LIFD 10-Q
Lftd Partners Inc. (LIFD)
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission file number
(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification Number) |
(Address of principal executive offices)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12 of the Act:
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| None | ||
Title of each class |
| Trading symbol(s) |
| Name of exchange on which registered |
Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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 | ||
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| 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
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 13, 2024, there were
LFTD Partners Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended March 31, 2024
Table of Contents
| 1 |
| Table of Contents |
Use of Names
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” “Company,” “Corporation” or “LFTD Partners” refer to LFTD Partners Inc. together with its wholly owned subsidiary Lifted Liquids, Inc d/b/a Lifted Made (“Lifted”) and d/b/a Urb Finest Flowers (“Urb”).
Currency
Unless otherwise indicated, all references to “$” in this document refer to United States dollars.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that are considered forward-looking statements. Forward-looking statements give the Company’s current expectations and forecasts of future events. All statements other than statements of current or historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding the Company’s future financial position, performance, operations, business strategy, budgets, projected costs, capital spending, sources of liquidity and financing sources, and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” and similar expressions, as they relate to the Company, are intended to identify forward-looking statements. These statements are based on the Company’s current plans, and the Company’s actual future activities and results of operations may be materially different from those set forth in the forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made herein. These risks and uncertainties include the “Risk Factors” included in this Quarterly Report on Form 10-Q. Risk factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q.
Any or all of the forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. The Company has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. The forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and assumptions. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events occurring after the date hereof. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements contained in this Quarterly Report on Form 10-Q.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 29, 2024. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Certain information included herein contains statements that may be considered forward-looking statements, such as statements relating to our anticipated revenues and operating results, future performance and operations, plans for future expansion, capital spending, sources of liquidity and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include the “Risk Factors” included herein and in our Annual Report on Form 10-K filed with the SEC on March 29, 2024, that can be read at www.sec.gov.
| 2 |
| Table of Contents |
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LFTD PARTNERS INC. AND SUBSIDIARY LIFTED LIQUIDS, INC.
CONSOLIDATED BALANCE SHEETS
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| March 31, 2024 |
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| December 31, 2023 |
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| ASSETS |
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| Current Assets |
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Cash and Cash Equivalents |
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Prepaid Expenses |
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| Accounts Receivable, net of allowance of $ |
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Inventory |
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Income Tax Receivable |
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| Current Portion of Settlement Asset and Receivables |
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Other Current Assets |
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Total Current Assets |
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Restricted Cash |
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Goodwill |
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Investment in Ablis |
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Investment in Bendistillery and Bend Spirits |
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Net Deferred Tax Asset |
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| Fixed Assets, less accumulated depreciation of $ |
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| Security and State Licensing Deposits and Bonds |
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| Operating Lease Right-of-Use Asset, net of Right-of-Use Asset Amortization of $ |
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| Non-Current Portion of Settlement Asset and Receivables |
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| Total Assets |
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| LIABILITIES AND SHAREHOLDERS' EQUITY |
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| Current Liabilities |
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Operating Lease Liability |
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Deferred Revenue |
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Minimum Earnout Consideration to be paid pursuant to the Oculus Merger Agreement ($ |
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Collab Commissions and Royalties Payable |
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Accounts Payable and Accrued Expenses |
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Accounts Payable - Related Party |
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| Preferred Stock Dividends Payable |
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| Notes Payable to Surety Bank |
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| Interest Payable to Surety Bank |
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| Total Current Liabilities |
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| Non-Current Liabilities |
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| Operating Lease Liability |
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| Net Deferred Tax Liability |
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| Notes Payable to Surety Bank |
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| Total Non-Current Liabilities |
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| $ |
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| Total Liabilities |
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| Commitments and Contingencies |
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| Shareholders' Equity |
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| Preferred Stock, $ |
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Series A Convertible Preferred Stock: |
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Series B Convertible Preferred Stock: |
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| Common Stock, $ |
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Additional Paid-in Capital |
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Accumulated Deficit |
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| Total Shareholders' Equity |
| $ |
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| $ |
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| Total Liabilities and Shareholders' Equity |
| $ |
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| $ |
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The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
| F-1 |
| Table of Contents |
LFTD PARTNERS INC. AND SUBSIDIARY LIFTED LIQUIDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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| For the Three Months Ended |
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| March 31, |
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| 2024 |
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| 2023 |
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Net Sales |
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Cost of Goods Sold |
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Gross Profit |
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Operating Expenses |
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Payroll Expenses |
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Deferred Contingent Stock Expense |
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Company-Wide Management Bonus Pool |
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Professional Fees |
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Bank Charges and Merchant Fees |
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Advertising and Marketing |
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Bad Debt Expense |
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Depreciation and Amortization |
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Collab Commission and Royalty Expense |
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Other Operating Expenses |
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Total Operating Expenses |
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Income/(Loss) From Operations |
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Other Income/(Expenses) |
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Interest Expense |
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Debt Financing Expenses |
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Dividend Income |
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Penalties |
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| Loss on Disposal of Fixed Assets |
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| Loss on Jeeter Collab |
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Interest Income |
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Total Other Expenses |
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Loss Before Provision for Income Taxes |
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Provision for Income Taxes |
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Net Loss Attributable to LFTD Partners Inc. common stockholders |
| $ | ( | ) |
| $ | ( | ) |
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Basic Net Loss per Common Share |
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Diluted Net Loss per Common Share |
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Weighted average number of common shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
| F-2 |
| Table of Contents |
LFTD PARTNERS INC. AND SUBSIDIARY LIFTED LIQUIDS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
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| Deferred |
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| Additional |
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| Contingent |
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| Total |
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| Preferred Stock |
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| Common Stock |
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| Paid-in |
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| Accumulated |
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| Shares |
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| Amount |
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| Shares |
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| Amount |
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| to be Issued |
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| Deficit |
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| Equity |
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| Balance, December 31, 2022 |
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| Issuance of 410,000 of the total 645,000 shares of Deferred Contingent Stock related to the acquisition of Lifted, of which shares began being issued on February 24, 2023 upon direction by the Deferred Contingent Stock Recipients |
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| Series A Preferred Stock dividend payable |
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| Series B Preferred Stock dividend payable |
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| Net Loss |
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| Balance, March 31, 2023 |
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| $ |
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| $ |
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| $ |
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| $ |
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| Balance, December 31, 2023 |
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| $ |
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| $ |
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| $ |
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| $ |
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| $ |
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| Series A Preferred Stock dividend payable |
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| Series B Preferred Stock dividend payable |
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| Net Income |
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| Balance, March 31, 2024 |
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| $ |
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| $ |
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| $ |
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| $ |
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The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
| F-3 |
| Table of Contents |
LFTD PARTNERS INC. AND SUBSIDIARY LIFTED LIQUIDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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| March 31, |
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| Cash Flows From Operating Activities |
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Net Loss |
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Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities |
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Deferred Contingent Stock Compensation Expense |
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Bad Debt Expense |
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Depreciation and Amortization |
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Debt Financing Expenses |
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Loss on Disposal of Fixed Assets |
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Loss on Jeeter Collab |
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Spoiled and Written Off Inventory |
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Sales Allowances |
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Deferred Income Taxes |
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Effect on Cash of Changes in Operating Assets and Liabilities |
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Accounts Receivable |
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Prepaid Expenses |
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Income Tax Receivable and Payable |
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Inventory |
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Other Current Assets |
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Collab Commissions and Royalties Payable |
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Trade Accounts Payable and Accrued Expenses |
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Accounts Payable and Interest Payable to Related Parties |
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Change in Settlement Asset and Receivables |
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Change in Right Of Use Asset |
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Change in Finance and Operating Lease Liabilities |
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Deferred Revenue |
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Net Cash Provided by Operating Activities |
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Cash Flows From Investing Activities |
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Net Purchases of Fixed Assets |
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Net Cash Used in Investing Activities |
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| Cash Flows From Financing Activities |
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| Payments on Surety Bank Loans |
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| Payments of Dividends to Preferred Stockholders |
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Payments on Finance Lease Liability |
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Net Cash Used In Financing Activities |
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Net Increase/(Decrease) in Cash |
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| Cash, Cash Equivalents and Restricted Cash at Beginning of Period |
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| Cash, Cash Equivalents and Restricted Cash at End of Period |
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| For the Three Months Ended |
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| March 31, |
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| Supplemental Cash Flow Information |
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| Cash Paid For Interest |
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| Cash Paid For Income Taxes |
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| Non-Cash Activities |
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| Right-of-Use assets acquired from inception of Operating Leases |
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| Reconciliation of the Consolidated Statements of Cash Flows to the Consolidated Balance Sheets |
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| Cash and Cash Equivalents |
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| Restricted Cash |
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| Total Cash, Cash Equivalents and Restricted Cash at End of Period |
| $ |
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| $ |
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The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
| F-4 |
| Table of Contents |
LFTD PARTNERS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – DESCRIPTION OF THE BUSINESS OF LFTD PARTNERS INC.
LFTD Partners Inc. (hereinafter sometimes referred to as “LFTD Partners”, the “Company”, “LIFD”, the “Company”, “we”, “us”, “our”, etc.) was organized under the laws of the State of Nevada on January 2, 1986. Shares of the Company’s common stock are traded on the OTCQB Venture Market under the trading symbol LIFD.
On May 18, 2021, the Company changed its name to LFTD Partners Inc. from Acquired Sales Corp. On March 15, 2022, the Company changed its stock trading symbol to LIFD.
After acquiring, operating and then selling businesses involved in the defense sector, our business is currently directly or indirectly involved in the development, manufacture and/or sale or re-sale of a wide variety of branded, hemp-derived, psychoactive and alternative lifestyle products, and of products involving, nicotine, tobacco and marijuana.
We are primarily interested in acquiring rapidly growing, profitable companies that are also involved in the manufacture and sale of branded, hemp-derived, psychoactive and alternative lifestyle products (a “Canna-Infused Products Company”). Management of the Company is open-minded to the concept of also acquiring operating businesses and/or assets directly or indirectly involving products containing nicotine, tobacco, marijuana, distilled spirits, beer, wine, and/or real estate. In addition, management of the Company is open-minded to the concept of diversifying, by acquiring all or a portion of one or more operating businesses and/or assets that are considered to be “essential” businesses that are outside our industry and that are unlikely to be shut down by the government during pandemics such as COVID-19, or that have less regulatory risk than a Canna-Infused Products Company.
Lifted Made
On February 24, 2020, we acquired
Lifted is the worldwide, exclusive manufacturer and seller of Diamond Supply Co. (www.DiamondSupplyCo.com) and Cali Sweets hemp-derived products.
Ablis, Bendistillery and Bend Spirits
On April 30, 2019, we also closed on the acquisition of
Ablis manufactures and sells flavored, lightly carbonated, canned, CBD-infused beverages, “functails” – a term coined by Ablis and which means a beverage crafted with high-quality functional ingredients, CBD-infused muscle rub, among other products.
Bendistillery manufactures and sells straight and flavored vodka and gin and various types of whiskey under its brand Crater Lake Spirits.
Bank Financing and Purchase of Headquarters Building
On December 14, 2023, LFTD Partners and Lifted (together the “Borrower”), jointly borrowed a total of $
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Purchase of the 5511 Building
Toward the end of 2020, our Vice Chairman and Chief Operating Officer Nicholas S. Warrender (“NWarrender”), through his assigned entity 95th Holdings, LLC (“Holdings”), purchased the 5511 Building, which was immediately leased to us to conduct our expanded operations. The 5511 Building includes office, laboratory and warehouse space. As part of the lease agreement with Holdings, the parties agreed that our wholly owned subsidiary Lifted would eventually purchase the 5511 Building. The purchase price for the 5511 Building was originally subject to valuation based on a formula agreed upon by the parties. Pursuant to an agreement with NWarrender on December 30, 2021, the parties agreed to set the purchase price for the 5511 Building at $
Improvements to and Potential Expansion of the 5511 Building
Due to an extreme need for additional employee parking spots at the 5511 Building, the Company in the fourth quarter of 2022 built a parking lot at the 5511 Building for $
The Company desires to have all of its operations under one roof at the 5511 Building in order to become more efficient. The Company has hired and paid an architectural and construction company (the “Construction Company”) which has created a preliminary design for expanding the 5511 Building by approximately 30,000 square feet. The Construction Company has provided a preliminary estimate that the potential expansion could cost the Company approximately $
$3,000,000 Working Capital Loan
Credit Agreement
Pursuant to the Credit Agreement dated as of December 14, 2023 (the “Credit Agreement”), among the Borrower and the Lender, the Lender agreed to loan to the Borrower $
The Credit Agreement is also subject to certain negative covenants in which the Borrower agreed (subject to certain exceptions) not to, among other things:
| · | Become subject to other liens or encumbrances; |
| · | Change ownership of Lifted without the consent of the Lender; |
| · | Enter into a merger, acquisition or divestiture; |
| · | Conduct stock buybacks; |
| · | Serve as a guarantor; |
| · | Wind up, liquidate or dissolve; |
| · | Enter into the purchase, sale, exchange or transfer of property; |
| · | Permit the outstanding principal balance of the Working Capital Loan to exceed 40% of the fair market value of the collateral securing the Working Capital Loan; or |
| · | Directly or indirectly issue, assume or create any additional indebtedness on the collateral. |
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Promissory Note
Pursuant to the Promissory Note dated as of December 14, 2023 (the “WC Note”), among the Borrower and the Lender, the Lender agreed to loan to the Borrower the Working Capital Loan at a fixed annual interest rate of
Security Agreement
Pursuant to a Security Agreement dated as of December 14, 2023 (“Security Agreement”), the Borrower granted to the Lender a security interest in all the Borrower’s personal property relating to its business to secure the obligations of the Borrower under the Credit Agreement. The collateral that is secured by the Security Agreement includes all the Borrower’s accounts, general intangibles, inventory, equipment, goods, deposit accounts, contractual rights, fixtures, money, insurance and commercial tort claims.
If an event of default under the Credit Agreement occurs, then the Lender may exercise the Borrower’s rights in the collateral. In that event, the Lender will have all the rights of a secured party with respect to the collateral under the Uniform Commercial Code, including, among other things, the right to sell the collateral at public or private sale.
Collateral Assignment Agreement
Under the Collateral Assignment Agreement dated as of December 14, 2023, between the Borrower and the Lender, the Borrower assigned to the Lender, in connection with the terms of the Credit Agreement, all of Borrower’s “intellectual property”, including but not limited to, all patents, patent rights, trademarks and service marks, works, inventions, copyrights, trade names, software and computer programs, trade secrets, methods, processes, know how, drawings, and specifications. In the event of default under the Credit Agreement or WC Note, or other cross collateralized obligations, the Lender would be entitled to the foregoing intellectual property collateral to the detriment of the Borrower.
Pledge Agreement
Under the Pledge Agreement dated as of December 14, 2023, between the Borrower and the Lender, the Borrower, in connection with the terms of the Credit Agreement, pledges all equity holdings in Lifted, Bendistillery, Inc., Bend Spirits, Inc., and Ablis Holding Company. In the event of default under the Credit Agreement or WC Note, or other cross collateralized obligations, the Lender would be entitled to the foregoing equity collateral to the detriment of the Borrower.
$910,000 Loan
Business Loan Agreement
Pursuant to the Business Loan Agreement dated as of December 14, 2023 (the “Loan Agreement”), among the Borrower and the Lender, the Lender agreed to loan $
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Promissory Note
Pursuant to the Promissory Note dated as of December 14, 2023 (the “BL Note”), among the Borrower and the Lender, the Lender agreed to loan to the Borrower the Business Loan at a fixed annual interest rate of
Mortgage
Pursuant to the Mortgage dated as of December 14, 2023 (the “Mortgage”), among Lifted in favor of the Lender, in connection with the terms of the Loan Agreement and BL Note, Lifted agreed to a first priority mortgage on the 5511 Building (Parcel Number 08-222-32-410-104). In the event of default under the Loan Agreement or BL Note, or other cross collateralized obligations, the Lender would be entitled to the foregoing equity collateral to the detriment of the Borrower.
Assignment of Rents, Leases, and Security Deposits
Pursuant to the Assignment of Rents, Leases, and Security Deposits dated as of December 14, 2023 (the “Lease Assignment”), among Lifted in favor of the Lender, in connection with the terms of the Loan Agreement and BL Note, Lifted agreed to assign its rights to leases and income from the 5511 Building to Lender. In the event of default under the Loan Agreement or BL Note, or other cross collateralized obligations, the Lender would be entitled to the foregoing equity collateral to the detriment of the Borrower.
Default under any of the agreements described above could have a highly detrimental, if not catastrophic impact on our company.
Consolidated Balance Sheet Presentation of the Working Capital and Business Loans and Maturity Analysis
The following presents the Working Capital and Business Loans in the Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023:
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Working Capital Loan |
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Business Loan |
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Total principal amount |
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Less: Unamortized debt financing costs |
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Less: Current portion of Surety Bank notes |
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Non-Current portion of Surety Bank notes |
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The following represents aggregate payments due on the Working Capital and Business Loans during each of the five years subsequent to March 31, 2024 and thereafter:
Maturity Analysis as of March 31, 2024: |
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2024 |
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2025 |
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2026 |
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2027 |
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2028 |
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Thereafter |
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Total |
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Less: Interest portion |
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Total principal amount |
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Manufacturing, Sales and Marketing Agreements
During the year ended December 31, 2023 Lifted entered into Manufacturing, Sales and Marketing Agreements with Cali Sweets, LLC (“Cali”), Diamond Supply Co. (“Diamond”), and DreamFields Brands Inc. d/b/a Jeeter (“Jeeter”) (collectively, “Agreements”). The terms of these Agreements are described below. The aggregate net revenue related to these Agreements for the quarter ended March 31, 2024 was $
Cali Sweets Agreement
On January 11, 2023, Lifted entered into a Manufacturing, Sales and Marketing Agreement (“Cali Agreement”) with Cali Sweets, LLC (“Cali”). Cali is headquartered in North Hollywood, California, and currently sells products under the brand name Koko Nuggz. The Cali Agreement entitles Lifted to be the exclusive worldwide manufacturer and distributor of Cali’s disposable vape products (under the brand name Koko Puffz) and gummy products (under the brand name Koko Yummiez) (“Cali Products”).
Pursuant to the Cali Agreement, Lifted manufactures, markets, and distributes certain Cali Products and brands worldwide. Lifted and Cali equally share certain production and marketing costs associated with such Cali Products on a dollar-for-dollar basis. Revenue from the sale of such Cali Products are divided on a 60/40 basis, net of any returns, discounts, or replacements, with 60% allocated to Lifted, and the remaining 40% to Cali.
