SEC Form 10-Q filed by Smart for Life Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended:
or
For the transition period from ____________ to _____________
Commission File Number:
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
| (Registrant’s telephone number, including area code) |
| N/A |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| (1) |
| (1) | On March 21, 2025, the Nasdaq Stock Market LLC (“Nasdaq”) filed a Form 25 with the U.S. Securities and Exchange Commission to complete the delisting of the Company’s common stock from The Nasdaq Capital Market, which became effective on March 31, 2025. The deregistration of the common stock under Section 12(b) of the Act will be effective 90 days, or such shorter period as the U.S. Securities and Exchange Commission may determine, after filing of the Form 25. The common stock is currently quoted on the OTC Pink Market maintained by the OTC Markets Group, Inc. under the symbol “SMFL.” |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | ||
| Smaller reporting company | |||
| Emerging growth company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No
As of May 23, 2025, there were
Smart for Life, Inc.
Quarterly Report on Form 10-Q
Period Ended June 30, 2024
TABLE OF CONTENTS
| PART I | ||
| FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 37 |
| Item 4. | Controls and Procedures | 37 |
| PART II | ||
| OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 38 |
| Item 1A. | Risk Factors | 38 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 38 |
| Item 3. | Defaults Upon Senior Securities | 38 |
| Item 4. | Mine Safety Disclosures | 38 |
| Item 5. | Other Information | 38 |
| Item 6. | Exhibits | 39 |
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SMART FOR LIFE, INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1
SMART FOR LIFE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2024 AND DECEMBER 31, 2023
(UNAUDITED)
| June 30, 2024 | December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Related party receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Current assets of discontinued operations | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Deposits and other assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Assets of discontinued operations | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Accrued expenses, related parties | ||||||||
| Contract liabilities | ||||||||
| Preferred stock dividends payable | ||||||||
| Operating lease liability, current | ||||||||
| Debt, current, net of debt discounts | ||||||||
| Debt, current – related party | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Operating lease liability, noncurrent | ||||||||
| Debt, noncurrent, net of debt issuance cost | ||||||||
| Debt, noncurrent – related party | ||||||||
| Liabilities of discontinued operations, noncurrent | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Deficit: | ||||||||
| Series B Preferred Stock, $ | ||||||||
| Series C Preferred Stock, $ | ||||||||
| Common Stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
2
SMART FOR LIFE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023
(UNAUDITED)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues: | ||||||||||||||||
| Products | $ | $ | $ | $ | ||||||||||||
| Advertising | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of revenues: | ||||||||||||||||
| Products | ||||||||||||||||
| Advertising | ||||||||||||||||
| Total cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Compensation – administrative | ||||||||||||||||
| Professional services | ||||||||||||||||
| Consulting fees – related parties | ||||||||||||||||
| Impairment of intangible assets | ||||||||||||||||
| Depreciation and amortization expense | ( | ) | ||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Other income (expense) | ( | ) | ( | ) | ||||||||||||
| Gain on debt extinguishment | ||||||||||||||||
| Loss on sale of subsidiaries | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Income (loss) from discontinued operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding, basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
3
SMART FOR LIFE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023
(UNAUDITED)
For the Three and Six Months Ended June 30, 2024
| Preferred Stock | Common Stock | Additional Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance, January 1, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Exercise of warrants | — | |||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||
| Conversion of series B preferred stock to common stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Conversion of series C preferred stock to common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Common stock issued for services | — | |||||||||||||||||||||||||||
| Common stock issued for conversion of notes payable | — | |||||||||||||||||||||||||||
| Series C preferred stock issued for conversion of notes payable | — | |||||||||||||||||||||||||||
| Conversion of Series A dividends to common stock | — | |||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Exercise of warrants | — | |||||||||||||||||||||||||||
| Conversion of Series C preferred stock to common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Common stock issued for conversion of notes payable | — | |||||||||||||||||||||||||||
| Warrant exercise for debt settlement | — | |||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
4
SMART FOR LIFE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023
(UNAUDITED)
For the Three and Six Months Ended June 30, 2023
| Preferred Stock | Common Stock | Additional Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Exercise of warrants | — | |||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Conversion of notes and interest to series B preferred stock | — | |||||||||||||||||||||||||||
| Conversion of series A preferred stock | ( | ) | ||||||||||||||||||||||||||
| Stock based compensation | — | — | ||||||||||||||||||||||||||
| Stock issued as compensation for license agreement and note amendments | — | |||||||||||||||||||||||||||
| Conversion of board fees to series B preferred stock | — | |||||||||||||||||||||||||||
| Conversion of accrued compensation to series B preferred stock | — | |||||||||||||||||||||||||||
| Exercise of warrants | — | |||||||||||||||||||||||||||
| Shares issued for cash, net | — | |||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
5
SMART FOR LIFE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
SIX MONTHS ENDED JUNE 30, 2024 AND 2023
(UNAUDITED)
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Debt issuance cost | ||||||||
| Loss on sales of subsidiaries | ||||||||
| Depreciation and amortization expense | ||||||||
| Gain on extinguishment of debt | ( | ) | ( | ) | ||||
| Impairment on intangible assets | ||||||||
| Stock-based compensation | ||||||||
| Non-cash conversion of payables to debt | ||||||||
| Non-cash finance fees | ||||||||
| Non-cash expenses paid with debt | ||||||||
| Non-cash financing expenses – stock issued for services | ||||||||
| Non-cash operating lease costs, net | ( | ) | ||||||
| Provision for bad debt | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Deposits and other assets | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued expenses | ( | ) | ||||||
| Accrued expenses, related parties | ||||||||
| Contract liabilities | ( | ) | ( | ) | ||||
| Discontinued operations | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Additions to property and equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Receipts from related parties | ||||||||
| Payments to related parties | ( | ) | ||||||
| Proceeds from issuance of common stock, net | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from debt | ||||||||
| Repayments on debt | ( | ) | ( | ) | ||||
| Repayment of debt of discontinued operations | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Interest paid | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Debt issued in connection with acquisition | $ | $ | ||||||
| Stock issued for exercise of warrants | $ | $ | ||||||
| Warrant exercise for debt settlement | ||||||||
| Non-cash original issue debt discount | ||||||||
| Conversion of notes payable to equity | ||||||||
| Conversion of interest to equity | ||||||||
| Conversion of interest to notes payable | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
6
SMART FOR LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2024 AND 2023
(UNAUDITED)
Note 1 — Description of Business
Smart for Life, Inc., formerly Bonne Santé Group, Inc. (“SMFL”), is a Nevada corporation which was originally formed in the State of Delaware on February 7, 2017 and converted to a Nevada corporation on April 10, 2023. 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, SMFL acquired
On July 1, 2021, SMFL 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.
On August 27, 2021, SMFL transferred all of the equity interests of Oyster Management Services, Ltd., Lawee Enterprises, L.L.C. and
U.S. Medical Care Holdings, L.L.C. to Doctors Scientific Organica, LLC. On May 19, 2022, SMFL acquired Lavi Enterprises, LLC.
On the same date, SMFL transferred all of the equity interests of Lavi Enterprises, LLC to Doctors Scientific Organica, LLC. On December
13, 2022, Oyster Management Services, Ltd. was converted to a limited liability company known as Oyster Management Services, L.L.C. As
a result of the foregoing, Oyster Management Services, L.L.C., Lawee Enterprises, L.L.C., U.S. Medical Care Holdings, L.L.C. and
Lavi Enterprises, LLC are now wholly owned subsidiaries of Doctors Scientific Organica, LLC (collectively, “DSO”). Based in
Riviera Beach, Florida, DSO operates a
On August 24, 2021, Smart for Life Canada Inc. (“DSO Canada”) was established as a wholly owned subsidiary of Doctors Scientific Organica, LLC in Canada. SMFL Canada sells retail products through a retail store location in Montreal Canada and the same location also acts as distribution center for international direct to consumer and big box customers. On January 8, 2024, the retail store location was closed.
