Company Overview
Smart for Life, Inc. (NASDAQ:SMFL) is a distinguished leader in the Health & Wellness sector, specializing in the marketing, manufacturing, and distribution of a broad spectrum of nutraceutical and related products. The company has executed a strategic buy-and-build strategy, executing a series of accretive acquisitions to create a vertically integrated platform with the objective of aggregating companies generating a minimum of $300 million in revenues by the fourth quarter of 2026.
Company Formation and Early Acquisitions
Smart for Life was formed on February 2, 2017 as a global holding company engaged in the development, marketing, manufacturing, acquisition, operation and sale of a broad spectrum of nutraceutical and related products with an emphasis on health and wellness. The company’s evolution has been marked by a series of strategic acquisitions that have strengthened its capabilities and expanded its market reach.
On March 8, 2018, Smart for Life acquired 51% of Millenium Natural Manufacturing Corp. and Millenium Natural Health Products, Inc. The company later acquired the remaining 49% of these companies on October 8, 2019. On September 30, 2020, the company changed the name of Millenium Natural Manufacturing Corp. to Bonne Sante Natural Manufacturing, Inc. (BSNM) and subsequently merged Millenium Natural Health Products Inc. into BSNM on November 24, 2020. BSNM operates a 22,000 square-foot FDA-certified manufacturing facility in Doral, Florida, providing contract manufacturing services for a significant number of customers.
Expansion and Further Acquisitions
On July 1, 2021, the company acquired 100% of Doctors Scientific Organica, LLC, Oyster Management Services, Ltd., Lawee Enterprises, L.L.C. and U.S. Medical Care Holdings, L.L.C., collectively known as DSO. On August 27, 2021, the company transferred all of the equity interests of Oyster Management Services, Ltd., Lawee Enterprises, L.L.C. and U.S. Medical Care Holdings, L.L.C. to Doctors Scientific Organica, LLC. DSO manufactures, sells, and owns the Smart for Life brand of natural health and wellness meal replacement products, including proprietary hunger-suppressing functional foods.
Smart for Life continued its expansion in 2021 with the acquisitions of Nexus Offers, Inc., a cost-per-action/cost-per-acquisition network platform, on November 8, 2021, and GSP Nutrition Inc., a sports nutrition company offering supplements for athletes and active lifestyle consumers under the Sports Illustrated Nutrition brand, on December 6, 2021.
On May 19, 2022, the company acquired 100% of Lavi Enterprises, LLC and transferred all of the equity interests to Doctors Scientific Organica, LLC. Additionally, on August 24, 2021, Smart for Life established Smart for Life Canada Inc. as a wholly-owned subsidiary of DSO in Canada, further expanding its international presence.
Most recently, on July 29, 2022, the company acquired 100% of Ceautamed Worldwide, LLC and its wholly-owned subsidiaries Wellness Watchers Global, LLC and Greens First Female LLC. Ceautamed owns the Greens First line of branded products, which have been marketed specifically to the healthcare provider sector.
Diversified Health & Wellness Platform
Through these strategic acquisitions, Smart for Life has built a diversified Health & Wellness platform with capabilities spanning manufacturing, branding, distribution, and digital marketing. The company’s portfolio of subsidiaries provides a comprehensive suite of products and services to serve the growing demand for nutraceuticals, sports nutrition, and natural health solutions.
Financials
Smart for Life’s financial performance has been impacted by the challenges of integrating these acquisitions and the broader macroeconomic environment. For the fiscal year ended December 31, 2022, the company reported total revenues of $15.9 million, a 46.8% decrease from the prior year, and a net loss of $29.98 million. The company’s net loss was primarily driven by significant interest expense, impairment charges, and integration costs related to its acquisitions.
In the most recent fiscal year (2023), Smart for Life reported revenue of $8.23 million and a net income of -$22.68 million. The company’s operating cash flow (OCF) was -$6.83 million, and free cash flow (FCF) was -$5.85 million. For the most recent quarter (Q3 2023), revenue was $2.75 million, with a net income of -$4.34 million. Both OCF and FCF for the quarter were -$5.07 million. The company experienced a year-over-year revenue decline of 48.66%, primarily due to cash constraints and the inability to pay for raw materials, resulting in lower product volumes.
Liquidity
Smart for Life faces significant liquidity challenges. As of September 30, 2023, the company reported $8.89 thousand in cash and cash equivalents and had a working capital deficit of $11.4 million. The company’s debt-to-equity ratio stood at -2.05, indicating a high debt load relative to its equity. The current ratio of 0.11 and quick ratio of 0.05 are extremely low, further highlighting the company’s liquidity concerns.
To address these issues, Smart for Life has been actively engaged in restructuring and refinancing efforts to improve its financial flexibility, including the sale of non-core assets and the issuance of new equity and debt. The company has access to several credit lines, including a $958,000 revolving line of credit for DSO, a $50,000 revolving line of credit for Ceautamed, and an additional $70,000 revolving line of credit for DSO.
Product Segments
Smart for Life operates in two primary product segments: nutraceutical products and digital marketing services.
The nutraceutical products segment, which includes the manufacturing and sale of nutritional and health-related products such as functional foods, supplements, and vitamins, is the company’s largest revenue generator. In the first nine months of 2023, this segment accounted for 95.14% of total revenues, generating $7.08 million. However, this represents a 38.66% year-over-year decrease, primarily due to cash constraints and inability to purchase sufficient raw materials for production. The cost of revenues for this segment decreased by 27.91% to $4.53 million, but as a percentage of product revenues, it increased from 54.45% to 63.98% due to higher labor costs associated with production.
The digital marketing segment, operated through the Nexus subsidiary, generates revenues when sales of listed products are made by vendors through Nexus’ affiliate marketing network. This segment saw a significant 85.88% year-over-year decrease in revenues to $361,470, attributable to cash constraints and inability to pay affiliate marketers. The cost of revenues for this segment, consisting of commissions and bonuses paid to affiliate marketers, decreased by 85.19% to $279,040, with the cost as a percentage of advertising revenues increasing from 73.60% to 77.20%.
Future Strategy and Outlook
Looking ahead, Smart for Life is focused on executing the second phase of its post-restructuring strategy, which includes the identification and integration of additional accretive acquisitions in the Health & Wellness sector. The company is currently negotiating the acquisition of four profitable targets and exploring additional opportunities to further expand its portfolio and drive long-term growth.
Smart for Life’s diversified platform, experienced management team, and strategic acquisition strategy position the company to capitalize on the growing demand for nutraceuticals, sports nutrition, and natural health solutions. The global nutraceuticals market is expected to grow at a CAGR of 7.9% from 2023 to 2030, driven by increasing consumer awareness of preventative health and wellness. Additionally, the sports nutrition market, where the company’s GSP subsidiary operates, is projected to grow at a CAGR of 8.2% from 2023 to 2028.
As Smart for Life continues to execute its buy-and-build model, it aims to emerge as a leading consolidator in the fragmented Health & Wellness industry. However, the company will need to address its operational and financial challenges to fully capitalize on these positive industry trends and achieve its growth objectives.
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