than being directly referred
by a known good account holder. This allows Nexus to stem any fraudulent traffic, which we believe is a substantial competitive advantage
for product vendors. Nexus has also established long term relationships with its product vendors and offers competitive bonuses for its
digital marketer base. We believe that these factors set Nexus apart from its competition. |
Our Growth Strategies
We will strive to grow our business by pursuing
the following growth strategies.
| ● | Acquisition of additional
businesses. The nutritional products industry is highly fragmented with a large pool
of companies generating less than $20 million in revenues representing significant opportunity
for industry consolidation. Over the next 24 months,
we plan to acquire multiple companies aggregating a minimum of $100 million in annualized
revenues with the number of prospective acquisitions in the pipeline representing over $50
million in additional revenue. As noted above, we also do not currently have sufficient capital
to complete these acquisitions. We intend to raise capital for additional acquisitions primarily
through debt financing at our operating company level, additional equity offerings by our
company, or by undertaking a combination of any of the above. The sale of additional equity
securities could result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to operating and
financial covenants that would restrict our operations. Financing may not be available in
amounts or on terms acceptable to us, if at all. There is no guarantee that we will be able
to acquire additional businesses under the terms outlined above or that we will be able to
find additional acquisition candidates should we terminate our plans for any of our current
acquisition targets. |
| ● | Increase sales from existing and new customers. We expect to continue to drive growth
for our consumer products branded business through our increased focus on our top brands and continued expansion in various health and
wellness categories, which we expect to result in incremental shelf space with existing customers and new customer additions. We expect
that our focus on delivering tangible benefits to consumers through product innovation will not only benefit us but also benefit our customers.
Our ability to supply both branded and private label products broadens and deepens our partnerships with key retail customers, providing
us more opportunities for category leadership and growth. We view the private label business as an important and valuable service that
we provide to key accounts. |
| ● | Further penetrate international markets. Our products are currently marketed and sold in
approximately two countries. In fiscal 2021, approximately 14% of our sales were to customers outside the United States. We plan to capitalize
on our marketing and distribution capabilities to drive incremental international sales of our consumer product brands in emerging markets,
which are characterized by a rising middle class and a strong demand for high quality nutritional and wellness products from U.S.-based
manufacturers. |
| ● | Drive productivity through operational efficiencies. We expect to continue to focus on improving
efficiency across our operations to allow us to reduce costs in our manufacturing facilities as well as across our overhead cost areas.
Our recent acquisition of DSO significantly increased our production capacity. In addition, we have launched an initiative to optimize
our product portfolio, which we expect will enable further efficiencies across our manufacturing network. We are also introducing new
initiatives that leverage automation, standardization and simplification and are expected to increase productivity across our operations. |
Impact of Coronavirus Pandemic
In December 2019, a novel coronavirus disease,
or COVID-19, was initially reported and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. COVID-19
has had a widespread and detrimental effect on the global economy as a result of the continued increase in the number of cases and affected
countries and actions by public health and governmental authorities, businesses, other organizations, and individuals to address the outbreak,
including travel bans and restrictions, quarantines, shelter in place, stay at home or total lock-down orders and business limitations
and shutdowns. Despite recent developments of vaccines, the duration and severity of COVID-19, mutations and possible additional mutations,
and the degree of their impact on our business is uncertain and difficult to predict.
We are dependent upon certain contract manufacturers
and suppliers and their ability to reliably and efficiently fulfill our orders is critical to our business success. The COVID-19 pandemic
has impacted and may continue to impact certain of our manufacturers and suppliers. As a result, we have faced and may continue to face
delays or difficulty sourcing certain products and raw materials, which could negatively affect our business and financial results. Even
if we are able to find alternate sources for such raw materials, they may cost more, which could adversely impact our profitability and
financial condition.
Furthermore, the global deterioration in economic
conditions, which may have an adverse impact on discretionary consumer spending or investing, could also impact our business and demand
for our products. For instance, consumer spending and investing may be negatively impacted by general macroeconomic conditions, including
a rise in unemployment, and decreased consumer confidence resulting from the pandemic. Changing consumer and investor behaviors as a result
of the pandemic may also have a material impact on our revenue.
Our efforts to help mitigate the negative impact
of the outbreak on our business may not be effective, and we may be affected by a protracted economic downturn. Furthermore, while many
governmental authorities around the world have and continue to enact legislation to address the impact of COVID-19, including measures
intended to mitigate some of the more severe anticipated economic effects of the virus, we may not benefit from such legislation, or such
legislation may prove to be ineffective in addressing COVID-19’s impact on our and our customer’s businesses and operations.
Even after the COVID-19 outbreak has subsided, we may continue to experience impacts to our business as a result of COVID-19’s global
economic impact and any recession that has occurred or may occur in the future. Further, as the COVID-19 situation is unprecedented and
continuously evolving, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or in
a manner that we currently do not consider that may present significant risks to our operations.
The extent to which the COVID-19 pandemic may
impact our results will depend on future developments, which are highly uncertain and cannot be predicted as of the date of this prospectus.
Nevertheless, the pandemic and the current financial, economic and capital markets environment, and future developments in the global
supply chain and other areas present material uncertainty and risk with respect to our performance, financial condition, results of operations
and cash flows. See also “Risk Factors” for more information.
Our Risks and Challenges
An investment in our securities involves a high
degree of risk. You should carefully consider the risks summarized below. These risks are discussed more fully in the “Risk Factors”
section immediately following this Prospectus Summary. These risks include, but are not limited to, the following:
| ● | We are an early-stage company with a limited operating history. |
| ● | The effect of the COVID-19 pandemic on our operations, and the operations of our customers and suppliers,
has had, and is expected to continue to have, a negative effect on our business, financial condition, cash flows and results of operations. |
| ● | Our acquisitions may result in significant transaction expenses, integration and consolidation risks,
and we may be unable to profitably operate our consolidated company. |
| ● | Our ability to obtain continued financing is critical to the growth of our business. We will need additional
financing to fund operations, which additional financing may not be available on reasonable terms or at all. |
| ● | Unfavorable publicity or consumer perception of our products and any similar products distributed by other
companies could have a material adverse effect on our business. |
| ● | Our success is linked to the size and growth rate of the vitamin, mineral and supplement market and an
adverse change in the size or growth rate of that market could have a material adverse effect on us. |
| ● | We operate in highly competitive and fast-evolving industries, and our failure to compete effectively
could affect our market share, financial condition and growth prospects adversely. |
| ● | Our major customers account for a significant portion of our consolidated net sales and the loss of any
major customer could have a material adverse effect on our results of operations. |
| ● | If we experience product recalls, we may incur significant and unexpected costs, and our business reputation
could be adversely affected. |
| ● | We may incur material product liability claims, which could increase our costs and adversely affect our
reputation, revenues and operating income. |
| ● | We rely on our manufacturing operations to produce the vast majority of the nutritional supplements that
we sell, and disruptions in our manufacturing system or losses of manufacturing certifications could affect our results of operations
adversely. |
| ● | We are also dependent on certain third-party contract manufacturers and suppliers. |
| ● | An increase in the price and shortage of supply of key raw materials could adversely affect our business. |
| ● | Our expansion into new business lines and services may result in unseen risks, challenges and uncertainties. |
| ● | Privacy protection is increasingly demanding, and we may be exposed to risks and costs associated with
security breaches, data loss, credit card fraud and identity theft that could cause us to incur unexpected expenses and loss of revenue,
suffer reputational harm with our customers, as well as other risks. |
| ● | Assertions by third parties of infringement, misappropriation or other violation by us of their intellectual
property rights could result in significant costs and substantially harm our business and operating results. |
| ● | We may be required to indemnify our vendors and/or customers, the payment of which could have a material
adverse effect on our business, financial condition and operating results. |
| ● | Compliance with new and existing laws and governmental regulations could increase our costs significantly
and adversely affect our results of operations. |
| ● | Our failure to comply with FTC regulations could result in substantial monetary penalties and could adversely
affect our operating results. |
| ● | Our operations are subject to environmental and health and safety laws and regulations that may increase
our cost of operations or expose us to environmental liabilities. |
| ● | Economic, political and other risks associated with our international operations could adversely affect
our revenues and international growth prospects. |
| ● | We may not complete our analysis of our internal control over financial reporting in a timely manner,
or these internal controls may not be determined to be effective. |
| ● | We may not be able to maintain a listing of our common stock on Nasdaq. |
| ● | The market price of our stock may be highly volatile, and you could lose all or part of your investment. |
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company”
under the Jumpstart Our Business Startups Act of 2012, or 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 of 2002, or 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, or the Securities Act, 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 consolidated 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, or 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.
Corporate Information
Our principal executive offices are located at
990 S Rogers Circle, Suite 3, Boca Raton, Florida 33487, and our telephone number is (786) 749-1221. We maintain a website
at www.smartforlifecorp.com. Information available on our website is not incorporated by reference in and is not deemed a part of this
prospectus.
The Offering
Common stock offered by the selling stockholders: |
|
This prospectus relates to 58,853,719
shares of common stock that may be sold from time to time by the selling stockholders named in this prospectus, which includes:
|
|
● | 1,282,896 shares of common stock; |
| ● | 6,296,035 shares of common stock issuable upon the exercise
of prefunded warrants issued to the selling stockholders at an exercise price of $0.0001 per share; |
| ● | 48,369,076 shares of common
stock issuable upon the exercise of amended and restated warrants issued to the selling stockholders
at an exercise price of $0.35 per share; and |
| ● | up to an additional 2,905,712 shares of common stock that
may be issuable to the selling stockholders upon the occurrence of certain adjustments to the prefunded warrants. |
Shares outstanding:(1) |
|
36,103,067 shares of common stock. |
Use of proceeds: |
|
We will not receive any proceeds from the sales of outstanding common stock by the selling stockholders, but we will receive funds from the exercise of the warrants held by the selling stockholders. |
Risk factors: |
|
Investing in our securities involves a high degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 21. |
Trading market and symbol: |
|
Our common stock is listed on Nasdaq under the symbol “SMFL.” |
| (1) | The number of shares of common stock outstanding does not include the following: |
| ● | 2,578,000 shares of common stock issuable upon the exercise of outstanding options issued under our stock
incentive plans at a weighted average exercise price of $0.34 per share; |
| ● | 249,505 additional shares of common stock that are reserved for issuance under our stock incentive plans; |
| ● | 1,499,925 shares of common stock issuable upon the conversion of our outstanding series A convertible
preferred stock; |
| ● | 225,179,851 shares of common stock issuable upon the exercise of outstanding warrants at a weighted average
exercise price of $0.40; and |
| ● | shares of common stock issuable upon the conversion of 5% secured subordinated convertible promissory
notes in the aggregate principal amount of $2,150,000 that are convertible at the option of the holders into shares of common stock at
a conversion price of $6.25. |
Summary
Financial Information
The following tables summarize certain financial
data regarding our business and should be read in conjunction with our financial statements and related notes contained elsewhere in this
prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
All financial statements included in this prospectus
are prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP. The summary financial
information is only a summary and should be read in conjunction with our historical combined financial statements and related notes contained
elsewhere herein. The financial statements contained elsewhere fully represent our financial condition and operations; however, they are
not indicative of our future performance.
In accordance with the rules of the Securities
and Exchange Commission, or the SEC, we have not included historical financial statements for GSP in this prospectus because the acquisition
of GSP was not deemed to be significant.
Smart for Life, Inc.
Our summary financial data as of December 31,
2021 and 2020 and for the years then ended are derived from our audited consolidated financial statements included elsewhere in this prospectus.
We derived our summary financial data as of September 30, 2022 and for the nine
months ended September 30, 2022 and 2021 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus,
which include all adjustments, consisting of normal recurring adjustments, that our management considers necessary for a fair presentation
of our financial position and results of operations as of the dates and for the periods presented.
| |
Nine Months Ended
September 30, | | |
Year Ended
December 31, | |
| |
2022 | | |
2021 | | |
2021 | | |
2020 | |
| |
(unaudited) | | |
(unaudited) | | |
| | |
| |
Statements of Operations Data | |
| | |
| | |
| | |
| |
Revenues | |
$ | 5,356,985 | | |
$ | 3,367,853 | | |
$ | 9,022,593 | | |
$ | 1,959,595 | |
Cost of revenues | |
| 2,724,321 | | |
| 1,932,065 | | |
| 6,124,633 | | |
| 1,831,629 | |
Gross profit | |
| 2,632,664 | | |
| 1,435,788 | | |
| 2,897,960 | | |
| 127,966 | |
Operating expenses | |
| 4,079,049 | | |
| 3,196,833 | | |
| 8,138,781 | | |
| 2,029,700 | |
Operating loss | |
| (1,446,385 | ) | |
| (1,761,045 | ) | |
| (5,240,821 | ) | |
| (1,901,734 | ) |
Total other expense | |
| (501,336 | ) | |
| (595,187 | ) | |
| (2,524,702 | ) | |
| (1,267,284 | ) |
Net loss | |
$ | (1,947,721 | ) | |
$ | (2,356,232 | ) | |
$ | (7,765,523 | ) | |
$ | (3,169,018 | ) |
| |
As
of
September 30, | | |
As of December 31, | |
| |
2022 | | |
2021 | | |
2020 | |
| |
(unaudited) | | |
| | |
| |
Balance Sheet Data | |
| | |
| | |
| |
Cash | |
$ | 303,533 | | |
$ | 205,093 | | |
$ | 484,949 | |
Total current assets | |
| 8,324,108 | | |
| 4,339,504 | | |
| 689,751 | |
Total assets | |
| 34,147,142 | | |
| 22,610,407 | | |
| 1,888,903 | |
Total current liabilities | |
| 16,824,176 | | |
| 17,144,748 | | |
| 6,881,821 | |
Total liabilities | |
| 32,095,863 | | |
| 28,701,145 | | |
| 9,014,729 | |
Total liabilities and stockholders’ equity | |
$ | 34,147,142 | | |
$ | 22,610,407 | | |
$ | 1,888,903 | |
Ceautamed
The summary financial data of Ceautamed as of
December 31, 2021 and for the year then ended are derived from the audited consolidated financial statements of Ceautamed included elsewhere
in this prospectus. We derived the summary financial data of Ceautamed as of
June 30, 2022 and for the six months ended June 30, 2022 then ended from the unaudited consolidated financial statements of Ceautamed
included elsewhere in this prospectus, which include all adjustments, consisting of normal recurring adjustments, that management considers
necessary for a fair presentation of the financial position and results of operations of Ceautamed as of the dates and for the periods
presented.
| |
Six Months Ended
June 30,
2022 | | |
Year Ended
December 31, 2021 | |
| |
(unaudited) | | |
| |
Statements of Operations Data | |
| | |
| |
Sales, net | |
$ | 1,415,494 | | |
$ | 4,165,943 | |
Cost of goods sold | |
| 775,300 | | |
| 2,219,599 | |
Gross profit | |
| 640,194 | | |
| 1,946,344 | |
Operating expenses | |
| 457,285 | | |
| 1,030,892 | |
Operating income | |
| 182,909 | | |
| 915,452 | |
Total other income (expense) | |
| (27,554 | ) | |
| 22,853 | |
Net income | |
$ | 155,355 | | |
$ | 938,305 | |
| |
As
of
June 30,
2022 | | |
As
of
December 31,
2021 | |
| |
(unaudited) | | |
| |
Balance Sheet Data | |
| | |
| |
Cash | |
$ | 153,254 | | |
$ | 136,737 | |
Total current assets | |
| 505,612 | | |
| 645,615 | |
Total assets | |
| 521,435 | | |
| 663,738 | |
Total current liabilities | |
| 3,566,677 | | |
| 3,483,205 | |
Total liabilities | |
| 3,684,689 | | |
| 3,590,062 | |
Total liabilities and deficiency in member’s equity | |
$ | 521,435 | | |
$ | 663,738 | |
Nexus
The summary financial data of Nexus as of December
31, 2020 and for the year then ended are derived from the audited financial statements of Nexus included elsewhere in this prospectus.
Statements of Operations Data | |
Year Ended
December 31,
2020 | |
Net sales | |
$ | 5,674,946 | |
Cost of services | |
| 4,353,573 | |
Gross profit | |
| 1,321,373 | |
Operating expenses | |
| 1,436,710 | |
Operating income (loss) | |
| (115,337 | ) |
Income (loss) before income taxes | |
| (115,337 | ) |
Income tax expense | |
| (5,863 | ) |
Net income (loss) | |
$ | (121,200 | ) |
Balance Sheet Data | |
As
of
December 31,
2020 | |
Cash | |
$ | 36,188 | |
Total current assets | |
| 183,033 | |
Total assets | |
| 183,033 | |
Total current liabilities | |
| 216,392 | |
Total liabilities | |
| 216,392 | |
Total liabilities and stockholders’ equity | |
$ | 183,033 | |
DSO
The summary financial data of DSO as of December
31, 2020 and for the year then ended are derived from the audited consolidated financial statements of DSO included elsewhere in this
prospectus.
Income Statement Data | |
Year Ended
December 31,
2020 | |
Net sales | |
$ | 10,782,192 | |
Cost of goods sold | |
| 4,436,389 | |
Gross profit | |
| 6,345,803 | |
Operating expenses | |
| 4,691,117 | |
Operating income | |
| 1,654,686 | |
Total other income (expense) | |
| (85,307 | ) |
Net income | |
$ | 1,569,379 | |
Balance Sheet Data | |
As of December 31, 2020 | |
Cash | |
$ | — | |
Total current assets | |
| 2,154,691 | |
Total assets | |
| 3,139,885 | |
Total current liabilities | |
| 2,160,331 | |
Total liabilities | |
| 2,605,515 | |
Total member’s equity (deficit) | |
| 534,370 | |
Total liabilities and member’s equity (deficit) | |
$ | 3,139,885 | |
Unaudited
Pro Forma Condensed Combined Financial Information
The following unaudited pro forma condensed combined
financial information and related notes present the historical condensed combined financial information of our company after giving effect
to the acquisitions of DSO that was completed July 1, 2021, Nexus that was completed on November 8, 2021, GSP that was completed on December
6, 2021 and Ceautamed that was completed on July 29, 2022. The acquisitions were accounted for as business combinations in accordance
with the guidance contained in the Financial Accounting Standards Board’s Accounting Standards Codification Topic 805, Business
Combinations, or ASC 805. The unaudited pro forma condensed combined financial information gives effect to the acquisitions based
on the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial information.
The unaudited condensed combined statements of
operations for the nine months ended September 30, 2022 are presented as if the acquisitions had occurred on January 1, 2022. The unaudited
condensed combined statements of operations for the year ended December 31, 2021 are presented as if the acquisitions had occurred on
January 1, 2021.
The unaudited pro forma condensed combined financial
information was prepared in accordance with Article 11 of Regulation S-X of the SEC. The unaudited pro forma adjustments reflecting the
transaction have been prepared in accordance with the guidance for business combinations presented in ASC 805 and reflect the allocation
of our purchase price to the assets acquired and liabilities assumed in the acquisitions based on their estimated fair values. The historical
financial information has been adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma
events that are: (i) directly attributable to the acquisitions; (ii) factually supportable; and (iii) with respect to the condensed combined
statements of operations, expected to have a continuing impact on our combined results of operations.
The unaudited pro forma condensed combined financial
information is presented for informational purposes only and is not necessarily indicative of the operating results or financial position
that would have occurred if the acquisitions had been affected on the dates previously set forth, nor is it indicative of the future operating
results or financial position in combination. Our purchase price allocation was made using our best estimates of fair value, which are
dependent upon certain valuation and other analyses. Further, the unaudited pro forma condensed combined financial information does not
give effect to the potential impact of anticipated synergies, operating efficiencies, cost savings or transaction and integration costs
that may result from the acquisitions.
The unaudited pro forma condensed combined financial
information has been derived from and should be read in conjunction with the following:
| (a) | The unaudited interim condensed consolidated financial statements
and related notes of Smart for Life, Inc. for the nine months ended September 30, 2022 and 2021; |
| (b) | The audited consolidated financial statements and related
notes of Smart for Life, Inc. for the years ended December 31, 2021 and 2020; and |
| (d) | The audited consolidated financial statements and related
notes of Ceautamed Worldwide LLC for the year ended December 31, 2021. |
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT
OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022
| |
Historical Information | | |
| | |
| | |
| | |
| |
| |
Smart for
Life, Inc. | | |
Ceautamed
January 1 to
July 28,
2022 | | |
Combined | | |
Pro Forma
Adjustments | | |
Notes | | |
Pro Forma Combined | |
Revenues | |
| | |
| | |
| | |
| | |
| | |
| |
Products | |
$ | 11,537,041 | | |
$ | 1,689,380 | | |
$ | 13,226,421 | | |
$ | — | | |
| | | |
$ | 13,226,421 | |
Advertising | |
| 2,560,321 | | |
| — | | |
| 2,560,321 | | |
| — | | |
| | | |
| 2,560,321 | |
Total revenues | |
| 14,097,362 | | |
| 1,689,380 | | |
| 15,786,742 | | |
| — | | |
| | | |
| 15,786,742 | |
Cost of revenues | |
| | | |
| | | |
| | | |
| — | | |
| | | |
| | |
Products | |
| 6,281,486 | | |
| 939,357 | | |
| 7,220,843 | | |
| — | | |
| | | |
| 7,220,843 | |
Advertising | |
| 1,884,479 | | |
| — | | |
| 1,884,479 | | |
| — | | |
| | | |
| 1,884,479 | |
Total cost of revenues | |
| 8,165,965 | | |
| 939,357 | | |
| 9,105,322 | | |
| — | | |
| | | |
| 9,105,322 | |
Gross profit | |
| 5,931,397 | | |
| 750,023 | | |
| 6,681,420 | | |
| — | | |
| | | |
| 6,681,420 | |
Operating expenses | |
| | | |
| | | |
| | | |
| — | | |
| | | |
| | |
General and administrative | |
| 5,139,263 | | |
| 249,149 | | |
| 5,388,412 | | |
| — | | |
| | | |
| 5,388,412 | |
Salaries | |
| 5,120,518 | | |
| 232,511 | | |
| 5,444,029 | | |
| — | | |
| | | |
| 5,444,029 | |
Professional services | |
| 1,622,871 | | |
| — | | |
| 1,622,871 | | |
| — | | |
| | | |
| 1,622,871 | |
Depreciation and amortization expense | |
| 1,375,514 | | |
| 2,300 | | |
| 1,377,814 | | |
| 608,586 | | |
| a | | |
| 1,986,400 | |
Total operating expenses | |
| 13,258,166 | | |
| 574,960 | | |
| 13,833,126 | | |
| 608,586 | | |
| | | |
| 14,441,712 | |
Operating income (loss) | |
| (7,326,769 | ) | |
| 175,063 | | |
| (7,151,706 | ) | |
| (608,586 | ) | |
| | | |
| (7,760,292 | ) |
Other income (expense) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| (693,614 | ) | |
| — | | |
| (693,614 | ) | |
| — | | |
| | | |
| (693,614 | ) |
Gain on debt extinguishment | |
| 134,956 | | |
| — | | |
| 134,956 | | |
| — | | |
| | | |
| 134,956 | |
Change in fair value of derivative liability | |
| 146,513 | | |
| — | | |
| 146,513 | | |
| — | | |
| | | |
| 146,513 | |
Interest expense | |
| (14,168,479 | ) | |
| (27,570 | ) | |
| (14,196,049 | ) | |
| (338,333 | ) | |
| b | | |
| (14,534,382 | ) |
Total other income (expense) | |
| (14,580,624 | ) | |
| (27,570 | | |
| (14,608,194 | ) | |
| (338,333 | ) | |
| | | |
| (14,946,527 | ) |
Income (loss) before income taxes | |
| (21,907,393 | ) | |
| 147,493 | | |
| (21,759,900 | ) | |
| (946,919 | ) | |
| | | |
| (22,706,819 | ) |
Income tax expense | |
| — | | |
| — | | |
| — | | |
| — | | |
| | | |
| — | |
Net income (loss) | |
$ | (21,907,393 | ) | |
$ | 147,493 | | |
$ | (21,759,900 | ) | |
$ | (946,919 | ) | |
| | | |
$ | (22,706,819 | ) |
Preferred stock dividends | |
| (600,750 | ) | |
| — | | |
| (600,750 | ) | |
| — | | |
| | | |
| (600,750 | ) |
Net income (loss) attributable to common stockholders | |
| (22,508,143 | ) | |
| 147,493 | | |
| (22,508,143 | ) | |
| (946,919 | ) | |
| | | |
| (23,307,569 | ) |
Loss per share, basic and diluted | |
$ | (0.80 | ) | |
| | | |
| | | |
| | | |
| | | |
$ | (0.83 | ) |
Weighted average shares outstanding, basic and diluted | |
| 28,008,542 | | |
| | | |
| | | |
| | | |
| | | |
| 28,008,542 | |
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT
OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2021
| |
Historical Information | | |
| | |
| | |
| |
| |
| |
Smart for Life | | |
DSO January 1 to June 30, 2021 | | |
Nexus January 1 to November 7, 2021 | | |
GSP January 1 to December 5, 2021 | | |
Ceautamed | | |
Combined | | |
Pro Forma
Adjustments | | |
Notes | |
Pro Forma
Combined | |
Revenues | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| |
Products | |
$ | 8,330,571 | | |
$ | 4,772,565 | | |
$ | — | | |
$ | 4,022 | | |
$ | 4,165,943 | | |
$ | 17,273,101 | | |
$ | — | | |
| |
$ | 17,273,101 | |
Advertising | |
| 692,022 | | |
| — | | |
| 4,678,068 | | |
| — | | |
| — | | |
| 5,370,090 | | |
| — | | |
| |
| 5,370,090 | |
Total revenues | |
| 9,022,593 | | |
| 4,772,565 | | |
| 4,678,068 | | |
| 4,022 | | |
| 4,165,943 | | |
| 22,643,191 | | |
| | | |
| |
| 22,643,191 | |
Cost of revenues | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| — | | |
| |
| | |
Products | |
| 5,596,247 | | |
| 2,042,966 | | |
| — | | |
| 5,159 | | |
| 2,219,599 | | |
| 9,863,971 | | |
| — | | |
| |
| 9,863,971 | |
Advertising | |
| 528,386 | | |
| — | | |
| 3,548,757 | | |
| — | | |
| — | | |
| 4,077,143 | | |
| — | | |
| |
| 4,077,143 | |
Total cost of revenues | |
| 6,124,633 | | |
| 2,042,966 | | |
| 3,548,757 | | |
| 5,159 | | |
| 2,219,599 | | |
| 13,941,114 | | |
| — | | |
| |
| 13,941,114 | |
Gross profit | |
| 2,897,960 | | |
| 2,729,599 | | |
| 1,129,311 | | |
| (1,137 | ) | |
| 1,946,344 | | |
| 8,702,077 | | |
| — | | |
| |
| 8,702,077 | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| | |
General and administrative | |
| 7,420,856 | | |
| 2,214,741 | | |
| 1,054,365 | | |
| 286,477 | | |
| 1,022,556 | | |
| 11,998,995 | | |
| — | | |
| |
| 11,998,995 | |
Depreciation and amortization expense | |
| 717,925 | | |
| 82,786 | | |
| — | | |
| 4,323 | | |
| 8,336 | | |
| 813,370 | | |
| 2,409,858 | | |
a | |
| 3,223,228 | |
Total operating expenses | |
| 8,138,781 | | |
| 2,297,527 | | |
| 1,054,365 | | |
| 290,800 | | |
| 1,030,892 | | |
| 12,812,365 | | |
| 2,409,858 | | |
| |
| 15,222,223 | |
Operating (loss) income | |
| (5,240,821 | ) | |
| 432,072 | | |
| 74,946 | | |
| (291,937 | ) | |
| 915,452 | | |
| (4,110,288 | ) | |
| (2,409,858 | ) | |
| |
| (6,520,146 | ) |
Other income (expense) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| | |
Gain on debt extinguishment | |
| — | | |
| 842,477 | | |
| — | | |
| — | | |
| — | | |
| 842,477 | | |
| — | | |
| |
| 842,477 | |
Other income (expense) | |
| (12,782 | ) | |
| 7,903 | | |
| — | | |
| — | | |
| 180,351 | | |
| 175,472 | | |
| — | | |
| |
| 175,472 | |
Interest expense | |
| (2,511,920 | ) | |
| (25,810 | ) | |
| (3,053 | ) | |
| (8,925 | ) | |
| (157,498 | ) | |
| (2,707,206 | ) | |
| (1,368,333 | ) | |
b | |
| (4,075,539 | ) |
Total other income (expense) | |
| (2,524,702 | ) | |
| 824,570 | | |
| (3,053 | ) | |
| (8,925 | ) | |
| 22,853 | | |
| (1,689,257 | ) | |
| (1,368,333 | ) | |
| |
| (3,057,590 | ) |
Income (loss) before income taxes | |
| (7,765,523 | ) | |
| 1,256,642 | | |
| 71,893 | | |
| (300,862 | ) | |
| 938,305 | | |
| (5,799,545 | ) | |
| (3,778,191 | ) | |
| |
| (3,462,556 | ) |
Income tax expense | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| |
| — | |
Net income (loss) | |
$ | (7,765,523 | ) | |
$ | 1,256,642 | | |
$ | 71,893 | | |
$ | (300,862 | ) | |
$ | 938,305 | | |
$ | (5,799,545 | ) | |
$ | (3,778,191 | ) | |
| |
$ | (3,462,556 | ) |
Preferred stock dividends | |
| 355,417 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 355,417 | | |
| — | | |
| |
| 355,417 | |
Net income (loss) attributable to common shareholders | |
$ | (8,120,940 | ) | |
$ | 1,256,642 | | |
$ | 71,893 | | |
$ | (300,862 | ) | |
$ | 938,305 | | |
$ | (6,154,962 | ) | |
$ | (3,778,191 | ) | |
| |
$ | (3,817,973 | ) |
Loss per share | |
$ | (0.61 | ) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
$ | (0.28 | ) |
Weighted average shares outstanding | |
| 13,397,034 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| 13,397,034 | |
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
1. Basis of Pro Forma Presentation
On February 11, 2020, we entered into a securities
purchase agreement, which was amended on July 7, 2020 and June 4, 2021, to acquire DSO. On July 1, 2021, the acquisition was completed.
On July 21, 2021, we entered into a securities
purchase agreement, which was amended on November 8, 2021, to acquire Nexus. On November 8, 2021, the acquisition was completed.
On November 29, 2021, we entered into a contribution
and exchange agreement to acquire all of the issued and outstanding capital stock of GSP. On December 6, 2021, the acquisition was completed.
On
March 14, 2022, we entered into a securities purchase agreement, which
was amended on July 29, 2022, to acquire Ceautamed. On July 29, 2022, the acquisition was completed.
The unaudited pro forma condensed combined statements
of operations for the nine months ended September 30, 2022 combines our historical condensed consolidated statements of operations with
the condensed consolidated statements of operations of Ceautamed as if the acquisition had occurred on January 1, 2022. The unaudited
pro forma condensed combined statements of operations for the year ended December 31, 2021 combines our historical condensed consolidated
statements of operations with the condensed consolidated statements of operations of DSO, Nexus, GSP and Ceautamed as if the acquisitions
had occurred on January 1, 2021. The historical financial information is adjusted in the unaudited pro forma condensed combined financial
information to give effect to pro forma events that are: (i) directly attributable to the acquisitions; (ii) factually supportable; and
(iii) with respect to the condensed combined statements of operations, expected to have a continuing impact on our combined results.
2. Consideration Transferred
DSO
Pursuant to the terms of the securities purchase
agreement, we paid $6,000,000 in cash and issued two promissory notes to the member of DSO. The first promissory note is a convertible
promissory note in the principal amount of $3,000,000 that bears interest at an annual rate of 6% and the second promissory note is also
in the principal amount of $3,000,000, is not convertible, and bears interest at an annual rate of 6%.
The table below summarizes the value of the total
consideration given in the transaction.
| |
Amount | |
Cash issued | |
$ | 6,000,000 | |
Debt issued | |
| 6,000,000 | |
Total consideration | |
$ | 12,000,000 | |
Nexus
Pursuant to the terms of the securities purchase
agreement, we paid $2,200,000 in cash and issued two promissory notes to the stockholders of Nexus. The first promissory note is a convertible
promissory note in the principal amount of $1,900,000 that bears interest at an annual rate of 5% and the second promissory note is also
in the principal amount of $1,900,000, is not convertible, and bears interest at an annual rate of 5%.
The table below summarizes the value of the total
consideration given in the transaction.
| |
Amount | |
Cash issued | |
$ | 2,200,000 | |
Debt issued | |
| 3,800,000 | |
Total consideration | |
$ | 6,000,000 | |
GSP
The total purchase price for the acquisition of
$425,000, payable in shares of common stock. An aggregate of 42,500 shares of common stock were issued at closing on December 6, 2021.
The contribution and exchange agreement provided that if the effective price per share of common stock in our initial public offering
(as determined in accordance with the contribution and exchange agreement) was less than $10 per share, then we were required to issue
an additional number of shares of common stock equal to an amount determined by dividing the $425,000 purchase price by the effective
offering price per share, minus 42,500. Since the effective initial public offering price was $5.00 per share, we issued an additional
42,500 shares of common stock to the stockholders of GSP upon closing of our initial public offering on February 18, 2022.
In connection with this acquisition, we also issued
29,446 shares of common stock to certain vendors of GSP who agreed to settle accounts payable owed to them into common stock, half of
which were issued at closing on December 6, 2021 and the remaining of which were issued upon closing of our initial public offering on
February 18, 2022, as the number of shares was subject to the same adjustment described above.
The table below summarizes the value of the total
consideration given in the transaction.
| |
Amount | |
Equity issued | |
$ | 425,000 | |
Total consideration | |
$ | 425,000 | |
Ceautamed
Pursuant to the terms of the securities purchase
agreement, we paid $3,000,000 in cash and issued three sets of promissory notes to the members of
Ceautamed. The first promissory notes are convertible promissory notes in the aggregate principal amount of $2,150,000 that bear
interest at 5% per annum. The second promissory notes are also in the in the aggregate principal amount of $2,150,000, are not convertible
and bear interest at 5% per annum. The third promissory notes are in the in the aggregate principal amount of $1,300,000, are not convertible
and bear interest at 5% per annum.
The table below summarizes the value of the total
consideration given in the transaction.
| |
Amount | |
Cash issued | |
$ | 3,000,000 | |
Debt issued | |
| 5,600,000 | |
Total consideration | |
$ | 8,600,000 | |
3. Purchase Price Allocation
Under the acquisition method of accounting outlined
in ASC 805, the identifiable assets acquired and liabilities assumed in the acquisitions are recorded at their acquisition-date fair values
and are included in our consolidated financial position.
DSO
The following table summarizes the purchase price
allocation for the assets acquired and liabilities assumed in connection with the acquisition of DSO.
| |
Amount | |
Tangible assets acquired | |
$ | 3,700,000 | |
Liabilities assumed | |
| (1,102,057 | ) |
Intangible assets | |
| 8,060,000 | |
Goodwill | |
| 1,342,000 | |
Net assets acquired | |
$ | 12,000,000 | |
The intangible assets acquired from DSO are comprised
of the following:
| |
Amount | |
Customer relationships | |
$ | 4,220,000 | |
Tradename | |
| 2,010,000 | |
Developed technology | |
| 1,570,000 | |
Patent | |
| 230,000 | |
Non-compete agreement | |
| 30,000 | |
Goodwill | |
| 1,342,000 | |
Total intangible assets | |
$ | 9,402,000 | |
Nexus
The following table summarizes the purchase price
allocation for the assets acquired and liabilities assumed in connection with the acquisition of Nexus.
| |
Amount | |
Tangible assets acquired | |
$ | 44,330 | |
Liabilities assumed | |
| (21,567 | ) |
Intangible assets | |
| 5,977,237 | |
Net assets acquired | |
$ | 6,000,000 | |
The intangible assets acquired from Nexus are
comprised of the following:
| |
Amount | |
Non-compete agreements | |
$ | 780,000 | |
Customer relationships | |
| 5,197,237 | |
Total intangible assets | |
$ | 5,977,237 | |
GSP
The following table summarizes the purchase price
allocation for the assets acquired and liabilities assumed in connection with the acquisition of GSP.
| |
Amount | |
Tangible assets acquired | |
$ | 114,284 | |
Liabilities assumed | |
| (273,504 | ) |
Intangible assets | |
| 584,220 | |
Net assets acquired | |
$ | 425,000 | |
The intangible assets acquired from GSP are comprised
of the following:
| |
Amount | |
License agreements | |
$ | 584,220 | |
Total intangible assets | |
$ | 584,220 | |
Ceautamed
The following table summarizes the preliminary
purchase price allocation for the assets acquired and liabilities assumed in connection with the acquisition of Ceautamed.
| |
Amount | |
Tangible assets acquired | |
$ | 635,223 | |
Liabilities assumed | |
| (635,233 | ) |
Intangible assets | |
| 8,600,000 | |
Net assets acquired | |
$ | 8,600,000 | |
The intangible assets acquired from Ceautamed
are comprised of the following:
| |
Amount | |
Non-compete agreements | |
$ | 785,530 | |
Customer contracts | |
| 7,429,271 | |
Intellectual property | |
| 385,199 | |
Total intangible assets | |
$ | 8,600,000 | |
4. Pro Forma Adjustments
The pro forma adjustments included in the unaudited
pro forma condensed combined financial information are as follows:
(a) Adjustments to reflect the estimated amortization of the intangible assets acquired.
The estimated useful lives of the acquired
intangible assets and the estimated amortization for DSO are as follows. As the acquisition of DSO occurred on July 1, 2021, the pro forma
adjustment represents the period from January 1, 2021 through June 30, 2021:
Asset | |
Useful life (months) | | |
Amortization | |
Customer relationships | |
| 120 | | |
$ | 211,000 | |
Trade name | |
| 180 | | |
| 67,000 | |
Developed technology | |
| 180 | | |
| 52,333 | |
Patents | |
| 60 | | |
| 23,000 | |
Non-compete agreements | |
| 36 | | |
| 5,000 | |
Total | |
| | | |
$ | 358,333 | |
The estimated useful lives of the acquired
intangible assets and the estimated amortization for Nexus are as follows. As the acquisition of Nexus occurred on November 8, 2021, the
pro forma adjustment represents the period from January 1, 2021 through November 7, 2021:
Asset | |
Useful life (months) | | |
Amortization | |
Non-compete agreements | |
| 36 | | |
$ | 216,667 | |
Customer relationships | |
| 120 | | |
| 433,103 | |
Total | |
| | | |
$ | 649,770 | |
Based on Nexus historical data, we estimate
the useful life of the Nexus customer relationships to be three years by analyzing the length of time of the existing relationships representing
more than 75% of the revenue recognized during the period.
The estimated useful lives of the acquired
intangible assets and the estimated amortization for GSP are as follows. As the acquisition of GSP occurred on December 6, 2021, the pro
forma adjustment represents the period from January 1, 2021 through December 5, 2021:
Asset | |
Useful life (months) | | |
Amortization | |
License agreements | |
| 60 | | |
$ | 107,107 | |
Total | |
| | | |
$ | 107,107 | |
The estimated useful lives of the acquired
intangible assets and the estimated amortization for Ceautamed are as follows.
Asset | |
Useful life
(months) | | |
Amortization
for Period
from
January 1 to July 28,
2022 | | |
Amortization
for Year
Ended
December 31,
2021 | |
Non-compete agreements | |
| 36 | | |
$ | 152,742 | | |
$ | 315,843 | |
Customer contracts | |
| 120 | | |
| 433,374 | | |
| 1,684,651 | |
Intellectual property | |
| 120 | | |
| 22,470 | | |
| 409,364 | |
Total | |
| | | |
$ | 608,586 | | |
$ | 2,409,858 | |
(b) Adjustment to reflect the interest associated with the note payables associated with the acquisitions.
Pursuant to the terms of the DSO securities
purchase agreement, the purchase price consisted of a combination of a cash payment and notes payable to the seller. The interest rate
associated with the notes is 6%. We also obtained a loan in the principal amount of $3,000,000 from an institutional lender in order to
partially finance the DSO acquisition. The interest rate associated with this loan is 15% per annum. The computed interest expense which
would have been incurred had the acquisition occurred on January 1, 2021 is included and netted against the eliminated debt interest of
DSO.
Pursuant
to the terms of the Nexus securities purchase agreement, the purchase price consisted of a combination of a cash payment and notes payable
to the sellers. The interest rate associated with the notes is 5%. We also entered into a securities purchase agreement with certain
investors in order to partially finance the Nexus acquisition, pursuant to which we sold 12% unsecured subordinated convertible debentures
in the aggregate principal amount of $2,250,000 to such investors for gross proceeds of $2,250,000.
Pursuant to the terms of the Ceautamed
securities purchase agreement, the purchase price consisted of a combination of a cash payment and notes payable to the sellers. The interest
rates associated with the notes is 5%. We also obtained a loan in the principal amount of $2,000,000 from a lender in order to partially
finance the acquisition. The interest rate associated with this loan is 15% per annum. The computed interest expense which would have
been incurred had the acquisition occurred at the beginning of the respective fiscal periods is included and netted against the eliminated
debt interest of Ceautamed.
The following table summarized the interest
expense calculations presented in the respective periods.
Acquisition | |
Debt | | |
Interest
Rate | | |
Interest Expense for Period from January 1 to July 28, 2022 | | |
Interest Expense for Year Ended December 31, 2021 | |
DSO | |
$ | 6,000,000 | | |
| 6 | % | |
$ | — | | |
$ | 180,000 | |
DSO | |
| 3,000,000 | | |
| 15 | % | |
| — | | |
| 225,000 | |
Nexus | |
| 2,250,000 | | |
| 12 | % | |
| — | | |
| 225,000 | |
Nexus | |
| 3,800,000 | | |
| 5 | % | |
| — | | |
| 158,333 | |
Ceautamed | |
| 5,600,000 | | |
| 5 | % | |
| 163,333 | | |
| 280,000 | |
Ceautamed | |
| 2,000,000 | | |
| 15 | % | |
| 175,000 | | |
| 300,000 | |
Total | |
| | | |
| | | |
$ | 338,333 | | |
$ | 1,368,333 | |
RISK FACTORS
An investment in our securities involves a
high degree of risk. You should carefully consider the following risk factors, together with the other information contained in this prospectus,
before purchasing our securities. We have listed below (not necessarily in order of importance or probability of occurrence) what we believe
to be the most significant risk factors applicable to us, but they do not constitute all of the risks that may be applicable to us. Any
of the following factors could harm our business, financial condition, results of operations or prospects, and could result in a partial
or complete loss of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute
forward-looking statements. Please refer to the section titled “Cautionary Statement Regarding Forward-Looking Statements”.
Risks
Related to Our Business and Industry
We are an early-stage company with a limited
operating history.
We were organized as a Delaware corporation in
February 2017. We have a limited history upon which you can evaluate our business and prospects. Our prospects must be considered in light
of the risks encountered by companies in the early stages of development in highly competitive markets, particularly the markets for nutraceuticals
and related products. You should consider the frequency with which early-stage businesses encounter unforeseen expenses, difficulties,
complications, delays and other adverse factors. These risks are described in more detail below.
We have incurred losses since our inception,
and we may not be able to manage our businesses on a profitable basis.
We have
generated losses since inception and have relied on cash on hand, sales of securities, external bank lines of credit, and issuance of
third-party and related party debt to support our operations. For the year ended December
31, 2021, we generated an operating loss of $5,240,821 and
a net loss of $7,765,523, and for the nine months ended September 30,
2022, we generated an operating loss of $7,326,769 and a net loss of $21,907,393. We cannot assure you that we will achieve profitably
or that we will have adequate working capital to meet our obligations as they become due. Management believes that our success will depend
on our ability to successfully complete additional acquisitions of profitable nutraceutical companies and related products as well as
develop our own brands. We cannot guarantee that we will be successful in completing acquisitions or any other companies or products,
that we will successfully integrate acquired companies, or that we will be able to successfully develop our own brands. We cannot assure
you that even if we are successful in completing the acquisitions or in developing our own branded products, we will be successful in
profitably managing such companies, acquired assets and brands. We cannot assure you that we will maintain profitability for any period
of time or that investors will not lose their entire investment.
The effect of the COVID-19 pandemic on our
operations, and the operations of our customers and suppliers, has had, and is expected to continue to have, a negative effect on our
business, financial condition, cash flows and results of operations.
The COVID-19 pandemic continues to rapidly evolve.
At this time, there continues to be significant volatility and uncertainty relating to the full extent to which the COVID-19 pandemic
and the various responses to it will impact our business, operations and financial results.
We are dependent upon certain contract manufacturers
and suppliers and their ability to reliably and efficiently fulfill our orders is critical to our business success. The COVID-19 pandemic
has impacted and may continue to impact certain of our manufacturers and suppliers. As a result, we have faced and may continue to face
delays or difficulty sourcing certain products and raw materials, which could negatively affect our business and financial results. Even
if we are able to find alternate sources for such raw materials, they may cost more, which could adversely impact our profitability and
financial condition.
Furthermore, the global deterioration in economic
conditions, which may have an adverse impact on discretionary consumer spending or investing, could also impact our business and demand
for our products. For instance, consumer spending and investing may be negatively impacted by general macroeconomic conditions, including
a rise in unemployment, and decreased consumer confidence resulting from the pandemic. Changing consumer and investor behaviors as a result
of the pandemic may also have a material impact on our revenue.
Our efforts to help mitigate the negative impact
of the outbreak on our business may not be effective, and we may be affected by a protracted economic downturn. Furthermore, while many
governmental authorities around the world have and continue to enact legislation to address the impact of COVID-19, including measures
intended to mitigate some of the more severe anticipated economic effects of the virus, we may not benefit from such legislation, or such
legislation may prove to be ineffective in addressing COVID-19’s impact on our and our customer’s businesses and operations.
Even after the COVID-19 outbreak has subsided, we may continue to experience impacts to our business as a result of COVID-19’s global
economic impact and any recession that has occurred or may occur in the future. Further, as the COVID-19 situation is unprecedented and
continuously evolving, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or in
a manner that we currently do not consider that may present significant risks to our operations.
The extent to which the COVID-19 pandemic may
impact our results will depend on future developments, which are highly uncertain and cannot be predicted as of the date of this prospectus.
Nevertheless, the pandemic and the current financial, economic and capital markets environment, and future developments in the global
supply chain and other areas present material uncertainty and risk with respect to our performance, financial condition, results of operations
and cash flows.
To the extent the COVID-19 pandemic adversely
affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk
Factors” section.
If we fail to implement our business plan
and complete acquisitions as planned, our mission will fail and our business will suffer accordingly.
Our mission is the creation of a world-class nutraceutical
company engaged in the development, manufacture and sales of quality nutraceutical and related health and lifestyle products for distribution
to an expanding global marketplace. We expect that our holding company strategy through which we plan to acquire profitable but undervalued
target companies and products will enable us to accelerate the development and expansion of our product portfolio, manufacturing capacity
and distribution channels. If we are unable execute our strategy of completing acquisitions as planned, we will not be able to fulfill
our mission or grow our business.
Our acquisitions may result in significant
transaction expenses, integration and consolidation risks, and we may be unable to profitably operate our consolidated company.
We are structured as a holding company and we
have executed a buy and hold strategy. We are engaged in the business of acquisition, operation and management of nutraceutical and related
products. Our acquisitions may result in significant transaction expenses and present new risks associated with entering additional markets
or offering new products and services and integrating the acquired companies. We may not have sufficient management, financial and other
resources to integrate companies we acquire or to successfully operate new businesses and we may be unable to profitably operate our expanded
company. Moreover, any new businesses that we may acquire, once integrated with our existing operations, may not produce expected or intended
results.
We may not be able to manage future growth
effectively.
We expect to continue to experience significant
growth. Should we keep growing rapidly, our financial, management and operating resources may not expand sufficiently to adequately manage
our growth. If we are unable to manage our growth, our costs may increase disproportionately, our future revenues may not grow or may
decline, and we may face dissatisfied customers. Our failure to manage our growth may adversely impact our business and the value of your
investment.
Our ability to obtain continued financing
is critical to the growth of our business. We will need additional financing to fund operations, which additional financing may not be
available on reasonable terms or at all.
Our future growth, including the potential for
future market expansion will require additional capital. We will consider raising additional funds through various financing sources,
including the procurement of commercial debt financing. However, there can be no assurance that such funds will be available on commercially
reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to execute our growth strategy,
and operating results may be adversely affected. Any additional debt financing will increase expenses and must be repaid regardless of
operating results and may involve restrictions limiting our operating flexibility.
Our ability to obtain financing may be impaired
by such factors as the capital markets, both generally and specifically in our industry, which could impact the availability or cost of
future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations,
are not sufficient to satisfy our capital needs, we may be required to decrease the pace of, or eliminate, our future product offerings
and market expansion opportunities and potentially curtail operations.
Unfavorable publicity or consumer perception
of our products and any similar products distributed by other companies could have a material adverse effect on our business.
We believe the nutritional supplement market is
highly dependent upon consumer perception regarding the safety, efficacy and quality of nutritional supplements generally, as well as
of products distributed specifically by us. Consumer perception of our products can be significantly influenced by scientific research
or findings, regulatory investigations, litigation, national media attention and other publicity regarding the consumption of nutritional
supplements. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention
or other research findings or publicity will be favorable to the nutritional supplement market or any particular product, or consistent
with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that
are perceived as less favorable than, or that question, earlier research reports, findings or publicity could have a material adverse
effect on the demand for our products and our business, results of operations, financial condition and cash flows. Our dependence upon
consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or
other publicity, whether or not accurate or with merit, could have a material adverse effect on us, the demand for our products, and our
business, results of operations, financial condition and cash flows. Further, adverse publicity reports or other media attention regarding
the safety, efficacy and quality of nutritional supplements in general, or our products specifically, or associating the consumption of
nutritional supplements with illness, could have such a material adverse effect. Such adverse publicity reports or other media attention
could arise even if the adverse effects associated with such products resulted from consumers' failure to consume such products appropriately
or as directed.
Our success is linked to the size and growth
rate of the vitamin, mineral and supplement market and an adverse change in the size or growth rate of that market could have a material
adverse effect on us.
An adverse change in size or growth rate of the
vitamin, mineral and supplement market could have a material adverse effect on us. Underlying market conditions are subject to change
based on economic conditions, consumer preferences, the impact of COVID-19 and other factors that are beyond our control, including media
attention and scientific research, which may be positive or negative.
General economic conditions, including a
prolonged macroeconomic downturn, may negatively affect consumer purchases, which could adversely affect our sales, as well as our ability
to access credit on terms previously obtained.
Our results are dependent on a number of factors
impacting consumer spending, including general economic and business conditions; consumer confidence; wages and employment levels; the
housing market; consumer debt levels; availability of consumer credit; credit and interest rates; fuel and energy costs; energy shortages;
taxes; and general political conditions, both domestic and abroad. Consumer product purchases, including purchases of our products, may
decline during recessionary periods. A prolonged downturn or an uncertain outlook in the economy may materially adversely affect our business,
revenues and profits and the market price of our common stock, and we cannot be certain that funding for our capital needs will be available
from our existing financial institutions and the credit markets if needed, and if available, to the extent required and on acceptable
terms. If we cannot obtain funding when needed, in each case on acceptable terms, we may be unable to adequately fund our operating expenses
and fund required capital expenditures, which may have an adverse effect on our revenues and results of operations.
We operate in highly competitive and fast-evolving
industries, and our failure to compete effectively could affect our market share, financial condition and growth prospects adversely.
The markets
in which we operate are characterized by rapid technological changes, frequent new product introductions, established and emerging competition,
extensive intellectual property disputes and litigation, price competition, aggressive marketing practices, evolving industry standards
and changing customer preferences. Accordingly, our prospects must be considered in light of the uncertainties, risks, expenses, and difficulties
frequently encountered by companies operating in rapidly changing and competitive markets.
The nutritional supplement industry is a large
and growing industry and is highly fragmented in terms of both geographical market coverage and product categories. The market for nutritional
supplements is highly competitive in all our channels of distribution. We compete with companies that may have broader product lines or
larger sales volumes, or both, than we do, and our products compete with nationally advertised brand name products. These national brand
companies have resources greater than ours. Numerous companies compete with us in the development, manufacture and marketing of nutritional
supplements worldwide. The market is highly sensitive to the introduction of new products, which may rapidly capture a significant share
of the market. We also may face competition from low-cost entrants to the industry, including from international markets. Increased competition
from companies that distribute through the wholesale channel, especially the private label market, could have a material adverse effect
on our business, results of operations, financial condition and cash flows as these competitors may have greater financial and other resources
available to them and possess extensive manufacturing, distribution and marketing capabilities far greater than ours. We are also subject
to competition in the attraction and retention of employees. Many of our competitors have greater financial resources and can
offer employees compensation packages with which it is difficult for us to compete.
As a result of our acquisition of Nexus, we have
also entered the digital marketing industry as a way to promote the products and brands that we sell. We compete with other advertising service providers
that may reach our target audience by means that are more effective than our services. Further, if such other providers of advertising
have a long operating history, large product and service suites, more capital resources and broad international or local recognition,
our operating results may be adversely affected if we cannot successfully compete.
The digital advertising market is rapidly developing.
Accordingly, the development of the markets in which we operate makes it difficult to evaluate the viability and sustainability of our
business and its acceptance by advertisers and clients. We cannot assure you that we will be profitable every year. We expect that our
operating expenses will increase as we expand. Any significant failure to realize anticipated revenue growth could result in operating
losses.
We may not be able to compete effectively in some
or all our markets, and our attempt to do so may require us to reduce our prices, which may result in lower margins. Failure to compete
effectively could have a material adverse effect on our market share, business, results of operations, financial condition, cash flows
and growth prospects.
Our major customers account for a significant
portion of our consolidated net sales and the loss of any major customer could have a material adverse effect on our results of operations.
During fiscal 2021, Amazon, Twinlab, and Costco
accounted for 29%, 22% and 15%, respectively, of our total revenues. We do not have a long-term contract with any major customer, and
the loss of any major customer could have a material adverse effect on our results of operations. In addition, our results of operations
and ability to service our debt obligations would be impacted negatively to the extent that any major customer is unable to make payments
to us or does not make timely payments on outstanding accounts receivables.
Failure to develop new products and production
technologies or to implement productivity and cost reduction initiatives successfully may harm our competitive position.
Our business depends significantly on the development
of commercially viable new products as well as process technologies. If we are unsuccessful in developing new products and production
processes in the future, our competitive position and results of operations may be negatively affected. However, as we invest in new technology,
we face the risk of unanticipated operational or commercialization difficulties, including an inability to obtain necessary permits or
governmental approvals, the development of competing technologies, failure of facilities or processes to operate in accordance with specifications
or expectations, construction delays, cost over-runs, the unavailability of financing, required materials or equipment and various other
factors. Likewise, our initiatives to improve productivity and performance and to generate cost savings may not be completed or beneficial
or the estimated cost savings from such activities may not be realized.
Resources devoted to product innovation
may not yield new products that achieve commercial success.
The development of new and innovative products
requires significant investment in research and development and testing of new ingredients, formulas and possibly new production processes.
The research and development process can be expensive and prolonged and entails considerable uncertainty. Products may appear promising
in development but fail to reach market within the expected time frame, or at all. We may face significant challenges with regard to a
key product launch. Further, products also may fail to achieve commercial viability due to pricing competitiveness with other retailers,
failure to timely bring the product to market, failure to differentiate the product with our competitors and other reasons. Finally, there
is no guarantee that our development teams will be able to successfully respond to competitive products that could render some of our
offerings obsolete. Development of a new product, from discovery through testing to the store shelf, typically takes between four to seven
months, but may require an even longer timeline if clinical trials are involved. Each of these time periods can vary considerably from
product to product and therefore the costs and risks of producing a commercially viable product can increase significantly as time passes.
Our failure to appropriately respond to
changing consumer preferences and demand for new products and services could harm our customer relationships and product sales significantly.
The nutritional supplement industry is characterized
by rapid and frequent changes in demand for products and new product introductions. Our failure to accurately predict these trends could
negatively impact consumer opinion of us as a source for the latest products, which, in turn, could harm our customer relationships and
cause decreases in our net sales. The success of our new product offerings depends upon a number of factors, including our ability to:
| ● | accurately anticipate customer needs; |
| ● | innovate and develop new products; |
| ● | successfully commercialize new products in a timely manner; |
| ● | price our products competitively; |
| ● | manufacture and deliver our products in sufficient volumes and in a timely manner; and |
| ● | differentiate our product offerings from those of our competitors. |
If any new products fail to gain market acceptance,
are restricted by regulatory requirements or have quality problems, this would harm our results of operations. If we do not introduce
new products or make enhancements to meet the changing needs of our customers in a timely manner, some of our products could be rendered
obsolete, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
If we experience product recalls, we may
incur significant and unexpected costs, and our business reputation could be adversely affected.
We may be exposed to product recalls and adverse
public relations if our products are mislabeled or alleged to cause injury or illness, or if we are alleged to have violated governmental
regulations. A product recall could result in substantial and unexpected expenditures, which would reduce operating profit and cash flow.
In addition, a product recall may require significant management attention. Product recalls may hurt the value of our brands and lead
to decreased demand for our products. Product recalls also may lead to increased scrutiny by federal, state or international regulatory
agencies of our operations and increased litigation and could have a material adverse effect on our business, results of operations, financial
condition and cash flows.
We may incur material product liability
claims, which could increase our costs and adversely affect our reputation, revenues and operating income.
As a manufacturer and distributor of products
designed for human consumption, we are subject to product liability claims if the use of our products is alleged to have resulted in injury.
Our products consist of vitamins, minerals, dietary supplements and other ingredients that are classified as foods and dietary supplements,
and, in most cases, are not necessarily subject to pre-market regulatory approval in the United States. Some of our products contain innovative
ingredients that do not have long histories of human consumption. Previously unknown adverse reactions resulting from human consumption
of these ingredients could occur. In addition, some of the products we sell are produced by third-party manufacturers. As a marketer of
products manufactured by third parties, we also may be liable for various product liability claims for products we do not manufacture.