On November 8, 2021, SMFL acquired
On December 6, 2021, SMFL acquired
On July 29, 2022, SMFL acquired Ceautamed Worldwide,
LLC and its wholly-owned subsidiaries Wellness Watchers Global, LLC and Greens First Female LLC (collectively, “Ceautamed”).
Ceautamed is based in Boca Raton, Florida and owns the Greens First line of branded products which have been specifically marketed to
the healthcare provider sector. On January 29, 2024, the Company entered into an asset purchase agreement pursuant to which the Company
agreed to sell nearly all of the assets of Ceautamed for a
On August 15, 2022, SMFL entered into a joint
venture with a seller of Ceautamed to form Smart Acquisition Group, LLC. This subsidiary was
7
Note 2 — Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements reflect the consolidated operations of SMFL and its wholly owned subsidiaries DSO, DSO Canada, Nexus, GSP and BSNM (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”). Ceautamed has been deemed to be a discontinued operation. Intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current year presentation.
Reclassifications - Discontinued Operations to Continued Operations
The 2023 financials have been reclassified from reporting BSNM as discontinued operations to continued operations due to a change in the plan of the sale / leaseback of BSNM. In December 2023, with the board’s approval, the Company planned to sell BSNM. The Company had a buyer, who signed an offer letter, but was unable to work out the economics of the deal and therefore had not closed the transaction. Following this, in October 2024, management and the board revised its decision to sell BSNM and continue operating the business line. Also in October 2024, the Company started moving most of the equipment and much of the usable inventory to its Riviera Beach facility. The Company also surrendered the BSNM facility in November 2024 back to the landlord. As a result, the classification of BSNM has been revised in accordance with Accounting Standards Codification (“ASC”) 360-10, Property, Plant, and Equipment. The results of BSNM have been reclassified from discontinued operations to continuing operations for all periods presented to ensure comparability of the financial statements. The impact of the reclassification on previously reported amounts is summarized below:
1. Reclassification of
$
2. Adjustment to depreciation and amortization expenses, as BSNM is no longer classified as held for sale.
3. Reclassification of $
The comparative financial statements for the years ended December 31, 2023 and 2024, have been adjusted accordingly.
Ceautamed has been deemed to be a discontinued operation (see Note 3).
These reclassifications did not impact previously reported net income, earnings per share, or the Company’s consolidated financial position.
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 balance sheet as of December 31, 2023 has been derived from audited consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements for the three and six months ended June 30, 2024 and 2023 have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.
8
The unaudited financial information included in this report includes all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods. The results of operations for the three and six months ended June 30, 2024 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, 2023.
On April 24, 2023, the Company effected a 1-for-50 reverse stock split of its outstanding common stock. The impact of this transaction is reflected within all common stock, options, and warrant information retrospectively in these condensed consolidated financial statements.
On August 2, 2023, the Company effected a 1-for-3
reverse stock split of its authorized and outstanding common stock. The impact of this transaction is reflected within all common stock,
options, and warrant information retrospectively in these consolidated financial statements. As a result of the reverse stock split, the
Company’s authorized common stock decreased to
On October 27, 2023, the Company effected a 1-for-3
reverse stock split of its authorized and outstanding common stock. The impact of this transaction is reflected within all common stock,
options, and warrant information retrospectively in these consolidated financial statements. As a result of the reverse stock split, the
Company’s authorized common stock decreased to
On April 22, 2024, the Company effected a 1-for-7
reverse stock split of its authorized and outstanding common stock. The impact of this transaction is reflected within all common stock,
options, and warrant information retrospectively in these consolidated financial statements. As a result of the reverse stock split, the
Company’s authorized common stock decreased to
Liquidity, Capital Resources and Going Concern
The accompanying condensed consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. The Company has sustained recurring losses and
has a deficiency in working capital of approximately $
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates include, among other items, assessing the collectability of receivables, the realization of deferred taxes, useful lives and recoverability of tangible and intangible assets, assumptions used in the valuation of options, the computation of revenue based on the proportional delivery of services, and accruals for commitments and contingencies. Some of these estimates can be subjective and complex and, consequently, actual results could differ materially from those estimates.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three (3) months or less to be cash equivalents. At June 30, 2024 and December 31, 2023, there were no cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
The Company’s accounts receivable consists
primarily of receivables from customers. The balance is presented net of an allowance for expected credit losses. The Company monitors
the financial condition of its customers and records the allowance for expected credit losses on receivables when it believes customers
are unable to make their required payments based on factors such as delinquencies and aging trends. The allowance for expected credit
loss is the Company’s best estimate of the amount of probable credit losses related to existing accounts receivable. Accounts receivable
are presented net of an allowance for expected credit losses of $
9
Inventory
Inventory consists of raw materials, packaging materials, and finished goods and is valued at the lower of cost (first-in, first-out) (replacement cost or net realizable value). An allowance for inventory obsolescence is provided for slow moving or obsolete inventory to write down historical cost to net realizable value. The Company primarily performs its manufacturing for functional foods and nutraceuticals in the form of bars, cookies, powders, tablets and capsules.
The allowance for obsolescence is an estimate established through charges to cost of goods sold. Management’s judgment in determining the adequacy of the allowance is based upon several factors which include, but are not limited to, analysis of slow-moving inventory, analysis of the selling price of inventory, the predetermined shelf life of the product, and management’s judgment with respect to current economic conditions. Given the nature of the inventory, it is reasonably possible the Company’s estimate of the allowance for obsolescence will change in the near term.
Property and Equipment
Property and equipment are recorded at cost. Expenditures
for major betterments and additions are charged to the asset accounts, while replacements, maintenance and repairs which do not improve
or extend the lives of the respective assets are charged to expense as incurred. The Company provides for depreciation and amortization
over the estimated useful lives of various assets using the straight-line method ranging from
Goodwill
The Company allocates goodwill to reporting units based on the reporting unit expected to benefit from the business combination. The Company evaluates its reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on December 31 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
Intangible Assets
Intangible assets consist of customer contracts,
developed technology, non-compete agreements, license agreements, 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
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.
Lease Right-of-Use Assets and Liabilities
The Company records a right-of-use asset and lease liability on the condensed consolidated balance sheets for all leases with terms longer than 12 months. Leases are classified either as finance or operating with the classification affecting the pattern of expense recognition.
Related Parties
The Company follows ASC 850, “Related Party Disclosures,” for the identification of related parties and disclosure of related party transactions (see Note 13).
10
Debt Issuance Costs
In accordance with ASC 835-30, “Other Presentation Matters,” the Company has reported debt issuance cost as a deduction from the carrying amount of debt and amortizes these costs using the effective interest method over the term of the debt as interest expense.
Fair Value Measurement
Under ASC Topic 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). ASC Topic 820 establishes a hierarchy for inputs to valuation techniques used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that reflect assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. There are three levels to the hierarchy based on the reliability of inputs, as follows:
| Level 1 - | Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
| Level 2 - | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets and liabilities in markets that are not active. | |
| Level 3 - | Unobservable inputs for the asset or liability. The degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. |
The Company’s cash and cash equivalents are measured using Level 1 inputs and include cash on hand, deposits in banks, certificates of deposit and money market funds. Due to their short-term nature, the carrying amounts reported in the consolidated balance sheets approximate the fair value of cash and cash equivalents.
The Company has certain assets that are measured at fair value on a non-recurring basis including those described in Note 6, and are adjusted to fair value only when the carrying values are more than the fair values. The categorization of the framework used to price the assets is considered a Level 3 measurement due to the subjective nature of the unobservable inputs used to determine the fair value.
Certain nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The estimated fair value of financial instruments is determined using the best available market information and appropriate valuation methodologies. Considerable judgment is necessary, however, in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange, or the value that ultimately will be realized upon maturity or disposition. In the evaluation of the estimated value of such assets, data for determining the value of the estimates are utilized based on the relevant facts and circumstances. The use of different market assumptions may have a material effect on the estimated fair value amounts.