Under the terms of the Cali Agreement, Lifted has the right, in its discretion, to add new Cali brands and Cali Products as they are developed. Lifted can also set prices for Cali Products it supplies or unilaterally discontinue the supply of any Cali product if it no longer makes business sense to Lifted. The parties also agreed that Cali will provide social media marketing services for both Cali Products and brands, and for Lifted’s Urb branded products.
The term of the Cali Agreement is five years and may be extended with the mutual consent of the parties. However, after the initial 24 months, the Cali Agreement may be terminated by either party, for any or no reason, upon providing the other party with 180 days written notice. Cali may become subject to early exit payments to Lifted if it early terminates. The exit fee formula is based on estimated profits that Lifted may have enjoyed had Cali not early terminated the relationship.
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Accounting for the Cali Agreement
Regarding the accounting for the Cali Agreement: the Company has evaluated the principal versus agent considerations in Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The Company has considered the following facts to assess whether Lifted has control of the Cali Products that are manufactured and distributed pursuant to the Cali Agreement:
| · | Lifted is the exclusive worldwide manufacturer and distributor of the Cali Products. To fulfill its obligations pursuant to the Cali Agreement, Lifted sources raw goods, labor, and other resources to manufacture the Cali Products at Lifted’s facilities and holds these raw goods and Cali Products in its facilities until the Cali Products are sold and shipped to customers. |
| · | Customers’ orders of Cali Products are received through Lifted’s website www.urb.shop. Lifted processes these orders, prepares the Cali Products for shipment from Lifted’s inventories, and ships the Cali Products directly to the customers. Lifted is responsible for collecting payments from customers but does not guarantee collection. |
| · | Lifted has the right, in its discretion, to add new Cali brands and Cali Products as they are developed. |
| · | Lifted can set prices for Cali Products it supplies or unilaterally discontinue the supply of any Cali product if it no longer makes business sense to Lifted. |
Based on these considerations, the Company concludes that Lifted is the principal relative to Cali in the Cali Agreement.
Therefore, sales of Cali Products are recognized and reported by the Company on a gross basis on the Consolidated Statements of Operations, and once payment is collected from a customer from the sale of Cali Products, the Commission Payable to Cali is reported as a current liability on the Company’s Consolidated Balance Sheets, and Commission Expense is reported in the Operating Expenses section of the Consolidated Statements of Operations.
Manufacturing, Sales and Marketing Agreement With Diamond Supply Co.
On April 23, 2023, Lifted entered into a Manufacturing, Sales and Marketing Agreement (“Diamond Agreement”) with Diamond Supply Co. (“Diamond”), Calabasas, California. Founded in 1998, Diamond develops and sells a full range of skateboard hard and soft goods including bolts, bearings, t-shirts, hoodies, and other skateboarding and streetwear accessories. The Diamond Agreement entitles Lifted to be the exclusive worldwide manufacturer and distributor of Diamond’s disposable vapes, gummies, pre-rolled joints, and hard candies (“Diamond Products”). These Diamond Products may contain CBD, hemp, delta-8-THC, delta-10-THC, cannabis and/or cannabinoid derivatives and are to be branded under one or more of Diamond’s brands or marks.
Lifted shall pay Diamond a royalty of twenty percent (20%) of Adjusted Gross Revenue (defined below) on the initial manufacturing run of each Diamond Product manufactured and sold by Lifted under the Diamond Agreement. The Diamond Agreement defines Adjusted Gross Revenue as revenue on the Diamond Product “less any sales taxes, actual returns, pre-approved discounts, replacements, refunds and credits for returns.”
After the initial manufacturing run of a Diamond Product, Lifted shall pay Diamond a royalty of forty five percent (45%) of Adjusted Gross Revenue on subsequent manufacturing runs for that Diamond Product; however, under the terms of the Diamond Agreement, the parties will split manufacturing costs 50/50 for Diamond Products sold after each Diamond Product’s first manufacturing run. Alternatively, under the terms of the Diamond Agreement, Diamond is entitled to notify Lifted that it elects to be paid a flat 7% of Adjusted Gross Revenue on specific subsequent manufacturing runs without sharing in the manufacturing costs for that run. Diamond is also entitled to purchase Diamond Products produced under the Diamond Agreement from Lifted for direct sale on Diamond’s website and via certain other channels used by Diamond. Under the terms of the Diamond Agreement, Diamond’s cost for these Diamond Products acquired for direct sale is 30% below wholesale.
Under the terms of the Diamond Agreement, the parties will work together to set prices for Diamond Products. The term of the Agreement is three years and may be extended with the mutual consent of the parties. However, the Diamond Agreement may be extended for one-year with notice by Diamond at least three months prior to the end of the
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Accounting for the Diamond Agreement
Regarding the accounting for the Diamond Agreement: the Company has evaluated the principal versus agent considerations in ASC 606, Revenue from Contracts with Customers. The Company has considered the following facts to assess whether Lifted has control of the Diamond products that are manufactured and distributed pursuant to the Diamond Agreement:
| · | Lifted is the exclusive worldwide manufacturer and distributor of the Diamond Products. To fulfill its obligations pursuant to the agreement, Lifted sources raw goods, labor, and other resources to manufacture the Diamond Products at its own facilities and holds these raw goods and Diamond Products in its facilities until the Diamond Products are sold and shipped to customers. |
| · | Customers’ orders of Diamond Products are received through Lifted’s website www.urb.shop. Customers that attempt to purchase the Diamond Products from www.diamondsupplyco.com are redirected to www.urb.shop. Lifted processes these orders, prepares the Diamond Products for shipment from Lifted’s inventories, and ships the Diamond Products directly to customers. |
| · | Lifted and Diamond agree upon the retail sales prices for the Diamond Products, and both Lifted and Diamond are to make good faith efforts to collect all payments in connection with each party’s sales of Diamond Products to all of its customers. |
Based on these considerations, the Company concludes that Lifted is the principal relative to Diamond in the Diamond Agreement.
Therefore, sales of Diamond Products are recognized and reported by the Company on a gross basis on the Consolidated Statements of Operations, and once payment is collected from a customer from the sale of Diamond Products, the Royalty Payable to Diamond is reported as a current liability on the Company’s Consolidated Balance Sheets, and Royalty Expense is reported in the Operating Expenses section of the Consolidated Statements of Operations.
Jeeter Agreement
On July 17, 2023, Lifted and DreamFields Brands Inc. d/b/a Jeeter (“Jeeter”) entered a Manufacturing, Sales and Marketing Agreement dated as of July 14, 2023 (the “Jeeter Agreement”). Pursuant to the Jeeter Agreement: (1) Jeeter appointed Lifted as its exclusive manufacturer, seller and distributor within the United States of vape, gummies and pre-rolled products containing hemp-derived cannabinoids sold under the Jeeter brand (“Jeeter Products”); (2) Jeeter and Lifted agreed upon the devices, formulation, design, packaging, run costs, and marketing of each of the Jeeter Products; (3) Jeeter and Lifted shared equally the costs of manufacturing, marketing, distributing and insuring the Jeeter Products (“Product Costs”); and (4) the revenue from all Product sales, minus applicable Product offsets and sales commissions (“Aggregate Product Revenue”), were allocated 60% to Jeeter and 40% to Lifted.
The Jeeter Agreement was for an Initial Term of two years, provided that if the completed Product sales during the first year of the Initial Term were a minimum of $
Jeeter could terminate the Jeeter Agreement at any time upon written notice to Lifted upon any of the following: (1) if Lifted failed to achieve the Minimum Sales during any 12 month period; (2) if there was any material change in federal legislation regarding the manufacturing, sale, use or consumption of hemp-derived delta-8-THC that in Jeeter’s sole and absolute determination had an adverse impact upon the Jeeter Agreement; or (3) if Jeeter determined in its sole and absolute discretion that the sale of Jeeter Products under the Jeeter Agreement had or was reasonably likely to have an adverse impact on Jeeter’s delta-9-THC product business.
The Jeeter Agreement provided that if Aggregate Product Revenue achieves $
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Accounting for the Jeeter Agreement
Regarding the accounting for the Jeeter Agreement: the Company evaluated the principal versus agent considerations in ASC 606, Revenue from Contracts with Customers. The Company considered the following facts to assess whether Lifted had control of the Jeeter Products that are manufactured and distributed pursuant to the Jeeter Agreement:
| · | Lifted was the exclusive manufacturer, seller, and distributor of the applicable Jeeter branded products in the USA. To fulfill its obligations pursuant to the agreement, Lifted sourced raw goods, labor, and other resources to manufacture the Jeeter Products at its own facilities and held these raw goods and Jeeter Products in its facilities until the Jeeter Products were sold and shipped to customers. Initially, Lifted was manufacturing all of the Jeeter Products, but in the middle of Q3 2023 Jeeter also began manufacturing joints at its facility after being authorized by Lifted to do so. Nonetheless, Jeeter produced joints during Monday through Friday, and then shipped the finished joints to Lifted’s headquarters in Kenosha on Saturday. Lifted controlled the Jeeter Products until they were then sold and shipped to the customers. |
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| · | Customers’ orders of Jeeter Products were received through Lifted’s website www.urb.shop. Lifted processed these orders, prepared the Jeeter Products for shipment from Lifted’s inventories, and shipped the Jeeter Products directly to the customers. Lifted was responsible for collecting payments from customers but did not guarantee collection, nor the timetable of such collection. |
Based on these considerations, the Company concluded that Lifted was the principal relative to Jeeter in the Jeeter Agreement.
Therefore, sales of Jeeter Products were recognized and reported by the Company on a gross basis on the Consolidated Statements of Operations, and once payment was collected from a customer from the sale of Jeeter Products, the Commission Payable to Jeeter was reported as a current liability on the Company’s Consolidated Balance Sheets, and Commission Expense was reported in the Operating Expenses section of the Consolidated Statements of Operations.
Termination of the Jeeter Agreement
The Jeeter Agreement was terminated effective January 1, 2024 pursuant to a Termination Agreement dated as of March 22, 2024 between Jeeter and Lifted. Pursuant to such Termination Agreement, among other things:
Mirsky Agreement
On July 11, 2023, Lifted and Florence Mirsky (“Mirsky”) entered into an Agreement (the “Mirsky Agreement”). Pursuant to the Mirsky Agreement, in consideration of Mirsky’s introduction of Jeeter to Lifted, Lifted shall pay to Mirsky finder’s fees equal to
Lifted Purchase of Assets of Oculus CRS, LLC, and Merger With Oculus CHS Management Corp.
Asset Purchase Agreement
On April 28, 2023, Lifted purchased nearly all of the assets (the “Purchased Assets”) of its hemp flower products supplier Oculus CRS, LLC, Aztec, New Mexico (“Oculus”) for $
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The gross Purchase Price of $
Agreement and Plan of Merger
Simultaneously with Lifted’s purchase of the Purchased Assets, Lifted executed an Agreement and Plan of Merger (“Oculus Merger Agreement”) with Oculus CHS Management Corp. (the “Management Corp.”), pursuant to which the Management Corp. was merged with and into Lifted, with Lifted being the surviving corporation in the merger (the “Merger”). The only assets of the Management Corp. were multi-year employment contracts with the owners/managers of Oculus, Chase and Hagan Sanchez (the “Employment Agreements”).
The Merger consideration (the “Merger Consideration”) will be paid by Lifted to Chase and Hagan Sanchez in two installments.
The first installment of the Merger Consideration was paid by Lifted to Chase and Hagan Sanchez at the closing of the Merger, and consisted of
The second installment of the Merger Consideration will be paid by Lifted to Chase and Hagan Sanchez following the first anniversary of the closing of the Merger, which will be April 28, 2024. The second installment of the Oculus Merger Consideration will be calculated and paid out as follows:
(1) Lifted’s CEO NWarrender, in consultation with LIFD’s President and CFO WJacobs, will analyze and make a written determination (the “Determination”) of the incremental pre-tax cash flow that NWarrender estimates that the hemp flower products division is generating for Lifted above and beyond the annual profits that are currently being generated for Lifted due to Lifted’s current business relationship with Oculus (the “Incremental Pre-Tax Profits”), after taking into account all relevant financial factors including but not limited to the purchase price of the Purchased Assets, the Merger Consideration, and all items of income, expense and investment directly and indirectly associated with Lifted’s hemp flower products division, which Determination will be final and legally binding on all of the parties; and
(2) Within five days following delivery of the Determination, Lifted will pay Chase and Hagan Sanchez a second installment of Merger Consideration equal to five times the Incremental Pre-Tax Profits, provided that (a) 20% of such second installment of Merger Consideration shall be paid in the form of cash, (b) 80% of such second installment of Merger Consideration shall be paid in the form of unregistered shares of common stock of LIFD, which unregistered shares of common stock of LIFD shall be valued at $5 per share regardless of whether LIFD’s common stock is then trading at a price that is lower or higher than $5 per share, and (c) such second installment of Merger Consideration shall be subject to a minimum value of $1 million dollars (“Minimum Earnout Consideration”) and a maximum value of $6 million dollars (with the stock portion of the second installment of Merger Consideration being valued at $5 per share under all circumstances).
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As examples, for illustrative purposes only:
| (a) | If, according to NWarrender’s Determination, the |
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| (c) | If, according to NWarrender’s Determination, the Incremental Pre-Tax Profits of Lifted being generated by the business is $2,000,000, then the second installment of the Merger Consideration would be the maximum of $6,000,000, of which ($6,000,000 X .2) = $1,200,000 would be in the form of cash, and the remaining $4,800,000 would be paid in the form of ($4,800,000/$5) = 960,000 newly issued shares of unregistered LIFD Common Stock. |
Accounting for Lifted’s Purchase of Assets of Oculus CRS, LLC, and Merger With Oculus CHS Management Corp.
Consideration Paid Pursuant to the Asset Purchase Agreement |
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Cash used to pay off Oculus' liabilities at the closing |
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Consideration Paid Pursuant to the Oculus Merger Agreement |
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Value of Minimum Earnout Consideration to be paid in cash |
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Value of Minimum Earnout Consideration to be paid in shares of common stock of LIFD (160,000 shares of common stock valued at $5.00 per share) |
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Total Consideration |
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Assets Acquired: |
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Total Liabilities Assumed |
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Net Assets Acquired |
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As described in NOTE 14 – SUBSEQUENT EVENTS, on May 8, 2024, NWarrender, in consultation with WJacobs, made the Determination that the Incremental Pre-Tax Profits were zero dollars ($
(1) Two Hundred Thousand Dollars ($
(2) One Hundred Sixty Thousand (
On May 13, 2024, the cash component of the second installment of Merger Consideration was paid, and the stock component of the second installment of Merger Consideration was issued.
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Employment Agreements
Pursuant to the terms of the Oculus Merger Agreement, upon the closing of the Merger, all of the Management Corp.’s rights and obligations under the Employment Agreements have been assumed by Lifted. Chase and Hagan Sanchez are now the Vice President of Flower and General Manager of Flower of Lifted, respectively, and will continue to manage the hemp flower products business in Aztec, NM, which will operate as a hemp flower products division within Lifted, reporting to NWarrender, Lifted’s CEO. Pursuant to Chase Sanchez’s employment agreement, his salary is $
At the time of the Merger, in addition to Chase and Hagan Sanchez, a total of 20 other people who had previously worked at Oculus became full-time employees of Lifted. Lifted agreed to, and did, pay employment bonuses to certain of these new people, in an aggregate amount totaling $
Lease of Space Located at 16178 US Hwy 550, Aztec, New Mexico
Pursuant to the terms of the Oculus Merger Agreement, upon the closing of the Merger, Lifted assumed Oculus’ lease of office and operational space in Aztec, New Mexico.
Extrax NM Agreement
On June 1, 2023, Lifted and Extrax NM, LLC (“ENM”) entered into an Agreement (the “ENM Agreement”). Pursuant to the ENM Agreement, (1) Lifted will sell certain devices/objects to ENM, and Lifted will loan certain amounts to ENM, and (2) ENM will manufacture and exclusively sell Urb-branded marijuana products to licensed marijuana dispensaries located in New Mexico. ENM shall pay over to Lifted one-half of the gross sales proceeds, excluding only governmentally-imposed taxes, received by ENM from product sales, which payments shall be allocated and applied as follows: firstly, to repay Lifted for its loans to ENM; secondly, to pay to Lifted mutually agreed upon amounts for said devices/objects sold by Lifted to ENM; and thirdly, to pay to Lifted a license fee.
The ENM Agreement is for an Initial Term of 60 months, provided that if the aggregate product sales during the Initial Term are $
Lifted and ENM each shall have the right to terminate the ENM Agreement in specified circumstances, including in the event that its CEO determines in good faith, and provides evidence to other party proving, that the business being conducted pursuant to the terms and conditions of the ENM Agreement is no longer profitable for such company.
Regarding the accounting for the ENM Agreement: the Company has evaluated the principal versus agent considerations in ASC 606, Revenue from Contracts with Customers. Management has considered the following facts to assess Lifted’s position relative to ENM under the ENM Agreement:
| · | ENM has the right to use the Urb brand name on marijuana products sold within New Mexico in accordance with ENM’s license to manufacture marijuana products that can be sold to marijuana dispensaries in New Mexico. ENM sources raw goods, labor, and other resources to manufacture the Urb-branded products at its own facilities and holds these raw goods and Urb-branded products in its facilities until the Urb-branded products are sold and shipped to customers. ENM controls the Urb-branded products until they are then sold and shipped to the customers. |
| · | Customers’ orders of Urb-branded products are received by ENM. ENM processes these orders, prepares the Urb-branded products for shipment from ENM’s inventories, and ships the Urb-branded products directly to the customers. ENM is responsible for collecting payments from the customers, referred to in the ENM Agreement as the “Unit Sale Proceeds”. |
| · | ENM will source some of the raw goods, fixed assets and supplies from Lifted for manufacture of the Urb-branded products. The raw goods sourced from Lifted are referred to in the ENM Agreement as “Unit Components”. These Unit Components are maintained in Lifted’s inventories and shipped to ENM based on agreement between the CEOs of both Lifted and ENM. Lifted receives an agreed upon price, referred to in the ENM Agreement as the “Unit Component Price”, for each Unit Component shipped to ENM. |
| · | ENM shall pay over to Lifted one-half of the Unit Sale Proceeds, which payments shall be allocated and applied as follows: firstly, to repay Lifted for its loans to ENM; secondly, to pay to Lifted mutually agreed upon amounts for the Unit Components; and thirdly, to pay to Lifted a License Fee. |
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Based on these considerations, the Company concludes that Lifted is a principal relative to ENM in the ENM Agreement in regards to Lifted’s sale of Unit Components to ENM. Therefore, Lifted recognizes sales of Unit Components to ENM on a gross basis on Lifted’s Consolidated Statements of Operations.
