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STEMTECH CORPORATION
FORM 10-Q
September 30, 2023
INDEX
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information set forth in this Quarterly Report on Form 10-Q, including in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein may address or relate to future events and expectations and as such constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements which are not historical reflect our current expectations and projections about our future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our management and their interpretation of what is believed to be significant factors affecting our business, including many assumptions regarding future events. Such forward-looking statements include statements regarding, among other things:
| · | the size and growth of the potential markets for our products and the ability to serve those markets; | |
| · | our expectations regarding our expenses and revenue, the sufficiency of our cash resources and needs for additional financing; | |
| · | the rate and degree of market acceptance of any of our products; | |
| · | our expectations regarding competition; | |
| · | our anticipated growth strategies; | |
| · | our ability to attract or retain key personnel; | |
| · | our ability to establish and maintain development partnerships; | |
| · | regulatory developments in the U.S. and foreign countries, especially those related to change in, and enforcement of, cannabis laws; | |
| · | our ability to obtain and maintain intellectual property protection for our products; and | |
| · | the anticipated trends and challenges in our business and the market in which we operate. |
Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “would,” “could,” “scheduled,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially and perhaps substantially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors. These statements may be found under the section of our Annual Report on Form 10-K for the year ended December 31, 2022 (filed on April 17, 2023) entitled “Risk Factors” as well as in our other public filings.
In light of these risks and uncertainties, and especially given the start-up nature of our business, there can be no assurance that the forward-looking statements contained herein will in fact occur. Readers should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
| 3 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
STEMTECH CORPORATION
Consolidated Balance Sheets
(Unaudited)
| September 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Long term deposits | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Goodwill | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Notes payable | ||||||||
| Convertible debentures, net of discount | ||||||||
| Operating lease liabilities - current | ||||||||
| Deferred revenues | ||||||||
| Factoring liability | ||||||||
| Derivative liability | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| Operating lease liabilities – non-current | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES (Note 11) | ||||||||
| STOCKHOLDERS' DEFICIT | ||||||||
| Common stock - $ par value; and shares authorized as of September 30, 2023 and December 31, 2022, respectively; and shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Stemtech Corporation stockholders’ deficit | ( | ) | ( | ) | ||||
| Non-controlling interest in subsidiaries | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | $ | ||||||
See accompanying notes to these unaudited consolidated financial statements.
| 4 |
STEMTECH CORPORATION
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
| For the three-months ended September 30, | For the nine-months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| NET SALES | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Freight-in | ||||||||||||||||
| TOTAL COST OF GOODS SOLD | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Commissions | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| TOTAL OPERATING EXPENSES | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Other income (expenses), net | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||||||||||
| Gain on extinguishment of debt | ||||||||||||||||
| Gain on settlement of derivative liabilities | ||||||||||||||||
| Gain on forgiveness of PPP Loan | ||||||||||||||||
| TOTAL OTHER INCOME (EXPENSE), NET | ( | ) | ( | ) | ( | ) | ||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | ( | ) | ( | ) | ( | ) | ||||||||||
| PROVISION (BENEFIT) FOR INCOME TAXES | ( | ) | ||||||||||||||
| NET INCOME (LOSS) | ( | ) | ( | ) | ( | ) | ||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS | ( | ) | ( | ) | ( | ) | ||||||||||
| NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) per common share | ||||||||||||||||
| Basic | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Shares used to compute income (loss) per share | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| Comprehensive income (loss) | ||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Change in foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive income (loss) available to common stockholders | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
See accompanying notes to these unaudited consolidated financial statements.
| 5 |
STEMTECH CORPORATION
Consolidated Statements of Stockholders’ Deficit
For the three and nine months ended September 30, 2023 and 2022
(Unaudited)
| Balance at June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock based compensation | – | |||||||||||||||||||||||||||||||
| Stock issued for services | ||||||||||||||||||||||||||||||||
| Conversion of convertible notes and accrued interest to common stock | ||||||||||||||||||||||||||||||||
| Stock issued for loan extension | ||||||||||||||||||||||||||||||||
| Stock issued as debt issuance cost | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | – | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Loss attributable to non-controlling interest | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Net income | – | |||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Non-controlling | Total Stockholders' | |||||||||||||||||||||||||||
| No. of Shares | Amount | Capital | Deficit | Loss | Sub total | Interest | Equity | |||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock based compensation | – | |||||||||||||||||||||||||||||||
| Stock issued for services | ||||||||||||||||||||||||||||||||
| Stock issued for loan extension | ||||||||||||||||||||||||||||||||
| Conversion of convertible notes and accrued interest to common stock | ||||||||||||||||||||||||||||||||
| Stock issued as debt issuance cost | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | – | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Loss attributable to non-controlling interests | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Non- controlling | Total Stockholders' | |||||||||||||||||||||||||||
| No. of Shares | Amount | Capital | Deficit | Income (Loss) | Sub total | Interests | Deficit | |||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock based compensation | – | |||||||||||||||||||||||||||||||
| Stock issued for services | ||||||||||||||||||||||||||||||||
| Conversion of convertible notes and accrued interest to common stock | ||||||||||||||||||||||||||||||||
| Settlement of accrued liabilities for common stock | – | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | – | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Income attributable to non-controlling interests | – | |||||||||||||||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock based compensation | – | |||||||||||||||||||||||||||||||
| Stock issued for services | ||||||||||||||||||||||||||||||||
| Conversion of convertible notes and accrued interest to common stock | ||||||||||||||||||||||||||||||||
| Settlement of accrued liabilities for common stock | ||||||||||||||||||||||||||||||||
| Stock issued for LFR Acquisition | ||||||||||||||||||||||||||||||||
| Reclassification of derivative liabilities to APIC | – | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | – | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Loss attributable to non-controlling interests | – | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
See accompanying notes to these unaudited consolidated financial statements.