Revenue Recognition
The Company evaluates and recognizes revenues by:
| ● | identifying the contract(s) with the customer, |
| ● | identifying the performance obligations in the contract, |
| ● | determining the transaction price, |
| ● | allocating the transaction price to performance obligations in the contract; and |
| ● | recognizing revenue as each performance obligation is satisfied through the transfer of a promised good or service to a customer (i.e., “transfer of control”). |
11
Products (BSNM, DSO, GSP, and Ceautamed)
The Company generates product revenues by
manufacturing and packaging of nutraceutical products as a contract manufacturer for customers. The majority of the Company’s
revenue is recognized when it satisfies a single performance obligation by transferring control of its products to a customer.
Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained
within the underlying contracts or agreements. The Company’s general payment terms are short-term in duration. For the three
months ended June 30, 2024, revenue was made up of contract manufacturing of $
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 had unsatisfied performance obligations of $
Freight
Freight costs for the six months ended June 30,
2024 and 2023 were $
Advertising
Advertising costs are expensed as incurred. Advertising
costs for the six months ended June 30, 2024 and 2023 were $
Paycheck Protection Program
The Company records Paycheck Protection Program (“PPP”) loan proceeds in accordance with ASC 470, “Debt.” Debt is extinguished when either the debtor pays the creditor or the debtor is legally released from being the primary obligor, either judicially or by the creditor.
Stock-based Compensation
The Company recognizes expense for stock options and warrants granted over the vesting period based on the fair value of the award at the grant date and valued using a Black-Scholes option pricing model to determine the fair market value of the stock options and warrants. Forfeitures are reduced from options and warrants outstanding and the Company calculates the amount of tax benefit available by tracking each stock option award on an employee-by-employee basis and on a grant-by-grant basis. The Company then compares the recorded expense to the tax deduction received for each stock option and warrant grant. The Company’s policy is to recognize forfeitures as they occur.
Income Taxes
The Company accounts for income taxes under the provisions of ASC 740, “Income Taxes”. The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. At June 30, 2024 and December 31, 2023, the Company had no liabilities for uncertain tax positions. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. The Company’s tax years subject to examination by tax authorities generally remain open for three (3) years from the date of filing.
12
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. Due to the continued losses, the Company has recorded a full valuation allowance at the end of June 30, 2024 and December 31, 2023.
Employee Retention Credits
In accordance with the Coronavirus Aid, Relief
and Economic Security Act (the “CARES Act”), the Company filed for Employee Retention Credits for applicable periods in 2020
and 2021. As amounts to be refunded are subject to IRS calculations, and the timing for processing of the credits are unknown, the Company
recognizes as other income amounts refunded upon the receipt of the payment. During the six months ended June 30, 2024 and 2023, the Company
received $
Recent Accounting Standards Adopted
On August 5, 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06, “Debt – Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40),” which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in GAAP. This ASU is effective for fiscal years beginning after December 31, 2023. The adoption of this guidance did not materially impact the financial statements.
Recent Accounting Standards Not Yet Effective
In December 2023, the FASB issued ASU No. 2023-09, “Improvements to Income Tax Disclosures”. The ASU is intended to improve the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation, as well as income taxes paid disaggregated by jurisdiction. The ASU is effective for annual periods beginning after December 15, 2024 and should be applied on a prospective basis, but retrospective application is permitted. We are currently assessing the impact that this ASU will have on the Company’s financial statements.
In March 2024, the FASB issued ASU 2024-02, “Codification Improvements – Amendments to Remove References to the Concept Statements”. The ASU is part of the Board’s standing project to make “Codification updates for technical corrections such as conforming amendments, clarifications to guidance, simplifications to wording or the structure of guidance, and other minor improvements.” We are currently assessing the impact that this ASU will have on the Company’s financial statements.
In November 2024, the FASB issued ASU No. 2024-03, “Disaggregation of Income Statement Expenses”. The ASU is intended to improve financial reporting by requiring disaggregated disclosure of certain costs and expenses. The ASU is effective for fiscal years beginning after December 15, 2026 and for interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The ASU may be applied on either a prospective or retrospective basis. We are currently assessing the impact that this ASU will have on the Company’s financial statements.
The Company has reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a material impact on the Company’s financial statements.
Note 3 — Discontinued Operations
ASC 360, “Property, Plant, and Equipment”
requires that a long-lived asset (disposal group) to be sold shall be classified as held for sale in the period in which a set of criteria
have been met, including criteria that the sale of the asset (disposal group) is probable, and actions required to complete the plan indicate
that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. On January 29, 2024, the Company
contributed nearly all of the assets of Ceautamed into First Health for a
13
For comparability purposes, certain prior period line items relating to the assets held for sale have been reclassified and presented as discontinued operations for all periods presented in the accompanying consolidated statements of operations, consolidated statements of cash flows, and the consolidated balance sheets.
In accordance with ASC 205-20-S99, “Allocation of Interest to Discontinued Operations,” the Company elected to not allocate consolidated interest expense to discontinued operations where the debt is not directly attributable to or related to discontinued operations.
The following information presents the major classes of line item of assets and liabilities included as part of discontinued operations in the consolidated balance sheets as of June 30, 2024 and December 31, 2023:
| June 30, 2024 | December 31, 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Contract liabilities | ||||||||
| Lease liability, current | ||||||||
| Debt, current, net of debt discounts | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Lease liability, noncurrent | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | $ | $ | ||||||
14
The following information presents the major classes of line items constituting the after-tax loss from discontinued operations in the consolidated statements of operations for the six months ended June 30, 2024 and 2023:
| June 30, 2024 | June 30, 2023 | |||||||
| Revenues | ||||||||
| Products | $ | $ | ||||||
| Cost of revenues | ||||||||
| Products | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| General and administrative | ||||||||
| Compensation | ||||||||
| Professional services | ( | ) | ||||||
| Depreciation and amortization expense | ||||||||
| Total operating expenses | ||||||||
| Operating profit (loss) | ( | ) | ||||||
| Other income (expense) | ||||||||
| Other income (expense) | ||||||||
| Gain on extinguishment of debt | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Total other income (expense) | ( | ) | ( | ) | ||||
| Net income (loss) from discontinued operations | ( | ) | ||||||
| Income tax expense | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
Note 4 — Inventory
Inventory consisted of the following:
| June 30, 2024 | December 31, 2023 | |||||||
| Raw materials | $ | $ | ||||||
| Packaging materials | ||||||||
| Finished goods | ||||||||
| Less: allowance for obsolescence | ||||||||
| $ | $ | |||||||
Note 5 — Property and Equipment
Property and equipment consisted of the following:
| Estimated Useful Lives (in Years) | June 30, 2024 | December 31, 2023 | |||||||||
| Furniture and fixtures | $ | $ | |||||||||
| Equipment – manufacturing | |||||||||||
| Building and equipment | |||||||||||
| Leasehold improvements | |||||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | |||||||
| Property and equipment, net | $ | $ | |||||||||
15
Depreciation and amortization expense for the
six months ended June 30, 2024 and 2023 totaled $
Note 6 — Intangible Assets
Intangible assets consisted of the following:
| Estimated Useful Lives (in Years) | June 30, 2024 | December 31, 2023 | |||||||||
| Goodwill | $ | $ | |||||||||
| Customer contracts | $ | $ | |||||||||
| Developed technology | |||||||||||
| Non-compete agreements | |||||||||||
| Patents | |||||||||||
| Tradename | |||||||||||
| Total intangible assets | |||||||||||
| Less: amortization | ( | ) | ( | ) | |||||||
| Intangibles, net | $ | $ | |||||||||
Amortization for the six months ended June 30,
2024 and 2023 was $
The future amortization is as follows:
Years Ending December 31: | ||||
| 2024 (remainder of year) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
Note 7 — Leases
Leases Involving Real Estate
Leases of distribution and manufacturing facilities,
customer support centers and the Company’s corporate headquarters have lease terms that generally range from
Rental payments on these leases typically provide for fixed minimum payments that increase over the lease term at predetermined amounts. Certain leases of real estate provide for rental increases based on the consumer price index, which are included in the Company’s measurement of lease payments based on the rate or index in effect at lease commencement and are therefore included in the measurement of the lease liabilities.