The Company concludes that Lifted is an agent relative to ENM in the ENM Agreement in regards to ENM’s sale of Urb-branded products to dispensary customers. When ENM pays over to Lifted one-half of the Unit Sale Proceeds, Lifted will first apply this money to the loans receivable from ENM, and then the money will be applied to the receivable(s) related Lifted’s sale of the Unit Components to ENM. Then, any of the excess/remaining money will be recognized and reported by Lifted as License Fee revenue on Lifted’s Consolidated Statements of Operations.
Manufacturing, Sales and Marketing Agreement With Subsidiary of a Large, Publicly Traded US Marijuana Company
On or about January 23, 2024, Lifted entered into a Manufacturing, Sales and Marketing Agreement effective as of January 20, 2024 (“Agreement”) with a wholly owned subsidiary of a large, publicly traded US marijuana company that designs and sells hemp-derived vape and gummy products. The Agreement is similar in many respects to the other manufacturing, sales and marketing agreements entered into by Lifted in 2023. Our management does not believe that any of the relationships with the other collaborating companies have had a significant impact on our revenues as no sales under any of the agreements have increased Lifted’s revenues by more than 5%. There is no assurance that this new Agreement, with this new counterparty, will have a greater impact on our revenues than the relationships with the others; however, it may.
Services to be Provided by Lifted Made
Under the terms of the new Agreement with this new counterparty, the parties (“Parties”) have agreed that Lifted will serve as the exclusive manufacturer and distributor of certain 2018 Farm Bill compliant hemp-derived vape products and gummy products in the formulations and to the specifications mutually agreed upon by the Parties (the “Products”). The territory for the sale of the Products is limited to the United States of America (“Territory”). In addition to serving as exclusive manufacturer and distributor of the Products, Lifted will be responsible to sell the Products to customers (“Customers”), and to collect all payments from such Customers for the Products in the Territory during the Term (the “Services”).
Lifted, in its capacity as the exclusive manufacturer and distributor of the Products in the Territory during the Term, shall be an independent contractor and not an agent, representative or employee of the other party. As part of the Services, Lifted shall create a distribution and sub-distribution network for the sale of Products to Customers within the Territory. Neither Party shall have any right or power to represent or bind the other Party with respect to any third party.
Term
Marketing
Under the terms of the Agreement, the other party shall be primarily responsible for marketing the Products and shall pay the costs of such marketing. Lifted shall reasonably cooperate in advertising and marketing programs for the Products and shall reasonably cooperate in implementing sales, promotional and merchandising programs for the Products. All promotional discounts shall be subject to the mutual agreement of the Parties.
| F-16 |
| Table of Contents |
Quality
Under the terms of the Agreement, Lifted is required to use its best efforts to source materials for production of the Products at the lowest cost, provided such Products shall conform to quality standards consistent with industry standards for such products. Lifted is required to ensure the Products fall within certain predefined limits of heavy metals, microbial impurities, mycotoxins, residual pesticides, residual solvents and processing chemicals, as well as additional quality standards communicated to Lifted. Any Products failing such quality standards may be rejected. Lifted is also required to manufacture the Products and be responsible for all safety testing and approvals in conformity with the standards and legal requirements applicable to the manufacturing, distribution and sale of any Products and ensuring that all governmentally required reporting (including but not limited to PACT Act reporting) is accurately and timely made, and that all applicable excise taxes and sales taxes (collectively, “Excise and Sales Taxes”) are paid. In the event of any defects in the Products, Lifted shall, at its sole cost and expense, either (i) refund the cost of such Product or (ii) replace the Product, such election to be at the other party’s sole discretion.
Under the terms of the Agreement, all elements of the design, manufacturing, quality, advertising and promotion of the Products shall be mutually agreed upon and approved by the Parties, and Lifted shall submit to the other for approval: (i) any relevant schematic designs, (ii) pre-production samples, (iii) production samples, and (iv) such other specific items as are requested by the other party in its reasonable discretion from time to time for approval, and at all times prior to production and prior to being offered for sale. Products not approved by both Parties to the Agreement shall not go on to the next stage of production and shall not be offered for sale or sold by Lifted.
Prices
Under the terms of the Agreement, the Parties have agreed to work together in good faith to determine the sales prices to Customers for the Products and such prices shall be subject to the Parties’ mutual agreement. The Parties have agreed to work together to enact lawful and appropriate pricing strategies, including MSRP and maximum sale prices. Lifted shall make good faith efforts to collect all payments in connection with sales of all Products.
Customers
Under the terms of the Agreement, the Parties have agreed to work together in good faith to determine the Customers to which Lifted is selling the Products, subject to Lifted’s reasonable discretion, provided that the Parties shall regularly evaluate sales targets, accounts receivable, bad debt, and other reasonable factors to determine which Customers to direct Product to, and the other party shall have the right, in its reasonable discretion, to reject and direct Lifted to stop selling to a Customer in the event it deems necessary upon advanced notice to Lifted.
Forecasting
Under the terms of the Agreement, the Parties have agreed to meet monthly to review Products, discuss predicted order volumes, review pricing to Customers, plan marketing and sales efforts, discuss expansion into other states within the Territory, and evaluate additional potential Customers. The Parties shall also use such meetings to agree upon the quantities of raw materials, ingredients and supplies to produce the Products.
Purchase Orders
Under the terms of the Agreement, the other party shall initiate all Purchase Orders. Lifted has the right, in its sole discretion, to accept or reject any Purchase Order. Lifted may accept any Purchase Order by confirming the order via written confirmation and written invoice sent by an authorized agent of Lifted, including estimated completion date of the Products contemplated by such Purchase Order.
Excess Demand
Under the terms of the Agreement, in the event the Parties reasonably determine, after good faith discussions, that Lifted cannot accept the volume of Purchase Orders and anticipated demand for the future production of Products at any point during the Term of this Agreement (or in the event Lifted rejects a Purchase Order), the Agreement’s exclusivity shall be automatically waived by Lifted, but only to the extent of such excess demand as reasonably determined by the Parties after good faith discussions. In such a case, the other party shall have the right to work with any manufacturer, in its sole discretion, to meet such excess demand expectations.
| F-17 |
| Table of Contents |
Costs of Purchase Order
Under the terms of the Agreement, upon Lifted’s acceptance of a Purchase Order, Lifted is entitled to invoice the other party for 50% of the costs of the Purchase Orders with net 15-day terms. Lifted may only use the 50% down payment for placing orders for materials and production costs, including lab testing, associated with the accepted Purchase Order and for no other purpose. Once the Products are completed and are ready for shipment to Customers, Lifted is entitled to invoice the other party for the remaining 50% of the costs of the Purchase Orders with net 15-day terms.
Cost Recovery and Royalty
Under the terms of the Agreement, once sales of the Products begin, Lifted is required to use all revenue from the sale of the Products (less returns, discounts, refunds, etc.) (“Adjusted Gross Revenue”) until the other party has been repaid the cost of the Purchase Order. Thereafter, the Parties shall divide the remaining Adjusted Gross Revenue 60/40, with 40% of that Adjusted Gross Revenue going to Lifted (the “Royalty”).
Warranty
Under the terms of the Agreement, Lifted represents and warrants (i) that the Products, packaging and labels to be used in the Territory shall comply with all applicable laws, rules and regulations in those US states where sales of such Products are legal; (ii) that the Products shall comply with all federal, state or local laws and regulations relating to the Products’ quality, dosage, labeling, identity, quantity, or packaging; (iii) that the Products will not be adulterated or misbranded within the meaning of any applicable federal or state law or regulation, and will contain all necessary warnings, disclosures or instructions, in each case, pursuant to all applicable laws, rules and regulations; (iv) all third parties Lifted engages in connection with the manufacturing, distribution and sale of the Product (e.g., sub-distributors) adhere to all applicable laws, rules and regulations, including without limitation those regarding the importation, child and/or oppressive labor, and the regulation of controlled substances and 2018 Farm Bill; and (v) all Products shall be free from defects in material and workmanship and fit for their intended purpose.
Indemnification
Under the terms of the Agreement, Lifted agreed to indemnify the other party for (i) harm, injury, damage or loss arising out of or in connection with the Services, production and manufacture, distribution and/or sale of the Products (including by any third parties engaged by Lifted (e.g., sub-distributors)); (ii) harm, injury, damage or loss arising out of or in connection with the use of the Products by any Customer or end-user, to the extent such harm, injury, damage or loss results from a defect in the Products; (iii) any uncured material breach by Lifted of any provision hereof; (iv) any violation of any applicable law or government regulation by Lifted or any third party engaged by Lifted in connection with the Products; and (v) any recall or withdrawal of a Product in accordance with this Agreement. Notwithstanding the forgoing, Lifted shall have no indemnification obligation hereunder pursuant to clauses (i), (ii) or (iii) above if such recall, withdrawal or defect arises out of or relates to any misuse, mishandling, or improper storage of, or damage caused to, the Products by anyone other than Lifted or its manufacturers/producers, Customers, or any third party engaged by Lifted in connection with the Products.
Insurance
During the Term of the Agreement, each Party, at its own expense, is required to procure and maintain in full force and effect its own insurance policy or policies against any loss, liability, product liability, personal injury, death, or property damage, and shall provide certificates of insurance evidencing such coverage to the other Party promptly upon request.
| F-18 |
| Table of Contents |
Termination
At any time during the Term of the Agreement, either party has the option, but not the obligation, to terminate this Agreement at any time, effective upon written notice, in the event the other Party has defaulted on any of its obligations under this Agreement and such default is not cured within thirty (30) days after receipt of written notice specifying the default.
Accounting for the Agreement
Regarding the accounting for the Agreement: the Company has evaluated the principal versus agent considerations in ASC 606, Revenue from Contracts with Customers. Management has considered the following facts to assess Lifted’s position relative to the other party under the Agreement:
An entity is a principal and therefore records revenue on a gross basis if it controls a promised good or service before transferring that good or service to the customer.
An entity is an agent and records as revenue the net amount it retains for its agency services if its role is to arrange for another entity to provide the goods or services.
Management has considered the following facts to assess whether Lifted has control of the Products that are manufactured and distributed pursuant to the Agreement:
· Lifted is the exclusive nationwide manufacturer and distributor of the Products. To fulfill its obligations pursuant to the Agreement, Lifted sources raw goods, labor, and other resources to manufacture the Products at Lifted’s facilities and holds the Products in its facilities until the Products are sold and shipped to customers.
· Customers’ orders of Products are received through Lifted’s website www.urb.shop. Lifted processes these orders, prepares the Products for shipment from Lifted’s warehouse, and ships the Products directly to the customers. Lifted is responsible for the collection of payments from customers, and is responsible for paying the other party 10% of any accounts receivable that are past due by more than 90 days.
Lifted does not include in its inventory the value of the Products, because the other party pays for 100% of the costs of the Products.
The Company concludes that Lifted is the principal relative to the other party in the Agreement.
Sales of Products are recognized and reported by the Company on a gross basis on the Consolidated Statements of Operations, and until such time that the other party has received, in each instance with respect to an applicable Purchase Order, one-hundred percent (100%) of the Purchase Order Amount from Lifted, Lifted will report all of the money received from the other party as a current liability on the Company’s Consolidated Balance Sheets. This current liability account will become smaller as Lifted remits payments to the other party.
After the other party has received 100% of the Purchase Order Amount from Lifted, any Adjusted Gross Revenue will be appropriately allocated and paid 60% to the other party and 40% to Lifted as royalty payments.
Capital Raise
We currently have several million dollars of cash on hand. Nevertheless, we may deem it necessary or desirable in the future to raise additional capital in order to build our available working capital, to close future acquisitions, to potentially expand the 5511 Building, or to pay other corporate obligations. No guarantee or assurance can be made that such capital can be raised on acceptable terms, if at all.
If we were ever to proceed forward with an equity raise, it may be in conjunction with a potential listing of our common stock on a stock exchange. However, there can be no guarantee or assurance that any such debt and/or equity capital raise or listing will be completed on acceptable terms, if at all.
NOTE 2 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements – The accompanying unaudited interim consolidated financial statements include the accounts of LFTD Partners and have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and in accordance with the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements and, accordingly, certain information, footnotes and disclosures normally included in the annual financial statements, prepared in accordance with US GAAP have been condensed or omitted in accordance with SEC rules and regulations. The financial data presented herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”). In the opinion of management, the financial data presented includes all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented, and all adjustments necessary for a fair presentation have been included in the accompanying unaudited consolidated financial statements and consist of only normal recurring adjustments, except as disclosed herein. As part of the consolidation, all significant intercompany transactions are eliminated, and on the Consolidated Statements of Operations, certain expenses are consolidated into the Other Operating Expenses category. Certain previously reported amounts have been reclassified between line items to conform to the current period presentation. Results of interim periods should not be considered indicative of the results for the full year. These unaudited interim consolidated financial statements include estimates and assumptions of management that affect the amounts reported in the unaudited consolidated financial statements. Actual results could differ from these estimates.
Use of Estimates – The preparation of financial statements in conformity with US GAAP typically requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results and outcomes may differ from management’s estimates and assumptions. Key estimates in these financial statements include the allowance for doubtful accounts, sales allowance, estimated useful lives of property, plant and equipment, valuation allowance on deferred income tax assets, the earnout liability pursuant to the Oculus Merger Agreement, and the fair value of stock options and warrants.
| F-19 |
| Table of Contents |
Cash and Cash Equivalents – Cash and cash equivalents as of the reported period ends include cash on-hand. The Company considers all highly liquid investments with an original maturity date within 90 days to be cash equivalents. Cash equivalents are carried at cost. The Company maintains its cash balance at a credit-worthy financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $
Restricted Cash – The Company considers cash balances that are legally restricted as to withdrawal or usage to be restricted cash. The Company’s Business Loan Agreement with Surety Bank requires the Company to maintain a $
Fair Value of Financial Instruments – The historical carrying amount of the financial instruments, which principally include cash, trade receivables, historical accounts payable and accrued expenses, approximates fair value due to the relative short maturity of such instruments.
ASC 820 defines fair value, establishes a framework for measuring fair value under US GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair-value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Accounting for Investments
The Company’s Investment in Lifted Made
The financial statements of LFTD Partners are consolidated with Lifted’s, since Lifted is a wholly owned subsidiary of LFTD Partners.
The Company’s Investments in Ablis, Bendistillery and Bend Spirits
The Company’s investments in Ablis Holding Company, Bendistillery Inc. and Bend Spirits, Inc. are recorded at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company owns less than
At each reporting period, the Company makes a qualitative assessment considering impairment indicators to evaluate whether its investments are impaired. Factors that the Company would consider indicators of impairment include: (1) a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee, (2) a significant adverse change in the regulatory, economic, or technological environment of the investee, (3) a significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates, (4) a bona fide offer to purchase, an offer by the investee to sell, or a completed auction process for the same or similar investment for an amount less than the carrying amount of that investment, and (5) factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants, if any.
| F-20 |
| Table of Contents |
The qualitative assessments at the end of first, second and third quarters are done via conference calls with the management teams of Ablis, Bendistillery and Bend Spirits. The qualitative assessment at the end of the fourth quarter relating to these entities also includes review of their respective financial statements that have been reviewed by a third-party accounting firm. At that time, the Company performs an annual impairment assessment. The reviewed financial statements of these companies are not audited, and the Company is not active in the management of these companies, and except for these companies’ quarterly meetings with the management of the Company, the Company’s assessment of these companies is inherently limited to infrequent and relatively brief conversations with officers of these companies and to reviews of those reviewed financial statements.
The Company’s Investment in SmplyLifted
On September 22, 2020, LFTD Partners Inc. and Lifted and privately held SMPLSTC, Costa Mesa, CA formed an equally-owned new entity called SmplyLifted LLC (“SmplyLifted”), which sold tobacco-free nicotine pouches under the brand name FR3SH.
Lifted had a 50% membership interest in SmplyLifted. The other 50% of SmplyLifted was owned by SMPLSTC and its principals. Under US GAAP, the Company used the equity method to account for its 50% membership interest in SmplyLifted. Under the equity method of accounting, the Company recorded its share (50%) of SmplyLifted’s earnings (or losses) as income (or losses) on the Consolidated Statements of Operations. The Company recorded its initial investment in SmplyLifted, which was $200,000, as an asset at historical cost. Under the equity method, the investment’s value was periodically adjusted to reflect the changes in value due to Lifted’s share in SmplyLifted’s income or losses.
Prepaid Expenses – Prepaid expenses relate primarily to advance payments made for purchases of inventory; prepaid inventory is transferred to inventory when the purchased items are received by the Company. Other expenses, such as prepaid commercial property and general liability insurance, and prepaid health and dental insurance, among others, are also recognized as prepaid expenses when advance payments are made for services that will be performed in periods subsequent to the balance sheet date. Prepaids for these other expenses are recognized as expenses ratably over the applicable service period.
Accounts Receivable – Accounts receivable of $
The Company evaluates the collectability of its trade accounts receivable based on a number of factors. Management of the Company reviews and discusses all outstanding customer trade balances as of reporting period end. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded (the “Allowance for Doubtful Accounts”), which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. Management also considers industry-specific factors which may impact customers’ ability to meet their financial obligations to the Company.
In addition to specific customer identification of potential bad debts, management takes into consideration Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses, which is codified as Accounting Standards Codification Topic 326, adds to US GAAP the current expected credit loss model (“CECL Model”), which is a measurement model based on expected losses rather than incurred losses. Under the CECL Model, an entity recognizes its estimate of expected losses as an allowance. The Company has considered the applicable guidance in ASU 2016-13. Key aspects of the CECL Model include the following:
1. The CECL Model applies to financing receivables measured at amortized cost, which includes trade accounts receivable.
2. An entity will recognize an allowance for credit losses that results in the financial statements reflecting the net amount expected to be collected from the financial asset.
