| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to prevent the information presented from being misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K, which contains audited financial information for the two years in the period ended December 31, 2023. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of ordinary recurring items) to present fairly the financial position and the results of operations of the Company for the periods presented. Interim results are not necessarily indicative of results to be expected for the full fiscal year or any future period. Going Concern and Management’s Liquidity Plans In accordance with the Financial Accounting Standards Board (“FASB”) standard on going concern, Accounting Standard Update (“ASU”) 2014-15, the Company assesses going concern uncertainty in its condensed consolidated financial statements to determine if it has sufficient cash, cash equivalents and working capital on hand, including marketable securities, and any available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is referred to as the “look-forward period” in ASU 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to the Company, it considers various scenarios, forecasts, projections, estimates and makes certain key assumptions, including the timing and nature of projected cash expenditures or programs, and its ability to delay or curtail expenditures or programs, if necessary, among other factors. Based on this assessment, the Company makes certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent the Company deems probable those implementations can be achieved and it has the proper authority to execute them within the look-forward period in accordance with ASU 2014-15. The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary if the Company is unable to continue as a going concern. As of March 31, 2024, the Company had $29 thousand of cash on hand, had an accumulated deficit of $124.7 million and a working capital deficit of $11.8 million. Our operating activities consume a portion of our cash resources. We anticipate that we will continue to incur operating losses and negative cash flows from operations as we execute our strategic and business development initiatives. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company may need to complete additional equity or debt financings to fully execute its business plans and strategies. We have previously funded our operating losses primarily through the issuance of common stock and/or promissory notes and cash generated from our product sales. We anticipate that we will incur decreased operating losses and negative cash flows from operations as we execute on our strategic and business development initiatives and with the elimination of overhead and operating expenses related to the Company’s pharmaceutical business segment that have been discontinued in connection with the Asset Sale. There can be no assurance, however, that the Company will be able to raise additional capital when needed, or at terms deemed acceptable, if at all. Reclassifications Certain reclassifications have been made to prior year’s consolidated financial statements to enhance comparability with the current year’s consolidated financial statements. These reclassifications had no effect on the previously reported net loss. Use of Estimates The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements, and other factors that management believes to be reasonable. In addition, the Company has considered the potential impact of certain macroeconomic factors, including inflation, rising interest rates, and recessionary pressures, on its business and operations. Although the full impact of these factors is unknown and cannot be estimated reasonably, the Company believes it has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of the reporting date. Significant areas requiring the use of management estimates include, but are not limited to, revenue recognition, the allowance for doubtful accounts, valuation of intangible assets and goodwill, depreciation and amortization useful lives, assumptions used to calculate the fair value of the contingent stock consideration, stock-based compensation, deferred taxes and the assumptions used to calculate fair values of the purchase price allocations and convertible promissory notes. Actual results could differ materially from such estimates under different assumptions or circumstances. Cash and Cash Equivalents The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. As of March 31, 2024 and December 31, 2023, the Company had no cash equivalents. The Company maintains its cash in banks insured by the Federal Deposit Insurance Corporation in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. As of March 31, 2024, the Company did not have cash balances in excess of the federal insurance limit. Investments The Company follows Accounting Standards Codification (“ASC”) 325-20, “Cost Method Investments” (“ASC 325-20”), to account for its ownership interest in noncontrolled entities. Under ASC 325-20, equity securities that do not have readily determinable fair values (i.e., non-marketable equity securities) and are not required to be accounted for under the equity method are typically carried at cost. Investments of this nature are initially recorded at cost. Dividends distributed from net accumulated earnings of the noncontrolled entity subsequent to the date of investment are recorded as income. Dividends received in excess of earnings accumulated subsequent to the date of investment are considered a return of investment and are recorded as reductions in the cost basis of the investment. The carrying amount of investments is written down only when there is clear evidence that a decline in value that is considered other than temporary has occurred. Accounts Receivable Accounts receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management’s evaluation of their collectability. Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that the likelihood of collection is remote. Any future recoveries are applied against the allowance for doubtful accounts. Inventory Inventory is stated at the lower of cost or net realizable value (“NRV”). NRV is the amount by which the estimated selling price of the product exceeds the sum of any additional costs expected to be incurred on the sale of such product in the ordinary course of business. The Company determines the cost of its inventory on a first-in, first-out (“FIFO”) basis. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period. To state the inventory at the lower of cost or NRV, we maintain reserves against individual stock keeping units. Inventory reserves, once established, are not reversed until the related inventories have been sold or scrapped. If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and would be reflected in the cost of goods sold in the period the revision is made. Goodwill and Intangible Assets Goodwill represents the excess of the purchase price paid over the fair value of net identifiable assets and liabilities acquired. Goodwill is not amortized but is tested for impairment at least annually, or if circumstances indicate its value may no longer be recoverable. Qualitative factors considered in this assessment include industry and market conditions, overall financial performance, and other relevant events and factors affecting the Company’s business. Based on the qualitative assessment, if it is determined that the fair value of goodwill is more likely than not to be less than its carrying amount, the fair value of a reporting unit will be calculated and compared with its carrying amount and an impairment charge will be recognized for the amount that the carrying value exceeds the fair value. Intangible assets with finite lives, such as patents, web design and trademarks are stated at cost less accumulated amortization. Amortization is calculated using the straight-line method over the estimated useful lives of the assets, which range from two years to twenty years. We review the useful lives and potential impairment of intangible assets whenever events or circumstances suggest that the carrying amount may not be recoverable. Impairment of Long-Lived Assets Long-lived assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable when compared to undiscounted cash flows expected to result from the use and eventual disposition of the asset. Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically a discounted cashflow analysis, and an impairment charge is recorded for the excess of carrying value over fair value. Contingent Consideration Liabilities Business acquisitions of the Company may involve the potential for future payment of consideration to former selling security holders in amounts determined upon the attainment of prescribed financial or other milestones. The fair value of such liabilities is determined using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows and the risk-adjusted discount rate used to present value the cash flows. These obligations are referred to as contingent consideration. ASC 805, “Business Combinations,” requires that contingent consideration be estimated and recorded at fair value as of the acquisition date as part of the total consideration transferred. Additionally, the fair value of contingent consideration after the acquisition date is reassessed by the Company as changes in circumstances and conditions occur, with the subsequent change in fair value recorded in its unaudited condensed consolidated statements of operations. Changes in key assumptions can materially affect the estimated fair value of contingent consideration liabilities. Related Parties Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Revenue Recognition The Company recognizes revenue in accordance with ASC 606, “Revenue Recognition.” Revenue under Topic 606 is required to be recognized either at a “point in time” or “over time,” depending on the facts and circumstances of the arrangement, and are evaluated using a five-step model. To achieve the core principle of Topic 606, we performed the following five steps: · Identify the contract(s) with customer; · Identify the performance obligations in the contract; · Determine the transactions price; · Allocate the transactions price to the performance obligations in the contract; and · Recognize revenue when (or as) we satisfy a performance obligation. Under Topic 606, the Company recognizes revenue as, or when, we satisfy performance obligations under a contract. We account for a contract when the parties approved the contract and are committed to perform on it, the rights of each party and the payment terms are identified, the contract has commercial substance and it is probable that we will collect substantially all of the consideration. A performance obligation is a promise in a contract to transfer a distinct good or service, or a series of distinct goods or services, to a customer. The transaction price of a contract must be allocated to each performance obligation and recognized as the performance obligation is satisfied. In essence, we recognize revenue when or as control of the promised goods or services transfer to the customer. Sera Labs Revenue Sera Labs recognizes revenue as, or when, we satisfy performance obligations under a contract. We account for a contract when the parties approved the contract and are committed to perform on it, the rights of each party and the payment terms are identified, the contract has commercial substance and it is probable that we will collect substantially all of the consideration. A performance obligation is a promise in a contract to transfer a distinct good or service, or a series of distinct goods or services, to a customer. The transaction price of a contract must be allocated to each performance obligation and recognized as the performance obligation is satisfied. In essence, we recognize revenue when or as control of the promised goods or services transfer to the customer. Sales through Advanced Legacy Technologies LLC (ALT) In April 2022, pursuant to the Distribution Services Agreement between Sera Labs and ALT (the “Agreement”), ALT was engaged to provide a range of auxiliary services to Sera Labs designed to support the direct-to-consumer (“DTC”) sales channel, enhancing the efficiency and effectiveness of our product distribution. These services include, but are not limited to, processing customer payments, handling customer service inquiries, and managing logistics and fulfillment coordination with our third-party manufacturing and fulfillment vendor (3PL). ALT's role was instrumental in