Leases Involving Equipment
Equipment leases have lease terms that generally
range from less than
16
Financial Information
The following provides information about the Company’s right of use assets and lease liabilities as of June 30, 2024 and December 31, 2023:
| Balance Sheet Classification | June 30, 2024 | December 31, 2023 | ||||||||
| Right of use assets operating leases | $ | $ | ||||||||
| Lease liabilities | ||||||||||
| Current | ||||||||||
| Operating leases | ||||||||||
| Noncurrent | ||||||||||
| Operating leases | ||||||||||
| Total lease liabilities | $ | $ | ||||||||
The components of the Company’s lease costs for the six months ended June 30, 2024 and 2023 are as follows:
| Income Statement Classification | June 30, 2024 | June 30, 2024 | ||||||||
| Rent expense | $ | $ | ||||||||
Supplemental cash flow information related to Company’s leases for the six months ended June 30, 2024:
| Operating Leases | ||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | |||
Weighted average remaining lease term and weighted average discount rate for the Company’s leases as of June 30, 2024:
| Operating Leases | ||||
| Weighted average remaining term (in years) | ||||
| Weighted average discount rate | % | |||
Annual maturity analysis of the Company’s lease liabilities as of June 30, 2024:
| Operating Leases | |||
| 2024 | $ | ||
| 2025 | |||
| 2026 | |||
| 2027 | |||
| 2028 | |||
| Thereafter | |||
| Total payments | |||
| Less: interest | ( |
) | |
| Present value of lease liability | |||
| Less: Current portion of lease liabilities | ( |
) | |
| Noncurrent portion of lease liabilities | $ |
17
Note 8 — Debt
Original Issue Discount Subordinated Debentures
In June 2022, the Company commenced offerings
of original issue discount subordinated debentures. As of June 30, 2024, the Company has completed multiple closings and issued debentures
in the aggregate principal amount of $
On February 21, 2024, the Company received a judgement
on an original issue discount subordinated debenture dated August 26, 2022, whereby the outstanding amount of the debenture was amended
to $
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 $
18
Acquisition Notes – Related Parties
On July 1, 2021, the Company issued a
On November 8, 2021, the Company issued a
On July 29, 2022, the Company issued secured
subordinated convertible promissory notes in the aggregate principal amount of $
On July 29, 2022, the Company issued secured subordinated
promissory notes in the aggregate principal amount of $
19
On July 29, 2022, the Company issued secured
subordinated promissory notes in the aggregate principal amount of $
Other Promissory Notes and Cash Advances
Promissory Notes
On July 1, 2021, the Company entered into a loan
agreement with Diamond Creek Capital, LLC for a term loan in the principal amount of up to $
In 2018, the Company entered into an amended
note agreement and convertible promissory note for $
On October 12, 2022, the Company issued promissory
notes in the principal amount of $
On November 2, 2022, the Company issued a promissory
note to a board member in the principal amount of $
On December 6, 2022, the Company issued a promissory
note to a board member in the principal amount of $
On December 21, 2022, the Company issued a promissory
note to a board member in the principal amount of $
20
On February 8, 2023, the Company issued a promissory
note to a board member in the principal amount of $
On February 14, 2023, the Company issued a promissory
note to a third party in the principal amount of $
On February 19, 2023, the Company issued a promissory
note to a third party in the principal amount of $
On March 7, 2023, the Company issued a promissory
note to a board member in the principal amount of $
On April 13, 2023, the Company issued a promissory
note to a third party in the principal amount of $
On April 21, 2023, the Company issued a
promissory note to a board member in the principal amount of $
On June 22, 2023, the Company issued an
original issue discount promissory note to a board member in the principal amount of $
On July 12, 2023, the Company issued a
promissory note to a third party in the principal amount of $
On August 10, 2023, the Company issued a
promissory note to a board member in the principal amount of $
On August 15, 2023, the Company issued a
promissory note to a board member in the principal amount of $
On August 24, 2023, the Company issued a promissory
note to a third party in the principal amount of $
On September 7, 2023, the Company issued a
promissory note to a board member in the principal amount of $
On September 14, 2023, the Company issued a promissory
note to a third party in the principal amount of $
On September 29, 2023, the Company issued a
promissory note to a board member in the principal amount of $
21
On October 4, 2023, the Company issued a
promissory note to a board member in the principal amount of $
On October 11, 2023, the Company issued a promissory
note to a third party in the principal amount of $
On November 14, 2023, the Company issued a
promissory note to a board member in the principal amount of $
On November 30, 2023, the Company issued a
promissory note to a board member in the principal amount of $
Promissory Note - Related Party
On March 5, 2024, the Company issued a promissory
note to a related party in the principal amount of $
Cash Advances
In July 2022, the Company entered into a cash
advance agreement for $
In August 2022, the Company entered into a cash
advance agreement for $
In September 2022, the Company entered into a
cash advance agreement for $
In November 2022, the Company entered into cash
advance agreements for $
In December 2022, the Company entered into cash
advance agreements for $
In June 2023, the Company refinanced the January
2023 agreements with balances of $
In July 2023, the Company entered into cash advance
agreements for $
In August 2023, the Company refinanced an agreement
from June 2023, and as a result, the Company received an additional $
In November 2023, the Company entered into cash
advance agreements for $
22
Equipment Financing Loan
In May 2022, the Company entered into an equipment
financing loan for $
In August 2022, the Company entered into an equipment
financing loan for $
In July 2022, the Company entered into an equipment
financing loan for $
Revolving Lines of Credit
In August 2022, Ceautamed entered into a revolving
line of credit with a bank, which permits borrowings up to $
In September 2022, DSO entered into a revolving
line of credit with a bank, which permits borrowings up to $
In September 2023, DSO entered into a merchant
loan agreement for $
EIDL Loan
In June 2020, pursuant to the economic injury
disaster loan program under the under the provisions of the CARES Act, the Company entered into a promissory note with the U.S. Small
Business Administration with a principal amount of $
PPP Loans
In February 2021, the Company received an additional
$
23
Total Debt
Debt is comprised of the following components as of June 30, 2024:
| Original issue discount subordinated debentures | $ | |||
| Original issue discount secured subordinated note | ||||
| Acquisition notes – related party | ||||
| Promissory notes and cash advances | ||||
| Promissory note – related party | ||||
| Revolving lines of credit | ||||
| Equipment financing loan | ||||
| EIDL loan | ||||
| PPP loans | ||||
| Debt issuance costs | ( | ) | ||
| Debt, net | ||||
| Debt, current | ||||
| Debt issuance costs, current | ( | ) | ||
| Current portion of debt, net | ||||
| Debt, non-current | ||||
| Debt issuance costs, non-current | ( | ) | ||
| Non-current portion of debt, net | $ |
The Company was not in compliance with all debt covenants as of June 30, 2024, but waivers of non-compliance were obtained for all such debt, except as disclosed in Note 8.
The future contractual maturities of the debt are as follows:
| For the Year Ended December 31: | ||||
| 2024 (remainder of year) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
Note 9 — Concentrations of Credit Risks
Credit Risks
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and accounts receivable. The Company maintains bank accounts with several financial institutions. Concentrations of credit risk with respect to accounts receivable are limited to the dispersion of customers across different industries and geographic regions.