| 6 |
STEMTECH CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right of use asset | ||||||||
| Stock compensation expense | ||||||||
| Stock issued for services | ||||||||
| Amortization of debt discount | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| Non-cash interest expense from issuance on debt (derivative) | ||||||||
| Gain on settlement of derivative liabilities | ( | ) | ||||||
| Gain on forgiveness of PPP Loan | ( | ) | ||||||
| Gain on extinguishment of debt | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities, net of effect of acquisitions: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Long term deposits | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Deferred revenues | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from notes payable | ||||||||
| Repayment of note payable | ( | ) | ( | ) | ||||
| Net proceeds from financing arrangement | ||||||||
| Net cash provided by financing activities | ||||||||
| Effects of currency translation on cash | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Supplemental noncash transactions | ||||||||
| Stock issued for LFR Acquisition | $ | $ | ||||||
| Issuance of common stock for conversion of debt | $ | $ | ||||||
| Settlement of accrued liabilities for common stock | $ | $ | ||||||
| Reclassification of derivative liabilities to APIC | $ | $ | ||||||
| Recognition of right of use asset - operating lease | $ | $ | ||||||
See accompanying notes to these unaudited consolidated financial statements.
| 7 |
STEMTECH CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Organization and Basis of Presentation
Stemtech Corporation and its Subsidiaries (collectively, the “Company”) was incorporated in the State of Nevada, USA on September 4, 2009 under the previous name Globe Net Wireless Corp. On November 19, 2021, the Company adopted an Amendment to its Articles changing the name of the Corporation to Stemtech Corporation in the state of Nevada, and on April 14, 2022, FINRA gave final approval for said name change, as evidenced by the 8-K filed that date. Stemtech is a global network marketing company that develops science-based products that it believes supports wellness by helping the body maintain healthy stem cell physiology, also known as stem cell enhancers. Known as the Stem Cell Nutrition Company®, the Company is a pioneer in stem cell science, and believes it can demonstrate that adult stem cells function as the natural renewal system of the body. The Company believes our products enhance and support the work of the body’s stem cells by releasing more stem cells, helping to circulate them in the blood and migrate them into tissues, where they can perform their daily function of renewal for optimal health. Our mission is to enhance wellness and prosperity around the world. These products are marketed internationally by the Company’s subsidiaries and through independent distributors. The Company markets its products under the following brands: RCM System, stemrelease3™, Stemflo® MigraStem™, OraStem® (Oral Health Care), D-Fuze™ (Electromagnetic Frequency Blocker), Cellect One™ Rapid Renew Stem Cell Peptide Night Cream.
On August 19, 2021, Stemtech Corporation (“Stemtech”), a Delaware corporation, entered into a Merger Agreement (the “Merger Agreement”) with Globe Net Wireless Corp. (“Globe Net” or “GNTW”). The merger was accounted for as a reverse acquisition and recapitalization in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations. Management evaluated the guidance contained in ASC 805 with respect to the identification of the acquirer in the merger and concluded, based on a consideration of the pertinent facts and circumstances, that Stemtech acquired Globe Net for financial accounting purposes. On November 9, 2021, the Company changed its fiscal year end from a fiscal year end of August 31 to a calendar year end of December 31.
The consolidated financial statements include the accounts of Stemtech (Parent) and its ten (10) subsidiaries:
| 1) | Stemtech HealthSciences Corp (U.S.A.) (“Stemtech HealthSciences”) – 100% |
| 2) | Stemtech Canada, Inc. (“Canada”) – 100% |
| 3) | Stemtech Health Sciences S. de R.L. de C.V. (“Mexico”) – 100% |
| 4) | Stemtech Services SARL de C.V. (Mexico) (“Stemtech Mexico”) – 100% |
| 5) | Stemtech Malaysia Holdings Sdn. Bhd. (“Malaysia Holdings”) – 100% |
| 6) | Stemtech Malaysia Sdn. Bhd. (“Malaysia”) – 70% |
| 7) | Stemtech Taiwan Holding, Inc. (“Taiwan”) – 100% |
| 8) | Tecrecel S.A. (“Ecuador”) – 100% |
| 9) | Food & Health Tech Foodhealth SA (“Ecuador FHTFH”) – 100% |
| 10) | Life Factor Research (“LFR”) – 100% |
| 8 |
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2022, filed April 17, 2023. In the opinion of management, all adjustments (consisting of normal recurring adjustments unless otherwise indicated) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2023, are not necessarily indicative of the results that may be expected for the year as a whole. All intercompany accounts and transactions have been eliminated in consolidation.
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and classification of liabilities and commitments in the normal course of business. The accompanying consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might result if the Company is unable to continue as a going concern.
The Company has experienced recurring net losses
and negative cash flows from operations since inception and has an accumulated deficit of approximately $25.2 million and a working capital
deficiency of approximately $
The Company’s ability to continue as a going concern for the next twelve months from the issuance of these financial statements depends on its ability to execute its business plan, increase revenue, and reduce expenses. Such conditions raise substantial doubt about the Company’s ability to continue as a going concern.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
The Company considers all highly liquid temporary
investments purchased with original maturities of three months or less at the date of purchase to be cash equivalents. The Company has
| 9 |
Inventory
Inventory is comprised of finished goods and raw materials and is valued at the lower of cost or market, using the “first-in, first-out” method in determining cost. Management evaluates the allowance for inventory obsolescence on a regular basis and has determined that no allowance for slow moving or obsolete inventory is necessary as at September 30, 2023 and December 31, 2022.
Impairment of Long-Lived Assets
The Company assesses, on an annual basis, the recoverability of the carrying amount of intangible assets and long-lived assets used in continuing operations. A loss is recognized when expected future cash flows (undiscounted and without interest) are less than the carrying amount of the asset. The impairment loss is determined as the difference by which the carrying amount of the asset exceeds its fair value. The Company evaluated its long-lived assets for any indications of impairment. The Company concluded that there was no impairment, however there can be no assurance that market conditions will not change or demand for the Company’s products will continue which could result in impairment of long-lived assets in the future.