We have been in the past, and may be in the future, subject to various product liability claims, including, among others, that our products
include inadequate instructions for use or inadequate warnings concerning possible side effects and interactions with other substances.
A product liability claim against us could result in increased costs and could adversely affect our reputation with our customers, which,
in turn, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Insurance coverage, even where available,
may not be sufficient to cover losses we may incur.
Our business exposes us to the risk of liabilities
arising from our operations. For example, we may be liable for claims brought by users of our products or by employees, customers or other
third parties for personal injury or property damage occurring in the course of our operations. We seek to minimize these risks through
various insurance contracts from third-party insurance carriers. However, our insurance coverage is subject to large individual claim
deductibles, individual claim and aggregate policy limits, and other terms and conditions. We retain an insurance risk for the deductible
portion of each claim and for any gaps in insurance coverage. We do not view insurance, by itself, as a material mitigant to these business
risks.
We cannot assure that our insurance will be sufficient
to cover our losses. Any losses that insurance does not substantially cover could have a material adverse effect on our business, results
of operations, financial condition and cash flows.
We rely on our manufacturing operations
to produce the vast majority of the nutritional supplements that we sell, and disruptions in our manufacturing system or losses of manufacturing
certifications could affect our results of operations adversely.
We currently operate manufacturing facilities
in Doral and Riviera Beach, Florida. All our domestic and foreign operations manufacturing
products for sale to the United States are subject to good manufacturing practices, or GMPs, promulgated by the FDA and other applicable
regulatory standards, including in the areas of environmental protection and worker health and safety. Any significant disruption in our
operations at any of these facilities, including any disruption due to any regulatory requirement, could affect our ability to respond
quickly to changes in consumer demand and could have a material adverse effect on our business, results of operations, financial condition
and cash flows. Additionally, we may be exposed to risks relating to the transfer of work between facilities or risks associated with
opening new facilities or closing existing facilities that may cause a disruption in our operations. Although we have implemented GMPs
in our facilities, there can be no assurance that products manufactured in our plants will not be contaminated or otherwise fail to meet
our quality standards. Any such contamination or other quality failures could result in costly recalls, litigation, regulatory actions
or damage to our reputation, which could have a material adverse effect on our business, results of operations, financial condition and
cash flows.
We are also dependent on certain third-party
contract manufacturers and suppliers.
Some of our own brand of vitamins and supplements,
as well as the products we sell under the Sports Illustrated Nutrition brand, are produced by third party contract manufacturers.
We also purchase certain important ingredients and raw materials from third-party suppliers. The principal raw materials required in our
operations are vitamins, minerals, herbs, gelatin and packaging components. Real or perceived quality control problems with products manufactured
by contract manufacturers or raw materials outsourced from certain suppliers could negatively impact consumer confidence in our products,
or expose us to liability. In addition, disruption in the operations of any such manufacturer or supplier or material increases in the
price of raw materials, for any reason, such as changes in economic and political conditions, tariffs, trade disputes, regulatory requirements,
import restrictions, loss of certifications, power interruptions, fires, hurricanes, drought or other climate-related events, war or other
events, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Natural disasters (whether or not caused
by climate change), unusually adverse weather conditions, pandemic outbreaks, terrorist acts and global political events could cause permanent
or temporary facility closures, impair our ability to purchase, receive or replenish raw materials or cause customer traffic to decline,
all of which could result in lost sales and otherwise adversely affect our financial performance.
The occurrence of one or more natural disasters,
such as hurricanes, fires, floods and earthquakes (whether or not caused by climate change), unusually adverse weather conditions, pandemic
outbreaks (including the recent outbreak of COVID-19), terrorist acts or disruptive global political events, such as civil unrest in locations
where our facilities, contract manufacturers or suppliers are located, or similar disruptions could adversely affect our operations and
financial performance. To the extent these events result in the closure of one or more of our manufacturing facilities or our corporate
headquarters, or impact one or more of our contract manufacturers or key suppliers, our operations and financial performance could be
materially adversely affected through lost sales. In addition, these events could result in increases in fuel (or other energy) prices
or a fuel shortage, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products
from some local and overseas suppliers, the temporary disruption in the transport of goods from overseas, delay in the delivery of goods
to our customers, the temporary reduction in the availability of our products, expiration of inventory, future long-lived asset impairment
charges and disruption to our information systems. These events also could have indirect consequences, such as increases in the cost of
insurance, if they were to result in significant loss of property or other insurable damage.
An increase in the price and shortage of
supply of key raw materials could adversely affect our business.
Our products are composed of certain key raw materials.
If the prices of these raw materials were to increase significantly, the costs to manufacture our products or to purchase products from
our contract manufacturers could increase significantly and we may not be able to pass on such increases to our customers. Additionally,
in the event any of our, or our contract manufacturer’s, third-party suppliers or vendors become unable or unwilling to continue
to provide raw materials in the required volumes and quality levels or in a timely manner, we, or our contract manufacturers, would be
required to identify and obtain acceptable replacement supply sources. If we, or they, are unable to identify and obtain alternative supply
sources in a timely manner or at all, our business could be adversely affected. A significant increase in the price of raw materials that
cannot be passed on to customers could have a material adverse effect on our results of operations and financial condition. Events such
as COVID-19, the threat of political or social unrest, or the perceived threat thereof, may also have a significant impact on raw material
prices and transportation costs for our products. In addition, the interruption in supply of certain key raw materials essential to the
manufacturing of our products may have an adverse impact on us and our suppliers’ ability to provide us with the necessary products
needed to maintain our customer relationships and an adequate level of sales.
General trade tensions between the U.S. and China
have been escalating since 2018, with multiple rounds of U.S. tariffs on Chinese goods taking effect, with some subsequently being de-escalated.
Furthermore, China or other countries may institute retaliatory trade measures in response to existing or future tariffs imposed by the
U.S. that could have a negative impact on our business. If any of these events continue as described, we may need to seek alternative
suppliers or vendors, raise prices, or make changes to our operations, any of which could have a material adverse effect on our sales
and profitability, results of operations and financial condition.
Our expansion into new business lines and
services may result in unseen risks, challenges and uncertainties.
As a result of our acquisition of Nexus in November
2021, we have entered the digital marketing business as a way to promote the products and brands that we sell. Such acquisition may result
in unseen risks, challenges and uncertainties. We may incur additional capital expenditure to support the expansion of our business and
there is no guarantee that we may increase our revenues generated from such new business. Also, our failure to manage costs and expenses
and evaluate consumer demands with respect to such new business could materially and adversely affect the prospects of us achieving overall
profitability of and recouping our investments in this new business line. Moreover, this new business line may require significant managerial,
financial, operational and other resources, as well as the smooth cooperation with our company. We may also face higher regulatory, legal
and counterparty risks from entering this business. If we fail to manage the development of this new business line successfully, our growth
potential, business and results of operations may be materially and adversely affected.
Declines in foot traffic, rising real estate
prices and other costs and risks relating to operating a brick and mortar retail store could affect our results.
On August 24, 2021, we established Smart for Life
Canada Inc. as a wholly owned subsidiary of Doctors Scientific Organica, LLC 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.
The success of our retail store is affected by
(1) the location of the store; (2) surrounding tenants or vacancies; (3) increased competition in the area where the store is located;
(4) the amount spent on advertising and promotion to attract consumers to the store; and (5) a shift towards online shopping resulting
in a decrease in retail store traffic. Declines in consumer traffic could have a negative impact on our net sales and could materially
adversely affect our financial condition and results of operations. Furthermore, declines in traffic could result in store impairment
charges if expected future cash flows of the related asset group do not exceed the carrying value.
We rent this store under a three-year lease agreement
ending in September 2024. If we fail to negotiate appropriate terms for new leases or lease renewals, we may incur lease costs that are
excessive and cause operating margins to be below acceptable levels. We may also make term commitments that are too long or too short,
without the option to exit early or extend. Factors such as the condition of local property markets, availability of lease financing,
taxes, zoning and environmental issues, and competitive actions may impact the availability of, and our ability to successfully negotiate,
leases. Furthermore, the success of the store depends on a number of factors, including the success of the shopping center where our store
is located, consumer demographics and consumer shopping patterns. These factors cannot be predicted with complete accuracy. If we fail
to profitably operate this new store, our financial performance could be adversely affected.
Our success is dependent on the accuracy,
reliability, and proper use of sophisticated and dependable information processing systems and management information technology and any
interruption in these systems could have a material adverse effect on our business, financial condition, and results of operations.
Our success is dependent on the accuracy, reliability,
and proper use of sophisticated and dependable information processing systems and management information technology. Our information technology
systems are designed and selected to facilitate order entry and customer billing, maintain customer records, accurately track purchases,
manage accounting, finance and manufacturing operations, generate reports, and provide customer service and technical support. Any interruption
in these systems or any interruption associated with the transition of these systems to a new information technology platform could have
a material adverse effect on our business, financial condition, and results of operations.
System interruptions or security breaches
may affect sales.
Customer access to, and ability to use, our websites
affect our sales. If we are unable to maintain and continually enhance the efficiency of our systems, we could experience system interruptions
or delays that could affect our operating results negatively. In addition, we could be liable for breaches of security on our websites,
loss or misuse of our customers’ personal information or payment data. Although we have developed systems and processes that are
designed to protect consumer information and prevent fraudulent credit card transactions and other security breaches, failure to prevent
or mitigate such fraud or breaches may negatively affect our operating results.
We must successfully maintain and/or upgrade
our information technology systems, and our failure to do so could have a material adverse effect on our business, financial condition
or results of operations.
We rely on various information technology systems
to manage our operations. Recently, we have implemented, and we continue to implement, modifications and upgrades to such systems and
acquired new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing
and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control
structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel
to implement and operate the new systems, demands on management time and other risks and costs of delays or difficulties in transitioning
to or integrating new systems into our current systems. These implementations, modifications and upgrades may not result in productivity
improvements at a level that outweighs the costs of implementation, or at all. In addition, the difficulties with implementing new technology
systems may cause disruptions in our business operations and have a material adverse effect on our business, financial condition or results
of operations.
Privacy protection is increasingly demanding,
and we may be exposed to risks and costs associated with security breaches, data loss, credit card fraud and identity theft that could
cause us to incur unexpected expenses and loss of revenue, suffer reputational harm with our customers, as well as other risks.
The protection of customer, employee, vendor and
other business data is critical to us. We receive confidential customer data, including payment card and personally identifiable information,
in the normal course of customer transactions. In order for our sales channels to function, we and other parties involved in processing
customer transactions must be able to transmit confidential information, including credit card information, securely over public networks.
While we have taken significant steps to protect customer and confidential information, the intentional or negligent actions of employees,
business associates or third parties may undermine our security measures and result in unauthorized parties obtaining access to our data
systems and misappropriating confidential data. There can be no assurance that advances in computer capabilities, new discoveries in the
field of cryptography or other developments will prevent a compromise of our customer transaction processing capabilities and personal
data. Because the techniques used to obtain unauthorized access to, disable, degrade, or sabotage systems change frequently and often
are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative
measures. Any compromise of our data security could result in a violation of applicable privacy and other laws or standards, significant
legal and financial exposure beyond the scope or limits of our insurance coverage, interruption of our operations, increased operating
costs associated with remediation, equipment acquisitions or disposal, added personnel, and a loss of confidence in our security measures,
which could harm our business or investor confidence. Any security breach involving the misappropriation, loss or other unauthorized disclosure
of sensitive or confidential information could attract a substantial amount of media attention, damage our reputation, expose us to risk
of litigation and material liability, disrupt our operations and harm our business.
Federal, state, provincial and international laws
and regulations govern the collection, retention, sharing and security of data that we receive from and about our employees, customers
and vendors. The regulatory environment surrounding information security and privacy has been increasingly demanding in recent years,
including the recent implementation of the California Consumer Privacy Act. In Canada, we are subject to Canada’s Personal
Information and Protection of Electronic Documents Act, which provides Canadian residents with privacy protections and sets out rules
for how companies may collect, use and disclose personal information in the course of commercial activities. The costs of compliance with,
and other burdens imposed by, these and other international data privacy and security laws may limit our business and services and could
have a materially adverse impact on our business.
We believe that we are in material compliance
with all laws, regulations and self-regulatory regimes that are applicable to us. However, the laws, regulations, and self-regulatory
regimes may be modified, and new laws may be enacted in the future that may apply to us and affect our business. Further, data protection
authorities may interpret existing laws in new ways. We may deploy new services from time to time, which may also require us to change
our compliance practices. Any such developments (or developments stemming from enactment or modification of other laws) or the failure
to anticipate accurately the application or interpretation of these laws could create liability for us, result in adverse publicity, increase
our future compliance costs, make our products and services less attractive to our customers, or cause us to change or limit our business
practices, and materially affect our business and operating results. Further, any failure or perceived failure by us or third-party service
providers to comply with international data privacy and security laws may lead to regulatory enforcement actions, fines, private lawsuits
or reputational damage.
We may not be able to protect our intellectual
property rights.
We regard our trademarks, service marks, copyrights,
patents, trade secrets, proprietary technologies, domain names and similar intellectual property as important to our success. We rely
on trademark, copyright and patent law, trade secret protection and confidentiality agreements with our future employees, consultants,
vendors, customers and others to protect our proprietary rights. Many of the trademarks that we use contain words or terms having a somewhat
common usage and, as a result, we may have difficulty registering them in certain jurisdictions. We have not yet obtained registrations
for our most important marks. If other companies have registered or have been using in commerce similar trademarks for products similar
to ours, we may have difficulty in registering, or enforcing an exclusive right to use, our marks.
There can be no assurance that our efforts to
protect our proprietary rights will be sufficient or effective, that any pending or future patent and trademark applications will lead
to issued patents and registered trademarks in all instances, that others will not develop or patent similar or superior technologies,
products, or that our patents, trademarks, and other intellectual property will not be challenged, invalidated, misappropriated or infringed
by others. Additionally, the intellectual property laws and enforcement practices of other countries in which our product is or may in
the future be offered may not protect our products and intellectual property rights to the same extent as the laws of the United States.
If we are unable to protect our intellectual property from unauthorized use, our brand image may be harmed, and our business and results
of operations may suffer.
Assertions by third parties of infringement,
misappropriation or other violation by us of their intellectual property rights could result in significant costs and substantially harm
our business and operating results.
In recent years, there has been significant litigation
involving intellectual property rights in many technology-based industries. Any infringement, misappropriation or related claims, whether
or not meritorious, is time-consuming, diverts technical and management personnel and is costly to resolve. As a result of any such dispute,
we may have to develop non-infringing technology, pay damages, enter into royalty or licensing agreements, cease providing our product
or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on terms acceptable to us. Any of
these events could result in increases in operating expenses, limit our product offerings or result in a loss of business.
We may be required to indemnify our vendors
and/or customers, the payment of which could have a material adverse effect on our business, financial condition, and operating results.
We provide certain rights of indemnification to
our vendors and/or customers in certain circumstances. If any plaintiff is successful in certifying a class and thereafter prevailing
on the merits of their complaint, such an adverse result could have a material adverse effect on us. In addition, due to the nature and
scope of the indemnity and defense we will likely need to provide, the legal fees associated with such indemnification could be significant
enough to have a material adverse effect on our cash flows until such matters are fully and finally resolved.
Compliance with new and existing laws and
governmental regulations could increase our costs significantly and adversely affect our results of operations.
The processing, formulation, safety, manufacturing,
packaging, labeling, advertising and distribution of our products are subject to federal laws and regulation by one or more federal agencies,
including the FDA, the Federal Trade Commission, or the FTC, the Consumer Product Safety Commission, or the CPSC, the U.S. Department
of Agriculture, or the USDA, and U.S. Environmental Protection Agency, or the EPA. These activities are also regulated by various state,
local and international laws and agencies of the states and localities in which our products are sold. Government regulations may prevent
or delay the introduction, or require the reformulation, of our products, which could result in lost revenues and increased costs to us.
For instance, the FDA regulates, among other things, the composition, safety, manufacture, labeling and marketing of dietary ingredients
and dietary supplements (including vitamins, minerals, herbs, and other dietary ingredients for human use). Dietary supplements and dietary
ingredients that do not comply with FDA’s regulations and/or the Dietary Supplement Health and Education Act of 1994 will be deemed
adulterated or misbranded. Manufacturers and distributors of dietary supplements and dietary ingredients are prohibited from marketing
products that are adulterated or misbranded, and the FDA may take enforcement action against any adulterated or misbranded dietary supplement
on the market. The FDA has broad enforcement powers. If we violate applicable regulatory requirements, the FDA may bring enforcement actions
against us, which could have a material adverse effect on our business, prospects, financial condition, and results of operations. The
FDA may not accept the evidence of safety for any new ingredient that we may wish to market, may determine that a particular supplement
or ingredient presents an unacceptable health risk based on the required submission of serious adverse events or other information, and
may determine that a particular claim or statement of nutritional value that we use to support the marketing of a supplement is an impermissible
drug claim, is not substantiated, or is an unauthorized version of a “health claim.” See “Business—Regulation—Food
and Drug Administration” for additional information. Any of these actions could prevent us from marketing particular nutritional
supplement products or making certain claims or statements with respect to those products. The FDA could also require us to remove a particular
product from the market. Any future recall or removal would result in additional costs to us, including lost revenues from any products
that we are required to remove from the market, any of which could be material. Any product recalls or removals could also lead to an
increased risk of litigation and liability, substantial costs, and reduced growth prospects.
Additional or more stringent laws and regulations
of dietary supplements and other products have been considered from time to time. These developments could require reformulation of some
products to meet new standards, recalls or discontinuance of some products not able to be reformulated, additional record-keeping requirements,
increased documentation of the properties of some products, additional or different labeling, additional scientific substantiation, or
other new requirements. Any of these developments could increase our costs significantly. In addition, regulators’ evolving interpretation
of existing laws could have similar effects.
Our failure to comply with FTC regulations
could result in substantial monetary penalties and could adversely affect our operating results.
The FTC exercises jurisdiction over the advertising
of dietary supplements and requires that all advertising to consumers be truthful and non-misleading. The FTC actively monitors the dietary
supplement space and has instituted numerous enforcement actions against dietary supplement companies for failure to have adequate substantiation
for claims made in advertising or for the use of false or misleading advertising claims. Failure to comply with applicable regulations
could result in substantial monetary penalties, which could have a material adverse effect on our financial condition or results of operations.
Our operations are subject to environmental
and health and safety laws and regulations that may increase our cost of operations or expose us to environmental liabilities.
We are subject, directly or indirectly, to numerous
federal, state, local and foreign environmental and health and safety laws and regulations governing our operations, including the handling,
transportation and disposal of our non-hazardous and hazardous substances and wastes, as well as emissions and discharges from our operations
into the environment, including discharges to air, surface water and groundwater. Failure to comply with such laws and regulations could
result in costs for remedial actions, penalties or the imposition of other liabilities. New laws, changes in existing laws or the interpretation
thereof, or the development of new facts or changes in their processes could also cause us to incur additional capital and operating expenditures
to maintain compliance with environmental laws and regulations and environmental permits. Any failure by us to comply with environmental,
health and safety requirements could result in the limitation or suspension of our operations, including operations at our manufacturing
facility. We also could incur monetary fines, civil or criminal sanctions, third-party claims or cleanup or other costs as a result of
violations of or liabilities under such requirements.
We also are subject to laws and regulations that
impose liability and cleanup responsibility for releases of hazardous substances into the environment without regard to fault or knowledge
about the condition or action causing the liability. Under certain of these laws and regulations, such liabilities can be imposed for
cleanup of previously owned or operated properties, or for properties to which substances or wastes that were sent in connection with
current or former operations at our facilities. The presence of contamination from such substances or wastes could also adversely affect
our ability to sell or lease our properties, or to use them as collateral for financing.
Failure to comply with federal, state
and international privacy, data protection, marketing and consumer protection laws, regulations and industry standards, or the expansion
of current or the enactment or adoption of new privacy, data protection, marketing and consumer protection laws, regulations or industry
standards, could adversely affect our business.
We are subject to a variety of federal, state
and foreign laws, regulations and industry standards regarding privacy, data protection, data security, marketing and consumer protection,
which address the collection, storing, sharing, using, processing, disclosure and protection of data relating to individuals, as well
as the tracking of consumer behavior and other consumer data. We are also subject to laws, regulations and industry standards relating
to endorsements and influencer marketing. Many of these laws, regulations and industry standards are changing and may be subject to differing
interpretations, are costly to comply with or inconsistent among jurisdictions. For example, the FTC expects companies like ours to comply
with guidelines issued under the Federal Trade Commission Act that govern the collection, use, disclosure, and storage of consumer information,
and establish principles relating to notice, consent, access and data integrity and security. The laws and regulations in many foreign
countries relating to privacy, data protection, data security, marketing and consumer protection often are more restrictive than in the
United States, and may in some cases be interpreted to have a greater scope. Additionally, the laws, regulations and industry standards,
both foreign and domestic, relating to privacy, data protection, data security, marketing and consumer protection are dynamic and may
be expanded or replaced by new laws, regulations or industry standards.
We strive to comply with applicable laws,
policies, contractual and other legal obligations and certain applicable industry standards of conduct relating to privacy, data security,
data protection, marketing and consumer protection. However, these obligations and standards of conduct often are complex, vague, and
difficult to comply with fully, and it is possible that these obligations and standards of conduct may be interpreted and applied in new
ways and/or in a manner that is inconsistent with each other or that new laws, regulations or other obligations may be enacted. It is
possible that our practices may be argued or held to conflict with applicable laws, policies, contractual or other legal obligations,
or applicable industry standards of conduct relating to privacy, data security, data protection, marketing or consumer protection. Any
failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, the FTC, other
regulatory requirements or orders or other federal, state or, as we continue to expand internationally, international privacy, data security,
data protection, marketing or consumer protection-related laws, regulations, contractual obligations or self-regulatory principles or
other industry standards could result in claims, proceedings or actions against us by governmental entities or others or other liabilities
or could result in a loss of consumers. Any of these circumstances could adversely affect our business.
We expect that there will continue to be
new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States
and other jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our business.
For instance, with the increased focus on the use of data for advertising, the anticipation and expectation of future laws, regulations,
standards and other obligations could impact us. In addition, as we expand our data analytics and other data related product offerings
there may be increased scrutiny on our use of data and we may be subject to new and unexpected regulations. Future laws, regulations,
standards and other obligations could, for example, impair our ability to collect or use information that we utilize to provide targeted
digital promotions and media to consumers, thereby impairing our ability to maintain and grow our total customers and increase revenues.
Future restrictions on the collection, use, sharing or disclosure of our users’ data or additional requirements for express or implied
consent of users for the use and disclosure of such information could require us to modify our solutions, possibly in a material manner,
and could limit our ability to develop or outright prohibit new solutions and features. Any such new laws, regulations, other legal obligations
or industry standards, or any changed interpretation of existing laws, regulations or other standards may require us to incur additional
costs and restrict our business operations. If our measures fail to comply with current or future laws, regulations, policies, legal obligations
or industry standards relating to privacy, data protection, data security, marketing or consumer protection, we may be subject to litigation,
regulatory investigations, fines or other liabilities, as well as negative publicity and a potential loss of business. Moreover, if future
laws, regulations, other legal obligations or industry standards, or any changed interpretations of the foregoing limit our ability to
store, process and share personally identifiable information or other data, demand for our products could decrease, our costs could increase,
our revenue growth could slow, and our business, financial condition and operating results could be harmed.
We are exposed to potential liability for
information on our customers’ websites and for products and services sold through their websites and we may incur significant costs
and damage to our reputation as a result of defending against such potential liability.
We are exposed to potential liability for information
on our customers’ websites. We could be exposed to liability with respect to such third-party information such as their products,
links to third-party websites, advertisements and content provided by customers. Among other things, we may face assertions that, by directly
or indirectly providing such third-party content or links to other websites, we should be liable for defamation, negligence, copyright
or trademark infringement, or other actions by parties providing such content or operating those websites. We may also face assertions
that content on our publishers and advertisers’ websites, including statistics or other data we compile internally, or information
contained in websites linked to our websites contains false information, errors or omissions, and users and our customers could seek damages
for losses incurred as a result of their reliance upon or otherwise relating to incorrect information. We may also be subject to fines
and other sanctions by the government for such incorrect information. In addition, our services could be used as a platform for fraudulent
transactions and third party products and services sold through us may be defective. The measures we take to guard against liability for
third-party content, information, products and services may not be adequate to exonerate us from relevant civil and other liabilities.
Any such claims, with or without merit, could
be time-consuming to defend and result in litigation and significant diversion of management’s attention and resources. Even if
these claims do not result in liability to us, we could incur significant costs in investigating and defending against these claims and
suffer damage to our reputation.
If the use of third-party cookies or
other tracking technology is rejected by Internet users, restricted by third parties outside of our control, or otherwise subject to unfavorable
regulation, our performance could decline and we could lose customers and revenue.
We use a number of technologies to collect
information about our customers. For instance, we use small text files (referred to as “cookies”), placed through an Internet
browser on an Internet user’s machine which corresponds to a data set that we keep on our servers, to gather important data. Our
cookies collect anonymous information, such as when an Internet user views an advertisement, clicks on an advertisement, or visits one
of our advertisers’ websites. In some countries, including countries in the European Economic Area, this information may be considered
personal information under applicable data protection laws. On mobile devices, we may also obtain location-based information about the
user’s device through our cookies or other tracking technologies. We use these technologies to achieve our campaign goals, to ensure
that the same Internet user does not unintentionally see the same media too frequently, to report aggregate information regarding the
performance of our digital promotions and marketing campaigns, and to detect and prevent fraudulent activity throughout our network.
Cookies may easily be deleted or blocked
by Internet users. All of the most commonly used Internet browsers (including Chrome, Firefox, Internet Explorer, and Safari) allow Internet
users to prevent cookies from being accepted by their browsers. Internet users can also delete cookies from their computers at any time.
Some Internet users also download “ad blocking” software that prevents cookies from being stored on a user’s computer.
If more Internet users adopt these settings or delete their cookies more frequently than they currently do, our business could be harmed.
In addition, the Safari and Firefox browsers blocks third-party cookies by default, and other browsers may do so in the future. Unless
such default settings in browsers were altered by Internet users to permit the placement of third-party cookies, we would be able to set
fewer of our cookies in users’ browsers, which could adversely affect our business. In addition, companies such as Google have publicly
disclosed their intention to move away from cookies to another form of persistent unique identifier, or ID, to identify individual Internet
users or Internet-connected devices in the bidding process on advertising exchanges. If companies do not use shared IDs across the entire
ecosystem, this could have a negative impact on our ability to find the same anonymous user across different web properties, and reduce
the effectiveness of our marketing efforts.
In addition, in the European Union, or EU,
Directive 2009/136/EC, commonly referred to as the “Cookie Directive,” directs EU member states to ensure that collecting
information on an Internet user’s computer, such as through a cookie, is allowed only if the Internet user has appropriately given
his or her prior freely given, specific, informed and unambiguous consent. Similarly, this Directive which also contains specific rules
for the sending of marketing communications, limits the use of marketing texts messages and e-mails. Additionally, an e-Privacy Regulation,
which will replace the Cookie Directive with requirements that could be stricter in certain respects, apply directly to activities within
the EU without the need to be transposed in each member state’s law, and could impose stricter requirements regarding the use of
cookies and marketing e-mails and text messages and additional penalties for noncompliance, has been proposed, although at this time it
is unclear whether it will be approved as it is currently drafted or when its requirements will be effective. We may experience challenges
in obtaining appropriate consent to our use of cookies from consumers or to send marketing communications to consumers within the EU,
which may affect our ability to run promotions and our operating results and business in European markets, and we may not be able to develop
or implement additional tools that compensate for the lack of data associated with cookies. Moreover, even if we are able to do so, such
additional tools may be subject to further regulation, time consuming to develop or costly to obtain, and less effective than our current
use of cookies.
Economic, political and other risks associated
with our international operations could adversely affect our revenues and international growth prospects.
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. We have sales outside of the United States. For fiscal 2021 and 2020, international sales represented
approximately 15% and 0%, respectively, of our total revenues.
We intend to expand our international presence
as part of our business strategy. Our international operations are subject to a number of risks inherent to operating in foreign countries,
and any expansion of our international operations will amplify the effects of these risks, which include, among others:
| ● | differences in culture, economic and labor conditions and practices; |
| ● | the policies of the U.S. and foreign governments; |
| ● | disruptions in trade relations and economic instability; |
| ● | differences in enforcement of contract and intellectual property rights; |
| ● | social and political unrest; |
| ● | natural disasters, terrorist attacks, pandemics or other catastrophic events; |
| ● | complex, varying and changing government regulations and legal standards and requirements, particularly
with respect to tax regulations, price protection, competition practices, export control regulations and restrictions, customs and tax
requirements, immigration, anti-boycott regulations, data privacy, intellectual property, anti-corruption and environmental compliance,
including the Foreign Corrupt Practices Act; |
| ● | greater difficulty enforcing intellectual property rights and weaker laws protecting such rights; and |
| ● | greater difficulty in accounts receivable collections and longer collection periods. |
We are also affected by domestic and international
laws and regulations applicable to companies doing business abroad or importing and exporting goods and materials. These include tax laws,
laws regulating competition, anti-bribery/anti-corruption and other business practices, and trade regulations, including duties and tariffs.
Compliance with these laws is costly, and future changes to these laws may require significant management attention and disrupt our operations.
Additionally, while it is difficult to assess what changes may occur and the relative effect on our international tax structure, significant
changes in how U.S. and foreign jurisdictions tax cross-border transactions could materially and adversely affect our results of operations
and financial position.
Our results of operations and financial position
are also impacted by changes in currency exchange rates. Unfavorable currency exchange rates between the US Dollar and foreign currencies,
particularly the Canadian dollar, could adversely affect us in the future. Fluctuations in currency exchange rates may present challenges
in comparing operating performance from period to period.
There are other risks that are inherent in our
Canadian and other international operations, including the potential for changes in socio-economic conditions, laws and regulations, including,
among others, competition, import, export, labor and environmental, health and safety laws and regulations, and monetary and fiscal policies,
protectionist measures that may prohibit acquisitions or joint ventures, or impact trade volumes, unsettled political conditions; government-imposed
plant or other operational shutdowns, backlash from foreign labor organizations related to our restructuring actions, corruption; natural
and man-made disasters, hazards and losses, violence, civil and labor unrest, and possible terrorist attacks.
Additionally, if the opportunity arises, we may
expand our operations into new and high-growth international markets. However, there is no assurance that we will expand our operations
in such markets in our desired time frame. To expand our operations into new international markets, we may enter into business combination
transactions, make acquisitions or enter into strategic partnerships, joint ventures or alliances, any of which may be material. We may
enter into these transactions to acquire other businesses or products to expand our products or take advantage of new developments and
potential changes in the industry. Our lack of experience operating in new international markets and our lack of familiarity with local
economic, political and regulatory systems could prevent us from achieving the results that we expect on our anticipated time frame or
at all. If we are unsuccessful in expanding into new or high-growth international markets, it could adversely affect our operating results
and financial condition.
Our international operations require us
to comply with anti-corruption laws and regulations of the U.S. government and various international jurisdictions in which we do business.
Doing business on a worldwide basis requires us
to comply with the laws and regulations of the U.S. government and various international jurisdictions, and our failure to successfully
comply with these rules and regulations may expose us to liabilities. These laws and regulations apply to companies, individual directors,
officers, employees, and agents, and may restrict our operations, trade practices, investment decisions and partnering activities. In
particular, our international operations are subject to U.S. and foreign anti-corruption laws and regulations, such as the Foreign Corrupt
Practices Act, or the FCPA. The FCPA prohibits us from providing anything of value to foreign officials for the purposes of influencing
official decisions or obtaining or retaining business or otherwise obtaining favorable treatment, and requires us to maintain adequate
record- keeping and internal accounting practices to accurately reflect our transactions. As part of our business, we may deal with state-owned
business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA. In addition,
some of the international locations in which we operate lack a developed legal system and have elevated levels of corruption. As a result
of the above activities, we are exposed to the risk of violating anti-corruption laws. Violations of these legal requirements are punishable
by criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts as well
as other remedial measures. We have established policies and procedures designed to assist us and our personnel in complying with applicable
U.S. and international laws and regulations. However, there can be no assurance that our policies and procedures will effectively prevent
us from violating these regulations in every transaction in which we may engage, and such a violation could adversely affect our reputation,
business, financial condition and results of operations.
Our success depends on the experience and
skill of our board of directors, executive officers and key personnel, whom we may not be able to retain and we may not be able to hire
enough additional personnel to meet our needs.
We are dependent on Alfonso J. Cervantes, Jr.
(Executive Chairman), Darren C. Minton (Chief Executive Officer and President), and Alan B. Bergman (Chief Financial Officer). There can
be no assurance that they will continue to be employed by us for a particular period of time. The loss of any member of the board of directors
or executive officer or advisors could harm our business, financial condition, cash flow and results of operations.
The success of our strategy will depend on a well-defined
management structure and the availability of a management team with proven competencies in the identification, acquisition and integration
of complementary companies and assets. To implement our business plan, we will need to keep the personnel that we currently have and,
if our business is to grow as planned, we will need additional personnel. We cannot assure you that we will be successful in retaining
our present team or in attracting and retaining additional personnel. If we are unable to attract and retain key personnel or are unable
to do so in a cost-effective manner, our business may be materially and adversely affected.
Although dependent on certain key personnel,
we do not have any key man life insurance policies on any such people.
We are dependent on our management team to conduct
our operations and execute our business plan, however, we have not purchased any insurance policies with respect to the management in
the event of the death or disability of any of our key managers. Therefore, if any of the members of our management team dies or becomes
disabled, we will not receive any compensation to assist with his absence.
We may be a party to lawsuits that arise
in the ordinary course of business.
We may be a party to lawsuits in the future (including
product liability, false advertising, and intellectual property claims) that arise in the ordinary course of business. The possibility
of such litigation, and its timing, is in large part outside our control. It is possible that future litigation could arise that could
have material adverse effects on us.
The obligations associated with being a
public company will require significant resources and management attention, and we will incur increased costs as a result of becoming
a public company.
We became a public company in February 2022. As
a public company, we will face increased legal, accounting, administrative and other costs and expenses that we have not incurred as a
private company, and we expect to incur additional costs related to operating as a public company. We are subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which requires that we file annual, quarterly and current reports
with respect to our business and financial condition, and proxy and other information statements, as well as the rules and regulations
implemented by the SEC, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010, the Public Company Accounting Oversight Board, and the listing requirements of Nasdaq, each of which imposes additional reporting
and other obligations on public companies. As a public company, we are required to, among other things:
| ● | prepare and distribute periodic reports, proxy statements and other stockholder communications in compliance
with the federal securities laws and rules and Nasdaq rules; |
| ● | hire additional financial and accounting personnel and other experienced accounting and finance staff
with the expertise to address complex accounting matters applicable to public companies; |
| ● | institute more comprehensive financial reporting and disclosure compliance procedures; |
| ● | involve and retain, to a greater degree, outside counsel and accountants to assist us with the activities
listed above; |
| ● | build and maintain an investor relations function; |
| ● | establish new internal policies, including those relating to trading in our securities and disclosure
controls and procedures; |
| ● | comply with the maintenance requirements of Nasdaq; and |
| ● | comply with the Sarbanes-Oxley Act. |
We expect these rules and regulations, and any
future changes in laws, regulations and standards relating to corporate governance and public disclosure, which have created uncertainty
for public companies, to increase legal and financial compliance costs and make some activities more time consuming and costly. These
laws, regulations and standards are subject to varying interpretations, in many cases, due to their lack of specificity, and, as a result,
their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in
continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
Our investment in compliance with existing and evolving regulatory requirements will result in increased administrative expenses and a
diversion of management’s time and attention from revenue-generating activities to compliance activities, which could have a material
adverse effect on our business, financial condition and results of operations.
We also expect that being a public company will
make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or
incur substantially higher costs to obtain coverage. These increased costs may require us to divert a significant amount of money that
we could otherwise use to expand our business and achieve our strategic objectives.
We may not complete our analysis of our
internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective.
We will be required, pursuant to Section 404 of
the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial
reporting in the second annual report we file with the SEC. This assessment will need to include disclosure of any material weaknesses
identified by our management in our internal control over financial reporting. However, our auditors will not be required to formally
attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until we are no longer a non-accelerated
filer or no longer an emerging growth company if we take advantage of the exemptions available to us through the JOBS Act.
We are in the very early stages of the costly
and challenging process of compiling the system and process documentation necessary to perform the evaluation needed to comply with Section
404. In this regard, we will need to continue to dedicate internal resources, engage outside consultants and adopt a detailed work plan
to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate,
validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for
internal control over financial reporting. As we transition to the requirements of reporting as a public company, we may need to add additional
finance staff. We may not be able to remediate any future material weaknesses, or to complete our evaluation, testing and any required
remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal
control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that
our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of
our internal controls when they are required to issue such opinion, investors could lose confidence in the accuracy and completeness of
our financial reports, which could harm our stock price.
Risks Related to This Offering and Ownership
of Our Common Stock
We may not be able to maintain a listing
of our common stock on Nasdaq.
Our common stock is currently listed on the Nasdaq
Capital Market. We must meet certain financial and liquidity criteria to maintain the listing of our common stock on Nasdaq. If we fail
to meet any of Nasdaq’s continued listing standards or we violate Nasdaq listing requirements, our common stock may be delisted.
In addition, our board of directors may determine that the cost of maintaining our listing on a national securities exchange outweighs
the benefits of such listing.
On June 2, 2022, we received a notification letter,
which was modified on June 3, 2022, from Nasdaq notifying us that we are not in compliance with the minimum bid price requirement set
forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on the Nasdaq. Nasdaq Listing Rule 5550(a)(2) requires listed securities
to maintain a minimum bid price of $1.00 per share, and Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum
bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. Based on the closing bid price
of our common stock for the 30 consecutive business days from April 20, 2022 to June 1, 2022, we no longer meet the minimum
bid price requirement. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were provided 180 calendar days, or until November
29, 2022, to regain compliance with Nasdaq Listing Rule 5550(a)(2).
On November 28, 2022, we received an additional
notification letter from Nasdaq notifying us that we are not in compliance with the Nasdaq stockholders’ equity requirement of $2,500,000
for continued listing on The Nasdaq Capital Market, as set forth in Listing Rule 5550(b), given that our Form 10-Q for the period ended
September 30, 2022 evidenced stockholders’ equity of only $2,051,279. Given the stockholders’ equity deficiency, Nasdaq determined
to terminate the grace period noted above one day early, pursuant to its discretionary authority, as set forth in Listing Rule 5101. Based
on the foregoing, we requested a hearing before a Nasdaq Hearings Panel. The hearing request stayed any suspension or delisting action
pending the conclusion of the hearings process. At the hearing, we intend to present our plan for regaining compliance with the bid price
and stockholders’ equity requirements and to request a further extension so that we may complete the execution of our plan. Although
we believe that our plan will be sufficient to enable us to regain compliance, no assurance can be provided that Nasdaq will ultimately
accept our plan or that we will ultimately regain compliance with all applicable requirements for continued listing.
A delisting of our common stock from Nasdaq may
materially impair our stockholders’ ability to buy and sell our common stock and could have an adverse effect on the market price
of, and the efficiency of the trading market for, our common stock. The delisting of our common stock could significantly impair our ability
to raise capital and the value of your investment.
The market price of our stock may be highly
volatile, and you could lose all or part of your investment.
The market for our common stock may be characterized
by significant price volatility when compared to the shares of larger, more established companies that have large public floats, and our
stock price will likely be more volatile than the shares of such larger, more established companies for the indefinite future. The stock
market in general has recently been highly volatile. Furthermore, there have been recent instances of extreme stock price run-ups followed
by rapid price declines and stock price volatility following a number of recent initial public offerings, particularly among companies
with relatively smaller public floats. We also experienced such volatility following our initial public offering in February 2022 and
may continue to experience such volatility, which may be unrelated to our actual or expected operating performance and financial condition
or prospects, making it difficult for prospective investors to assess the rapidly changing value of our common stock.
The market price of our common stock is likely
to be volatile due to a number of factors. First, as noted above, our common stock is likely to be more sporadically and thinly traded
compared to the shares of such larger, more established companies. The price for our common stock could, for example, decline precipitously
in the event that a large number of shares is sold on the market without commensurate demand. Secondly, we are a speculative or “risky”
investment due to our lack of profits to date. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear
of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on
the market more quickly and at greater discounts than would be the case with the stock of a larger, more established company that has
a large public float. Many of these factors are beyond our control and may decrease the market price of our common stock regardless of
our operating performance. The market price of our common stock could also be subject to wide fluctuations in response to a broad and
diverse range of factors, including the following:
| ● | actual or anticipated variations in our periodic operating results; |
| ● | increases in market interest rates that lead investors of our common stock to demand a higher investment
return; |
| ● | changes in earnings estimates; |
| ● | changes in market valuations of similar companies; |
| ● | actions or announcements by our competitors; |
| ● | adverse market reaction to any increased indebtedness we may incur in the future; |
| ● | additions or departures of key personnel; |
| ● | actions by stockholders; |
| ● | speculation in the media, online forums, or investment community; and |
| ● | our ability to maintain the listing of our common stock on Nasdaq. |
Volatility in the market price of our common stock
may prevent investors from being able to sell their common stock at or above the price at which they purchased our common stock. As a
result, you may suffer a loss on your investment.
We have not paid in the past and do not
expect to declare or pay dividends in the foreseeable future.
We
have not paid in the past and do not expect to declare or pay dividends in the foreseeable future, as we anticipate that we will invest
future earnings in the development and growth of our business. Therefore,
holders of our common stock will not receive any return on their investment unless they sell their securities, and holders may be unable
to sell their securities on favorable terms or at all.
We may use these proceeds in ways with which
you may not agree.
We
may receive up to approximately $75 million in proceeds upon the exercise
of warrants issued to the selling stockholders. While we currently intend to use these proceeds for working capital and general corporate
purposes, we have considerable discretion in the application of the proceeds.
You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used in a manner agreeable
to you. You must rely on our judgment regarding the application of these proceeds. The proceeds may be used for corporate purposes that
do not immediately improve our profitability or increase the price of our common stock. See “Use of Proceeds” for more
information.
The number of shares being registered for
sale is significant in relation to our trading volume.
All of the shares registered for sale on behalf
of the selling stockholders are “restricted securities” as that term is defined in Rule 144 under the Securities Act. We have
filed this registration statement to register these restricted shares for sale into the public market by the selling stockholders. These
restricted securities, if sold in the market all at once or at about the same time, could depress the market price during the period the
registration statement remains effective and also could affect our ability to raise equity capital. Any outstanding shares not sold by
the selling stockholders pursuant to this prospectus will remain as “restricted shares” in the hands of the holders, except
for those sales that satisfy the requirements under Rule 144 or another exemption to the registration requirements under the Securities
Act.
Future issuances of our common stock or
securities convertible into, or exercisable or exchangeable for, our common stock, could cause the market price of our common stock to
decline and would result in the dilution of your holdings.
Future issuances of our common stock or securities
convertible into, or exercisable or exchangeable for, our common stock, could cause the market price of our common stock to decline. We
cannot predict what effect, if any, future sales of our common stock, or the availability of common stock for future sale, will have on
the market price of our common stock. Sales of substantial amounts of our common stock in the public market, or the perception that such
sales could occur, could materially adversely affect the market price of our common stock and may make it more difficult for you to sell
your common stock at a time and price which you deem appropriate. In all events, future issuances of our common stock would result in
the dilution of your holdings.
Rule 144 sales in the future may have a
depressive effect on our share price.
All of the outstanding common stock held by the
present officers, directors, and affiliate stockholders are “restricted securities” within the meaning of Rule 144 under the
Securities Act. As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements
of Rule 144 or other applicable exemptions from registration under the Securities Act and as required under applicable state securities
laws. Rule 144 provides in essence that a person who is an affiliate or officer or director who has held restricted securities for six
months may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the
greater of 1.0% of a company’s outstanding common stock. There is no limitation on the amount of restricted securities that may
be sold by a non-affiliate after the owner has held the restricted securities for a period of six months if our company is a current,
reporting company under the Exchange Act. A sale under Rule 144 or under any other exemption from the Securities Act, if available, or
pursuant to subsequent registration of common stock of present stockholders, may have a depressive effect upon our stock price.
Future issuances of debt securities, which
would rank senior to our common stock upon our bankruptcy or liquidation, and future issuances of preferred stock, which could rank senior
to our common stock for the purposes of dividends and liquidating distributions, may adversely affect the level of return you may be able
to achieve from an investment in our common stock.
In the future, we may attempt to increase our
capital resources by offering debt securities. Upon bankruptcy or liquidation, holders of our debt securities, and lenders with respect
to other borrowings we may make, would receive distributions of our available assets prior to any distributions being made to holders
of our common stock. Moreover, if we issue preferred stock, the holders of such preferred stock could be entitled to preferences over
holders of common stock in respect of the payment of dividends and the payment of liquidating distributions. Because our decision to issue
debt or preferred stock in any future offering, or borrow money from lenders, will depend in part on market conditions and other factors
beyond our control, we cannot predict or estimate the amount, timing or nature of any such future offerings or borrowings. Holders of
our common stock must bear the risk that any future offerings we conduct or borrowings we make may adversely affect the level of return,
if any, they may be able to achieve from an investment in our common stock.
If securities industry analysts do not publish
research reports on us, or publish unfavorable reports on us, then the market price and market trading volume of our common stock could
be negatively affected.
Any trading market for our common stock may be
influenced in part by any research reports that securities industry analysts publish about us. We do not currently have and may never
obtain research coverage by securities industry analysts. If no securities industry analysts commence coverage of us, the market price
and market trading volume of our common stock could be negatively affected. In the event we are covered by analysts, and one or more of
such analysts downgrade our securities, or otherwise reports on us unfavorably, or discontinues coverage of us, the market price and market
trading volume of our common stock could be negatively affected.
If our shares of common stock become subject
to the penny stock rules, it would become more difficult to trade our shares.
The SEC has adopted rules that regulate broker-dealer
practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00,
other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems,
provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system.
If we do not retain a listing on Nasdaq or another national securities exchange and if the price of our common stock is less than $5.00,
our common stock could be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not
otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the
penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer
must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s
written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks;
and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the
trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares.
We are subject to ongoing public reporting
requirements that are less rigorous than Exchange Act rules for companies that are not emerging growth companies and our stockholders
could receive less information than they might expect to receive from more mature public companies.
We are required to publicly report on an ongoing
basis as an “emerging growth company” under the reporting rules set forth under the Exchange Act. For so long as we remain
an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other
Exchange Act reporting companies that are not emerging growth companies. 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 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 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.
Because we will be subject to ongoing public reporting
requirements that are less rigorous than Exchange Act rules for companies that are not emerging growth companies, our stockholders could
receive less information than they might expect to receive from more mature public companies. We cannot predict if investors will find
our common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less
active trading or more volatility in the price of our common stock.
Anti-takeover provisions in our charter
documents and under Delaware law could make an acquisition of our company more difficult, and limit attempts by our stockholders to replace
or remove our current management.
Provisions in our certificate of incorporation
and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our certificate of incorporation
and bylaws include provisions that:
| ● | permit the board of directors to establish the number of directors and fill any vacancies and newly created
directorships; |
| ● | provide that directors may only be removed by the majority of the shares of voting stock then outstanding;
and |
| ● | establish advance notice requirements for nominations for election to our board of directors or for proposing
matters that can be acted upon by stockholders at annual stockholder meetings. |
These provisions may frustrate or prevent any
attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members
of our board of directors, which is responsible for appointing the members of our management.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus 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. The forward-looking statements are contained principally in, but not limited
to, the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and “Business.” 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 the
heading “Risk Factors” and elsewhere in this prospectus. 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.
The forward-looking statements made in this prospectus
relate only to events or information as of the date on which the statements are made in this prospectus. Although we will become a public
company after this offering and have ongoing disclosure obligations under United States federal securities laws, we do not intend
to update or otherwise revise the forward-looking statements in this prospectus, whether as a result of new information, future events
or otherwise.
USE
OF PROCEEDS
We
will not receive any proceeds from the sale of common stock by the selling stockholders. We may, however, receive up to approximately
$16.9 million from the exercise of warrants held by the selling stockholders.
We
have no specific plan for such proceeds except to generate funds for working capital and general corporate purposes. We will have broad
discretion in the way that we use these proceeds.
The
selling stockholders will pay any underwriting discounts and commissions and expenses incurred by them for brokerage, accounting, tax
or legal services or any other expenses incurred by them in disposing of the shares. We will bear all other costs, fees and expenses
incurred in effecting the registration of the shares covered by this prospectus, including, without limitation, all registration and
filing fees and fees and expenses of our counsel and our accountants.
MARKET
PRICE OF COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock began trading on the Nasdaq Capital Market under the symbol “SMFL” on February 16, 2022.
Number
of Holders of our Common Shares
As of December 20, 2022, there were approximately
96 stockholders of record of our common stock. In computing the number of holders of record of our common stock, each broker-dealer and
clearing corporation holding shares on behalf of its customers is counted as a single stockholder.
Dividend
Policy
We
have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings
for use in the operation of our business and do not anticipate paying any cash dividends on our common stock in the near future. We may
also enter into credit agreements or other borrowing arrangements in the future that will restrict our ability to declare or pay cash
dividends on our common stock. Any future determination to declare dividends will be made at the discretion of our board of directors
and will depend on our financial condition, operating results, capital requirements, contractual restrictions, general business conditions
and other factors that our board of directors may deem relevant. See also “Risk Factors—Risks
Related to this Offering and Ownership of Our Common Stock—We have not paid in the past and do not expect to declare
or pay dividends in the foreseeable future.”
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table sets forth certain information about the securities authorized for issuance under our incentive plans as of December
31, 2021.
Plan Category | |
Number of securities to be
issued upon
exercise of
outstanding
options, warrants
and rights (a) | | |
Weighted-average
exercise price of
outstanding
options, warrants
and rights (b) | | |
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a)) (c) | |
Equity compensation plans approved by security holders | |
| 1,450,000 | | |
$ | 0.01 | | |
| 550,000 | |
Equity compensation plans not approved by security holders | |
| - | | |
| - | | |
| - | |
Total | |
| 1,450,000 | | |
$ | 0.01 | | |
| 550,000 | |
On
September 14, 2020, we established our 2020 Stock Incentive Plan. Awards that may be granted include incentive stock options as described
in section 422(b) of the Internal Revenue Code of 1986, as amended, or the Code, non-qualified stock options (i.e., options that are
not incentive stock options) and awards of restricted stock. The maximum number of shares of common stock that may be issued pursuant
to awards granted under the 2020 Stock Incentive Plan is 2,000,000 shares. Shares subject to an award under the 2020 Stock Incentive
Plan for which the award is canceled, forfeited or expires again become available for grants under the 2020 Stock Incentive Plan. Shares
subject to an award that is settled in cash will not again be made available for grants under the 2020 Stock Incentive Plan.
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 of our company 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 prospectus. 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 prospectus, particularly in the sections titled “Risk Factors” and
“Cautionary Statement Regarding Forward-Looking Statements.”
Overview
We
are engaged in the development, marketing, manufacturing, acquisition, operation and sale of a broad spectrum of nutritional and related
products with an emphasis on health and wellness. Structured as a global holding company, we are executing a buy-and-build strategy with
serial accretive acquisitions creating a vertically integrated company with an objective of aggregating companies generating a minimum
of $300 million in revenues within the next thirty-six months. To drive growth and earnings,
we are developing proprietary products as well as acquiring other profitable companies, encompassing brands, manufacturing and distribution
channels.
We
also operate a network platform in the affiliate marketing space. Affiliate marketing is an advertising model in which a product vendor
compensates third-party digital marketers to generate traffic or leads for the product vendor’s products and services. The third-party
digital marketers are referred to as affiliates, and the commission fee incentivizes them to find ways to promote the products being
sold by the product vendor.
On
March 8, 2018, we acquired 51% of BSNM and on October 9, 2019, we acquired the remaining 49%. 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 DSO. DSO manufactures, sells and owns the Smart for Life brand of natural health and wellness meal replacement
products. The brand includes proprietary hunger suppressing functional foods that are designed to work with the body’s natural
ability to lose weight. It also develops premium supplements and commodities that will promote optimal health and wellness. DSO has over
15 years of experience providing high-quality products to premium retail locations and companies. Its branded vitamins and supplements
are also being sold through Amazon, and this sales channel is becoming a major contributor to the growth of the brand online.
On
August 24, 2021, we established Smart for Life Canada Inc. as a wholly owned subsidiary of DSO in Canada. This subsidiary sells retail
products through a retail store location in Montreal Canada and the same location also acts as distribution center for our international
direct to consumer and big box customers. We maintain inventory and employees at this location.
On
November 8, 2021, we acquired Nexus. 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 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. 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 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.
Recent
Developments
Private
Placement and Related Transactions
On
December 8, 2022, we entered into a securities purchase agreement with certain accredited investors, pursuant to which we issued to the
investors an aggregate of 1,282,896 shares of common stock and prefunded warrants to purchase an aggregate of 1,574,248 shares of common
stock for an aggregate purchase price of $1,000,000, or $0.35 per underlying share.
The
investors were previously issued 12% unsecured subordinated convertible debentures in the aggregate principal amount of $2,250,000, which
were convertible into shares of common stock at a conversion price of $1.00 per share. In connection with the securities purchase agreement,
the investors agreed to convert all outstanding principal and interest on the debentures, in the amount of $2,542,500, into an aggregate
of 2,542,501 shares of common stock in accordance with the terms of the debentures. In consideration for, and as inducement for, the
conversion of the debentures as aforesaid, we also issued to the investors debenture prefunded warrants to purchase an aggregate of 4,721,787
shares of common stock.
The
investors were also previously issued warrants for the purchase of an aggregate of 11,999,404 shares of common stock at an exercise price
of $6.25, which contain a full ratchet anti-dilution adjustment provision. As a result of the issuance of shares at $0.35 per share,
the exercise price of these warrants was reduced to $0.35 per share and the number of shares underlying the warrants was increased to
214,275,076 shares in accordance with the terms of the warrants. Pursuant to the securities purchase agreement, the investors then agreed
to amend and restate the terms of the warrants to, among other things, remove full ratchet anti-dilution adjustment provision.
The
securities purchase agreement contains customary representations and warrants, covenants and indemnification of the investors for a transaction
of this type. In addition, we agreed that we would not (i) issue, enter into any agreement to issue or announce the issuance or proposed
issuance of any shares of common stock or securities convertible into or exchangeable for common stock or (ii) file any registration
statement or any amendment or supplement thereto, except as contemplated by the registration rights agreement described below, from the
date of the securities purchase agreement until thirty (30) days after the earliest of the date that: (a) the registration statement
of which this prospectus forms a part has been declared effective by the SEC, (b) all of the shares of common stock issued and issuable
to the investors pursuant to the securities purchase agreement, or the Registrable Securities, have been sold pursuant to Rule 144 or
may be sold pursuant to Rule 144 without the requirement for us to be in compliance with the current public information required under
Rule 144 and without volume or manner-of-sale restrictions, (c) following the one year anniversary of the date of the closing of the
securities purchase agreement, provided that a holder of Registrable Securities is not an affiliate of our company, or (d) all of the
Registrable Securities may be sold pursuant to an exemption from registration under Section 4(a)(1) of the Securities Act without volume
or manner-of-sale restrictions.
On
December 8, 2022, we also entered into a registration rights agreement with the investors, pursuant to which we agreed to file a registration
statement with the SEC covering the resale of all Registrable Securities with fifteen (15) days and use our commercially reasonable efforts
to have the registration statement declared effective by the SEC within sixty (60) days. If (i) the registration statement is not declared
effective by the SEC by such date, (ii) we fail to request acceleration of the registration statement or respond to any SEC comments
within certain time periods set forth in the registration rights agreement, or (iii) the registration statement ceases to remain continuously
effective for certain time periods set forth in the registration rights agreement, then, on each such date and on each monthly anniversary
of each such date (if the applicable event shall not have been cured by such date), we must pay to each investor an amount in cash, as
partial liquidated damages and not as a penalty, equal to the product of 1.0% multiplied by the aggregate subscription amount paid by
such investor pursuant to the securities purchase agreement.
Dawson
James Securities, Inc. acted as placement agent in connection with the private placement described above and received a cash commission
of $90,000 and warrants for the purchase of 228,572 shares of common at an exercise price of $0.35.
Please
see “Description of Securities” below for a full description of all warrants issued in connection with this private
placement.
Lease
Agreement
On
November 28, 2022, we entered into a lease agreement with 990 S Rogers Circle, LLC for a 7,877 square foot premises located in Boca Raton,
Florida, which will serve as our new corporate headquarters. The term of the lease commenced on December 1, 2022 and ends on December
31, 2029, with one option to extend the term for five years. The monthly rent is approximately $13,283 for the first year, with 3.5%
annual increases to approximately $16,328 in the final year of the initial term. We are also responsible for our proportionate (5.69%)
share of any increases to the landlord’s taxes, insurance and common area maintenance costs after December 31, 2022.
Amendments
to Promissory Notes
On
November 28, 2022, we entered into letter agreements with the holders of most of the secured subordinated promissory notes in the aggregate
principal amount of $1,300,000 described under “—Liquidity and Capital Resources” below 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 ten
percent (10%) to fifteen percent (15%). We also agreed that if an event of default (as defined in the notes) has occurred and is continuing,
then we shall not create any senior indebtedness (as defined in the notes) without the consent of the holders of a majority of the principal
amount of the notes. In exchange for the agreement of the holders to enter into the letter agreements, we agreed to pay certain amendment
fees as more particularly described in the letter agreements. We are in the process of negotiating a similar extension of one remining
note in the principal amount of $100,000.