Cash
The Company places its cash with high credit quality
financial institutions. At June 30, 2024 and December 31, 2023, the Company had no cash balances in excess of the Federal Deposit Insurance
Corporation coverage of $
Major Customers
For the six months ended June 30, 2024 and 2023,
the Company had two significant customers representing an aggregate of
24
For the three months ended June 30, 2024 and 2023,
the Company had three and two significant customers representing an aggregate of
Major Vendors
For the six months ended June 30, 2024 and 2023,
the Company had four and one major supplier representing an aggregate
For the three months ended June 30, 2024 and 2023,
the Company had four and one major supplier representing
Note 10 — Income Taxes
The Company has evaluated the positive and negative evidence in assessing the realizability of its deferred tax assets. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, estimates of projected future taxable income and tax planning strategies to determine which deferred tax assets are more likely than not to be realized in the future.
The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. Interest and penalties related to income tax matters, if any, would be recognized as a component of income tax expense. At June 30, 2024 and December 2023, 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 June 30, 2024, the Company had net operating
loss carry forwards for federal income tax purposes of approximately $
Note 11 — Stockholders’ Equity
Preferred Stock
During the three and six months ended June 30,
2024, and
During the three and six months ended June 30,
2024, the Company issued
Common Stock
During the three and six months ended June 30,
2024, the Company issued (i)
During the three and six months ended June 30,
2023, the Company issued (i)
25
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
In January 2022, the Company adopted its 2022
Equity Inventive Plan, as amended (the “2022 Plan”), under which the Company is authorized to issue awards for up to
The Company recognized $
On May 30, 2024, the Company entered into warrant
solicitation inducement letters (the “Inducement Letters”) with the holders (the “Exercising Holders”) of warrants
for the purchase of an aggregate of
On June 3, 2024, the Company issued a pre-funded
warrant for the purchase of
In addition to the warrant exercises described
above, during the three and six months ended June 30, 2024, warrant holders exercised an aggregate of
In the three and six months ended June 30, 2023,
warrant holders exercised an aggregate of
26
The following is a summary of options and warrants granted, exercised, forfeited and outstanding during the six months ended June 30, 2024 and 2023:
| 2024-Stock Options | 2024-Warrants | |||||||||||||||
| Number of Options | Weighted Average Exercise Price | Number of Warrants | Weighted Average Exercise Price | |||||||||||||
| Outstanding at January 1, 2024 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ( | ) | ||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at June 30, 2024 | $ | $ | ||||||||||||||
| Exercisable at June 30, 2024 | ||||||||||||||||
| 2023-Stock Options | 2023-Warrants | |||||||||||||||
| Number of Options | Weighted Average Exercise Price | Number of Warrants | Weighted Average Exercise Price | |||||||||||||
| Outstanding at January 1, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ( | ) | ||||||||||||
| Forfeited | ( | ) | ( | ) | ||||||||||||
| Outstanding at June 30, 2023 | $ | $ | ||||||||||||||
| Exercisable at June 30, 2023 | ||||||||||||||||
The fair value of each option and warrant in 2024 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| Risk-free interest rate | % | |||
| Expected volatility | % | |||
| Expected life (years) | ||||
| Dividend yield | % |
The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns. The risk-free rate is based on the U.S. Treasury yield constant maturity in effect at the time of grant for periods corresponding with the expected life of the option.
Net Loss Per Share
Basic and diluted net loss per share of common
stock for the six months ended June 30, 2024, and 2023 was determined by dividing net loss by the weighted average shares of common stock
outstanding during the period. The Company’s potentially dilutive shares, consisting of
Note 12 — Commitments and Contingencies
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.
27
Note 13 — Related Party Transactions
The Company entered into debt with related parties which are reflected in Note 8.
The Company is party to a management services
agreement with Trilogy Capital Group, LLC (“Trilogy”), a company controlled by the Company’s Executive Chairman. For
the six months ended June 30, 2024 and 2023, the Company paid Trilogy $
Note 14 — Subsequent Events
In accordance with ASC 855, Subsequent Events, the Company has reviewed its operations subsequent to June 30, 2024 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.
SEC Order
On September 9, 2024, the SEC issued an order
against the Company which found that the Company entered into two separation agreements with former employees that each contained language
violating Rule 21F-17(a) of the Securities Exchange Act of 1934, as amended. The order imposes a civil money penalty against the Company
for the two noted violations in the total amount of $
Completion of Ceautamed Disposition
As noted above, on
October 1, 2024, the
Additional Equity Transactions
Subsequent to June 30, 2024, an aggregate of
Subsequent to June 30, 2024, holders returned
an aggregate of
Subsequent to June 30, 2024, the Company issued
an aggregate of
Subsequent to June 30, 2024, an aggregate of
28
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this report. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report.
Use of Terms
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our” and “our company” are to Smart for Life, Inc., a Nevada corporation, and its consolidated subsidiaries.
Special Note Regarding Forward Looking Statements
This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
| ● | our goals and strategies; |
| ● | our future business development, financial condition and results of operations; |
| ● | expected changes in our revenue, costs or expenditures; |
| ● | growth of and competition trends in our industry; |
| ● | our expectations regarding demand for, and market acceptance of, our products; |
| ● | our expectations regarding our relationships with investors, institutional funding partners and other parties with which we collaborate; |
| ● | fluctuations in general economic and business conditions in the markets in which we operate; and |
| ● | relevant government policies and regulations relating to our industry. |
In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2023, or the Form 10-K, or elsewhere in this report. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
Overview
We are engaged in the development, marketing, manufacturing, acquisition, operation and sale of a broad spectrum of nutritional and related products with an emphasis on health and wellness. Structured as a global holding company, we are executing a buy-and-build strategy with serial accretive acquisitions creating a vertically integrated company. 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.
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On March 8, 2018, we acquired 51% of Millenium Natural Manufacturing Corp. and Millenium Natural Health Products Inc. and on October 9, 2019, we acquired the remaining 49% of these companies. On September 30, 2020, we changed the name of Millenium Natural Manufacturing Corp. to Bonne Sante Natural Manufacturing, Inc., or BSNM, and on November 24, 2020, we merged Millenium Natural Health Products Inc. into BSNM to better reflect our vertical integration. In November 2024 we relocated the operations of BSNM from Doral, Florida to Riviera Beach, Florida. It manufactures nutritional products for a significant number of customers.
On July 1, 2021, we 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. 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 acquired Lavi Enterprises, LLC. On the same date, we transferred all of the equity interests of Lavi Enterprises, LLC to Doctors Scientific Organica, LLC. On December 13, 2022, Oyster Management Services, Ltd. was converted to a limited liability company known as Oyster Management Services, L.L.C. As a result of the foregoing, Oyster Management Services, L.L.C., Lawee Enterprises, L.L.C., U.S. Medical Care Holdings, L.L.C. and Lavi Enterprises, LLC are now wholly owned subsidiaries of Doctors Scientific Organica, LLC. In this report, we collectively refer to Doctors Scientific Organica, LLC and its consolidated subsidiaries as DSO. Based in Riviera Beach, Florida, DSO operates a 30,000 square-foot FDA-certified manufacturing facility. DSO manufactures and sells weight management foods and related products. Additionally, DSO provides manufacturing services for other customers.
On November 8, 2021, we acquired 100% of Nexus Offers, Inc., or Nexus. Nexus operates a cost per action/cost per acquisition network. This network consists of hundreds of digital marketers who stand ready to market products introduced to the Nexus network. The cost per action/cost per acquisition model is where digital marketers are paid for an action (e.g., a product sale or lead generation) that is taken as a direct result of their marketing efforts. Through the digital marketer’s method of marketing, the digital marketer sends traffic to one of the product vendor’s offers listed on the network.
On December 6, 2021, we acquired 100% of GSP Nutrition Inc., or GSP. GSP is a sports nutrition company that offers nutritional supplements for athletes and active lifestyle consumers.