Revenue Recognition
It is the Company’s policy that revenues from product sales is recognized in accordance with ASC 606 “Revenues from Contracts with Customers.” Five basic steps must be followed before revenue can be recognized; (1) Identifying the contract(s) with a customer that creates enforceable rights and obligations; (2) Identifying the performance obligations in the contract, such as promising to transfer goods or services to a customer; (3) Determining the transaction price, meaning the amount of consideration in a contract to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer; (4) Allocating the transaction price to the performance obligations in the contract, which requires the Company to allocate the transaction price to each performance obligation on the basis of the relative standalone selling prices of each distinct good or services promised in the contract; and (5) Recognizing revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. The amount of revenue recognized is the amount allocated to the satisfied performance obligation.
Revenues from direct retail sales to consumers and revenues from independent distributors occur when title and risk of loss had passed, which generally occurs at the time the products are shipped. Revenues are recorded net of estimated sales returns and allowances.
Allowances for product returns are provided at
the time the sale is recorded. This liability is based upon historic return rates and the relevant return pattern, which reflects anticipated
returns to be received over a period of up to one year following the original sale. As at September 30, 2023, the Company had a reserve
for sales returns of approximately $
Comprehensive Income (Loss)
The other comprehensive income (loss) in the accompanying consolidated financial statements relates to the net income (loss) of the Company for the respective period as well as unrealized foreign currency translation adjustments.
Foreign Currency Translation
A portion of the Company’s business operations occur outside the United States. The local currency of each of the Company’s subsidiaries is generally its functional currency. All assets and liabilities are translated into U.S. Dollars at exchange rates existing at the balance sheet dates, revenue and expenses are translated at weighted-average exchange rates and stockholders’ deficit is recorded at historical exchange rates. The resulting foreign currency translation adjustments are recorded as a separate component of stockholders’ deficit in the consolidated balance sheets and as a component of comprehensive income (loss) . Transaction gains and losses are included in other income (expense), net in the consolidated statements of operations and comprehensive income (loss).
| 10 |
Basic net income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share includes potentially dilutive securities such as outstanding options and warrants, using various methods such as the treasury stock or modified treasury stock method in the determination of dilutive shares outstanding during each reporting period.
For the nine months ended September 30, 2023 and 2022, the dilutive effect of and , respectively, of common stock warrants have not been included in the average shares outstanding for the calculation of net income (loss) per share as the effect would be anti-dilutive as a result of our net income (loss) in these periods.
Fair Value Measurements
As defined in ASC 820 “Fair Value Measurements,” fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
The Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels, the Company performs an analysis of the assets and liabilities at each reporting period end.
The Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued interest, notes payable and, convertible debentures. The carrying amounts of these financial instruments are of approximate fair value due to either length of maturity or interest rates that approximate prevailing rates unless otherwise disclosed in these financial statements. The Company’s derivative liabilities are valued using option pricing models with Level 3 inputs.
Sequencing
Based upon ASC 840-15-25, the Company has adopted a sequencing approach regarding the application of ASC 815-40 to its outstanding convertible notes and warrants. Pursuant to the sequencing approach, the Company evaluates its contracts based upon the earliest issuance date.
Note 3 – Inventory
Inventory consists of the following components:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Finished goods | $ | $ | ||||||
| Raw materials | ||||||||
| Total Inventory | $ | $ | ||||||
| 11 |
Note 4 – Intangible Assets
On May 7, 2018, Stemtech Corporation purchased
the assets of Stemtech International, Inc. (the “Former Parent Company”), out of a Chapter 7 Bankruptcy for $
Pursuant to a bankruptcy decree, the Company paid $400,000 in cash and assumed a note payable in the amount of $4,000,000 representing 100% percent of the issued and outstanding capital stock of Stemtech Canada, Inc. (Canada), Stemtech Health Sciences S. de R.L. de C.V. (Mexico), Stemtech Services SARL de C.V. (Mexico) (“Stemtech Mexico”), Ste, Stemtech New Zealand, Ltd. (“Stemtech New Zealand”), Stemtech Taiwan Holding, Inc. (U.S.A.), PT Stemtech Indonesia (Indonesia Pty Ltd.), Stemtech Korea (Korea) and Tecrecel S.A. (Ecuador); and Stemtech Malaysia Holdings S/B (Malaysian Parent) that owns two-thirds of its subsidiary Stemtech Malaysia Holding Sdn. Bhd. (Malaysia).
Fair Value of the Acquired Assets
The Company accounted for the acquisitions as business combinations using the acquisition method of accounting as prescribed in ASC Topic 805 Business Combinations (“ASC 805”) and ASC Topic 820 – Fair Value Measurements and Disclosures (“ASC 820”). In accordance with ASC 805 and ASC 820, the Company assigned fair value to the tangible assets acquired, identifiable intangible assets and liabilities assumed as of the acquisition dates. Goodwill as of the acquisition date is measured as the excess of purchase consideration over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed.
The excess purchase price has been recorded as
goodwill in the amount of $
Fair Value of the LFR Acquisition
In March 2023, the Company acquired 100% of LFR, a research and development company with expertise in the formulation of products. The Company accounted for this transaction under the asset acquisition method of accounting as prescribed in ASC Topic 805 Business Combinations (“ASC 805”) and ASC Topic 820 – Fair Value Measurements and Disclosures (“ASC 820”). In accordance with ASC 805 and ASC 820, the Company assigned fair value to the tangible assets acquired, identifiable intangible assets and liabilities assumed as of the acquisition dates.