On
November 29, 2022, we entered into a letter agreement with Sasson E. Moulavi to amend the terms of the 6% secured subordinated promissory
note in the principal amount of $3,000,000 described under “—Liquidity and Capital Resources” below to amend
the terms of this note. Pursuant to the letter agreement, the parties agreed to amend and restate the note to amend the amortization
schedule attached thereto, 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, we agreed to (i) issue to Dr. Moulavi 100,000 shares
of common stock under our 2022 Equity Incentive Plan and (ii) pay to Dr. Moulavi a fee of $50,000 in cash, which shall be paid upon completion
of our anticipated debt financing expected to close by December 31, 2022.
Impact
of Coronavirus Pandemic
In
December 2019, a novel coronavirus disease, or COVID-19, was initially reported and on March 11, 2020, the World Health Organization
characterized COVID-19 as a pandemic. COVID-19 has had a widespread and detrimental effect on the global economy as a result of the continued
increase in the number of cases and affected countries and actions by public health and governmental authorities, businesses, other organizations,
and individuals to address the outbreak, including travel bans and restrictions, quarantines, shelter in place, stay at home or total
lock-down orders and business limitations and shutdowns. Despite recent developments of vaccines, the duration and severity of COVID-19,
mutations and possible additional mutations, and the degree of their impact on our business is uncertain and difficult to predict.
We
are dependent upon certain contract manufacturers and suppliers and their ability to reliably and efficiently fulfill our orders is critical
to our business success. The COVID-19 pandemic has impacted and may continue to impact certain of our manufacturers and suppliers.
As a result, we have faced and may continue to face delays or difficulty sourcing certain products and raw materials, which could negatively
affect our business and financial results. Even if we are able to find alternate sources for such raw materials, they may cost more,
which could adversely impact our profitability and financial condition.
Furthermore,
the global deterioration in economic conditions, which may have an adverse impact on discretionary consumer spending or investing, could
also impact our business and demand for our products. For instance, consumer spending and investing may be negatively impacted by general
macroeconomic conditions, including a rise in unemployment, and decreased consumer confidence resulting from the pandemic. Changing consumer
and investor behaviors as a result of the pandemic may also have a material impact on our revenue.
Our
efforts to help mitigate the negative impact of the outbreak on our business may not be effective, and we may be affected by a protracted
economic downturn. Furthermore, while many governmental authorities around the world have and continue to enact legislation to address
the impact of COVID-19, including measures intended to mitigate some of the more severe anticipated economic effects of the virus, we
may not benefit from such legislation, or such legislation may prove to be ineffective in addressing COVID-19’s impact on our and
our customer’s businesses and operations. Even after the COVID-19 outbreak has subsided, we may continue to experience impacts
to our business as a result of COVID-19’s global economic impact and any recession that has occurred or may occur in the future.
Further, as the COVID-19 situation is unprecedented and continuously evolving, COVID-19 may also affect our operating and financial results
in a manner that is not presently known to us or in a manner that we currently do not consider that may present significant risks to
our operations.
The
extent to which the COVID-19 pandemic may impact our results will depend on future developments, which are highly uncertain
and cannot be predicted as of the date of this prospectus. Nevertheless, the pandemic and the current financial, economic and capital
markets environment, and future developments in the global supply chain and other areas present material uncertainty and risk with respect
to our performance, financial condition, results of operations and cash flows. See also “Risk Factors” for more information.
Principal
Factors Affecting Our Financial Performance
Our operating
results are primarily affected by the following factors:
| ● | our
ability to acquire new customers or retain existing customers; |
| ● | our
ability to offer competitive product pricing; |
| ● | our
ability to broaden product offerings; |
| ● | industry
demand and competition; and |
| ● | market
conditions and our market position. |
Emerging
Growth Company
We
qualify as an “emerging growth company” under the 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 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 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 Nine Months Ended September 30, 2022 and 2021
The
following table sets forth key components of our results of operations during the nine months ended September 30, 2022 and 2021, both
in dollars and as a percentage of our revenues.
| |
September 30, 2022 | | |
September 30, 2021 | |
| |
Amount | | |
% of Revenues | | |
Amount | | |
% of Revenues | |
Revenues | |
| | |
| | |
| | |
| |
Products | |
$ | 11,537,041 | | |
| 81.84 | % | |
$ | 4,794,494 | | |
| 100.00 | % |
Advertising | |
| 2,560,321 | | |
| 18.16 | % | |
| — | | |
| — | |
Total revenues | |
| 14,097,362 | | |
| 100.00 | % | |
| 4,794,494 | | |
| 100.00 | % |
Cost of revenues | |
| | | |
| | | |
| | | |
| | |
Products | |
| 6,281,486 | | |
| 44.56 | % | |
| 3,328,402 | | |
| 69.42 | % |
Advertising | |
| 1,884,479 | | |
| 13.37 | % | |
| — | | |
| — | |
Total cost of revenues | |
| 8,165,965 | | |
| 57.93 | % | |
| 3,328,402 | | |
| 69.42 | % |
Gross profit | |
| 5,931,397 | | |
| 42.07 | % | |
| 1,466,092 | | |
| 30.58 | % |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
General and administrative | |
| 5,139,263 | | |
| 36.46 | % | |
| 1,693,181 | | |
| 35.32 | % |
Salaries | |
| 5,120,518 | | |
| 36.32 | % | |
| 1,910,284 | | |
| 39.84 | % |
Professional services | |
| 1,622,871 | | |
| 11.51 | % | |
| 571,014 | | |
| 11.91 | % |
Depreciation and amortization expense | |
| 1,375,514 | | |
| 9.76 | % | |
| 656,458 | | |
| 13.69 | % |
Total operating expenses | |
| 13,258,166 | | |
| 94.05 | % | |
| 4,830,937 | | |
| 100.76 | % |
Operating loss | |
| (7,326,769 | ) | |
| (51.97 | )% | |
| (3,364,845 | ) | |
| (70.18 | )% |
Other income (expense) | |
| | | |
| | | |
| | | |
| | |
Other (expense) income | |
| (693,614 | ) | |
| (4.92 | )% | |
| 80,311 | | |
| 1.68 | % |
Gain on extinguishment of debt | |
| 134,956 | | |
| 0.96 | % | |
| — | | |
| — | |
Change in value of derivative liability | |
| 146,513 | | |
| 1.04 | % | |
| — | | |
| — | |
Interest expense | |
| (14,168,479 | ) | |
| (100.50 | )% | |
| (813,055 | ) | |
| (16.96 | )% |
Total other income (expense) | |
| (14,580,624 | ) | |
| (103.43 | )% | |
| (732,744 | ) | |
| (15.28 | )% |
Net loss | |
$ | (21,907,393 | ) | |
| (155.40 | )% | |
$ | (4,097,589 | ) | |
| (85.46 | )% |
Revenues.
Our total revenues were $14,097,362 for the nine months ended September 30, 2022, as compared to $4,794,494 for the nine months ended
September 30, 2021, an increase of $9,302,868, or 194.03%. Such increase was primarily due to the acquisitions that were completed subsequent
to September 30, 2021, including the acquisition of DSO that was completed in the third quarter of 2021, the acquisitions of Nexus and
GSP that were completed in the fourth quarter of 2021 and the acquisition of Ceautamed that was completed in the third quarter of 2022.
Our
nutraceutical business generates revenue from the sales of nutritional and related products. Revenues from our nutraceutical business
(products) were $11,537,041 for the nine months ended September 30, 2022, which included $597,604 from GSP and Ceautamed, as compared
to $4,794,494 for the nine months ended September 30, 2021, an increase of $6,742,547, or 140.63%. Excluding these acquisitions, revenues
from our nutraceutical business increased by $6,144,943, or 128.17%. This increase was primarily due to increased sales of our contract
manufacturing services associated with the relief of certain supply constraints of products and increased marketing efforts for our products
and services. The increase was the result of an increase in the volume of products sold and not due to pricing changes.
Our
digital marketing business generates revenues when sales of listed products are sold by product vendors through our network as a result
of the marketing efforts of digital marketers. Revenues from our digital marketing business (advertising) were $2,560,321 for the nine
months ended September 30, 2022, all of which were from Nexus, which was acquired in November of 2021.
Cost
of revenues. Our total cost of revenues was $8,165,965 for the nine months ended September 30, 2022, as compared to $3,328,402
for the nine months ended September 30, 2021, an increase of $2,953,084, or 88.72%. Such increase was primarily due to the acquisitions
described above.
Cost
of revenues for our nutraceutical business consist of ingredients, packaging materials, freight, and labor associated with the production
of various products. Cost of revenues for our nutraceutical business (products) were $6,281,486 for the nine months ended September 30,
2022, which included $346,863 from GSP and Ceautamed, as compared to $3,328,402 for the nine months ended September 30, 2021, an increase
of $2,953,084, or 88.72%. Excluding these acquisitions, cost of revenues for our nutraceutical business increased by $2,606,221, or 78.30%.
As a percentage of product revenues, cost of revenues for product sales decreased from 69.42% in the 2021 period to 54.45% in the 2022
period (or 54.25% excluding the acquisitions) due to reduced costs of materials based on purchasing power.
Cost
of revenues for our digital marketing business consist of commissions and bonuses paid to digital marketers. Cost of revenues from our
digital marketing business (advertising) were $1,884,479 for the nine months ended September 30, 2022, all of which were from Nexus,
which was acquired in November of 2021. As a percentage of advertising revenues, cost of revenues for advertising sales was 73.60% for
the nine months ended September 30, 2022.
Gross
profit. As a result of the foregoing, our gross profit was $5,931,397 for the nine months ended September 30, 2022, as compared
to $1,466,092 for the nine months ended September 30, 2021, an increase of $4,465,305, or 304.57%. Such increase was primarily due to
the acquisitions described above. Excluding these acquisitions, our gross profit increased by $3,538,722, or 241.37%. As a percentage
of revenues, our gross profit increased from 30.58% in the 2021 period to 42.07% in the 2022 period (or 45.75% excluding the acquisitions).
General
and administrative expenses. Our general and administrative expenses consist primarily of advertising expenses, bad debts,
rent expense, insurance and other expenses incurred in connection with general operations. Our general and administrative expenses were
$5,139,263 for the nine months ended September 30, 2022, which included $354,354 from Nexus, GSP and Ceautamed, as compared to $1,693,181
for the nine months ended September 30, 2021, an increase of $3,446,082, or 203.53%. Excluding the acquisitions, our general and administrative
expenses increased by $3,091,728, or 182.60%. Such increase was primarily due to increased advertising expenses related to the acquired
entities and increased rates for insurance as a public company. As a percentage of revenues, general and administrative expenses increased
from 35.32% in the 2021 period to 36.46% in the 2022 period (or 43.74% excluding the acquisitions).
Salaries.
Salaries consist of employee salaries and bonuses plus related payroll taxes. Our salaries expense for the nine months ended September
30, 2022 were $5,120,518, which included $512,175 from Nexus, GSP and Ceautamed, as compared to $1,910,284 for the nine months ended
September 30, 2021, an increase of $3,210,234, or 168.05%. Excluding the acquisitions, our salaries expenses increased by $2,698,059,
or 141.24%. Such increase is the result of increased head count. As a percentage of revenues, salaries expense decreased from 39.84%
in the 2021 period to 36.32% in the 2022 period (or 42.13% excluding the acquisitions).
Professional
services. Professional services consists of expenses for services such as accounting, legal, consulting and investor relations.
Our professional services expense for the nine months ended September 30, 2022 were $1,622,871, which included $42,313 from Nexus, GSP
and Ceautamed, as compared to $571,014 for the nine months ended September 30, 2021, an increase of $1,051,857, or 184.21%. Excluding
the acquisitions, our professional services expenses increased by $1,009,544, or 176.80%. Such increase is the result of expenses related
to our initial public offering and related professional services incurred in 2021. As a percentage of revenues, professional services
expense decreased from 11.91% in the 2021 period to 11.51% in the 2022 period (or 14.45% excluding the acquisitions).
Depreciation
and amortization. Depreciation and amortization was $1,375,514, or 9.76% of revenues, for the nine months ended September
30, 2022, which included $600,271 from Nexus, GSP and Ceautamed, as compared to $656,458, or 13.69% of revenues, for the nine months
ended September 30, 2021. The increase in amortization is associated with the amortization of the intangible assets acquired in the various
acquisitions.
Total
other income (expense). We had $14,580,624 in total other expense, net, for the nine months ended September 30, 2022, as compared
to total other expense, net, of $732,744 for the nine months ended September 30, 2021. Total 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 value of derivative
liability of $146,513 and a gain on the extinguishment of paycheck protection program loans of $134,956, while other expense, net, for
the nine months ended September 30, 2021 consisted of interest expense of $813,055, offset by other income of $80,311.
Net
loss. As a result of the cumulative effect of the factors described above, we had a net loss of $21,907,393 for the nine
months ended September 30, 2022, which included $584,992 from Nexus, GSP and Ceautamed, as compared to $4,097,589 for the nine months
ended September 30, 2021, an increase of $17,809,804, or 434.64%. Excluding the acquisitions, our loss increased by $17,220,083, or 420.25%.
Comparison
of Years Ended December 31, 2021 and 2020
The
following table sets forth key components of our results of operations during the years ended December 31, 2021 and 2020, both in dollars
and as a percentage of our revenues.
| |
December 31, 2021 | | |
December 31, 2020 | |
| |
Amount | | |
% of Revenues | | |
Amount | | |
% of Revenues | |
Revenues | |
| | |
| | |
| | |
| |
Products | |
$ | 8,330,571 | | |
| 92.33 | % | |
$ | 1,959,595 | | |
| 100.00 | % |
Advertising | |
| 692,022 | | |
| 7.67 | % | |
| — | | |
| — | % |
Total revenues | |
| 9,022,593 | | |
| 100.00 | % | |
| 1,959,595 | | |
| 100.00 | % |
Cost of revenues | |
| | | |
| | | |
| | | |
| | |
Products | |
| 5,596,247 | | |
| 62.02 | % | |
| 1,831,629 | | |
| 93.47 | % |
Advertising | |
| 528,386 | | |
| 5.86 | % | |
| — | | |
| — | % |
Total cost of revenues | |
| 6,124,633 | | |
| 67.88 | % | |
| 1,831,629 | | |
| 93.47 | % |
Gross profit | |
| 2,897,960 | | |
| 32.12 | % | |
| 127,966 | | |
| 6.53 | % |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
General and administrative | |
| 7,420,856 | | |
| 82.25 | % | |
| 1,863,087 | | |
| 95.08 | % |
Depreciation and amortization expense | |
| 717,925 | | |
| 7.96 | % | |
| 166,613 | | |
| 8.50 | % |
Total operating expenses | |
| 8,138,781 | | |
| 90.20 | % | |
| 2,029,700 | | |
| 103.58 | % |
Operating loss | |
| (5,240,821 | ) | |
| (58.09 | )% | |
| (1,901,734 | ) | |
| (97.05 | )% |
Other expense | |
| | | |
| | | |
| | | |
| | |
Other expense | |
| (12,782 | ) | |
| (0.14 | )% | |
| (14,141 | ) | |
| (0.72 | )% |
Interest expense | |
| (2,511,920 | ) | |
| (27.84 | )% | |
| (1,253,143 | ) | |
| (63.95 | )% |
Total other expense | |
| (2,524,702 | ) | |
| (27.98 | )% | |
| (1,267,284 | ) | |
| (64.67 | )% |
Net loss | |
$ | (7,765,523 | ) | |
| (86.07 | )% | |
$ | (3,169,018 | ) | |
| (161.72 | )% |
Revenues.
Our total revenues were $9,022,593 for the year ended December 31, 2021, which included $5,573,976 from DSO from the period from July
1, 2021 (date of acquisition) to December 31, 2021, $692,022 from Nexus for the period from November 8, 2021 (date of acquisition) to
December 31, 2021 and $82 from GSP for the period from December 6, 2021 (date of acquisition) to December 31, 2021, as compared to $1,959,595
for the year ended December 31, 2020, an increase of $7,062,998, or 360.43%. Excluding these acquisitions, our revenues increased by
$849,993, or 43.38%. This increase was primarily due to increased sales of our contract manufacturing services following the easing of
pandemic related restrictions. The increase was the result of an increase in the volume of products sold and not due to pricing changes.
Cost
of revenues. Our total cost of revenues were $6,124,633 for the year ended December 31, 2021, which included $3,160,414 from
DSO from the period from July 1, 2021 (date of acquisition) to December 31, 2021, $528,386 from Nexus for the period from November 8,
2021 (date of acquisition) to December 31, 2021 and $0 from GSP for the period from December 6, 2021 (date of acquisition) to December
31, 2021, as compared to $1,831,629 for the year ended December 31, 2020, an increase of $4,293,004, or 234.38%. Excluding these acquisitions,
our cost of revenues increased by $690,238, or 37.68%. Such increase was due to an increase in the amount of sales during 2021. As a
percentage of revenues, our cost of revenues decreased from 93.47% in 2020 to 67.88% in 2021 (or 89.76% excluding the acquisitions) due
to reduced costs of materials based on purchasing power.
Gross
profit. As a result of the foregoing, our gross profit was $2,897,960 for the year ended December 31, 2021, which included $2,437,947
from DSO from the period from July 1, 2021 (date of acquisition) to December 31, 2021, $165,636 from Nexus for the period from November
8, 2021 (date of acquisition) to December 31, 2021 and $82 from GSP for the period from December 6, 2021 (date of acquisition) to December
31, 2021, as compared to $127,966 for the year ended December 31, 2020, an increase of $2,769,994, or 2,164.63%. Excluding these acquisitions,
our gross profit increased by $159,755, or 124.84%. As a percentage of revenues, our gross profit increased from 6.53% in 2020 to 32.12%
in 2021 (or 10.24% excluding the acquisitions).
General
and administrative expenses. Our general and administrative expenses were $7,420,856 for the year ended December 31, 2021,
which included $3,284,538 from DSO from the period from July 1, 2021 (date of acquisition) to December 31, 2021, $106.947 from Nexus
for the period from November 8, 2021 (date of acquisition) to December 31, 2021 and $583 from GSP for the period from December 6, 2021
(date of acquisition) to December 31, 2021, as compared to $1,863,087 for the year ended December 31, 2020, an increase of $5,557,769,
or 298.31%. Excluding these acquisitions, our general and administrative expenses increased by $2,166,554, or 116.29%. Such increase
was partially due to the addition of corporate office personnel. During 2021, we hired a new Chief Financial Officer and Controller,
and the 2021 expense includes the full year compensation for our President and Chief Executive Officer, both of whom were hired during
2020. Additionally, we engaged additional professionals associated with our audits and acquisition targets. As a percentage of revenues,
general and administrative expenses decreased from 95.08% in 2020 to 82.25% in 2021 (or 143.42% excluding the acquisitions).
Depreciation
and amortization. Depreciation and amortization was $717,925, or 7.96% of net revenues, for the year ended December 31,
2021, which included $408,730 from DSO from the period from July 1, 2021 (date of acquisition) to December 31, 2021, $83,008 from Nexus
for the period from November 8, 2021 (date of acquisition) to December 31, 2021 and $8,001 from GSP for the period from December 6, 2021
(date of acquisition) to December 31, 2021, as compared to $166,613, or 8.50% of revenues, for the year ended December 31, 2020. The
increase in amortization is associated with intangible assets resulting from the acquisitions.
Total
other expense. We had $2,524,702 in total other expense, net, for the year ended December 31, 2021, as compared to total other
expense, net, of $1,267,284 for the year ended December 31, 2020. Total other expense, net, for the year ended December 31, 2021 consisted
of interest expense of $2,511,920 and other expense of $12,782, while other expense, net, for the year ended December 31, 2020 consisted
of interest expense of $1,253,143 and other expense of $14,141.
Net
loss. As a result of the cumulative effect of the factors described above, we had a net loss of $7,765,523 for the year
ended December 31, 2021, which included $1,679,638 from DSO from the period from July 1, 2021 (date of acquisition) to December 31, 2021,
$22,391 from Nexus for the period from November 8, 2021 (date of acquisition) to December 31, 2021 and $8,705 from GSP for the period
from December 6, 2021 (date of acquisition) to December 31, 2021, as compared to $3,169,018 for the year ended December 31, 2020, an
increase of $4,596,505, or 145.05%. Excluding the acquisitions, our loss increased by $2,868,173, or 90.51%.
Liquidity
and Capital Resources
As
of September 30, 2022, we had cash of $303,533. 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.
We believe that our current levels of cash, along
with the recent acquisition of Ceautamed and with additional debt or equity issuances of approximately $2.5 million, will be sufficient
to meet our anticipated cash needs for our operations for at least the next 12 months. Additional funds will be required to execute our
business plan and our strategy of acquiring additional companies. As noted elsewhere in this prospectus, over the next 24 months, we plan
to acquire multiple companies aggregating a minimum of $100 million in annualized revenues with the number of prospective acquisitions
in the pipeline representing over $50 million in additional revenue. The funds required to execute this business plan will depend on the
size, capital structure and purchase price consideration that the seller of a target business deems acceptable in a given transaction.
The amount of funds needed to execute our business plan also depends on what portion of the purchase price of a target business the seller
of that business is willing to take in the form of seller notes or our equity or equity in one of our subsidiaries. As noted elsewhere
in this prospectus, we intend on paying no more than 60% cash on any acquisition that we execute with a target of 50%. Given these factors,
we believe that the amount of outside additional capital necessary to execute our business plan for the next 24 months ranges from $20
million to $60 million. With respect to the prospective acquisitions in the pipeline representing over $50 million in additional revenue,
the amount of capital needed ranges from $10 million to $30 million.
We
intend to raise capital for additional acquisitions primarily through debt financing at our operating company level, additional equity
offerings by the Company, or by undertaking a combination of any of the above. The sale of additional equity securities could result
in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require
us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on
terms acceptable to us, if at all.
There
is no guarantee that we will be able to acquire additional businesses under the terms outlined above or that we will be able to find
additional acquisition candidates should we terminate our plans for any of our current acquisition targets.
Summary
of Cash Flow
The
following table provides detailed information about our net cash flow for all financial statement periods presented in this prospectus.
| |
Nine Months Ended
September 30, | | |
Year Ended
December 31, | |
| |
2022 | | |
2021 | | |
2021 | | |
2020 | |
Net cash used in operating activities | |
$ | (7,491,867 | ) | |
$ | (5,147,524 | ) | |
$ | (5,019,113 | ) | |
$ | (1,980,562 | ) |
Net cash used in investing activities | |
| (3,072,271 | ) | |
| (6,001,550 | ) | |
| (8,241,383 | ) | |
| (32,966 | ) |
Net cash provided by financing activities | |
| 10,662,578 | | |
| 11,354,226 | | |
| 12,980,640 | | |
| 2,486,265 | |
Net change in cash | |
| 98,440 | | |
| 205,152 | | |
| (279,856 | ) | |
| 472,737 | |
Cash and cash equivalents at beginning of period | |
| 205,093 | | |
| 484,949 | | |
| 484,949 | | |
| 12,212 | |
Cash and cash equivalents at end of period | |
$ | 303,533 | | |
$ | 690,101 | | |
$ | 205,093 | | |
$ | 484,949 | |
Our
net cash used in operating activities was $7,491,867 for the nine months ended September 30, 2022, as compared to $5,147,524 for the
nine months ended September 30, 2021. For the nine months ended September 30, 2022, our net loss of $21,907,393 and $10,844,961 for interest
expense on future equity agreements, increased inventory of $2,208,654, increased accounts payable of $1,597,032, depreciation and amortization
of $1,375,514, amortization of debt issuance costs of $1,737,976, and stock-based compensation of $822,626, were the primary drivers
for cash used in operations. For the nine months ended September 30, 2021, our net loss of $4,097,589 and a decrease in inventory of
$2,972,531, offset by an increase in accounts payable of $941,909, depreciation and amortization of $656,458 and debt issuance costs,
net of $536,628, were the primary drivers for cash used in operations.
Our
net cash used in operating activities was $5,019,113 for the year ended December 31, 2021, as compared to $1,980,562 for the year ended
December 31, 2020. For the year ended December 31, 2021, our net loss of $7,765,523 and a decrease in inventory of $842,049, offset by
debt issuances costs of $621,638, an increase in accrued expenses of $1,012,897, an increase in deferred revenue of $487,766, and amortization
of $486,184, were the primary drivers for cash used in operations. For the year ended December 31, 2020, our net loss of $3,169,018,
offset by an increase in inventory of $507,970 and an increase in accrued expenses of $448,794, were the primary drivers for cash used
in operations.
Our
net cash used in investing activities was $3,072,271 for the nine months ended September 30, 2022, as compared to $6,001,550 for the
nine months ended September 30, 2021. Net cash used in investing activities for the nine months ended September 30, 2022 consisted of
cash paid for the acquisition of Ceautamed of $3,000,000 and additional equipment purchases of $72,271, while net cash used in investing
activities for the nine months ended September 30, 2021 consisted of cash paid for the acquisition of DSO of $6,000,000 and equipment
purchases of $1,550.
Our
net cash used in investing activities was $8,241,383 for the year ended December 31, 2021, as compared to $32,966 for the year ended
December 31, 2020. Net cash used in investing activities for the year ended December 31, 2021 consisted of cash paid for the acquisition
of DSO of $6,000,000, cash paid for the acquisition of Nexus of $2,100,000 and purchases of property and equipment of $141,383, while
the net cash used in investing activities for the year ended December 31, 2020 consisted entirely of purchases of property and equipment.
Our
net cash provided by financing activities was $10,662,578 for the nine months ended September 30, 2022, as compared to $11,354,226 for
the nine months ended September 30, 2021. Net cash provided by financing activities for the nine months ended September 30, 2022 consisted
of net proceeds from our initial public offering 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 of convertible notes and notes payable of $8,852,491, payments to related
parties of $1,711,600 and payment of fees from issuance of common stock of $53,549, while net cash provided by financing activities for
the nine months ended September 30, 2021 consisted of proceeds from the issuance of preferred stock of $7,080,000, proceeds from convertible
notes and notes payable of $5,301,130 and paycheck protection program loans proceeds of $261,164, offset by repayments on convertible
notes and notes payable of $995,757.
Our
net cash provided by financing activities was $12,980,640 for the year ended December 31, 2021, as compared to $2,486,265 for the year
ended December 31, 2020. Net cash provided by financing activities for the year ended December 31, 2021 consisted of net proceeds of
$7,080,000 from the private placement of preferred stock described below, proceeds from the issuance of note payables of $7,418,969,
proceeds from related parties of $1,367,400 and a gain on right of use asset and lease liability of $53,654, offset by repayments on
convertible notes and notes payable of $851,860 and repayments on due to related parties of $1,087,523, while net cash provided by financing
activities for the year ended December 31, 2020 consisted of proceeds from the issuance of note payables of $2,555,749, paycheck protection
program loan proceeds of $318,013 and a gain on right of use asset and lease liability of $63,880, offset by repayments on notes payable
of $490,100.
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 initial public offering of units, each unit consisting of one share of common stock, a series
A warrant to purchase one share of common stock and a series B warrant to purchase one share of common stock. Pursuant to the underwriting
agreement, we agreed to sell 1,440,000 units to the underwriters, at a purchase price per unit of $9.10 (the offering price to the public
of $10.00 per unit minus the underwriters’ discount), and also agreed to grant to the underwriters a 45-day option to purchase
up to 216,000 additional shares of common stock, up to 216,000 additional series A warrants, and/or up to 216,000 additional series B
warrants, in any combination thereof, at a purchase price to the public of $9.98 per share and $0.01 per warrant, less underwriting discounts
and commissions, solely to cover over-allotments, if any.
On
February 18, 2022, the closing of our initial public offering was completed. At the closing, the underwriters partially exercised the
option and purchased 206,390 series A warrants and 206,390 series B warrants. Therefore, we sold 1,440,000 shares of common stock, 1,646,390
series A warrants and 1,646,390 series B warrants for total gross proceeds of $14,404,128. After deducting the underwriting commission
and expenses, we received net proceeds of approximately $12,763,000. We used to the proceeds of the offering to pay off certain debt
and plan to use the remaining net proceeds for working capital and general corporate purposes.
The
series A warrants are exercisable until the fifth anniversary of the issuance date at an exercise price equal to $7.00 per share and
may be exercised on a cashless basis if the issuance of common stock upon exercise of the warrants
is not covered by an effective registration statement. The exercise price and number of shares of common stock issuable upon exercise
of the series A warrants may be adjusted in certain circumstances, including in the event of a stock dividend, extraordinary dividend
on or recapitalization, reorganization, merger, or consolidation.
The
series B warrants are exercisable until the fifth anniversary of the issuance date at an exercise price equal to $10.00 per share and
may be exercised on a cashless basis, whereby the holder will receive one share of common stock for each series B warrant exercised.
As of September 30, 2022, 1,439,230 of the series B warrants were exercised on a cashless basis
and we issued 1,439,230 shares of common stock upon such exercise.
Private
Placement of Series A Convertible Preferred Stock
On
July 1, 2021, we completed a private placement in which we sold an aggregate of 6,000 shares of series A convertible preferred stock
and warrants for the purchase of an aggregate of 8,999,552 shares of common stock to certain investors for gross proceeds of $6,000,000.
On August 18, 2021, we completed an additional closing of this private placement in which we sold 2,000 shares of series A convertible
preferred stock and warrants for the purchase of 2,999,852 shares of common stock for gross proceeds of $2,000,000.
During
the 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.
Outstanding
Debt
Original
Issue Discount Subordinated Debentures
In
June 2022, we commenced an offering of original issue discount subordinated debentures. As of September 30, 2022, we have completed four
closings of this offering and issued debentures in the aggregate principal amount of $3,579,686. The debentures contain an original issue
discount of 15%, or an aggregate original issue discount of $538,240. As a result, the total purchase price was $3,050,000. 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 our next equity financing in which we receive gross proceeds in excess of $20 million, (ii) twenty-four months
after the date of issuance or (iii) within 30 days after election of repayment from the holder so long as the election is after the 6-month
anniversary of the debenture. We may voluntarily prepay the debentures in whole or in part without premium or penalty. The
debentures contain customary events of default for a loan of this type. The debentures are unsecured and are subordinated in right of
payment to the prior payment in full of all senior indebtedness and are pari passu in right of payment to any other
unsecured indebtedness incurred by us in favor of any third party. As of September 30, 2022, the outstanding principal balance
of the debentures was $3,588,240 and debt issuance cost was $483,801.
Original
Issue Discount Secured Subordinated Note
On
July 29, 2022, we entered into a securities purchase agreement with an accredited investor, pursuant to which we 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 an original issue discount of $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 and payable in accordance with the amortization
schedule set forth on Exhibit A to the note. We may prepay the principal and all accrued and unpaid interest on the note without penalty,
in whole or in part; provided however, in no event before January 15, 2023, unless with the explicit prior written approval of the holder.
The note contains customary events of default for a loan of this type. The note is guaranteed by BSNM, DSO, Nexus, GSP and Ceautamed
and is secured by a security interest in all of the assets of our company and such guarantors; provided
that such security interest is subordinate to the rights of the lenders under any senior indebtedness (as defined in the note).
As of September 30, 2022, the outstanding principal balance of the note was $2,257,889 and debt issuance cost was $263,756.
12%
Unsecured Subordinated Convertible Debentures
On
November 5, 2021, we entered into a securities purchase agreement with certain investors, pursuant to which we sold 12% unsecured subordinated
convertible debentures in the aggregate principal amount of $2,250,000 to such investors for gross proceeds of $2,214,000, the proceeds
of which were used to fund the acquisition of Nexus. The debentures were due and payable on the earliest of the maturity date, November
30, 2022, or upon their earlier conversion or redemption. As of September 30, 2022, the outstanding principal balance of the debentures
was $2,250,000 and debt issuance cost was $26,174. On December 8, 2022, the debentures were converted into an aggregate of 2,542,501
shares of common stock. See “—Recent Developments” above.
Acquisition
Notes
On
July 29, 2022, we issued secured subordinated convertible promissory notes in the aggregate principal amount of $2,150,000 in connection
with the acquisition of Ceautamed. The notes shall bear 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%. The notes are convertible at the option of the holder into 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 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 its subsidiaries 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, 2022, the outstanding principal
balance of these notes was $2,150,000.
On
July 29, 2022, we issued secured subordinated promissory notes in the aggregate principal amount of $2,150,000 in connection with the
acquisition of Ceautamed. 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 in accordance with the amortization schedule set forth on Exhibit A
to the notes. We may redeem all or any portion of the notes at any time without premium or penalty. The notes contain customary covenants
and events of default for loans of this type, including upon any default under the senior indebtedness (as defined in the notes). The
notes are guaranteed by Ceautamed and its subsidiaries 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, 2022, the outstanding principal balance of these notes was $2,150,000.
On
July 29, 2022, we issued secured subordinated promissory notes in the aggregate principal amount of $1,300,000 in connection with the
acquisition of Ceautamed. The notes shall 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%. We may redeem all or any portion of the notes at any time without premium or penalty. The notes
contain customary covenants and events of default for loans of this type, including upon any default under the senior indebtedness (as
defined in the notes). The notes are guaranteed by Ceautamed and its subsidiaries 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, 2022, the outstanding principal balance of these notes was
$1,300,000. See “—Recent Developments” above regarding amendments to these notes.
On
November 8, 2021, we issued a 5% secured subordinated promissory note in the principal amount of $1,900,000 to Justin Francisco and Steven
Rubert in connection with the acquisition of Nexus. This note accrues interest at 5% per annum and the outstanding principal and interest
will be amortized on a straight-line basis and are payable quarterly in accordance with the amortization schedule attached to the note,
with all amounts due and payable on November 8, 2024. We may prepay all or any portion of this note any time prior to maturity without
premium or penalty. The note contains customary covenants and events of default for a loan of this
type, including if a default occurs under any senior secured indebtedness to banks and other financial institutions or private equity
funds, and is secured by a security interest in all of our assets; provided that such security interest is subordinate to the rights
of the lenders under any such senior secured indebtedness. As of September 30, 2022, the outstanding principal balance of this
note was $1,900,000.
On
July 1, 2021, we issued a 6% secured subordinated promissory note in the principal amount of $3,000,000 to Sasson E. Moulavi in connection
with the acquisition of DSO. This note accrues interest at 6% per annum and the outstanding principal and interest will be amortized
on a straight-line basis and are payable quarterly in accordance with the amortization schedule attached to the note, with all amounts
due and payable on July 1, 2024. We may prepay all or any portion of this note any time prior to maturity without premium or penalty.
This note contains customary covenants and events of default for a loan of this type, including
if a default occurs under any senior secured indebtedness to banks and other financial institutions or private equity funds, and is secured
by a security interest in all of the assets of DSO; provided that such security interest is subordinate to the rights of the lenders
under any such senior secured indebtedness. As of September 30, 2022, the outstanding principal balance of this note was $3,000,000.
See “—Recent Developments” above regarding an amendment to this note.
Promissory
Notes
On
July 1, 2021, we entered into a loan agreement with Diamond Creek Capital, LLC for a term loan in the principal amount of up to $3,000,000.
The loan bears interest at a rate of 15.0% per annum, provided that upon an event of default, such rate shall increase by 5%. The loan
was due and payable on the earlier of July 1, 2022 or upon completion of the initial public offering.
We repaid $1,325,000 of the principal balance and $27,604 of the interest from the proceeds of
the initial public offering. 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 our assets and contains customary events of default. As of September 30, 2022, the outstanding
principal balance of this note was $1,025,000.
Since
inception, we have 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 initial public offering
with the exception of a note which has an outstanding balance of $200,000 at September 30, 2022. This note accrues interest at 12% and
is due and payable on April 1, 2023.
In
May 2022, we issued a promissory note in the principal amount of $346,000. The note was increased in July 2022 to $650,000. This note
bears interest at a rate of 10% and matures on April 1, 2023. At September 30, 2022, the outstanding amount was $555,958.
In
August 2022, we issued a promissory note in the principal amount of $100,000. This note bears interest at a rate of 17.5% and matures
on October 17, 2022. At September 30, 2022, the outstanding amount was $25,000.
Cash
Advances
In
July 2022, we entered into a cash advance agreement for $650,000 with a required repayment amount of $897,750, which requires weekly
payments of approximately $40,806. At September 30, 2022, the outstanding amount was $803,708.
In
August 2022, we entered into a cash advance agreement for $100,000 with a required repayment amount of $146,260, which requires weekly
payments of approximately $6,200. At September 30, 2022, the outstanding amount was $96,660.
In
September 2022, we entered into a cash advance agreement for $243,750 with a required repayment amount of $372,500, which requires weekly
payments of approximately $15,000. At September 30, 2022, the outstanding amount was $372,500.
Debt
issuance cost for all cash advances was $424,661 at September 30, 2022.
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 September 30, 2022, the outstanding principal balance of this lines of credit was $969,513.
In
August 2022, Ceautamed entered into a revolving line of credit with a bank, which permitted borrowing up to $500,000, and bears interest
at 45.09%. As of September 30, 2022, the outstanding principal balance of this line of credit was $46,532.
In
September 2022, DSO entered into a revolving line of credit with a bank, which permitted borrowings up to $70,000, and bears interest
at 9.49%. As of September 30, 2022, the outstanding principal balance of this lines of credit was $70,255.
Equipment
Financing Loan
In
May 2022, we entered into an equipment financing loan for $146,765 used for the purchase of equipment within BSNM’s operations.
The loan bears interest at 10.18% and matures on April 1, 2027. At September 30, 2022, the outstanding amount was $138,721.
In
August 2022, we entered into an equipment financing loan for $35,050 used for the purchase of equipment within BSNM’s operations.
The loan bears interest at 10.18% and matures on August 1, 2027. At September 30, 2022, the outstanding amount was $35,050.
In
July 2022, we entered into an equipment financing loan for $8,463 used for the purchase of equipment within Ceautamed’s operations.
At September 30, 2022, the outstanding amount was $7,950.
EIDL
Loan
In
June 2020, pursuant to the economic injury disaster loan, or EIDL, program under the under the provisions of the Coronavirus Aid, Relief
and Economic Security Act, or the CARES Act, we entered into a promissory note with the U.S. Small Business Administration, or the SBA,
with a principal amount of $300,000. This loan matures in 30 years and bears interest at a rate of 3.75%. The loan is secured by all
of our assets. As of September 30, 2022, the outstanding principal balance of this loan was $300,000.
PPP
Loans
In
May 2020, we received $239,262 in paycheck protection program, or PPP, loans under the CARES Act. This loan bears interest at a rate
of 1% per annum and matures in April 2022. As of September 30, 2022, the outstanding principal balance of this loan was $168,013.
In
February 2021, we received an additional $261,164 in PPP loans under the CARES Act. This loan bears interest at a rate of 1% per
annum and matures in January 2023. As of September 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. We have filed for forgiveness during 2022, and have received notice of forgiveness on some of the loans in the amount
of $134,956 and are awaiting notice of forgiveness on the remainder.
Contractual
Obligations
Our
principal commitments consist mostly of obligations under the loans described above, the operating leases described under “Business—Facilities”
and pricing/margin structures for products established with our clients. We do not have any purchase obligations with any suppliers.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical
Accounting Policies
The
following discussion relates to critical accounting policies for our company. The preparation of financial statements in conformity with
GAAP requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto,
and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant
to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition
and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial condition
and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates
are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting
the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies
involve the most significant estimates and judgments used in the preparation of our financial statements:
Revenue
Recognition. We evaluate and recognize revenue by: identifying the contract(s) with the customer; identifying the performance
obligations in the contract; determining the transaction price; allocating the transaction price to performance obligations in the contract;
and recognizing revenue as each performance obligation is satisfied through the transfer of a promised good or service to a customer
(i.e., “transfer of control”).
Products
(BSNM, DSO, GSP and Ceautamed)
We
primarily generate product revenues by manufacturing and packaging of nutraceutical products as a contract manufacturer for its customers.
The majority of our revenue is recognized when we satisfy a single performance obligation by transferring control of products to a customer.
Control is generally transferred when our products are either shipped or delivered based on the terms contained within the underlying
contracts or agreements. Our general payment terms are short-term in duration. We do not have significant financing components or payment
terms. We did not have any material unsatisfied performance obligations at September 30, 2022 or December 31, 2021.
Distribution
expenses to transport our products, where applicable, and warehousing expense after manufacture are accounted for within operating expenses.
Advertising/Marketing
(Nexus)
Nexus
generates advertising revenues when sales of listed products are sold by product vendors through its network as a result of the marketing
efforts of digital marketers. The products on the network come from several different customers, which pay Nexus a specific amount per
sale, the amount of which is dictated by the customer. The revenue is recognized upon the sale of a product by the customer, net of fraudulent
traffic or disputed transactions. A portion of the specific amount received by Nexus for that sale is paid out to the digital marketer
as a commission, which is recorded in cost of sales. To illustrate the revenue process, a digital marketer logs onto the platform and
selects an offer to promote for the day. The platform generates a unique link which the digital marketer distributes either via email
or a banner ad. As the link is distributed to the consumer via the marketing efforts of the digital marketer, the consumer visits that
link to make a purchase from the customer’s website, and when such purchase is complete, revenue is recognized by Nexus and the
sale is credited to the digital marketer’s Nexus account. The benefit to the digital marketer operating on Nexus’ network
is that the digital marketer receives a commission without the possibility of a claw back or refund. The customer benefits through increased
sales of its products as a result of the marketing efforts of the digital marketers. Nexus’ platform acts as the transaction ledger,
keeping track of clicks, sales and commissions.
Nexus’
general payment terms are short-term in duration. Insertion orders are utilized between Nexus and the customer for each campaign related
to a particular product being marketed. The insertion order remains in effect until the customer or Nexus terminates the order, and either
party may terminate the order at any time upon 14 days’ written notice. The customer is billed weekly for the sales digital marketers
have generated for the week. Nexus does not have significant financing components or payment terms. Nexus did not have any material unsatisfied
performance obligations at September 30, 2022 or December 31, 2021.
Inventory.
Inventory consists of raw materials, work in progress, and finished goods and is valued at the lower of cost (first-in, first-out) or
net realizable value. An allowance for inventory obsolescence is provided for slow moving or obsolete inventory to write down historical
cost to net realizable value. The allowance for obsolescence is an estimate established through charges to cost of goods sold. Management’s
judgment in determining the adequacy of the allowance is based upon several factors which include, but are not limited to, analysis of
slow-moving inventory, analysis of the selling price of inventory, the predetermined shelf life of the product, and management’s
judgment with respect to current economic conditions. Given the nature of the inventory, it is reasonably possible our estimate of the
allowance for obsolescence will change in the near term.
Property
and Equipment, net. Property and equipment are recorded at cost. Expenditures for major betterments and additions are charged
to the asset accounts, while replacements, maintenance and repairs which do not improve or extend the lives of the respective assets
are charged to expense as incurred. We provide for depreciation and amortization over the estimated useful lives of various assets using
the straight-line method ranging from 3-5 years.
Goodwill
and Intangible Assets. Goodwill is not amortized but is subject to annual impairment tests. In addition to the annual impairment
review, impairment reviews are performed whenever circumstances indicate a possible impairment may exist. Impairment testing for goodwill
is done at the reporting unit level. We compare the fair value of the reporting unit assets to the carrying amount, on at least an annual
basis, to determine if there is potential impairment. If the fair value of the reporting unit assets is less than their carrying value,
an impairment loss will be recognized. No goodwill impairments were recognized during three and nine months ended September 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, GSP and Ceautamed. We amortize 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. We assess potential impairments to its long-lived assets when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the undiscounted cash flows
expected to be generated by an asset (or group of assets) is less than its carrying amount. Any required impairment loss is measured
as the amount by which the asset’s carrying value exceeds its fair value and is recorded as a reduction in the carrying value of
the related asset and a charge to operating results. We had no impairment of long-lived assets at September 30, 2022 and December 31,
2021.
Operating
Lease Right-of-Use Assets and Liabilities. We record a right-of-use asset and lease liability on the balance sheet for all leases
with terms longer than 12 months. Leases are classified either as finance or operating with the classification affecting the pattern
of expense recognition. Lease liabilities are recognized based on the present value of the remaining lease payments and are discounted
using the most reasonable incremental borrowing rate. We use the implicit rate when it is readily determinable. Since our lease does
not provide an implicit rate, to determine the present value of lease payments, management uses our incremental borrowing rate based
on the information available at lease commencement. Leases with a term of 12 months or less at inception are not recorded on our balance
sheet and are expensed on a straight- line basis over the lease term.
Stock-based
Compensation. We recognize expense for stock options and warrants granted over the vesting period based on the fair value of
the award at the grant date, are valued using a Black-Scholes option pricing model to determine the fair market value of the stock options.
We calculate the amount of tax benefit available by tracking each stock option award on an employee-by-employee basis and on a grant-by-grant
basis. We then compare the recorded expense to the tax deduction received for each stock option grant.
CORPORATE
HISTORY AND STRUCTURE
Our
company was incorporated in the State of Delaware on February 2, 2017 under the name Bonne Santé Group, Inc. On August 4, 2021,
we changed our name to Smart for Life, Inc. in connection with the acquisition of DSO described below.
Acquisition
of BSNM
On
March 8, 2018, we acquired 51% of Millenium Natural Manufacturing Corp. and Millenium Natural Health Products Inc. for a purchase price
of $2,140,272. On October 8, 2019, we entered into an agreement to acquire the remaining 49% of these companies for a purchase price
of $100,000, which was completed on October 8, 2019.
Millenium
Natural Manufacturing Corp. was originally incorporated in the State of Florida on March 12, 1998 under the name Millenium Natural Health
Products Inc. On March 24, 2003, its name was changed to Millenium Natural Manufacturing Corp. Millenium Natural Health Products Inc.
was originally incorporated in the State of Florida on February 5, 2002 under the name Millenium Natural Manufacturing Corp. On March
24, 2003, its name was changed to Millenium Natural Health Products Inc. On September 30, 2020, we changed the name of Millenium Natural
Manufacturing Corp. to BSNM and on November 24, 2020, we merged Millenium Natural Health Products Inc. into BSNM to better reflect our
vertical integration.
Acquisition
of DSO
On
February 11, 2020, we entered into securities purchase agreement, which was amended on July 7, 2020 and June 4, 2021, to acquire all
of the issued and outstanding equity interests 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 July 1, 2021, the acquisition was completed.
The
total purchase price was $12,000,000 comprised of (i) $6,000,000 in cash, (ii) a 6% secured subordinated convertible promissory note
in the principal amount of $3,000,000 and (iii) a 6% secured subordinated promissory note in the principal amount of $3,000,000.
On
May 19, 2022, we acquired all of the issued and outstanding equity interests of Lavi Enterprises, LLC, an operating company associated
with DSO that has relationships with various customers and distributors of DSO’s products, for $100.
Doctors
Scientific Organica, LLC was originally incorporated in the State of Nevada on February 16, 2006. On September 28, 2015, it converted
to a Florida company. Oyster Management Services, Ltd. was organized in the State of Florida on April 1, 2003. On December 13, 2022,
it was converted to a limited liability company known as Oyster Management Services, L.L.C. Lawee Enterprises, L.L.C. was organized in
the State of Florida on January 3, 2005. U.S. Medical Care Holdings, L.L.C. was organized in the State of Florida on April 1, 2003. Lavi
Enterprises, LLC was organized in the State of Florida on September 25, 2007.
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 May 19, 2022, 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 prospectus, we collectively refer to Doctors Scientific Organica, LLC and its consolidated subsidiaries as DSO.
Establishment
of Canadian Subsidiary
On
August 24, 2021, we established Smart for Life Canada Inc. as a wholly owned subsidiary of Doctors Scientific Organica, LLC 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.
Acquisition
of Nexus
On
July 21, 2021, we entered into a securities purchase agreement, which was amended on November 8, 2021, to acquire all of the issued and
outstanding capital stock of Nexus. On November 8, 2021, the acquisition was completed.
The
total purchase price was $6,000,000 comprised of (i) $2,200,000 in cash, (ii) a 5% secured subordinated convertible promissory note in
the principal amount of $1,900,000 and (iii) a 5% secured subordinated promissory note in the principal amount of $1,900,000.
Nexus
was incorporated in the State of Florida on October 10, 2016.
Acquisition
of GSP
On
November 29, 2021, we entered into a contribution and exchange agreement to acquire all of the issued and outstanding capital stock of
GSP. On December 6, 2021, the acquisition was completed.
The
total purchase price was $425,000, payable in 85,000 shares of our common stock, half of which were issued on December 6, 2021 and the
remaining of which were issued upon closing of our initial public offering on February 18,
2022. In connection with this acquisition, we also issued 29,446 shares of common stock to certain vendors of GSP who agreed to settle
accounts payable owed to them into our common stock, half of which were issued on December 6, 2021 and the remaining of which were issued
upon closing of our initial public offering on February 18, 2022.
GSP
was incorporated in the State of Delaware on January 3, 2020.
Acquisition
of Ceautamed
On
March 14, 2022, we entered into a securities purchase agreement, which was amended on July 29, 2022, to acquire all of the issued and
outstanding equity interests of Ceautamed Worldwide LLC and its wholly-owned subsidiaries Wellness
Watchers Global, LLC and Greens First Female LLC, which we collectively refer to in this prospectus
as Ceautamed. On July 29, 2022, the acquisition was completed.
The
total purchase price was $8,600,000 comprised of (i) $3,000,000 in cash (subject to adjustment),
(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.
Ceautamed
Worldwide LLC was organized in the State of Florida on May 21, 2009.
Wellness Watchers Global, LLC was originally organized in the State of Delaware on November 30, 2006. On December 18, 2006, it converted
to a Florida company. Greens First Female LLC was organized in the State of Florida on April 1, 2016.
Corporate
Structure
The
following charts depict our organization structure.
BUSINESS
Overview
We
are engaged in the development, marketing, manufacturing, acquisition, operation and sale of a broad spectrum of nutritional and related
products with an emphasis on health and wellness. Structured as a global holding company, we are executing a buy-and-build strategy with
serial accretive acquisitions creating a vertically integrated company with an objective of aggregating companies generating a minimum
of $300 million in revenues within the next thirty-six months. To drive growth and earnings, we are developing proprietary products
as well as acquiring other profitable companies, encompassing brands, manufacturing and distribution channels.
We
also operate a network platform in the affiliate marketing space. Affiliate marketing is an advertising model in which a product vendor
compensates third-party digital marketers to generate traffic or leads for the product vendor’s products and services. The third-party
digital marketers are referred to as affiliates, and the commission fee incentivizes them to find ways to promote the products being
sold by the product vendor.
Our
Business Model
We
are engaged in a comprehensive program to develop a robust pipeline of prospective acquisitions in addition to the companies currently
operated by us. Our management has significant experience in locating and evaluating prospective target operating companies. We have
also entered into buy-side agreements with certain advisers and consultants to assist management in identifying and evaluating prospective
target operating companies. The nutritional products industry is highly fragmented with a large pool of companies generating less than
$20 million in revenues representing significant opportunity for industry consolidation.
We
plan to acquire target companies utilizing a combination of cash, promissory notes, earnouts and public company stock, generally at 4x
to 6x trailing adjusted EBITDA. Aside from our first acquisition described below, we intend on paying no more than 60% cash on any acquisition
that we execute with a target of 50%. The remainder is allocated between stock and a note and/or earnout with a heavier weighting toward
the former. Although the acquisition consideration is structured, we believe that our acquisitions will provide three distinct benefits
to the principals of an acquisition. First, a significant liquidity event. Second, the creation of a significant equity position in an
emerging growth public company. Third, ongoing employment at customary industry compensation.
Over
the next 24 months, we plan to acquire multiple companies aggregating a minimum of $100 million in annualized revenues with the number
of prospective acquisitions in the pipeline representing over $50 million in additional revenue. We do not currently have sufficient
capital to complete these acquisitions. We intend to raise capital for additional acquisitions primarily through debt financing at our
operating company level, additional equity offerings by our company, or by undertaking a combination of any of the above. The sale of
additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt
service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all.
There
is no guarantee that we will be able to acquire additional businesses under the terms outlined above or that we will be able to find
additional acquisition candidates should we terminate our plans for any of our current acquisition targets.
Our
Industry
The
markets in which we operate are characterized by rapid technological changes, frequent new product introductions, established and emerging
competition, extensive intellectual property disputes and litigation, price competition, aggressive marketing practices, evolving industry
standards and changing customer preferences. Accordingly, our prospects must be considered in light of the uncertainties, risks, expenses,
and difficulties frequently encountered by companies operating in rapidly changing and competitive markets.
Nutraceutical
Industry
The
nutraceutical industry focuses on nutritional supplements intended to improve longevity, sports fitness and provide health benefits in
addition to the basic nutritional value present in food. Most people are familiar with various nutraceutical products—and have
likely used them—even if they are unfamiliar with the industry name. Nutraceuticals comprise such commonly used items as herbal
products, specific diet products, vitamins, processed foods and beverages, functional foods, isolated nutrients and other dietary products.
Functional foods are foods that have a potentially positive effect on health beyond basic nutrition. A familiar example of a functional
food is oatmeal because it contains soluble fiber that can help lower cholesterol levels. Some foods are also modified to have health
benefits. An example is orange juice that has been fortified with calcium for bone health.
The
following table prepared by the Council for Responsible Nutrition (www.crnusa.org), or CRN, depicts the types of supplements taken by
the population in the different indicated categories beginning in 2018 and estimated through 2027. We sell products across all of these
product categories, and we believe that our market share in each of these categories is currently less than 1%.
SOURCE:
Council for Responsible Nutrition
The
nutraceutical industry has experienced significant growth across the globe, propelled by the increasing age expectancies and associated
increases in diseases of aging and lifestyle. A shift in demographics has also allowed manufacturers to benefit in recent years. The
number of Americans ages 65 and older is projected to nearly double from 52 million in 2018 to 95 million by 2060, and the
65-and-older age group’s share of the total population will rise from 16% to 23%. Moreover, the CRN reported 77% of U.S. adults
take dietary supplements.
According
to a study by Grand View Research, Inc., amid the COVID-19 crisis, the global market for nutraceuticals is projected to grow from $412.7
billion in the year 2020 and reach $722.5 billion by 2027, growing at a CAGR of 8.3% over the analysis period. The nutraceuticals market
in the United States is estimated at $104.5 billion in the year 2021 according to Global Industry Analysts Inc. The U.S. currently accounts
for a 34.57% share in the global market. Among the other noteworthy geographic markets are China, Japan and Canada, each forecast to
grow at 9.6%, 6.3% and 6.7%, respectively, over the analysis period. Within Europe, Germany is forecast to grow at approximately 7.1%
CAGR.
Nutraceuticals
are garnering immense attention in recent years due to various trends including changing lifestyles, burgeoning middle-class segment
across emerging economies, transforming dietary habits, aging population, and increased life expectancy. In addition, the focus of R&D
based pharmaceutical sector on expensive specialty drugs is increasing the burden on the healthcare system as well as resulting in higher
out-of-pocket costs for drugs driving the focus on prevention than intervention. The self-care trend across the world is driving strong
demand for nutraceuticals including superfoods, food and dietary supplements, sports nutrition, and functional foods and beverages. Given
the hectic lifestyles and the lack of time for consumption of the required nutrients through regular diet, the need for replenishing
such essential nutrients is increasing. In this context, nutraceuticals are emerging to be the solution for meeting this requirement.
Nutraceuticals are considered to be the vital link between health and food.
The
market is also experiencing strong demand for personalized approaches to wellness that is driving product innovation in the areas of
weight management, sports nutrition, and healthy snacking. Other noteworthy trends benefiting market prospects in the near term include
emergence of clean labeling as a new norm owing to increasing focus of consumers on ingredient list on the product; innovative delivery
technologies such as microencapsulation, which protects the product from adverse conditions such as light and air.
To
our knowledge, the projections above for future periods do not take into account the effects of the worldwide coronavirus pandemic. Accordingly,
those projections may be overstated and should not be given undue weight. At this time, we cannot predict the exact effects of the pandemic.
As
the overall population continues to turn to healthier living in hopes of offsetting rising healthcare expenditures and preventing general
subpar health conditions, we believe that the demand for nutraceutical industry products will resemble a similar trend.
Digital
Marketing
As
a result of our acquisition of Nexus, we have entered the digital marketing industry as a way to promote the products and brands that
we sell. Digital marketing is a component of marketing that uses internet and online based digital technologies such as desktop computers,
mobile phones and other digital media and platforms to promote products and services.
The
COVID-19 pandemic resulted in people staying at home and/or working remotely from home, resulting in huge increase in online traffic.
Clicks and display ads are among the most prominent forms of digital marketing initiatives. Clicks are expensive compared to display
ads, as clicks ensure the customer is directed to the advertiser’s website. However, clicks provide a better return on investment.
According
to Global Industry Analysis, Inc., the global market for digital advertising and marketing is estimated at $350 billion in
the year 2020, and is projected to reach $786.2 billion by 2026, growing at a CAGR of 13.9% over the analysis period. The digital
advertising and marketing market in the U.S. is estimated at $155.3 billion in the year 2021. We believe that our market share
is currently less than 1%.
Our
Operating Subsidiaries
BSNM
BSNM
is a nutraceutical contract manufacturer. Since 1998, our strong manufacturing capabilities and dedication to our clients has enabled
us to build relationships with hundreds of customers throughout the United States and around the world, including South America, Central
America and Europe. We specialize in a wide variety of products to fill our client’s needs, from the private labeling of vitamins,
dietary supplements, nutraceuticals, sport nutrition and broad-spectrum nutritional supplements. Our experienced team of scientists,
formulators, and manufacturing experts have the years of knowledge necessary to take our client’s concepts all the way from initial
idea to finished product. In addition, we can provide the support for a simple and cost-effective “turn key” solution to
manufacturing existing formulations.
To
meet the specific demands of any order, we have state-of-the-art manufacturing and packaging lines to decrease cost and maximize efficiencies.
We certify that all products and labels meet stringent FDA requirements and our quality control associates will continually monitor the
entire process until products are delivered. Our goal is to exceed our customer’s expectations with respect to product quality,
service and price.
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. The program uses
an exact protein-to-sugar ratio, a low glycemic index and glycemic load as well as multiple small meals throughout the day to deliver
specific amounts of protein, super fibers and complex carbs to suppress hunger, keep sugar and insulin low and trigger the body’s
release of the fat releasing hormone glucagon.