Principal Factors Affecting Our Financial Performance
Our operating results are primarily affected by the following factors:
| ● | our ability to acquire new customers or retain existing customers; |
| ● | our ability to offer competitive product pricing; |
| ● | our ability to broaden product offerings; |
| ● | industry demand and competition; and |
| ● | market conditions and our market position. |
Emerging Growth Company
We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, 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; |
| ● | 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); |
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| ● | submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and |
| ● | disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. |
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of our initial public offering, (ii) the last day of the first fiscal year in which our total annual gross revenues are $1.235 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.
Discontinued Operations
On July 29, 2022, we acquired 100% of Ceautamed Worldwide, LLC and its wholly-owned subsidiaries Wellness Watchers Global, LLC and Greens First Female LLC (which we collectively refer to as Ceautamed), which owns the Greens First line of branded products which have been specifically marketed to the healthcare provider sector. On January 29, 2024, we entered into an asset purchase agreement pursuant to which we agreed to sell nearly all of the assets of Ceautamed and its subsidiaries for a 49% ownership interest in a new limited liability company, First Health FL LLC, or First Health. The agreement allows for the 51% owner to purchase the remaining 49% for $1 at an unspecified future date. On October 1, 2024, such owner elected to exercise the option, effective as of October 2, 2024, paid us the option price of $1.00, and we delivered the remaining 49% interest in First Health to such owner. As a result, the financial results and balances of Ceautamed have been classified as discontinued operations within this report and the accompanying unaudited condensed consolidated financial statements.
Results of Operations
Comparison of Three Months Ended June 30, 2024 and 2023
The following table sets forth key components of our results of operations during the three months ended June 30, 2024 and 2023, both in dollars and as a percentage of our revenues.
| June 30, 2024 | June 30, 2023 | |||||||||||||||
| Amount | % of Revenues | Amount | % of Revenues | |||||||||||||
| Revenues | ||||||||||||||||
| Products | $ | 877,799 | 100.00 | % | $ | 1,324,364 | 99.20 | % | ||||||||
| Advertising | — | — | 10,616 | 0.80 | % | |||||||||||
| Total revenues | 877,799 | 100.00 | % | 1,334,980 | 100.00 | % | ||||||||||
| Cost of revenues | ||||||||||||||||
| Products | 471,715 | 53.74 | % | 1,012,458 | 75.84 | % | ||||||||||
| Advertising | — | — | 9,121 | 0.68 | % | |||||||||||
| Total cost of revenues | 471,715 | 53.74 | % | 1,021,579 | 76.52 | % | ||||||||||
| Gross profit | 406,084 | 46.26 | % | 313,401 | 23.48 | % | ||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | 319,736 | 36.42 | % | 1,410,904 | 105.69 | % | ||||||||||
| Compensation - administrative | 514,684 | 58.63 | % | 1,285,447 | 96.29 | % | ||||||||||
| Professional services | 285,289 | 32.50 | % | 916,302 | 68.64 | % | ||||||||||
| Impairment on intangible assets | — | — | 466,737 | 34.96 | % | |||||||||||
| Depreciation and amortization expense | 323,126 | 36.81 | % | (38,610 | ) | (2.89 | )% | |||||||||
| Total operating expenses | 1,442,835 | 164.37 | % | 4,040,780 | 302.68 | % | ||||||||||
| Operating loss | (1,036,751 | ) | (118.11 | )% | (3,727,379 | ) | (279.21 | )% | ||||||||
| Other income (expense) | ||||||||||||||||
| Other income (expense) | (38,675 | ) | (4.41 | )% | 281,700 | 21.10 | % | |||||||||
| Gain on debt extinguishment | 92,396 | 10.53 | % | 189,705 | 14.21 | % | ||||||||||
| Loss on sale of subsidiary | (148,954 | ) | (16.97 | )% | — | — | ||||||||||
| Interest expense | (1,078,886 | ) | (122.91 | )% | (560,581 | ) | (41.99 | )% | ||||||||
| Total other income (expenses) | (1,174,119 | ) | (133.76 | )% | (89,176 | ) | (6.68 | )% | ||||||||
| Loss from continuing operations | (2,210,870 | ) | (251.87 | )% | (3,816,555 | ) | (285.89 | )% | ||||||||
| Loss from discontinued operations | (152 | ) | (0.02 | )% | (403,441 | ) | (30.22 | )% | ||||||||
| Net loss | $ | (2,211,022 | ) | (251.88 | )% | $ | (4,219,996 | ) | (316.11 | )% | ||||||
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Revenues. Our total revenues decreased by $457,181, or 34.25%, to $877,799 for the three months ended June 30, 2024 from $1,334,980 for the three months ended June 30, 2023.
Our nutraceutical business generates revenue from the sales of nutritional and related products. Revenues from our nutraceutical business (products) decreased by $446,565, or 33.72%, to $877,799 for the three months ended June 30, 2024 from $1,324,364 for the three months ended June 30, 2023. This decrease was primarily due to our cash constraints and our inability to pay for raw materials used in the production of both branded and contract manufacturing products. The decreased revenues were the result of a decrease in the volume of products sold and not due to pricing changes.
Our digital marketing business generates revenues when sales of listed products are sold by product vendors through our network as a result of the marketing efforts of digital marketers. We did not generate any revenues from our digital marketing business (advertising) for the three months ended June 30, 2024, as compared to $10,616 for the three months ended June 30, 2023. The decrease in revenue is attributable to our repurposing of the subsidiary from affiliate network management to focusing on the advertising of our other subsidiaries.
Cost of revenues. Our total cost of revenues decreased by $549,864, or 53.82%, to $471,715 for the three months ended June 30, 2024 from $1,021,579 for the three months ended June 30, 2023. Such decrease is directly related to the decrease in revenues.
Cost of revenues for our nutraceutical business consist of ingredients, packaging materials, freight, and labor associated with the production of various products. Cost of revenues for our nutraceutical business (products) decreased by $540,743, or 53.41%, to $471,715 for the three months ended June 30, 2024 from $1,012,458 for the three months ended June 30, 2023. As a percentage of product revenues, cost of revenues for product sales were 53.74% and 76.45% for the three months ended June 30, 2024, and 2023, respectively. The decreased percentage is due to decreased product offerings allowing for a concentration of ingredients used in production.
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) was $0 for the three months ended June 30, 2024, as compared to $269,394 for the three months ended March 31, 2023. As a percentage of advertising revenues, cost of revenues for advertising sales was 0.00% and 85.92% for the three months ended June 30, 2024 and 2023, respectively. Such decrease is directly related to the decrease in revenues.
Gross profit. As a result of the foregoing, our gross profit increased by $92,683, or 29.57%, to $406,084 for the three months ended June 30, 2024 from $313,401 for the three months ended June 30, 2023. As a percentage of revenues, our gross profit was 46.26% and 23.48% for the three months ended June 30, 2024 and 2023, respectively.
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 decreased by $1,091,168, or 77.34%, to $319,736 for the three months ended June 30, 2024 from $1,410,904 for the three months ended June 30, 2023. As a percentage of revenues, our general and administrative expenses were 36.42% and 105.69% for the three months ended June 30, 2024 and 2023, respectively. The decrease was primarily due to decreased advertising costs, royalty fees and insurance rates in 2024.
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Compensation - administrative. Our compensation expenses include both cash and non-cash items, including salaries plus related payroll taxes. Our compensation expenses decreased by $770,763, or 59.96%, to $514,684 for the three months ended June 30, 2024 from $1,285,447 June 30, 2023. As a percentage of revenues, our compensation expenses were 58.63% and 96.29% for the three months ended June 30, 2024 and 2023, respectively. Such decrease was primarily due to a reduction of headcount.
Professional services. Our professional services expenses consist primarily of investor relations, consulting, advisory, legal and audit expenses incurred in connection with general operations. Our professional services expenses decreased by $631,013, or 68.87%, to $285,289 for the three months ended June 30, 2024 from $916,302 for the three months ended June 30, 2023. As a percentage of revenues, our professional services expenses were 32.50% and 68.64% for the three months ended June 30 2024 and 2023, respectively. The decrease was primarily due to decreased legal fees, investor relations efforts, and audit fees, all due to the cash constraints of the company.