The consideration paid for 100% of LFR was
million shares of the Company with a fair value of $
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The components of all acquired intangible assets were as follows at September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | Average Estimated Life (Years) | ||||||||||
| Patent products | $ | $ | ||||||||||
| Trade names and trademarks | ||||||||||||
| Customer/distribution list | ||||||||||||
| Non-compete agreement | ||||||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||||||
| Total | $ | $ | ||||||||||
Intellectual Property
The Company has five current patents filed international, and as our research and development progress, plan on filing more patents as we progress. Our current patent portfolio includes:
| · | Patent US 9, 289, 375 – Skin Care Composition Containing Combinations of Natural Ingredients | |
| · | Patent AU 201127647 – Methods and Composition for Enhancing Stem Cell Mobilization | |
| · | Patent MX 344304 – Metodos y Composiciones para Mejorar las Celulas Madre | |
| · | Patent US 10,159,705 – Methods and Composition for Enhancing Stem Cell Mobilization | |
| · | Patent MX 358857 – Composiciones para el Cuidado de la Piel que Contienen Combinaciones de Ingredientes Naturales | |
| · | Patent MX 358857 (part 1 of 3) - Composiciones para el Cuidado de la Piel que Contienen Combinaciones de Ingredientes Naturales | |
| · | Patent MX 358857 (part 2 of 3) - Composiciones para el Cuidado de la Piel que Contienen Combinaciones de Ingredientes Naturales | |
| · | Patent MX358857 (part 3 of 3) - Composiciones para el Cuidado de la Piel que Contienen Combinaciones de Ingredientes Naturales |
Note 5 – Operating Lease Commitments
On August 16, 2021, the Company extended its office
space lease with Sunbeam Properties Inc. to rent approximately
In June 2022, the Company entered into a lease for office space in Mexico which terminates on May 31, 2024.
The following table presents information about the amount and timing of liabilities arising from the Company’s operating leases as of September 30, 2023:
| Maturity of operating lease liabilities for the following periods: | ||||
| October 1, 2023 to December 31, 2023 | $ | |||
| January 1, 2024 to September 30, 2024 | ||||
| Total undiscounted operating lease payments | ||||
| Less: imputed interest | ||||
| Present value of operating lease liabilities | $ | |||
The Company’s operating leases do not provide an implicit rate that can readily be determined. Therefore, the Company uses a discount rate based on its incremental borrowing rate, which is determined using the average of borrowing rates explicitly stated in the Company’s convertible debt.
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Note 6 – Notes Payable
Schedule of notes payable as of:
| September 30, 2023 | December 31, 2022 | |||||||
| Secured Royalty Participation Agreements (1) | $ | $ | ||||||
| Vehicle and equipment loans (2) | ||||||||
| Notes payable (3) | ||||||||
| Convertible debentures, net of discount (4) | ||||||||
| Total notes payable, net of discount of $ | $ | $ | ||||||
| (1) | |
| (2) |
| (3) |
On October 20, 2021, the Company issued a
pair of promissory notes to investors, totaling $
On July 21, 2023, the Company issued a promissory
note with an investor for $
As of September 30, 2023, and December 31, 2022, the outstanding balance for these notes stood at $ |
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| (4) |
In the second quarter of 2022, one of the notes held by investor MCUS LLC (“MCUS”) was extended by 60 days, until August 1, 2022. As part of the extension agreement, the Company issued shares of common stock to the noteholder. Moreover, the conversion price of the note was reduced to the lower of (i) 50% of the lowest volume weighted average prices for common stock over the 30 trading days leading up to the conversion notice date and (ii) the Closing Price on the Closing Date, capped at $2.25. On August 18, 2022, this note was extended to September 30, 2022, in exchange for shares of common stock and in the fourth quarter of 2022, this note was once again extended, this time until May 31, 2023.
On July 13, 2022, another note held by investor
Leonite Fund 1, LP (”Leonite”), was extended to September 1, 2022, in exchange for warrants, common stock shares,
and an increased principal amount of $
Throughout the third and fourth quarters of 2022,
the Company issued a collective sum of $
During the year ended December 31, 2022, a sum
of $
In January 2023, the Company issued
upon the conversion of $ |
| On February 28, 2023, the Company entered into a comprehensive settlement and exchange agreement concerning a Senior Secured Convertible Promissory Note with Leonite. Under this agreement, Leonite agreed to settle its outstanding liability and cancel its warrants in exchange for common stock shares of the Company to purchase common stock at $0.05 per share. As the debt was settled, the Company recognized a loss on extinguishment worth $ | |
| On March 27, 2023, the Company executed an investment agreement with an institutional investor (“Holder”) for up to $ |
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| On April 11, 2023, the Company amended its Promissory Note with MCUS, resulting in the conversion price being fixed at $ | |
| Similarly, on May 1, 2023, the Company amended its convertible promissory note with SHRG, wherein SHRG capitalized $ | |
| As of September 30, 2023,
the outstanding gross principal balance for the two convertible notes was $ | |
| As of December 31, 2022, the outstanding gross principal balance for the three convertible notes was $ | |
| The aggregate balance of convertible notes payable, net of discount, as of September 30, 2023 and December 31, 2022 was $ |
Note 7 – Derivative Liabilities
The Company issued debt instruments that consist of the issuance of convertible notes with variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock, which gives rise to a derivative liability which is a non-cash liability. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate. Pursuant to ASC Subtopic 815-15 Embedded Derivatives (“ASC 815-15”), the fair values of the variable conversion options and warrants and shares to be issued were recorded as derivative liabilities on the issuance date and revalued at each reporting period. Based upon ASC 840-15-25, the Company has adopted a sequencing approach regarding the application of ASC 815-40 to its outstanding convertible notes and warrants. Pursuant to the sequencing approach, the Company evaluates its contracts based upon the earliest issuance date.
Schedule of Derivative Liabilities
| Derivative Liability - Convertible Notes | Derivative Liability - Warrants | Total | ||||||||||
| Balance as of January 1, 2022 | $ | $ | $ | |||||||||
| Change due to issuances | ||||||||||||
| Change due to redemptions | ( | ) | ( | ) | ( | ) | ||||||
| Change in fair value | ||||||||||||
| Balance as of December 31, 2022 | ||||||||||||
| Change due to issuances | ||||||||||||
| Change due to redemptions | ( | ) | ( | ) | ( | ) | ||||||
| Change in fair value | ( | ) | ( | ) | ( | ) | ||||||
| Balance as of September 30, 2023 | $ | $ | $ | |||||||||
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The Company used a Monte Carlo model to estimate the fair value of its derivatives. A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the fair value of derivative liabilities during the following periods:
| September 30, 2023 | December 31, 2022 | |||||||
| Stock price | N/A | |||||||
| Contractual term (in years) | N/A | |||||||
| Volatility (annual) | N/A | |||||||
| Risk-free rate | N/A |
Note 8 – Financing Arrangement
During the year ended December 31, 2022, the Company
entered into five non-recourse agreements for the sale of future receipts receiving gross proceeds of $
During the nine month period ended September
30, 2023, the Company entered into various non-recourse agreements for the sale of future receipts for net proceeds of $
The Company accounts for these agreements as a
financing arrangement, with the purchase price recorded as a liability and daily repayments made are a reduction of the liability. As
of September 30, 2023, there was an outstanding balance of $
Note 9 – Stockholders’ (Deficit) Equity
On May 5, 2023, the Company amended its articles of incorporation to increase the number of authorized shares of common stock of the Company to .