Our
Smart for Life products deliver:
| ● | Hunger
controlling protein mix |
| ● | No
toxins or preservatives |
| ● | The
right amount of protein per calorie ratio |
| ● | No
insulin spike, lets glucagon do its job |
| ● | A
small amount of essential good fats |
| ● | Right
amount of complex carbs |
DSO
also develops premium supplements and commodities that will promote optimal health and wellness. This natural product line uses simple
quality ingredients to help create a more sustainable lifestyle. DSO has over 15 years of experience providing high-quality products
to premium retail locations and companies. DSO 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. All products are packaged in eco-friendly and bio-degradable packaging.
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. 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.
We
believe that the Sports Illustrated brand is one of the most recognized brands in sports and athletics. 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. See “—Intellectual Property” below for additional details regarding this license.
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.
Ceautamed sells a wide variety of nutritional
products, including antioxidant rich supplements, plant-based protein, alkalizing nutrients and products designed for weight management.
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.
Nexus’
has relationships with both product vendors and digital marketers. A product vendor is a Nexus
customer that has products, whether digital or physical, for sale and is looking for increased sales through digital marketing avenues
from digital marketers. Digital marketers are Nexus contractors that engage in digital marketing. An example of a digital marketer
is someone who has a strong Facebook following, or a strong knowledge of Facebook ad marketing. Other examples include google ad marketing
or email marketers who send marketing messages to an opted in list of subscribers. Historically, Nexus’ customers consisted exclusively
of owners of digital products that were also delivered digitally. Following our acquisition of Nexus, BSNM, DSO, GSP and Ceautamed,
as well as any additional nutraceutical companies that we acquire in the future, will also become
customers of Nexus. Nexus will use its online marketplace to market our nutraceutical products through its network of digital marketers.
Our nutraceutical product companies will then sell and physically deliver the nutraceutical products to the end users identified through
the efforts of the digital marketers. Nexus has the ability to “plug and play” with any of the products sold by companies
that we may acquire in the future as we can take the consumer facing products being sold by those companies and seamlessly add them
to the Nexus network to generate sales.
Product
vendors come to Nexus to increase sales of their products and digital marketers come to Nexus to receive a commission in exchange for
their marketing efforts, which are designed to generate sales for the product vendors. When a digital marketer’s marketing efforts
results in a sale of a product by a product vendor, the digital marketer is then credited with a commission. The product vendor is billed
weekly for the sales that the product vendor makes during the week as the result of such digital marketers’ marketing efforts.
The product vendor pays Nexus and Nexus pays the digital marketer. This is an anonymous transaction as digital marketers and product
vendors are only defined inside the marketplace by an offer name (product vendor) and an affiliate number (digital marketer).
Manufacturing,
Distribution and Quality Control
BSNM operates a 22,000 square foot manufacturing
facility in Doral, Florida. This facility primarily focuses on the contract manufacturing of vitamins and supplements, with a particular
emphasis on the production of tablets, capsules and powders, along with turn-key solutions for packaging these health and wellness products
in a wide variety of bottles, jars, sachets and stick packs. From inception through December 31, 2021, it has manufactured nutritional
products for approximately 240 companies, and during the year ended December 31, 2021, it manufactured nutritional products for approximately
25 companies.
DSO
operates a 30,000 square foot manufacturing facility in Riviera Beach, Florida. This facility is primarily focused on the production
of natural health and wellness meal replacement products, including nutrition bars, cookies, soups and shakes, as well as some vitamin
and supplement capabilities such as powders.
GSP
and Ceautamed rely on third-party contract manufacturers to manufacture their products.
All
our manufacturing operations are subject to GMPs promulgated by the FDA and other applicable regulatory standards. We believe our manufacturing
processes comply with the GMPs for dietary supplements or foods, and our manufacturing and distribution facilities generally have sufficient
capacity to meet our current business requirements and our currently anticipated sales. We place special emphasis on quality control.
We assign lot numbers to all raw materials and initially hold them in quarantine while our quality department evaluates them for compliance
with established specifications. Once released, we retain samples and process the material according to approved formulas by blending,
mixing and technically processing as necessary. We manufacture products in final delivery form as a capsule, tablet, powder, or nutrition
bar. After a product is manufactured, our laboratory analysts test its weight, purity, potency, disintegration and dissolution, if applicable,
utilizing both internal equipment and third-party labs. We hold the product in quarantine until we complete the quality evaluation and
determine that the product meets all applicable specifications before packaging. When the manufactured product meets all specifications,
our automated packaging equipment packages the product with at least one tamper-evident safety seal and affixes a label, an indelible
lot number and, in most cases, the expiration or “best by” date.
Our
manufacturing operations are designed to allow low-cost production of a wide variety of products of different quantities, physical sizes
and packaging formats, while maintaining a high level of customer service and quality. Flexible production line changeover capabilities
and reduced cycle times allow us to respond quickly to changes in manufacturing schedules and customer demands.
We
have inventory control systems at our facilities that track each manufacturing and packaging component as we receive it from our supply
sources through manufacturing and shipment of each product to customers. To facilitate this tracking, most products we sell are bar coded.
We believe our distribution capabilities increase our flexibility in responding to our customers’ delivery requirements.
Raw
Materials and Suppliers
In
fiscal 2021 and 2020, we spent approximately $3,454,000 and $801,000, respectively, on raw materials, excluding packaging and similar
product materials. The principal raw materials required in our operations are vitamins, minerals, herbs, and gelatin. We believe that
there are adequate sources of supply for all our principal raw materials, and in general we maintain two to three suppliers for many
of our raw materials. From time to time, weather or unpredictable fluctuations in the supply and demand may affect price, quantity, availability,
or selection of raw materials. We believe that our strong relationships with our suppliers yield high quality, competitive pricing, and
overall good service to our customers. Although we cannot be sure that our sources of supply for our principal raw materials will be
adequate in all circumstances, we believe that we can develop alternate sources in a timely and cost-effective manner if our current
sources become inadequate. During fiscal 2021, no one raw material supplier accounted for more than 10% of our raw material purchases.
Due to availability of numerous alternative raw material suppliers, we do not believe that the loss of any single raw material supplier
would have a material adverse effect on our consolidated financial condition or results of operations. See “Risk Factors—Risks
Related to Our Business and Industry—An increase in the price and shortage of supply of key raw materials could adversely affect
our business.”
Sales
and Marketing
We
employ many different techniques and strategies within our marketing initiatives. These include direct to consumer outreach, use of influencers,
Facebook targeting, focused e-mail campaigns, TV/Video spots and traditional media. Our marketing goal is always to increase visibility
and relevance of our brands in the minds of our customers and potential customers. We hope to expand our programs to include experimental
marketing techniques in the future.
We
recently acquired Nexus, which we believe will become a value-added component of our marketing strategies.
Customers
BSNM, DSO, GSP and Ceautamed primarily sell products
to customers under individual purchase orders placed by them under their standard terms and conditions of sale. These terms and conditions
generally include insurance requirements, representations by us with respect to the quality of our products and our manufacturing process,
our obligations to comply with law, and indemnifications by us if we breach our representations or obligations. There is no commitment
from any customer to purchase from us, or from us to sell to them, any minimum amount of product. During fiscal 2021, Amazon, Twinlab
and Costco accounted for 29%, 22% and 15%, respectively, of our total revenues.
Ceautamed has also entered distribution agreements
with WBC Group, LLC whereby it acts as an exclusive distributor of certain of Ceautamed’s products to professional health and wellness
providers and service locations, and to any distributors selling to such providers and locations, within the U.S. and Canada, as well
as through e-commerce websites Amazon, Ebay and Walmart.
As
described above, Nexus’ customers are product vendors. Although the number of customers that Nexus
has fluctuates from year to year, it has established long-term relationships with its significant product vendors,
but it does not have long-term contracts with any of its customers. The relationship with customers can be terminated at any time
by either party; however, as a result of Nexus’ extensive network of digital marketers, which drive sales for product vendors,
the average length of Nexus’ relationships with its significant customers is 3 years. Most of Nexus’ customers are acquired
through existing customer referrals. Nexus also attends Internet marketing conferences to promote is service.
The
loss of any major customer would have a material adverse effect on us if we were unable to replace that customer. See “Risk
Factors—Risks Related to Our Business and Industry—Our major customers account for a significant portion of our consolidated
net sales and the loss of any major customer could have a material adverse effect on our results of operations.”
Competition
The
nutraceutical industry is highly competitive. Our competitors include a number of large, nationally known brands such as Nature Made
(Pharmavite), Nature’s Bounty, GNC, Spectrum (Hain Celestial), Country Life, Garden of Life and Jarrow Formulas, and many smaller
brands, manufacturers and distributors. The sales of products through online marketplace platforms such as Amazon and firms’ websites
continue to expand. Private label products also provide competition to our products. Whole Foods Market, Walmart, CVS, Walgreens and
many health stores also sell a portion of their nutritional supplement offerings under their own private labels. Private label products
are often sold at a discount to branded products. We also compete with distributors that sell products to health stores as well as mass
market retailers such as United Natural Foods and KeHE Distributors. In addition, several major pharmaceutical companies continue to
offer nutritional supplement lines in the mass market, including Centrum (Pfizer and GSK) and One-A-Day (Bayer). Pharmaceutical companies
also offer prescription and over-the-counter products that are or may be competitive with nutritional supplements, particularly with
regard to certain categories of products. Finally, as the nutraceutical market generally has low barriers to entry, additional competitors
enter the market regularly.
Nexus’
competitors would be any digital marketing agency in the cost per acquisition space looking to acquire exclusive advertiser offers and
high end publishers who can send high amounts of traffic through digital marketing media. Examples include Ca$hNetwork, OfferBlueprint
and MaxBounty.
Competitive
Strengths
Based
on management’s belief and experience in the industry, we believe that the following competitive strengths enable us to compete
effectively.
| ● | Proprietary
manufacturing facilities. BSNM and DSO own and operate proprietary manufacturing
facilities, which allow for a high level of managerial control over all aspects of production,
including sourcing, logistics and maintaining the highest levels of quality during the manufacturing
process. Through direct ownership, we are able to optimize our sales and marketing practices
and provide a completely integrated approach, all solidified by a single manufacturing platform
for capsules, tablets, powders and various other delivery methods for all vitamins and supplements.
In addition, as a private label contract manufacturer for third parties, we can provide a
turnkey solution for brands and retailers who want to minimize their supply chain disruption
and maximize their control over product flow to end customers. In addition, as a middle market-sized
contract manufacturer, we are not encumbered by the often overly complex processes that our
larger competitors may have. We can be nimble and highly adaptable, “flexing”
with our customers’ needs as they change over time, which allows us to better service
our ever-expanding international client base. We are able to maintain a competitive advantage
due to our vertically integrated operational control. This vertical integration also allows
us to minimize intellectual property and data security risks, while also eliminating costs,
improving focus, optimizing quality and launching with a faster time-to-market for new products.
We retain control over every step of the manufacturing processes, allowing us to establish
our own institutional advantages and maximize efficiencies. |
| ● | Established and trusted brands. Smart for Life, Doctors Scientific Organica, Sports Illustrated
Nutrition and Greens First are well-established brands in the in the health and wellness industry. In particular, Smart for Life products
are currently sold in many of the largest big-box retailers in the United States and Canada, including Costco, Walmart, Sam’s Club,
BJ’s and Publix, as well as through online channels such as Amazon. DSO has established a dedicated following of consumers that
are strong believers in the high-quality vitamins and supplements it sells to its customers, along with the eco-friendly and bio-degradable
packaging, with Amazon sales numbers continuing to increase as a result. We believe that the Sports Illustrated brand is one of the most
recognized brands in sports and athletics. In connection with our acquisition of GSP, we acquired a license for the exclusive use of the
Sports Illustrated brand (excluding the Sports Illustrated Swimsuit brand for which we have 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. |
| ● | Client
focused innovative research and development. We believe that our research and development
team adds significant value to our company and our customers and is a differentiating factor
for our company. We strive to be technology driven leveraging technology, science, and innovation
in our research and development efforts. We work closely with our clients to create and develop
new and exciting products. We frequently work directly with our customers in our research
and development labs to create innovative solutions that create value for our customers in
a timely manner. Our team works closely with physicians to create novel wholesome products
that add nutritional and functional value. |
| ● | Ability
to market through captive marketing subsidiary. We believe that our subsidiary, Nexus,
allows us access to a broad spectrum of marketing tools to be utilized across the entire
spectrum of our products. We believe that having an experienced management team and existing
customer base accessible to all of our other brands in our portfolio will allow us to drive
sales and revenue of existing products as well as test new product offerings generated
through our research and development. |
| ● | Referral
only network based on long term relationships. Nexus operates a referral only network,
meaning that all of its digital marketers are referred. There is no way to get a Nexus account other
than being directly referred by a known good account holder. This allows Nexus to stem any
fraudulent traffic, which we believe is a substantial competitive advantage for product vendors.
Nexus has also established long term relationships with its product vendors and offers competitive
bonuses for its digital marketer base. We believe that these factors set Nexus apart from
its competition. |
Growth
Strategies
We
will strive to grow our business by pursuing the following growth strategies.
| ● | Acquisition of additional businesses. The nutritional products industry is highly fragmented
with a large pool of companies generating less than $20 million in revenues representing significant opportunity for industry consolidation.
Over the next 24 months, we plan to acquire multiple companies aggregating a minimum of $100 million in annualized revenues with the number
of prospective acquisitions in the pipeline representing over $50 million in additional revenue. As noted above, we also do not currently
have sufficient capital to complete these acquisitions. We intend to raise capital for additional acquisitions primarily through debt
financing at our operating company level, additional equity offerings by our company, or by undertaking a combination of any of the above.
The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in
increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations.
Financing may not be available in amounts or on terms acceptable to us, if at all. There is no guarantee that we will be able to acquire
additional businesses under the terms outlined above or that we will be able to find additional acquisition candidates should we terminate
our plans for any of our current acquisition targets. |
| ● | Increase
sales from existing and new customers. We expect to continue to drive growth
for our consumer products branded business through our increased focus on our top brands
and continued expansion in various health and wellness categories, which we expect to result
in incremental shelf space with existing customers and new customer additions. We expect
that our focus on delivering tangible benefits to consumers through product innovation will
not only benefit us but also benefit our customers. Our ability to supply both branded and
private label products broadens and deepens our partnerships with key retail customers, providing
us more opportunities for category leadership and growth. We view the private label business
as an important and valuable service that we provide to key accounts. |
| ● | Further
penetrate international markets. Our products are currently marketed and sold in
approximately two countries. In fiscal 2021, approximately 14% of our sales were to customers
outside the United States. We plan to capitalize on our marketing and distribution capabilities
to drive incremental international sales of our consumer product brands in emerging markets,
which are characterized by a rising middle class and a strong demand for high quality nutritional
and wellness products from U.S.-based manufacturers. |
| ● | Drive
productivity through operational efficiencies. We expect to continue to focus on
improving efficiency across our operations to allow us to reduce costs in our manufacturing
facilities as well as across our overhead cost areas. Our recent acquisition of DSO significantly
increased our production capacity. In addition, we have launched an initiative to optimize
our product portfolio, which we expect will enable further efficiencies across our manufacturing
network. We are also introducing new initiatives that leverage automation, standardization
and simplification and are expected to increase productivity across our operations. |
Intellectual
Property
We
believe trademark protection is particularly important to the maintenance of the recognized brand names under which we market our products.
We own or have rights to material trademarks or trade names that we use in conjunction with the sale of our products, including the Smart
for Life, Doctors Scientific Organica and Sports Illustrated Nutrition brand names. We also own website domain names and have proprietary
methodologies that we use in our manufacturing businesses. We also rely upon trade secrets, know-how, continuing technological innovations
and licensing opportunities to develop and maintain our competitive position.
In
January 2020, GSP entered into a license agreement, which was amended on June 1, 2020 and August 1, 2021, for the exclusive use of the
Sports Illustrated brand (excluding the Sports Illustrated Swimsuit brand for which GSP has a right of first offer under the license)
in the United States and Canada for dietary and nutritional supplements in the form of capsules, softgel tablets, chewable tablets, lozenges,
gummies, protein bars, and protein powders and concentrates for preparing sports drinks or energy drinks, and the non-exclusive right
to use the brand for the production and sale of shaker bottles, in each case to be sold to/through certain approved accounts in the United
States and Canada.
As
consideration for the license, GSP must pay royalties in an amount that is between 4% and 14% of net sales (as defined in the license
agreement) with certain amounts guaranteed in advance. The aggregate amount of such guaranteed royalties is $1 million for the initial
term of the license agreement. In addition, GSP must contribute an amount ranging between 1% and 3% of its net sales to a common marketing
fund, to be spent on an annual basis on marketing efforts, including advertising and promotional campaigns.
The
license agreement has a term of five years ending on December 31, 2024, with a right to renew for an additional five-year term by providing
written notice of renewal between June 1, 2023 and July 31, 2023. The licensor may terminate the license agreement upon breach by GSP
of the payment or other terms of the license agreement (which is not cured within the applicable cure period, if any, if such breach
is capable of cure) or in the event of certain other customary termination events. GSP may terminate the license agreement upon
a material breach by the licensor if such breach is not cured with thirty (30) business days of the licensor’s receipt of written
notice thereof.
We
protect our intellectual property rights through a variety of methods, including trademark, patent and trade secret laws, as well as
confidentiality agreements and proprietary information agreements with vendors, employees, consultants and others who have access to
our proprietary information. Protection of our intellectual property often affords us the opportunity to enhance our position in the
marketplace by precluding our competitors from using or otherwise exploiting our technology and brands. We are also a party to several
intellectual property license agreements relating to certain of our products. The duration of our trademark registrations is generally
10, 15 or 20 years, depending on the country in which the marks are registered, and we can renew the registrations. The scope and
duration of our intellectual property protection varies throughout the world by jurisdiction and by individual product. Our global trademark
portfolio, with the aforementioned registration durations, consists of our core marks for our business and our proprietary product brands
which drive significant brand awareness for all of our businesses. Our proprietary product formulas and recipes, maintained as
trade secrets, are significant to our growth and success as they form the foundation for our production and sales of effective, high
quality products.
Facilities
Our
corporate offices are located at 990 S Rogers Circle, Suite 3, Boca Raton, Florida 33487. We rent this facility under a lease
that commenced on December 1, 2022 and ends on December 31, 2029, with one option to extend the term for five years. The monthly rent
is approximately $13,283 for the first year, with 3.5% annual increases to approximately $16,328 in the final year of the initial term.
We are also responsible for our proportionate (5.69%) share of any increases to the landlord’s taxes, insurance and common area
maintenance costs after December 31, 2022.
BSNM
is located at 10575 N.W. 37th Terrace, Doral, Florida 33178. It operates a 22,000 square foot manufacturing facility at this address.
The building housing this manufacturing facility is under a 5-year lease ending in June 2022, at the rental rate of $325,000 per year.
BSNM has an option to renew this lease for an additional three years with a 3% annual increase in the rental amount.
DSO’s
manufacturing and corporate offices are located at 1210 W 13th St, Riviera Beach, Florida 33404.
It operates a 30,000 square foot manufacturing facility at this address. The building housing this manufacturing facility is under
a five-year lease ending in August 2023 at the rental rate of $296,040 per year. DSO has an option to renew this lease for an additional
three years with a 3% annual increase in the rental amount.
Our
Canadian subsidiary Smart for Life Canada Inc. operates a retail store located at 6525 Décarie Boulevard, Suite GR-3, Montreal,
Quebec, Canada H3W-3E3. This location also acts as a distribution center for our international direct to consumer and big box customers.
Smart for Life Canada Inc. rents this facility under a three-year lease agreement ending in September 2024 at the rental rate of C$37,570
per year (approximately US$46,734), plus its 3.53% proportionate share of real estate taxes and operating expenses.
We
believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our
business.
Employees
As of September 30, 2022, we had approximately
120 employees with approximately 64 of such employees being engaged in our manufacturing operations and the balance being engaged in management
or middle management. None of our employees are represented by labor unions, and we believe that we have an excellent relationship with
our employees.
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.
Regulation
Our
business is subject to varying degrees of regulation by a number of government authorities in the United States, including the FDA, the
FTC, the CPSC, the USDA and the EPA. Various agencies of the state and localities in which we operate and in which our products are sold
also regulate our business.
The
areas of our business that these and other authorities regulate include, among others:
| ● | product
claims and advertising; |
| ● | product
ingredients; and |
| ● | how
we manufacture, package, distribute, import, export, sell and store our products. |
In
addition, our products sold in foreign countries are also subject to regulation under various national, local and international laws
that include provisions governing, among other things, the formulation, manufacturing, packaging, labeling, advertising and distribution
of dietary supplements and over-the-counter drugs.
As
a result of the acquisition of Nexus, we are also subject to laws and regulations generally applicable to providers of digital marketing
services, including federal and state laws and regulations governing data security and privacy, unfair and deceptive acts and practices,
advertising and content regulation.
We
are also subject to a variety of other regulations in the United States, including those relating to taxes, employment, import and export,
and intellectual property.
Food
and Drug Administration
The
Dietary Supplement Health and Education Act of 1994, or DSHEA, amended the Federal Food, Drug, and Cosmetic Act, or the FDC Act, to establish
a new framework governing the composition, safety, labeling, manufacturing and marketing of dietary supplements. Generally, under the
FDC Act, dietary ingredients (i.e., vitamins; minerals; herb or other botanical; amino acids; or dietary substances for use by humans
to supplement diet by increasing total dietary intake; or any concentrate, metabolite, constituent, extract or combination of any of
the above) that were marketed in the United States prior to October 15, 1994 may be used in dietary supplements without notifying
the FDA. New dietary ingredients (i.e., dietary ingredients that were not marketed in the United States before October 15,
1994) must be the subject of a new dietary ingredient notification submitted to the FDA unless the ingredient has been “present
in the food supply as an article used for food” without being “chemically altered.” A new dietary ingredient notification
must provide the FDA evidence of a “history of use or other evidence of safety” establishing that use of the dietary ingredient
“will reasonably be expected to be safe.” A new dietary ingredient notification must be submitted to the FDA at least 75 days
before the initial marketing of the new dietary ingredient. The FDA may determine that a new dietary ingredient notification does not
provide an adequate basis to conclude that a dietary ingredient is reasonably expected to be safe. Such a determination could prevent
the marketing of such dietary ingredient.
In
2011 and 2016, the FDA issued draft guidance setting forth recommendations for complying with the new dietary ingredient notification
requirement. Although FDA guidance is non-binding and does not establish legally enforceable responsibilities, and companies are free
to use an alternative approach if the approach satisfies the requirements of applicable laws and regulations, FDA guidance is a strong
indication of the FDA’s current thinking on the topic discussed in the guidance, including its position on enforcement. At this
time, it is difficult to determine whether the 2016 draft guidance (which replaced the 2011 draft guidance), if finalized, would have
a material impact on our operations. However, if the FDA were to enforce the applicable statutes and regulations in accordance with the
draft guidance as written, such enforcement could require us to incur additional expenses, which could be significant, and negatively
impact our business in several ways, including, but not limited to, enjoining the manufacturing of our products until the FDA determines
that we are in compliance and can resume manufacturing, increasing our liability and reducing our growth prospects.
The
FDA or other agencies could take actions against products or product ingredients that, in their determination, present an unreasonable
health risk to consumers that would make it illegal for us to sell such products. In addition, the FDA could issue consumer warnings
with respect to the products or ingredients in such products that are sold in our stores. Such actions or warnings could be based on
information received through FDC Act-mandated reporting of serious adverse events.
We
take a number of actions to ensure the products we sell comply with the FDC Act. Some of these actions include maintaining and
continuously updating a list of restricted ingredients that will be prohibited from inclusion in any products that we sell. In
addition, we have developed and maintain a list of ingredients that we believe comply with the applicable provisions of the FDC Act. As
is common in our industry, we rely on some third-party vendors to ensure that the products they manufacture and sell to us comply with
all applicable regulatory and legislative requirements. In general, we seek representations and warranties, indemnification and/or insurance
from our vendors. However, even with adequate insurance and indemnification, any claims of non-compliance could significantly damage
our reputation and consumer confidence in our products. In addition, the failure of such products to comply with applicable regulatory
and legislative requirements could prevent us from marketing the products or require us to recall or remove such products from the market,
which in certain cases could materially and adversely affect our business, financial condition and results of operations. A removal or
recall could also result in negative publicity and damage to our reputation that could reduce future demand for our products. In the
past, we have attempted to offset any losses related to recalls and removals with reformulated or alternative products; however, there
can be no assurance that we would be able to offset all or any portion of losses related to any future removal or recall.
The
FDC Act permits structure/function claims to be included in labels and labeling for dietary supplements without FDA pre-market approval.
However, companies must have substantiation that the claims are “truthful and not misleading”, and must submit a notification
with the text of the claims to the FDA no later than 30 days after marketing the dietary supplement with the claims. Permissible
structure/function claims may describe how a particular nutrient or dietary ingredient affects the structure, function or general well-being
of the body, or characterize the documented mechanism of action by which a nutrient or dietary ingredient acts to maintain such structure
or function. The label or labeling of a product marketed as a dietary supplement may not expressly or implicitly represent that a dietary
supplement will diagnose, cure, mitigate, treat or prevent a disease (i.e. a disease claim). If the FDA determines that a particular
structure/function claim is an unacceptable disease claim that causes the product to be regulated as a drug, a conventional food claim
or an unauthorized version of a “health claim,” or, if the FDA determines that a particular claim is not adequately supported
by existing scientific data or is false or misleading in any particular, we would be prevented from using the claim and would have to
update our product labels and labeling accordingly.
In
addition, DSHEA provides that so-called “third-party literature,” e.g., “a publication, including an article,
a chapter in a book, or an official abstract of a peer-reviewed scientific publication that appears in an article and was prepared by
the author or the editors of the publication” supplements, when reprinted in its entirety, may be used “in connection with
the sale of a dietary supplement to consumers” without the literature being subject to regulation as labeling. Such literature:
(1) must not be false or misleading; (2) may not “promote” a particular manufacturer or brand of dietary supplement;
(3) must present a balanced view or is displayed or presented with other such items on the same subject matter so as to present
a balanced view of the available scientific information; (4) if displayed in an establishment, must be physically separate from
the dietary supplements; and (5) should not have appended to it any information by sticker or any other method. If the literature
fails to satisfy each of these requirements, we may be prevented from disseminating such literature with our products, and any continued
dissemination could subject our product to regulatory action as an illegal drug.
In
June 2007, pursuant to the authority granted by the FDC Act as amended by DSHEA, the FDA published detailed GMP regulations that govern
the manufacturing, packaging, labeling and holding operations of dietary supplement manufacturers. The GMP regulations, among other things,
impose significant recordkeeping requirements on manufacturers. The GMP requirements are in effect for all dietary supplement manufacturers,
and the FDA conducts inspections of dietary supplement manufacturers pursuant to these requirements. There remains considerable uncertainty
with respect to the FDA’s interpretation of the regulations and their actual implementation in manufacturing facilities.
In
addition, the FDA’s interpretation of the regulations governing dietary supplements will likely change over time as the agency
becomes more familiar with the industry and the regulations. The failure of a manufacturing facility to comply with the GMP regulations
renders products manufactured in such facility “adulterated,” and subjects such products and the manufacturer to a variety
of potential FDA enforcement actions. In addition, under the Food Safety Modernization Act, or FSMA, which was enacted in January 2011,
the manufacturing of dietary ingredients contained in dietary supplements will be subject to similar or even more burdensome manufacturing
requirements, which will likely increase the costs of dietary ingredients and will subject suppliers of such ingredients to more rigorous
inspections and enforcement. The FSMA will also require importers of food, including dietary supplements and dietary ingredients, to
conduct verification activities to ensure that the food they might import meets applicable domestic requirements.
The
FDA has broad authority to enforce the provisions of federal law applicable to dietary supplements, including powers to issue a public
warning or notice of violation letter to a company, publicize information about illegal products, detain products intended for import,
require the reporting of serious adverse events, require a recall of illegal or unsafe products from the market, and request the Department
of Justice to initiate a seizure action, an injunction action or a criminal prosecution in the United States courts.
The
FSMA expands the reach and regulatory powers of the FDA with respect to the production and importation of food, including dietary supplements.
The expanded reach and regulatory powers include the FDA’s ability to order mandatory recalls, administratively detain domestic
products, and require certification of compliance with domestic requirements for imported foods associated with safety issues. FMSA also
gave FDA the authority to administratively revoke manufacturing facility registrations, effectively enjoining manufacturing of dietary
ingredients and dietary supplements without judicial process. The regulation of dietary supplements may increase or become more restrictive
in the future.
Federal
Trade Commission
The
FTC exercises jurisdiction over the advertising of dietary supplements and other health-related products and requires that all advertising
to consumers be truthful and non-misleading. The FTC actively monitors the dietary supplement space and has instituted numerous enforcement
actions against dietary supplement companies for failure to have adequate substantiation for claims made in advertising or for the use
of false or misleading advertising claims. FTC enforcement actions may result in consent decrees, cease and desist orders, judicial injunctions
and the payment of fines with respect to advertising claims that are found to be unsubstantiated.
Environmental
Regulation
Our
facilities and operations, in common with those of similar industries making similar products, are subject to many federal, state, provincial
and local requirements, rules and regulations relating to the protection of the environment and of human health and safety, including
those regulating the discharge of materials into the environment. We continually examine ways to reduce our emissions, minimize waste
and limit our exposure to any liabilities, as well as decrease costs related to environmental compliance. Costs to comply with current
and anticipated environmental requirements, rules and regulations and any estimated capital expenditures for environmental control facilities
are not anticipated to be material when compared with overall costs and capital expenditures. Accordingly, we do not anticipate that
such costs will have a material effect on our financial position, results of operations, cash flows or competitive position.
New
Legislation or Regulation
Legislation
may be introduced which, if passed, would impose substantial new regulatory requirements on dietary supplements and other health products.
We cannot determine what effect additional domestic or international governmental legislation, regulations, or administrative orders,
when and if promulgated, would have on our business in the future. New legislation or regulations may require the reformulation of certain
products to meet new standards, require the recall or discontinuance of certain products not capable of reformulation, impose additional
record keeping or require expanded documentation of the properties of certain products, expanded or different labeling or scientific
substantiation.
MANAGEMENT
Directors
and Executive Officers
Set
forth below is information regarding our directors and executive officers as of the date of this prospectus.
Name |
|
Age |
|
Position |
Alfonso
J. Cervantes, Jr. |
|
73 |
|
Executive
Chairman of the Board |
Darren
C. Minton |
|
39 |
|
Chief
Executive Officer, President and Director |
Alan
B. Bergman |
|
54 |
|
Chief
Financial Officer |
Ronald
S. Altbach |
|
75 |
|
Director |
Robert
S. Rein, Esq. |
|
78 |
|
Director |
Arthur
S. Reynolds |
|
78 |
|
Director |
Roger
Conley Wood |
|
54 |
|
Director |
Alfonso
J. Cervantes, Jr. Mr. Cervantes is the founder of our company and has served as our Executive Chairman since our inception. Mr.
Cervantes is also Executive Chairman of Trilogy Capital Group, LLC, or Trilogy, a private equity firm and a principal stockholder, and
served as Chairman and Chief Executive Officer of its predecessor, Trilogy Capital Partners, Inc. since 2002. Through more than 35 years
as an executive in diversified businesses, Mr. Cervantes has accumulated extensive experience in the public markets with experience in
corporate finance and emerging growth companies. His significant corporate finance experience includes mergers and acquisitions, initial
public offerings, private placements as well as the reorganization of middle-market companies. Prior to Smart for Life, Inc., Mr. Cervantes
was the founder and Vice Chairman of Staffing 360 Solutions, Inc. (NASDAQ: STAF), from 2012 to 2015, where he facilitated, in association
with Mr. Minton, multiple acquisitions and drove the company from pure startup to over $100 million in revenues in approximately two
years. Mr. Cervantes is a graduate of Webster University with a degree in Communications. We believe Mr. Cervantes is qualified to serve
on our board of directors due to his extensive corporate finance experience and knowledge of our company.
Darren
C. Minton. Mr. Minton has served as our Chief Executive Officer since April 2022, President since September 2017 and as a member
of our board of directors since November 2018. Mr. Minton also serves as President of BSNM, managing day-to-day manufacturing operations.
Mr. Minton has more than 15 years of capital markets experience in both small and large organizations. Over the years, his capacities
have ranged from various executive positions, as well as president and chief executive officer positions with entrepreneurial ventures
to established roles reporting to public company boards, with significant leadership and team building skills. Prior to joining us, Mr.
Minton was a co-founder and Executive Vice President at Staffing 360 Solutions, Inc. (NASDAQ: STAF), from 2012 to 2017, where he facilitated
the company’s alternative public offering and listing on Nasdaq. He previously served as President of Trilogy Capital Partners,
Inc. and as an Analyst at Mesa West Capital, a privately held portfolio lender with a multi-billion dollar offering capability headquartered
in Los Angeles, as well as First Republic Bank in Palo Alto. Mr. Minton is a graduate of Stanford University with a degree in Economics.
We believe Mr. Minton is qualified to serve on our board of directors due to his extensive management and capital markets experience.
Alan
B. Bergman. Mr. Bergman has served as our Chief Financial Officer since January 2021. Mr. Bergman’s expertise includes
corporate financial management, mergers and acquisitions, corporate reorganizations, cost reduction and avoidance, financial analysis
and reporting, IPO management, contract negotiations, ISO 9000 Quality Systems and SEC reporting and compliance. Prior to joining us,
he served as Chief Financial Officer, Vice President Finance at Bright Mountain Media, Inc. (OTCQB: BMTM) from June 2019 to December
2020. Prior to that, he served as Vice President Finance at Greenlane Holdings, Inc. (NASDAQ: GNLN), from December 2018 to May 2019.
He previously served as Controller for Woodfield Distribution from October 2013 to February 2018 and as Vice President Finance at Latitude
Solutions from May 2011 to March 2013. Mr. Bergman commenced his career in 2000 with Deloitte as a Senior Auditor and subsequently as
Audit Manager at Mallah Furman, P.A. and as Senior Auditor at Weinberg & Company, P.A. In addition, Mr. Bergman is also an Adjunct
Professor of Accounting at Florida Atlantic University and Millennia Atlantic University. Mr. Bergman received his Master’s in
Accounting from University of Miami.
Ronald
S. Altbach. Mr. Altbach has been a member of our board of directors since October 2020. He previously served on our board from
our inception until November 2018. Mr. Altbach is a financial services executive with over 35 years of capital markets experience with
an emphasis on mergers and acquisitions and the development of strategic relationships. He has served in senior leadership positions
in a variety of industries, including investment banking, marketing, consumer and luxury products, and media finance. Mr. Altbach is
currently a principal in and Chief Commercial Officer and a director of MPS Infrastructure, Inc., which is engaged in the ownership,
development, building and operation of large-scale infrastructure projects with an emphasis on
sustainable water and power initiatives across Africa, where he has served since 2017. Mr. Altbach previously was President
of Altbachco, LLC, a New York-based investment company which is a principal shareholder in Regeneration Capital Group, a New York-based
merchant bank he co-formed with Mr. Cervantes in 2008 and where he served as President from 2009 to 2016. He serves as lead independent
director on the board of Catch Media, a cloud-based technology provider with millions of active users across the globe. He previously
held the position of Vice Chairman of Rosecliff, Inc., a New York-based merchant bank principally engaged in leveraged buyouts, and Chairman
of Paul Sebastian, Inc., a Rosecliff portfolio company that marketed its own fragrance brands, as well as licensed brands, to U.S. and
international department stores. Mr. Altbach is a graduate of Cornell University with a degree in Music. We believe Mr. Altbach is qualified
to serve on our board of directors due to his extensive capital markets experience.
Robert
S. Rein, Esq. Mr. Rein has been a member of our board of directors since February 2022. Mr. Rein is an attorney and has been
practicing law in California since 1971. Since 2008, Mr. Rein has been a Partner in Rein & Associates, a law firm representing businesses
and individuals with respect to all aspects of business transactions and matters. His practice primarily consists of handling business,
corporate and real estate matters; tax issues; and business and estate planning. Mr. Rein’s experience includes business acquisitions
and sales, reorganizations, financings, business and tax planning, and business counselling. His firm has represented both public and
private entities. Prior to the formation of Rein & Associates, Mr. Rein was a partner in predecessors to Rein & Associates since
1975. Mr. Rein obtained his B.A. in Economics from Brandeis University and his J.D. from Harvard Law School. Upon graduating law school,
Mr. Rein clerked for Judge Milton Conford, the then senior judge of the New Jersey Superior Court, Appellate Division. Mr. Rein is currently
the CEO and a member of the board of directors of R Solutions, Inc., a corporation involved in the furniture and other corporate fulfilment
business, and Racada Corp., a real estate investment company. We believe that Mr. Rein is well qualified to serve on our board of directors
due to his extensive legal and business experience.
Arthur
S. Reynolds. Mr. Reynolds has been a member of our board of directors since October 2022. Mr. Reynolds is an accomplished international
financier bringing more than 35 years of capital markets and financial experience providing cross-border financial consulting services
in Europe for clients principally located in the United States. He is the founder of Rexon Limited of London and New York where, since
1999, he has served as managing director. Mr. Reynolds was founder and, from 1997 to 1999, managing partner of London-based Value Management
& Research (UK) Limited. Mr. Reynolds was the founder and, from 1982 to 1997, served as managing director of Ferghana Financial Services
Limited. Prior thereto, Mr. Reynolds held executive positions at Merrill Lynch International Bank Limited, Banque de la Société
Financière Européene, J.P. Morgan & Company and Mobil Corporation. Between 2006 and 2016, Mr. Reynolds served on the
Board of Directors of ThermoEnergy Corporation, first as Chairman of the Audit Committee, subsequently as Chief Financial Officer, and
finally as Chairman. Mr. Reynolds is a member of the Board of the International Festival Society and serves as Chairman of the Elgar
Society’s North America Branch. Mr. Reynolds holds an B.A. from Columbia University, a M.A. from Cambridge University, and an M.B.A.
in Finance from New York University. Mr. Reynolds brings to the Board extensive financial and executive experience across multiple sectors,
with special strength in the international arena.
Roger
Conley Wood. Mr. Wood has been a member of our board of directors since February 2022. Mr. Wood is a seasoned executive
with over 25 years of experience serving in C-level positions with various technology and consumer product businesses. He is currently Chairman of
Conley Holdings, a private family company with interests in Homebuilding, Fashion, Training & Education,
Pet Care, Media & Entertainment and Personal Care sectors. He served as the Chief Executive Officer and Managing Partner
of Blue Bear Brands, a marketing consultancy specializing in predicative analytics and machine learning, from 2014 to 2020. He previously
held senior management positions with Hearst Corporation, Orca Payments, Amobee Media, Willis Group, Reebok International, Omnipoint
Voicestream and Motorola. He has served on the board of directors of numerous private companies and the board of trustees for the Wardlaw-Hartridge
School, Global Alumni Board of Harvard Business School, Junior Achievement and the British American Business Council. Mr. Wood obtained
his B.A. in Marketing and Statistics from Morehouse College and his Master’s in Business Administration from Harvard University. We
believe Mr. Wood is qualified to serve on our board of directors due to his extensive management and prior board experience.
Our
directors currently have terms which will end at our next annual meeting of the stockholders or until their successors are elected and
qualify, subject to their prior death, resignation or removal. Officers serve at the discretion of the board of directors. There is no
arrangement or understanding between any director or executive officer and any other person pursuant to which he was or is to be selected
as a director, nominee or officer.
Family
Relationships
There
are no family relationships among any of our officers or directors.
Involvement
in Certain Legal Proceedings
To
the best of our knowledge, except as described below, none of our directors or executive officers has, during the past ten years:
| ● | been
convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding
traffic violations and other minor offences); |
| ● | had
any bankruptcy petition filed by or against the business or property of the person, or of
any partnership, corporation or business association of which he was a general partner or
executive officer, either at the time of the bankruptcy filing or within two years prior
to that time; |
| ● | been
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated,
of any court of competent jurisdiction or federal or state authority, permanently or temporarily
enjoining, barring, suspending or otherwise limiting, his involvement in any type of business,
securities, futures, commodities, investment, banking, savings and loan, or insurance activities,
or to be associated with persons engaged in any such activity; |
| ● | been
found by a court of competent jurisdiction in a civil action or by the Securities and Exchange
Commission or the Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended, or vacated; |
| ● | been
the subject of, or a party to, any federal or state judicial or administrative order, judgment,
decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement
of a civil proceeding among private litigants), relating to an alleged violation of any federal
or state securities or commodities law or regulation, any law or regulation respecting financial
institutions or insurance companies including, but not limited to, a temporary or permanent
injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent
cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting
mail or wire fraud or fraud in connection with any business entity; or |
| ● | been
the subject of, or a party to, any sanction or order, not subsequently reversed, suspended
or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange
Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the
Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity
or organization that has disciplinary authority over its members or persons associated with
a member. |
Corporate
Governance
Governance
Structure
We
chose to appoint a separate Chairman of the Board who is not our Chief Executive Officer. Our board of directors has made this decision
based on their belief that a separate Chairman of the Board can act as a balance to the Chief Executive Officer, who also serves as a
non-independent director.
The
Board’s Role in Risk Oversight
The
board of directors oversees that the assets of our company are properly safeguarded, that the appropriate financial and other controls
are maintained, and that our business is conducted wisely and in compliance with applicable laws and regulations and proper governance.
Included in these responsibilities is the board’s oversight of the various risks facing our company. In this regard, our board
seeks to understand and oversee critical business risks. Our board does not view risk in isolation. Risks are considered in virtually
every business decision and as part of our business strategy. Our board recognizes that it is neither possible nor prudent to eliminate
all risk. Indeed, purposeful and appropriate risk-taking is essential for our company to be competitive on a global basis and to achieve
its objectives.
While
the board oversees risk management, company management is charged with managing risk. Management communicates routinely with the board
and individual directors on the significant risks identified and how they are being managed. Directors are free to, and indeed often
do, communicate directly with senior management.
Our
board administers its risk oversight function as a whole by making risk oversight a matter of collective consideration; however, much
of the work is delegated to committees, which will meet regularly and report back to the full board. The audit committee oversees risks
related to our financial statements, the financial reporting process, accounting and legal matters, the compensation committee evaluates
the risks and rewards associated with our compensation philosophy and programs, and that the nominating and corporate governance committee
evaluates risk associated with management decisions and strategic direction.
Independent
Directors
Nasdaq’s
rules generally require that a majority of an issuer’s board of directors must consist of independent directors. Our board of directors
currently consists of six (6) directors, four (4) of whom, Messrs. Altbach, Rein, Reynolds and Wood, are independent within the meaning
of Nasdaq’s rules.
Committees
of the Board of Directors
Our
board has established an audit committee, a compensation committee and a nominating and corporate governance committee, each with its
own charter approved by the board. Each committee’s charter available on our website at www.smartforlifecorp.com. In addition,
our board of directors may, from time to time, designate one or more additional committees, which shall have the duties and powers granted
to it by our board of directors.
Audit
Committee
Arthur
S. Reynolds, Ronald S. Altbach and Robert S. Rein, each of whom satisfies the “independence” requirements of Rule 10A-3
under the Exchange Act and Nasdaq’s rules, have been appointed to serve on our audit committee, with Mr. Reynolds serving as the
chairman. Mr. Reynolds qualifies as “audit committee financial expert.” The audit committee oversees our accounting and financial
reporting processes and the audits of the financial statements of our company.
The
audit committee is responsible for, among other things: (i) retaining and overseeing our independent accountants; (ii) assisting the
board in its oversight of the integrity of our financial statements, the qualifications, independence and performance of our independent
auditors and our compliance with legal and regulatory requirements; (iii) reviewing and approving the plan and scope of the internal
and external audit; (iv) pre-approving any audit and non-audit services provided by our independent auditors; (v) approving the fees
to be paid to our independent auditors; (vi) reviewing with our chief executive officer and chief financial officer and independent auditors
the adequacy and effectiveness of our internal controls; (vii) reviewing hedging transactions; and (viii) reviewing and assessing annually
the audit committee’s performance and the adequacy of its charter.
Compensation
Committee
Ronald
S. Altbach, Arthur S. Reynolds and Roger Conley Wood, each of whom satisfies the “independence” requirements of Rule 10A-3
under the Exchange Act and Nasdaq’s rules, have been appointed to serve on our compensation committee, with Mr. Altbach serving
as the chairman. The members of the compensation committee are also “non-employee directors” within the meaning of Section
16 of the Exchange Act. The compensation committee assists the board in reviewing and approving the compensation structure, including
all forms of compensation, relating to our directors and executive officers.
The
compensation committee is responsible for, among other things: (i) reviewing and approving the remuneration of our executive officers;
(ii) determining the compensation of our independent directors; (iii) making recommendations to the board regarding equity-based and
incentive compensation plans, policies and programs; and (iv) reviewing and assessing annually the compensation committee’s performance
and the adequacy of its charter.
Nominating
and Corporate Governance Committee
Robert
S. Rein, Esq., Ronald S. Altbach and Roger Conley Wood, each of whom satisfies the “independence” requirements of Rule 10A-3
under the Exchange Act and Nasdaq’s rules, have been appointed to serve on our nominating and corporate governance committee, with
Mr. Rein serving as the chairman. The nominating and corporate governance committee assists the board of directors in selecting individuals
qualified to become our directors and in determining the composition of the board and its committees.
The
nominating and corporate governance committee is responsible for, among other things: (i) recommending the number of directors to comprise
our board; (ii) identifying and evaluating individuals qualified to become members of the board and soliciting recommendations for director
nominees from the chairman and chief executive officer of our company; (iii) recommending to the board the director nominees for each
annual stockholders’ meeting; (iv) recommending to the board the candidates for filling vacancies that may occur between annual
stockholders’ meetings; (v) reviewing independent director compensation and board processes, self-evaluations and policies; (vi)
reviewing and approving related party transactions; (vii) overseeing compliance with our code of ethics; and (viii) monitoring developments
in the law and practice of corporate governance.
The
nominating and corporate governance committee’s methods for identifying candidates for election to our board of directors (other
than those proposed by our stockholders, as discussed below) will include the solicitation of ideas for possible candidates from a number
of sources - members of our board of directors, our executives, individuals personally known to the members of our board of directors,
and other research. The nominating and corporate governance committee may also, from time-to-time, retain one or more third-party search
firms to identify suitable candidates.
In
making director recommendations, the nominating and corporate governance committee may consider some or all of the following factors:
(i) the candidate’s judgment, skill, experience with other organizations of comparable purpose, complexity and size, and subject
to similar legal restrictions and oversight; (ii) the interplay of the candidate’s experience with the experience of other board
members; (iii) the extent to which the candidate would be a desirable addition to the board and any committee thereof; (iv) whether or
not the person has any relationships that might impair his or her independence; and (v) the candidate’s ability to contribute to
the effective management of our company, taking into account the needs of our company and such factors as the individual’s experience,
perspective, skills and knowledge of the industry in which we operate.
A
stockholder may nominate one or more persons for election as a director at an annual meeting of stockholders if the stockholder complies
with the notice and information provisions contained in our bylaws. Such notice must be in writing to our company not less than 120 days
and not more than 150 days prior to the anniversary date of the preceding year’s annual meeting of stockholders or as otherwise
required by requirements of the Exchange Act. In addition, stockholders furnishing such notice must be a holder of record on both (i) the
date of delivering such notice and (ii) the record date for the determination of stockholders entitled to vote at such meeting.
Code
of Ethics
We
have adopted a code of ethics that applies to all of our directors, officers and employees, including our principal executive officer,
principal financial officer and principal accounting officer. Such code of ethics addresses, among other things, honesty and ethical
conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities
laws, and reporting of violations of the code.
We
are required to disclose any amendment to, or waiver from, a provision of our code of ethics applicable to our principal executive officer,
principal financial officer, principal accounting officer, controller, or persons performing similar functions. We intend to use our
website as a method of disseminating this disclosure, as permitted by applicable SEC rules. Any such disclosure will be posted to our
website within four (4) business days following the date of any such amendment to, or waiver from, a provision of our code of ethics.
EXECUTIVE
COMPENSATION
Summary
Compensation Table - Years Ended December 31, 2021 and 2020
The
following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons
for services rendered in all capacities during the noted periods. No other executive officers received total annual salary and bonus
compensation in excess of $100,000.
Name
and Principal
Position | |
Year | | |
Salary ($) | | |
Bonus
($) | | |
Stock
Awards ($)(1) | | |
Option
Awards ($)(1) | | |
All Other
Compensation ($)(2) | | |
Total ($) | |
Alfonso J. Cervantes, Jr.,
| |
2021 | | |
| 216,667 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 216,667 | |
Executive Chairman | |
2020 | | |
| 200,000 | | |
| — | | |
| 22,500 | | |
| 900 | | |
| 23,328 | | |
| 246,728 | |
| |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ryan F. Zackon,
| |
2021 | | |
| 254,166 | | |
| — | | |
| — | | |
| — | | |
| 16,968 | | |
| 271,134 | |
Former
Chief Executive Officer(3) | |
2020 | | |
| 22,916 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 22,916 | |
| |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Darren C. Minton,
| |
2021 | | |
| 175,000 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 175,000 | |
Chief Executive Officer and President | |
2020 | | |
| 200,000 | | |
| — | | |
| 12,500 | | |
| 100 | | |
| — | | |
| 212,600 | |
(1) | The
amount is equal to the aggregate grant-date fair value with respect to the awards, computed
in accordance with FASB ASC Topic 718. |
(2) | Other
compensation includes automobile allowances. |
(3) | Mr.
Zackon served as our Chief Executive Officer from November 15, 2020 to April 30, 2022. |
Employment
Agreements
On
July 1, 2020, we entered into an employment agreement with Mr. Cervantes, our Executive Chairman. Pursuant to the employment agreement,
Mr. Cervantes was entitled to an annual base salary of $200,000, which was increased to $250,000 on completion of the DSO acquisition
on July 1, 2021 and was increased to $300,000 on completion of the Nexus acquisition on November 8, 2021. In addition, Mr. Cervantes
is eligible to receive a bonus of $100,000 for each bona fide acquisition and $250,000 on conclusion of an initial public offering of
not less than $10 million. He will also be entitled to an annual bonus of 20% of his base salary based on meeting company objectives
and the remainder will be based on meeting mutually agreed employee objections or as otherwise determined by the board. Mr. Cervantes
is eligible to participate in all equity incentive plans and other employee benefit plans, including health insurance, commensurate with
his position. We also provide Mr. Cervantes an allowance for a late model automobile and related expenses. The term of Mr. Cervantes’
agreement is five years, commencing July 1, 2020 and terminating June 30, 2025. His employment agreement is terminable on 30 days’
notice. However, we may terminate Mr. Cervantes’ employment without notice for cause (as defined in the employment agreement).
If we terminate Mr. Cervantes’ employment without cause or due to a disability, he is entitled to twelve (12) months of severance
pay equal to the base salary of the current year, which will be paid on a bi-weekly schedule. The employment agreement contains standard
confidentiality provisions and restrictive covenants prohibiting Mr. Cervantes from owning or operating a business that competes with
our company during the term of his employment.
On
November 15, 2020, we entered into an employment agreement with Mr. Zackon, our former Chief Executive Officer. Pursuant to the employment
agreement, Mr. Zackon was entitled to an annual base salary of $250,000, which was increased to $300,000 after the first year of employment.
On May 4, 2022, we entered into a separation agreement and release of claims with Mr. Zackon providing for the separation of his employment
effective as of April 30, 2022. Under the separation agreement, we agreed to pay Mr. Zackon a severance payment in the amount of $175,000,
equal to seven months of his base salary at his current level, less applicable statutory deductions and authorized withholdings, payable
in equal installments on our regular payroll dates during the period commencing on May 1, 2022 and ending on November 30, 2022. We also
agreed to pay Mr. Zackon a separation expense reimbursement of $10,000 no later than May 31, 2022. The separation agreement includes
restrictive covenants prohibiting Mr. Zackon from engaging with or owning any business that competes with our company, or soliciting
our employees, consultants or customers, during the six-month period commencing on April 30, 2022 and ending on October 30, 2022. The separation
agreement also includes a customary release of claims by Mr. Zackon in favor of our company and its affiliates, as well as customary
confidentiality and mutual non-disparagement provisions.
On
July 1, 2020, we entered into an employment agreement with Mr. Minton, our Chief Executive Officer and President. Pursuant to the employment
agreement, Mr. Minton was entitled to an annual base salary of $200,000, which was increased to $250,000 on completion of the DSO acquisition
on July 1, 2021. In addition, Mr. Minton is eligible to receive a bonus of $25,000 for our first two acquisitions following the date
of the employment agreement and $50,000 on conclusion of an initial public offering of not less than $10 million. He will also be entitled
to receive an annual bonus of up to 20% of his base salary based on meeting mutually agreed employee objectives or as otherwise determined
by the board. Mr. Minton is eligible to participate in all equity incentive plans and other employee benefit plans, including health
insurance, commensurate with his position. We also provide Mr. Minton an allowance for a late model automobile and related expenses.
The term of Mr. Minton’s agreement is three years, commencing July 1, 2020 and terminating June 30, 2023. His employment agreement
is terminable on 30 days’ notice. However, we may terminate Mr. Minton’s employment without notice for cause (as defined
in the employment agreement). If we terminate Mr. Minton’s employment without cause or due to a disability, he is entitled to six
(6) months of severance pay equal to the base salary of the current year, which will be paid on a bi-weekly schedule. The employment
agreement contains standard confidentiality provisions and restrictive covenants prohibiting Mr. Minton from owning or operating a business
that competes with our company during the term of his employment.
Outstanding
Equity Awards at Fiscal Year-End
The
following table includes certain information with respect to the value of all unexercised options and unvested shares of restricted stock
previously awarded to the executive officers named above at the fiscal year ended December 31, 2021.
| |
| Option Awards |
Name | |
| Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable | | |
| Number
of Securities Underlying Unexercised
Options
(#)
Unexercisable | | |
| Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#) | | |
| Option
Exercise
Price
($) | | |
Option
Expiration
Date |
Alfonso J. Cervantes, Jr. | |
| 1,000,000 | | |
| — | | |
| — | | |
$ | 0.01 | | |
09/14/30 |
Darren C. Minton | |
| 250,000 | | |
| — | | |
| — | | |
$ | 0.01 | | |
09/14/30 |
Additional
Narrative Disclosure
Retirement
Benefits
We
have not maintained, and do not currently maintain, a defined benefit pension plan or nonqualified deferred compensation plan. We currently
make available a retirement plan intended to provide benefits under Section 401(k) of the Internal Revenue Code of 1986, as amended,
or the Code, pursuant to which employees, including the executive officers named above, can make voluntary pre-tax contributions.
Potential
Payments Upon Termination or Change in Control
As
described under “—Employment Agreements” above, Mr. Zackon is entitled to severance in accordance with the separation
agreement and Messrs. Cervantes and Minton are entitled severance if their employment is terminated without cause.
Director
Compensation
The
table below sets forth the compensation paid to our independent directors during the fiscal year ended December 31, 2021.
Name | |
Fees Earned
or Paid in
Cash ($) | | |
Option
Awards ($)(1) | | |
Total ($) | |
Ronald S. Altbach | |
| — | | |
| 2,000 | | |
| 2,000 | |
(1) | The
amount is equal to the aggregate grant-date fair value with respect to the awards, computed
in accordance with FASB ASC Topic 718. |
No
other member of our board of directors received any compensation for his services as a director during the fiscal year ended December
31, 2021.
2020
Stock Incentive Plan
On
September 14, 2020, our board of directors adopted the Bonne Santé Group, Inc. 2020 Stock Incentive Plan, or the 2020 Plan, which
was approved by our stockholders on September 14, 2020. The following is a summary of certain significant features of the 2020 Plan.
The information which follows is subject to, and qualified in its entirety by reference to, the 2020 Plan document itself, which is filed
as an exhibit to the registration statement of which this prospectus forms a part.
Purposes
of Plan: The purpose of the 2020 Plan is to offer selected employees, consultants, advisors and outside directors the opportunity
to acquire equity in our company.
Types
of Awards: Awards that may be granted include incentive stock options as described in section 422(b) of the Code, non-qualified
stock options (i.e., options that are not incentive stock options) and awards of restricted stock. These awards offer our employees,
consultants, advisors and outside directors the possibility of future value, depending on the long-term price appreciation of our common
stock and the award holder’s continuing service with our company or one or more of its subsidiaries.
Eligible
Recipients: Persons eligible to receive awards under the 2020 Plan will be those employees, consultants, advisors and outside
directors of our company and its subsidiaries who are selected by the administrator.
Administration
of the Plan: The 2020 Plan is administered by our compensation committee. Among other things, the administrator has the
authority to select persons who will receive awards, determine the types of awards and the number of shares to be covered by awards,
and to establish the terms, conditions, restrictions and other provisions of awards.
Shares
Available Under the Plan: The maximum number of shares of common stock that may be delivered to participants under the 2020
Plan is 2,000,000, subject to adjustment for certain corporate changes affecting the shares, such as stock splits. Shares subject to
an award under the 2020 Plan for which the award is canceled, forfeited or expires again become available for grants under the 2020 Plan.
Shares subject to an award that is settled in cash will not again be made available for grants under the 2020 Plan. As of December 31,
2021, 550,000 shares remain available for issuance under the 2020 Plan.
Stock
Options:
General. Subject
to the provisions of the 2020 Plan, the administrator has the authority to determine all grants of stock options. That determination
will include: (i) the number of shares subject to any option; (ii) the exercise price per share; (iii) the expiration date of the option;
(iv) the manner, time and date of permitted exercise; (v) other restrictions, if any, on the option or the shares underlying the option;
and (vi) any other terms and conditions as the administrator may determine.