3. The allowance represents the portion of the amortized cost basis that an entity does not expect to collect due to credit over the asset’s contractual life, considering past events, current conditions and reasonable and supportable forecasts of future economic conditions.
| F-21 |
| Table of Contents |
In performing its CECL Model analysis, management calculates the ratio of write offs to sales made to wholesalers and distributors for the trailing three-year period (the “Bad Debt Loss Rate”). The Bad Debt Loss Rate is then multiplied by sales made to wholesalers and distributors during the trailing twelve months (the “Bad Debt Calc”). The Bad Debt Calc is compared to the total accounts receivable that is older than 90 days as of reported period end; for conservatism, whichever is larger is considered the Allowance for Doubtful Accounts as of reported period end. The Company’s position is that the Company’s conservative approach toward the treatment of Allowance for Doubtful Accounts provides sufficient coverage in relation to potential credit losses from outstanding invoice write-offs.
Inventory – Inventory is valued at the lower of average cost or market value (net realizable value). Inventory consisted of the following at March 31, 2024 and December 31, 2023:
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| December 31, 2023 |
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Raw Goods |
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Finished Goods |
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Total Inventory |
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The process of determining obsolete or spoiled inventory involves:
| 1) | Identifying raw goods that would no longer be used in the manufacture of finished goods; |
| 2) | Identifying expired raw goods; |
| 3) | Identifying finished goods that would no longer be sold or that are slow moving; |
| 4) | Identifying finished goods that are expired; and |
| 5) | Valuing and expensing raw and finished goods that would no longer be sold. |
Monthly overhead costs such as payments for rent, utilities, insurance, and indirect labor are allocated to finished goods based on the estimated percentage cost toward the finished goods. Depreciation expense related to certain machinery and equipment is also allocated to finished goods.
At March 31, 2024, $
During the quarters ended March 31, 2024, and 2023, $
On December 30, 2022,
The payable forgiveness resulted in a net $
| F-22 |
| Table of Contents |
However, based on
Fixed Assets – Fixed assets are recorded and stated at cost. Fixed assets that cost less than $
Management regularly reviews property and equipment and other long-lived assets for possible impairment. This review occurs annually, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is an indication of impairment, management then prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. The fair value is estimated using the present value of the future cash flows discounted at a rate commensurate with management’s estimates of the business risks.
Preparation of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning expected future conditions. Long-lived assets held for sale are recorded at the lower of their carrying amount or fair value less cost to sell.
Security Deposits – Prior to the Company’s acquisition of the 5511 Building on December 14, 2023, the Company had not paid a security deposit for its lease of the 5511 Building.
The Company has paid security deposits for its leased facilities located at 8920 58th Place, Suite 850, Kenosha, WI 53144, 8910 58th Place, Suites 100, 600 and 700, Kenosha, WI 53144, 9560 58th Place, Suite 360, Kenosha, WI 53144, 2701-09 West Fulton PH, Chicago, Illinois 60612, 5732 95th Avenue, Suites 100-300, Kenosha, WI 53144, and 789 Tech Center Drive, Unit C, Durango, Colorado 81301.
As part of Lifted’s acquisition of the assets of Oculus, Lifted has assumed Oculus’ lease of office and operational space located at 16178 US Hwy 550, Aztec, New Mexico, and the security deposit that had been previously paid by Oculus to the landlord of this leased space. As described in NOTE 14 – SUBSEQUENT EVENTS, the lease of space located at 16178 US Hwy 550, Aztec, New Mexico, was terminated on May 7, 2024.
The Company has paid security deposits for utilities to various vendors.
State Licensing Deposits – The Company is required to pay deposits for certain licenses in various states.
Revenue – The Company recognizes revenue in accordance with ASC 606. The majority of the Company’s sales are of branded products to distributors, wholesalers, and end consumers. A minority of the Company’s sales are of raw goods to manufacturers, distributors and wholesalers. The majority of the Company’s sales are to distributors, followed by the Company’s sales to wholesalers, and then the Company’s sales to end consumers. Distributors primarily sell Lifted’s products to vape and smoke shops, stores specializing in cannabinoid-infused products, convenience stores, health food stores, and other outlets.
Typically, 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. If the shipping terms on a sale are FOB destination, the revenue is deferred until the product reaches its destination.
The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers. Discounts and rebates provided to customers are recorded as a reduction to gross sales.
| F-23 |
| Table of Contents |
An allowance for sales is recorded for estimated future discounts/refunds related to returns of products sold prior to the reporting period end. Described below are some of the reasons why a customer may want to return an ordered item, and how the Company responds in each situation:
| 1) | The ordered item breaks, melts, or separates in transit to the customer. In this case, the Company will replace the broken, melted or separated item at no cost to the customer. |
| 2) | The Company sent the wrong item to the customer. In this case, the Company will allow the customer to keep, at no cost to the customer, the item that was mistakenly sent to the customer. The Company will also send the correct product to the customer, at no cost to the customer. |
| 3) | The customer ordered the wrong product. In this case, the customer, at his/her own expense, must mail the mistakenly ordered product back to the Company, and the Company will mail the correct product to the customer. |
| 4) | The ordered item is recalled. In a situation where product is recalled, the Company will offer a replacement, credit, or refund. |
An allowance for sales reduces net sales on the Consolidated Statements of Operations, and also reduces accounts receivable on the Consolidated Balance Sheets. Sales allowances of $
Disaggregation of Revenue
The Company has considered providing disaggregation of revenue by information regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments, such as type of good, geographical region, market or type of customer, type of contract, contract duration, timing of transfer of goods, and sales channels. Due to the rapidly evolving nature of our industry, the Company is constantly launching new products to stay ahead of trends, finding new sales channels, initiating new distribution networks and modifying the prices of its products.
Shown below are tables showing the approximate disaggregation of historical revenue:
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Net Sales |
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| F-24 |
| Table of Contents |
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Hemp vs Non-Hemp Product Sales |
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Net Sales |
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Product Type |
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Vapes |
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Edibles |
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Flower |
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Cartridges |
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| % | ||||
Apparel and Accessories |
| $ |
|
|
| % |
| $ |
|
|
| 0 | % | |||
Net Sales |
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
Deferred Revenue
Amounts received from a customer before the purchased product is shipped to the customer are treated as deferred revenue. If cash is not received, an accounts receivable is recognized for the invoiced order, but revenue is not recognized until the order is fully shipped. Accounts receivable include amounts associated with partially shipped orders, for which the unshipped portion is a contract asset. Contract assets represent invoiced but unfulfilled performance obligations.
At March 31, 2024, total deferred revenue was $
The table shown below represents the composition of deferred revenue between contract assets (invoiced but unfulfilled performance obligations) and deposits from customers from unfulfilled orders as of March 31, 2024 and December 31, 2023.
|
| March 31, 2024 |
|
| December 31, 2023 |
| ||
Contract Assets (invoiced but unfulfilled performance obligations) |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Deposits from customers for unfulfilled orders |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Total Deferred Revenue |
| $ |
|
| $ |
| ||
Cost of Goods Sold – Cost of goods sold consists of the costs of raw materials utilized in the manufacture of products, direct labor, co-packing fees, repacking fees, freight and shipping charges, warehouse expenses incurred prior to the manufacture of Lifted’s finished products and certain quality control costs. Raw materials include ingredients, product components and packaging materials.
Cost of goods sold amounted to $
Operating Expenses – Operating expenses include accounts such as payroll expenses, deferred stock compensation expense, the company-wide management bonus pool, management bonuses, professional fees, bank charges and merchant fees, advertising and marketing, bad debt expense, depreciation and amortization, collaboration commission and royalty expenses, and other operating expenses.
| F-25 |
| Table of Contents |
Total operating expenses decreased to $
Income Taxes – Provisions for income taxes are based on taxes payable or refundable for the current year and deferred income taxes. Deferred income taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements and on tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is provided against deferred income tax assets when it is not more likely than not that the deferred income tax assets will be realized.
Basic and Diluted Earnings (Loss) Per Common Share – Basic earnings (loss) per common share is determined by dividing earnings (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per common share is calculated by dividing earnings (loss) by the weighted-average number of common shares and dilutive common share equivalents outstanding during the period. When dilutive, the incremental potential common shares issuable upon exercise of stock options and warrants are determined by the treasury stock method. The following table summarizes the calculations of basic and diluted earnings (loss) per common share for the quarters ended March 31, 2024 and 2023:
|
| For the Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
Net Loss |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
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|
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|
Basic |
|
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|
| ||
Diluted |
|
|
|
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|
| ||
|
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|
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|
|
|
|
|
Basic Net Loss per Common Share |
| $ | ( | ) |
| $ | ( | ) |
Diluted Net Loss per Common Share |
| $ | ( | ) |
| $ | ( | ) |
As of March 31, 2024, in addition to our outstanding common stock, we have issued (a) options to purchase
As of March 31, 2024, the Company had
| F-26 |
| Table of Contents |
As of March 31, 2024, the Company had
(1) Two Hundred Thousand Dollars ($
(2) One Hundred Sixty Thousand (
On May 13, 2024, the cash component of the second installment of Merger Consideration was paid, and the stock component of the second installment of Merger Consideration was issued.
As of March 31, 2023, in addition to our outstanding common stock, we had issued (a) options to purchase
As of March 31, 2023, the Company had
As of March 31, 2023, the Company had
Recent Accounting Pronouncements – On December 14, 2023, the FASB issued a final standard on improvements to income tax disclosures, ASU 2023-09, Improvements to Income Tax Disclosures. The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. For public business entities, the new requirements will be effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact, if any, that the updated standard will have on the consolidated financial statements.
On November 27, 2023, the FASB issued ASU 2023-07-Segment Reporting. The new guidance was issued primarily to provide financial statement users with more disaggregated expense information about a public entity’s reportable segments. The guidance is effective for calendar year public entities in 2024 year-end financial statements, and should be adopted retrospectively unless impracticable. The Company is currently evaluating the impact, if any, that the updated standard will have on the consolidated financial statements.
The Company is researching what other pronouncements may be applicable to the Company’s accounting and whether or not any other pronouncements should be adopted.
Advertising and Marketing Expenses – Advertising and marketing costs are expensed as incurred. During the quarter ended March 31, 2024, the Company incurred $
| F-27 |
| Table of Contents |
Off-Balance Sheet Arrangements – The Company has no off-balance sheet arrangements.
Reclassifications – Some items from the prior period have been reclassified within the financial statements to conform with the current presentation.
Business Combinations and Consolidated Results of Operations and Outlook – The Company accounts for its acquisitions under ASC Topic 805, Business Combinations and Reorganizations (“ASC Topic 805”). ASC Topic 805 provides guidance on how the acquirer recognizes and measures the consideration transferred, identifiable assets acquired, liabilities assumed, non-controlling interests, and goodwill acquired in a business combination. ASC Topic 805 also expands required disclosures surrounding the nature and financial effects of business combinations. Acquisition costs are expensed as incurred.
When the Company acquires a business, we allocate the purchase price to the assets acquired and liabilities assumed in the transaction at their respective estimated fair values. We record any premium over the fair value of net assets acquired as goodwill. The allocation of the purchase price involves judgments and estimates both in characterizing the assets and in determining their fair value. We use all available information to make these fair value determinations and engage independent valuation specialists to assist in the fair value determination of the acquired long-lived assets.
Accounting for Operating and Finance Lease Right-of-Use Assets – In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842) (“ASU 2016-02”). The amended guidance, which was effective for the Company on January 1, 2019, requires the recognition of lease assets and lease liabilities on the balance sheet for those leases with terms in excess of 12 months and currently classified as operating leases. Leases with an initial term of one year or less are not recorded on the balance sheet; lease expense for these types of leases are recognized on a straight-line basis over the lease term. Options to extend or terminate a lease are not included in the determination of the right-of-use asset or lease liability unless it is reasonably certain to be exercised. Lifted adopted ASU 2016-02 using the modified retrospective approach, electing the package of practical expedients.
Accounting for Goodwill – Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.
Goodwill is not amortized but is subject to annual impairment testing unless circumstances dictate more frequent assessments. The Company performs an annual impairment assessment for goodwill during the fourth quarter of each year and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than the carrying amount. Goodwill impairment testing is a two-step process performed at the reporting unit level. Step one compares the fair value of the reporting unit to its carrying amount. The fair value of the reporting unit is determined by using the income approach. Under the income approach, the Company determines fair value based on estimated future cash flows of the reporting unit, which are discounted to the present value using discount factors that consider the timing and risk of cash flows and other factors. For the discount rate, the Company considered the current market interest rates, including the interest rates on the Company’s recently closed loans from Surety Bank, the Company’s risk relative to the overall market, the Company’s size and industry and other Company-specific risks. Other significant assumptions used in the income approach include the terminal value, growth rates, future capital expenditures and changes in future working capital requirements. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount exceeds its fair value, then the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit as calculated in step one. In this step, the fair value of the reporting unit is allocated to all of the reporting unit’s assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired on that date. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal to the excess.
Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic plans, and future market conditions, among others. There can be no assurance that the Company’s estimates and assumptions made for purposes of the goodwill impairment testing will prove to be accurate predictions of the future. Changes in assumptions and estimates could cause the Company to perform an impairment test prior to scheduled annual impairment tests.
| F-28 |
| Table of Contents |
NOTE 3 - RISKS AND UNCERTAINTIES
Going Concern – The Company currently has one revenue-generating subsidiary, Lifted. Prior to the acquisition of Lifted on February 24, 2020, the Company had no sources of revenue, and the Company had a history of recurring losses, which has resulted in an accumulated deficit of $
The Company’s investments in Ablis, Bendistillery and Bend Spirits made the Company a minority owner of these companies. As a minority owner, the Company is not able to recognize any portion of Ablis’, Bendistillery’s or Bend Spirits’ revenues or earnings in the Company’s financial statements. The Company monitors its investments in Ablis, Bendistillery and Bend Spirits, and from time to time will evaluate whether there has been a potential impairment of value.
The regulatory risks and uncertainties associated with Lifted's cannabinoid-infused products, vaping and nicotine products industries, together with the other significant risks described in our 2023 Annual Report on Form 10-K filed with the SEC on March 29, 2024, have created significant adverse risks to the Company, which have caused substantial doubt about the Company’s ability to continue as a going concern.
The Company has significant financial obligations under its loan agreements with Surety Bank, and also the Company is accruing and paying
In addition, factors that could materially affect future operating results include, but are not limited to, changes to laws and regulations, especially any future changes to the so-called “Farm Bill” at the federal level, any new rule proposed by the federal Drug Enforcement Administration that might attempt to classify certain hemp-derived products as controlled substances, and any other federal or state laws and regulations related to hemp-derived cannabinoids, nicotine or tobacco products, kratom, psychoactive products and/or vaping. The company is also subject to vendor concentration risk, customer concentration risk, customer credit risk, and counterparty risk.
The Company maintains levels of cash bank accounts that typically exceed federally insured limits. The Company has not experienced any losses in such accounts and it believes that it is not exposed to any significant credit risk on cash.
No assurance or guarantee whatsoever can be given that the net income of the Company’s wholly owned subsidiary Lifted will be sufficient to allow the Company to pay all of its operating expenses, its financial obligations under its loan agreements with Surety Bank, the dividends accruing and being paid on the Company’s preferred stock, future company-wide management bonus pool payments, and other obligations.
As a result of all of the foregoing described factors, there is substantial doubt that the Company will be able to continue as a going concern. Bankruptcy of the Company at some point in the future is a possibility. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
| F-29 |
| Table of Contents |
Customer Concentration Risk – During the quarter ended March 31, 2024, five customers made up approximately
Vendor Dependence – Regarding the purchases of raw goods and finished goods (“Inventory”), during the quarter ended March 31, 2024, approximately
The loss of Lifted’s relationships with these customers and vendors could have a material adverse effect on Lifted’s business.
NOTE 4 – THE COMPANY’S INVESTMENTS
The Company’s Investment in Lifted
At December 31, 2023, the Company performed its annual goodwill impairment assessment on the goodwill recognized as part of the acquisition of Lifted, and determined that no impairment was necessary.
The Company’s Investments in Ablis, Bendistillery and Bend Spirits
On April 30, 2019, the Company purchased
On April 23, 2024, the management of LFTD Partners had a video conference with the officers of Ablis, Bendistillery and Bend Spirits. During this meeting, the management of those companies discussed the performance of Ablis, Bendistillery and Bend Spirits during the quarter ended March 31, 2024. Based upon the financial and non-financial information that was shared with LFTD Partners during that conference call, the management of LFTD Partners believes that no impairment of the value of Bendistillery, Bend Spirits or Ablis is warranted at this point in time.
The Company’s Investment in SmplyLifted LLC
During February 24, 2020 through December 31, 2020, the Company recognized a loss of $
On February 9, 2022, Lifted signed an Agreement to sell its
| F-30 |
| Table of Contents |
NOTE 5 – PROPERTY AND EQUIPMENT, NET
Property and Equipment consist of the following:
Asset Class |
| March 31, 2024 |
|
| December 31, 2023 |
| ||
Building |
| $ |
|
| $ |
| ||
Land |
| $ |
|
| $ |
| ||
Machinery & Equipment |
| $ |
|
| $ |
| ||
Furniture & Fixtures |
| $ |
|
| $ |
| ||
Computer Equipment |
| $ |
|
| $ |
| ||
Building & Leasehold Improvements |
| $ |
|
| $ |
| ||
Vehicles |
| $ |
|
| $ |
| ||
Trade Show Booths |
| $ |
|
| $ |
| ||
Sub-total: |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
| $ | ( | ) |
| $ | ( | ) |
|
| $ |
|
| $ |
| ||
The useful lives of the Company’s property and equipment by asset class are as follows:
Asset Class | Estimated Useful Life | |
Building | ||
Land | ||
Machinery & Equipment | ||
Building Improvements | ||
Leasehold Improvements | ||
Trade Show Booths | ||
Vehicles | ||
Computer Equipment | ||
Furniture & Fixtures | ||
In the Consolidated Statements of Operations, depreciation expense is consolidated with amortization expense.
After allocating depreciation of machinery and equipment and 5511 Building of $
In comparison, after allocating depreciation of machinery and equipment of $
NOTE 6 – NOTES RECEIVABLE
The William Noyes Webster Foundation, Inc.