Stock issuance for services and stock based compensation
During the nine months ended September 30, 2023,
the Company issued shares of common stock, to officers, employees and vendors for services valued at $
During the nine months ended September 30, 2023 and 2022, the Company also recognized $ of expense relating to the vesting of common stock issued to the Company’s Chairman and CEO.
Settlement of accrued liabilities for common stock
During the nine months ended September 30, 2023,
the Company issued shares of common stock to officers, employees and vendors for accumulated past services of $
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Stock issued for LFR Acquisition
During the nine months ended September 30, 2023,
the Company issued shares of common stock for the acquisition of LFR with a fair value of $
Stock issued for loan extension
On June 8, 2022, the Company issued shares
of common stock valued at $
On July 13, 2022, the Company entered into an
amendment of its original promissory convertible note of September 1, 2021 with the note holder. The terms of the original note was amended
to increase the principal balance of the note by $
On August 18, 2022, the Company entered into an
additional amendment of a previous amendment dated May 31, 2022, of its original promissory convertible note executed on September 3,
2021. Under the terms of the new amendment dated August 18, 2022, the note is extended until September 30, 2022 and in exchange, the Company
agreed to provide the noteholder with shares of common stock. In addition, the noteholder also agreed to cancel warrants
previously issued to the noteholder in exchange for an additional shares of Company’s common stock. The Company recognized
$
On August 26, 2022, the Company cancelled
warrants previously issued to a note holder in exchange for the common shares valued at $
Conversion of convertible notes and accrued interest to common stock
On September 19, 2022, the Company, under the
terms of the note, issued common shares upon the conversion of $
On September 20, 2022, the Company, under the
terms of the note, issued common shares upon the conversion of $
On September 29, 2022, the Company, under the
terms of the note, issued common shares upon the conversion of $
On December 9, 2022, the Company, under the terms
of the note, issued common shares upon the conversion of $
On December 9, 2022, the Company, under the terms
of the note, issued common shares upon the conversion of $
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On January 13, 2023, the Company, under the terms
of the note, issued common shares upon the conversion of $
On January 23, 2023, the Company, under the terms
of the note, issued common shares upon the conversion of $
On April 26, 2023 and June 7, 2023, the Company
issued common shares valued at $
On May 1, 2023 and June 21, 2023, the Company
issued common shares valued at $
On June 12, 2023, the Company issued
common shares upon the conversion of $
Reclassification of derivative liabilities to APIC
On May 1, 2023, the Company no longer had derivative liabilities associated with the warrants and their cumulative value of $1,011,451 was reclassified into additional paid in capital on the consolidated statement of stockholders’ deficit.
Note 10 – Related Parties
Notes Payable and Accrued Interest – Related Parties
During the period ended September 30, 2022, the Company entered into the following related party transactions:
| · | It recognized $ | |
| · | A company with a common director advanced the Company $ | |
| · | The Company paid its CFO $ |
During the period ended September 30, 2023, the Company entered into the following related party transactions:
| · | Issued shares of common stock at $ per share for $ | |
| · | The Company paid $ | |
| · | The Company accrued $ | |
| · | The Company accrued $ | |
| · | The Company issued shares of common stock to one of its
board members to settle notes payable of $ | |
| · | A company with a common director advanced the Company $ |
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Note 11 – Commitments and Contingencies
Legal proceedings
On August 6, 2019, Ray Carter, the former CEO
prior to the Company’s Bankruptcy, filed a lawsuit against the Company’s subsidiary Stemtech HealthSciences, alleging unpaid
salary and vacation time dating to a period predating the Company’s current management team taking control in 2018. Mr. Carter’s
claim is in the amount of $267,000. The Company has counter-sued Ray Carter personally and deems this matter non-meritorious. At the
same time, the Company has accrued $
In the opinion of management, the resolution of these matters, if any, will not have a material adverse impact on the Company’s consolidated financial position or consolidated results of operations.
Note 12 – Taxes
At September 30, 2023, the Company had net operating
loss (“NOL”) carryforwards of approximately $
The Company applied the "more-likely-than-not" recognition threshold to all tax positions taken or expected to be taken in a tax return, which resulted in no unrecognized tax benefits as of September 30, 2023 and December 31, 2022, respectively.
Note 13 – Subsequent Events
Management of the Company has performed a review of events and transactions occurring after the consolidated balance sheet date to determine if there were any such events or transactions requiring adjustment to or disclosure in the accompanying consolidated financial statements, noting none other than the following:
On October 2, 2023, the Company issued 510,000 shares to an investor in exchange for the cancellation of his outstanding warrants.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this quarterly report. 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. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this quarterly report.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other Federal securities laws and is subject to the safe-harbor created by such Act and laws. Forward-looking statements may include statements regarding our goals, beliefs, strategies, objectives, plans, including product and technology developments, future financial conditions, results or projections or current expectations These forward-looking statements involve known or unknown risks, uncertainties and other factors that may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties. Although we believe that the expectations reflected-in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our actual results may differ materially from those anticipated in these forward-looking statements. These forward-looking statements are made as of the date of this report, and we assume no obligation to update these forward-looking statements whether as a result of new information, future events, or otherwise, other than as required by law. In light of these assumptions, risks, and uncertainties, the forward-looking events discussed in this report might not occur and actual results and events may vary significantly from those discussed in the forward-looking statements.