Option
Price. The exercise price for stock options will be determined at the time of grant. Normally, the exercise price will not be less
than the fair market value on the date of grant, as determined in good faith by the administrator. As a matter of tax law, the exercise
price for any incentive stock option awarded may not be less than the fair market value of the shares on the date of grant. However,
incentive stock option grants to any person owning more than 10% of our voting stock must have an exercise price of not less than 110%
of the fair market value on the grant date.
Exercise
of Options. An option may be exercised only in accordance with the terms and conditions for the option agreement as established
by the administrator at the time of the grant. The option must be exercised by notice to us, accompanied by payment of the exercise price.
Payments may be made in cash or, at the option of the administrator, by actual or constructive delivery of shares of common stock to
the holder of the option based upon the fair market value of the shares on the date of exercise.
Expiration
or Termination. Options, if not previously exercised, will expire on the expiration date established by the administrator at
the time of grant; provided that such term cannot exceed ten years and that such term of an incentive stock option granted to a holder
of more than 10% of our voting stock cannot exceed five years. Options will terminate before their expiration date if the holder’s
service with us terminates before the expiration date. The option may remain exercisable for specified periods after certain terminations
of service, including terminations as a result of death, disability or retirement, with the precise period during which the option may
be exercised to be established by the administrator and reflected in the grant evidencing the award.
Stock
Awards: Stock awards can also be granted under the 2020 Plan. A stock award is a grant of shares of common stock. These
awards will be subject to such conditions, restrictions and contingencies as the administrator shall determine at the date of grant.
Those may include requirements for continuous service and/or the achievement of specified performance goals.
Other
Material Provisions: Awards will be evidenced by a written agreement, in such form as may be approved by the administrator.
In the event of various changes to the capitalization of our company, such as stock splits, stock dividends and similar re-capitalizations,
an appropriate adjustment will be made by the administrator to the number of shares covered by outstanding awards or to the exercise
price of such awards. The administrator is also permitted to include in the written agreement provisions that provide for certain changes
in the award in the event of a change of control of our company, including acceleration of vesting. Except as otherwise determined by
the administrator at the date of grant, awards will not be transferable, other than by will or the laws of descent and distribution.
Prior to any award distribution, we are permitted to deduct or withhold amounts sufficient to satisfy any employee withholding tax requirements.
The board also has the authority, at any time, to discontinue the granting of awards. The board also has the authority to alter or amend
the 2020 Plan or any outstanding award or may terminate the 2020 Plan as to further grants, provided that no amendment will, without
the approval of our stockholders, increase the number of shares available under the 2020 Plan or change the persons eligible for awards
under the 2020 Plan. No amendment that would adversely affect any outstanding award made under the 2020 Plan can be made without the
consent of the holder of such award.
2022
Equity Incentive Plan
On
January 13, 2022, our board of directors adopted the Smart for Life, Inc. 2022 Equity Incentive Plan, or the 2022 Plan, which was approved
by our stockholders on January 13, 2022. The following is a summary of certain significant features of the 2022 Plan. The information
which follows is subject to, and qualified in its entirety by reference to, the 2022 Plan document itself, which is filed as an exhibit
to the registration statement of which this prospectus forms a part.
Purposes
of Plan: The purposes of the 2022 Plan are to attract and retain officers, employees and directors for our company and its
subsidiaries; motivate them by means of appropriate incentives to achieve long-range goals; provide incentive compensation opportunities;
and further align their interests with those of our stockholders through compensation that is based on our common stock.
Types
of Awards: Awards that may be granted include: (a) incentive stock options, (b) non-qualified stock options, (c) stock appreciation
rights, (d) restricted awards, (e) performance share awards, and (f) performance compensation awards. These awards offer our officers,
employees, consultants and directors the possibility of future value, depending on the long-term price appreciation of our common stock
and the award holder’s continuing service with our company.
Eligible
Recipients: Persons eligible to receive awards under the 2022 Plan will be those officers, employees, consultants, and directors
of our company and its subsidiaries who are selected by the administrator.
Administration
of the Plan: The 2022 Plan is administered by our compensation committee. Among other things, the administrator has the
authority to select persons who will receive awards, determine the types of awards and the number of shares to be covered by awards,
and to establish the terms, conditions, performance criteria, restrictions and other provisions of awards. The administrator has authority
to establish, amend and rescind rules and regulations relating to the 2022 Plan.
Shares
Available Under the Plan: The maximum number of shares of our common stock that may be delivered to participants under the
2022 Plan is 2,000,000, subject to adjustment for certain corporate changes affecting the shares, such as stock splits. Shares subject
to an award under the 2022 Plan for which the award is canceled, forfeited or expires again become available for grants under the 2022
Plan. Shares subject to an award that is settled in cash will not again be made available for grants under the 2022 Plan.
Stock
Options:
General. Stock
options give the option holder the right to acquire from us a designated number of shares of common stock at a purchase price that is
fixed upon the grant of the option. Stock options granted may be either tax-qualified stock options (so-called “incentive stock
options”) or non-qualified stock options. Subject to the provisions of the 2022 Plan, the administrator has the authority to determine
all grants of stock options. That determination will include: (i) the number of shares subject to any option; (ii) the exercise price
per share; (iii) the expiration date of the option; (iv) the manner, time and date of permitted exercise; (v) other restrictions, if
any, on the option or the shares underlying the option; and (vi) any other terms and conditions as the administrator may determine.
Option
Price. The exercise price for stock options will be determined at the time of grant. Normally, the exercise price will not be less
than the fair market value on the date of grant. As a matter of tax law, the exercise price for any incentive stock option awarded may
not be less than the fair market value of the shares on the date of grant. However, incentive stock option grants to any person owning
more than 10% of our voting stock must have an exercise price of not less than 110% of the fair market value on the grant date.
Exercise
of Options. An option may be exercised only in accordance with the terms and conditions for the option agreement as established
by the administrator at the time of the grant. The option must be exercised by notice to us, accompanied by payment of the exercise price.
Payments may be made in cash or, at the option of the administrator, by actual or constructive delivery of shares of common stock to
the holder of the option based upon the fair market value of the shares on the date of exercise.
Expiration
or Termination. Options, if not previously exercised, will expire on the expiration date established by the administrator at
the time of grant. In the case of incentive stock options, such term cannot exceed ten years provided that in the case of holders of
more than 10% of our voting stock, such term cannot exceed five years. Options will terminate before their expiration date if the holder’s
service with our company or a subsidiary terminates before the expiration date. The option may remain exercisable for specified periods
after certain terminations of employment, including terminations as a result of death, disability or retirement, with the precise period
during which the option may be exercised to be established by the administrator and reflected in the grant evidencing the award.
Incentive
and Non-Qualified Options. As described elsewhere in this summary, an incentive stock option is an option that is intended to
qualify under certain provisions of the Code, for more favorable tax treatment than applies to non-qualified stock options. Any option
that does not qualify as an incentive stock option will be a non-qualified stock option. Under the Code, certain restrictions apply to
incentive stock options. For example, the exercise price for incentive stock options may not be less than the fair market value of the
shares on the grant date and the term of the option may not exceed ten years. In addition, an incentive stock option may not be transferred,
other than by will or the laws of descent and distribution, and is exercisable during the holder’s lifetime only by the holder.
In addition, no incentive stock options may be granted to a holder that is first exercisable in a single year if that option, together
with all incentive stock options previously granted to the holder that also first become exercisable in that year, relate to shares having
an aggregate fair market value in excess of $100,000, measured at the grant date.
Stock
Appreciation Rights: Stock appreciation rights, or SARs, which may be granted alone or in tandem with options, have
an economic value similar to that of options. When an SAR for a particular number of shares is exercised, the holder receives a payment
equal to the difference between the market price of the shares on the date of exercise and the exercise price of the shares under the
SAR. Again, the exercise price for SARs normally is the market price of the shares on the date the SAR is granted. Under the Plan, holders
of SARs may receive this payment - the appreciation value - either in cash or shares valued at the fair market value on the date of exercise.
The form of payment will be determined by us.
Restricted
Awards: Restricted awards are shares awarded to participants at no cost. Restricted awards can take the form of awards of
restricted stock, which represent issued and outstanding shares subject to vesting criteria, or restricted stock units, which represent
the right to receive shares subject to satisfaction of the vesting criteria. Restricted stock awards are forfeitable and non-transferable
until the shares vest. The vesting date or dates and other conditions for vesting are established when the shares are awarded. These
awards will be subject to such conditions, restrictions and contingencies as the administrator shall determine at the date of grant.
Those may include requirements for continuous service and/or the achievement of specified performance goals.
Performance
Awards: A performance award is an award that may be in the form of cash or shares or a combination, based on the attainment
of pre-established performance goals and other conditions, restrictions and contingencies identified by the administrator.
Performance
Criteria: Under the 2022 Plan, one or more performance criteria will be used by the administrator in establishing performance
goals. Any one or more of the performance criteria may be used on an absolute or relative basis to measure the performance of our company,
as the administrator may deem appropriate, or as compared to the performance of a group of comparable companies, or published or special
index that the administrator deems appropriate. In determining the actual size of an individual performance compensation award, the administrator
may reduce or eliminate the amount of the award through the use of negative discretion if, in its sole judgment, such reduction or elimination
is appropriate. The administrator shall not have the discretion to (i) grant or provide payment in respect of performance compensation
awards if the performance goals have not been attained or (ii) increase a performance compensation award above the maximum amount payable
under the 2022 Plan.
Other
Material Provisions: Awards will be evidenced by a written agreement, in such form as may be approved by the administrator.
In the event of various changes to the capitalization of our company, such as stock splits, stock dividends and similar re-capitalizations,
an appropriate adjustment will be made by the administrator to the number of shares covered by outstanding awards or to the exercise
price of such awards. The administrator is also permitted to include in the written agreement provisions that provide for certain changes
in the award in the event of a change of control of our company, including acceleration of vesting. Except as otherwise determined by
the administrator at the date of grant, awards will not be transferable, other than by will or the laws of descent and distribution.
Prior to any award distribution, we are permitted to deduct or withhold amounts sufficient to satisfy any employee withholding tax requirements.
Our board also has the authority, at any time, to discontinue the granting of awards. The board also has the authority to alter or amend
the 2022 Plan or any outstanding award or may terminate the 2022 Plan as to further grants, provided that no amendment will, without
the approval of our stockholders, to the extent that such approval is required by law or the rules of an applicable exchange, increase
the number of shares available under the 2022 Plan, change the persons eligible for awards under the 2022 Plan, extend the time within
which awards may be made, or amend the provisions of the 2022 Plan related to amendments. No amendment that would adversely affect any
outstanding award made under the 2022 Plan can be made without the consent of the holder of such award.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information with respect to the beneficial ownership of our common stock as of December 20, 2022 for
(i) each of our named executive officers and directors; (ii) all of our named executive officers and directors as a group; and (iii)
each other stockholder known by us to be the beneficial owner of more than 5% of our outstanding common stock. Unless otherwise indicated,
the address of each beneficial owner listed in the table below is c/o our company, 990 S Rogers Circle, Suite 3, Boca Raton, Florida
33487.
Name
and Address of Beneficial Owner | |
Title
of Class | |
Amount
and Nature of Beneficial Ownership(1) | | |
Percent
of Class(2) | |
Alfonso
J. Cervantes, Jr., Executive Chairman(3) | |
Common
Stock | |
| 8,245,667 | | |
| 22.21 | % |
Darren
C. Minton, Chief Executive Officer, President and Director(4) | |
Common Stock | |
| 1,605,556 | | |
| 4.42 | % |
Alan
B. Bergman, Chief Financial Officer(5) | |
Common Stock | |
| 55,556 | | |
| * | |
Ronald
S. Altbach, Director(6) | |
Common Stock | |
| 1,245,495 | | |
| 3.45 | % |
Robert S. Rein, Esq.,
Director | |
Common Stock | |
| 1,237,000 | | |
| 3.43 | % |
Arthur S. Reynolds,
Director | |
Common Stock | |
| 100,000 | | |
| * | |
Roger Conley Wood,
Director | |
Common Stock | |
| 50,000 | | |
| * | |
All executive officers
and directors as a group | |
Common Stock | |
| 11,261,495 | | |
| 34.08 | % |
(1) | Beneficial
ownership is determined in accordance with SEC rules and generally includes voting or investment
power with respect to securities. For purposes of this table, a person or group of persons
is deemed to have “beneficial ownership” of any shares that such person or any
member of such group has the right to acquire within sixty (60) days. For purposes of computing
the percentage of outstanding shares of our common shares held by each person or group of
persons named above, any shares that such person or persons has the right to acquire within
sixty (60) days of December 20, 2022 are deemed to be outstanding for such person, but not
deemed to be outstanding for the purpose of computing the percentage ownership of any other
person. The inclusion herein of any shares listed as beneficially owned does not constitute
an admission of beneficial ownership by any person. |
(2) | Based
on 36,103,067 shares of common stock issued and outstanding as of December 20, 2022. |
(3) | Includes
2,000,000 shares of common stock held directly, 1,016,667 shares of common stock which Mr.
Cervantes has the right to acquire within 60 days through the exercise of vested options
and 5,229,000 shares of common stock held by Trilogy. Mr. Cervantes is the Chairman of Trilogy
and has voting and investment power over the securities held by it. Mr. Cervantes disclaims
beneficial ownership of the shares held by Trilogy except to the extent of his pecuniary
interest, if any, in such shares. |
(4) | Includes
1,350,000 shares of common stock held directly and 255,556 shares of common stock which Mr.
Minton has the right to acquire within 60 days through the exercise of vested options. |
(5) | Includes
50,000 shares of common stock held directly and 5,556 shares of common stock which Mr. Bergman
has the right to acquire within 60 days through the exercise of vested options. |
(6) | Includes
245,495 shares held directly and 1,000,000 shares of common stock held by Mesa Lane LLC.
Mr. Altbach is the Manager of Mesa Lane LLC and has voting and investment power over the
securities held by it. Mr. Altbach disclaims beneficial ownership of the shares held by Mesa
Lane LLC except to the extent of his pecuniary interest, if any, in such shares. |
We
do not currently have any arrangements which if consummated may result in a change of control of our company.
CURRENT
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Transactions
with Related Persons
The
following includes a summary of transactions since the beginning of our 2020 fiscal year, or any currently proposed transaction, in which
we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of
our total assets at year end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect
material interest (other than compensation described under “Executive Compensation” above). We believe the terms obtained
or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms
available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
| ● | We
have a management services agreement with Trilogy, a company controlled by our Executive
Chairman. As of September 30, 2022 and December 31, 2021, the amounts due from Trilogy are
$1,365,353 and $0, respectively. Additionally, as of September 30, 2022 and December 31,
2021, the amounts due to Trilogy are $0 and $325,966, respectively, which are presented net
of amounts due from Trilogy. |
| ● | Prior
to November 30, 2021, DSO rented its operating facility from Scientific Real Estate Holdings,
LLC, a non-consolidating company owned by its former sole member, Sasson Moulavi. Rent expense
paid to the related party for the year ended December 31, 2021 was $153,798. |
| ● | Prior
to October 1, 2021, DSO sold its products to Control de Poids / Smart for Life-Montreal,
which was considered a related party due to common ownership by Sasson Moulavi. During the
year ended December 31, 2021, sales to this related party were $25,384. |
Promoters
and Certain Control Persons
Alfonso
J. Cervantes, Jr., our Executive Chairman and founder, may be deemed a “promoter” as defined by Rule 405 of the Securities
Act. For information regarding compensation, including items of value, that have been provided or that may be provided to Mr. Cervantes,
please refer to “Executive Compensation” above.
In
addition, in 2020, at the same time that we made other compensatory stock and option awards to officers, directors and consultants for
prior services, we issued an aggregate of 2,250,000 shares of common stock and an option for the purchase of 1,000,000 shares of common
stock at an exercise price of $0.01 to Mr. Cervantes for services rendered.
As
noted above, we are also party to a management services agreement with Trilogy, a company controlled by Mr. Cervantes that initially
organized our company and provided us with seed capital. In 2020, we issued 6,200,000 shares of common stock to Trilogy.
SELLING
STOCKHOLDERS
The
common stock being offered by the selling stockholders are those previously issued to the selling stockholders and those issuable to
the selling stockholders upon the exercise of warrants. For additional information regarding the issuances of those securities, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Private Placement and Related
Transactions”. We are registering the shares of common stock in order to permit the selling stockholders to offer the shares
for resale from time to time. Except for the ownership of these securities, the selling stockholders have not had any material relationship
with us within the past three years and based on the information provided to us by the selling stockholders, no selling stockholder is
a broker-dealer or an affiliate of a broker-dealer.
The
table below lists the selling stockholders and other information regarding the beneficial ownership of the shares of common stock by
each of the selling stockholders. The second column lists the number of shares of common stock beneficially owned by each selling stockholder,
based on its ownership as of December 20, 2022, assuming the exercise of the warrants held by the selling stockholders on that date,
without regard to any limitations on exercises.
The
third column lists the shares of common stock being offered by this prospectus by the selling stockholders.
In
accordance with the terms of a registration rights agreement with the selling stockholders, this prospectus generally covers the resale
of the sum of the number of shares of common stock issued in the private placement and the maximum number of shares of common stock issuable
upon the exercise of warrants held by the selling stockholders, subject to adjustment as provided in the registration right agreement,
without regard to any limitations on the exercise of these securities. The fourth column assumes the sale of all of the shares offered
by the selling stockholders pursuant to this prospectus.
Under the terms of the warrants, a selling
stockholder may not exercise the warrants to the extent such exercise would cause such selling stockholder, together with its affiliates,
to beneficially own a number of shares of common stock which would exceed 4.99% of our then outstanding common stock following such exercise.
This limitation may be waived (up to a maximum of 9.99%) by the selling stockholder and in its sole discretion, upon not less than sixty-one
(61) days’ prior notice to us. The number of shares in the table below do not reflect this limitation but we have reduced the percent
owned to 4.99%. The selling stockholders may sell all, some or none of their shares in this offering. See “Plan of Distribution.”
Name
of Selling Stockholder | |
Common
Stock
Beneficially
Owned
Prior to this
Offering | | |
Number of
Shares
Being
Offered | | |
Common Stock
Beneficially
Owned After
this Offering | |
| |
| | |
| | |
Shares | | |
Percent(1) | |
Anson East
Master Fund LP(2) | |
| 14,092,050 | | |
| 3,678,358 | | |
| 10,595,299 | | |
| 4.99 | % |
Anson Investments Master
Fund LP(3) | |
| 42,276,124 | | |
| 11,035,071 | | |
| 31,785,874 | | |
| 4.99 | % |
District 2 Capital Fund
LP(4) | |
| 56,399,127 | | |
| 14,713,430 | | |
| 42,412,125 | | |
| 4.99 | % |
Ionic Ventures, LLC(5) | |
| 59,050,267 | | |
| 14,713,430 | | |
| 45,063,265 | | |
| 4.99 | % |
Sabby Volatility Warrant
Master Fund, Ltd.(6) | |
| 56,289,937 | | |
| 14,713,430 | | |
| 42,302,935 | | |
| 4.99 | % |
| (1) | Applicable percentage ownership after to
this offering is based on 36,103,067 shares of common stock deemed to be outstanding as of
December 20, 2022. As noted above, for purposes of computing percentage ownership after this
offering, we have assumed that all warrants offered by the selling stockholders will be exercised
for common stock and sold in this offering. |
| (2) | The number of shares being offered includes
(i) 106,908 shares of common stock, (ii) 366,775 shares of common stock issuable upon the
exercise of prefunded warrants, (iii) 3,023,068 shares of common stock issuable upon the
exercise of amended and restated warrants and (iv) up to an additional 181,607 shares of
common stock that may be issuable upon the occurrence of certain adjustments to the prefunded
warrants. The shares of common stock beneficially owned after this offering includes 151,170
shares of common stock, amended and restated warrants to purchase an additional 10,369,129
shares of common stock and series A warrants to purchase 75,000 shares of common stock. Anson
Advisors Inc. and Anson Funds Management LP, the Co-Investment Advisers of Anson East Master
Fund LP, hold voting and dispositive power over the shares held by Anson East Master Fund
LP. Bruce Winson is the managing member of Anson Management GP LLC, which is the general
partner of Anson Funds Management LP. Moez Kassam and Amin Nathoo are directors of Anson
Advisors Inc. Mr. Winson, Mr. Kassam and Mr. Nathoo each disclaim beneficial ownership of
these shares except to the extent of their pecuniary interest therein. |
| (3) | The number of shares being offered includes
(i) 320,724 shares of common stock, (ii) 1,100,325 shares of common stock issuable upon the
exercise of prefunded warrants, (iii) 9,069,201 shares of common stock issuable upon the
exercise of amended and restated warrants and (iv) up to an additional 544,821 shares of
common stock that may be issuable upon the occurrence of certain adjustments to the prefunded
warrants. The shares of common stock beneficially owned after this offering includes 453,503
shares of common stock, amended and restated warrants to purchase an additional 31,107,371
shares of common stock and series A warrants to purchase 225,000 shares of common stock.
Anson Advisors Inc. and Anson Funds Management LP, the Co-Investment Advisers of Anson Investments
Master Fund LP, hold voting and dispositive power over the shares held by Anson Investments
Master Fund LP. Bruce Winson is the managing member of Anson Management GP LLC, which is
the general partner of Anson Funds Management LP. Moez Kassam and Amin Nathoo are directors
of Anson Advisors Inc. Mr. Winson, Mr. Kassam and Mr. Nathoo each disclaim beneficial ownership
of these shares except to the extent of their pecuniary interest therein. |
| (4) | The number of shares being offered includes
(i) 427,632 shares of common stock, (ii) 1,467,101 shares of common stock issuable upon the
exercise of prefunded warrants, (iii) 12,092,269 shares of common stock issuable upon the
exercise of amended and restated warrants and (iv) up to an additional 726,428 shares of
common stock that may be issuable upon the occurrence of certain adjustments to the prefunded
warrants. The shares of common stock beneficially owned after this offering includes 635,625
shares of common stock, amended and restated warrants to purchase an additional 41,476,500
shares of common stock and series A warrants to purchase 300,000 shares common stock. Michael
Bigger is the Managing Member of District 2 GP LLC, the General Partner of District 2 Capital
Fund LP, and has voting and dispositive power over the shares held by it. Mr. Bigger disclaims
beneficial ownership of these shares except to the extent of his pecuniary interest therein. |
| (5) | The number of shares being offered includes
(i) 427,632 shares of common stock, (ii) 1,467,101 shares of common stock issuable upon the
exercise of prefunded warrants, (iii) 12,092,269 shares of common stock issuable upon the
exercise of amended and restated warrants and (iv) up to an additional 726,428 shares of
common stock that may be issuable upon the occurrence of certain adjustments to the prefunded
warrants. The shares of common stock beneficially owned after this offering includes 1,786,840
shares of common stock, amended and restated warrants to purchase an additional 41,476,500
shares of common stock, series A warrants to purchase 300,000 shares of common stock and
1,499,925 shares of common stock issuable upon the conversion of 1,000 shares of series A
convertible preferred stock. Brendan O’Neil and Keith Coulston are the principals of
Ionic Ventures, LLC and hold voting and dispositive power over the shares held by it. Mr.
O’Neil and Mr. Coulston each disclaim beneficial ownership of these shares except to
the extent of their pecuniary interest therein. |
| (6) | The number of shares being offered includes
(i) 1,894,733 shares of common stock issuable upon the exercise of prefunded warrants, (ii)
12,092,269 shares of common stock issuable upon the exercise of amended and restated warrants
and (ii) up to an additional 726,428 shares of common stock that may be issuable upon the
occurrence of certain adjustments to the prefunded warrants. The shares of common stock beneficially
owned after this offering includes 526,435 shares of common stock, amended and restated warrants
to purchase an additional 41,476,500 shares of common stock and series A warrants to purchase
300,000 shares common stock. Sabby Management, LLC, the investment manager of Sabby Volatility
Warrant Master Fund, Ltd., and Hal Mintz, manager of Sabby Management, LLC, may be deemed
to share voting and dispositive power with respect to these securities. Each of Sabby Management,
LLC and Hal Mintz disclaims beneficial ownership over the securities listed except to the
extent of their pecuniary interest therein. |
DESCRIPTION OF SECURITIES
General
The following description summarizes important
terms of the classes of our capital stock. This summary does not purport to be complete and is qualified in its entirety by the provisions
of our certificate of incorporation, the certificate of designation for our series A convertible preferred stock and our bylaws, which
have been filed as exhibits to the registration statement of which this prospectus is a part.
Our authorized capital stock currently consists
of 100,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value $0.0001 per share.
As of the date of this prospectus, there were
36,103,067 shares of common stock and 1,000 shares of series A convertible preferred stock issued and outstanding.
Common Stock
Dividend Rights. Subject to preferences
that may be applicable to any then-outstanding preferred stock, holders of common stock are entitled to receive ratably those dividends,
if any, as may be declared from time to time by the board of directors out of legally available funds.
Liquidation Rights. In the event of our
liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available
for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference
granted to the holders of any then-outstanding shares of preferred stock.
Voting Rights. The holders of common stock
are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Under our certificate of
incorporation and bylaws, any corporate action to be taken by vote of stockholders other than for election of directors shall be authorized
by the affirmative vote of the majority of votes cast. Directors are elected by a plurality of votes. Stockholders do not have cumulative
voting rights.
Other Rights. Holders of common stock have
no preemptive, conversion or subscription rights and there are no redemption or sinking fund provisions applicable to the common stock.
The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of preferred stock.
Preferred Stock
Our certificate of incorporation authorizes our
board to issue up to 10,000,000 shares of preferred stock in one or more series, to determine the designations and the powers, preferences
and rights and the qualifications, limitations and restrictions thereof, including the dividend rights, conversion or exchange rights,
voting rights (including the number of votes per share), redemption rights and terms, liquidation preferences, sinking fund provisions
and the number of shares constituting the series. Our board of directors could, without stockholder approval, issue preferred stock with
voting and other rights that could adversely affect the voting power and other rights of the holders of common stock and which could have
the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority
of our outstanding voting stock.
Series A Convertible Preferred Stock
On June 29, 2021, we filed a certificate of designation
with the Delaware Secretary of State to establish our series A convertible preferred stock. We designated a total of 8,000 shares of our
preferred stock as series A convertible preferred stock. Our 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 date that the registration statement relating to the initial public offering was
declared effective by the SEC (which we refer to as 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 our 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 our 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,
we 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 our 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, we 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 us.
Participation Rights. Pursuant to a securities
purchase agreement that we entered into with the holders of the series A convertible preferred stock, until February 14, 2023, the one-year
anniversary of the IPO date, upon any issuance by us or any of our subsidiaries of common stock or securities convertible into or exchangeable
for common stock for cash consideration, indebtedness or a combination thereof, each holder of series A convertible preferred stock shall
have the right to participate in such subsequent financing up to an amount equal to 50% of the aggregate amount raised thereunder on the
same terms, conditions and price provided for thereunder.
Options
As of the date of this prospectus, we have issued
options to purchase an aggregate of 2,578,000 shares of common stock under the 2020 Plan and 2022 Plan at a weighted average exercise
price of $0.34 per share.
Warrants
On December 18, 2020, we issued a warrant for
the purchase of 1,292,445 shares of common stock to Peah Capital, LLC. This warrant is exercisable for the period commencing on January
31, 2022 and ending on December 18, 2027; provided that, the warrant will automatically expire and terminate in the event a registration
statement covering the resale of all shares issued pursuant a future equity agreement with Peah Capital, LLC has been declared effective
by the SEC. The exercise price of this warrant is $0.0001, subject to standard adjustments for stock splits, stock combinations, stock
dividends, reclassifications and similar transactions. In addition, in the event that the number of our outstanding shares of common stock
is increased prior to the 18-month anniversary of the warrant, the number of shares issuable upon exercise of the warrant shall be automatically
increased to represent that number which is 9.9% of the then total outstanding capitalization.
In July and August 2021, we issued warrants for
the purchase of an aggregate of 11,999,404 shares of common stock at an exercise price of $6.25. As described in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Private Placement and Related
Transactions,” due to the issuance of common stock in the private placement at $0.35 per share, the exercise price of these
warrants was reduced to $0.35 per share and the number of shares underlying the warrants was increased to 214,275,076 shares in accordance
with the terms of the warrants. The warrants were then amended and restated. The amended and restated warrants expire on August 14, 2027,
have an exercise price of $0.35 and may be exercised on a cashless basis if there is no effective registration statement registering the
shares issuable upon exercise of the amended and restated warrants; provided that the amended and restated warrants may not be exercised
in full until we have sufficient authorized shares to accommodate such exercise. The exercise price is subject to a price-based adjustment
for new issuances of securities below the exercise price (subject to certain exceptions), as well as standard adjustments for stock splits,
stock dividends, recapitalizations, mergers and similar transactions. In addition to the foregoing, the amended and restated warrants
provide that if we combine (including by way of reverse stock split) outstanding shares of common stock into a smaller number of shares
and the lowest volume weighted average price of our common stock during the five consecutive trading days commencing on the effective
date of such combination is less than the exercise price then in effect, then the exercise price shall be reduced (but in no event increased)
to such lower price. The amended and restated warrants also contain a beneficial ownership limitation which provides that we shall
not effect any exercise, and a holder shall not have the right to exercise, any portion of a amended and restated warrants to
the extent that, after giving effect to the exercise, 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 exercise. 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 us.
On July 1, 2021, we issued warrants for the purchase
of an aggregate of 1,078,173 shares of common stock to Dawson James Securities, Inc. and its designees as partial compensation for services
rendered in connection with our private placement of series A convertible preferred stock and loan from Diamond Creek Capital, LLC that
were completed on July 1, 2021. These warrants are exercisable for a period of five years at an exercise price of $0.6667 per share, subject
to standard adjustments for stock splits, stock combinations, stock dividends, reclassifications, mergers, consolidations, reorganizations
and similar transactions, and may be exercised on a cashless basis.
On November 5, 2021, we issued warrants for the
purchase of 72,000 shares of common stock to Dawson James Securities, Inc. and its designees as partial compensation for services rendered
in connection with our private placement of debentures that was completed on November 5, 2021. Half to these shares, or 36,000 shares,
were subsequently forfeited by Dawson James Securities, Inc. These warrants are exercisable for a period of five years at an exercise
price of $2.50 per share, subject to standard adjustments for stock splits, stock combinations, stock dividends, reclassifications, mergers,
consolidations, reorganizations and similar transactions, and may be exercised on a cashless basis.
In December 2021 and January 2022, we entered
into note and warrant purchase agreements with certain investors, pursuant to which we sold to such investors (i) original issue discount
secured subordinated promissory notes in the aggregate principal amount of $705,882 and (ii) warrants for the purchase of 120,000 shares
of our common stock. These warrants are excisable at any time during the three (3) year period commencing on August 18, 2022, the sixth
(6th) month anniversary of the closing of our initial public offering. The exercise price per share is $6.25, subject to standard adjustments
for stock splits, stock combinations, stock dividends, reclassifications, mergers, consolidations, reorganizations and similar transactions,
and may be exercised on a cashless basis if the market value of our common stock is greater than such exercise price.
On February 18, 2022,
we issued series A warrants for the purchase of 1,646,390 shares of common stock in connection with our initial public offering. The series
A warrants are exercisable until the fifth anniversary of the issuance date at an exercise price equal to $7.00 per share and may be exercised
on a cashless basis if the issuance of common stock
upon exercise of the warrants is not covered by an effective registration statement. The exercise price and number of shares of
common stock issuable upon exercise of the series A warrants may be adjusted in certain circumstances, including in the event of a stock
dividend, extraordinary dividend on or recapitalization, reorganization, merger or consolidation.
On February 18, 2022, we issued series B warrants
for the purchase of 1,646,390 shares of common stock in connection with our initial public offering. Most of the series B warrants were
subsequently exercised. As of the date of this prospectus, series B warrants for the purchase of 207,160 shares of common stock remain
outstanding. The series B warrants are exercisable until the fifth anniversary of the issuance date at an exercise price equal to $10.00
per share and may be exercised on a cashless basis. In such event, the aggregate number of shares of common stock issuable in such cashless
exercise shall equal the product of (x) the aggregate number of shares of common stock that would be issuable upon exercise of the series
B warrant in accordance with its terms if such exercise were by means of a cash exercise rather than a cashless exercise and (y) 1.00.
On December 8, 2022, we issued prefunded warrants
to purchase an aggregate of 1,574,248 shares of common stock. The prefunded warrants have a nominal exercise price of $0.0001 (subject
to standard adjustments for stock splits, stock dividends, recapitalizations, mergers and similar transactions) and may be exercised on
a cashless basis; provided that we shall not issue to any shares upon exercise of the prefunded warrants to the extent such shares would
represent in excess of 19.9% of the number of shares of common stock or 19.9% of the voting power of the shares of common stock outstanding
immediately before giving effect to such issuance unless and until we obtain stockholder approval permitting such issuance in accordance
with applicable Nasdaq rules. The prefunded warrants also contain a beneficial ownership limitation which provides that we shall
not effect any exercise, and a holder shall not have the right to exercise, any portion of a prefunded warrants to
the extent that, after giving effect to the exercise, 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 exercise. 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 us.
On December 8, 2022, we also issued debenture
prefunded warrants to purchase an aggregate of 4,721,787 shares of common stock. The debenture prefunded warrants have the same terms
as the prefunded warrants; provided that the limitation on exercise relating to stockholder approval only applies to the Additional Warrant
Shares (as defined below) and they contain a one-time adjustment which provides that on each of: (a) the date that we complete a reverse
split of our outstanding common stock; (b) the date that stockholder approval is obtained and deemed effective; and (c) the date that
(i) the registration statement of which this prospectus forms a part has been declared effective by the SEC, (ii) all of the shares of
common stock issued and issuable to the holders of the debenture prefunded warrants pursuant to the securities purchase agreement, dated
December 8, 2022, or the Registrable Securities, have been sold pursuant to Rule 144 or may be sold pursuant to Rule 144 without the requirement
for us to be in compliance with the current public information required under Rule 144 and without volume or manner-of-sale restrictions,
(iii) following the one year anniversary of the date of the closing of the securities purchase agreement, provided that a holder of Registrable
Securities is not an affiliate of our company, or (iv) all of the Registrable Securities may be sold pursuant to an exemption from registration
under Section 4(a)(1) of the Securities Act without volume or manner-of-sale restrictions, if the lowest volume weighted average price
of our common stock during the five consecutive trading days commencing on such date, or the Market Price, is less than $0.35 (as adjusted
for the reverse split), then the number of shares issuable upon exercise of the debenture prefunded warrants shall increase to equal (i)
the principal amount plus accrued but unpaid interest of the debentures issued to the holders that was outstanding on the date of conversion
thereof divided by the applicable Market Price minus (ii) the number of shares issued upon conversion of the debentures (which we refer
to as the Additional Warrant Shares); provided, however, that regardless of the actual Market Price, the Market Price for purposes of
this adjustment shall not be less than $0.25.
On December 8, 2022, we issued warrants for the
purchase of an aggregate of 228,572 shares of common stock to Dawson James Securities, Inc. and its designees as partial compensation
for services rendered in connection with our private placement of common stock and prefunded warrants that was completed on such date.
These warrants are exercisable for a period of five years at an exercise price of $0.35 per share, subject to standard adjustments for
stock splits, stock combinations, stock dividends, reclassifications, mergers, consolidations, reorganizations and similar transactions,
and may be exercised on a cashless basis; provided that such exercise is subject to stockholder approval.
Convertible Notes
On July 29, 2022, we issued secured subordinated
convertible promissory notes in the aggregate principal amount of $2,150,000 in connection with the acquisition of Ceautamed. The notes
shall bear 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%. The notes are convertible
at the option of the holder into 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.
Anti-takeover Effects of Delaware Law and Charter
Provisions
We have elected not to be governed by Section
203 of the General Corporation Law of the State of Delaware, which prohibits a publicly-held Delaware corporation from engaging in a business
combination, except under certain circumstances, with an interested stockholder.
Our certificate of incorporation and bylaws contain
certain provisions that may have anti-takeover effects, making it more difficult for or preventing a third party from acquiring control
of our company or changing our board of directors and management.
Our certificate of incorporation authorizes our
board of directors to issue up to 10,000,000 shares of preferred stock without further stockholder approval. The preferred stock may be
issued in one or more series, the terms of which may be determined at the time of issuance by the board of directors without further action
by the stockholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights and sinking
fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce
the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our
ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it
more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent
our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the
market price of our common stock.
Our bylaws permit the board of directors to establish
the number of directors and fill any vacancies and newly created directorships. These provisions will prevent a stockholder from increasing
the size of our board of directors and gaining control of our board of directors by filling the resulting vacancies with its own nominees.
In addition, our bylaws provide that no member of our board of directors may be removed from office by our stockholders without cause
and, in addition to any other vote required by law, upon the approval of not less than the majority of the total voting power of all of
our outstanding voting stock then entitled to vote in the election of directors.
Our bylaws establish an advance notice procedure
for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election
to the board of directors. Stockholders at an annual meeting will only be able to consider proposals or nominations specified in the notice
of meeting or brought before the meeting by or at the direction of the board of directors or by a stockholder who was a stockholder of
record on the record date for the meeting, who is entitled to vote at the meeting and who has given us timely written notice, in proper
form, of the stockholder’s intention to bring that business before the meeting. Although our bylaws do not give the board of directors
the power to approve or disapprove stockholder nominations of candidates or proposals regarding other business to be conducted at a special
or annual meeting, our bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures
are not followed or may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect its own slate of directors
or otherwise attempting to obtain control of our company.
Furthermore, neither the holders of our common
stock nor the holders of our preferred stock have cumulative voting rights in the election of our directors. The combination of the present
ownership by a few stockholders of a significant portion of our issued and outstanding common stock and lack of cumulative voting makes
it more difficult for other stockholders to replace our board of directors or for a third party to obtain control of our company by replacing
its board of directors.
Transfer Agent and Registrar
VStock Transfer, LLC, 18 Lafayette Place, Woodmere,
NY 11598, telephone 212-828-8436, is the transfer agent for our common stock.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS
The following is a summary of the material United
States federal income tax consequences of the purchase, ownership and disposition of our common stock. This summary is limited to Non-U.S.
Holders (as defined below) that hold our common stock as a capital asset (generally, property held for investment) for United States federal
income tax purposes. This summary does not discuss all of the aspects of United States federal income taxation that may be relevant to
a Non-U.S. Holder in light of the Non-U.S. Holder’s particular investment or other circumstances. Accordingly, all prospective Non-U.S.
Holders should consult their own tax advisors with respect to the United States federal, state, local and non-United States tax consequences
of the purchase, ownership and disposition of our common stock.
This summary is based on provisions of the Code,
applicable United States Treasury regulations and administrative and judicial interpretations, all as in effect or in existence on the
date of this prospectus. Subsequent developments in United States federal income tax law, including changes in law or differing interpretations,
which may be applied retroactively, could alter the United States federal income tax consequences of owning and disposing of our common
stock as described in this summary. There can be no assurance that the IRS will not take a contrary position with respect to one or more
of the tax consequences described herein and we have not obtained, nor do we intend to obtain, a ruling from the IRS with respect to the
United States federal income tax consequences of the ownership or disposition of our common stock.
As used in this summary, the term “Non-U.S.
Holder” means a beneficial owner of our common stock that is not, for United States federal income tax purposes:
| ● | an individual who is a citizen or resident of the United States; |
| ● | a corporation (or other entity treated as a corporation)
created or organized in or under the laws of the United States, any state thereof, or the District of Columbia; |
| ● | an entity or arrangement treated as a partnership; |
| ● | an estate whose income is includible in gross income for United States federal income tax purposes regardless
of its source; or |
| ● | a trust, if (1) a United States court is
able to exercise primary supervision over the trust’s administration and one or more “United States persons” (within
the meaning of the Code) has the authority to control all of the trust’s substantial decisions, or (2) the trust has a valid
election in effect under applicable United States Treasury regulations to be treated as a United States person. |
If an entity or arrangement treated as a partnership
for United States federal income tax purposes holds our common stock, the tax treatment of a partner in such a partnership generally will
depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. Partnerships,
and partners in partnerships, that hold our common stock should consult their own tax advisors as to the particular United States federal
income tax consequences of owning and disposing of our common stock that are applicable to them.
This summary does not consider any specific facts
or circumstances that may apply to a Non-U.S. Holder, including the impact of the Medicare contribution tax on net investment income and
the alternative minimum tax, and does not address any special tax rules that may apply to particular Non-U.S. Holders, including, without
limitation:
| ● | a Non-U.S. Holder that is a financial institution,
insurance company, tax-exempt organization, pension plan, broker, dealer or trader in stocks or securities, foreign currency dealer, U.S.
covered expatriate, controlled foreign corporation or passive foreign investment company; |
| ● | a Non-U.S. Holder holding our common stock as
part of a conversion, constructive sale, wash sale or other integrated transaction or a hedge, straddle or synthetic security; |
| ● | a Non-U.S. Holder that holds or receives our common stock pursuant to the exercise of any employee stock
option or otherwise as compensation; or |
| ● | a Non-U.S. Holder that at any time owns, directly, indirectly or constructively, 5% or more of our outstanding
common stock. |
In addition, this summary does not address any
U.S. state or local, or non-U.S. or other tax consequences, or any United States federal income tax consequences for beneficial owners
of a Non-U.S. Holder, including stockholders of a controlled foreign corporation or passive foreign investment company that holds our
common stock. This summary also does not address the effects of other United States federal tax laws, such as estate and gift tax laws.
Each Non-U.S. Holder should consult its tax
advisor regarding the United States federal, state, local and non-U.S. income and other tax consequences of owning and disposing of our
common stock.
Distributions
We do not currently expect to pay any cash dividends
on our common stock. If we make distributions of cash or property (other than certain pro rata distributions of our common stock) with
respect to our common stock, any such distributions generally will constitute dividends for United States federal income tax purposes
to the extent paid from our current or accumulated earnings and profits, as determined under United States federal income tax principles.
If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a nontaxable return of capital
to the extent of the Non-U.S. Holder’s adjusted tax basis in its common stock and will reduce (but not below zero) such Non-U.S.
Holder’s adjusted tax basis in its common stock. Any remaining excess will be treated as gain from a disposition of our common stock
subject to the tax treatment described below in “—Dispositions of Our Common Stock.”
Subject to the discussion below on effectively
connected income, dividends paid to a Non-U.S. Holder of our common stock will be subject to United States federal withholding tax at
a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty, provided the Non-U.S.
Holder furnishes a valid IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) certifying qualification for the lower treaty
rate).
Distributions on our common stock that are treated
as dividends and that are effectively connected with a Non-U.S. Holder’s conduct of a trade or business in the United States will
be taxed on a net income basis at the regular graduated rates and in the manner applicable to U.S. persons. An exception may apply if
the Non-U.S. Holder is eligible for, and properly claims, the benefit of an applicable income tax treaty and the dividends are not attributable
to a permanent establishment or fixed base maintained by the Non-U.S. Holder in the United States. In such case, the Non-U.S. Holder may
be eligible for a lower rate under an applicable income tax treaty between the United States and its jurisdiction of tax residence. Dividends
that are effectively connected with a Non-U.S. Holder’s conduct of a trade or business in the United States will not be subject
to the United States withholding tax if the Non-U.S. Holder provides to the applicable withholding agent a properly executed IRS Form
W-8ECI (or other applicable form) in accordance with the applicable certification and disclosure requirements. A Non-U.S. Holder treated
as a corporation for United States federal income tax purposes may also be subject to a “branch profits tax” at a 30% rate
(unless the Non-U.S. Holder is eligible for a lower rate under an applicable income tax treaty) on the Non-U.S. Holder’s earnings
and profits (attributable to dividends on our common stock or otherwise) that are effectively connected with the Non-U.S. Holder’s
conduct of a trade or business within the United States.
The IRS Forms and other certifications described
above must be provided to the applicable withholding agent prior to the payment of dividends and must be updated periodically. A Non-U.S.
Holder may obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for a refund with the IRS in
the form of a U.S. tax return. Non-U.S. Holders should consult their tax advisors regarding their eligibility for benefits under a relevant
income tax treaty and the manner of claiming such benefits.
The foregoing discussion is subject to the discussions
below under “—Backup Withholding and Information Reporting” and “—FATCA Withholding.”
Dispositions of Our Common Stock
A Non-U.S. Holder generally will not be subject
to United States federal income tax (including United States withholding tax) on gain recognized on any sale or other disposition of our
common stock unless:
| ● | the gain is effectively connected with the Non-U.S.
Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable
to a permanent establishment or fixed base maintained by the Non-U.S. Holder in the United States); in this case, the gain will be subject
to United States federal income tax on a net income basis at the regular rates and in the manner applicable to United States persons
(unless an applicable income tax treaty provides otherwise) and, if the Non-U.S. Holder is treated as a corporation for United States
federal income tax purposes, the “branch profits tax” described above may also apply; |
| ● | the Non-U.S. Holder is an individual who is present
in the United States for 183 days or more in the taxable year of the disposition and meets certain other requirements; in this case, except
as otherwise provided by an applicable income tax treaty, the gain, which may be offset by certain United States source capital losses
(provided the Non-U.S. Holder has timely filed United States federal income tax returns with respect to such losses), generally will be
subject to a flat 30% United States federal income tax, even if the Non-U.S. Holder is not treated as a resident of the United States
under the Code; or |
| ● | we are or have been a “United States real
property holding corporation” for United States federal income tax purposes at any time during the shorter of (i) the five-year
period ending on the date of disposition and (ii) the period that the Non-U.S. Holder held our common stock. |
Generally, a corporation is a “United States
real property holding corporation” if the fair market value of its “United States real property interests” equals or
exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in
a trade or business. We believe that we are not currently, and we do not anticipate becoming in the future, a United States real property
holding corporation. However, because the determination of whether we are a United States real property holding corporation is made from
time to time and depends on the relative fair market values of our assets, there can be no assurance in this regard. If we were a United
States real property holding corporation, the tax relating to disposition of stock in a United States real property holding corporation
generally will not apply to a Non-U.S. Holder whose holdings, direct, indirect and constructive, constituted 5% or less of our common
stock at all times during the applicable period, provided that our common stock is “regularly traded on an established securities
market” (as provided in applicable United States Treasury regulations) at any time during the calendar year in which the disposition
occurs. However, no assurance can be provided that our common stock will be regularly traded on an established securities market for purposes
of the rules described above. Non-U.S. Holders should consult their tax advisors regarding the possible adverse United States federal
income tax consequences to them if we are, or were to become, a United States real property holding corporation.
The foregoing discussion is subject to the discussions
below under “—Backup Withholding and Information Reporting” and “—FATCA Withholding.”
Backup Withholding and Information Reporting
Backup withholding (currently at a rate of 24%)
will not apply to payments of dividends on our common stock to a Non-U.S. Holder if the Non-U.S. Holder provides to the applicable withholding
agent a properly executed IRS Form W-8BEN or W-8BEN-E (or other applicable form) certifying under penalties of perjury that the Non-U.S.
Holder is not a United States person or is otherwise entitled to an exemption. However, the applicable withholding agent generally will
be required to report to the IRS (and to such Non-U.S. Holder) payments of distributions on our common stock and the amount of United
States federal income tax, if any, withheld from those payments, regardless of whether such distributions constitute dividends. In accordance
with applicable treaties or agreements, the IRS may provide copies of such information returns to the tax authorities in the country in
which the Non-U.S. Holder resides.
The gross proceeds from sales or other dispositions
of our common stock may be subject, in certain circumstances discussed below, to United States backup withholding and information reporting.
If a Non-U.S. Holder sells or otherwise disposes of our common stock outside the United States through a non-United States office of a
non-United States broker and the disposition proceeds are paid to the Non-U.S. Holder outside the United States, then the United States
backup withholding and information reporting requirements generally will not apply to that payment. However, United States information
reporting, but not United States backup withholding, will apply to a payment of disposition proceeds, even if that payment is made outside
the United States, if a Non-U.S. Holder sells our common stock through a non-United States office of a broker that is a United States
person or has certain enumerated connections with the United States, unless the broker has documentary evidence in its files that the
Non-U.S. Holder is not a United States person and certain other conditions are met or the Non-U.S. Holder otherwise qualifies for an exemption.
If a Non-U.S. Holder receives payments of the
proceeds of a disposition of our common stock to or through a United States office of a broker, the payment will be subject to both United
States backup withholding and information reporting unless the Non-U.S. Holder provides to the broker a properly executed IRS Form W-8BEN
or W-8BEN-E (or other applicable form) certifying under penalties of perjury that the Non-U.S. Holder is not a United States person, or
the Non-U.S. Holder otherwise qualifies for an exemption.
Backup withholding is not an additional tax. Any
amounts withheld under the backup withholding rules may be credited against the Non-U.S. Holder’s United States federal income tax
liability (which may result in the Non-U.S. Holder being entitled to a refund), provided that the required information is timely furnished
to the IRS.
FATCA Withholding
The Foreign Account Tax Compliance Act and related
Treasury guidance (commonly referred to as FATCA) impose United States federal withholding tax at a rate of 30% on payments to certain
foreign entities of (i) U.S. source dividends (including dividends paid on our common stock) and (ii) (subject to the proposed
Treasury Regulations discussed below) the gross proceeds from the sale or other disposition of property that produces U.S. source dividends
(including sales or other dispositions of our common stock). This withholding tax applies to a foreign entity, whether acting as a beneficial
owner or an intermediary, unless such foreign entity complies with (i) certain information reporting requirements regarding its United
States account holders and its United States owners and (ii) certain withholding obligations applicable to certain payments to its
account holders and certain other persons. Accordingly, the entity through which a Non-United States Holder holds its common stock will
affect the determination of whether such withholding is required. Foreign financial institutions located in jurisdictions that have an
intergovernmental agreement with the United States governing FATCA may be subject to different rules.
Under the applicable Treasury Regulations and
administrative guidance, withholding under FATCA generally will apply to payments of dividends on our common stock. While withholding
under FATCA would have applied also to payments of gross proceeds from the sale or other disposition of stock on or after January 1, 2019,
proposed Treasury Regulations eliminate FATCA withholding on payments of gross proceeds. Taxpayers generally may rely on these proposed
Treasury Regulations until final Treasury Regulations are issued.
Non-U.S. Holders are encouraged to consult their
tax advisors regarding FATCA.
PLAN OF DISTRIBUTION
Each selling stockholder and any of
their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their securities covered hereby on any
stock exchange, market or trading facility on which the securities are traded or in private transactions. These sales will occur at fixed
prices, at market prices prevailing at the time of sale, at prices related to prevailing market prices, or at negotiated prices. A selling
stockholder may use any one or more of the following methods when selling securities:
| ● | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
| ● | block trades in which the broker-dealer will attempt to sell the securities as agent but may position
and resell a portion of the block as principal to facilitate the transaction; |
| ● | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| ● | an exchange distribution in accordance with the rules of the applicable exchange; |
| ● | privately negotiated transactions; |
| ● | settlement of short sales; |
| ● | in transactions through broker-dealers that agree with the selling stockholders to sell a specified number
of such securities at a stipulated price per security; |
| ● | through the writing or settlement of options
or other hedging transactions, whether through an options exchange or otherwise; |
| ● | a combination of any such methods of sale; or |
| ● | any other method permitted pursuant to applicable
law. |
The selling stockholders may also sell securities
under Rule 144 or any other exemption from registration under the Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders
may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders
(or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser) in amounts to be negotiated, but, except
as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission
in compliance with FINRA Rule 2121; and in the case of a principal transaction a markup or markdown in compliance with FINRA Rule 2121.
In connection with the sale of the
securities or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions,
which may in turn engage in short sales of the securities in the course of hedging the positions they assume. The selling stockholders
may also sell securities short and deliver these securities to close out their short positions, or loan or pledge the securities to broker-dealers
that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers
or other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other
financial institution of securities offered by this prospectus, which securities such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The selling stockholders and any broker-dealers
or agents that are involved in selling the securities may be deemed to be “underwriters” within the meaning of the Securities
Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale
of the securities purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each selling stockholder
has informed us that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute
the securities.
We are required to pay certain fees
and expenses incurred by us incident to the registration of the securities. We have agreed to indemnify the selling stockholders against
certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
We agreed to keep this prospectus effective until
the earlier of (i) the date on which the securities may be resold by the selling stockholders without registration and without regard
to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for us to be in compliance with the current
public information under Rule 144 under the Securities Act or any other rule of similar effect or (ii) all of the securities have been
sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale securities will
be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain
states, the resale securities covered hereby may not be sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations
under the Exchange Act, any person engaged in the distribution of the resale securities may not simultaneously engage in market making
activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement
of the distribution. In addition, the selling stockholders will be subject to applicable provisions of the Exchange Act and the rules
and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of the common stock by the selling
stockholders or any other person. We will make copies of this prospectus available to the selling stockholders and have informed them
of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with
Rule 172 under the Securities Act).
LEGAL MATTERS
The validity of the common stock covered by this
prospectus will be passed upon by Bevilacqua PLLC. Bevilacqua PLLC holds 323,267 shares of common stock. Bevilacqua PLLC received these
securities as partial consideration for legal services previously provided to us.
EXPERTS
The financial statements of Smart for Life, Inc.,
Doctors Scientific Organica, LLC, Nexus Offers, Inc. and Ceautamed Worldwide LLC appearing elsewhere in this prospectus have been included
herein in reliance upon the reports of Daszkal Bolton LLP, an independent registered public accounting firm, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We
have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock offered by
this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set
forth in the registration statement, some of which is contained in exhibits to the registration statement as permitted by the rules and
regulations of the SEC. For further information with respect to us and our common stock, we refer you to the registration statement, including
the exhibits filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract
or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement,
please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or
document filed as an exhibit is qualified in all respects by the filed exhibit.
You may obtain copies of this information by mail from the public reference room of the SEC at 100 F Street, N.E., Room 1580, Washington,
D.C. 20549, at prescribed rates. You may obtain information on the operation of the public reference rooms by calling the SEC at 1(800)
SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like
us, that file electronically with the SEC. The address of that website is www.sec.gov.
We
file periodic reports, proxy statements and other information with the
SEC. These periodic reports, proxy statements and other information are available for inspection and copying at the SEC’s public
reference facilities and the website of the SEC referred to above. Additionally, we will make these filings available, free of charge,
on our website at www.smartforlifecorp.com as soon as reasonably
practicable after we electronically file such materials with, or furnish them to, the SEC. The information on our website, other than
these filings, is not, and should not be, considered part of this prospectus and is not incorporated by reference into this document.
FINANCIAL
STATEMENTS
|
Page |
Unaudited Condensed Consolidated Financial Statements of Smart for Life, Inc. for the Three and Nine Months Ended September 30, 2022 and 2021 |
F-2 |
Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021 |
F-3 |
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited) |
F-4 |
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited) |
F-5 |
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited) |
F-6 |
Notes to Unaudited Condensed Consolidated Financial Statements |
F-7 |
|
|
Audited Consolidated Financial Statements of Smart for Life, Inc. for the Years Ended December 31, 2021 and 2020 |
F-26 |
Report of Independent Registered Public Accounting Firm |
F-27 |
Consolidated Balance Sheets as of December 31, 2021 and 2020 |
F-29 |
Consolidated
Statements of Operations for the Years Ended December 31, 2021 and 2020 |
F-30 |
Consolidated
Statement of Changes in Stockholders’ Deficit for the Years Ended December 31, 2021 and 2020 |
F-31 |
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 |
F-32 |
Notes to Consolidated Financial Statements |
F-33 |
|
|
Unaudited Consolidated Financial Statements of Ceautamed Worldwide LLC and Affiliates for the Six Months Ended June 30, 2022 |
F-55 |
Consolidated Balance Sheets as of June 30, 2022 |
F-56 |
Consolidated Statement of Income and Changes in Deficiency in Member’s Equity for the Six Months Ended June 30, 2022 |
F-57 |
Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2022 |
F-58 |
Notes to Consolidated Financial Statements |
F-59 |
|
|
Audited Consolidated Financial Statements of Ceautamed Worldwide LLC and Affiliates for the Year Ended December 31, 2021 |
F-64 |
Report
of Independent Registered Public Accounting Firm |
F-65 |
Consolidated Balance Sheets as of December 31, 2021 |
F-66 |
Consolidated Statement of Income and Changes in Deficiency in Member’s Equity for the Year Ended December 31, 2021 |
F-67 |
Consolidated Statement of Cash Flows for the Year Ended December 31, 2021 |
F-68 |
Notes to Consolidated Financial Statements |
F-69 |
|
|
Audited Financial Statements of Nexus Offers, Inc. for the Years Ended December 31, 2020 and 2019 |
F-75 |
Report
of Independent Registered Public Accounting Firm |
F-76 |
Balance Sheets as of December 31, 2020 and 2019 |
F-77 |
Statements of Operations for the Years Ended December 31, 2020 and 2019 |
F-78 |
Statements
of Income and Changes in Stockholders’ Equity for the Years Ended December 31, 2020 and 2019 |
F-79 |
Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 |
F-80 |
Notes to Financial Statements |
F-81 |
|
|
Audited Consolidated Financial Statements of Doctors Scientific Organica, LLC for the Years Ended December 31, 2020 and 2019 |
F-85 |
Report
of Independent Registered Public Accounting Firm |
F-86 |
Consolidated Balance Sheets as of December 31, 2020 and 2019 |
F-87 |
Consolidated Statements of Income and Changes in Member’s Equity for the Years Ended December 31, 2020 and 2019 |
F-88 |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 |
F-89 |
Notes to Consolidated Financial Statements |
F-90 |
SMART
FOR LIFE, INC.