The Foundation, a non-profit Massachusetts corporation, has received a provisional registration from the Commonwealth of Massachusetts to own and operate a medical marijuana cultivation facility in Plymouth, Massachusetts, and a medical marijuana dispensary in Dennis, Massachusetts. Jane W. Heatley (“Heatley”) is the founder and a member of the board of directors of the Foundation.
| F-31 |
| Table of Contents |
Teaming Agreement – The Company believes it is highly likely that the board of directors of the Foundation will only approve contracts that have been negotiated and approved by Heatley. Consequently, on July 8, 2014, the Company entered into a Teaming Agreement (the “Teaming Agreement”) with Heatley, in which, among other things: (1) the Company and Heatley agreed to use their respective best efforts, working exclusively together as a team, and not as a partnership or other entity, in order to consummate transactions, agreements, contracts or other arrangements pursuant to which the Company will provide capital and expertise to the Foundation; and (2) Heatley agreed that Heatley shall not, and shall not permit the Foundation to, discuss or negotiate for debt or equity financing, or consulting services or other expertise, from any third party. The Company claims that Heatley violated the Teaming Agreement by discussing and negotiating for debt or equity financing, or consulting services or other expertise, from at least one third party. Heatley claims that the Company violated the Teaming Agreement alleging that the Company failed to lend funds to the Foundation in accordance with the Teaming Agreement. The Company believes Heatley’s claim to be baseless. No assurances whatsoever can be made that Heatley will comply with the terms of the Teaming Agreement, nor that the Company will be able to adequately enforce the terms of the Teaming Agreement if it is ever the subject of litigation.
Promissory Note – On July 14, 2014, the Foundation signed and delivered to the Company a Secured Promissory Note (the “Note”) which is in the stated loan amount of $
Between April and July 2015, the Company loaned an additional $
Uncollectable Note and Interest Receivable – The Company assessed the collectability of the Note based on the adequacy of the Foundation’s collateral and the Foundation’s capability of repaying the Note according to its terms. Based on this assessment, on September 1, 2015, the Company concluded that the Note and interest receivable would not be collectible. As such, the Company wrote off the Note totaling $
NOTE 7 – INTANGIBLE ASSETS, NET
Website
The cost of developing Lifted’s website, www.urb.shop, which was previously www.LiftedMade.com, was amortized over
NOTE 8 – RELATED PARTY TRANSACTIONS
Sublease of Space Located at 2701-09 West Fulton PH, Chicago, Illinois 60612
On July 6, 2022, Lifted entered into a sublease for office space in Chicago, Illinois located at 2701-09 West Fulton PH, Chicago, Illinois 60612. The sublease costs $
| F-32 |
| Table of Contents |
The sublessor is Lifted’s former Chief Strategy Officer. The sublease is structured so that the sublessor's lease payment obligations to the landlord are passed on to Lifted on a dollar-for-dollar basis, such that the sublessor does not realize a cashflow profit or loss from the sublease.
The sublease is currently operating on a month-to-month basis. Since the term is less than twelve months, this lease is not recorded on the Consolidated Balance Sheet, and lease expense is recognized on a straight-line basis over the lease term.
Robert T. Warrender II
In January 2022, Lifted hired Mr. Robert T. Warrender II, NWarrender’s father, as an employee. Mr. Warrender is also a Director of LFTD Partners Inc. During the quarters ended March 31, 2024 and 2023, $
Robert T. Warrender III
Mr. Robert T. Warrender III is NWarrender’s brother, and Director Mr. Robert T. Warrender II’s son. From January 9, 2023 until July 1, 2023, Mr. Warrender worked for Lifted as an employee in sales; previously, Mr. Warrender operated as an independent contractor of Lifted. During the quarter ended March 31, 2023, $
Outside Director Fees
Each of the Company’s outside directors, including Mr. Vincent J. Mesolella, Dr. Joshua A. Bloom, Mr. Richard E. Morrissy, Dr. James S. Jacobs, and Mr. Kevin J. Rocio, received quarterly director fees of $
William C. “Jake” Jacobs
At the closing of the acquisition of Lifted,
Nicholas S. Warrender
Purchase of 5511 95th Avenue, Kenosha, Wisconsin 53144
Toward the end of 2020, NWarrender, through his assigned entity 95th Holdings, LLC ("Holdings"), purchased a building located at 5511 95th Avenue, Kenosha, Wisconsin 53144 (“5511 Building”) that was immediately leased to us to conduct our expanded operations. The 5511 Building includes office, laboratory and warehouse space. As part of the lease agreement with Holdings, the parties agreed that our wholly owned subsidiary Lifted would eventually purchase the 5511 Building. The purchase price for the 5511 Building was originally subject to variation based on a formula agreed upon by the parties. Pursuant to the Omnibus Agreement with NWarrender on December 30, 2021, Lifted was obligated to purchase the 5511 Building from Holdings on or before December 31, 2022 for a fixed purchase price of $
| F-33 |
| Table of Contents |
Prior to the Acceleration Agreement, Lifted had an obligation to complete the purchase of the 5511 Building on or before December 31, 2022. Pursuant to an Acceleration Agreement, the deadline to purchase the 5511 Building was extended by one year to December 31, 2023. In addition,
On December 14, 2023, LFTD Partners and Lifted (together the “Borrower”), jointly borrowed a total of $
The
Prior to Lifted’s purchase of the 5511 Building, from June 1, 2018 through June 1, 2021, Lifted rented
Lifted’s rented space in Zion, Illinois, was not adequate in light of various issues including zoning uncertainties, lack of air conditioning, and small size. As such, on December 18, 2020, Lifted as tenant entered into a Lease Agreement (the “Lease) with Holdings (“Landlord”) for office, laboratory and warehouse space in the 5511 Building.
Lifted constructed improvements including a clean room, and gradually moved into the 5511 Building over the course of the first quarter of 2021. Under the terms of the “triple-net” Lease, starting on January 1, 2021, Lifted leased approximately
Rent Schedule
Date |
| Base Monthly Rent |
| |
January 1, 2021 – December 31, 2021 |
| $ |
| |
January 1, 2022 – December 31, 2022 |
| $ |
| |
January 1, 2023 – December 31, 2023 |
| $ |
| |
January 1, 2024 – December 31, 2024 |
| $ |
| |
January 1, 2025 – December 31, 2025 |
| $ |
| |
Under the terms of the Lease, the tenant, Lifted, had the option to purchase the property at any time prior to December 31, 2025, and in any event, Lifted had been obligated to purchase the 5511 Building on or before that date. Pursuant to the Lease, in all cases Lifted’s purchase price for the 5511 Building was to be in an amount equal to the greater of: (1) the fair market value of the 5511 Building at the time Lifted purchases the 5511 Building; or (2) any remaining principal balance of any purchase-money mortgage for the 5511 Building existing at the time of the closing of Lifted’s purchase, plus the corresponding amount identified in the Additional Purchase Price Schedule attached as Exhibit B to the Lease,
Landlord was an entity owned by NWarrender, who is the largest stockholder of the Company as beneficial owner of
| F-34 |
| Table of Contents |
Corner Vapory LLC
NWarrender is a
NOTE 9 – SHAREHOLDERS’ EQUITY
Issuance of Series A Convertible Preferred Stock
The Company has authorized
Between February 27, 2019 and May 13, 2019, the Company accepted subscriptions from accredited investors to purchase
| F-35 |
| Table of Contents |
As of March 31, 2024 and December 31, 2023, the Company has accrued a liability of $
All of the issuances of securities described above were restricted share issuances and deemed to be exempt from registration in reliance on Rule 506 of Regulation D and/or Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. Each investor represented that they were accredited investors, as defined in Rule 501 of Regulation D and, there was no general solicitation or general advertising used to market the securities. We made available to each investor disclosure of all aspects of our business, including providing the investor with press releases, access to our auditors, and other financial, business, and corporate information. All securities issued were restricted with an appropriate restrictive legend on certificates for notes and warrants issued stating that the securities (and underlying shares) have not been registered under the Securities Act and cannot be sold or otherwise transferred without an effective registration or an exemption therefrom.
Issuance of Series B Convertible Preferred Stock
The Company has authorized
Between July 24, 2019 and December 5, 2019, the Company accepted subscriptions from accredited investors to purchase
| F-36 |
| Table of Contents |
As of March 31, 2024 and December 31, 2023, the Company has accrued a liability of $
All of the issuances of securities described above were restricted share issuances and deemed to be exempt from registration in reliance on Rule 506 of Regulation D and/or Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. Each investor represented that they were accredited investors, as defined in Rule 501 of Regulation D and, there was no general solicitation or general advertising used to market the securities. We made available to each investor disclosure of all aspects of our business, including providing the investor with press releases, access to our auditors, and other financial, business, and corporate information. All securities issued were restricted with an appropriate restrictive legend on certificates for notes and warrants issued stating that the securities (and underlying shares) have not been registered under the Securities Act and cannot be sold or otherwise transferred without an effective registration or an exemption therefrom.
Share-Based Compensation
At the closing of acquisition of Lifted,
Due to the lack of marketability of the Company’s common stock, LFTD Partners hired a third-party valuation firm (the “Valuation Firm”) to calculate discount rates to apply to the value of the Deferred Contingent Stock for both financial reporting and tax purposes. The Valuation Firm used the Finnerty Protective Put Model to determine the discount rates to apply to the Deferred Contingent Stock in order to value it, for both financial reporting and tax reporting purposes. The Finnerty model is variant of the protective put method that estimates the discount based on the average price over the restriction period rather than based on the final price.
The Valuation Firm’s report indicated that, for financial reporting purposes, a
The Valuation Firm’s report also indicated that, for tax reporting purposes, discounts ranging from
Through March 31, 2024,
| F-37 |
| Table of Contents |
The following is a summary of share-based compensation, stock option and warrant activity as of March 31, 2024 and changes during the quarter then ended:
|
|
|
|
| Weighted-Average |
|
| Weighted-Average Remaining Contractual |
|
| Aggregate Intrinsic |
| ||||
|
| Shares |
|
| Exercise Price |
|
| Term (Years) |
|
| Value |
| ||||
Exercisable Options, Warrants, Rights to Purchase Warrants to Purchase Common Stock and Financing Warrants Outstanding, December 31, 2023 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Exercisable Options, Warrants, Rights to Purchase Warrants to Purchase Common Stock and Financing Warrants Outstanding, March 31, 2024 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
Outstanding Options, Warrants, Rights to Purchase Warrants to Purchase Common Stock and Financing Warrants, March 31, 2024 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
Cancellation of Warrants Issued in Connection with the Acquisition of Lifted Made
On February 24, 2023, warrants to purchase
NOTE 10 – CONTINGENT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Lease and Purchase of Building Located at 5511 95th Ave, Kenosha, Wisconsin 53144
On December 18, 2020, Lifted as tenant entered into a Lease Agreement (the “Lease) with 95th Holdings, LLC (“Landlord”) for office, laboratory and warehouse space in a building located at 5511 95th Avenue, in the City of Kenosha, State of Wisconsin (the “Premises”). The lease commencement date was January 1, 2021, and lease termination date was January 1, 2026.
Landlord is an entity owned directly or indirectly by NWarrender, the Company’s Vice Chairman and COO, the CEO of Lifted, and the largest stockholder of the Company as the beneficial owner of
Lifted constructed improvements to the Premises including a clean room, and gradually moved into the Premises over the course of the first quarter of 2021.
| F-38 |
| Table of Contents |
Under the terms of the “triple-net” Lease, starting on January 1, 2021, Lifted leased approximately
Rent Schedule
Date |
| Base Monthly Rent |
| |
January 1, 2021 – December 31, 2021 |
| $ |
| |
January 1, 2022 – December 31, 2022 |
| $ |
| |
January 1, 2023 – December 31, 2023 |
| $ |
| |
January 1, 2024 – December 31, 2024 |
| $ |
| |
January 1, 2025 – December 31, 2025 |
| $ |
| |
Under the terms of the Omnibus Agreement, Lifted was obligated to purchase the Premises from Landlord on or before December 31, 2022 for a fixed purchase price of $
Pursuant to the Acceleration Agreement, Lifted’s obligation to purchase the Premises from Landlord was delayed to on or before December 31, 2023.
Prior to the signing of the Acceleration Agreement, the Finance Lease Right-of-Use Asset was to be amortized over its useful life (
Lifted purchased the Premises from Landlord on December 14, 2023, for $
Lease of Space Located at 8920 58th Place, Suite 850, Kenosha, Wisconsin 53144
On September 23, 2021, Lifted entered into a lease agreement with TI Investors of Kenosha LLC, (“TI”) for office and warehouse space located at 8920 58th Place, Suite 850, Kenosha, WI 53144 (the “58th Lease”). Subsequent to Lifted entering into the 58th Lease, the property was sold to Ladi Investments, LLC (“Ladi”); thus Ladi is the current landlord. The 58th Lease serves as sales offices, finished goods storage and outgoing shipping for Lifted.
The term of the 58th Lease commenced on October 1, 2021. The initial term of the 58th Lease was to be three years, unless earlier terminated in accordance with the terms and conditions of the 58th Lease. While extensions were not prohibited, Lifted did not have the right to unilaterally elect to extend the term of the 58th Lease for an additional term.
| F-39 |
| Table of Contents |
Under the terms of the 58th Lease, Lifted leases approximately
Rent Schedule
Date |
| Base Monthly Rent |
| |
10/01/2021 – 09/30/2022 |
| $ |
| |
10/01/2022 – 09/30/2023 |
| $ |
| |
10/01/2023 – 09/30/2024 |
| $ |
| |
The 58th Lease was terminated as of midnight on March 31, 2024 in conjunction with Lifted entering into the Second Amendment to the Second 58th Lease (defined below) on March 25, 2024. The terms and conditions of the Second Amendment to the Second 58th Lease are described below in the section “Second Amendment to the Second 58th Lease” under “Lease of Space Located at 8910 58th Place, Suites 600 and 700, Kenosha, Wisconsin 53144”.
Lease of Space Located at 8910 58th Place, Suites 600 and 700, Kenosha, Wisconsin 53144
On November 17, 2021, Lifted entered into a lease agreement with TI for office and warehouse space located at 8910 58th Place, Suites 600 & 700, Kenosha, WI 53144 (the “Second 58th Lease”). Subsequent to Lifted entering into the Second 58th Lease, the property was sold to Ladi; thus Ladi is the current landlord. The Second 58th Lease space is used for raw goods storage.
The term of the Second 58th Lease commenced on January 1, 2022. The initial term of the Second 58th Lease was to be five years, unless extended or earlier terminated in accordance with the Second 58th Lease. While extensions were not prohibited, Lifted did not have the right to unilaterally elect to extend the term of the Second 58th Lease for an additional term.
Under the terms of the Second 58th Lease, Lifted leases approximately
Rent Schedule
Date |
| Base Monthly Rent |
| |
01/01/2022 – 12/31/2022 |
| $ |
| |
01/01/2023 – 12/31/2023 |
| $ |
| |
01/01/2024 – 12/31/2024 |
| $ |
| |
01/01/2025 – 12/31/2025 |
| $ |
| |
01/01/2026 – 12/31/2026 |
| $ |
| |
First Amendment to the Second 58th Lease
On February 23, 2022, the Second 58th Lease was amended (the “First Amendment to the Second 58th Lease”) to change the lease commencement date from January 1, 2022 to February 1, 2022, and to change the lease termination date from December 31, 2026 to January 31, 2027. The First Amendment to the Second 58th Lease did not change the base monthly rent amounts; it simply pushed them back one month.
Second Amendment to the Second 58th Lease
On March 25, 2024, the Second 58th Lease was amended for a second time (the “Second Amendment to the Second 58th Lease”).
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| Table of Contents |
Effective as of April 1, 2024 (the “Expansion Date”), the Second 58th Lease has been expanded to include an additional
The Expansion Area will be used for office, manufacturing and warehouse space.
Under the Second Amendment to the Second 58th Lease, the term of the Second 58th Lease is extended through May 31, 2029.
Commencing on February 1, 2027, the base monthly rent for Suites 600 and 700 of the Second 58th Lease, exclusive of the Expansion Area (Suite 100), is extended as follows:
Suites 600 and 700 | ||||
Date |
| Base Monthly Rent |
| |
February 1, 2027 – January 31, 2028 |
| $ |
| |
February 1, 2028 – January 31, 2029 |
| $ |
| |
February 1, 2029 – May 31, 2029 |
| $ |
| |
Commencing on the Expansion Date, the base monthly rent for the Expansion Area (Suite 100) is as follows:
Suite 100 | ||||
Date |
| Base Monthly Rent |
| |
April 1, 2024 – May 31, 2024 |
| $ |
| |
June 1, 2024 – March 31, 2025 |
| $ |
| |
April 1, 2025 – March 31, 2026 |
| $ |
| |
April 1, 2026 – March 31, 2027 |
| $ |
| |
April 1, 2027 – March 31, 2028 |
| $ |
| |
April 1, 2028 – March 31, 2029 |
| $ |
| |
April 1, 2029 – May 31, 2029 |
| $ |
| |
Under the Second Amendment to the Second 58th Lease, Lifted is also responsible for paying its proportionate share of real estate taxes and other operating costs. Pursuant to the Second Amendment to the Second 58th Lease, Lifted is required to remit an additional security deposit of $
The effectiveness of the Second Amendment to the Second 58th Lease was contingent upon the successful execution of all three of the following documents:
| (i) | the Lease Termination Agreement dated March 18, 2024, by and between Ladi and Lifted for Lifted’s leased space located at 8920 58th Place, Suite 850, Kenosha, Wisconsin 53144 (the “8920 Suite 850 Termination Agreement”), |
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| (ii) | the Lease Termination Agreement dated March 18, 2024, by and between Ladi and Lifted for Lifted’s leased space located at 9560 58th Place, Suite 360, Kenosha, Wisconsin 53144 (the “the 9560 Suite 360 Termination Agreement”), and |
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| (iii) | the Lease Termination Agreement dated March 18, 2024, by and between Ladi and a third party that currently leases the space located at 8910 58th Place, Suite 100, Kenosha, Wisconsin 53144 (the “8910 Suite 100 Termination Agreement”). |
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| Table of Contents |
These contingencies were met on or about March 27, 2024.
Lease of Space Located at 9560 58th Place, Suite 360, Kenosha, Wisconsin 53144
On May 31, 2022, Lifted entered into another lease agreement with TI for office and warehouse space located at 9560 58th Place, Suite 360, Kenosha, WI 53144 (the “Third 58th Lease”). Subsequent to Lifted entering into the Third 58th Lease, the property was sold to Ladi; thus Ladi is the current landlord. The Third 58th Lease is used for manufacturing, as well as office space.
The term of the Third 58th Lease commenced on July 1, 2022 (the “Commencement Date”). The initial term of the Third 58th Lease was five years from the Commencement Date, ending on June 30, 2027, unless extended or earlier terminated in accordance with the Lease. While extensions were not prohibited, Lifted did not have the right to unilaterally elect to extend the term of the Third 58th Lease for an additional term.