Implications of Being an Emerging Growth Company
Emerging Growth Company - We are an emerging growth company as defined in Section 2(a)(19) of the Securities Act of 1933, as amended, or the Securities Act. We will continue to be an emerging growth company until: (i) the last day of our fiscal year during which we had total annual gross revenues of at least $1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement under the Securities Act; (iii) the date on which we have, during the previous 3-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a large accelerated filer, as defined in Section 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30.
As an emerging growth company, we are exempt from:
| · | Sections 14A(a) and (b) of the Exchange Act, which require companies to hold stockholder advisory votes on executive compensation and golden parachute compensation; | |
| · | The requirement to provide, in any registration statement, periodic report or other report to be filed with the Securities and Exchange Commission, or the “Commission” or “SEC”, certain modified executive compensation disclosure under Item 402 of Regulation S-K or selected financial data under Item 301 of Regulation S-K for any period before the earliest audited period presented in our initial registration statement; | |
| · | Compliance with new or revised accounting standards until those standards are applicable to private companies; | |
| · | The requirement under Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, to provide auditor attestation of our internal controls and procedures; and | |
| · | Any Public Company Accounting Oversight Board, or “PCAOB”, rules regarding mandatory audit firm rotation or an expanded auditor report, and any other PCAOB rules subsequently adopted unless the Commission determines the new rules are necessary for protecting the public. |
We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the Jumpstart Our Business Startups Act.
We are also a smaller reporting company as defined in Rule 12b-2 of the Exchange Act. As a smaller reporting company, we are not required to provide selected financial data pursuant to Item 301 of Regulation S-K, nor are we required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. We are also permitted to provide certain modified executive compensation disclosure under Item 402 of Regulation S-K.
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Company Overview
Stemtech Corporation was incorporated under the laws of the State of Nevada, U.S. on September 4, 2009. Our registration statement on Form S-1 was filed with the SEC was declared effective on May 15, 2013. On August 19, 2021, the Company entered into a Merger Agreement with Stemtech Corporation by which the Company acquired one hundred percent of the shares of STEMTECH CORPORATION in exchange for the issuance of 37,060,000 shares of the Company, approximately 85% of the issued and outstanding shares of the Company. On November 19, 2021, the Company adopted an Amendment to its Articles changing the name of the Corporation to Stemtech Corporation in the state of Nevada, and on April 14, 2022, FINRA gave final approval for said name change.
Stemtech has pioneered and patented a whole new category of dietary supplements. Stemtech’s advanced Stem Cell Nutrition formulations are one-of-a-kind natural products designed to help support the three most important aspects of stem cell physiology: 1) Releasing more stem cells; 2) their circulation in the blood; and 3) Migration into tissues, where they can perform their daily function of renewal and rejuvenation for optimal health. We actually harness the incredible power of adult stem cells. How does this work? Adult stem cells are released from your bone marrow into the bloodstream, they then Circulate in the bloodstream and flow to the tissues most in need. As they arrive, the adult stem cells migrate into the tissues, reproduce and become new, healthy cells of those tissues. This process takes place every single day, even without tissue damage, as part of the natural renewal system of the body. It is important to understand that Stemtech’s products do not contain stem cells. They are composed of natural botanicals and other ingredients that have been clinically documented to support the performance of your own adult stem cells. Stemtech also offers our all-natural OraStem toothpaste, which is a tooth whitener, breath freshener, anti-microbial, stem cell attracting and promotes good gum health. In December 2022, our new Cellect One™ Rapid Renew Stem Cell Peptide Night Cream. Cellect One is a Stemtech proprietary formula containing an FDA patented ingredient, Red Oak Bark, which enables deep penetration to promote good skin health.
While sales of products obviously create the cash flow, our real business model is not just “sales”, but lateral penetration. We do this through our IBPs - “Independent Business Partner” Sales Forces, and we invest much energy in growing our IBPs. Post funding, Stemtech is projecting the addition of 30,000 new independent business partner reps over the next 12 to 24 months, adding to the existing IBPs. With an enhanced compensation plan, IBPs will be even more incentivized to build their network, attracting additional industry leaders. IBPs are a testimonial to our product and business model, lowering our customer acquisition costs.
We have reinstituting contests, travel incentives, cruises, other trips, Business Academies (Aguas Calientes, Mexico in May 2023; Las Vegas, U.S. in June, 2023) for Training, regional conferences, our Annual Convention with new product launches. Our IBPs offer highly flexible yet steady income which is most adapted to todays “Laptop & Cellphone Lifestyle”, with structured and organized weekly Corporate training calls, a personalized website, back-office tracking, oversight and management Tools, Reports, Training Materials and Social Sharing. Stemtech also launched the Stemtech AdvanceOffice Mobile App, based on the Verb Technology platform in September 2022, improving communication, sharing of information, training videos and other content for recruiting, on-boarding, customer retention and measuring key performance indicators for the IBP business.
Stemtech launched a new marketing program in January 2022, with sales continuing to come in from returning consumers who believe in the quality products. Until September 2021, the Company had operated on an extremely tight budget, with inadequate working capital and difficulties fulfilling orders. Since the cash infusions noted in “Financing” infra, the company now has the resources to contact and re-engage the over 200,000 former distributors. With this new cash infusion, the Company has engaged experienced marketing and social media professionals to initiate new marketing strategies which are expected to bring increased activity. Moreover, we are now better positioned to absorb significant new clientele as the company has directed significant cash towards our inventory, and we now have enough inventory on hand to fulfill over $3 million dollars’ worth of new orders, an inventory level we have not had since going into bankruptcy in 2017. Management conservatively believes that given the cash on hand and working expenditures as describe above, we can reinvigorate sales to be more consistent with the company’s previous revenue historically, as we were recognized 4 times in the Inc 5000 Magazine’s list of fastest growing companies.