Impairment of intangible assets. Due to a significant decrease in advertising revenues, we performed an impairment analysis on the affiliate relationships associated with our Nexus subsidiary and recognized an impairment of $466,737 during the three months ended June 30, 2023. No impairment was recognized in the three months ended June 30, 2024.
Depreciation and amortization. Depreciation and amortization was $323,126, or 36.81% of revenues, for the three months ended June 30, 2024, as compared to $(38,610), or (2.89)% of revenues, for the three months ended June 30, 2024. The increase in amortization is associated with intangible assets resulting from acquisitions and the impairment of the intangible assets.
Total other expense. We had $1,174,119 in total other expense, net, for the three months ended June 30, 2024, as compared to total other expense, net, of $89,176 for the three months ended June 30, 2023. Total other expense, net, for the three months ended June 30, 2024 consisted of interest expense of $1,078,886, loss on sale of subsidiary of $148,954, and other expense of $38,675, offset by gain on extinguishment of debt of $92,396, while other expense, net, for the three months ended June 30, 2023 consisted of interest expense of $560,581, offset by a gain on extinguishment of debt of $189,705 and $281,700 of other income from employee retention credits received.
Loss from discontinued operations. We had $152 in loss from discontinued operations for the three months ended June 30, 2024, as compared to $403,441 for the three months ended June 30, 2023.
Net loss. As a result of the cumulative effect of the factors described above, we had a net loss of $2,211,021 for the three months ended June 30, 2024, as compared to $4,219,996 for the three months ended June 30, 2023.
Comparison of Six Months Ended June 30, 2024 and 2023
The following table sets forth key components of our results of operations during the six months ended June 30, 2024 and 2023, both in dollars and as a percentage of our revenues.
| June 30, 2024 | June 30, 2023 | |||||||||||||||
| Amount | % of Revenues | Amount | % of Revenues | |||||||||||||
| Revenues | ||||||||||||||||
| Products | $ | 1,356,592 | 99.99 | % | $ | 2,585,351 | 87.91 | % | ||||||||
| Advertising | 115 | 0.01 | % | 355,471 | 12.09 | % | ||||||||||
| Total revenues | 1,356,707 | 100.00 | % | 2,940,822 | 100.00 | % | ||||||||||
| Cost of revenues | ||||||||||||||||
| Products | 742,963 | 54.76 | % | 1,981,142 | 67.37 | % | ||||||||||
| Advertising | — | — | 278,515 | 9.47 | % | |||||||||||
| Total cost of revenues | 742,963 | 54.76 | % | 2,259,657 | 76.84 | % | ||||||||||
| Gross profit | 613,744 | 45.24 | % | 681,165 | 23.16 | % | ||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | 962,083 | 70.91 | % | 2,405,748 | 81.81 | % | ||||||||||
| Compensation - administrative | 890,398 | 65.63 | % | 2,620,137 | 89.10 | % | ||||||||||
| Professional services | 1,143,641 | 84.30 | % | 1,220,298 | 41.50 | % | ||||||||||
| Consulting fees - related parties | — | — | 27,547 | 0.94 | % | |||||||||||
| Impairment on intangible assets | — | — | 466,737 | 15.87 | % | |||||||||||
| Depreciation and amortization expense | 646,253 | 47.63 | % | 397,185 | 13.51 | % | ||||||||||
| Total operating expenses | 3,642,375 | 268.47 | % | 7,137,652 | 242.71 | % | ||||||||||
| Operating loss | (3,028,631 | ) | (223.23 | )% | (6,456,487 | ) | (219.55 | )% | ||||||||
| Other income (expense) | ||||||||||||||||
| Other income (expense) | (61,762 | ) | (4.55 | )% | 304,852 | 10.37 | % | |||||||||
| Gain on debt extinguishment | 92,396 | 6.81 | % | 189,705 | 6.45 | % | ||||||||||
| Loss on sale of subsidiaries | (132,491 | ) | (9.77 | )% | — | — | ||||||||||
| Interest expense | (2,066,140 | ) | (152.29 | )% | (1,923,626 | ) | (65.41 | )% | ||||||||
| Total other income (expenses) | (2,167,997 | ) | (159.80 | )% | (1,429,069 | ) | (48.59 | )% | ||||||||
| Loss from continuing operations | (5,196,628 | ) | (383.03 | )% | (7,885,556 | ) | (268.14 | )% | ||||||||
| Income (loss) from discontinued operations | 89,433 | 6.59 | % | (618,755 | ) | (21.04 | )% | |||||||||
| Net loss | $ | (5,107,195 | ) | (376.44 | )% | $ | (8,504,311 | ) | (289.18 | )% | ||||||
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Revenues. Our total revenues decreased by $1,584,115, or 53.87%, to $1,356,707 for the six months ended June 30, 2024 from $2,940,822 for the six months ended June 30, 2023.
Revenues from our nutraceutical business (products) decreased by $1,228,759, or 47.53%, to $1,356,592 for the six months ended June 30, 2024 from $2,585,351 for the six months ended June 30, 2023. This decrease was primarily due to our cash constraints and our inability to pay for raw materials used in the production of both branded and contract manufacturing products. The decreased revenues were the result of a decrease in the volume of products sold and not due to pricing changes.
Revenues from our digital marketing business (advertising) decreased by $355,356, or 99.97%, to $115 for the six months ended June 30, 2024 from $355,471 for the six months ended June 30, 2023. The decrease in revenue is attributable to our repurposing of the subsidiary from affiliate network management to focusing on the advertising of our other subsidiaries.
Cost of revenues. Our total cost of revenues decreased by $1,516,694, or 67.12%, to $742,963 for the six months ended June 30, 2024 from $2,259,657 for the six months ended June 30, 2023. Such decrease is directly related to the decrease in revenues.
Cost of revenues for our nutraceutical business (products) decreased by $1,238,179, or 62.50%, to $742,963 for the six months ended June 30, 2024 from $1,981,142 for the six months ended June 30, 2023. As a percentage of product revenues, cost of revenues for product sales were 54.77% and 76.63% for the six months ended June 30, 2024 and 2023, respectively. The decreased percentage is due to decreased product offerings allowing for a concentration of ingredients used in production.
Cost of revenues from our digital marketing business (advertising) was $0 for the six months ended June 30, 2024, as compared to $278,515 for the six months ended June 30, 2023. As a percentage of advertising revenues, cost of revenues for advertising sales was 0% and 78.35% for the six months ended June 30, 2024 and 2023, respectively. Such decrease is directly related to the decrease in revenues.
Gross profit. As a result of the foregoing, our gross profit decreased by $67,421, or 9.90%, to $613,744 for the six months ended June 30, 2024 from $681,165 for the six months ended June 30, 2023. As a percentage of revenues, our gross profit was 45.24% and 23.16% for the six months ended June 30, 2024 and 2023, respectively.
General and administrative expenses. Our general and administrative expenses decreased by $1,443,665, or 60.01%, to $962,083 for the six months ended June 30, 2024 from $2,405,748 for the six months ended June 30, 2023. As a percentage of revenues, our general and administrative expenses were 70.91% and 81.81% for the six months ended June 30, 2024 and 2023, respectively. Such decrease was primarily due to decreased advertising costs, royalty fees and insurance rates in 2024.
Compensation - administrative. Our compensation expenses decreased by $1,729,739, or 66.02%, to $890,398 for the six months ended June 30, 2024 from $2,620,137 for the six months ended June 30, 2023. As a percentage of revenues, our compensation expenses were 65.63% and 89.10% for the six months ended June 30, 2024 and 2023, respectively. Such decrease was primarily due to reduced headcount.
Professional services. Our professional services expenses decreased by $76,657, or 6.28%, to $1,143,641 for the six months ended June 30, 2024 from $1,220,298 for the six months ended June 30, 2023. As a percentage of revenues, our professional services expenses were 84.30% and 41.50% for the six months ended June 30 2024 and 2023, respectively. Such percentage increase was primarily due legal fees and Nasdaq compliance consulting fees incurred.