Under the terms of the Third 58th Lease, Lifted leases approximately
Rent Schedule
Date |
| Base Monthly Rent |
| |
07/01/2022 – 06/30/2023 |
| $ |
| |
07/01/2023 – 06/30/2024 |
| $ |
| |
07/01/2024 – 06/30/2025 |
| $ |
| |
07/01/2025 – 06/30/2026 |
| $ |
| |
07/01/2026 – 06/30/2027 |
| $ |
| |
The Third 58th Lease was terminated as of midnight on March 31, 2024 in conjunction with Lifted entering into the Second Amendment to the Second 58th Lease (defined above) on March 25, 2024. The terms and conditions of the Second Amendment to the Second 58th Lease are described above in the section “Second Amendment to the Second 58th Lease” under “Lease of Space Located at 8910 58th Place, Suites 600 and 700, Kenosha, Wisconsin 53144”.
Sublease of Space Located at 2701-09 West Fulton PH, Chicago, Illinois 60612
On July 6, 2022, Lifted entered into a sublease for office space in Chicago, Illinois located at 2701-09 West Fulton PH, Chicago, Illinois 60612. The sublease costs $
The sublessor is Lifted’s former Chief Strategy Officer. The sublease is structured so that the sublessor's lease payment obligations to the landlord are passed on to Lifted on a dollar-for-dollar basis, such that the sublessor does not realize a cashflow profit or loss from the sublease.
The sublease is currently operating on a month-to-month basis. Since the term is less than twelve months, this lease is not recorded on the Consolidated Balance Sheet, and lease expense is recognized on a straight-line basis over the lease term.
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| Table of Contents |
Lease of Space Located at 5732 95th Avenue, Suites 100, 200 and 300, Kenosha, Wisconsin 53144
On November 28, 2022, Lifted entered into a lease agreement with Ladi for commercial space located at 5732 95th Avenue, Suite 200 and 300, Kenosha, WI 53144 (the “5732 Lease”). The 5732 Lease is used for Lifted’s gummy manufacturing operations.
The 5732 Lease commenced on February 1, 2023. The initial term of the 5732 Lease extends approximately five years (sixty-one months) from February 1, 2023 to February 29, 2028, unless extended or earlier terminated in accordance with the 5732 Lease. While extensions are not prohibited, Lifted does not have the right to unilaterally elect to extend the term of the 5732 Lease for an additional term.
Under the terms of the 5732 Lease, Lifted leases approximately 4,657 square feet of space. Lifted was not required to pay any base square foot charge during February 2023. Lifted is responsible for paying its proportionate share of real estate taxes and other operating costs. Prior to the First Amendment to the 5732 Lease, as described below, the base monthly rent under the 5732 Lease was as follows:
Rent Schedule
Date |
| Base Monthly Rent |
| |
February 1, 2023 – February 28, 2023 |
| $ |
| |
March 1, 2023 – February 29, 2024 |
| $ |
| |
March 1, 2024 – February 28, 2025 |
| $ |
| |
March 1, 2025 – February 28, 2026 |
| $ |
| |
March 1, 2026 – February 28, 2027 |
| $ |
| |
March 1, 2027 – February 29, 2028 |
| $ |
| |
First Amendment to the 5732 Lease
Effective April 1, 2023 (the “Expansion Date”), the 5732 Lease was amended (the "First Amendment to the 5732 Lease”) to expand the square footage of the leased space to include an additional 2,668 square feet of space located at 5732 95th Avenue, Suite 100, Kenosha, Wisconsin 53144 (the “Expansion Area”).
Commencing on the Expansion Date, the base monthly rent for the Expansion Area is:
Date |
| Base Monthly Rent |
| |
April 1, 2023 – January 31, 2024 |
| $ |
| |
February 1, 2024 – January 31, 2025 |
| $ |
| |
February 1, 2025 – January 31, 2026 |
| $ |
| |
February 1, 2026 – January 31, 2027 |
| $ |
| |
February 1, 2027 – January 31, 2028 |
| $ |
| |
February 1, 2028 – February 29, 2028 |
| $ |
| |
Lifted is also responsible for paying its proportionate share of real estate taxes and other operating costs.
The 5732 Lease and the First Amendment to the 5732 Lease are accounted for as a single operating lease.
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| Table of Contents |
Lease of Space Located at 16178 US Hwy 550, Aztec, New Mexico
Pursuant to the terms of the Oculus Merger Agreement, upon the closing of the Merger, Lifted assumed Oculus’ lease of office and operational space in Aztec, New Mexico. The leased premises include a shop building of approximately
Lease of Space Located at 789 Tech Center Drive, Unit C, Durango, Colorado 81301
On February 27, 2024, Lifted entered into a lease agreement with CR Properties, LLC, (“CR”) for office, manufacturing and warehouse space located at 789 Tech Center Drive, Unit C, Durango, Colorado 81301 (the “789 Tech Lease”).
The initial term of the 789 Tech Lease commenced on March 1, 2024, and will end on February 28, 2025 (“Initial Term”). After the Initial Term, Lifted and CR may renegotiate the lease.
Under the terms of the 789 Tech Lease, Lifted leases a total of approximately
In addition to the base monthly rent, Lifted is also responsible for paying its proportionate share of real estate taxes and other operating costs.
Since the Initial Term is twelve months, this lease is not recorded on the Consolidated Balance Sheet, and lease expense is recognized on a straight-line basis over the lease term.
Third Party Facilities
From time to time, the Company maintains inventory at third party facilities around the USA.
Balance Sheet Classification of Operating Lease Assets and Liabilities
Asset |
| Balance Sheet Line |
| March 31, 2024 |
| |
Operating Lease Right-of-Use Asset, net of Right-of-Use Asset Amortization of $307,678 in 2024 |
| Non-Current Assets |
| $ |
| |
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|
Liability |
| Balance Sheet Line |
| March 31, 2024 |
| |
Operating Lease Liabilities |
| Current Liabilities |
| $ |
| |
|
| Non-Current Liabilities |
|
|
| |
Lease Costs
The table below summarizes the components of lease costs for the following periods:
|
| For the Three Months Ended March 31, |
| |||||
Lease Cost: |
| 2024 |
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| 2023 |
| ||
Finance lease expense: |
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| ||
Amortization of Right-of-Use Assets |
| $ |
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| $ |
| ||
Interest on lease liabilities |
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| ||
Operating lease expense |
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|
| $ |
| ||
Total |
| $ |
|
| $ |
| ||
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| Table of Contents |
Weighted Average Discount Rate
In calculating the right-of-use assets and liabilities, the Company uses a discount rate based on a published range of conventional commercial mortgage interest rates corresponding to the life of each lease. The Company uses the higher end of the range due to the Company’s limited credit history. The Company’s weighted average discount rate for all its right-of-use liabilities as of the end of the reported period is
Maturity Analysis
The following table is the maturity analysis of the Company’s operating and finance leases as of the reported period end.
Maturity Analysis as of March 31, 2024 |
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| ||
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| Finance |
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| Operating |
| ||
2024 |
| $ |
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| $ |
| ||
2025 |
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| ||
2026 |
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2027 |
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2028 |
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Thereafter |
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Total |
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| ||
Less: Present value discount |
|
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|
|
| ( | ) | |
Lease liability |
| $ |
|
| $ |
| ||
Allocation of a Portion of Lease Expense to Finished Goods
As described in NOTE 2 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, a portion of monthly overhead costs such as lease expense are allocated to finished goods. For example, monthly overhead costs such as payments for rent, utilities, insurance, and indirect labor are allocated to finished goods based on the estimated percentage cost toward the finished goods. Depreciation expense related to certain machinery and equipment is also allocated to finished goods.
Potential Issuance of Warrants to Purchase Shares of Common Stock of the Company
The Compensation Committee of the Company’s Board of Directors may, from time to time, recommend that certain warrants to purchase shares of common stock of the Company should be issued to new or current members of the Company’s Board of Directors, to officers and employees of the Company and its subsidiaries, or to members of any advisory board or consultants to the Company.
Bonus to Lifted’s Chief Strategy Officer
Lifted’s former Chief Strategy Officer (the “CSO”), who worked for Lifted from July 1, 2021 through April 30, 2024, had been hired to develop and implement certain important strategies to assist Lifted’s efforts to increase its production, fulfillment and sales capabilities. The CSO’s two-year agreement with Lifted entitled the CSO to be paid an annual salary of $
Company-Wide Management Bonus Pool
Please refer to NOTE 12 – COMPANY-WIDE MANAGEMENT BONUS POOL for more information about the company-wide management bonus pool.
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| Table of Contents |
Payment of Brokers’ Fees Related to the Sale of Preferred Stock
The Company has committed to pay brokers’ fees in regard to the capital being raised for the Company by such brokers in the Company’s private placements of preferred stock, such fee to consist of warrants to purchase unregistered shares of common stock of the Company at an exercise price equal to the conversion price per share of such preferred stock, exercisable at any time during a five year period; the number of such shares will be calculated as six percent of the aggregate capital raised by such brokers in the private placement of preferred stock divided by the conversion price per share of such preferred stock.
Other Contingent Contractual Obligations and Commercial Commitments
For other contingent contractual obligations and commercial commitments, please refer to NOTE 8 – RELATED PARTY TRANSACTIONS.
NOTE 11 – LEGAL PROCEEDINGS
The Company may be involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except for income tax contingencies, the Company records accruals for contingencies to the extent that management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred.
Lifted currently is involved in two pending lawsuits, as the defendant:
| (1) | Jessie Hooks v. Lifted Made, URB Cannabis, Barry Hollingsworth, Gerard Jacobs, Nicholas Warrender, and Pharmlabs, LLC – Plaintiff filed suit against the Company, three of its officers, and a testing company in the United States District Court for the Eastern District of Wisconsin alleging that Plaintiff bought an unspecified quantity of the Company’s products and that some of the Company’s products exceeded legal limitations for hemp and that all of the Defendants misrepresented the nature of the products. The Complaint asserts seven causes of action including a civil RICO claim and alleges the existence of |
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| (2) | Loree Perry, Individually and on Behalf of All Others Similarly Situated v. Sheikhani Group, et al – Plaintiff added the Company and four of its officers to a putative class action case against a Texas retailer, several cannabis industry manufacturers, testing companies, and related individuals in the United States District Court for the Eastern District of Texas. The Amended Complaint alleges that Plaintiff bought two of the Company’s vape cartridge products and that the delta-9-THC cannabinoid content of those and additional unspecified “many” of the Company’s other products was underreported. The Amended Complaint alleges that all of the Defendants misrepresent the nature of their products and are intentionally engaging in ongoing illegal sales. The Amended Complaint asserts seven causes of action including a civil RICO claim and alleges the existence of |
Lifted currently is involved in one pending lawsuit, as the plaintiff:
(1) | Lifted Liquids, Inc. v. Asad Awawdeh and Habib Cash and Carry SD, Inc. – The Company has filed an action seeking to recover approximately $ |
Dismissal of Koff v Lifted Made
On November 13, 2023, Lifted received a letter dated November 6, 2023 from the State of Wisconsin Department of Workforce Development (“Department”). The letter stated that the Department had dismissed the case Koff v Lifted Made. Previously, a disgruntled former Lifted employee had filed an action with the Wisconsin Department of Workforce Development claiming discrimination and retaliation.
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| Table of Contents |
Settlement Agreement with Girish GPO, Inc.
On November 9, 2023, Lifted entered into a settlement agreement that was mutually acceptable to the parties which has resolved the following lawsuit: Lifted Liquids, Inc. v. Girish GPO, Inc., Girish Ray, and the Law Offices of Saul Roffe. The Company had filed an action in a case styled “Lifted Liquids, Inc. v. Girish GPO, Inc., Girish Ray, and the Law Offices of Saul Roffe” seeking to recover $30,000 that was to be held in escrow by the Law Offices of Saul Roffe. The Company also sought approximately $14,569 in damages resulting from Girish GPO’s failure to pay for product it ordered and that the Company delivered. The Company has obtained a $30,000 default judgment against the Law Offices of Saul Roffe and is attempting to collect on the judgment. The action against Girish GPO has been resolved with the Girish defendants agreeing to pay the Company $34,000 over time.
Settlement Agreement With Dev Distribution, LLC
On October 9, 2023, Lifted entered into a settlement agreement that was mutually acceptable to the parties which has resolved the following lawsuit: Lifted Liquids, Inc. v. DEV Distribution, LLC, No, DC-22-15080. In October 2022, Lifted filed an action against Dev Distribution LLC (“Dev”), a
Amendment to Settlement With Dev Distribution, LLC
As described in NOTE 14 – SUBSEQUENT EVENTS, on April 1, 2024, the Company entered into an Addendum to Settlement Agreement and Mutual Release (“Addendum”) with Dev.
Settlement Agreement With Edgar Martha
On May 25, 2023, Lifted entered into a settlement agreement that was mutually acceptable to the parties which has resolved the following lawsuit: Martha, Edgar v. Lifted Liquids. Mr. Edgar Martha, who worked in Lifted’s production facility, had sued Lifted in regard to an alleged chemical burn. In May 2023,
NOTE 12 – COMPANY-WIDE MANAGEMENT BONUS POOL
Pursuant to the employment agreements entered into between the Company and its three principal executives GJacobs, WJacobs and NWarrender (individually, “Executive”), the Company is obligated to compensate management of the Company via a management bonus pool.
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| Table of Contents |
For each fiscal year during the Employment Term, the Executive shall be eligible to be considered for an annual bonus (the “Annual Bonus”) as part of a Company-wide management bonus pool arrangement. During the fourth quarter of each year, the Chairman of the Compensation Committee of the Board (the “Compensation Committee”) shall recommend in writing a consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) target (each, a “Target”) for the following year (the “Target Year”), which Target must be approved in writing by each of the following for as long as he remains employed by the Company: GJacobs, WJacobs, and NWarrender (collectively, and with respect to each for only as long as he is an employee of the Company, the “Executive Management Group”). If the Chairman of the Compensation Committee does not recommend in writing a Target for a Target Year that is approved in writing by all of the members of the Executive Management Group prior to the commencement of the Target Year, then the Target for the Target Year shall be equal to the actual consolidated EBITDA of the Company and its subsidiaries during the then-current year (i.e., the year preceding the Target Year) as certified in writing by the Company’s outside firm of independent certified public accountants. If the actual consolidated EBITDA of the Company and its subsidiaries during the Target Year as certified in writing by the Company’s outside firm of independent certified public accountants exceeds the Target (the amount by which the actual consolidated EBITDA of the Company and its subsidiaries during the Target Year as certified in writing by the Company’s outside firm of independent certified public accountants exceeds the Target, the “Excess Amount”), then cash equal to 33% of the Excess Amount shall be set aside by the Company as a cash management bonus pool (the “Bonus Pool”), and the amount of the Bonus Pool shall be allocated and paid out by the Company as bonuses or fees to the officers of the Company and its subsidiaries (and potentially, to directors or third parties who have significantly helped the Company and its subsidiaries during the Target Year), with the amount to be paid to each payee, including the amount of any Annual Bonus to be paid to the Executive, to be determined by unanimous written agreement of the Executive Management Group, in their sole discretion. The Executive expressly agrees and acknowledges that the amount of the Annual Bonus (if any) allocated and paid to the Executive as so determined by unanimous written agreement of the Executive Management Group shall be final, non-appealable, and binding upon the Executive, regardless of whether the Executive receives any Annual Bonus, and regardless of whether any Annual Bonus received by the Executive is higher or lower than any other person’s bonus, under any and all circumstances whatsoever. The Company shall pay the Executive the Annual Bonus, if any, no later than March 15th of the year following the applicable Target Year. In the event that there is funding for the Bonus Pool but the Executive Management Group does not reach a unanimous decision on Bonus allocations, then no annual bonus shall be paid. The Annual Bonus Pool would then be placed in escrow and the Executive Management Group would mediate.
Pursuant to the Amended Omnibus Agreement, the 2022 company-wide bonus pool shall not be allowed to be accrued or paid by LIFD if and to the extent that doing so would decrease LIFD’s 2022 diluted earnings per share of common stock below $
NOTE 13 – INCOME TAXES
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act reduced the U.S. federal statutory tax rate, broadened the corporate tax base through the elimination or reduction of deductions, exclusions, and credits, limited the ability of U.S. corporations to deduct interest expense, and transitioned to a territorial tax system which allows for the repatriation of foreign earnings to the U.S. with a
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| Table of Contents |
Significant components on the Company’s income tax provision (benefit) for continuing operations is as follows:
|
| For the Three Months Ended |
| |||||
|
| March 31, |
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| 2024 |
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| 2023 |
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Current |
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Domestic-Federal |
| $ |
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| $ |
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Domestic-State |
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Franchise taxes |
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Foreign |
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Deferred |
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Domestic-Federal |
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| ( | ) |
Domestic-State |
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| ( | ) |
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| ( | ) |
Foreign |
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| ( | ) |
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| ( | ) |
Total Provision/(Benefit) for Income Taxes |
| $ | ( | ) |
| $ |
| |
The Company currently believes that all significant filing positions are highly certain and that all of its significant income tax filing positions and deductions would be sustained upon audit. Therefore, the Company has no significant reserves for uncertain tax positions and no adjustments to such reserves were required by US GAAP. The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company’s tax returns are subject to examination for the years ended December 31, 2018 through 2023.