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 AND 2021
SMART FOR
LIFE, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER
30, 2022 AND DECEMBER 31, 2021
| |
September 30,
2022 | | |
December 31,
2021 | |
| |
(unaudited) | | |
| |
ASSETS | |
| | |
| |
Current assets: | |
| | |
| |
Cash | |
$ | 303,533 | | |
$ | 205,093 | |
Accounts receivable,
net | |
| 754,864 | | |
| 388,958 | |
Inventory | |
| 5,601,198 | | |
| 3,392,544 | |
Due from related
parties, net | |
| 1,365,353 | | |
| — | |
Prepaid
expenses and other current assets | |
| 299,160 | | |
| 352,909 | |
Total
current assets | |
| 8,324,108 | | |
| 4,339,504 | |
| |
| | | |
| | |
Property and equipment,
net | |
| 562,220 | | |
| 523,044 | |
Intangible assets, net | |
| 21,867,571 | | |
| 14,420,900 | |
Goodwill | |
| 1,342,000 | | |
| 1,342,000 | |
Deposits and other assets | |
| 63,699 | | |
| 61,877 | |
Operating
lease right-of-use assets | |
| 1,987,544 | | |
| 1,923,082 | |
Total
other assets | |
| 25,823,034 | | |
| 18,270,903 | |
Total
assets | |
$ | 34,147,142 | | |
$ | 22,610,407 | |
| |
| | | |
| | |
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT) | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 3,441,599 | | |
$ | 1,991,788 | |
Accrued expenses | |
| 2,269,392 | | |
| 2,066,087 | |
Accrued expenses,
related parties | |
| 820,816 | | |
| 371,319 | |
Due to related parties,
net | |
| — | | |
| 325,966 | |
Deferred revenue | |
| 978,041 | | |
| 681,786 | |
Preferred stock dividends
payable | |
| 600,750 | | |
| 355,417 | |
Operating lease liability,
current | |
| 268,310 | | |
| 384,530 | |
Derivative liability | |
| 94,255 | | |
| — | |
Debt,
current, net of debt discounts | |
| 8,351,013 | | |
| 10,967,855 | |
Total
current liabilities | |
| 16,824,176 | | |
| 17,144,748 | |
| |
| | | |
| | |
Long-term liabilities: | |
| | | |
| | |
Operating lease liability,
noncurrent | |
| 1,768,609 | | |
| 1,570,388 | |
Debt,
noncurrent | |
| 13,503,078 | | |
| 9,986,009 | |
Total
long-term liabilities | |
| 15,271,687 | | |
| 11,556,397 | |
Total
liabilities | |
| 32,095,863 | | |
| 28,701,145 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ Equity
(Deficit) | |
| | | |
| | |
Series A Convertible Preferred Stock, $.0001 par value, 8,000 shares authorized, 1,000 and 8,000 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | |
| — | | |
| 1 | |
Common Stock, $.0001 par value, 100,000,000 shares authorized, 31,927,670 and 13,937,500 issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | |
| 3,194 | | |
| 1,394 | |
Additional paid in
capital | |
| 38,970,079 | | |
| 8,922,467 | |
Accumulated
deficit | |
| (36,921,994 | ) | |
| (15,014,600 | ) |
Total
stockholders’ equity (deficit) | |
| 2,051,279 | | |
| (6,090,738 | ) |
Total
liabilities and stockholders’ equity (deficit) | |
$ | 34,147,142 | | |
$ | 22,610,407 | |
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, 2022 AND 2021
(UNAUDITED)
| |
Three
Months Ended September
30, | | |
Nine
Months Ended September
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenues | |
| | |
| | |
| | |
| |
Products | |
$ | 4,501,657 | | |
$ | 3,367,853 | | |
$ | 11,537,041 | | |
$ | 4,794,494 | |
Advertising | |
| 855,328 | | |
| — | | |
| 2,560,321 | | |
| — | |
Total
revenues | |
| 5,356,985 | | |
| 3,367,853 | | |
| 14,097,362 | | |
| 4,794,494 | |
Cost of revenues | |
| | | |
| | | |
| | | |
| | |
Products | |
| 2,094,198 | | |
| 1,932,065 | | |
| 6,281,486 | | |
| 3,328,402 | |
Advertising | |
| 630,123 | | |
| — | | |
| 1,884,479 | | |
| — | |
Total
cost of revenues | |
| 2,724,321 | | |
| 1,932,065 | | |
| 8,165,965 | | |
| 3,328,402 | |
Gross profit | |
| 2,632,664 | | |
| 1,435,788 | | |
| 5,931,397 | | |
| 1,466,092 | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
General and administrative | |
| 1,760,381 | | |
| 910,012 | | |
| 5,139,263 | | |
| 1,693,181 | |
Salaries | |
| 1,479,816 | | |
| 1,134,103 | | |
| 5,120,518 | | |
| 1,910,284 | |
Professional services | |
| 316,440 | | |
| 571,014 | | |
| 1,622,871 | | |
| 571,014 | |
Depreciation
and amortization expense | |
| 522,412 | | |
| 581,704 | | |
| 1,375,514 | | |
| 656,458 | |
Total
operating expenses | |
| 4,079,049 | | |
| 3,196,833 | | |
| 13,258,166 | | |
| 4,830,937 | |
Operating loss | |
| (1,446,385 | ) | |
| (1,761,045 | ) | |
| (7,326,769 | ) | |
| (3,364,845 | ) |
Other income (expense) | |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| (183,189 | ) | |
| 78,869 | | |
| (693,614 | ) | |
| 80,311 | |
Gain on debt extinguishment | |
| — | | |
| — | | |
| 134,956 | | |
| — | |
Change in value of
derivative liability | |
| 108,426 | | |
| — | | |
| 146,513 | | |
| — | |
Interest
expense | |
| (426,573 | ) | |
| (674,056 | ) | |
| (14,168,479 | ) | |
| (813,055 | ) |
Total
other (expense) | |
| (501,336 | ) | |
| (595,187 | ) | |
| (14,580,624 | ) | |
| (732,744 | ) |
Loss before income taxes | |
| (1,947,721 | ) | |
| (2,356,232 | ) | |
| (21,907,393 | ) | |
| (4,097,589 | ) |
Income
tax expense | |
| — | | |
| — | | |
| — | | |
| — | |
Net
loss | |
$ | (1,947,721 | ) | |
$ | (2,356,232 | ) | |
$ | (21,907,393 | ) | |
$ | (4,097,589 | ) |
Preferred stock dividends | |
| — | | |
| — | | |
| (600,750 | ) | |
| — | |
Net loss attributable
to common stockholders | |
| (1,947,721 | ) | |
| (2,356,232 | ) | |
| (22,508,143 | ) | |
| (4,097,589 | ) |
Loss per share, basic and diluted | |
$ | (0.07 | ) | |
$ | (0.17 | ) | |
$ | (0.80 | ) | |
$ | (0.30 | ) |
Weighted average shares outstanding, basic and diluted | |
| 28,008,542 | | |
| 13,818,890 | | |
| 28,008,542 | | |
| 13,835,274 | |
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 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
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 | | |
| 13,937,500 | | |
$ | 1,394 | | |
$ | 8,922,467 | | |
$ | (15,014,600 | ) | |
$ | (6,090,738 | ) |
Stock
issued for cash with initial public offering | |
| — | | |
| — | | |
| 1,440,000 | | |
| 144 | | |
| 10,623,348 | | |
| — | | |
| 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 | |
Common
stock issued upon exercise of series B warrants | |
| — | | |
| — | | |
| 1,437,730 | | |
| 144 | | |
| (144 | ) | |
| — | | |
| — | |
Stock
issued upon conversion of convertible notes | |
| — | | |
| — | | |
| 1,239,494 | | |
| 124 | | |
| 5,622,761 | | |
| — | | |
| 5,622,885 | |
Stock
issued in connection with acquisition | |
| — | | |
| — | | |
| 42,500 | | |
| 4 | | |
| (4 | ) | |
| — | | |
| — | |
Stock
issued for conversion of accounts payable | |
| — | | |
| — | | |
| 14,723 | | |
| 1 | | |
| 147,222 | | |
| — | | |
| 147,223 | |
Stock
issued for services | |
| — | | |
| — | | |
| 877,000 | | |
| 88 | | |
| 822,538 | | |
| — | | |
| 822,626 | |
Stock
issued upon conversion of preferred stock | |
| (7,000 | ) | |
| (1 | ) | |
| 10,499,469 | | |
| 1,050 | | |
| (1,049 | ) | |
| — | | |
| — | |
Common
stock issued under future equity agreements | |
| — | | |
| — | | |
| 2,168,992 | | |
| 217 | | |
| 10,844,743 | | |
| — | | |
| 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 | | |
| — | | |
| 31,657,408 | | |
| 3,166 | | |
| 39,023,336 | | |
| (31,589,077 | ) | |
| 7,437,425 | |
Common
stock issued upon conversion of promissory note | |
| — | | |
| — | | |
| 73,267 | | |
| 7 | | |
| 73,260 | | |
| — | | |
| 73,267 | |
Common
stock issued upon option exercise | |
| — | | |
| — | | |
| 195,495 | | |
| 20 | | |
| (20 | ) | |
| — | | |
| — | |
Preferred
stock dividend payable | |
| — | | |
| — | | |
| — | | |
| — | | |
| (159,916 | ) | |
| — | | |
| (159,916 | ) |
Change
in derivative liability | |
| — | | |
| — | | |
| — | | |
| — | | |
| 39,959 | | |
| — | | |
| 39,959 | |
Net
loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (3,385,195 | ) | |
| (3,385,195 | ) |
Balance,
June 30, 2022 | |
| 1,000 | | |
$ | — | | |
| 31,926,170 | | |
$ | 3,193 | | |
$ | 38,970,079 | | |
$ | (34,974,272 | ) | |
$ | 3,999,000 | |
Common
stock issued upon exercise of series B warrants | |
| — | | |
| — | | |
| 1,500 | | |
| 1 | | |
| — | | |
| (1 | ) | |
| — | |
Net
loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,947,721 | ) | |
| (1,947,721 | ) |
Balance,
September 30, 2022 | |
| 1,000 | | |
$ | — | | |
| 31,927,670 | | |
$ | 3,194 | | |
$ | 38,970,079 | | |
$ | (36,921,994 | ) | |
$ | 2,051,279 | |
For the
Three and Nine Months Ended September 30, 2021
| |
Preferred
Stock | | |
Common
Stock | | |
Additional | | |
| | |
| |
| |
| | |
| | |
| | |
| | |
Paid-In | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
Balance, January 1, 2021 | |
| — | | |
$ | — | | |
| 13,805,000 | | |
$ | 1,381 | | |
$ | 121,870 | | |
$ | (7,249,077 | ) | |
$ | (7,125,826 | ) |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (780,641 | ) | |
| (780,641 | ) |
Balance, March 31, 2021 | |
| — | | |
| — | | |
| 13,805,000 | | |
| 1,381 | | |
| 121,870 | | |
| (8,029,718 | ) | |
| (7,906,467 | ) |
Stock issued for services | |
| — | | |
| — | | |
| 65,000 | | |
| 6 | | |
| — | | |
| — | | |
| 6 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (960,722 | ) | |
| (960,722 | ) |
Balance, June 30, 2021 | |
| — | | |
$ | — | | |
| 13,870,000 | | |
$ | 1,387 | | |
$ | 121,870 | | |
$ | (8,990,440 | ) | |
$ | (8,867,183 | ) |
Warrants
issued in connection with debt obtained | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,565,200 | | |
| — | | |
| 1,565,200 | |
Stock issued for cash | |
| 8,000 | | |
| 1 | | |
| — | | |
| — | | |
| 7,079,999 | | |
| — | | |
| 7,080,000 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,356,232 | ) | |
| (2,356,232 | ) |
Balance, September 30, 2021 | |
| 8,000 | | |
$ | 1 | | |
| 13,870,000 | | |
$ | 1,387 | | |
$ | 8,767,069 | | |
$ | (11,346,672 | ) | |
$ | (2,578,215 | ) |
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 THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
| |
Nine
Months Ended September 30, | |
| |
2022 | | |
2021 | |
Cash flows from operating
activities: | |
| | |
| |
Net loss | |
$ | (21,907,393 | ) | |
$ | (4,097,589 | ) |
Adjustments to reconcile
net loss to net cash used in operating activities: | |
| | | |
| | |
Bad debt expense | |
| 6,731 | | |
| - | |
Depreciation and amortization
expense | |
| 1,375,514 | | |
| 656,458 | |
Gain on extinguishment
of debt | |
| 134,956 | | |
| — | |
Stock-based compensation | |
| 822,626 | | |
| — | |
Amortization of debt
issuance costs | |
| 1,737,976 | | |
| 536,628 | |
Discounts on debt
obtained | |
| (302,045 | ) | |
| — | |
Interest expense associated
to warrants issued with debt obtained | |
| — | | |
| 12,921 | |
Interest expense associated
with future equity agreements | |
| 10,844,961 | | |
| — | |
Right of use asset
and lease liability | |
| 17,539 | | |
| 49,069 | |
Change in value of
derivative liability | |
| 127,214 | | |
| — | |
Change in operating
assets and liabilities: | |
| | | |
| | |
Accounts receivable,
net | |
| (314,587 | ) | |
| (104,487 | ) |
Inventory | |
| (2,208,654 | ) | |
| (2,972,531 | ) |
Prepaid expenses
and other current assets | |
| 53,749 | | |
| (36,573 | ) |
Deposits and other
assets | |
| (1,822 | ) | |
| (24,680 | ) |
Accounts payable | |
| 1,597,032 | | |
| 941,909 | |
Accrued expenses | |
| 48,496 | | |
| (139,919 | ) |
Accrued expenses,
related parties | |
| 449,497 | | |
| — | |
Deferred
revenue | |
| 296,255 | | |
| 31,270 | |
Net
cash used in operating activities | |
| (7,491,867 | ) | |
| (5,147,524 | ) |
| |
| | | |
| | |
Cash flows from investing
activities: | |
| | | |
| | |
Cash paid for acquisition
of DSO | |
| — | | |
| (6,000,000 | ) |
Cash paid for acquisition
of Ceautamed | |
| (3,000,000 | ) | |
| — | |
Additions
to property and equipment | |
| (72,271 | ) | |
| (1,550 | ) |
Net
cash used in investing activities | |
| (3,072,271 | ) | |
| (6,001,550 | ) |
| |
| | | |
| | |
Cash flows from financing
activities: | |
| | | |
| | |
Repayments from related
parties | |
| (1,711,600 | ) | |
| (292,311 | ) |
Advances to related
parties | |
| 390,041 | | |
| — | |
Proceeds from initial
public offering | |
| 12,738,288 | | |
| — | |
Proceeds from issuance
of preferred stock | |
| — | | |
| 7,080,000 | |
Proceeds from convertible
notes and notes payable | |
| 8,151,889 | | |
| 5,301,130 | |
Repayments on convertible
notes and notes payable | |
| (8,852,491 | ) | |
| (995,757 | ) |
Paycheck protection
program loan proceeds | |
| — | | |
| 261,164 | |
Payment
of fees from issuance of common stock | |
| (53,549 | ) | |
| — | |
Net
cash provided by financing activities | |
| 10,662,578 | | |
| 11,354,226 | |
| |
| | | |
| | |
Net increase in cash | |
| 98,440 | | |
| 205,152 | |
Cash,
beginning of period | |
| 205,093 | | |
| 484,949 | |
Cash,
end of period | |
$ | 303,533 | | |
$ | 690,101 | |
| |
| | | |
| | |
Supplemental
disclosure of cash flow information: | |
| | | |
| | |
Interest
paid | |
$ | 3,257,894 | | |
$ | 276,427 | |
| |
| | | |
| | |
Non-cash
investing and financing activities: | |
| | | |
| | |
Stock
issued for conversion of accounts payable | |
$ | 147,223 | | |
$ | — | |
Stock
issued for conversion of convertible notes and interest | |
$ | 5,622,885 | | |
$ | — | |
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, 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.
On
July 29, 2022, SFL acquired Ceautamed Worldwide, LLC (“Ceautamed”) and its wholly-owned
subsidiaries Wellness Watchers Global, LLC (“WW”) and Greens First Female LLC (“GFF”).
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.
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 AND 2021
(UNAUDITED)
Note
2 — Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying unaudited condensed consolidated financial statements reflect the consolidated operations of SFL and its wholly owned subsidiaries
BSNM, DSO, DSO Canada, Nexus, GSP, Lavi, Ceautamed, WW and GFF (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.
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 nine months ended September 30, 2022 and 2021 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 three and nine months ended September 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
September 30, 2022, the Company had current liabilities in excess of current assets in the amount of approximately $8.5 million. During
the nine months ended September 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 $21.9 million
and had consumed cash in operating activities of approximately $7.5 million during the period.
To
date, the Company has satisfied its capital needs with the net proceeds from its IPO, 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.
The
Company’s condensed consolidated financial statements have been prepared in accordance with US GAAP applicable to a going concern,
which assumes that the Company will be able to meet its obligations and continue its operations in the normal course of business. Management
believes that there is substantial doubt that current available resources will be sufficient
to fund the Company’s planned expenditures over the next 12 months. Accordingly, 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. 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 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.
Based
on its analysis, the Company concluded that with additional debt or equity issuances of approximately $3.1 million, it will have the
ability to continue as a going concern for at least the next 12 months.
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 AND 2021
(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, useful lives and recoverability of tangible and intangible assets, assumptions
used in the valuation of derivatives, 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, 2022 and December 31, 2021, there were no cash equivalents.
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company’s allowance for doubtful accounts represents the Company’s estimate for uncollectible receivables based on a review
of specific accounts and the Company’s historical collection experience. The Company writes off specific accounts based on an ongoing
review of collectability, as well as management’s past experience with the customers. Accounts receivable are presented net of
an allowance for doubtful accounts of $10,865 and $17,170 at September 30, 2022 and December 31, 2021, respectively.
Inventory
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, net
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
3-5 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 nine months ended September 30, 2022 and during the
year ended December 31, 2021.
Intangible
assets consist of customer relationships, non-compete agreements, license agreements, goodwill, 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, 2022 AND 2021
(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 had no impairment of long-lived assets at September 30, 2022 and December 31, 2021.
Operating
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,” 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 Accounting Standards Update (“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.
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 AND 2021
(UNAUDITED)
Revenue
Recognition
The
Company evaluates and recognize revenue by:
| ● | identifying
the contract(s) with the customer, |
| ● | identifying
the performance obligations in the contract, |
| ● | determining
the transaction price, |
| ● | allocating
the transaction price to performance obligations in the contract; and |
| ● | recognizing
revenue as each performance obligation is satisfied through the transfer of a promised good
or service to a customer (i.e., “transfer of control”). |
Products
(BSNM, DSO, GSP and Ceautamed)
The
Company generates product revenues by manufacturing and packaging of nutraceutical products as a contract manufacturer for its 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 September 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 September 30, 2022 or December 31, 2021.
Freight
For
the nine months ended September 30, 2022 and 2021, freight costs amounted to $754,909 and $181,782, 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 nine months ended September 30, 2022 were $1,618,467, and have been recorded
in general and administrative expenses 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.
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 AND 2021
(UNAUDITED)
Stock-based
Compensation
The
Company recognizes expense for stock options and warrants granted over the vesting period based on the fair value of the award at the
grant date, are valued using a Black-Scholes option pricing model to determine the fair market value of the stock options. The Company
calculates the amount of tax benefit available by tracking each stock option award on an employee-by-employee basis and on a grant-by-grant
basis. The Company then compares the recorded expense to the tax deduction received for each stock option grant.
Income
Taxes
The
Company accounts for income tax under the provisions of ASC 740, “Income Taxes.” The Company records a liability for uncertain
tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. At September 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 FASB issued 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.
Note
3 — Acquisitions
On
March 14, 2022, the Company entered into securities purchase agreement, which was amended on July 29, 2022, to acquire Ceautamed. On
July 29, 2022, 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). 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
table below summarizes the value of the total consideration given in the transaction.
| |
Amount | |
Cash issued | |
$ | 3,000,000 | |
Debt issued | |
| 5,600,000 | |
Total consideration | |
$ | 8,600,000 | |
Under
the acquisition method of accounting outlined in ASC 805, the identifiable assets acquired and liabilities assumed in the acquisition
are recorded at their acquisition-date fair values and are included in the Company’s condensed consolidated financial position.
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 AND 2021
(UNAUDITED)
The
following table summarizes the preliminary purchase price allocation for the assets acquired and liabilities assumed in connection with
the acquisition of Ceautamed.
| |
Amount | |
Tangible assets acquired | |
$ | 635,223 | |
Liabilities assumed | |
| (635,233 | ) |
Intangible assets | |
| 8,600,000 | |
Net assets acquired | |
$ | 8,600,000 | |
The
intangible assets acquired from Ceautamed have estimated useful lives and values of:
| |
Useful
life
in years | |
Amount | |
Non-compete agreements | |
3 | |
$ | 785,530 | |
Customer contracts | |
10 | |
| 7,429,271 | |
Intellectual property | |
10 | |
| 385,199 | |
Total intangible assets | |
| |
$ | 8,600,000 | |
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, GSP and
Ceautamed 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 September
30, | | |
Nine
Months Ended September
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenues | |
$ | 5,643,449 | | |
$ | 3,885,858 | | |
$ | 15,927,943 | | |
$ | 17,003,901 | |
Operating loss | |
$ | (1,415,979 | ) | |
$ | (1,300,481 | ) | |
$ | (7,096,841 | ) | |
$ | (2,387,786 | ) |
Loss per share, basic and diluted | |
$ | (0.07 | ) | |
$ | (0.09 | ) | |
$ | (0.77 | ) | |
$ | (0.17 | ) |
Weighted average shares outstanding, basic and diluted | |
| 28,008,542 | | |
| 13,818,890 | | |
| 28,008,542 | | |
| 13,818,890 | |
Note
4 — Inventory
Inventory
consisted of the following:
|
|
September
30,
2022 |
|
|
December
31, 2021 |
|
Raw materials |
|
$ |
485,433 |
|
|
$ |
452,583 |
|
Finished goods |
|
|
5,115,765 |
|
|
|
2,939,961 |
|
|
|
$ |
5,601,198 |
|
|
$ |
3,392,544 |
|
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 AND 2021
(UNAUDITED)
Note
5 — Property and Equipment
Property
and equipment consisted of the following:
| |
Estimated
Useful Lives
(in Years) | |
September 30,
2022 | | |
December 31,
2021 | |
Furniture and fixtures | |
7 | |
$ | 9,139 | | |
$ | 9,139 | |
Equipment – Manufacturing | |
5 | |
| 1,341,392 | | |
| 1,102,239 | |
Building & Equipment | |
5 | |
| 3,840 | | |
| 193 | |
Leasehold improvements | |
2.5 | |
| 90,099 | | |
| 71,539 | |
| |
| |
| 1,444,470 | | |
| 1,183,110 | |
Less: accumulated
depreciation and amortization | |
| |
| (882,250 | ) | |
| (660,066 | ) |
Property and equipment,
net | |
| |
$ | 562,220 | | |
$ | 523,044 | |
Depreciation
expense for the nine months ended September 30, 2022 and 2021 totaled $222,184 and $123,857, 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) | |
September 30,
2022 | | |
December 31,
2021 | |
Customer contracts | |
10 | |
$ | 17,288,770 | | |
$ | 9,859,499 | |
Intellectual property | |
10 | |
| 385,199 | | |
| — | |
Developed technology | |
15 | |
| 1,570,000 | | |
| 1,570,000 | |
Non-compete agreements | |
3 | |
| 1,595,530 | | |
| 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 | |
| |
| 23,663,719 | | |
| 15,063,719 | |
Less: amortization | |
| |
| (1,796,148 | ) | |
| (642,819 | ) |
Intangibles, net | |
| |
$ | 21,867,571 | | |
$ | 14,420,900 | |
Amortization
for the nine months ended September 30, 2022 and 2021 was $1,148,603 and $41,462, 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) | |
$ | 616,285 | |
2023 | |
| 2,465,141 | |
2024 | |
| 2,465,141 | |
2025 | |
| 2,378,859 | |
2026 | |
| 2,149,226 | |
Thereafter | |
| 11,793,980 | |
Total | |
$ | 21,867,571 | |
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 AND 2021
(UNAUDITED)
Note
7 — Lease Commitments
The
Company enters into lessee arrangements consisting of operating leases for its operations. The Company had four operating leases as of
September 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 assets and liabilities is included in the accompanying condensed consolidated balance sheets as follows:
| |
September 30,
2022 | | |
December 31,
2021 | |
Asset | |
| | |
| |
Operating lease right of use
assets | |
$ | 1,987,544 | | |
$ | 1,923,082 | |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
Operating lease liabilities, current portion | |
$ | 268,310 | | |
$ | 384,530 | |
Operating liabilities,
net of current portion | |
| 1,768,609 | | |
| 1,570,388 | |
Total lease liabilities | |
$ | 2,036,919 | | |
$ | 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) | |
$ | 148,777 | |
2023 | |
| 465,164 | |
2024 | |
| 478,141 | |
2025 | |
| 491,508 | |
2026 | |
| 505,277 | |
Thereafter | |
| 746,597 | |
Total payments | |
| 2,835,464 | |
Less: amount representing
interest | |
| (798,545 | ) |
Lease obligation, net | |
| 2,036,919 | |
Less: current portion | |
| (268,310 | ) |
Lease obligation –
long-term | |
$ | 1,768,609 | |
Rent
expense for the nine months ended September 30, 2022 and 2021 was $471,566 and $303,195, respectively, reflected in general and administrative
in the accompanying condensed consolidated statement of operations.
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. |
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 AND 2021
(UNAUDITED)
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 September 30, 2022, and December 31, 2021, the Company did not have any derivative instruments that were designated as hedges.
The
derivative liability as of September 30, 2022 in the amount of $94,255 is related to conversion feature on the outstanding convertible
notes not converted by the noteholders as of September 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 $94,255 and will subsequently remeasure
the fair value at the end of each period, and record the change of fair value in the condensed 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
September 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 | |
| (188,446 | ) |
Derivative Liability, September 30, 2022 | |
$ | 94,255 | |
Note
9 — Debt
Original
Issue Discount Subordinated Debentures
In
June 2022, the Company commenced an offering of original issue discount subordinated debentures. As of September 30, 2022, the Company
has completed four closings of this offering and issued debentures in the aggregate principal amount of $3,579,686. The debentures contain
an original issue discount of 15%, or an aggregate original issue discount of $538,240. As a result, the total purchase price was $3,050,000.
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) 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, 2022, the outstanding principal balance of the debentures was $3,588,240 and debt issuance cost was
$483,801.
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 an original issue discount of $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 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 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, 2022, the outstanding principal balance of the note was $2,257,889 and debt issuance cost was $266,327.
SMART
FOR LIFE, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022 AND 2021
(UNAUDITED)
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 September 30, 2022, the outstanding
principal balance of the debentures was $2,250,000 and debt issuance cost was $26,174.
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.
Acquisition
Notes
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. The notes shall bear 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%. The notes are convertible at the option of the holder into 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 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 its subsidiaries
WW and GFF 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,
2022, the outstanding principal balance of these notes was $2,150,000.
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. 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 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 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 its subsidiaries WW and GFF 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, 2022, the outstanding principal balance of these
notes was $2,150,000.
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. The notes shall 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%. 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 its subsidiaries WW and GFF 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, 2022, the outstanding principal
balance of these notes was $1,300,000.
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 September 30, 2022, the outstanding
principal balance of this note was $1,900,000.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
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 September 30, 2022, the outstanding principal balance of this note was $3,000,000.
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 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 September 30, 2022, the outstanding principal balance of this note was $1,025,000.
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.
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 was repaid in full on July
29, 2022.
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 September 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.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
In May 2022, the Company issued a promissory note
in the principal amount of $346,000. The note was increased in July 2022 to $650,000. This note bears interest at a rate of 10% and matures
on April 1, 2023. At September 30, 2022, the outstanding amount was $555,958.
In August 2022, the Company issued a promissory
note in the principal amount of $100,000. This note bears interest at a rate of 17.5% and matures on October 17, 2022. At September 30,
2022, the outstanding amount was $25,000.
Cash Advances
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 September 30, 2022, the outstanding amount was $0.
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.
At September 30, 2022, the outstanding amount was $803,708.
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, 2022, the outstanding amount was $96,660.
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.
At September 30, 2022, the outstanding amount was $372,500.
Debt issuance cost for all cash advances was $424,661
at September 30, 2022.
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 September 30, 2022, the
outstanding principal balance of this lines of credit was $969,513.
In August 2022, Ceautamed entered into a revolving
line of credit with a bank, which permitted borrowing up to $500,000, and bears interest at 45.09%. As of September 30, 2022, the outstanding
principal balance of this line of credit was $46,532.
In September 2022, DSO entered into a revolving
line of credit with a bank, which permitted borrowings up to $70,000, and bears interest at 9.49%. As of September 30, 2022, the outstanding
principal balance of this lines of credit was $70,255.
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, 2022, the outstanding amount was $138,721
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, 2022, the outstanding amount was $35,050.
In July 2022, the Company entered into an equipment
financing loan for $8,463 used for the purchase of equipment within CWWs operations. At September 30, 2022, the outstanding amount was
$7,950.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
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, 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 September 30, 2022, the outstanding principal balance of this loan was $168,013.
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
September 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 September 30, 2022:
Original issue discount subordinated debentures | |
$ | 3,588,240 | |
Original issue discount secured subordinated note | |
| 2,257,884 | |
12% unsecured subordinated convertible debentures | |
| 2,250,000 | |
Acquisition notes | |
| 10,500,000 | |
Promissory notes and cash advances | |
| 2,522,868 | |
Revolving lines of credit | |
| 1,086,300 | |
Equipment financing loan | |
| 181,721 | |
EIDL loan | |
| 300,000 | |
PPP loans | |
| 365,470 | |
| |
| 23,052,483 | |
Debt discount | |
| (1,198,392 | ) |
Total | |
$ | 21,854,091 | |
The future contractual maturities of the debt
are as follows:
For the Year Ended December 31: | |
| |
2022 (remainder of year) | |
$ | 4,702,020 | |
2023 | |
| 3,648,993 | |
2024 | |
| 7,727,643 | |
2025 | |
| 3,991,953 | |
2026 | |
| 419,843 | |
Thereafter | |
| 1,363,639 | |
Total | |
$ | 21,854,091 | |
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
Note 10 — Concentrations of Credit
Risks
Credit Risks
Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist principally of cash and accounts receivable. The Company maintains bank accounts
with several financial institutions. Concentrations of credit risk with respect to accounts receivable are limited to the dispersion of
customers across different industries and geographic regions.
Cash
The Company places its cash with high credit quality
financial institutions. At September 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.
Major Customers
For the three months ended September 30, 2022,
the Company had two significant customers representing an aggregate of 41% of revenues and three that make up 66% of the accounts receivable
balance. For the three months ended September 30, 2021, the Company had no customers representing a significant percentage of revenues
nor of the accounts receivable balance. For the nine months ended September 30, 2022, the Company had two significant customers representing
an aggregate of 41% of revenues and three that make up 66% of the accounts receivable balance. For the nine months ended September 30,
2021, the Company had no customers representing a significant percentage of revenues nor 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 September 30, 2022,
the Company had one major supplier representing 10% of purchases and 2.5% of accounts payable.
For the nine months ended September 30, 2022, the Company had no major supplier representing a significant percentage 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.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
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.
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.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
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.
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 September 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
nine months ended September 30, 2022, a total of 1,439,230 of the series B warrants were exercised on a cashless basis and the Company
issued 1,439,230 shares of common stock upon such exercise.
During the
nine months ended September 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 September 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 nine months ended September 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
September 30, 2022, there were 342,000 shares of common stock available for issuance under the 2022 Plan.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022 AND 2021
(UNAUDITED)
On August 12, 2022, the Company issued stock options
to employees under the 2022 Plan for an aggregate of 1,328,000 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. The
Company did not issue any other stock options under the 2022 Plan during the nine months ended September 30, 2022.
The Company recognized $0 of compensation expense
related to the vesting of options during the nine months ended September 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 September 30, 2022, 1,439,230 of
the series B warrants were exercised on a cashless basis and we issued 1,439,230 shares
of common stock upon such exercise.
The following is a summary of options and warrants
granted, exercised, forfeited and outstanding during the nine months ended September 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 | |
| 1,328,000 | | |
| 0.63 | | |
| 3,382,780 | | |
| 3.95 | |
Exercised | |
| 195,495 | | |
| 0.01 | | |
| 1,439,230 | | |
| — | |
Forfeited | |
| 4,505 | | |
| 0.01 | | |
| 275,988 | | |
| — | |
Outstanding at September 30, 2022 | |
| 2,578,000 | | |
$ | 0.33 | | |
| 16,469,568 | | |
$ | 4.52 | |
Exercisable at September 30, 2022 | |
| 1,250,000 | | |
| | | |
| 16,469,568 | | |
| | |
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.
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022 AND 2021
(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 is party to a management services
agreement with Trilogy Capital Group, LLC, a company controlled by the Company’s Executive Chairman. As of September 30, 2022 and
December 31, 2021, the amounts due from the related party are $1,365,353 and $0, respectively. Additionally, as of September 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.
Note 14 — Subsequent Events
In accordance with ASC 855-10, the Company has
reviewed its operations subsequent to September 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.
On October 17, 2022, the Company issued 150,000
shares of common stock to a service provider.
On October 17, 2022, the Company granted a restricted
stock award for 100,000 shares of common stock to a new director under the 2022 Plan. The shares vest monthly over a one-year period.
SMART FOR LIFE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021 AND 2020
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and
Stockholders of Smart for Life, Inc.
Doral, Florida
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Smart for Life, Inc. (the “Company”) at December 31, 2021 and 2020, and the related consolidated statements
of operations, changes in deficiency in stockholders’ equity, and cash flows for each of the years in the two-year period ended
December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021
and 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide
a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below are
matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated
to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and
(2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter
in any way our opinion on the consolidated financial statements, taken as whole, and we are not, by communicating the critical matter
below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.
Valuation of Intangible Assets and Goodwill
in Acquisitions
As described in Notes 3 to the consolidated financial
statements, the Company completed the acquisitions for consideration of $18.4 million and the transactions were accounted for as business
combinations. The Company recorded acquired intangible assets and goodwill at fair value on the date of acquisitions using a discounted
cash flow methodology to fair. The methods used to estimate the fair value of acquired intangible assets and goodwill involve significant
assumptions. The significant assumptions applied by management in estimating the fair value of acquired intangible assets included income
projections and discount rates.
The principal considerations for our determination
that performing procedures relating to the valuation of intangible assets in acquisitions are a critical audit matter are (1) there was
a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value of intangible assets acquired due
to the significant judgment by management when developing the estimates and (2) significant audit effort was required in evaluating the
significant assumptions relating to the estimates, including the income projections and discount rates. In addition, the audit effort
involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit
evidence obtained.
Addressing the matter involved performing procedures
and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures
included, among others, reading the purchase agreements, and testing management’s process for estimating the fair value of intangible
assets. Testing management’s process included evaluating the appropriateness of the valuation models, testing the completeness,
accuracy, and relevance of underlying data used in the models, and testing the reasonableness of significant assumptions, including the
income projections and discount rates. Evaluating the reasonableness of the income projections involved considering the current performance
of the acquired businesses, the consistency with external market and industry data, and whether these assumptions were consistent with
other evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating
the reasonableness of significant assumptions, including the discount rates, by comparing them against discount rate ranges that were
independently developed using publicly available market data for comparable companies.
/s/ Daszkal Bolton LLP |
|
|
|
We have served as the Company’s auditor since 2021. |
|
|
Fort Lauderdale, Florida |
|
|
|
March 31, 2022 |
|
SMART FOR LIFE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2021 AND 2020
| |
December 31,
2021 | | |
December 31,
2020 | |
ASSETS | |
| | |
| |
Current assets: | |
| | |
| |
Cash | |
$ | 205,093 | | |
$ | 484,949 | |
Accounts receivable, net | |
| 388,958 | | |
| 69,325 | |
Inventory | |
| 3,392,544 | | |
| 58,426 | |
Prepaid expenses and other current assets | |
| 352,909 | | |
| 77,051 | |
Total current assets | |
| 4,339,504 | | |
| 689,751 | |
| |
| | | |
| | |
Property and equipment, net | |
| 523,044 | | |
| 381,174 | |
Intangible assets, net | |
| 14,420,900 | | |
| 285,627 | |
Goodwill | |
| 1,342,000 | | |
| — | |
Deposits and other assets | |
| 61,877 | | |
| 37,197 | |
Operating lease right-of-use assets | |
| 1,923,082 | | |
| 495,154 | |
Total other assets | |
| 18,270,903 | | |
| 1,199,152 | |
Total assets | |
$ | 22,610,407 | | |
$ | 1,888,903 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 2,065,515 | | |
$ | 986,632 | |
Accrued expenses | |
| 2,066,087 | | |
| 1,271,199 | |
Accrued expenses, related parties | |
| 371,319 | | |
| 163,115 | |
Due to related parties, net | |
| 325,966 | | |
| 46,089 | |
Deferred revenue | |
| 681,786 | | |
| 194,020 | |
Preferred stock dividends payable | |
| 355,417 | | |
| — | |
Lease liability, current | |
| 384,530 | | |
| 249,284 | |
Debt, current, net of debt discounts | |
| 10,894,128 | | |
| 3,971,482 | |
Total current liabilities | |
| 17,144,748 | | |
| 6,881,821 | |
| |
| | | |
| | |
Long-term liabilities: | |
| | | |
| | |
Lease liability, noncurrent | |
| 1,570,388 | | |
| 223,985 | |
Debt, noncurrent | |
| 9,986,009 | | |
| 1,908,923 | |
Total long-term liabilities | |
| 11,556,397 | | |
| 2,132,908 | |
Total liabilities | |
| 28,701,145 | | |
| 9,014,729 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ Deficit | |
| | | |
| | |
Series A Convertible Preferred Stock, $.0001 par value, 8,000 shares authorized, 8,000 and 0 shares issued and outstanding as of December 31, 2021 and 2020, respectively | |
| 1 | | |
| — | |
Common Stock, $.0001 par value, 100,000,000 shares authorized, 13,937,500 and 13,805,000 issued and outstanding as of December 31, 2021 and 2020, respectively | |
| 1,394 | | |
| 1,381 | |
Additional paid in capital | |
| 8,922,467 | | |
| 121,870 | |
Accumulated deficit | |
| (15,014,600 | ) | |
| (7,249,077 | ) |
Total stockholders’ deficit | |
| (6,090,738 | ) | |
| (7,125,826 | ) |
Total liabilities and stockholders’ equity | |
$ | 22,610,407 | | |
$ | 1,888,903 | |
The accompanying notes are an integral part
of these consolidated financial statements
SMART FOR LIFE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
| |
December 31,
2021 | | |
December 31,
2020 | |
Revenues | |
| | |
| |
Products | |
$ | 8,330,571 | | |
$ | 1,959,595 | |
Advertising | |
| 692,022 | | |
| — | |
Total revenues | |
| 9,022,593 | | |
| 1,959,595 | |
Cost of revenues | |
| | | |
| | |
Products | |
| 5,596,247 | | |
| 1,831,629 | |
Advertising | |
| 528,386 | | |
| — | |
Total cost of revenues | |
| 6,124,633 | | |
| 1,831,629 | |
Gross profit | |
| 2,897,960 | | |
| 127,966 | |
Operating expenses | |
| | | |
| | |
General and administrative | |
| 7,420,856 | | |
| 1,863,087 | |
Depreciation and amortization expense | |
| 717,925 | | |
| 166,613 | |
Total operating expenses | |
| 8,138,781 | | |
| 2,029,700 | |
Operating loss | |
| (5,240,821 | ) | |
| (1,901,734 | ) |
Other (expense) | |
| | | |
| | |
Other (expense) | |
| (12,782 | ) | |
| (14,141 | ) |
Interest (expense) | |
| (2,511,920 | ) | |
| (1,253,143 | ) |
Total other (expense) | |
| (2,524,702 | ) | |
| (1,267,284 | ) |
Loss before income taxes | |
| (7,765,523 | ) | |
| (3,169,018 | ) |
Income tax expense | |
| — | | |
| — | |
Net loss | |
$ | (7,765,523 | ) | |
$ | (3,169,018 | ) |
Preferred stock, Series A, dividends | |
| 355,417 | | |
| — | |
Net loss attributable to common shareholders | |
| (8,120,940 | ) | |
| (3,169,018 | ) |
Weighted average shares outstanding | |
| 13,397,034 | | |
| 6,031,685 | |
Loss per share | |
$ | (0.61 | ) | |
$ | (0.53 | ) |
Weighted average shares outstanding | |
| 13,397,034 | | |
| 3,203,849 | |
The accompanying notes are an integral part
of these consolidated financial statements
SMART FOR LIFE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
| |
| | |
| | |
Additional | | |
| | |
| |
| |
Preferred Stock | | |
Common Stock | | |
Paid-In | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
Balance, December 31, 2019 | |
| — | | |
$ | — | | |
| 2,000,000 | | |
$ | 200 | | |
$ | — | | |
$ | (4,080,059 | ) | |
$ | (4,079,859 | ) |
Stock issued for services | |
| — | | |
| — | | |
| 11,805,000 | | |
| 1,181 | | |
| 121,870 | | |
| — | | |
| 123,051 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (3,169,018 | ) | |
| (3,169,018 | ) |
Balance, December 31, 2020 | |
| — | | |
$ | — | | |
| 13,805,000 | | |
$ | 1,381 | | |
$ | 121,870 | | |
$ | (7,249,077 | ) | |
$ | (7,125,826 | ) |
Stock issued for services | |
| — | | |
| — | | |
| 90,000 | | |
| 9 | | |
| 891 | | |
| — | | |
| 900 | |
Stock issued for acquisition | |
| — | | |
| — | | |
| 42,500 | | |
| 4 | | |
| 424,996 | | |
| — | | |
| 425,000 | |
Preferred stock, Series A, dividends payable | |
| — | | |
| — | | |
| — | | |
| — | | |
| (355,417 | ) | |
| — | | |
| (355,417 | ) |
Warrants issued in connection with debt | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,650,128 | | |
| — | | |
| 1,650,128 | |
Stock issued for cash | |
| 8,000 | | |
| 1 | | |
| — | | |
| — | | |
| 7,079,999 | | |
| — | | |
| 7,080,000 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (7,765,523 | ) | |
| (7,765,523 | ) |
Balance, December 31, 2021 | |
| 8,000 | | |
$ | 1 | | |
| 13,937,500 | | |
$ | 1,394 | | |
$ | 8,922,467 | | |
$ | (15,014,600 | ) | |
$ | (6,090,738 | ) |
The accompanying notes are an integral part
of these consolidated financial statements
SMART FOR LIFE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
| |
December 31,
2021 | | |
December 31,
2020 | |
Cash flows from operating activities: | |
| | |
| |
Net loss | |
$ | (7,765,523 | ) | |
$ | (3,169,018 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Bad debt expense | |
| — | | |
| 10,346 | |
Debt issuance cost, net | |
| 621,638 | | |
| — | |
Depreciation expense | |
| 231,741 | | |
| 108,760 | |
Amortization expense | |
| 486,184 | | |
| 57,853 | |
Stock-based compensation | |
| — | | |
| 663 | |
Stock issued for services | |
| 900 | | |
| 122,388 | |
Change in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 94,530 | | |
| (46,015 | ) |
Inventory | |
| (842,049 | ) | |
| 507,970 | |
Prepaid expenses and other current assets | |
| (264,854 | ) | |
| (500 | ) |
Deposits and other assets | |
| (24,680 | ) | |
| (37,197 | ) |
Accounts payable | |
| 734,134 | | |
| (15,796 | ) |
Accrued expenses | |
| 1,012,896 | | |
| 448,794 | |
Accrued expenses, related parties | |
| 208,204 | | |
| — | |
Deferred revenue | |
| 487,766 | | |
| 31,190 | |
Net cash used in operating activities | |
| (5,019,113 | ) | |
| (1,980,562 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchase of Doctors Scientific Organica | |
| (6,000,000 | ) | |
| — | |
Purchase of Nexus Offers | |
| (2,100,000 | ) | |
| — | |
Additions to property and equipment | |
| (141,383 | ) | |
| (32,966 | ) |
Net cash used in investing activities | |
| (8,241,383 | ) | |
| (32,966 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Right of use asset and lease liability | |
| 53,654 | | |
| 63,880 | |
Proceeds from issuance of preferred stock, net of fees | |
| 7,080,000 | | |
| — | |
Proceeds from issuance of note payable | |
| 7,418,969 | | |
| 2,873,762 | |
Repayments on notes payable | |
| (1,851,860 | ) | |
| (490,100 | ) |
Proceeds from due to related parties | |
| 1,367,400 | | |
| 79,273 | |
Repayments on due to related parties | |
| (1,087,523 | ) | |
| (40,550 | ) |
Net cash provided by financing activities | |
| 12,980,640 | | |
| 2,486,265 | |
| |
| | | |
| | |
Net increase (decrease) in cash | |
| (279,856 | ) | |
| 472,737 | |
Cash, beginning of year | |
| 484,949 | | |
| 12,212 | |
Cash, end of year | |
$ | 205,093 | | |
$ | 484,949 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Interest paid | |
$ | 937,034 | | |
$ | 85,307 | |
Non-cash investing and financing activities | |
$ |
| | |
$ |
| |
Issuance of common stock for acquisition of GSP | |
$ | 425,000 | | |
$ | — | |
Non-cash acquisition of Doctors Scientific Organica | |
$ | 6,000,000 | | |
$ | — | |
Non-cash acquisition of Nexus Offers | |
$ | 3,800,000 | | |
$ | — | |
The accompanying notes are an integral part
of these consolidated financial statements
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER
31, 2021 AND 2020
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 & Wellness.
On March 8, 2018, SFL acquired 51% of Millenium
Natural Manufacturing Corp. and Millenium Natural Health Products, Inc. (collectively, “Millenium”). 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.
Note 2 — Summary of Significant Accounting
Policies
Principles of Consolidation
The consolidated financial statements reflect
the consolidated operations of SFL and its wholly owned subsidiaries BSNM, DSO, DSO Canada, Nexus and GSP (collectively the “Company”)
and are prepared in the United States Dollars in accordance with generally accepted accounting principles in the United States of America
(“GAAP”). Intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain prior period amounts have been reclassified
to conform with the current year presentation.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER
31, 2021 AND 2020
Note 2 — Summary of Significant Accounting
Policies (cont.)
Liquidity, Capital Resources and Going Concern
At
December 31, 2021 the Company had current liabilities in excess of current assets in the amount of approximately $12.5 million. During
2021, the Company received approximately $5.9 million from the proceeds from the issuance of indebtedness and approximately $7.0 million
from the proceeds of preferred stock issuance, but sustained a net loss of approximately $7.7 million and had consumed cash in operating
activities of approximately $5.2 million during the year.
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.
Subsequent to December 31, 2021, the Company completed
a series of debt and equity financings and an initial public offering resulting in net proceeds of approximately $12.8 million. These
events served to mitigate the conditions that historically raised substantial doubt about the Company’s ability to continue as a
going concern. Based on this analysis, the Company concluded it has 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 December 31, 2021 and 2020, there were no cash
equivalents.
Accounts Receivable and Allowance for Doubtful
Accounts
The Company’s allowance for doubtful accounts
represents the Company’s estimate for uncollectible receivables based on a review of specific accounts and the Company’s historical
collection experience. The Company writes off specific accounts based on an ongoing review of collectability, as well as management’s
past experience with the customers. Accounts receivable are presented net of an allowance for doubtful accounts of $17,170 and $12,915
at December 31, 2021 and 2020, 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) (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 their manufacturing for nutraceuticals in the form of 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.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER
31, 2021 AND 2020
Note 2 — Summary of Significant Accounting
Policies (cont.)
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 3-15 years.
Goodwill and Intangible Assets
Goodwill is not amortized but is subject to annual
impairment tests. In addition to the annual impairment review, impairment reviews are performed whenever circumstances indicate a possible
impairment may exist. Impairment testing for goodwill is done at the reporting unit level. Reporting units are one level below the business
segment level, and the Company’s impairment testing is performed at the operating division 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 2021.
During 2021, goodwill increased by $1.3 million
related to the acquisition of DSO.
During 2021, identifiable intangible assets increased
by $3.3 million related to acquisitions and declined by $486,184 due to amortization.
Intangible
assets and goodwill 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 December 31, 2021 and 2020.
Lease Right-of-Use Asset
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.
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.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER
31, 2021 AND 2020
Note 2 — Summary of Significant Accounting
Policies (cont.)
Revenue Recognition
The Company evaluates and recognize revenue by:
| ● | identifying
the contract(s) with the customer, |
| ● | identifying
the performance obligations in the contract, |
| ● | determining
the transaction price, |
| ● | allocating
the transaction price to performance obligations in the contract; and |
| ● | recognizing
revenue as each performance obligation is satisfied through the transfer of a promised good
or service to a customer (i.e., “transfer of control”). |
Products (BSNM, DSO and GSP)
The Company primarily generates 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 December 31, 2021 or 2020.
Distribution expenses to transport the Company’s
products, where applicable, and warehousing expense after manufacture are accounted for within operating expenses.
Marketing (Nexus)
Nexus generates revenues when sales of listed
products are sold by product vendors through its network as a result of the marketing efforts of digital marketers. The products on the
network come from several different customers, which pay Nexus a specific amount per sale, the amount of which is dictated by the customer.
The revenue is recognized upon the sale of a product by the customer, net of fraudulent traffic or disputed transactions. A portion of
the specific amount received by Nexus for that sale is paid out to the digital marketer as a commission, which is recorded in cost of
sales. To illustrate the revenue process, a digital marketer logs onto the platform and selects an offer to promote for the day. The platform
generates a unique link which the digital marketer distributes either via email or a banner ad. As the link is distributed to the consumer
via the marketing efforts of the digital marketer, the consumer visits that link to make a purchase from the customer’s website,
and when such purchase is complete, revenue is recognized by Nexus and the sale is credited to the digital marketer’s Nexus account.
The benefit to the digital marketer operating on Nexus’ network is that the digital marketer receives a commission without the possibility
of a claw back or refund. The customer benefits through increased sales of its products as a result of the marketing efforts of the digital
marketers. Nexus’ platform acts as the transaction ledger, keeping track of clicks, sales and commissions.
Nexus’ general payment terms are short-term
in duration. Insertion orders are utilized between Nexus and the customer for each campaign related to a particular product being marketed.
The insertion order remains in effect until the customer or Nexus terminates the order, and either party may terminate the order at any
time upon 14 days’ written notice. The customer is billed weekly for the sales digital marketers have generated for the week. Nexus
does not have significant financing components or payment terms. Nexus did not have any material unsatisfied performance obligations at
December 31, 2021 or 2020.
Freight
For
the years ended December 31, 2021 and 2020, freight costs amounted to $390,804 and $84,229, respectively, and have been recorded
in cost of goods sold in the accompanying consolidated statement of income.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER
31, 2021 AND 2020
Note 2 — Summary of Significant Accounting
Policies (cont.)
Advertising
Advertising
costs are expensed as incurred. Advertising costs for the years ended December 31, 2021 and 2020 were $1,019,705 and $36,593, 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, are valued using a Black-Scholes
option pricing model to determine the fair market value of the stock options. The Company calculates the amount of tax benefit available
by tracking each stock option award on an employee-by-employee basis and on a grant-by-grant basis. The Company then compares the recorded
expense to the tax deduction received for each stock option grant.
Income Taxes
The Company accounts for income tax under the
provisions of ASC 740, Income Taxes. The Company records a liability for uncertain tax positions when it is probable that a loss has been
incurred and the amount can be reasonably estimated. At December 31, 2021 and 2020, 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. Due to the continued losses, the Company as recorded a full valuation at the end of December 31, 2021 and 2020.
The provision for income taxes is computed using
the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences
of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit
carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in
effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce
deferred tax assets to the amount that is believed more likely than not to be realized.
Recent Accounting Standards Issued Not Yet
Adopted
In December 2019, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“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 is currently evaluating
the impact that adoption of this new standard will have on its consolidated financial statements.
On August 5, 2020, the FASB issued ASU 2020-06,1
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 feels the
adoption of this ASU will not have a material impact to the financial statements.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 2 — Summary of Significant Accounting
Policies (cont.)
Accounting Pronouncement Adopted
The Company has adopted the FASB issued ASU No.
2016-02, Leases (Topic 842), which establishes an ROU model that requires lessees to record an ROU asset and a lease liability on the
consolidated balance sheets for all leases with terms longer than 12 months. The Company adopted ASU 2016-02 during 2019, which resulted
in the recognition of the right-of-use assets and related obligations on its consolidated financial statements.
Note 3 — Acquisitions
Acquisition of DSO
On February 11, 2020, the Company entered into
securities purchase agreement, which was amended on July 7, 2020 and June 4, 2021, to acquire DSO. On July 1, 2021, the acquisition was
completed.
Pursuant to the terms of the securities purchase
agreement, the Company paid $6,000,000 in cash and issued two promissory notes to the member of DSO. The first promissory note is a convertible
promissory note in the principal amount of $3,000,000 that bears interest at an annual rate of 6% and the second promissory note is also
in the principal amount of $3,000,000, is not convertible, and bears interest at an annual rate of 6%.
The table below summarizes the value of the total
consideration given in the transaction.
| |
Amount | |
Cash issued | |
$ | 6,000,000 | |
Debt issued | |
| 6,000,000 | |
Total consideration | |
$ | 12,000,000 | |
Under the acquisition method of accounting outlined
in ASC 805, the identifiable assets acquired and liabilities assumed in the acquisitions are recorded at their acquisition-date fair values
and are included in the Company’s consolidated financial position.
The following table summarizes the purchase price
allocation for the assets acquired and liabilities assumed in connection with the acquisition of DSO.
| |
Amount | |
Tangible assets acquired | |
$ | 3,700,000 | |
Liabilities assumed | |
| (1,102,057 | ) |
Intangible assets | |
| 8,060,000 | |
Goodwill | |
| 1,342,000 | |
Net assets acquired | |
$ | 12,000,000 | |
The intangible assets acquired from DSO are comprised
of the following:
| |
Amount | |
Customer relationships | |
$ | 4,220,000 | |
Tradename | |
| 2,010,000 | |
Developed technology | |
| 1,570,000 | |
Patent | |
| 230,000 | |
Non-compete agreement | |
| 30,000 | |
Goodwill | |
| 1,342,000 | |
Total intangible assets | |
$ | 9,402,000 | |
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 3 — Acquisitions (cont.)
Acquisition of Nexus
On July 21, 2021, the Company entered into a securities
purchase agreement, which was amended on November 8, 2021, to acquire all of the issued and outstanding capital stock of Nexus. On November
8, 2021, the acquisition was completed.
Pursuant to the terms of the securities purchase
agreement, the Company paid $2,200,000 in cash and issued two promissory notes to the stockholders of Nexus. The first promissory note
is a convertible promissory note in the principal amount of $1,900,00 that bears interest at an annual rate of 5% and the second promissory
note is also in the principal amount of $1,900,000, is not convertible, and bears interest at an annual rate of 5%.
The table below summarizes the value of the total
consideration given in the transaction.
| |
Amount | |
Cash issued | |
$ | 2,200,000 | |
Debt issued | |
| 3,800,000 | |
Total consideration | |
$ | 6,000,000 | |
Under the acquisition method of accounting outlined
in ASC 805, the identifiable assets acquired and liabilities assumed in the acquisitions are recorded at their acquisition-date fair values
and are included in the Company’s consolidated financial position.
The following table summarizes the preliminary
purchase price allocation for the assets acquired and liabilities assumed in connection with the acquisition of Nexus.
| |
Amount | |
Tangible assets acquired | |
$ | 44,330 | |
Liabilities assumed | |
| (21,567 | ) |
Intangible assets | |
| 5,977,237 | |
Net assets acquired | |
$ | 6,000,000 | |
The intangible assets acquired from Nexus are
comprised of the following:
| |
Amount | |
Non-compete agreements | |
$ | 780,000 | |
Customer relationships | |
| 5,197,237 | |
Total intangible assets | |
$ | 5,977,237 | |
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 3 — Acquisitions (cont.)
Acquisition of GSP
On November 29, 2021, the Company entered into
a contribution and exchange agreement to acquire all of the issued and outstanding capital stock of GSP. On December 6, 2021, the acquisition
was completed.
The total purchase price was $425,000, payable
in shares of common stock. An aggregate of 42,500 shares of common stock were issued at closing. The contribution and exchange agreement
provided that if the effective price per share of common stock in the Company’s initial public (as determined in accordance with
the contribution and exchange agreement) is less than $10 per share, then the Company must issue an additional number of shares of common
stock equal to an amount determined by dividing the $425,000 purchase price by the effective offering price per share, minus 42,500. In
connection with this acquisition, the Company also issued 14,723 shares of common stock to certain vendors of GSP who agreed to settle
accounts payable owed to them into common stock. See Note 14 regarding the issuance of additional shares upon closing of the Company’s
initial public offering.
The table below summarizes the value of the total
consideration given in the transaction.
| |
Amount | |
Equity issued | |
$ | 425,000 | |
Total consideration | |
$ | 425,000 | |
Under the acquisition method of accounting outlined
in ASC 805, the identifiable assets acquired and liabilities assumed in the acquisitions are recorded at their acquisition-date fair values
and are included in the Company’s consolidated financial position.
The following table summarizes the preliminary
purchase price allocation for the assets acquired and liabilities assumed in connection with the acquisition of GSP.
| |
Amount | |
Tangible assets acquired | |
$ | 114,284 | |
Liabilities assumed | |
| (273,504 | ) |
Intangible assets | |
| 584,220 | |
Net assets acquired | |
$ | 425,000 | |
The intangible assets acquired from GSP are comprised
of the following:
| |
Amount | |
License agreements | |
$ | 584,220 | |
Total intangible assets | |
$ | 584,220 | |
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 3 — Acquisitions (cont.)