Below this IBP level, we have our “DTC” (Direct To Consumer) network marketing Distribution model. This integrative model allows us an immediate global presence and ability to operate in multiple countries on any continent. We are uniquely positioned in this post pandemic economy beset by supply chain issues, as this method requires no up-front or required buy-in of inventory, with monthly shipments available for known recurring sales. This platform has us now operating at the intersection of the ecommerce economy, social economy and gig economy.
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The Company has been making great strides the past year, having filed our “Orastem” trademark registration in Mexico as noted in our press release of August 23, 2022. In addition, Stemtech filed our new ‘stemceuticals’ trademark registration. We also have been fortunate to have Dr. Bankole Johnson join our Life Sciences Advisory Board in September, as well as the introduction of a whole new line of stem cell skin care products. Life Factor Research brings their expertise in research, development and product formulations enabling the Company to now organically develop whole new lines of Stemceuticals. This new arrangement enables Stemtech to offer more new, cutting-edge products to an ever-growing market interested in improved health and quality of life.
In addition, Stemtech has worked to reduce overhead costs by outsourcing U.S. order fulfillment services to a third-party partner who will also be responsible for inventory planning and production scheduling, beginning August 7, 2023. Further, beginning August 1, 2023, the customer service function for the U.S. was transitioned to our Mexico offices in Guadalajara at a cost savings and improved synergistic benefits by expanding service hours from 8 to 12 hours in the U.S. Also, U.S. health insurance coverage has ended with the release of employees. With the new inventory process, the cost of insurance coverage will be reduced to lower rates beginning in September.
RESULTS OF OPERATIONS
Our consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation. We expect we will require additional capital to meet our long-term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities.
Three-Month Period Ended September 30, 2023 Compared to the Three-Month Period Ended September 30, 2022.
During the three months ended September 30, 2023 and 2022, net sales were $1,298,322 and $1,047,030, respectively. This variance is due to an increase in IBPs and management anticipates net sales to increase further as it has recently implemented a price increase, however current economic risks of recession can influence this.
During the three months ended September 30, 2023 and 2022, cost of goods sold was $290,896 versus $180,599, for a positive variance of $110,297 or 61%. This variance is in line with the increase in sales during the three months ended September 30, 2023.
During the three months ended September 30, 2023 and 2022, our commissions expenses were $386,070 and $306,293, respectively, resulting in an increase of $79,777, or 26%.
During the three months ended September 30, 2023 and 2022, our general and administrative expenses were $1,081,224 and $3,822,131, respectively, resulting in a decrease of $2,740,907, or 72%. The decrease is primarily due to stock issued for services in 2022 at a higher stock price than in 2023 and the cutting of operational expenses, such as personnel.
During the three months ended September 30, 2023 and 2022, our selling and marketing expenses were $119,123 and $120,434, respectively, resulting in a decrease of $1,311, or 1%.
During the three months ended September 30, 2023, total non-operating expenses were $427,573 compared to total non-operating income of $20,768,637 during the three months ended September 30, 2022, resulting in a decrease in income of $21,196,210. The difference is primarily due to $18,229,091 gain from change in fair value of derivative liabilities and a gain on extinguishment of debt of $4,237,648 in 2022.
The net loss attributable to Stemtech for the three months ended September 30, 2023 was $1,041,800 compared to net income attributable to Stemtech for the three month period ended September 30, 2022 was $17,416,917. The loss was caused by the factors described above.
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Nine-Month Period Ended September 30, 2023 Compared to the Nine-Month Period Ended September 30, 2022.
During the nine months ended September 30, 2023 and 2022, net sales were $3,559,789 and $3,479,762, respectively, resulting in an increase of $80,027, or 2%. This variance is due to an increase in IBPs and management anticipates net sales to increase further as it has recently implemented a price increase, however current economic risks of recession can influence this.
During the nine months ended September 30, 2023, cost of goods sold was $781,895 versus $836,409, for a negative variance of $54,514 or 7%.
During the nine months ended September 30, 2023 and 2022, our commissions expenses were $807,678 and $761,345, respectively, resulting in an increase of $46,333, or 6%. The variance is in line with increased sales during the nine months ended September 30, 2023.
During the nine months ended September 30, 2023 and 2022, our selling and marketing expenses were $387,102 and $400,018, respectively, resulting in a decrease of $12,916, or 3%.
During the nine months ended September 30, 2023 and 2022, our general and administrative expenses were $4,366,912 and $6,073,133, respectively, resulting in a decrease of $1,706,221, or 28%. The decrease is primarily due to stock issued for services in 2022 at a higher stock price than in 2023 and the cutting of operational expenses, such as personnel.
During the nine months ended September 30, 2023 and 2022, our total operating expenses were $5,575,492 and $7,234,496, respectively, resulting in a decrease of $1,659,004, or 23%. The decrease in operating expenses was caused by the factors described above.
During the nine months ended September 30, 2023, total non-operating expenses were $770,385 compared to $3,499,953 resulting in a decrease in expenses of $2,729,568. The difference is primarily due to a $4,112,025 loss from change in fair value of derivative liabilities in 2022 to a $1,681,798 gain in 2023, offset by an increase in interest expense of $1,318,600.
The net loss attributable to Stemtech for the nine months ended September 30, 2023 and 2022, was $3,565,449 and $8,026,062, respectively. The decrease in net loss was caused by the factors described above.
Liquidity and Capital Resources
We are not currently profitable, and we cannot provide any assurance of when we will be profitable. We incurred a net loss of $3,565,449 and $8,026,062 for the nine months ended September 30, 2023 and 2022, respectively. During the nine months ended September 30, 2023, we met our short-term liquidity requirements from issuance of debt.
As of September 30, 2023, our current assets were $694,732 compared to $612,370 in current assets at December 31, 2022. As of September 30, 2023, our current liabilities were $5,846,149 compared to $7,415,791 at December 31, 2022. Current liabilities at September 30, 2023 were comprised of $2,650,165 of accounts payable and accrued expenses, $1,360,313 in notes payables, $1,392,972 in convertible notes net of discounts and $83,836 in current operating lease liabilities, $82,835 of deferred revenues.