A reconciliation of the amount of tax provision (benefit) computed using the U.S. federal statutory income tax rate to the provision for income taxes on continuing operations is as follows:
|
| For the Three Months Ended |
| |||||
|
| March 31, |
| |||||
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| 2024 |
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| 2023 |
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Domestic-Federal |
| $ | ( | ) |
| $ | ( | ) |
State taxes, net of federal benefit |
|
| ( | ) |
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| ( | ) |
Non-deductible expenses |
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Franchise taxes |
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Change in estimated future income tax rates |
|
| ( | ) |
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| ( | ) |
Change in valuation allowance |
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Total Provision/(Benefit) for Income Taxes |
| $ | ( | ) |
| $ |
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| F-49 |
| Table of Contents |
Deferred tax assets and liabilities as of March 31, 2024 and December 31, 2023 were as follows:
|
| March 31, |
|
| December 31, |
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| 2024 |
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| 2023 |
| ||
Deferred Tax Assets: |
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Stock-based compensation |
| $ |
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| $ |
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Operating loss carry forwards |
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Sales Allowances |
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Spoiled and Written-Off Inventory |
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Accrued Related Party Expenses |
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Allowance for Doubtful Accounts |
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Lease Liabilities |
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Interest Carryforward |
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Less: Valuation allowance for stock-based compensation |
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| ( | ) |
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| ( | ) |
Total Deferred Tax Assets |
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Deferred Tax Liabilities: |
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Depreciation & Amortization |
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| ( | ) |
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| ( | ) |
Goodwill |
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| ( | ) |
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| ( | ) |
Total Deferred Tax Liabilities |
|
| ( | ) |
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| ( | ) |
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Net Deferred Tax Assets/(Liabilities) |
| $ |
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| $ | ( | ) | |
NOTE 14 – SUBSEQUENT EVENTS
Management of the Company has evaluated the events that have occurred through the date of the filing of this Quarterly Report on Form 10-Q and has noted the following subsequent events for disclosure purposes:
Amendment to Settlement With Dev Distribution, LLC
On April 1, 2024, the Company entered into an Addendum to Settlement Agreement and Mutual Release (“Addendum”) with Dev. Under the Addendum, the total consideration to be paid by Dev has been increased from $
Stock Buyback Transactions and Cancellations
On April 2, 2024, LFTD Partners signed a Stock Buyback Agreement to purchase
On April 8, 2024, LFTD Partners signed a Stock Buyback Agreement to purchase
On April 9, 2024, LFTD Partners signed a Stock Buyback Agreement to purchase
Second Amendment to the Second 58th Lease
On March 25, 2024, the Second 58th Lease was amended for a second time (the “Second Amendment to the Second 58th Lease”).
Effective as of April 1, 2024 (the “Expansion Date”), the Second 58th Lease has been expanded to include an additional
The Expansion Area will be used for office, manufacturing and warehouse space.
Under the Second Amendment to the Second 58th Lease, the term of the Second 58th Lease is extended through May 31, 2029.
| F-50 |
| Table of Contents |
Commencing on February 1, 2027, the base monthly rent for Suites 600 and 700 of the Second 58th Lease, exclusive of the Expansion Area (Suite 100), is extended as follows:
Suites 600 and 700 | ||||
Date |
| Base Monthly Rent |
| |
February 1, 2027 – January 31, 2028 |
| $ |
| |
February 1, 2028 – January 31, 2029 |
| $ |
| |
February 1, 2029 – May 31, 2029 |
| $ |
| |
Commencing on the Expansion Date, the base monthly rent for the Expansion Area (Suite 100) is as follows:
Suite 100 | ||||
Date |
| Base Monthly Rent |
| |
April 1, 2024 – May 31, 2024 |
| $ |
| |
June 1, 2024 – March 31, 2025 |
| $ |
| |
April 1, 2025 – March 31, 2026 |
| $ |
| |
April 1, 2026 – March 31, 2027 |
| $ |
| |
April 1, 2027 – March 31, 2028 |
| $ |
| |
April 1, 2028 – March 31, 2029 |
| $ |
| |
April 1, 2029 – May 31, 2029 |
| $ |
| |
Under the Second Amendment to the Second 58th Lease, Lifted is also responsible for paying its proportionate share of real estate taxes and other operating costs. Pursuant to the Second Amendment to the Second 58th Lease, Lifted is required to remit an additional security deposit of $
The effectiveness of the Second Amendment to the Second 58th Lease was contingent upon the successful execution of all three of the following documents:
| (i) | the Lease Termination Agreement dated March 18, 2024, by and between Ladi and Lifted for Lifted’s leased space located at 8920 58th Place, Suite 850, Kenosha, Wisconsin 53144 (the “8920 Suite 850 Termination Agreement”), |
|
|
|
| (ii) | the Lease Termination Agreement dated March 18, 2024, by and between Ladi and Lifted for Lifted’s leased space located at 9560 58th Place, Suite 360, Kenosha, Wisconsin 53144 (the “the 9560 Suite 360 Termination Agreement”), and |
|
|
|
| (iii) | the Lease Termination Agreement dated March 18, 2024, by and between Ladi and a third party that currently leases the space located at 8910 58th Place, Suite 100, Kenosha, Wisconsin 53144 (the “8910 Suite 100 Termination Agreement”). |
These contingencies were met on or about March 27, 2024.
Second Installment of Merger Consideration
On May 8, 2024, NWarrender, in consultation with WJacobs, made the Determination that the Incremental Pre-Tax Profits were zero dollars ($
(1) Two Hundred Thousand Dollars ($
(2) One Hundred Sixty Thousand (
On May 13, 2024, the cash component of the second installment of Merger Consideration was paid, and the stock component of the second installment of Merger Consideration was issued.
| F-51 |
| Table of Contents |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used in this Quarterly Report on Form 10-Q, references to the “Company,” “LFTD Partners,” “LIFD,” “we,” “our” or “us” refer to LFTD Partners Inc. and Lifted, unless the context otherwise indicates.
The following Management’s Discussion and Analysis (“MD&A”) section includes a discussion of our results of operations, liquidity and financial condition and certain factors that may affect our future results. In addition to historical financial information, the following MD&A contains forward-looking statements and forward-looking information, as defined under applicable United States securities laws, that reflect our plans, estimates and beliefs. This MD&A is supplemental to, and should be read in conjunction with, the Company’s unaudited interim consolidated financial statements, and the risk factors, consolidated financial statements and related, accompanying notes that appear in LFTD Partners’ 2023 Annual Report on Form 10-K, which was filed with the SEC on March 29, 2024. As a result of many factors, the Company’s actual results may differ materially from those anticipated in these forward-looking statements and information. The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). Financial information presented in this MD&A is presented in United States dollars (“$”).
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that are considered forward-looking statements. Forward-looking statements give the Company’s current expectations and forecasts of future events. All statements other than statements of current or historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding the Company’s future financial position, performance, operations, business strategy, budgets, projected costs, capital spending, sources of liquidity and financing sources, and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” and similar expressions, as they relate to the Company, are intended to identify forward-looking statements. These statements are based on the Company’s current plans, and the Company’s actual future activities and results of operations may be materially different from those set forth in the forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made herein. These risks and uncertainties include the “Risk Factors” included in this Quarterly Report on Form 10-Q. Risk factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q.
Any or all of the forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. The Company has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. The forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and assumptions. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events occurring after the date hereof. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements contained in this Quarterly Report on Form 10-Q.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 29, 2024. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Certain information included herein contains statements that may be considered forward-looking statements, such as statements relating to our anticipated revenues and operating results, future performance and operations, plans for future expansion, capital spending, sources of liquidity and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include the “Risk Factors” included herein and in our Annual Report on Form 10-K filed with the SEC on March 29, 2024, that can be read at www.sec.gov.
| 3 |
| Table of Contents |
Significant Financial Obligations and Acute Regulatory Risks
Prior to the acquisition of Lifted on February 24, 2020, LFTD Partners Inc. had no sources of revenue, and LFTD Partners Inc. had a history of recurring losses, which has resulted in an accumulated deficit of $3,241,142 as of March 31, 2024. LFTD Partners Inc. currently is making significant payments of interest and principal on its loans from Surety Bank, and is accruing and paying dividends on outstanding Series A Preferred Stock and Series B Preferred Stock at the rate of 3% per year, among other ongoing financial obligations. In addition, as extensively discussed in the Company’s 2023 Annual Report on Form 10-K, filed with the SEC on March 29, 2024, we are subject to a wide variety of Risk Factors including substantial legal and regulatory risks. These matters cumulatively raise substantial doubt about our ability to continue as a going concern.
The legal and regulatory risks facing Lifted's business are particularly acute at this point in time, in at least two respects: (1) an official of the federal Drug Enforcement Administration (the "DEA") made a presentation at a conference in Houston in April 2023, in which that official reportedly stated that the DEA plans to issue a new rule that would have the effect of classifying certain hemp-derived cannabinoids as controlled substances. If such a new rule were to be issued and become legally binding upon Lifted, it could have a material adverse effect upon over 90% of Lifted's business and upon the trading price of the Company's common stock. As of the date of this Quarterly Report on Form 10-Q, we are not aware of any draft DEA rule that would materially affect Lifted’s business; and (2) a new or amended federal "Farm Bill" is expected to be passed by Congress and signed by the President sometime during 2024. If such a new or amended federal "Farm Bill" were to eliminate or limit the legality of hemp and hemp-derivatives, it could have a material adverse effect upon over 90% of Lifted's business and upon the trading price of the Company's common stock. As of the date of this Quarterly Report on Form 10-Q, we are not aware of any draft "Farm Bill" legislation that would materially adversely affect Lifted’s business.
Overview
Please refer to NOTE 1 – DESCRIPTION OF THE BUSINESS OF LFTD PARTNERS INC. for more information.
Liquidity and Capital Resources
On February 24, 2020, the Company acquired 100% of the ownership interests of Lifted. All of the Company’s sales are generated by the Company’s wholly owned subsidiary Lifted; LFTD Partners by itself generates no sales. We also do not recognize any revenue or earnings from our investments in Bendistillery, Ablis or Bend Spirits.
The Company's cash needs for working capital, capital expenditures, growth opportunities, the payments of Series A and Series B Preferred Stock dividends, bonuses, its financial obligations under its loan agreements with Surety Bank, and other obligations, are expected to be met with current cash on hand and cash flows provided by operating activities.
The Company has a history of losses as evidenced by the accumulated deficit at March 31, 2024 of $3,241,142. We plan to sustain the Company as a going concern by taking the following actions: (1) continuing to operate Lifted; (2) acquiring and/or developing profitable businesses that will create positive income from operations; and/or (3) completing private placements of our common stock and/or preferred stock. We believe that by taking these actions, we will be provided with sufficient future operations and cash flow to continue as a going concern. However, there can be no assurance that we will be successful in consummating such actions on acceptable terms, if at all. Moreover, many of such actions can be expected to result in substantial dilution to the existing shareholders of the Company.
The following table summarizes our Company’s cash flows for the three months ended March 31, 2024 and 2023.
|
| For the Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2024 |
|
| 2023 |
| ||
Net Cash Provided by Operating Activities |
| $ | 178,633 |
|
| $ | 329,205 |
|
Net Cash Used in Investing Activities |
|
| (31,835 | ) |
|
| (368,785 | ) |
Net Cash Used In Financing Activities |
|
| (128,152 | ) |
|
| (20,918 | ) |
| 4 |
| Table of Contents |
Cash Flows From Operating Activities
Net cash provided by operating activities was $178,633 for the quarter ended March 31, 2024. During the quarter ended March 31, 2024, net cash provided by operating activities primarily resulted from net loss of $1,141,004, which includes non-cash expenses of $1,470,813, offset by decreases in working capital items of $151,176. Non-cash expenses are primarily related to the loss of $1,349,467 related to the termination of the Jeeter collaboration.
In comparison, net cash provided by operating activities was $329,205 for the quarter ended March 31, 2023. During the quarter ended March 31, 2023, net cash provided by operating activities primarily resulted from a net loss of $141,742, which includes non-cash expenses of $2,246,777, offset by increases in working capital items of $1,775,830. Non-cash expenses are primarily related to $2,138,175 of stock compensation expense. Working capital of $1,671,501 was used to purchase inventory.
Cash Flows From Investing Activities
Net cash used in investing activities was $31,835 and $368,785 during the quarters ended March 31, 2024 and 2023, respectively, and was due to the net purchase of fixed assets in both periods.
Cash Flows From Financing Activities
During the quarter ended March 31, 2024, net cash used in financing activities was $128,152, consisting of payments on the Surety Bank loans of $125,152, and payments of preferred stock dividends totaling $3,000.
In comparison, during the quarter ended March 31, 2023, net cash used in financing activities was $20,918, driven by payments of preferred stock dividends and payments on the finance lease liability.
During the quarter ended March 31, 2024, net cash increased by $18,646. In comparison, during the quarter ended March 31, 2023, net cash decreased by $60,498.
Comparison of the balance sheet as of March 31, 2024 and December 31, 2023
The following table summarizes our Company’s current assets, current liabilities and working capital as of March 31, 2024 and December 31, 2023.
|
| March 31, 2024 |
|
| December 31, 2023 |
| ||
Current Assets |
| $ | 18,465,296 |
|
| $ | 21,668,980 |
|
Current Liabilities |
|
| 7,054,927 |
|
|
| 8,686,744 |
|
Working Capital |
|
| 11,410,369 |
|
|
| 12,982,236 |
|
As of March 31, 2024, we had cash and cash equivalents of $4,376,185; in comparison, as of December 31, 2023, we had cash and cash equivalents of $4,357,539.
As of March 31, 2024, we reported prepaid expenses of $1,340,206, primarily consisting of prepaid inventory of $1,146,570. In comparison, as of December 31, 2023, we reported prepaid expenses of $2,509,961 primarily consisting of prepaid inventory of $2,317,799.
Accounts receivable of $3,901,279, net of $650,695 allowance for doubtful accounts, were outstanding as of March 31, 2024. In comparison, accounts receivable of $3,586,176, net of $375,417 allowance for doubtful accounts, were outstanding as of December 31, 2023.
An allowance for sales is recorded for estimated future discounts/refunds related to returns of products sold prior to the reporting period end. An allowance for sales reduces net sales on the Consolidated Statements of Operations, and also reduces accounts receivable on the Consolidated Balance Sheets. Sales allowances of $344,812 and $635,098 were reported as of March 31, 2024 and December 31, 2023, respectively. A primary impetus for the need of a sales allowance and a reduction in accounts receivable as of March 31, 2024 and December 31, 2023 was that, sometimes, when employees of federal, state and local regulatory agencies and/or law enforcement make statements and/or issue correspondence that claim or imply that certain hemp-derived cannabinoid products are unsafe or illegal, these statements and correspondence, and industry publications and/or news media coverage of such statements and correspondence, may trigger confusion, uncertainty or alarm among the distributors, retailers and consumers who purchase our products, and consequently result in decreased sales or returns/exchanges of our products. However, the Company has been able to re-sell the returned products to other distributors, retailers and consumers. Nonetheless, in anticipation of the need to honor exchanges of these certain products, management records a credit note reserve and corresponding sales allowance for these types of products.
| 5 |
| Table of Contents |
As of March 31, 2024, we had inventory of $7,659,443; in comparison, as of December 31, 2023, we had inventory of $10,174,667. In the first quarter of 2024, raw goods and finished goods inventories totaling $1,859,780 were transferred to Jeeter as part of Lifted’s termination of its collaboration agreement with Jeeter, and $398,815 of obsolete and spoiled inventory was written off.
Total current assets as of March 31, 2024 of $18,465,296 were adequate for us to fund current operations.
As of March 31, 2024 and December 31, 2023, our other assets primarily included goodwill of $23,092,794, which was comprised of $22,292,767 of goodwill from the acquisition of Lifted on February 24, 2020, and $800,027 of goodwill from the purchase of nearly all of the assets of its hemp flower products supplier Oculus CRS, LLC in April 2023.
Also, as of both March 31, 2024 and December 31, 2023, our other assets included our investments in Ablis, Bendistillery and Bend Spirits, which total $1,896,200. Net fixed assets as of March 31, 2024 and December 31, 2023 were $2,888,511 and $2,996,387, respectively.
In addition, as of both March 31, 2024 and December 31, 2023, our other assets also included restricted cash of $1,000,000. We are required by our Business Loan Agreement with Surety Bank to maintain a minimum depository balance of $1,000,000 with Surety Bank for the duration of our Business Loan. The Business Loan matures on December 14, 2028.
As of March 31, 2024, current liabilities of $7,054,927 primarily consisted of accounts payable and accrued expenses of $4,450,754, Minimum Earnout Consideration of $1,000,000 to be paid pursuant to the Oculus Merger Agreement ($200,000 in cash, and $800,000 in the form of 160,000 shares of common stock valued at $5.00 per share), the current portion of the notes payable to Surety Bank of $519,529, and deferred revenue of $853,202.
As described in NOTE 14 – SUBSEQUENT EVENTS, on May 8, 2024, NWarrender, in consultation with WJacobs, made the Determination that the Incremental Pre-Tax Profits were zero dollars ($0). Consequently, the second installment of Merger Consideration consists of:
(1) Two Hundred Thousand Dollars ($200,000) in cash; and
(2) One Hundred Sixty Thousand (160,000) newly issued shares of unregistered LIFD Common Stock.
On May 13, 2024, the cash component of the second installment of Merger Consideration was paid, and the stock component of the second installment of Merger Consideration was issued.
As of December 31, 2023, current liabilities of $8,686,744 primarily consisted of accounts payable and accrued expenses of $6,172,655, Minimum Earnout Consideration of $1,000,000 to be paid pursuant to the Oculus Merger Agreement ($200,000 in cash, and $800,000 in the form of 160,000 shares of common stock valued at $5.00 per share), collab commissions and royalties payable of $572,838, the current portion of the notes payable to Surety Bank of $506,061, and deferred revenue of $235,891.
In prior years, the Company’s payables have been greater than its cash on hand. Prior to the Company’s acquisition of Lifted, the Company had inconsistent income-generating ability and was therefore reliant on raising money from loans or stock sales.
The Company had an accumulated deficit of $3,241,142 and $2,096,780 as of March 31, 2024 and December 31, 2023, respectively.