Proforma
The following unaudited supplemental proforma
financial information reflects the combined results of operations had the DSO, Nexus and GSP acquisition occurred at the beginning of
2020. 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:
| |
Year Ended
December 31,
2021 | | |
Year Ended
December 31,
2020 | |
Net sales | |
$ | 18,477,166 | | |
$ | 18,495,670 | |
Net income (loss) | |
$ | (12,121,307 | ) | |
$ | (7,424,046 | ) |
| |
| | | |
| | |
Earnings (loss) per share, basic and diluted | |
$ | (0.90 | ) | |
$ | (1.23 | ) |
Weighted average shares outstanding, basic and diluted | |
| 13,397,034 | | |
| 6,031,685 | |
Note 4 — Inventory
Inventory consisted of the following at December
31:
| |
2021 | | |
2020 | |
Raw materials | |
$ | 452,583 | | |
$ | 54,797 | |
Work in Progress | |
| — | | |
| 3,629 | |
Finished goods | |
| 2,939,961 | | |
| — | |
| |
| 3,392,544 | | |
| 58,426 | |
Less: allowance for obsolescence | |
| — | | |
| — | |
| |
$ | 3,392,544 | | |
$ | 58,426 | |
Note 5 — Property and Equipment
Property and equipment consisted of the following
at December 31:
| |
Estimated Useful Lives (in Years) | | |
2021 | | |
2020 | |
Furniture and fixtures | |
| 7 | | |
$ | 9,139 | | |
$ | 1,090 | |
Equipment – Manufacturing | |
| 5 | | |
| 1,102,239 | | |
| 797,760 | |
Building & Equipment | |
| 5 | | |
| 193 | | |
| — | |
Leasehold improvements | |
| 2.5 | | |
| 71,539 | | |
| 10,650 | |
| |
| | | |
| 1,183,110 | | |
| 809,500 | |
Less: accumulated depreciation and amortization | |
| | | |
| (660,066 | ) | |
| (428,326 | ) |
Property and equipment, net | |
| | | |
$ | 523,044 | | |
$ | 381,174 | |
Depreciation and amortization expense for the
years ended December 31, 2021 and 2020 totaled $231,741 and $108,760, respectively.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 6 — Intangible Assets
Intangible assets consisted of the following at
December 31:
| |
Estimated
Useful Lives
(in Years) | | |
2021 | | |
2020 | |
Customer contracts | |
| 10 | | |
$ | 9,859,499 | | |
$ | 442,262 | |
Developed technology | |
| 15 | | |
| 1,570,000 | | |
| — | |
Non-compete agreements | |
| 3 | | |
| 810,000 | | |
| — | |
Patents | |
| 5 | | |
| 230,000 | | |
| — | |
Tradename | |
| 15 | | |
| 2,010,000 | | |
| — | |
Licenses agreements | |
| 5 | | |
| 584,220 | | |
| — | |
Total intangible assets | |
| | | |
| 15,063,917 | | |
| 442,262 | |
Less: amortization | |
| | | |
| (642,819 | ) | |
| (156,635 | ) |
Intangibles, net | |
| | | |
$ | 14,420,900 | | |
$ | 285,627 | |
Amortization (included in depreciation and amortization
expense) for the years ended December 31, 2021 and 2020 was $486,184 and $57,853, respectively.
The future amortization is as follows:
Years Ending December 31: | |
| |
2022 | |
$ | 1,421,692 | |
2023 | |
| 1,421,850 | |
2024 | |
| 1,421,850 | |
2025 | |
| 1,421,850 | |
2026 | |
| 1,367,937 | |
Thereafter | |
| 7,365,721 | |
Total | |
$ | 14,420,900 | |
Note 7 — Lease Commitments
The Company enters into lessee arrangements consisting
of operating leases for premises. The Company had four and three operating leases for premises as of December 31, 2021 and 2020, respectively.
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 asset and liability were calculated
utilizing a discount rate of 12%, according to the Company’s elected policy.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 7 — Lease Commitments (cont.)
Right of Use Asset and Liability
The right of use asset and liability is included
in the accompanying consolidated balance sheets as follows at December 31:
| |
2021 | | |
2020 | |
Asset | |
| | |
| |
Right of use asset | |
$ | 1,923,082 | | |
$ | 495,154 | |
| |
| | | |
| | |
Liability | |
| | | |
| | |
Right of use liability, current portion | |
$ | 384,530 | | |
$ | 249,284 | |
Right of use liability, net of current portion | |
| 1,570,388 | | |
| 223,985 | |
Total lease liability | |
$ | 1,954,918 | | |
$ | 473,269 | |
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 | |
$ | 583,646 | |
2023 | |
| 369,473 | |
2024 | |
| 379,579 | |
2025 | |
| 389,989 | |
2026 | |
| 400,712 | |
Thereafter | |
| 638,895 | |
Total payments | |
| 2,762,294 | |
Less: amount representing interest | |
| (807,376 | ) |
Lease obligation, net | |
| 1,954,918 | |
Less: current portion | |
| (384,530 | ) |
Lease obligation – long-term | |
$ | 1,570,388 | |
Rent expense for the years ended December 31,
2021 and 2020 was $417,669 and $277,113, respectively.
Note 8 — Debt
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 Company’s initial public offering was declared
effective by the SEC (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 December 31, 2021, the outstanding principal balance of the debentures was
$2,214,000, and debt issuance costs was $202,500.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 8 — Debt (cont.)
At any time after 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 Date;
provided 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. At any time after the IPO
Date, 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.
Acquisition Notes
On November 8, 2021, the Company issued a 5% secured
subordinated convertible promissory note in the principal amount of $1,900,000 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 initial public offering on February 18, 2022. See Note 14.
On November 8, 2021, the Company issued a 5% secured
subordinated promissory note in the principal amount of $1,900,000 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 December 31, 2021, 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 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 initial public offering on February 18, 2022. See Note 14.
On July 1, 2021, the Company issued a 6% secured
subordinated promissory note in the principal amount of $3,000,000 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 December
31, 2021, the outstanding principal balance of this note was $3,000,000.
Promissory Notes
On July 1, 2021, the Company entered into a loan
agreement 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 loan is secured by all of the Company’s assets and contains customary events
of default. As of December 31, 2021, the outstanding principal balance of this note was $2,750,000.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 8 — Debt (cont.)
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 our 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 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 the
earlier of: (i) eighteen (18) months from the date of the note or (ii) upon completion of the initial public offering. The loan is secured
by all of the Company’s assets and contains customary events of default. As of December 31, 2021, the outstanding principal balance
of this note was $1,614,906. As of December 31, 2020, the outstanding principal balance of this note was $1,615,176. The Company repaid
$1,000,000 of the principal balance from proceeds of the initial public offering on February 18, 2022. See Note 14.
Since inception, the Company has issued other
promissory notes to various lenders. These notes accrue interest at rates between 12-17%. These notes are unsecured and contain customary
events of default. As of December 31, 2021, the outstanding principal balance of these notes was $5,993,720. As of December 31, 2020,
the outstanding principal balance of these notes was $3,312,971. These notes were repaid in full upon closing of the initial public offering.
See Note 14.
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 initial public offering on February 18, 2022. See Note 14.
Other
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 December 31, 2021, the
outstanding principal balance of this lines of credit was $621,662.
Merchant Cash Advances
In December 2021, the Company entered into a merchant
cash advance agreement for $340,000 with a required repayment amount of $493,500, which requires weekly payments of approximately $20,562.
At December 31, 2021, the outstanding amount was $294,313.
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 December 31, 2021, the outstanding principal balance of this loan was $300,000. As of December 31, 2020,
the outstanding principal balance of this loan was $300,000.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 8 — Debt (cont.)
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 December 31, 2021, the outstanding principal balance of this loan was $239,262. As of December 31, 2020,
the outstanding principal balance of this loan was $239,262.
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
December 31, 2021, the outstanding balance of this loan was $261,164.
The PPP provides that the PPP loans may be partially
or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company will file for forgiveness
during 2022.
Total Debt
Debt is comprised of the following components
as of December 31, 2021:
Debenture notes | |
$ | 2,214,000 | |
Promissory notes | |
| 8,234,476 | |
Acquisition notes | |
| 9,800,000 | |
Other | |
| 621,662 | |
Merchant cash advances | |
| 294,313 | |
SBA loans | |
| 300,000 | |
PPP loans | |
| 500,426 | |
| |
| 21,964,877 | |
Debt issuance costs | |
| (1,084,740 | ) |
Total | |
$ | 20,880,137 | |
The future contractual maturities of the debt
are as follows:
For the Year Ended December 31: | |
| |
2022 | |
$ | 10,894,128 | |
2023 | |
| 1,231,699 | |
2024 | |
| 8,359,976 | |
2025 | |
| 69,780 | |
2026 | |
| 69,780 | |
Thereafter | |
| 254,774 | |
Total | |
$ | 20,880,137 | |
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
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 December 31, 2021 and 2020, the Company had cash balances of $0 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 year ended December 31, 2021, the Company
had 3 significant customers representing an aggregate of 65% of revenues and one that makes up 76% of the accounts receivable balance.
The Company’s officers are closely monitoring the relationships with all customers.
Major Vendors
The Company does not have any suppliers which
represent a significant portion of its supply chain. The Company’s officers are closely monitoring the relationships with all 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 December 31, 2021 and 2020, 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 December 31, 2021, the Company had net operating
loss carry forwards for federal income tax purposes of approximately $14.3 million, which will be available to offset future taxable income.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
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. Holders of series A convertible
preferred stock are 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 shall increase to 15% per annum after November 23, 2021 and 24% per annum after December 31, 2021; provided, however,
that no dividends shall accrue following the IPO Date. The dividends shall be calculated on the basis of a 360-day year, consisting of
twelve 30 calendar day periods, and shall accrue daily and shall be deemed to accrue whether or not earned or declared and whether or
not there are profits, surplus or other funds legally available for the payment of dividends. Any dividends that are not paid within three
(3) trading days following a dividend payment date shall continue to accrue and shall entail a late fee at the rate of 15% per annum or
the lesser rate permitted by applicable law.
Liquidation Rights. Prior to the IPO Date,
upon any liquidation, dissolution or winding-up of our 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 an amount equal to the greater of
(a) 150% of the stated value, plus any accrued and unpaid dividends thereon, for each share held, and (b) the amount that could otherwise
be received by a holder for the shares issuable upon conversion of the series A convertible preferred stock in full (ignoring for such
purposes any conversion limitations) before any distribution or payment shall be made to the holders of common stock. Following the IPO
Date, 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. Until the IPO Date, the
holders of series A convertible preferred stock shall have the same voting rights as the holders of common stock (on an as-if-converted-to-common-stock-basis).
On and after the IPO Date, the series A convertible preferred stock shall 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, after the IPO Date, 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 Company’s certificate of incorporation
or other charter documents in any manner that adversely affects any rights of the holders of series A convertible preferred stock, (d)
prior to the IPO Date, increase the number of authorized shares of common stock or series A convertible preferred stock, (e) prior to
the IPO Date, repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of common stock
or securities convertible into or exchangeable for common stock, (f) prior to the IPO Date, repurchases of common stock or securities
convertible into or exchangeable for common stock of departing officers and directors, (g) prior to the IPO Date, pay cash dividends or
distributions on any equity securities, (h) prior to the IPO Date, enter into any change of control transaction (as defined in the certificate
of designation) or (i) either prior to the IPO Date or after the IPO Date, as applicable, 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); provided,
however, if the pre-money valuation of the Company on the IPO Date is less than $75,000,000, the conversion price shall be reduced to
equal the product of (i) the then conversion price and (ii) the quotient obtained by dividing (A) the pre-money valuation of the Company
on the IPO Date and (B) $75,000,000. 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 us.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 11 — Stockholders’ Equity
(cont.)
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.
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 December 6, 2021, the Company issued 42,500
shares of common stock valued at $425,000 in connection with the acquisition of GSP.
On June 15, 2020, the Company issued 6,625,000
shares of common stock for services rendered valued at $66,250.
Between June 15, 2020 and November 30, 2020, the
Company issued 5,180,000 shares of common stock for compensation valued at $51,800.
Stock Options and Warrants
In 2020, the Company adopted its 2020 Incentive
Plan (the “2020 Plan”) under which the Company is authorized to issue a total of 2,000,000 qualified stock options and nonqualified
stock options to purchase common stock, to be granted to employees, and certain consultants or independent advisors who provide services
to the Company. The maximum term of the options is ten (10) years. The Board of Directors has the right to accelerate the vesting period
of the options based upon the performance of the employees and other reasons that would benefit the Company.
At December 31, 2021 and 2020, there were 550,000
and 750,000 stock options, respectively, available for issuance.
The Company recognized $1,000 of compensation
expense related to the vesting of options during the year ended December 31, 2021.
The following is a summary of options granted,
exercised, forfeited and outstanding during the year ended December 31, 2021:
| |
2021-Stock Options | | |
2021-Warrants | |
| |
Number of Options | | |
Weighted Average Exercise Price | | |
Number of Warrants | | |
Weighted Average Exercise Price | |
Outstanding at beginning of year | |
| 1,250,000 | | |
$ | 0.01 | | |
| 1,382,441 | | |
$ | 0.01 | |
Granted | |
| 200,000 | | |
| 0.01 | | |
| 13,419,565 | | |
| 5.78 | |
Exercised | |
| — | | |
| — | | |
| — | | |
| — | |
Forfeited | |
| — | | |
| — | | |
| — | | |
| — | |
Outstanding at December 31, | |
| 1,450,000 | | |
$ | 0.01 | | |
| 1,480,157 | | |
$ | 5.18 | |
Exercisable at December 31, | |
| 1,450,000 | | |
| | | |
| 1,480,157 | | |
| | |
Available for issuance at December 31, | |
| 550,000 | | |
| | | |
| — | | |
| | |
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 11 — Stockholders’ Equity
(cont.)
The following is a summary of options granted,
exercised, forfeited and outstanding during the year ended December 31, 2020:
| |
2020-Stock Options | | |
2020-Warrants | |
| |
Number of Options | | |
Weighted Average Exercise Price | | |
Number of Warrants | | |
Weighted Average Exercise Price | |
Outstanding at beginning of year | |
| — | | |
$ | 0.01 | | |
| 89,996 | | |
$ | 0.01 | |
Granted | |
| 1,250,000 | | |
| 0.01 | | |
| 1,2452,449 | | |
| 0.01 | |
Exercised | |
| — | | |
| — | | |
| — | | |
| — | |
Forfeited | |
| — | | |
| — | | |
| — | | |
| — | |
Outstanding at December 31, | |
| 1,250,000 | | |
$ | 0.01 | | |
| 1,542,445 | | |
$ | 0.01 | |
Exercisable at December 31, | |
| 1,250,000 | | |
| | | |
| 89,996 | | |
| | |
Available for issuance at December 31, | |
| 750,000 | | |
| | | |
| — | | |
| | |
During 2021, there were 200,000 stock options
granted. At December 31, 2021, total future compensation costs related to non-vested stock options, less estimated forfeitures are approximately
$3,000 and will be recognized over the next three years. During 2020, there were 1,250,000 stock options granted.
Valuation Assumptions for Stock Options
and Warrants
The fair value of each option was estimated on
the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| |
2021 | | |
2020 | |
Risk-free interest rate | |
| 0.36 | % | |
| 1.69 | % |
Expected volatility | |
| 77 | % | |
| 81 | % |
Expected life (years) | |
| 5 | | |
| 5 | |
Dividend yield | |
| 0 | % | |
| 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 CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
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 2021.
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.
Employment Agreements
In July 2020 and November, the Company hired a
President and Chief Executive Officer for 3-year terms. Compensation ranges from $200,000 to $350,000. Compensation includes annual bonuses
of 10-20% if certain milestones are met and issuance of 250,000 shares of restricted
common stock of which 83,333 shares vest at 1 year anniversary and remaining amount over last 2 years of the agreement.
In January 2021, the Company hired a Chief Financial
Officer for a 3-year term. Compensation ranges from $175,000 to $250,000. Compensation includes annual bonuses of 0-20% if certain milestones
are met.
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 December 31, 2021 and
2020, the amounts due from the related party are $0 and $78,466, respectively.
Prior to September 30, 2021, DSO rented its operating
facility from Scientific Real Estate Holdings, LLC, a non-consolidating company owned by its former sole member. Rent paid to the related
party for the year ended December 31, 2021 was $153,798.
Prior to October 1, 2021, DSO sold its products
to Control de Poids / Smart for Life-Montreal, which was considered a related party due to common ownership by its former sole member.
During the year ended December 31, 2021, sales to this related party were $25,384.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 14 — Subsequent Events
In accordance with ASC 855-10, the Company has
reviewed its operations subsequent to December 31, 2021 to the date these 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.
Initial
Public Offering
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 initial public offering 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 initial public offering 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 $12,763,000.
The terms
of the warrants included within the units are set forth in a warrant agent agreement, dated February 16, 2022, between the Company and
VStock Transfer, LLC, the Company’s transfer agent. The warrants are exercisable immediately and expire five years from the date
of issuance. The series A warrants have an exercise price of $7.00 per share and the series B warrants have an exercise price of $10.00
per share, subject to appropriate adjustments in certain circumstances, including in the event of a stock dividend, extraordinary dividend
on or recapitalization, reorganization, merger or consolidation, and may also be exercised on a cashless basis if at any time during the
term of the warrants, the issuance of common stock upon exercise of the warrants is not covered by an effective registration statement.
Additionally, holders of series B warrants may exercise such warrants on a “cashless” basis upon the earlier of (i) 10 trading
days from the issuance date of such warrant or (ii) the time when $10.0 million of volume is traded in the Company’s common stock,
if the volume weighted average price of the common stock on any trading day on or after the date of issuance fails to exceed the exercise
price of the series B warrant. In the event of a cashless exercise of the series B warrants as described in the preceding sentence, the
aggregate number of shares of common stock issuable in such cashless exercise shall equal the product of (x) the aggregate number of shares
of common stock that would be issuable upon exercise of the series B warrant in accordance with its terms if such exercise were by means
of a cash exercise rather than a cashless exercise and (y) 1.00. The warrants also contain an exercise limitation, pursuant to which a
holder will not have the right to exercise any portion of the warrant if the holder (together with its affiliates) would beneficially
own in excess of 4.99% of the number of shares of common stock outstanding immediately after giving effect to the exercise, which such
percentage may be increased or decreased to any other percentage not in excess of 9.99% upon 61 days’ notice to the Company.
As of March
30, 2022, 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.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 14 — Subsequent Events (cont.)
Private Placement of Notes and Warrants
In January 2022, the Company entered into note
and warrant purchase agreements with certain investors, pursuant to which we sold to such investors (i) original issue discount secured
subordinated promissory notes in the aggregate principal amount of $529,411 and (ii) warrants for the purchase of 90,000 shares of common
stock (equal to the investors’ investment amount divided by $5.00, the effective initial public offering price), for total gross
proceeds of $450,000. These notes have an original issue discount of 15% and additionally bore interest at 15% per annum and were due
upon completion of the initial public offering. These notes were repaid in full upon closing of the initial public offering.
These warrants are excisable at any time during
the three (3) year period commencing on August 18, 2022 (the sixth (6th) month anniversary of the closing of the initial public
offering) at an exercise price of $6.25 (125% of the effective initial public offering price), subject to standard adjustments for stock
splits, stock combinations, stock dividends, reclassifications, mergers, consolidations, reorganizations and similar transactions, and
may be exercised on a cashless basis if the market value of our common stock is greater than such exercise price.
Repayment of Debt
Between February and March 2022, the Company repaid
loans with various individuals equal to $4,530,912.
Conversion of Debt
Upon closing of the initial public offering on
February 18, 2022, the 5% secured subordinated convertible promissory note in the principal amount of $1,900,000 issued in connection
with the acquisition of Nexus was automatically converted into 386,460 shares of common stock. See Note 8.
Upon closing of the initial public offering on
February 18, 2022, the 6% secured subordinated convertible promissory note in the principal amount of $3,000,000 issued in connection
with the acquisition of DSO was automatically converted into 623,200 shares of common stock. See Note 8.
Upon closing of the initial public offering on
February 18, 2022, the convertible promissory note in the principal amount of $500,000 was automatically converted into 229,834 shares
of common stock. See Note 8.
Issuances of Common Stock
Upon closing of the initial public offering on
February 18, 2022, the Company issued an additional 57,223 shares of common stock to the stockholders of GSP in accordance with the terms
of the contribution and exchange agreement. See Note 3.
Upon closing of the initial public offering on
February 18, 2022, the Company issued an aggregate of 2,179,269 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 initial public offering.
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 immediately vested on the date of grant. The remaining 200,000 shares, which were granted to independent directors, vest
monthly over a one-year period. A total of 547,000 of these shares were granted under the 2020 Plan. The remaining 330,000 were granted
under the 2022 Equity Incentive Plan described below.
Conversion of Preferred Stock
Subsequent to December 31, 2021, 7,000 shares
of series A convertible preferred stock have been converted into common stock by the preferred stock stockholders. As a result, 1,000
shares of series A convertible preferred stock remain outstanding.
SMART FOR LIFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 14 — Subsequent Events (cont.)
2022 Equity Incentive Plan
On January 13, 2022, the Company’s board
of directors adopted the Smart for Life, Inc. 2022 Equity Incentive Plan (the “2022 Plan”) and reserved 2,000,000 shares of
common stock for issuance thereunder. Persons eligible to receive awards under the 2022 Plan include officers, employees, consultants,
and directors of the Company and its subsidiaries. Awards that may be granted include: (a) incentive stock options, (b) non-qualified
stock options, (c) stock appreciation rights, (d) restricted awards, (e) performance share awards, and (f) performance compensation awards.
Signing of Ceautamed Acquisition
On March 14, 2022, the Company entered into a
securities purchase agreement (the “Purchase Agreement”) with Ceautamed Worldwide, LLC (“Ceautamed”), RMB Industries,
Inc., RTB Childrens Trust and D&D Hayes, LLC (the “Sellers”), pursuant to which the Company agreed to acquire all of the
issued and outstanding membership interests of Ceautamed, a vitamin and supplement company, from the Sellers for an aggregate purchase
price of $9,750,000, consisting of (i) $4,875,000 in cash, (ii) convertible promissory notes in the aggregate principal amount of $2,437,500
and (iii) non-convertible promissory notes in the aggregate principal amount of $2,437,500, subject to certain adjustments described below.
The purchase price is based upon a six and one-half
(6.5) times multiple of estimated adjusted EBITDA (as defined in the Purchase Agreement) for the calendar year 2021. The Company has engaged
a firm to prepare a quality of earnings report on Ceautamed and its subsidiaries. The purchase price will be adjusted upwards or downwards
upon delivery of such quality of earnings report based upon the difference between six and one-half (6.5) times the adjusted EBITDA as
shown in the quality of earnings report and the purchase price. The adjusted purchase price will be allocated among the cash portion of
the purchase price and the notes based on the percentage of the purchase price that each such component of consideration makes up as described
above.
In addition, the cash portion of the purchase
price will be (i) decreased by the amount of any outstanding indebtedness of Ceautamed for borrowed money existing as of the closing date
and any unpaid transaction expenses, and (ii) increased by the amount of cash and cash equivalents of Ceautamed and its subsidiaries as
of the closing date.
The purchase price is also 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 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, 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 convertible promissory notes and (iii) twenty-five
percent (25%) shall be paid through an increase or reduction in the principal amount of the non-convertible promissory notes.
The Purchase Agreement contains customary representations,
warranties and covenants, including a covenant that the Sellers will not compete with the business of Ceautamed for a period of three
(3) years following closing. The Purchase Agreement also contains mutual indemnification for breaches of representations or warranties
and failure to perform covenants or obligations contained in the Purchase Agreement. In the case of the indemnification provided by the
Sellers with respect to breaches of certain non-fundamental representations and warranties, the Sellers will only become liable for indemnified
losses if the amount exceeds $150,000, whereupon the Sellers will be liable for all losses relating back to the first dollar, provided
that the liability of the Sellers for breaches of certain non-fundamental representations and warranties shall not exceed fifteen percent
(15%) of the purchase price and each Seller’s aggregate liability for the breach of fundamental representations shall be limited
to the purchase price.
The closing of the Purchase Agreement is subject
to customary closing conditions, including, without limitation, the completion of accounting and legal due diligence investigations; the
receipt of all authorizations, consents and approvals of all governmental authorities and third parties; the release of any liens against
any of the assets of Ceautamed; the Company obtaining the requisite acquisition financing; and delivery of all documents required for
the transfer of the equity interests of Ceautamed to the Company.
CEAUTAMED WORLDWIDE LLC AND AFFILIATES
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
CEAUTAMED WORLDWIDE LLC AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2022
(UNAUDITED)
| |
June 30,
2022 | |
ASSETS | |
| |
Current assets: | |
| |
Cash | |
$ | 153,254 | |
Accounts receivable, net | |
| 100,891 | |
Inventory, net | |
| 245,652 | |
Other current assets | |
| 5,815 | |
Total current assets | |
| 505,612 | |
| |
| | |
Property and equipment, net | |
| 15,823 | |
Total assets | |
$ | 521,435 | |
| |
| | |
LIABILITIES AND DEFICIENCY IN MEMBER’S EQUITY | |
| | |
Current liabilities: | |
| | |
Accounts payable | |
$ | 1,075,911 | |
Accrued expenses | |
| 580,005 | |
Deposit on sale of business | |
| 1,000,000 | |
Notes payable, current | |
| 100,578 | |
Related party loans | |
| 810,183 | |
Total current liabilities | |
| 3,566,677 | |
| |
| | |
Long-term liabilities: | |
| | |
Notes payable, net of current portion | |
| 118,012 | |
Total liabilities | |
| 3,684,689 | |
| |
| | |
Commitments and contingencies | |
| | |
| |
| | |
Deficiency in member’s equity | |
| (3,163,254 | ) |
Total liabilities and deficiency in member’s equity | |
$ | 521,435 | |
The accompanying notes are an integral part
of these consolidated financial statements
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
CONSOLIDATED
STATEMENT OF INCOME AND CHANGES IN DEFICIENCY IN MEMBER’S EQUITY
FOR
THE SIX MONTHS ENDED JUNE 30, 2022
(UNAUDITED)
| |
June
30, 2022 | |
Sales,
net | |
$ | 1,415,494 | |
Cost
of goods sold | |
| 775,300 | |
Gross
profit | |
| 640,194 | |
| |
| | |
Operating
expenses: | |
| | |
General
and administrative | |
| 177,127 | |
Salaries
and wages | |
| 277,858 | |
Depreciation | |
| 2,300 | |
Total
operating expenses | |
| 457,285 | |
| |
| | |
Operating
income | |
| 182,909 | |
| |
| | |
Other
income (expense): | |
| | |
Interest
expense | |
| (27,554 | ) |
Total
expense | |
| (27,554 | ) |
| |
| | |
Net
income | |
$ | 155,355 | |
Deficiency
in members’ equity, beginning of period | |
| (2,926,324 | ) |
Distributions
to members | |
| (392,285 | ) |
Deficiency
in members’ equity, end of period | |
$ | (3,163,254 | ) |
The
accompanying notes are an integral part of these consolidated financial statements
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2022
(UNAUDITED)
| |
June
30, 2022 | |
Cash
flows from operating activities: | |
| |
Net
income | |
$ | 155,355 | |
Adjustments
to reconcile net income to net cash used in operating activities: | |
| | |
Depreciation | |
| 2,300 | |
Changes
in operating assets and liabilities: | |
| | |
Accounts
receivable, net | |
| 149,819 | |
Inventory,
net | |
| 8,569 | |
Other
current assets | |
| (1,868 | ) |
Accounts
payable | |
| (666,510 | ) |
Accrued
expenses | |
| (65,155 | ) |
Net
cash used in operating activities | |
| (417,490 | ) |
| |
| | |
Cash
flows from investing activities: | |
| | |
Deposit
on sale of business | |
| 1,000,000 | |
Net
cash provided by investing activities | |
| 1,000,000 | |
| |
| | |
Cash
flows from financing activities: | |
| | |
Repayment
of notes payable | |
| (120,520 | ) |
Repayment
of related party loans | |
| (53,188 | ) |
Distributions | |
| (392,285 | ) |
Net
cash used in financing activities | |
| (565,993 | ) |
| |
| | |
Net
increase in cash | |
| 16,517 | |
Cash
at beginning of period | |
| 136,737 | |
Cash
at end of period | |
$ | 153,254 | |
| |
| | |
Supplemental
disclosure of cash flow information: | |
| | |
Interest
paid | |
$ | 79,801 | |
The
accompanying notes are an integral part of these consolidated financial statements
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
(UNAUDITED)
Note
1 - Description of Business
Ceautamed
Worldwide LLC (“CWW”) is a limited liability company formed in the State of Florida on May 29, 2009. The Company has two
affiliates, Wellness Watchers Global, LLC (“WW”) and Greens First Female LLC (“GFF”), both of which are limited
liabilities companies formed in the State of Florida formed on November 30, 2006 and April 1, 2016, respectively. CWW, WW, and GFF offer
nutritional supplements though both wholesale distributors and retail channels in Boca Raton, Florida.
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation and Consolidation
The
accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the
United States of America (“GAAP”). The consolidated financial statements include the accounts of CWW, WW, and GFF forming
the “Company” which have been consolidated based on variable interest entities with common ownership. All material intercompany
account balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires that the Company’s management make estimates
and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and certain financial statement disclosures.
Estimates and assumptions are used for, but not limited to, revenue recognition and deferred revenue. Although these estimates are based
on management’s knowledge of current events and actions it may undertake in the future, actual results may ultimately differ from
these estimates and assumptions. These estimates are revised as additional information becomes available, and if material, the effects
of changes in estimates are disclosed in the notes to the financial statements.
Cash
and Cash Equivalents
The
Company considers all highly liquid financial instruments with maturities of 90 days or less when acquired to be cash equivalents. The
Company had no cash equivalents for the periods presented.
Accounts
Receivable, net
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 $57,607 at June 30, 2022.
Inventory,
net
Inventory
consists of finished goods and is valued at the weighted average costs. An allowance for inventory obsolescence is provided for slow
moving or obsolete inventory to write down historical cost to net realizable value. The Company utilizes contract manufacturers for manufacturing
for nutraceuticals in the form of powders 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. Inventory is presented net of an allowance for inventory obsolescence of $129,710 at June
30, 2022.
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
(UNAUDITED)
Property
and Equipment, net
Property
and equipment are reported at cost, less accumulated depreciation, amortization, and any impairment in value. Long-lived assets, including
property and equipment, are assessed for impairment whenever events or changes in business circumstances arise that may indicate that
the carrying amount of the long-lived assets may not be recoverable. Depreciation of property and equipment are calculated using the
straight-line method over the following estimated economic useful lives of the related assets. The Company’s property and equipment
consists of various furniture and office equipment which is being depreciated over a 3 to 5 years estimated useful life.
Ordinary
maintenance and repairs are expenses as incurred.
Revenue
Recognition
The
Company evaluates revenue recognition based on the criteria set forth in ASC 606, Revenue from Contracts with Customers.
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”). |
The
Company primarily generates 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.
Paycheck
Protection Program Loan
The
Company records Paycheck Protection Program (“PPP”) loan proceeds in accordance with the Financial Accounting Standards Board
(“FASB”) ASC 470, Debt. Debt is extinguished when either the debtor pays the creditor or the debtor is legally released
from being the primary obligor.
Freight
Freight
costs are included in cost of goods sold in the accompanying the consolidated statement of income and changes in deficiency in members’
equity. Freight cost was $56,355 for the six month period ended June 30, 2022, included in cost of goods sold.
Advertising
Advertising
costs are expensed as incurred. Advertising expense was $16,980 for the six month period ended June 30, 2022, included in general administrative
expenses.
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
(UNAUDITED)
Income
Taxes
The
Company has elected to be treated as a limited liability company for federal and State income tax purposes. Under this election, all
taxable income, losses and credits pass through to its member and are reflected on its member’s individual income tax return. Accordingly,
no provision for income taxes has been reported in the accompanying financial statements.
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, the Company has no liabilities for uncertain tax positions. The Company’s policy is to recognize interest
and penalties related to income tax matters as a component of income tax expense. The Company continually evaluates expiring statutes
of limitations, audits, and proposed settlements changes in tax law and new authoritative rulings.
Recently
Accounting Pronouncement
In
February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases. The new standard establishes
a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance
sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the consolidated statement of income and deficiency in members’ equity. The new
standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company
adopted the ASU on January 1, 202. It had no leases that extend beyond 12 months, therefore no right of use asset and related obligation
were presented within the consolidated financial statements.
Note
3 – Property and Equipment, Net
Property
and equipment are summarized as follows at June 30, 2022:
| |
June
30, 2022 | |
Computer
equipment and website | |
$ | 113,155 | |
Furniture
and fixtures | |
| 33,883 | |
Leasehold
improvements | |
| 19,335 | |
Total
property and equipment | |
| 166,373 | |
Less:
accumulated depreciation | |
| (150,550 | ) |
Property
and equipment, net | |
$ | 15,823 | |
Depreciation
expense was $2,300 for the six months period ended June 30, 2022.
Note
4 – Inventory
Inventory
is summarized as follows at June 30, 2022:
| |
June
30, 2022 | |
Finished
goods | |
$ | 375,362 | |
Less:
reserve for inventory obsolescence | |
| (129,710 | ) |
Inventory,
net | |
$ | 245,652 | |
Note
5 – Debt
Business
Loans
During
October 2021, the Company entered a business cash loan for $250,000 with interest of 35.01%, which required monthly payments of $20,633
and is due in January 2023. The business loan had an outstanding balance of $125,061 at June 30, 2022. Accrued interest on this loan
was $13,024 and included in accrued expenses on the consolidated balance sheet.
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
(UNAUDITED)
Line
of Credit
In
December 2019, the Company entered a business line of credit, which permitted borrowings up to $50,000 with interest at 45.90%, which
required monthly payments of $5,214 and was due in December 2020. The business line of credit was not extended and due on demand. The
business loan had an outstanding balance of $1,355 at June 30, 2022.
Equipment
Lease
In
May 2020, the Company entered an equipment lease for its computer server in the amount of $15,388. The business loan had an outstanding
balance of $8,719 at June 30, 2022.
Economic
Injury Disaster Loans (“EIDL”)
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 $84,600, with interest of 3.75%, deferred payments for initial 12 months,
and due in June 2050. The EIDL loan had an outstanding balance of $88,660 at June 30, 2022.
Related
Party Loans
Since
the inception of the Company, the Company has borrowed money from its members. These loans bear interest ranging from 0% to 10% per annum,
and due on demand. The related party loans had an outstanding balance of $810,182 at June 30, 2022. The related party loans had an outstanding
accrued interest of $566,258 at December 31, 2021 included in accrued expenses on the consolidated balance sheet.
The
future maturities of the debt are as follows:
For
the Year Ended December 31: | |
| |
2022
(remainder) | |
$ | 910,761 | |
2023 | |
| 36,744 | |
2024 | |
| 4,956 | |
2025 | |
| 4,956 | |
2026 | |
| 4,956 | |
Thereafter | |
| 66,400 | |
Total | |
$ | 1,028,773 | |
Note
6 – Commitments and Contingencies
Legal
Proceedings
From
time to time, the Company is subject to threatened and asserted claims in the ordinary course business. Because litigation and arbitration
are subject to inherent uncertainties and the outcome of such matters cannot be predicted with certainty, future developments could cause
any one or more of these matters to have a material impact on the Company’s financial condition, results of operations or liquidity
in any future period.
Referral
Agreements
The
Company has entered into two referral agreements under which the Company has agreed to pay commissions in the amount of 30% of all fees
received from referred clients.
Operating
Lease
The
Company leases office and warehouse space for its headquarters and warehouse in Boca Raton, Florida. The lease is month to month and
expires in October 2022. The Company is negotiating with the landlord regarding the continuation of the lease, as the landlord has notified
the Company that the warehouse portion of the lease will not be extended.
The
lease calls for initial monthly lease payments of $7,350. Rent expense related to this lease was $43,600 for the six month period ended
June 30, 2022, included in general administrative expenses.
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
(UNAUDITED)
Note
7 – Concentration of Credit Risks
Cash
Concentration
The
Company places its cash on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”)
covers $250,000 for substantially all depository accounts. From time to time, the Company may have amounts on deposit in excess of the
insured limits. The Company had no cash balances in excess of the FDIC coverage of $250,000 per financial institution for the periods
presented. The Company has not experienced any losses on such accounts and does not feel it is exposed to any significant risk with respect
to cash.
Revenue
Concentration
The
Company had one (1) customer which accounted for 62% of sales for the six-month period ended June 30, 2022. This customer accounted for
56% of accounts receivable six-month period ended June 30, 2022.
Vendor
Concentration
The
Company had a one (1) vendor which accounted for 66% of cost of goods sold for six-month period ended June 30, 2022. This vendor was
a member of the Company and had accounts payable outstanding of $824,086 at June 30, 2022. The amount was subsequently settled see Note
9.
Note
8 – Member’s Equity
Distributions
The
Company shall distribute equally to its members based on ownership interest subject to certain liabilities being paid, operating expenses
being covered, and sufficient assets to cover if a liquidation were to occur.
Voting
Each
member is entitled to one vote based on manager appointment.
Liquidation
Event
Upon
dissolution of the Company and liquidation of Company property, and after payment of all selling costs and expenses, the liquidator will
distribute the Company assets to the in satisfaction of liabilities to creditors except Company obligations to current members; debt
obligations to current members; and then to members based on member financial interest.
Membership
Interest Redemption
In
March 2022, a member entered into an accounts payable and membership interest redemption agreement to settle accounts payable owed to
member in the amount of $1,200,000.
Note
9 – Sale of Business
In
March 2022, Smart for Life, Inc. entered into a securities purchase agreement to acquire all of the issued and outstanding membership
interests of the Company for an aggregate purchase price of $9,750,000, consisting of (i) $4,875,000 in cash, (ii) convertible promissory
notes in the aggregate principal amount of $2,437,500 and (iii) non-convertible promissory notes in the aggregate principal amount of
$2,437,500, subject to certain adjustments. In June 2022, the Company received a $1,000,000 deposit on sale of business recorded on the
consolidated balance sheet.
Note
10 – Subsequent Events
On
July 29, 2022, the Company entered into a first amendment to securities purchase agreement to amend certain terms of the purchase agreement
noted above. On the same date, closing of the sale of business was completed. Pursuant to the terms of the securities purchase agreement,
as amended, the aggregate purchase price is $8,600,000 (subject to adjustments) consisting 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.
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER
31, 2021
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Managers
Ceautamed
Worldwide, LLC
Boca
Raton, Florida
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheet of Ceautamed Worldwide, LLC (the “Company”) as of December 31, 2021,
and the related consolidated statements of income and changes in deficiency in members’ equity, and cash flows for the year ended
December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations
and its cash flows for each of the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United
States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits,
we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audits provide a reasonable basis for our opinion.
Critical
Audit Matter
The
critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements
that were communicated or required to be communicated to the managers of the Company and that: (1) relate to accounts or disclosures
that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication
of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating
the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which
they relate.
Valuation
of Collectability of Accounts Receivable
As
described in Notes 2 to the financial statements, the Company estimates for uncollectible receivables based on a review of specific accounts
and the Company’s historical collection experience.
Addressing
the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial
statements. These procedures included, evaluating customer contracts, obtaining confirmations from customers, and evaluating recent accounts
receivable for uncollectible accounts. Testing management’s process included evaluating the appropriateness of assumptions on collectability.
/s/
Daszkal Bolton LLP |
|
We
have served as the Company’s auditor since 2022. |
Sunrise,
Florida |
October
12, 2022 |
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2021
| |
December 31,
2021 | |
ASSETS | |
| |
Current
assets: | |
| |
Cash | |
$ | 136,737 | |
Accounts
receivable, net | |
| 250,710 | |
Inventory,
net | |
| 254,221 | |
Other
current assets | |
| 3,947 | |
Total
current assets | |
| 645,615 | |
| |
| | |
Property
and equipment, net | |
| 18,123 | |
Total
assets | |
$ | 663,738 | |
| |
| | |
LIABILITIES
AND DEFICIENCY IN MEMBER’S EQUITY | |
| | |
Current
liabilities: | |
| | |
Accounts
payable | |
$ | 1,742,421 | |
Accrued
expenses | |
| 645,160 | |
Notes
payable, current | |
| 232,253 | |
Related
party loans | |
| 863,371 | |
Total
current liabilities | |
| 3,483,205 | |
| |
| | |
Long-term
liabilities: | |
| | |
Notes
payable, net of current portion | |
| 106,857 | |
Total
liabilities | |
| 3,590,062 | |
| |
| | |
Commitments
and contingencies | |
| | |
| |
| | |
Deficiency
in member’s equity | |
| (2,926,324 | ) |
Total
liabilities and deficiency in member’s equity | |
$ | 663,738 | |
The
accompanying notes are an integral part of these consolidated financial statements
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
CONSOLIDATED
STATEMENT OF INCOME AND CHANGES IN DEFICIENCY IN MEMBER’S EQUITY
FOR
THE SIX YEAR ENDED DECEMBER 31, 2021
| |
December 31,
2021 | |
| |
| |
Sales,
net | |
$ | 4,165,943 | |
Cost
of goods sold | |
| 2,219,599 | |
Gross
profit | |
| 1,946,344 | |
| |
| | |
Operating
expenses: | |
| | |
General
and administrative | |
| 492,315 | |
Salaries
and wages | |
| 530,241 | |
Depreciation | |
| 8,336 | |
Total
operating expenses | |
| 1,030,892 | |
| |
| | |
Operating
income | |
| 915,452 | |
| |
| | |
Other
income (expense): | |
| | |
Gain
on debt extinguishment | |
| 180,351 | |
Interest
expense | |
| (157,498 | ) |
Total
other income | |
| 22,853 | |
| |
| | |
Net
income | |
$ | 938,305 | |
Deficiency
in members’ equity, beginning of period | |
| (3,011,438 | ) |
Distributions
to members | |
| (853,191 | ) |
Deficiency
in members’ equity, end of period | |
$ | (2,926,324 | ) |
The
accompanying notes are an integral part of these consolidated financial statements
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR
THE YEAR ENDED DECEMBER 31, 2021
| |
December 31,
2021 | |
| |
| |
Cash
flows from operating activities: | |
| |
Net
income | |
$ | 938,305 | |
Adjustments
to reconcile net income to net cash provided by operating activities: | |
| | |
Gain
on debt extinguishment | |
| (180,351 | ) |
Depreciation | |
| 8,336 | |
Changes
in operating assets and liabilities: | |
| | |
Accounts
receivable, net | |
| 43,237 | |
Inventory,
net | |
| 269,462 | |
Other
current assets | |
| 39,589 | |
Accounts
payable | |
| (203,467 | ) |
Accrued
expenses | |
| 57,644 | |
Deferred
revenue | |
| (100,000 | ) |
Net
cash provided by operating activities | |
| 872,755 | |
| |
| | |
Cash
flows from investing activities: | |
| | |
Net
cash provided by investing activities | |
| - | |
| |
| | |
Cash
flows from financing activities: | |
| | |
Proceeds
from notes payable | |
| 390,711 | |
Repayment
of notes payable | |
| (260,928 | ) |
Proceeds
from loans payable, related parties | |
| 74,788 | |
Repayment
of loans payable, related parties | |
| (155,512 | ) |
Distributions | |
| (853,191 | ) |
Net
cash used in financing activities | |
| (804,132 | ) |
| |
| | |
Net
increase in cash | |
| 68,623 | |
Cash
at beginning of year | |
| 68,114 | |
Cash
at end of year | |
$ | 136,737 | |
| |
| | |
Supplemental
disclosure of cash flow information: | |
| | |
Interest
paid | |
$ | 79,801 | |
The
accompanying notes are an integral part of these consolidated financial statements
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021
Note
1 - Description of Business
Ceautamed
Worldwide LLC (“CWW”) is a limited liability company formed in the State of Florida on May 29, 2009. The Company has two
affiliates, Wellness Watchers Global, LLC (“WW”) and Greens First Female LLC (“GFF”), both of which are limited
liabilities companies formed in the State of Florida formed on November 30, 2006 and April 1, 2016, respectively. CWW, WW, and GFF offer
nutritional supplements though both wholesale distributors and retail channels in Boca Raton, Florida.
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation and Consolidation
The
accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the
United States of America (“GAAP”). The consolidated financial statements include the accounts of CWW, WW, and GFF forming
the “Company” which have been consolidated based on variable interest entities with common ownership. All material intercompany
account balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires that the Company’s management make estimates
and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and certain financial statement disclosures.
Estimates and assumptions are used for, but not limited to, revenue recognition and deferred revenue. Although these estimates are based
on management’s knowledge of current events and actions it may undertake in the future, actual results may ultimately differ from
these estimates and assumptions. These estimates are revised as additional information becomes available, and if material, the effects
of changes in estimates are disclosed in the notes to the financial statements.
Cash
and Cash Equivalents
The
Company considers all highly liquid financial instruments with maturities of 90 days or less when acquired to be cash equivalents. The
Company had no cash equivalents for the periods presented.
Accounts
Receivable, net
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 $57,607 at December 31, 2021.
Inventory,
net
Inventory
consists of finished goods and is valued at the weighted average costs. An allowance for inventory obsolescence is provided for slow
moving or obsolete inventory to write down historical cost to net realizable value. The Company utilizes contract manufacturers for manufacturing
for nutraceuticals in the form of powders 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. Inventory is presented net of an allowance for inventory obsolescence of $129,710 at December
31, 2021.
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021
Property
and Equipment, net
Property
and equipment are reported at cost, less accumulated depreciation, amortization, and any impairment in value. Long-lived assets, including
property and equipment, are assessed for impairment whenever events or changes in business circumstances arise that may indicate that
the carrying amount of the long-lived assets may not be recoverable. Depreciation of property and equipment are calculated using the
straight-line method over the following estimated economic useful lives of the related assets. The Company’s property and equipment
consists of various furniture and office equipment which is being depreciated over a 3 to 5 years estimated useful life.
Ordinary
maintenance and repairs are expenses as incurred.
Revenue
Recognition
The
Company evaluates revenue recognition based on the criteria set forth in ASC 606, Revenue from Contracts with Customers.
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”). |
The
Company primarily generates 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 December 31, 2021.
Paycheck
Protection Program Loan
The
Company records Paycheck Protection Program (“PPP”) loan proceeds in accordance with the Financial Accounting Standards Board
(“FASB”) ASC 470, Debt. Debt is extinguished when either the debtor pays the creditor or the debtor is legally released
from being the primary obligor.
Freight
Freight
costs are included in cost of goods sold in the accompanying the consolidated statement of income and changes in deficiency in members’
equity. Freight cost was $155,131 for the year ended December 31, 2021, included in cost of goods sold.
Advertising
Advertising
costs are expensed as incurred. Advertising expense was $56,355 for the year ended December 31, 2021, included in general administrative
expenses.
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021
Income
Taxes
The
Company has elected to be treated as a limited liability company for federal and State income tax purposes. Under this election, all
taxable income, losses and credits pass through to its member and are reflected on its member’s individual income tax return. Accordingly,
no provision for income taxes has been reported in the accompanying financial statements.
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 December 31, 2021, the Company has no liabilities for uncertain tax positions. The Company’s policy is to recognize
interest and penalties related to income tax matters as a component of income tax expense. The Company continually evaluates expiring
statutes of limitations, audits, and proposed settlements changes in tax law and new authoritative rulings.
Recently
Accounting Pronouncement
In
February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases. The new standard establishes
a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance
sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the consolidated statement of income and deficiency in members’ equity. The new
standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company
adopted the ASU on January 1, 2021. It had no leases that extend beyond 12 months, therefore no right of use asset and related obligation
were presented within the consolidated financial statements.
Note
3 – Property and Equipment, Net
Property
and equipment are summarized as follows at December 31, 2021:
| |
December 31,
2021 | |
Computer
equipment and website | |
$ | 113,155 | |
Furniture
and fixtures | |
| 33,883 | |
Leasehold
improvements | |
| 19,335 | |
Total
property and equipment | |
| 166,373 | |
Less:
accumulated depreciation | |
| (148,250 | ) |
Property
and equipment, net | |
$ | 18,123 | |
Depreciation
expense was $8,336 for the year ended December 31, 2021.
Note
4 – Inventory, Net
Inventory
is summarized as follows at December 31, 2021
| |
December 31,
2021 | |
Finished
goods | |
$ | 383,931 | |
Less:
reserve for inventory obsolescence | |
| (129,710 | ) |
Inventory,
net | |
$ | 254,221 | |
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021
Note
5 – Debt
Business
Loans
During
March 2020, the Company entered a business cash loan for up to $250,000 with interest of 43.96%, which required monthly payments of $25,833
and was repaid in 2021. During October 2021, the Company entered a new business cash loan for $250,000 with interest of 35.01%, which
requires monthly payments of $20,633 and is due in January 2023. The business loan had an outstanding balance of $218,265 at December
31, 2021. Accrued interest on this loan was $46,620 and included in accrued expenses on the consolidated balance sheet.
Line
of Credit
In
December 2019, the Company entered a business line of credit, which permitted borrowings up to $50,000 with interest at 45.90%, which
requires monthly payments of $5,214 and was due in December 2020. The business line of credit was not extended and due on demand. The
business loan had an outstanding balance of $19,244 at December 31, 2021.
Equipment
Lease
In
May 2020, the Company entered an equipment lease for its computer server in the amount of $15,388. The business loan had an outstanding
balance of $10,258 at December 31, 2021.
Economic
Injury Disaster Loans (“EIDL”)
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 $84,600, with interest of 3.75%, deferred payments for initial 12 months,
and due in June 2050. The EIDL loan had an outstanding balance of $91,180 at December 31, 2021.
In
addition, during 2021, the Company received a EIDL advance in the amount of $10,000. The EIDL advance was forgiven for the remaining
balance and recorded as gain on debt extinguishment of debt for $5,638.
Payroll
Protection Program (“PPP”) Loans
In
May 2020, the Company received two separate PPP loans from a financial institution pursuant to the PPP under Division A, Title I of the
CARES Act totaling $86,351. The PPP loans, which were in the form of a promissory note, were set to mature in May 2022 and bore interest
at a rate of 1.00% per annum, payable monthly commencing in November 2020. The PPP loans and accrued interest were fully forgiven in
2021 and recorded as gain on debt extinguishment of debt for $86,351.
In
March 2021, the Company received a second round of PPP loans from a financial institution in the amount of $98,459. The second PPP loans,
which were in the form of a promissory notes, were set to mature in March 2026 and bore interest at a rate of 1.00% per annum, payable
monthly commencing in June 2021. The second PPP loans and accrued interest were fully forgiven in November 2021 and recorded as gain
on debt extinguishment of debt for $98,459.
Related
Party Loans
Since
the inception of the Company, the Company has borrowed money from its members. These loans bear interest ranging from 0% to 10% per annum,
and due on demand. The related party loans had an outstanding balance of $863,370 at December 31, 2021. The related party loans had an
outstanding accrued interest of $541,238 at December 31, 2021 included in accrued expenses on the consolidated balance sheet.
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021
The
future maturities of the debt are as follows:
For
the Year Ended December 31: | |
| |
2022 | |
$ | 1,095,624 | |
2023 | |
| 25,589 | |
2024 | |
| 4,956 | |
2025 | |
| 4,956 | |
2026 | |
| 4,956 | |
Thereafter | |
| 66,410 | |
Total | |
$ | 1,202,481 | |
Note
6 – Commitments and Contingencies
Legal
Proceedings
From
time to time, the Company is subject to threatened and asserted claims in the ordinary course business. Because litigation and arbitration
are subject to inherent uncertainties and the outcome of such matters cannot be predicted with certainty, future developments could cause
any one or more of these matters to have a material impact on the Company’s financial condition, results of operations or liquidity
in any future period.
Referral
Agreements
The
Company has entered into two referral agreements under which the Company has agreed to pay commissions in the amount of 30% of all fees
received from referred clients.
Operating
Lease
The
Company leases office and warehouse space for its headquarters and warehouse in Boca Raton, Florida. The lease is month to month and
expires in October 2022. The Company is negotiating with the landlord regarding the continuation of the lease, as the landlord has notified
the Company that the warehouse portion of the lease will not be extended.
The
lease calls for initial monthly lease payments of $7,350. Rent expense related to this lease was $82,200 for the year ended December
31, 2021, included in general administrative expenses.
Note
7 – Concentration of Credit Risks
Cash
Concentration
The
Company places its cash on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”)
covers $250,000 for substantially all depository accounts. From time to time, the Company may have amounts on deposit in excess of the
insured limits. The Company had no cash balances in excess of the FDIC coverage of $250,000 per financial institution for the periods
presented. The Company has not experienced any losses on such accounts and does not feel it is exposed to any significant risk with respect
to cash.
Revenue
Concentration
The
Company had one (1) customer which accounted for 65% of sales for the year ended December 31, 2021. This customer accounted for 43% of
accounts receivable for the year ended December 31, 2021.
Vendor
Concentration
The
Company had a one (1) vendor which accounted for 85% of cost of goods sold for the year ended December 31, 2021. This vendor was a member
of the Company and had accounts payable outstanding of $1,605,261 at December 31, 2021. The amount was subsequently settled see Note
9.
CEAUTAMED
WORLDWIDE LLC AND AFFILIATES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021
Note
8 – Member’s Equity
Distributions
The
Company shall distribute equally to its members based on ownership interest subject to certain liabilities being paid, operating expenses
being covered, and sufficient assets to cover if a liquidation were to occur.
Voting
Each
member is entitled to one vote based on manager appointment.
Liquidation
Event
Upon
dissolution of the Company and liquidation of Company property, and after payment of all selling costs and expenses, the liquidator will
distribute the Company assets to the in satisfaction of liabilities to creditors except Company obligations to current members; debt
obligations to current members; and then to members based on member financial interest.
Note
9 – Subsequent Events
Membership
Interest Redemption
In
March 2022, a member entered into an accounts payable and membership interest redemption agreement to settle accounts payable owed to
member in the amount of $1,200,000.
Sale
of Business
In
March 2022, Smart for Life, Inc. entered into a securities purchase agreement to acquire all of the issued and outstanding membership
interests of the Company for an aggregate purchase price of $9,750,000, consisting of (i) $4,875,000 in cash, (ii) convertible promissory
notes in the aggregate principal amount of $2,437,500 and (iii) non-convertible promissory notes in the aggregate principal amount of
$2,437,500, subject to certain adjustments.
On
July 29, 2022, the Company entered into a first amendment to securities purchase agreement to amend certain terms of the purchase agreement
noted above. On the same date, closing of the sale of business was completed. Pursuant to the terms of the securities purchase agreement,
as amended, the aggregate purchase price is $8,600,000 (subject to adjustments) consisting 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.
NEXUS
OFFERS, INC.
FINANCIAL
STATEMENTS
DECEMBER
31, 2020 AND 2019
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders of
Nexus
Offers, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of Nexus Offers, Inc. (the “Company”) as of December 31, 2020, and 2019, and
the related to the statements of operations and changes in stockholders’ (deficit) equity, and cash flows for each of the years
ended in the two-year period ended December 31, 2020, and 2019, and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2020, and 2019, and the results of its operations and its cash flows for each of the years in the two-year
period ended December 31, 2020, and 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits,
we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/
Daszkal Bolton LLP
We
have served as the Company’s auditor since 2021
Sunrise,
Florida
December
15, 2021
NEXUS OFFERS, INC.
BALANCE SHEETS
DECEMBER 31, 2020 AND 2019
| |
December 31, 2020 | | |
December 31, 2019 | |
ASSETS | |
| | |
| |
Current assets: | |
| | |
| |
Cash | |
$ | 36,188 | | |
$ | 54,917 | |
Accounts receivable, net | |
| 146,845 | | |
| 116,609 | |
Total current assets | |
| 183,033 | | |
| 171,526 | |
Total assets | |
$ | 183,033 | | |
$ | 171,526 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Commissions payable | |
$ | 129,923 | | |
$ | 64,149 | |
Accrued expenses | |
| 26,569 | | |
| 19,536 | |
Notes payable | |
| 59,900 | | |
| — | |
Total current liabilities | |
| 216,392 | | |
| 83,685 | |
Total liabilities | |
| 216,392 | | |
| 83,685 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ (deficit) equity: | |
| | | |
| | |
Capital stock | |
| 100 | | |
| 100 | |
(Accumulated deficit) retained earnings | |
| (33,459 | ) | |
| 87,741 | |
Total stockholders’ (deficit) equity | |
| (33,359 | ) | |
| 87,841 | |
Total liabilities and stockholders’ (deficit) equity | |
$ | 183,033 | | |
$ | 171,526 | |
The accompanying notes are an integral part
of these financial statements
NEXUS OFFERS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
| |
December 31, 2020 | | |
December 31, 2019 | |
Net sales | |
$ | 5,674,946 | | |
$ | 3,634,159 | |
Cost of services | |
| 4,353,573 | | |
| 3,109,566 | |
Gross profit | |
| 1,321,373 | | |
| 524,593 | |
| |
| | | |
| | |
Operating expenses: | |
| | | |
| | |
General and administrative | |
| 1,436,710 | | |
| 437,741 | |
Total operating expenses | |
| 1,436,710 | | |
| 437,741 | |
| |
| | | |
| | |
Operating (loss) income | |
| (115,337 | ) | |
| 86,852 | |
| |
| | | |
| | |
(Loss) income before income taxes | |
| (115,337 | ) | |
| 86,852 | |
Income tax expense | |
| 5,863 | | |
| — | |
Net (loss) income | |
$ | (121,200 | ) | |
$ | 86,852 | |
| |
| | | |
| | |
Weighted average shares outstanding | |
| 100 | | |
| 100 | |
(Loss) earnings per share | |
$ | (1,212.00 | ) | |
$ | 868.52 | |
The accompanying notes are an integral part
of these financial statements
NEXUS OFFERS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
| |
Common Stock | | |
Additional Paid-In | | |
Accumulated (Deficit) | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Equity | | |
Total | |
Balance, December 31, 2018 | |
| 100 | | |
$ | 100 | | |
$ | — | | |
$ | 889 | | |
$ | 989 | |
Net income | |
| — | | |
| — | | |
| — | | |
| 86,852 | | |
| 86,852 | |
Balance, December 31, 2019 | |
| 100 | | |
$ | 100 | | |
$ | — | | |
$ | 87,741 | | |
$ | 87,841 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| (121,200 | ) | |
| (121,200 | ) |
Balance, December 31, 2020 | |
| 100 | | |
$ | 100 | | |
$ | — | | |
$ | (33,459 | ) | |
$ | (33,359 | ) |
The accompanying notes are an integral part
of these financial statements
NEXUS OFFERS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
| |
December 31,
2020 | | |
December 31,
2019 | |
Cash flows from operating activities: | |
| | |
| |
Net (loss) income | |
$ | (121,200 | ) | |
$ | 86,852 | |
Adjustments to reconcile net (loss) income to net cash used in operating activities: | |
| | | |
| | |
Change in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (30,236 | ) | |
| (116,609 | ) |
Commissions payable | |
| 65,774 | | |
| 64,149 | |
Accrued expenses | |
| 7,033 | | |
| 1,808 | |
Net cash (used in) provided by operating activities | |
| (78,629 | ) | |
| 36,200 | |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Net cash used in investing activities | |
| — | | |
| — | |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from economic injury disaster loan | |
| 59,900 | | |
| — | |
Net cash provided by financing activities | |
| 59,900 | | |
| — | |
| |
| | | |
| | |
Net (decrease) increase in cash | |
| (18,729 | ) | |
| 36,200 | |
Cash, beginning of period | |
| 54,917 | | |
| 18,717 | |
Cash, end of period | |
$ | 36,188 | | |
$ | 54,917 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Interest paid | |
$ | — | | |
$ | 1,787 | |
The accompanying notes are an integral part
of these financial statements
NEXUS OFFERS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Note 1 — Description of Business
Nexus Offers, Inc. (the “Company”)
is a Florida corporation which was formed on October 10, 2016. The Company 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 Company’s
network. The cost per action/cost per acquisition model is where digital marketers are paid for an action 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.