Cash Flows from Operating Activities
We have not generated positive cash flows from operating activities. For the nine-month period ended September 30, 2023, net cash flows used in operating activities were $904,009 versus $976,150 a year earlier, which is primarily due to the change in working capital accounts. The net loss of $3,567,983, gain on extinguishment of debt of $814,132, loss on settlement of derivative liabilities of $1,059,839 and the gain from the change in fair value of derivative liabilities of $1,681,798 was offset by the interest expense and amortization of debt discount of $1,604,081 and $2,443,506, respectively, as well as $432,049 depreciation and amortization expense and $328,388 of stock compensation expense and $433,951 in stock issued for services.
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Cash Flows from Financing Activities
We have financed our operations primarily from the issuance of notes payable. For the nine-month period ended September 30, 2023, net cash provided from financing activities of $1,308,616 mainly consisted of proceeds from notes payable of $1,711,000 partially offset by payments on factoring agreements. For the nine-month period ended September 30, 2022, $514,697 cash provided from financing activities mainly consisted of proceeds from notes payable of $341,939 and net proceeds of factoring liability of $239,986 partially offset by payments on factoring agreements.
Plan of Operation and Funding
We expect that working capital requirements will continue to be funded through a combination of our existing funds and further issuances of securities. Our working
Existing working capital, further advances and debt instruments, and anticipated cash flow are expected to be adequate to fund our operations over the next three months. We have no lines of credit or other bank financing arrangements. Generally, we have financed operations to date through the proceeds of the private placement of equity and debt instruments. In connection with our business plan, management anticipates additional increases in operating expenses and capital expenditures relating to: (i) acquisition of inventory; (ii) developmental expenses associated with a start-up business; (iii) marketing expenses; and (iv) IT website development. We intend to finance these expenses with further issuances of securities and director loans. Thereafter, we expect we will need to raise additional capital and generate revenues to meet long-term operating requirements. Additional issuances of equity or convertible debt securities will result in dilution to our current shareholders. Further, such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict our business operations.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial statement presentation and in accordance with Form 10-Q. Accordingly, they do not include all of the information and footnotes required in annual financial statements. In the opinion of management, the unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position and results of operations and cash flows. The results of operations presented are not necessarily indicative of the results to be expected for any other interim period or for the entire year.
Off-Balance Sheet Arrangements
As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Stockholders’ Deficit
Authorized Shares
Effective May 5, 2023, the Company is authorized to issue up to 400,000,000 shares of common stock, $0.001 par value. Prior to May 5, 2023, the Company was authorized to issue up to 200,000,000 shares (see Note 9). Each outstanding share of common stock entitles the holder to one vote per share on all matters submitted to a stockholder vote. All shares of common stock are non-assessable and non-cumulative, with no pre-emptive rights.
Commitments and Contingencies
None.
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Financing
On March 27, 2023, the Company and an institutional investor (the “Holder”) executed an investment agreement for up to $7,000,000 through a convertible promissory note, share purchase agreement and warrant agreement (the “2023 Note"). The 2023 Note has a principal amount of up to $7,000,000 with an original issue discount of 12% and is to be disbursed in four (4) disbursements as set forth as follows: (i) the first disbursement in the amount of $1,000,000 occurred on March 27, 2023; (ii) the second disbursement in the amount of $200,000 is due within three (3) days after the filing of an S-1 registration statement; (iii) the third disbursement in the amount of $500,000 is due forty-five (45) days after effectiveness of an S-1 registration statement; and (iv) $120,000 is due forty-five (45) days after the third disbursement. The 2023 Note carries an interest rate equal to seven percent (7%) per annum and is redeemable by the Company at any time at an amount equal to one hundred twenty-five percent (125%) of the then outstanding principal and interest accrued on the Note. All additional disbursements will be made at the Holder’s discretion, at any time, and if the Holder’s broker refuses to custody the securities issued in connection therewith, the Holder will have no obligation to make a disbursement under the disbursement schedule but will have the option to make such disbursement.
Future financing through equity investments is likely to be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights, and the issuance of warrants or other derivative securities, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and financing, including investment banking fees, legal fees, accounting fees, and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition.
Our ability to obtain needed financing may be impaired by such factors as the capital markets, both generally and specifically in the nutraceutical industry, which could impact the availability or cost of future financing. If the amount of capital we are able to raise from financing activities, together with our revenue from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.
We have no plans, arrangements or contingencies in place in the event that we cease operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 4. Controls and Procedures
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
An evaluation was conducted under the supervision and with the participation of our management of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2023. Based on that evaluation, our management concluded that our disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Such officer also confirmed that there was no change in our internal control over financial reporting during the three-month period ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On August 6, 2019, Ray Carter, the former CEO prior to the Company’s Bankruptcy, filed a lawsuit against the Company’s subsidiary Stemtech HealthSciences, alleging unpaid salary and vacation time dating to a period predating the Company’s current management team taking control in 2018. Mr. Carter’s claim is in the amount of $267,000. The Company has counter-sued Ray Carter personally and deems this matter non-meritorious. At the same time, the Company has accrued $267,000 which is included in accounts payable and accrued liabilities in the accompanying consolidated financial statements as at September 30, 2023 and December 31, 2022. Mr. Carter’s request for Summary Judgment was dismissed by the Court on March 3, 2023.
In the opinion of management, the resolution of these matters, if any, will not have a material adverse impact on the Company’s consolidated financial position or consolidated results of operations.
Item 1A. Risk Factors
We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
Item 2. Recent Sale of Unregistered Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 6. Exhibits
| * | Filed herewith. |
| ** | Furnished herewith. |
| *** | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Stemtech Corporation | ||
| Date: December 1, 2023 | By: | /s/ Charles S. Arnold |
| Charles S. Arnold | ||
| Title: |
Chief Executive Officer (Principal Executive Officer) | |
| Date: December 1, 2023 | By: | /s/ James S. Cardwell |
| James S. Cardwell | ||
| Title: |
Chief Financial Officer (Principal Financial Officer) | |
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