Comparison of operations for the three months ended March 31, 2024 to March 31, 2023
During the three months ended March 31, 2024, net sales decreased to $10,666,649 compared to $12,461,793 for the three months ended March 31, 2023. Reasons for the decrease in net sales from 2023 to 2024 include, but are not limited to: prohibition of, or tighter regulation of, intoxicating hemp-derived products has been adopted or proposed in many states that are significant markets for Lifted, including Florida; greater competition in the marketplace for branded hemp-derived and psychoactive products that are similar to those that Lifted sells; more distributors creating their own brands and selling their own branded products at a lower price than Lifted’s products; increased competition for products containing more milligrams of cannabinoids per unit at a lower price point; and other competing brands paying distributors and wholesalers for valuable shelf space.
| 6 |
| Table of Contents |
Shown below are tables showing the approximate disaggregation of historical revenue:
|
| For the Three Months Ended |
| |||||||||||||
|
| March 31, |
| |||||||||||||
Location of Sale |
| 2024 |
|
|
|
|
| 2023 |
|
|
|
| ||||
Inside of USA |
| $ | 10,666,649 |
|
|
| 100 | % |
| $ | 12,449,331 |
|
|
| 99 | % |
Outside of USA |
| $ | - |
|
|
| 0 | % |
| $ | 12,462 |
|
|
| 1 | % |
Net Sales |
| $ | 10,666,649 |
|
|
| 100 | % |
| $ | 12,461,793 |
|
|
| 100 | % |
|
| For the Three Months Ended |
| |||||||||||||
|
| March 31, |
| |||||||||||||
Type of Sale |
| 2024 |
|
|
|
|
| 2023 |
|
|
|
| ||||
Net sales of raw materials to customers |
| $ | 175,922 |
|
|
| 2 | % |
| $ | 2,386 |
|
|
| 0 | % |
Net sales of products to private label clients |
|
| 1,608,479 |
|
|
| 15 | % |
|
| 176,720 |
|
|
| 1 | % |
Net sales of products to wholesalers |
|
| 2,763,617 |
|
|
| 26 | % |
|
| 2,439,521 |
|
|
| 20 | % |
Net sales of products to distributors |
|
| 5,348,891 |
|
|
| 50 | % |
|
| 9,277,585 |
|
|
| 74 | % |
Net sales of products to end consumers |
|
| 769,740 |
|
|
| 7 | % |
|
| 565,581 |
|
|
| 5 | % |
Net Sales |
| $ | 10,666,649 |
|
|
| 100 | % |
| $ | 12,461,793 |
|
|
| 100 | % |
|
| For the Three Months Ended |
| |||||||||||||
|
| March 31, |
| |||||||||||||
Hemp vs Non-Hemp Product Sales |
| 2024 |
|
|
|
|
| 2023 |
|
|
|
| ||||
Net sales of hemp products |
| $ | 10,579,759 |
|
|
| 99 | % |
| $ | 11,464,850 |
|
|
| 92 | % |
Net sales of non-hemp products |
|
| 86,890 |
|
|
| 1 | % |
|
| 996,943 |
|
|
| 8 | % |
Net Sales |
| $ | 10,666,649 |
|
|
| 100 | % |
| $ | 12,461,793 |
|
|
| 100 | % |
|
| For the Three Months Ended |
| |||||||||||||
|
| March 31, |
| |||||||||||||
Product Type |
| 2024 |
|
|
|
| 2023 |
|
|
| ||||||
Vapes |
| $ | 5,467,103 |
|
|
| 51 | % |
| $ | 5,981,661 |
|
|
| 48 | % |
Edibles |
| $ | 3,619,158 |
|
|
| 34 | % |
| $ | 3,863,156 |
|
|
| 31 | % |
Flower |
| $ | 669,394 |
|
|
| 6 | % |
| $ | 1,620,033 |
|
|
| 13 | % |
Cartridges |
| $ | 856,080 |
|
|
| 8 | % |
| $ | 996,943 |
|
|
| 8 | % |
Apparel and Accessories |
| $ | 54,913 |
|
|
| 1 | % |
| $ | - |
|
|
| 0 | % |
Net Sales |
| $ | 10,666,649 |
|
|
| 100 | % |
| $ | 12,461,793 |
|
|
| 100 | % |
Gross profit for the three months ended March 31, 2024 and 2023 was $3,384,040 and $5,648,445, respectively. Gross margin percentage was 32% and 45% for the three months ended March 31, 2024 and 2023, respectively.
Write-offs of Inventory
Lifted's industry is constantly evolving. Consequently, Lifted finds it extremely difficult to predict future sales of its products, especially new products. This leaves Lifted exposed to significant risks of purchasing unneeded raw materials and of manufacturing unneeded inventory. During the quarters ended March 31, 2024 and 2023, $398,815 and $131,967, respectively, of obsolete and spoiled inventory was written off.
Deferred Contingent Stock
During the first quarter of 2023, the Company recognized a net loss after ten straight quarters of profitability, solely because of the impact of a one-time, non-cash stock compensation expense. At the closing of the acquisition of Lifted in February 2020, 645,000 shares of unregistered common stock of the Company were designated as contingent deferred compensation (the “Deferred Contingent Stock”) to certain persons specified by NWarrender in a schedule delivered by him to the Company (the “Deferred Contingent Stock Recipients”), as an employee retention incentive. Now that certain conditions and requirements have been met, the Deferred Contingent Stock vested on February 24, 2023, and on this date, in accordance with US GAAP, the Company expensed the value of the vested Deferred Contingent Stock. This one-time, non-cash, after-tax charge of $1,584,208 swung our Company from a net income for the quarter of $1,442,466 to a net loss of $141,742. But for this charge, our Company would have reported a basic and fully diluted EPS of $0.10 and $0.09, respectively, for the first quarter of 2023. No deferred contingent stock compensation expense was reported during the three months ended March 31, 2024.
| 7 |
| Table of Contents |
Payroll Expenses
During the quarters ended March 31, 2024 and 2023, the Company reported $1,602,078 and $1,874,498 of payroll expenses. Lifted’s former CSO, who was hired on July 1, 2021, and separated from Lifted on April 30, 2024, had developed and implemented certain important strategies which had assisted Lifted’s efforts to increase its production, fulfillment and sales capabilities. The CSO’s two-year agreement with Lifted entitled the CSO to be paid an annual salary of $180,000 plus a bonus equal to 5% of total net sales for Lifted in excess of $6,000,000 per quarter. During the quarters ended March 31, 2024 and 2023, bonuses earned by the CSO were $163,333 and $312,340, respectively.
Company-Wide Management Bonus Pool
During the quarter ended March 31, 2024, there was no reported Company-Wide Management Bonus Pool expense. In comparison, during the quarter ended March 31, 2023, the Company expensed and paid $233,332 to certain members of the management team of Lifted; however, none of this $233,332 went to GJacobs, WJacobs or NWarrender, and it is accounted for as Company-Wide Management Bonus Pool expense on the Consolidated Statements of Operations. This $233,332, along with the $233,336 Company-Wide Management Bonus Pool expense paid to certain members of the management team of Lifted (again excluding GJacobs, WJacobs or NWarrender) in the fourth quarter of 2022 will be deducted from future company-wide bonus pools on a dollar-for-dollar basis.
Advertising and Marketing Expenses
During the quarter ended March 31, 2024, the Company incurred $176,660 in advertising and marketing expenses, which primarily related to marketing campaigns, trade shows, and promotional products. In comparison, during the quarter ended March 31, 2023, the Company incurred $228,571 in advertising and marketing expenses, which primarily related to trade shows, marketing, and the cost of promotional items.
Bad Debt Expense
Bad debt expense increased to $275,278 during the quarter ended March 31, 2024, from $143,519 during the quarter ended March 31, 2023.
Collaboration Commission and Royalty Expense
For the quarter ended March 31, 2024, the Company reported collaboration commission and royalty expense of $170,915. No collaboration commission and royalty expense was reported during the quarter ended March 31, 2023.
Other Operating Expenses
Other Operating Expenses increased to $684,169 during the quarter ended March 31, 2024, from $611,466 during the quarter ended March 31, 2023. Other Operating Expenses include, for example, lab supplies, dues and subscriptions, meals and entertainment, insurance expenses, repairs and maintenance, and state license & filing fees. The annual cost of certain insurance policies that the Company has in place are based on the Company’s revenue; as such, these policies are costly for the Company.
Other Expenses
Other Expenses increased to $1,416,622 during the quarter ended March 31, 2024, from $9,636 during the quarter ended March 31, 2023. The increase in Other Expenses was primarily driven by the $1,349,467 loss related to the termination of the Jeeter collaboration. In comparison, during the quarter ended March 31, 2023, total, net non-operating Other Expenses of $9,636 primarily consisted of interest expense of $24,187, offset by interest income of $14,812
| 8 |
| Table of Contents |
Net Loss
Net Loss for the quarter ended March 31, 2024 was $1,141,004, compared to a Net Loss for the quarter ended March 31, 2023 of $141,742.
Off-Balance Sheet Arrangements
As of March 31, 2024, the Company does not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition of the Company, including, and without limitation, such considerations as liquidity and capital resources.
Critical Accounting Policies
Critical accounting policies are discussed in NOTE 2 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES of the consolidated financial statements accompanying this Quarterly Report on Form 10-Q.
Tax Provision
Please refer to NOTE 13 – INCOME TAXES for more information about the Company’s first quarter 2024 tax provision.
Other Matters
We may be subject to other legal proceedings, claims, and litigation arising in the ordinary course of business in addition to the matters discussed above in NOTE 11 – LEGAL PROCEEDINGS. We intend to vigorously pursue and defend such litigation. Although the outcome of these other matters is currently not determinable, our management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our Company’s financial position, results of operations, or cash flows.
Impact of COVID-19
The COVID-19 pandemic resulted in significant economic disruption to global travel and supply chains, and adversely impacted global commercial activity. Considerable uncertainty still surrounds COVID-19, the evolution and future impact of its variants, its potential long-term economic effects, as well as the effectiveness of any responses taken by government authorities and businesses and of various efforts to inoculate the global population. The travel restrictions, limits on hours of operations and/or closures of non-essential businesses, and other efforts to curb the spread of COVID-19 and its variants have significantly disrupted business activity globally and there is uncertainty as to if and when these disruptions will fully subside or re-emerge.
Although our total revenues for the quarters ended March 31, 2024 and 2023 were not materially impacted by COVID-19, it is possible that our revenues may be negatively impacted in future periods by COVID-19 and its variants, or by other potential pandemics. The uncertainty related to COVID-19 may also result in increased volatility in the financial projections we use as the basis for estimates and assumptions used in our financial statements. We have made some efforts to try to adapt our operations to meet the challenges of this uncertain and rapidly evolving situation, including expanding operations in areas where we perceive government restrictions on business operations are relatively less burdensome, and focusing some of our new product development in areas where we perceive government restrictions and prohibitions on hemp-derived cannabinoid products are relatively less likely. The COVID-19 pandemic and its ramifications, including Illinois Governor Pritzker’s Executive Order in response to the pandemic, materially damaged Lifted’s business, among other things by disrupting Lifted’s access to its employees, suppliers, packaging, distributors and customers. That is why Lifted applied for and received funding under the federal Economic Injury Disaster Loan program and the federal Paycheck Protection Program.
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Effects of the COVID-19 pandemic or other potential pandemics that may negatively impact our business in future periods include, but are not limited to: inflation; higher interest rates; disruption of the banking system; disruptions of Lifted’s workforce; limitations on the ability of our customers to conduct their business, purchase our products, and make timely payments; curtailed consumer spending; deferred purchasing decisions; supply chain problems and delays, and changes in demand from retail customers. We will continue to actively monitor the nature and extent of the impact to our business, operating results, and financial condition caused by pandemics.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our Chief Financial Officer, WJacobs, evaluated the effectiveness of the Company’s disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, WJacobs concluded that because of the material weakness in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of March 31, 2024.
(b) Management’s annual report on internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. “Internal Control Over Financial Reporting” is defined in Exchange Act Rules 13a -15(f) and 15d - 5(f) as a process designed by, or under the supervision of, an issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by an issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. It includes those policies and procedures that:
| (1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of an issuer; |
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| (2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and |
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| (3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material adverse effect on the financial statements. |
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During March 2024, management conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2024 based on the framework set forth in the report entitled Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation, management concluded that our internal control over financial reporting as of March 31, 2024 was not effective. Management identified the following material weaknesses as of March 31, 2024:
| (1) | There existed a lack of segregation of duties in regard to the Company’s financial reporting, procedures for depositing of funds, procedures for cash disbursements, procedures for checkbook entries, period close procedures, and procedures for financial statement preparation. |
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| (2) | There are not effective policies and procedures in place to provide adequate, independent oversight over financial reporting, timely preparation, and review of accounting records, and there is a lack of segregation of duties. |
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| (3) | There are insufficient review processes related to the compiling and valuation of inventory. |
Management is continually working to improve the effectiveness of our internal control over financial reporting. Our actions have included the following to improve controls over our financial statement preparation and reporting process:
| (1) | We have enhanced certain resources available within our accounting team. We hired a Chief Financial Officer of Lifted who is specifically responsible for overseeing the financial reporting processes of Lifted. We have also engaged a licensed, external certified public accountant who advises and assists us with various aspects of the financial reporting process, including at our direction, objectively reviewing work product significant to the closing of our financial statements. |
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| (2) | We have enhanced the use of specialist involvement in complex, non-routine, and technical areas of accounting, valuation, new accounting standards adoption, and tax matters. These specialists include the licensed, external certified public accountant referred to above, a global public accounting and tax firm, and a valuation firm. |
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| (3) | We are in the process of implementing tools to manage the structure of our financial closing processes. These tools include: (a) formalizing checklists designed to ensure accounting requirements and account reconciliations are completed and (b) formalizing required work instructions for completing and objectively reviewing financial closing work product, account reconciliations and analyses, which includes documenting preparer and reviewer responsibilities and signoffs. |
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| (4) | We are archiving, in an access-restricted retention domain, documentation critical to supporting our financial reporting, including financial closing work product, account reconciliations and analyses, supporting documents and agreements, accounting technical memoranda, and other documentation supporting complex, non-routine accounting and valuation matters. We make this documentation transparent to our registered public accounting firm and other advisers. |
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| (5) | From time to time, we have engaged a third-party consulting firm with expertise in corporate governance, internal controls, risk management, and assurance. This firm has been engaged to assist management with remediating internal control deficiencies and designing and implementing controls over our financial processes and reporting. |
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| (6) | Providing copies of our bank statements to our lead independent director, Vincent J. Mesolella. Our Chief Financial Officer, WJacobs, emails or mails copies of our bank statements to Mr. Mesolella monthly and engages with Mr. Mesolella, as needed, to address any questions or concerns. |
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. 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 and procedures may deteriorate. The Company is actively engaged in a comprehensive effort to remediate its material weaknesses in our internal control over financial reporting, but additional work is required, and no guarantee or assurance can be given as to when such work will be completed.
This Quarterly Report on Form 10-Q does not include an attestation report of our registered public accounting firm regarding internal controls over financial reporting.
Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Quarterly Report on Form 10-Q.
Notwithstanding the existence of the material weaknesses as described above, we believe that the consolidated financial statements in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with U.S. GAAP.
(c) Changes in internal control over financial reporting
Our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in our internal controls over financial reporting that occurred during our last fiscal quarter 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
Description of Legal Proceedings
Lifted currently is involved in three pending lawsuits, one as the plaintiff, and two as the defendant. Please refer to NOTE 11 – LEGAL PROCEEDINGS for more information.
ITEM 1A. RISK FACTORS
The Risk Factors identified in our Annual Report on Form 10-K for the year ended December 31, 2023 continue to represent the most significant risks to the Company’s future results of operations and financial conditions, without further modification or amendment, except as follows:
(1) The House and Senate of the State of Florida have passed legislation that, if not vetoed by the Governor of Florida, and if not stayed by court order, could materially adversely affect our sales of hemp-derived cannabinoid-infused products in Florida. In addition, opponents of our industry are known to be lobbying for similar legislation in other jurisdictions including but not limited to the states of Illinois and Texas, and if such legislation becomes law, it could materially adversely affect our sales of hemp-derived cannabinoid-infused products in those jurisdictions and the trading price of our common stock; and
(2) The visibility and trading volume of our common stock are low, and any material increase in such visibility and trading volume is likely dependent upon our ability to list our common stock on a recognized stock exchange, but our ability to satisfy the listing requirements for a recognized stock exchange cannot be guaranteed or assured. A continued inability to satisfy the listing requirements for a recognized stock exchange could materially adversely affect the visibility, trading volume, and trading price of our common stock.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuance of Deferred Contingent Stock
At the closing of the acquisition of Lifted, 645,000 shares of unregistered common stock of the Company were designated as contingent deferred compensation to certain persons specified by NWarrender in a schedule delivered by him to the Company at the closing of the Merger. Now that certain conditions and requirements have been met, starting on February 24, 2023, the deferred contingent stock has begun to be issued to certain recipients of the deferred contingent stock who have instructed the Company to issue to them their respective, earned deferred contingent stock. Through March 31, 2024, 503,000 shares of deferred contingent stock have been issued to certain recipients of deferred contingent stock, including 200,000 shares of deferred contingent stock to WJacobs. See NOTE 9 – SHAREHOLDERS’ EQUITY for more information.
Lifted Purchase of Assets of Oculus CRS, LLC, and Merger With Oculus CHS Management Corp.
On April 28, 2023, Lifted purchased nearly all of the assets (the “Purchased Assets”) of its hemp flower products supplier Oculus CRS, LLC, Aztec, New Mexico.
Simultaneously with Lifted’s purchase of the Purchased Assets, Lifted executed an Agreement and Plan of Merger (“Oculus Merger Agreement”) with Oculus CHS Management Corp. (the “Management Corp.”), pursuant to which the Management Corp. was merged with and into Lifted, with Lifted being the surviving corporation in the merger (the “Merger”). The only assets of the Management Corp. were multi-year employment contracts with the owners/managers of Oculus, Chase and Hagan Sanchez (the “Employment Agreements”).
The Merger consideration (the “Merger consideration”) will be paid by Lifted to Chase and Hagan Sanchez in two installments.
The first installment of the Merger Consideration was paid by Lifted to Chase and Hagan Sanchez at the closing of the Merger, and consisted of 100 shares of unregistered common stock of LIFD.
The second installment of the Merger Consideration will be paid by Lifted to Chase and Hagan Sanchez following the first anniversary of the closing of the Merger, which was April 28, 2024.
As described in NOTE 14 – SUBSEQUENT EVENTS, on May 8, 2024, NWarrender, in consultation with WJacobs, made the Determination that the Incremental Pre-Tax Profits were zero dollars ($0). Consequently, the second installment of Merger Consideration consists of:
(1) Two Hundred Thousand Dollars ($200,000) in cash; and
(2) One Hundred Sixty Thousand (160,000) newly issued shares of unregistered LIFD Common Stock.
On May 13, 2024, the cash component of the second installment of Merger Consideration was paid, and the stock component of the second installment of Merger Consideration was issued.
The Company relied on the exemption from registration contained in Section 4(2) of the Securities Act for the issuance of the shares of common stock described above.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None; not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
None; not applicable.
ITEM 5. OTHER INFORMATION
None; not applicable.
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ITEM 6. EXHIBITS.
The following Exhibits have been previously filed in the below referenced filings or have been attached hereto, and in any case, as is stated on the cover of this Report, all of the below Exhibits are incorporated herein by reference.
The following exhibits are filed with this Quarterly Report on Form 10-Q:
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101.INS |
| XBRL Instance Document |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document. |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document. |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document. |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document. |
101.SCH |
| XBRL Taxonomy Extension Schema Document. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| LFTD Partners Inc. |
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Dated: May 14, 2024 | By: | /s/ Gerard M. Jacobs |
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| Gerard M. Jacobs |
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| Chief Executive Officer |
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