The Company has relationships with both product
vendors and digital marketers. A product vendor is a customer that has products, whether digital
or physical, for sale and is looking for increased sales through digital marketing avenues from digital marketers. Digital marketers are
contractors that engage in digital marketing. Product vendors come to the Company to acquire sales and digital marketers come
to the Company to make sales. When a digital marketer makes a sale, they are then credited with commission. The product vendor pays Nexus
and Nexus pays the digital marketer.
Note 2 — Summary of Significant
Accounting Policies
Use of Estimates
The preparation of the financial statements in
conformity with generally accepted accounting principles in the United States of America (“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 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, 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-months or less to be cash equivalents. There were no cash equivalents at December 31, 2020
and 2019.
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. There was no allowance at December 31, 2020 and 2019, respectively.
NEXUS OFFERS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Note 2 — Summary of Significant Accounting
Policies (cont.)
Revenue Recognition
Impact of the initial adoption of Accounting
Standards Codification (“ASC”) 606
Effective January 1, 2019, the Company now evaluates
revenue recognition based on the criteria set forth in ASC 606, Revenue from Contracts with Customers. The Company adopted
the new revenue recognition standard using the modified retrospective method to undelivered performance obligations on existing contracts
which resulted in no impact to retained earnings.
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”). |
The Company generates revenues when sales of listed
products are sold by product vendors through its network as a result of the marketing efforts of digital marketers. The products on the
network come from several different customers, which pay the Company 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 the Company for that sale is paid out to the digital marketer as a commission, which is recorded
in cost of sales. To illustrate the revenue process, a digital marketer logs onto the platform and
selects an offer to promote for the day. The platform generates a unique link which the digital marketer distributes either via email
or a banner ad. As the link is distributed to the consumer via the marketing efforts of the digital marketer, the consumer visits that
link to make a purchase from the customer’s website, and when such purchase is complete, revenue is recognized by the Company and
the sale is credited to the digital marketer’s Nexus account. The benefit to the digital marketer operating on the Company’s
network is that the digital marketer receives a commission without the possibility of a claw back or refund. The customer benefits through
increased sales of its products as a result of the marketing efforts of the digital marketers. The Company’s platform acts as the
transaction ledger, keeping track of clicks, sales and commissions.
The Company’s general payment terms are
short-term in duration. Insertion orders are utilized between the Company and the customer for each campaign related to a particular product
being marketed. The insertion order remains in effect until the customer or the Company terminates the order, and either party may terminate
the order at any time upon 14 days’ written notice. The customer is billed weekly for the sales digital marketers have generated
for the week. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied
performance obligations at December 31, 2020 or 2019.
Advertising
Advertising costs are expensed as incurred. Advertising
costs for the years ended December 31, 2021 and 2020 were $60,744 and $21,422, respectively.
NEXUS OFFERS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Note 2 — Summary of Significant Accounting
Policies (cont.)
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 December 31, 2020 and 2019, 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. Due to the continued losses full valuation at the end of December 31, 2020 and 2019.
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
carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in
effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce
deferred tax assets to the amount that is believed more likely than not to be realized.
Recent Accounting Standards Issued Not
Yet Adopted
In December 2019, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“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 is currently evaluating
the impact that adoption of this new standard will have on its financial statements.
Note 3 — Debt
Note Payable – Economic Injury
Disaster Loan
In June 2020, the Company was granted a disaster
loan from the U.S. Small Business Administration (“SBA”), pursuant to the Economic Injury Disaster Loan (“EIDL”)
program under Division A, Title I of the Coronavirus Aid, Relief and Economic Security Act, in the amount of $59,900. The EIDL, which
was in the form of a note dated June 19, 2020, bears interest of 3.75% per annum, payable monthly for $2,437 commencing in June of 2021.
The EIDL may be prepaid at any time prior to maturity
with no prepayment penalties. Funds from the EIDL may only be used as working capital to alleviate economic injury caused by disaster
occurring in the month of January 2020, and continuing thereafter, and to pay Uniform Commercial Code lien filing fees. The Company intends
to use the funds from the EIDL for qualifying expenses. These amounts were fully repaid in September 2021 and therefore listed as short-term.
NEXUS OFFERS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Note 4 — 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 a single financial institution. 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 December 31, 2020 and 2019, the Company had cash balances of $0 and $0 in excess of the Federal Deposit Insurance
Corporation coverage of $250,000 per institution.
Major Customers and Vendors
The Company had four (4) and two (2) significant
customers representing a total of 54% and 21% of revenues for the years ended December 31, 2020 and 2019, respectively.
The Company contracts with digital marketers which
market customer products and are paid a commission based on sales of those products. This activity is captured and payable on a weekly
basis. At December 31, 2020 and 2019, one digital marketer accounted for approximately 12% and none of total purchases, respectively.
This digital marketer represented 25% and none of outstanding commissions payable at December 31, 2020 and 2019, respectively.
Note 5 — 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 December 31, 2020 and 2019, 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 December 31, 2020, the Company had net operating
loss carryforwards for federal income tax purposes of $39,209, which will be available to offset future taxable income.
Note 6 — Commitments and Contingencies
COVID-19 Pandemic
On March 11, 2020, the World Health Organization
(“WHO”) 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 financial statements. As such, it is uncertain as to the full magnitude
that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively
monitoring the impact of the global situation on its 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 financial condition, liquidity or operations for 2020.
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 7 — Subsequent Events
On September 23, 2021, the Company paid off its
loan from SBA in the full amount of $59,900.
On November 8, 2021, the Company was acquired
by Smart for Life, Inc. Smart for Life, Inc. is formally known as Bonne Santé Group, Inc.
DOCTORS SCIENTIFIC ORGANICA, LLC
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
Report of Independent Registered Public Accounting
Firm
To the Management and Board of Directors Doctors
Scientific Organica, LLC
Doral, Florida
Opinion on the Consolidated Financial
Statements
We have audited the accompanying consolidated
balance sheets of Doctors Scientific Organica, LLC (the “Company”) at December 31, 2020, and 2019, and the related consolidated
statements of income and changes in member’s equity (deficit), and cash flows for each of the years ended December 31, 2020 and
2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and
the results of its operations and its cash flows for each of the years then ended December 31, 2020 and 2019, in conformity with accounting
principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/ Daszkal Bolton LLP
We have served as the Company’s auditor
since 2021
Sunrise, Florida
August 5, 2021
DOCTORS SCIENTIFIC ORGANICA, LLC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2020 AND 2019
| |
December 31, 2020 | | |
December 31, 2019 | |
ASSETS | |
| | |
| |
Current assets: | |
| | |
| |
Cash | |
$ | — | | |
$ | 82,513 | |
Accounts receivable, net | |
| 510,065 | | |
| 464,817 | |
Inventory | |
| 1,618,002 | | |
| 971,060 | |
Prepaid expenses and other current assets | |
| 26,624 | | |
| 49,598 | |
Total current assets | |
| 2,154,691 | | |
| 1,567,988 | |
| |
| | | |
| | |
Property and equipment, net | |
| 312,453 | | |
| 380,136 | |
Other assets: | |
| | | |
| | |
Operating lease right of use asset | |
| 672,741 | | |
| 874,686 | |
Total other assets | |
| 985,194 | | |
| 1,254,822 | |
Total assets | |
$ | 3,139,885 | | |
$ | 2,822,810 | |
| |
| | | |
| | |
LIABILITIES AND MEMBER’S EQUITY (DEFICIT) | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable and cash overdraft | |
$ | 588,900 | | |
$ | 687,932 | |
Accrued expenses | |
| 86,722 | | |
| 306,585 | |
Due to related party | |
| 118,375 | | |
| 19,758 | |
Operating lease obligation, current portion | |
| 227,557 | | |
| 201,945 | |
Line of credit | |
| 739,657 | | |
| — | |
Paycheck protection program loan | |
| 352,750 | | |
| — | |
Notes payable | |
| 46,370 | | |
| 972,453 | |
Total current liabilities | |
| 2,160,331 | | |
| 2,188,673 | |
| |
| | | |
| | |
Long-term liabilities: | |
| | | |
| | |
Operating lease obligation, net of current portion | |
| 445,184 | | |
| 672,741 | |
Total long-term liabilities | |
| 445,184 | | |
| 672,741 | |
Total liabilities | |
| 2,605,515 | | |
| 2,861,414 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
Member’s equity (deficit) | |
| 534,370 | | |
| (38,604 | ) |
Total liabilities and member’s equity | |
$ | 3,139,885 | | |
$ | 2,822,810 | |
The accompanying notes are an integral part
of these consolidated financial statements
DOCTORS SCIENTIFIC ORGANICA, LLC
CONSOLIDATED STATEMENTS OF INCOME AND MEMBER’S
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
| |
December 31, 2020 | | |
December 31, 2019 | |
Net sales | |
$ | 10,782,192 | | |
$ | 10,048,642 | |
Cost of goods sold | |
| 4,436,389 | | |
| 4,777,392 | |
Gross profit | |
| 6,345,803 | | |
| 5,271,250 | |
| |
| | | |
| | |
Operating expenses: | |
| | | |
| | |
General and administrative | |
| 4,608,331 | | |
| 3,875,983 | |
Depreciation | |
| 82,786 | | |
| 97,160 | |
Total operating expenses | |
| 4,691,117 | | |
| 3,973,143 | |
| |
| | | |
| | |
Operating income | |
| 1,654,686 | | |
| 1,298,107 | |
| |
| | | |
| | |
Other income (expense): | |
| | | |
| | |
Other income | |
| — | | |
| 410,500 | |
Interest expense | |
| (85,307 | ) | |
| (95,076 | ) |
Total other (expense) income | |
| (85,307 | ) | |
| 315,424 | |
| |
| | | |
| | |
Net income | |
| 1,569,379 | | |
| 1,613,531 | |
| |
| | | |
| | |
Member’s (deficit), beginning of year | |
| (38,604 | ) | |
| (803,103 | ) |
Contributions from member | |
| 2,995,090 | | |
| 4,574,513 | |
Distributions to member | |
| (3,991,495 | ) | |
| (5,423,545 | ) |
Member’s equity (deficit), end of year | |
$ | 534,370 | | |
$ | (38,604 | ) |
The accompanying notes are an integral part
of these consolidated financial statements
DOCTORS SCIENTIFIC ORGANICA, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
| |
December 31, 2020 | | |
December 31, 2019 | |
Cash flows from operating activities: | |
| | |
| |
Net income | |
$ | 1,569,379 | | |
$ | 1,613,531 | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
Provision for bad debt | |
| 92,860 | | |
| 16,714 | |
Depreciation | |
| 82,786 | | |
| 97,160 | |
(Increase) decrease in operating assets: | |
| | | |
| | |
Accounts receivable | |
| (138,108 | ) | |
| 27,460 | |
Inventory | |
| (646,942 | ) | |
| (154,183 | ) |
Prepaid expenses and other current assets | |
| 22,974 | | |
| (49,598 | ) |
(Decrease) increase in operating liabilities: | |
| | | |
| | |
Accounts payable and cash overdraft | |
| (99,032 | ) | |
| (394,503 | ) |
Accrued expenses | |
| (219,863 | ) | |
| 173,381 | |
Due to related party | |
| 98,617 | | |
| (99,042 | ) |
Net cash provided by operating activities | |
| 762,671 | | |
| 1,230,920 | |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchases of property and equipment | |
| (15,103 | ) | |
| (110,923 | ) |
Net cash used in investing activities | |
| (15,103 | ) | |
| (110,923 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Distributions to member | |
| (3,991,495 | ) | |
| (5,423,545 | ) |
Contributions from member | |
| 2,407,076 | | |
| 4,374,513 | |
Proceeds from line of credit | |
| 1,937,397 | | |
| — | |
Repayments on line of credit | |
| (1,197,740 | ) | |
| — | |
Principal repayments on notes payable | |
| (379,069 | ) | |
| (659,452 | ) |
Proceeds from note payable | |
| 41,000 | | |
| 671,000 | |
Paycheck protection program loan proceeds | |
| 352,750 | | |
| — | |
Net cash used in financing activities | |
| (830,081 | ) | |
| (1,037,484 | ) |
| |
| | | |
| | |
Net (decrease) increase in cash | |
| (82,513 | ) | |
| 82,513 | |
Cash, beginning of year | |
| 82,513 | | |
| — | |
Cash, end of year | |
$ | — | | |
$ | 82,513 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Interest paid | |
$ | 85,307 | | |
$ | 95,076 | |
| |
| | | |
| | |
Supplemental disclosure of non-cash flow information: | |
| | | |
| | |
Non cash deemed contributions from member via assumption of liabilities | |
$ | 588,014 | | |
$ | 200,000 | |
The accompanying notes are an integral part
of these consolidated financial statements
DOCTORS SCIENTIFIC ORGANICA, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Note 1 — Description of Business
Doctors Scientific Organica, LLC and its consolidated
companies (collectively the “Company”) operates in Riviera Beach, Florida, and is primarily engaged in the development, marketing,
manufacturing, and sale of a broad spectrum of weight management and related products.
Doctors
Scientific Organica, LLC (“DSO”) was originally incorporated in the State of Nevada on February 16, 2006. On September
28, 2015, it converted to a Florida company. DSO owns 100% of Oyster Management
Services, Ltd. (“Oyster”), Lawee Enterprises, L.L.C. (“Lawee”) and
U.S. Medical Care Holdings, L.L.C. (“U.S. Medical”). Oyster was organized as a limited partnership in the State of Florida
on April 1, 2003. Lawee Enterprises, L.L.C. was organized as a limited liability company in the State of Florida on January 3,
2005. U.S. Medical was organized as a limited liability company in the State
of Florida on April 1, 2003.
Each wholly owned subsidiary services customers
in different sales markets. Based in Riviera Beach, Florida, DSO operates a 35,000 square-foot FDA-certified manufacturing facility.
Note 2 — Summary of Significant Accounting
Policies
Principles of Consolidation
The accompanying consolidated financial statements
reflect the consolidated operations of DSO and its wholly owned subsidiaries Oyster, Lawee and U.S. Medical. Intercompany balances and
transactions have been eliminated.
Use of Estimates
The accompanying consolidated financial statements
have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The preparation of the consolidated
financial statements 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, useful
lives and recoverability of tangible assets, 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 and Cash Equivalents
The Company considers all highly liquid investments
purchased with an original maturity of three (3) months or less to be cash equivalents. The Company had no cash equivalents at December
31, 2020 and 2019.
Accounts Receivable and Allowance for
Doubtful Accounts
Accounts receivable are uncollateralized customer
obligations due under normal trade terms. The Company does not accrue finance or interest charges. The Company uses an allowance method
to account for uncollectible accounts receivable. The Company’s allowance for doubtful accounts represents the Company’s best
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. Allowance for doubtful accounts were $90,731 and $35,016 at December 31, 2020 and 2019, respectively.
DOCTORS SCIENTIFIC ORGANICA, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Note 2 — Summary of Significant Accounting
Policies (cont.)
Inventory
Inventory consists of raw materials and finished
goods and is valued at the lower of 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 nutraceuticals
in the form of 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.
At December 31, 2020 and 2019, there was no allowance for inventory obsolescence.
Property and Equipment
Property and equipment are recorded at cost and
depreciated over the estimated useful lives of the related assets. 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. Depreciation is computed on the straight-line method over the estimated useful lives of the respective assets,
which range from five (5) to seven (7) 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 December 31, 2020 and 2019.
Lease Right-of-Use Asset
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.
DOCTORS SCIENTIFIC ORGANICA, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Note 2 — Summary of Significant Accounting
Policies (cont.)
Revenue Recognition
The Company evaluates revenue recognition based
on the criteria set forth in ASC 606, Revenue from Contracts with Customers.
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”). |
The Company primarily generates revenues by manufacturing
and sales of weight management products under its own brands and 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 December 31, 2020 or 2019.
Distribution expenses to transport the Company’s
products, where applicable, and warehousing expense after manufacture are accounted for within operating expenses.
Freight
The Company charges its customers a flat rate
for shipping and handling. Freight costs are included in cost of goods sold in the accompanying consolidated statements of income. For
the years ended December 31, 2020 and 2019, freight costs amounted to $484,503 and $599,174, respectively.
Advertising
Advertising costs are expensed as incurred. During
the years ended December 31, 2020 and 2019 the Company incurred advertising costs of $1,018,570 and $374,511, respectively.
Paycheck Protection Program
The Company records Paycheck Protection Program
(“PPP”) loan proceeds in accordance with the Financial Accounting Standards Board (“FASB”) 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.
DOCTORS SCIENTIFIC ORGANICA, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Note 2 — Summary of Significant Accounting
Policies (cont.)
Income Taxes
DSO, Lawee and U.S. Medical are limited liability
companies that have elected to be taxed as an S Corporation. Oyster is a limited partnership. As a result, income tax liabilities are
passed through to the individual member. Accordingly, no provision for income taxes is reflected in the consolidated financial statements.
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 December 31, 2020, 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 examinations by the U.S. federal, state and local non-U.S.
tax authorities generally remain open for three years from the date of filing.
Accounting Pronouncement Adopted
The Company has adopted the FASB issued ASU No.
2016-02, Leases (Topic 842), which establishes a right-of-use (“ROU”) model that requires lessees to record an ROU
asset and a lease liability on the consolidated balance sheets for all leases with terms longer than 12 months. The Company adopted ASU
2016-02 during 2019, which resulted in the recognition of the right-of-use assets and related obligations on its consolidated financial
statements.
Note 3 — Fair Value Disclosures
The Company’s financial instruments consist
mainly of cash, accounts receivable, accounts payable, accrued expenses, and term loans. The Company believes that the carrying amounts
of these financial instruments approximate its fair values due to their short-term nature or market interest rates. The term loans approximate
fair value due to the current rate of interest charged.
Note 4 — Inventory
Inventory consisted of the following at December
31:
| |
2020 | | |
2019 | |
Raw materials | |
$ | 1,491,214 | | |
$ | 896,381 | |
Finished goods | |
| 126,788 | | |
| 74,679 | |
| |
$ | 1,618,002 | | |
$ | 971,060 | |
Note 5 — Property and Equipment
Property and equipment consisted of the following
at December 31:
| |
Estimated
Useful Lives (in Years) | | |
2020 | | |
2019 | |
Furniture and fixtures | |
| 7 | | |
$ | 12,865 | | |
$ | 12,865 | |
Equipment – Manufacturing | |
| 7 | | |
| 1,351,402 | | |
| 1,336,300 | |
Leasehold improvements | |
| 5 – 7 | | |
| 68,400 | | |
| 68,400 | |
| |
| | | |
| 1,432,667 | | |
| 1,417,565 | |
Less: accumulated depreciation | |
| | | |
| (1,120,214 | ) | |
| (1,037,429 | ) |
Property and equipment, net | |
| | | |
$ | 312,453 | | |
$ | 380,136 | |
Depreciation expense for the years ended December
31, 2020 and 2019 totaled $82,786 and $97,160, respectively.
DOCTORS SCIENTIFIC ORGANICA, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Note 6 — Debt
PPP Loan
During April 2020, the Company was granted a loan
(the “PPP Loan”) pursuant to the PPP under Division A, Title I of the Coronavirus Aid, Relief, and Economic Secures Act (the
“CARES Act”) in the amount of $352,750. The PPP Loan, which was in the form of a note dated April 17, 2020, matures on April
17, 2022 and bears interest at a rate of 1.00% per annum. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they
are used for qualifying expenses as described in the CARES Act and meet the conditions established by the U.S. Small Business Administration
(the “SBA”). See Subsequent Events note.
Line of Credit
On June 26, 2020, the Company entered into a revolving
line of credit with a bank, which permitted borrowings up to $750,000 and bears interest at 3.5%. As of December 31, 2020, the balance
of the line of credit was $739,657. The line of credit matured on June 26, 2021.
Notes Payable
On April 16, 2010, the Company entered into a
twenty-year loan (the “Loan”) with a financial institution for an amount of $570,682. The loan required monthly payments including
interest at 7.49% per annum. The note was assumed by a related party during 2020.
During 2019, the Company entered into a one-year
financing agreement (the “2019 One-Year Financing Agreement”) with a vendor for an amount of $41,000. The agreement requires
monthly payments including interest at 9.72% per annum. The balance was fully paid during 2020.
On December 6, 2019, the Company entered into
a thirteen-month financing agreement (the “2019 Thirteen-Month Financing Agreement”) with a vendor for an amount of $350,000.
The agreement requires monthly payments including interest at 14.72% per annum.
On June 17, 2013, the Company entered into an
equipment loan (the “2013 Equipment Loan”) with a financial institution for an amount of $210,000 bearing an interest
rate of 1.96%. The equipment loan was fully paid during 2020.
On January 26, 2012, the Company entered into
an equipment loan (the “2012 Equipment Loan”) with a financial institution for an amount of $259,150 bearing an interest rate
of 5.25%. The equipment loan was fully paid during 2020.
On March 6, 2020, the Company entered into a one-year
financing agreement (the “2020 Financing Agreement”) with a vendor for an amount of $41,000. The agreement requires monthly
payments including interest at 9.72% per annum.
Notes payable consists of the following at December
31:
| |
2020 | | |
2019 | |
Loan | |
$ | — | | |
$ | 427,388 | |
2019 One-Year Financing Agreement | |
| — | | |
| 34,439 | |
2019 Thirteen-Month Financing Agreement | |
| 31,882 | | |
| 350,000 | |
2013 Equipment Loan | |
| — | | |
| 79,958 | |
2012 Equipment Loan | |
| — | | |
| 80,668 | |
2020 Financing Agreement | |
| 14,488 | | |
| — | |
Total | |
$ | 46,370 | | |
$ | 972,453 | |
Collateral and Guarantor
The notes payable and line of credit are collateralized
by certain assets of the Company and guaranteed by the sole member of the Company (the “Member”).
DOCTORS SCIENTIFIC ORGANICA, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Note 7 — Member’s Equity
DSO, U.S. Medical, and Oyster are limited liability
companies, governed by individual operating agreements. Each company maintains separate capital accounts for the Member, who is credited
for capital contributions and profits, and is debited for distributions and losses. The liability of the Member is limited to the Member’s
total capital contributions.
Note 8 — Operating Lease
On September 1, 2018, the Company entered into
an operating lease with an initial 5 year term with a related party for its warehouse space in Riviera Beach, Florida. The lease term
is used for the amortization/depreciation life of lease assets. The lease agreement does not contain any material residual value guarantees
or material restrictive covenants.
On January 1, 2019, the Company adopted ASC 842
using the modified retrospective method applied to the lease that was in place at January 1, 2019.
Discount Rate Applied to Property Operating
Lease
To determine the present value of minimum future
lease payments for its operating lease at January 1, 2019, 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” or “IBR”).
The lease asset and liability were calculated
utilizing a discount rate of 12%, according to the Company’s elected policy.
Right of Use Asset and Liability
The right of use asset and liability is included
in the accompanying consolidated balance sheets as follows at December 31:
| |
2020 | | |
2019 | |
Non-current assets: | |
| | |
| |
Right of use asset | |
$ | 672,741 | | |
$ | 874,686 | |
| |
| | | |
| | |
Liability: | |
| | | |
| | |
Right of use liability, current portion | |
$ | 227,557 | | |
$ | 201,945 | |
Right of use liability, net of current portion | |
| 445,184 | | |
| 672,741 | |
Total lease liability | |
$ | 672,741 | | |
$ | 874,686 | |
Minimum lease payments under the operating lease
are recognized on a straight-line basis over the term of the lease.
Years ending December 31: | |
| |
2021 | |
$ | 296,040 | |
2022 | |
| 296,040 | |
2023 | |
| 197,360 | |
Total payments | |
| 789,440 | |
Less: amount representing interest | |
| (116,699 | ) |
Lease obligation, net | |
| 672,741 | |
Less: current portion | |
| (227,557 | ) |
Lease obligation – long-term | |
$ | 445,184 | |
Rent expense for the years ended December 31,
2020 and 2019 was $303,757 and $299,967, respectively.
DOCTORS SCIENTIFIC ORGANICA, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Note 9 — Concentrations of Credit
Risks
Credit Risks
Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist principally of cash, accounts receivable and unbilled receivables. 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 maintains its cash in bank deposit
accounts which, at times, may exceed federally insured limits guaranteed by the Federal Deposit Insurance Corporation (“FDIC”)
up to $250,000 per institution per entity. The Company did not have cash balances in excess of the FDIC coverage at December 31, 2020
and 2019. The Company has not experienced any losses in such accounts.
Sales and Accounts Receivable
The following is a summary of customer concentration
in sales and accounts receivable at:
December 31, 2020 | |
December 31, 2019 |
Customer | |
% of Sales | | |
% of Accounts Receivable | | |
Customer | |
% of Sales | | |
% of Accounts Receivable | |
A | |
| 4 | % | |
| 11 | % | |
A | |
| 37 | % | |
| 62 | % |
B | |
| 27 | % | |
| 12 | % | |
B | |
| 15 | % | |
| 1 | % |
C | |
| 5 | % | |
| 15 | % | |
C | |
| 13 | % | |
| 0 | % |
D | |
| 9 | % | |
| 30 | % | |
| |
| | | |
| | |
E | |
| 1 | % | |
| 23 | % | |
| |
| | | |
| | |
F | |
| 25 | % | |
| <1 | % | |
| |
| | | |
| | |
Purchases
The following is a summary of vendor concentrations
in purchases and accounts payable at:
December 31,
2020 | |
December 31,
2019 |
Customer | |
%
of Purchases | | |
% of Accounts Payable | | |
Customer | |
%
of Purchases | | |
% of Accounts Payable | |
A | |
| 3 | % | |
| 17 | % | |
A | |
| 5 | % | |
| 14 | % |
B | |
| 14 | % | |
| 0 | % | |
B | |
| 1 | % | |
| 14 | % |
C | |
| 12 | % | |
| 0 | % | |
C | |
| 17 | % | |
| 0 | % |
DOCTORS SCIENTIFIC ORGANICA, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2020 AND 2019
Note 10 — Commitments and Contingencies
COVID-19 Pandemic
On March 11, 2020, the World Health Organization
(“WHO”) 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 2021.
Litigation
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.
Insurance Settlement
During 2019, the Company received $400,000 as
a settlement from an insurance claim for hurricane damages, which is included in other income in the accompanying consolidated statements
of income.
Note 11 — Related Party Transactions
The Company rents its operating facility from
a non-consolidating company owned by the Member. Rent expense paid to the related party for the years ended December 31, 2020 and 2019
was $302,040 and 298,449, respectively.
The Company has provided advances to, and received
advances from, the Member and entities related to the Member of the Company. These advances are non-interest bearing with no fixed maturity
and are expected to be repaid in the near term. At December 31, 2020 and 2019, the net balance due to related parties was $118,375 and
$19,758, respectively.
The Company sells its products to companies that
are considered related parties due to common ownership by the Member. During the years ended December 31, 2020 and 2019, sales to related
parties were $561,041 and $76,305, respectively. At December 31, 2020 and 2019, accounts receivable due from related parties was $0 and
$111,218, respectively.
Note 12 — Subsequent Events
Paycheck Protection Program Loan Forgiveness
The Company used the funds of its PPP Loan for
qualifying costs, and as such, received full loan forgiveness in the amount of $352,750 from the SBA in February 2021.
Paycheck Protection Program Loan
On February 10, 2021, the Company was granted
an additional loan (the “Second PPP Loan”) from City National Bank of Florida, N.A pursuant to the PPP under Division A, Title
I of the CARES Act in the amount of $356,438.The Second PPP Loan, which was in the form of a Note dated February 10, 2021, was set to
mature on February 10, 2023. The Company used the funds of its PPP Loan for qualifying costs, and as such, received full loan forgiveness
in the amount of $356,438 from the SBA in June 2021.
Acquisition
During July 2021, the Company was sold to a third
party, resulting in a change in ownership.
58,853,719
Shares
Common Stock
PROSPECTUS
, 2022
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses,
other than underwriting discounts and commissions, payable by us in connection with the sale of common shares being registered. All amounts,
other than the SEC registration fee, are estimates. We will pay all these expenses.
| |
Amount | |
SEC registration fee | |
$ | 2,026.45 | |
Accounting fees and expenses | |
| 5,000.00 | |
Legal fees and expenses | |
| 5,000.00 | |
Transfer agent fees and expenses | |
| 5,000.00 | |
Printing and related fees and expenses | |
| 5,000.00 | |
Miscellaneous fees and expenses | |
| 2,000.55 | |
Total | |
$ | 24,027.00 | |
Item 14. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of
the State of Delaware provides that a corporation may indemnify directors and officers as well as other employees and individuals against
expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement in connection with specified actions, suits
and proceedings whether civil, criminal, administrative, or investigative, other than a derivative action by or in the right of the corporation,
if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation
and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard
is applicable in the case of derivative actions, except that indemnification extends only to expenses, including attorneys’ fees,
incurred in connection with the defense or settlement of such action and the statute requires court approval before there can be any indemnification
where the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation’s certificate of incorporation, bylaws, disinterested director vote, stockholder
vote, agreement or otherwise.
Our certificate of incorporation and bylaws provide
for indemnification of directors and officers to the fullest extent permitted by law, including payment of expenses in advance of resolution
of any such matter.
We have entered into separate indemnification agreements
with our directors and officers. Each indemnification agreement provides, among other things, for indemnification to the fullest extent
permitted by law and our amended and restated certificate of incorporation and bylaws against any and all expenses, judgments, fines,
penalties and amounts paid in settlement of any claim. The indemnification agreements provide for the advancement or payment of all expenses
to the indemnitee and for reimbursement to us if it is found that such indemnitee is not entitled to such indemnification under applicable
law and our amended and restated certificate of incorporation and bylaws.
We have obtained standard policies of insurance under
which coverage is provided (a) to our directors and officers against loss rising from claims made by reason of breach of duty or
other wrongful act, and (b) to us with respect to payments which we may make to such officers and directors pursuant to the above
indemnification provision or otherwise as a matter of law.
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons controlling us under the foregoing provisions, we have been
informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore
unenforceable.
Item 15. Recent Sales of Unregistered Securities
During the past three years, we issued the following
securities, which were not registered under the Securities Act.
During the period from June 15, 2020 through April
13, 2021, we issued a total of 13,370,000 shares of our common stock to our employees and consultants in consideration for services rendered
to our company. The issuance of these securities was made in reliance upon an exemption from the registration requirements of Section
4(a)(2) of the Securities Act.
During the period from September 14, 2020 through
April 13, 2021, we granted options to purchase a total of 1,450,000 shares of our common stock to officers and directors of our company.
The issuance of these securities was made in reliance upon an exemption from the registration requirements of Section 4(a)(2) of the Securities
Act.
On December 18, 2020, we entered into a future equity
agreement with Peah Capital, LLC, pursuant to which we agreed to issue to Peah Capital, LLC concurrent with the closing of our initial
public offering a number of shares of our common stock equal to 75% of all funds loaned to us by it divided by the initial public offering
price. On February 18, 2022, we issued 251,250 shares of common stock to Peah Capital, LLC. We also issued a warrant for the purchase
of 1,292,445 shares of common stock to Peah Capital, LLC. This warrant is exercisable for the period commencing on January 31, 2022 and
ending on December 18, 2027; provided that, the warrant will automatically expire and terminate in the event a registration statement
covering the resale of all shares issued pursuant the future equity agreement has been declared effective by the SEC. The exercise price
of this warrant is $0.0001, subject to standard adjustments for stock splits, stock combinations, stock dividends, reclassifications and
similar transactions. In addition, in the event that the number of our outstanding shares of common stock is increased prior to the 18-month
anniversary of the warrant, the number of shares issuable upon exercise of the warrant shall be automatically increased to represent that
number which is 9.9% of the then total outstanding capitalization. The issuance of these securities was made in reliance upon an exemption
from the registration requirements of Section 4(a)(2) of the Securities Act.
On February 25, 2021, we issued a convertible promissory
note in the principal amount of $500,000 to East West Capital LLC. This note automatically converted into 229,834 shares of common stock
concurrent with the closing of our initial public offering on February 18, 2022. The issuance of these securities was made in reliance
upon an exemption from the registration requirements of Section 4(a)(2) of the Securities Act.
On May 10, 2021, we issued a convertible promissory
note in the principal amount of $73,727.01 to Bevilacqua PLLC, our outside securities counsel. On April 8, 2022, this note was converted
into 73,267 shares of common stock. The issuance of these securities was made in reliance upon an exemption from the registration requirements
of Section 4(a)(2) of the Securities Act.
On July 1, 2021, we issued a convertible promissory
note in the principal amount of $3,000,000 to Sasson E. Moulavi in connection with the acquisition of DSO. This note automatically converted
into 623,200 shares of common stock concurrent with the closing of our initial public offering on February 18, 2022. The issuance of these
securities was made in reliance upon an exemption from the registration requirements of Section 4(a)(2) of the Securities Act.
On July 1, 2021, we completed a private placement
in which we sold an aggregate of 6,000 shares of series A convertible preferred stock and warrants for the purchase of an aggregate of
8,999,552 shares of common stock to certain investors for gross proceeds of $6,000,000. On August 18, 2021, we completed an additional
closing of this private placement in which we sold 2,000 shares of series A convertible preferred stock and warrants for the purchase
of 2,999,852 shares of common stock for gross proceeds of $2,000,000. Please see “Description of Securities” for a
description of the series A convertible preferred stock and warrants issued in this private placement. The issuance of these securities
was made in reliance upon an exemption from the registration requirements of Section 4(a)(2) of the Securities Act.
On July 1, 2021, we issued warrants for the purchase
of an aggregate of 1,078,173 shares of common stock to Dawson James Securities, Inc. and its designees as partial compensation for services
rendered in connection with the private placement of series A convertible preferred stock and loan from Diamond Creek Capital, LLC that
were completed on July 1, 2021. These warrants are exercisable for a period of five years at an exercise price of $0.6667 per share, subject
to standard adjustments for stock splits, stock combinations, stock dividends, reclassifications, mergers, consolidations, reorganizations
and similar transactions, and may be exercised on a cashless basis. The issuance of these securities was made in reliance upon an exemption
from the registration requirements of Section 4(a)(2) of the Securities Act.
On November 5, 2021, we completed a private placement
in which we sold 12% unsecured subordinated convertible debentures in the aggregate principal amount of $2,250,000 to certain investors
for gross proceeds of $2,250,000. Please see “Description of Securities” for a description of the debentures issued
in this private placement. The issuance of these securities was made in reliance upon an exemption from the registration requirements
of Section 4(a)(2) of the Securities Act.
On November 5, 2021, we issued warrants for the purchase
of 36,000 shares of common stock to Dawson James Securities, Inc. and its designees as partial compensation for services rendered in connection
with the foregoing private placement. Half of these shares, or 36,000 shares, were subsequently forfeited by Dawson James Securities,
Inc. These warrants are exercisable for a period of five years at an exercise price of $2.50 per share, subject to standard adjustments
for stock splits, stock combinations, stock dividends, reclassifications, mergers, consolidations, reorganizations and similar transactions,
and may be exercised on a cashless basis. The issuance of these securities was made in reliance upon an exemption from the registration
requirements of Section 4(a)(2) of the Securities Act.
On November 8, 2021, we issued a 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
automatically converted into 386,460 shares of common stock concurrent with the closing of our initial public offering on February 18,
2022. The issuance of these securities was made in reliance upon an exemption from the registration requirements of Section 4(a)(2) of
the Securities Act.
On December 6, 2021, we issued 42,500 shares of our
common stock to the shareholders of GSP Nutrition in connection with the acquisition of GSP Nutrition. In connection with this acquisition,
we also issued 14,723 shares of common stock to certain vendors of GSP who agreed to settle accounts payable owed to them into our common
stock. The issuance of these securities was made in reliance upon an exemption from the registration requirements of Section 4(a)(2) of
the Securities Act.
In December 2021 and January 2022, we entered into
note and warrant purchase agreements with certain investors, pursuant to which we sold to such investors (i) original issue discount secured
subordinated promissory notes in the aggregate principal amount of $705,882 and (ii) warrants for the purchase of 120,000 shares of our
common stock. Please see “Description of Securities” for a description of the warrants issued in this private placement.
The issuance of these securities was made in reliance upon an exemption from the registration requirements of Section 4(a)(2) of the Securities
Act.
From May 2017 to December 31, 2021, we entered into
future equity agreements with over fifty lenders, pursuant to which we agreed to issue to such lenders concurrent with the closing of
our initial public offering a number of shares of our common stock equal to the principal amount loaned to us divided by the initial public
offering price. On February 18, 2022, we issued 1,928,019 shares of common stock to such lenders. The issuance of these securities was
made in reliance upon an exemption from the registration requirements of Section 4(a)(2) of the Securities Act.
Upon closing of our initial public offering on February
18, 2022, we 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 issuance of these
securities was made in reliance upon an exemption from the registration requirements of Section 4(a)(2) of the Securities Act.
Upon closing of our initial public offering on February
18, 2022, we issued an aggregate of 2,179,269 shares of common stock to various lenders pursuant to future equity agreements which required
us to issue shares of common stock upon closing of the initial public offering. The issuance of these securities was made in reliance
upon an exemption from the registration requirements of Section 4(a)(2) of the Securities Act.
In February and March 2022, we issued an aggregate
of 10,499,469 shares of common stock upon the conversion of 7,000 shares of series A convertible preferred stock. The issuance of these
securities was made in reliance upon an exemption from the registration requirements of Section 4(a)(2) of the Securities Act.
On April 8, 2022, we issued 73,267 shares of common
stock to Bevilacqua PLLC upon conversion of its convertible promissory note in the principal amount of $73,727. The issuance of these
securities was made in reliance upon an exemption from the registration requirements of Section 4(a)(2) of the Securities Act.
On June 9, 2022, we issued 195,495 shares of common
stock to a director upon a cashless exercise of a stock option. The issuance of these securities was made in reliance upon an exemption
from the registration requirements of Section 4(a)(2) of the Securities Act.
On October 17, 2022, we issued 150,000 shares of common
stock to a service provider. The issuance of these securities was made in reliance upon an exemption from the registration requirements
of Section 4(a)(2) of the Securities Act.
In instances described above where we indicate that
we relied upon Section 4(a)(2) of the Securities Act in issuing securities, our reliance was based upon the following factors: (a) the
issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there were only a limited
number of offerees; (c) there were no subsequent or contemporaneous public offerings of the securities by us; (d) the securities were
not broken down into smaller denominations; and (e) the negotiations for the sale of the stock took place directly between the offeree
and us.
Item 16. Exhibits.
(a) Exhibits.
Exhibit No. |
|
Description of Exhibit |
3.1 |
|
Certificate of Incorporation of Smart for Life, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed on December 16, 2021) |
3.2 |
|
Certificate of Designation of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 filed on December 16, 2021) |
3.3 |
|
Bylaws of Smart for Life, Inc. (incorporated by reference to Exhibit 3.4 to the Registration Statement on Form S-1 filed on December 16, 2021) |
4.1 |
|
Pre-Funded Common Stock Purchase Warrant issued by Smart for Life, Inc. to Anson East Master Fund LP on December 8, 2022 (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on December 9, 2022) |
4.2 |
|
Pre-Funded Common Stock Purchase Warrant issued by Smart for Life, Inc. to Anson Investments Master Fund LP on December 8, 2022 (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on December 9, 2022) |
4.3 |
|
Pre-Funded Common Stock Purchase Warrant issued by Smart for Life, Inc. to District 2 Capital Fund LP on December 8, 2022 (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K filed on December 9, 2022) |
4.4 |
|
Pre-Funded Common Stock Purchase Warrant issued by Smart for Life, Inc. to Ionic Ventures, LLC on December 8, 2022 (incorporated by reference to Exhibit 4.4 to the Current Report on Form 8-K filed on December 9, 2022) |
4.5 |
|
Pre-Funded Common Stock Purchase Warrant issued by Smart for Life, Inc. to Sabby Volatility Warrant Master Fund Ltd. on December 8, 2022 (incorporated by reference to Exhibit 4.5 to the Current Report on Form 8-K filed on December 9, 2022) |
4.6 |
|
Debenture Pre-Funded Common Stock Purchase Warrant issued by Smart for Life, Inc. to Anson East Master Fund LP on December 8, 2022 (incorporated by reference to Exhibit 4.6 to the Current Report on Form 8-K filed on December 9, 2022) |
4.7 |
|
Debenture Pre-Funded Common Stock Purchase Warrant issued by Smart for Life, Inc. to Anson Investments Master Fund LP on December 8, 2022 (incorporated by reference to Exhibit 4.7 to the Current Report on Form 8-K filed on December 9, 2022) |
4.8 |
|
Debenture Pre-Funded Common Stock Purchase Warrant issued by Smart for Life, Inc. to District 2 Capital Fund LP on December 8, 2022 (incorporated by reference to Exhibit 4.8 to the Current Report on Form 8-K filed on December 9, 2022) |
4.9 |
|
Debenture Pre-Funded Common Stock Purchase Warrant issued by Smart for Life, Inc. to Ionic Ventures, LLC on December 8, 2022 (incorporated by reference to Exhibit 4.9 to the Current Report on Form 8-K filed on December 9, 2022) |
4.10 |
|
Debenture Pre-Funded Common Stock Purchase Warrant issued by Smart for Life, Inc. to Sabby Volatility Warrant Master Fund Ltd. on December 8, 2022 (incorporated by reference to Exhibit 4.10 to the Current Report on Form 8-K filed on December 9, 2022) |
4.11 |
|
Amended and Restated Common Stock Purchase Warrant issued by Smart for Life, Inc. to Anson East Master Fund LP on December 8, 2022 (incorporated by reference to Exhibit 4.11 to the Current Report on Form 8-K filed on December 9, 2022) |
4.12 |
|
Amended and Restated Common Stock Purchase Warrant issued by Smart for Life, Inc. to Anson East Master Fund LP on December 8, 2022 (incorporated by reference to Exhibit 4.12 to the Current Report on Form 8-K filed on December 9, 2022) |
4.13 |
|
Amended and Restated Common Stock Purchase Warrant issued by Smart for Life, Inc. to Anson Investments Master Fund LP on December 8, 2022 (incorporated by reference to Exhibit 4.13 to the Current Report on Form 8-K filed on December 9, 2022) |
4.14 |
|
Amended and Restated Common Stock Purchase Warrant issued by Smart for Life, Inc. to Anson Investments Master Fund LP on December 8, 2022 (incorporated by reference to Exhibit 4.14 to the Current Report on Form 8-K filed on December 9, 2022) |
4.15 |
|
Amended and Restated Common Stock Purchase Warrant issued by Smart for Life, Inc. to District 2 Capital Fund LP on December 8, 2022 (incorporated by reference to Exhibit 4.15 to the Current Report on Form 8-K filed on December 9, 2022) |
4.16 |
|
Amended and Restated Common Stock Purchase Warrant issued by Smart for Life, Inc. to District 2 Capital Fund LP on December 8, 2022 (incorporated by reference to Exhibit 4.16 to the Current Report on Form 8-K filed on December 9, 2022) |
4.17 |
|
Amended and Restated Common Stock Purchase Warrant issued by Smart for Life, Inc. to Ionic Ventures, LLC on December 8, 2022 (incorporated by reference to Exhibit 4.17 to the Current Report on Form 8-K filed on December 9, 2022) |
4.18 |
|
Amended and Restated Common Stock Purchase Warrant issued by Smart for Life, Inc. to Ionic Ventures, LLC on December 8, 2022 (incorporated by reference to Exhibit 4.18 to the Current Report on Form 8-K filed on December 9, 2022) |
4.19 |
|
Amended and Restated Common Stock Purchase Warrant issued by Smart for Life, Inc. to Sabby Volatility Warrant Master Fund Ltd. on December 8, 2022 (incorporated by reference to Exhibit 4.19 to the Current Report on Form 8-K filed on December 9, 2022) |
4.20 |
|
Amended and Restated Common Stock Purchase Warrant issued by Smart for Life, Inc. to Sabby Volatility Warrant Master Fund Ltd. on December 8, 2022 (incorporated by reference to Exhibit 4.20 to the Current Report on Form 8-K filed on December 9, 2022) |
4.21 |
|
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) |
4.22 |
|
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) |
4.23 |
|
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) |
4.24 |
|
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) |
4.25 |
|
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) |
4.26 |
|
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) |
4.27 |
|
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) |
4.28 |
|
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) |
4.29 |
|
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) |
4.30 |
|
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) |
4.31 |
|
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) |
4.32 |
|
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) |
4.33 |
|
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) |
4.34 |
|
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) |
4.35 |
|
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) |
4.36 |
|
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) |
5.1* |
|
Opinion
of Bevilacqua PLLC as to the legality of the shares |
10.1 |
|
Securities Purchase Agreement, dated December 8, 2022, among Smart for Life, Inc. and the purchasers signatory thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 9, 2022) |
10.2 |
|
Registration Rights Agreement, dated December 8, 2022, among Smart for Life, Inc. and the purchasers signatory thereto (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on December 9, 2022) |
10.3+ |
|
License Agreement, dated January 1, 2020, between ABG-SI, LLC and GSP Nutrition Inc. (incorporated by reference to Exhibit 10.37 to Amendment No. 1 to Registration Statement on Form S-1/A filed on January 14, 2022) |
10.4+ |
|
Amendment No. 1 to License Agreement, dated June 1, 2020, between ABG-SI, LLC and GSP Nutrition Inc. (incorporated by reference to Exhibit 10.50 to Amendment No. 1 to Registration Statement on Form S-1/A filed on January 14, 2022) |
10.5+ |
|
Amendment No. 2 to License Agreement, dated August 1, 2021, between ABG-SI, LLC and GSP Nutrition Inc. (incorporated by reference to Exhibit 10.51 to Amendment No. 1 to Registration Statement on Form S-1/A filed on January 14, 2022) |
10.6 |
|
Secured Subordinated Convertible Promissory Note issued by Smart for Life, Inc. to RMB Industries, Inc. on July 29, 2022 (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on August 4, 2022) |
10.7 |
|
Secured Subordinated Convertible Promissory Note issued by Smart for Life, Inc. to RTB Childrens Trust on July 29, 2022 (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on August 4, 2022) |
10.8 |
|
Secured Subordinated Convertible Promissory Note issued by Smart for Life, Inc. to D&D Hayes, LLC on July 29, 2022 (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed on August 4, 2022) |
10.9 |
|
Secured Subordinated Promissory Note issued by Smart for Life, Inc. to RMB Industries, Inc. on July 29, 2022 (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed on August 4, 2022) |
10.10 |
|
Secured Subordinated Promissory Note issued by Smart for Life, Inc. to RTB Childrens Trust on July 29, 2022 (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K filed on August 4, 2022) |
10.11 |
|
Secured Subordinated Promissory Note issued by Smart for Life, Inc. to D&D Hayes, LLC on July 29, 2022 (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K filed on August 4, 2022) |
10.12 |
|
Secured Subordinated Promissory Note issued by Smart for Life, Inc. to RMB Industries, Inc. on July 29, 2022 (incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K filed on August 4, 2022) |
10.13 |
|
Letter Agreement, dated November 28, 2022, between Smart for Life, Inc. and RMB Industries, Inc. (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on December 2, 2022) |
10.14 |
|
Secured Subordinated Promissory Note issued by Smart for Life, Inc. to D&D Hayes, LLC on July 29, 2022 (incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K filed on August 4, 2022) |
10.15 |
|
Letter Agreement, dated November 28, 2022, between Smart for Life, Inc. and D&D Hayes, LLC (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed on December 2, 2022) |
10.16 |
|
Secured Subordinated Promissory Note issued by Smart for Life, Inc. to Bactolac Pharmaceuticals, Inc. on July 29, 2022 (incorporated by reference to Exhibit 10.11 to the Current Report on Form 8-K filed on August 4, 2022) |
10.17 |
|
Secured Subordinated Promissory Note issued by Smart for Life, Inc. to Stuart Benson on July 29, 2022 (incorporated by reference to Exhibit 10.12 to the Current Report on Form 8-K filed on August 4, 2022) |
10.18 |
|
Letter Agreement, dated November 28, 2022, between Smart for Life, Inc. and Stuart Benson (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K filed on December 2, 2022) |
10.19 |
|
5% Secured Subordinated Promissory Note issued by Smart for Life, Inc. to Justin Francisco and Steven Rubert on November 8, 2021 (incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1 filed on December 16, 2021) |
10.20 |
|
Amended and Restated 6% Secured Subordinated Promissory Note issued by Smart for Life, Inc. to Sasson E. Moulavi on November 29, 2022 (incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K filed on December 2, 2022) |
10.21 |
|
Original Issue Discount Secured Subordinated Note issued by Smart for Life, Inc. to Joseph X. Xiras on July 29, 2022 (incorporated by reference to Exhibit 10.14 to the Current Report on Form 8-K filed on August 4, 2022) |
10.22 |
|
Form of Debenture relating to 2022 private placement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on October 5, 2022) |
10.23 |
|
Loan Agreement, dated July 1, 2021, among Smart for Life, Inc., Bonne Sante Natural Manufacturing, Inc., Doctors Scientific Organica, LLC and Diamond Creek Capital, LLC (incorporated by reference to Exhibit 10.21 to the Registration Statement on Form S-1 filed on December 16, 2021) |
10.24 |
|
Term Loan Promissory Note issued by Smart for Life, Inc., Bonne Sante Natural Manufacturing, Inc. and Doctors Scientific Organica, LLC to Diamond Creek Capital, LLC on July 1, 2021 (incorporated by reference to Exhibit 10.22 to the Registration Statement on Form S-1 filed on December 16, 2021) |
10.25 |
|
Security Agreement, dated July 1, 2021, among Smart for Life, Inc., Bonne Sante Natural Manufacturing, Inc., Doctors Scientific Organica, LLC and Diamond Creek Capital, LLC (incorporated by reference to Exhibit 10.23 to the Registration Statement on Form S-1 filed on December 16, 2021) |
10.26 |
|
Lease Agreement, dated November 28, 2022, between 990 S Rogers Circle, LLC and Smart for Life, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 2, 2022) |
10.27 |
|
Lease, dated February 3, 2012, between O & B Properties, Inc. and Bonne Sante Natural Manufacturing, Inc., as amended (incorporated by reference to Exhibit 10.33 to the Registration Statement on Form S-1 filed on December 16, 2021) |
10.28 |
|
Business Lease, dated November 20, 2015, between Aqua USA Property Management LLC and Bonne Sante Natural Manufacturing, Inc. (incorporated by reference to Exhibit 10.34 to the Registration Statement on Form S-1 filed on December 16, 2021) |
10.29 |
|
Lease, dated September 1, 2018, between Scientific Real Estate Holdings LLC and Doctors Scientific Organica, LLC (incorporated by reference to Exhibit 10.35 to the Registration Statement on Form S-1 filed on December 16, 2021) |
10.30 |
|
Memorandum of Agreement of Lease, dated September 30, 2021, between The Linger Corporation and Smart for Life Canada Inc. (incorporated by reference to Exhibit 10.36 to the Registration Statement on Form S-1 filed on December 16, 2021) |
10.31† |
|
Employment Agreement, dated July 1, 2020, between Smart for Life, Inc. and Alfonso J. Cervantes (incorporated by reference to Exhibit 10.38 to the Registration Statement on Form S-1 filed on December 16, 2021) |
10.32† |
|
Employment Agreement, dated July 1, 2020, between Smart for Life, Inc. and Darren C. Minton (incorporated by reference to Exhibit 10.40 to the Registration Statement on Form S-1 filed on December 16, 2021) |
10.33 |
|
Form of Independent Director Agreement between Smart for Life, Inc. and each of Ronald S. Altbach, Robert S. Rein and Roger Conley Wood (incorporated by reference to Exhibit 10.41 to Amendment No. 1 to Registration Statement on Form S-1/A filed on January 14, 2022) |
10.34 |
|
Independent Director Agreement, dated October 17, 2022, between Smart for Life, Inc. and Arthur S. Reynolds (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on October 21, 2022) |
10.35 |
|
Form of Indemnification Agreement between Smart for Life, Inc. and each independent director (incorporated by reference to Exhibit 10.42 to Amendment No. 1 to Registration Statement on Form S-1/A filed on January 14, 2022) |
10.36† |
|
2020 Stock Incentive Plan (incorporated by reference to Exhibit 10.43 to the Registration Statement on Form S-1 filed on December 16, 2021) |
10.37† |
|
Form of Stock Option Agreement for 2020 Stock Incentive Plan (incorporated by reference to Exhibit 10.44 to the Registration Statement on Form S-1 filed on December 16, 2021) |
10.38† |
|
Form of Restricted Stock Award Agreement for 2020 Stock Incentive Plan (incorporated by reference to Exhibit 10.45 to the Registration Statement on Form S-1 filed on December 16, 2021) |
10.39† |
|
2022 Equity Incentive Plan (incorporated by reference to Exhibit 10.46 to Amendment No. 1 to Registration Statement on Form S-1/A filed on January 14, 2022) |
10.40† |
|
Form of Stock Option Agreement for 2022 Equity Incentive Plan (incorporated by reference to Exhibit 10.47 to Amendment No. 1 to Registration Statement on Form S-1/A filed on January 14, 2022) |
10.41† |
|
Form of Restricted Stock Award Agreement for 2022 Equity Incentive Plan (incorporated by reference to Exhibit 10.48 to Amendment No. 1 to Registration Statement on Form S-1/A filed on January 14, 2022) |
10.42† |
|
Form of Restricted Stock Unit Award Agreement for 2022 Equity Incentive Plan (incorporated by reference to Exhibit 10.49 to Amendment No. 1 to Registration Statement on Form S-1/A filed on January 14, 2022) |
21.1 |
|
Subsidiaries
of Smart for Life, Inc. (incorporated by reference to Exhibit 21.1 to the Registration Statement on Form S-1 filed on December 16,
2022) |
23.1* |
|
Consent
of Daszkal Bolton LLP for Smart for Life, Inc. |
23.2* |
|
Consent
of Daszkal Bolton LLP for Ceautamed Worldwide LLC |
23.3* |
|
Consent
of Daszkal Bolton LLP for Doctors Scientific Organica, LLC |
23.4* |
|
Consent
of Daszkal Bolton LLP for Nexus Offers, Inc. |
23.5* |
|
Consent of Bevilacqua PLLC (included in Exhibit 5.1) |
24.1 |
|
Power of Attorney (included on the signature page of this registration statement) |
101.INS |
|
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) |
107* |
|
Exhibit
Filing Fees |
| + | Certain confidential information contained these exhibits
has been omitted in accordance with Item 6.01(b)(10) because it is both (i) not material and (ii) is the type that we treat as private
or confidential because it would be competitively harmful if publicly disclosed |
| † | Executive compensation plan or arrangement |
(b) Financial Statement Schedules.
All financial statement schedules are omitted because
the information called for is not required or is shown either in the financial statements or in the notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide
to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such
names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
| (1) | For purposes of determining any liability under the Securities Act, the information omitted from the form
of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement
as of the time it was declared effective. |
| (2) | For purposes of determining any liability under the Securities Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boca Raton, State of Florida, on December 21, 2022.
|
SMART FOR LIFE, INC. |
|
|
|
By: |
/s/ Darren C. Minton |
|
|
Darren C. Minton |
|
|
Chief Executive Officer |
Pursuant to the requirements of the Securities Act
of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE |
|
TITLE |
|
DATE |
|
|
|
|
|
/s/
Darren C. Minton |
|
Chief
Executive Officer and Director |
|
December
21, 2022 |
Darren C. Minton |
|
(principal executive officer) |
|
|
|
|
|
|
|
/s/
Alan B. Bergman |
|
Chief Financial Officer
|
|
December
21, 2022 |
Alan B. Bergman |
|
(principal financial and accounting officer) |
|
|
|
|
|
|
|
*
|
|
Executive Chairman of
the Board |
|
December
21, 2022 |
Alfonso J. Cervantes,
Jr. |
|
|
|
|
|
|
|
|
|
*
|
|
Director |
|
December
21, 2022 |
Ronald S. Altbach |
|
|
|
|
|
|
|
|
|
*
|
|
Director |
|
December
21, 2022 |
Robert S. Rein, Esq. |
|
|
|
|
|
|
|
|
|
*
|
|
Director |
|
December
21, 2022 |
Arthur S. Reynolds |
|
|
|
|
|
|
|
|
|
*
|
|
Director |
|
December
21, 2022 |
Roger Conley Wood |
|
|
|
|
* |
By: |
/s/ Darren C. Minton |
|
|
|
Darren C. Minton |
|
|
|
Attorney-In-Fact |
|
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