Consulting fees - related parties. For the six months ended June 30, 2024 and 2023, we paid Trilogy Capital Group, LLC, a company controlled by our Executive Chairman, $0 and $27,547, respectively, for services rendered under a consulting agreement.
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Impairment of intangible assets. Due to a significant decrease in advertising revenues, we performed an impairment analysis on the affiliate relationships associated with our Nexus subsidiary and recognized an impairment of $466,737 during the six months ended June 30, 2023. No impairment was recognized in the six months ended June 30, 2024.
Depreciation and amortization. Depreciation and amortization was $646,253, or 47.63% of revenues, for the six months ended June 30, 2024, as compared to $397,185 or 13.51% of revenues, for the six months ended June 30, 2023. The increase in amortization is associated with intangible assets resulting from acquisitions.
Total other expense. We had $2,167,997 in total other expense, net, for the six months ended June 30, 2024, as compared to total other expense, net, of $1,429,069 for the six months ended June 30, 2023. Total other expense, net, for the six months ended June 30, 2024 consisted of interest expense of $2,066,140, a loss on the sale of subsidiary of $132,491, and other expense of $61,762, offset by a gain on extinguishment of debt of $92,396, while other expense, net, for the six months ended June 30, 2023 consisted of interest expense of $1,923,626, offset by a gain on extinguishment of debt of $189,705 and the receipt of employee retention credits of $304,852.
Income (loss) from discontinued operations. We had $89,433 in net income from discontinued operations for the six months ended June 30, 2024, as compared to a loss of $618,755 for the six months ended June 30, 2023.
Net loss. As a result of the cumulative effect of the factors described above, we had a net loss of $5,107,195 for the six months ended June 30, 2024, as compared to $8,504,311 for the six months ended June 30, 2023.
Liquidity and Capital Resources
As of June 30, 2024, we had cash of $31,703. To date, we have financed our operations primarily through revenue generated from operations, bank borrowings and sales of our securities. Since our inception in 2017, we have experienced losses and as a result have continued to use cash in our operations. We have been dependent upon financing activities as we implement our acquisition strategy.
Our unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have suffered recurring losses from operations and have a working capital deficiency of $9.7 million at June 30, 2024. These conditions raise substantial doubt about our ability to continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Management believes that currently available resources will not be sufficient to fund our planned expenditures over the next 12 months from the date hereof. Accordingly, we will be dependent upon the raising of additional capital through placement of common stock and/or debt financing in order to implement our business plan. There is no assurance that we will be successful with future financing ventures, and the inability to secure such financing may have a material adverse effect on our financial condition.
Summary of Cash Flow
The following table provides detailed information about our net cash flow for the six months ended June 30, 2024 and 2023.
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash used in operating activities | $ | (1,411,573 | ) | $ | (5,150,913 | ) | ||
| Net cash used in investing activities | — | (3,450 | ) | |||||
| Net cash provided by financing activities | 1,288,610 | 5,408,587 | ||||||
| Net change in cash | (122,963 | ) | 254,224 | |||||
| Cash and cash equivalents at beginning of period | 154,666 | 60,790 | ||||||
| Cash and cash equivalents at end of period | $ | 31,703 | $ | 315,014 | ||||
Our net cash used in operating activities was $1,411,573 for the six months ended June 30, 2024, as compared to $5,150,913 for the six months ended June 30, 2023. For the six months ended June 30, 2024, our net loss of $5,107,195, offset by non-cash financing of payable of $1,115,852, depreciation and amortization of $646,254, non-cash finance fees of $559,694, discontinued operations of $467,570, and a decrease in inventory of $460,630 were the primary drivers for cash used in operations. For the six months ended June 30, 2023, our net loss of $8,504,311, offset by debt issuance costs of $1,021,292, an increase in accrued expenses of $957,616, a decrease in inventory $625,755, an impairment of intangible assets of $466,737, and depreciation and amortization expense of $397,185 were the primary drivers for cash used in operations.
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We had no investing activities for the six months ended June 30, 2024, as compared to net cash used in investing activities of $3,450 for the six months ended June 30, 2024, which consisted entirely of additions to property and equipment.
Our net cash provided by financing activities was $1,288,610 for the six months ended June 30, 2024, as compared to $5,408,587 for the six months ended June 30, 2023. Net cash provided by financing activities for the six months ended June 30, 2024 consisted of proceeds from the exercise of warrants of $1,781,500, receipts from related parties of $1,245,453, and proceeds from debt of $163,500, offset by repayments to related parties of $1,420,304, repayment of debt of discontinued operations of $250,295 and repayment of debt of $231,244. Net cash provided by financing activities for the six months ended June 30, 2023 consisted of proceeds from the exercise of warrants of $5,425,140, proceeds from the issuance of common stock of $2,151,310, proceeds from debt issuance of $2,053,071, and receipts from related parties of $89,000, offset by payment of fees from issuance of common stock of $4,309,934.
Outstanding Debt
The following table shows aggregate figures for our total debt outstanding at June 30, 2024. For a complete description of the terms of our outstanding debt, please see Note 8 to our unaudited condensed consolidated financial statements above.
| Original issue discount subordinated debentures | $ | 2,518,110 | ||
| Original issue discount secured subordinated note | 1,199,854 | |||
| Acquisition notes – related party | 141,193 | |||
| Promissory notes and cash advances | 650,865 | |||
| Promissory note – related party | 250,000 | |||
| Revolving lines of credit | 2,219 | |||
| Equipment financing loan | 133,230 | |||
| EIDL loan | 300,000 | |||
| PPP loans | 197,457 | |||
| 5,392,928 | ||||
| Debt issuance costs | (71,959 | ) | ||
| Debt, net | 5,320,969 | |||
| Debt, current | 3,325,866 | |||
| Debt issuance costs, current | (23,043 | ) | ||
| Current portion of debt, net | 3,302,823 | |||
| Debt, non-current | 2,067,062 | |||
| Debt issuance costs, non-current | (48,916 | ) | ||
| Non-current portion of debt, net | $ | 2,018,146 |
Contractual Obligations
Our principal commitments consist mostly of obligations under the loans described above and pricing/margin structures for products established with our clients. We do not have any purchase obligations with any suppliers.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
The preparation of our unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in the Form 10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(e) of the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of June 30, 2024. Based upon, and as of the date of this evaluation, our chief executive officer and chief financial officer determined that because of the material weaknesses described in Item 9A “Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, which we are still in the process of remediating as of June 30, 2024, our disclosure controls and procedures were not effective. Investors are directed to Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, for the description of these weaknesses.
Remediation of Material Weaknesses in Internal Control Over Financial Reporting
As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, our management has identified the steps necessary to address the material weaknesses, and in the second quarter of 2024, we continued to implement these remedial procedures.
As part of our plan to remediate this material weakness, we are performing a full review of our internal control procedures. We have implemented, and plan to continue to implement, new controls and new processes. We have hired and plan to continue to hire additional qualified personnel and establish more robust processes to support our internal control over financial reporting, including clearly defined roles and responsibilities. We anticipate time being required to complete the implementation and to assess and ensure the sustainability of these controls. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
Other than in connection with the implementation of the remedial measures described above, there were no changes in our internal control over financial reporting or in any other factors that could significantly affect these controls during the three months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We have not sold any equity securities during the three months ended June 30, 2024 that were not previously disclosed in a current report on Form 8-K that was filed during the quarter.
We did not repurchase any shares of our common stock during the three months ended June 30, 2024.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
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ITEM 6. EXHIBITS.
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| * | Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: May 23, 2025 | SMART FOR LIFE, INC. |
| /s/ Darren C. Minton | |
| Name: Darren C. Minton | |
| Title: Chief Executive Officer | |
| (Principal Executive Officer and Principal Financial and Accounting Officer) |
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