facilitating the seamless operation of our DTC model, acting as an extension of our operational infrastructure to ensure customer satisfaction and streamline sales processes. However, ALT does not have its own employees and the management of the aforementioned processes was performed by employees of Sera Labs. Additionally, pursuant to the Agreement, Sera Labs is permitted to “assign, transfer or otherwise delegate [the] Agreement or any of its rights or obligations [under the Agreement] without the written consent of ALT,” which Sera Labs did in having its employees administer the Agreement. Under Topic 606, the Company was determined to be the principal in the transactions as we control the product, pricing, and promotions offered to the customers, and we are responsible for product returns and customer satisfaction. Sales through ALT were discontinued in 2023. The Agreement contemplated the use by ALT of its own bank account, but it did not explicitly authorize Sera Labs employees to directly execute transactions through ALT's bank account. The authorization was granted extemporaneously by the beneficial owner of ALT, who is the chief executive officer of the Company. Such authorization was provided to help facilitate the administration of the Agreement and encompasses the following key features: 1. Transaction Execution: Sera Labs employees are permitted to initiate and approve transactions related to the sales of our products, including the collection of revenues and payment of expenses associated with our direct-to-consumer sales channel. 2. Bank Account Management: Specific protocols are outlined for the oversight and reconciliation of the bank account, ensuring transparency and accountability in its use. This includes regular auditing and reporting mechanisms to monitor the flow of funds and to ensure they are accurately attributed to the respective parties. 3. Operational Integration: The intent was for the integration of ALT’s services to be performed similar to Sera Labs’ operational procedures, ensuring that ALT’s bank account usage is consistent with our overall business objectives and financial reporting practices. Revenue Recognition Revenue from eCommerce sales, including DTC sales, are recognized upon receipt of the merchandise by the customer. Sera Labs recognizes revenue in its DTC sales channel based on the principle that control of the specified goods is transferred to the customer. With the Power Keto and Immunity nutraceutical products which were facilitated through ALT, this control is evidenced through our agreement with 3PL, which stipulates that Sera Labs has the unilateral ability to direct 3PL to produce and ship the products directly to the customer upon order receipt. Despite 3PL retaining legal title to the products until the point of sale, the immediate transfer of legal title from Sera Labs to the customer upon sale (flash title transfer) demonstrates Sera Labs' control over the goods. Key factors supporting our determination as the principal in the ALT transactions include: Primary Responsibility for Goods and Services: Under the terms of the Agreement, Sera Labs has ultimate responsibility for the specified goods' delivery and quality, indicating our control over the goods before they are transferred to the customer. Inventory Risk: Under the terms of the Agreement, Sera Labs bears ultimate inventory risk before the goods are transferred to customers, as evidenced by our commitment to purchase the goods from 3PL upon receiving a customer order. Pricing Discretion: Under the terms of the Agreement, Sera Labs has the sole discretion to establish the pricing for the specified goods, further supporting our role in directing the use of and obtaining the benefits from the sale of these goods. These factors affirm the position of Sera Labs as the principal in the transactions under ASC 606, ensuring the correct recognition of revenue on a gross basis. We also elected to adopt the practical expedient related to shipping and handling fees which allows us to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations. Therefore, shipping and handling activities are considered part of the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred. Shipping revenue is recorded upon delivery to the customer. Practical Expedients and Exemptions The Company has elected certain practical expedients and policy elections as permitted under ASC Topic 606 as follows: · The Company adopted the practical expedient related to not adjusting the promised amount of consideration for the effects of a significant financing component if the period between transfer of product and customer payment is expected to be less than one year at the time of contract inception; · The Company made the accounting policy election to exclude any sales and similar taxes from the transaction price; and · The Company adopted the practical expedient not to disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Sales Tax The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to a customer, excluding sales taxes. The net amount of sales tax payable to the various state taxation authorities is included in sales tax payable in the unaudited condensed consolidated balance sheets. Sales Returns, Discounts and Warranties Sales returns, discount and warranties are considered variable consideration under ASC 606. The Company reduces revenue for estimated future returns, discounts and warranties which may occur with distributors and retailers. When evaluating the adequacy of sales returns, discounts and warranties, the Company analyzes the following: historical credit allowances, current sell-through of inventory of the Company’s products, current trends in retail industry, changes in customer demand, acceptance of products, and other related factors. Cost to Obtain a Contract The Company pays sales commissions to its employees and outside sales representatives for contracts and orders that they obtain relating to the wholesale sales of our products. The Company applies the optional practical expedient to immediately expense costs to obtain a contract or order if the recognition period of the revenue is one year or less. As such, sales commissions are immediately recognized as an expense and included as part of sales and marketing expenses. Deferred Revenue Advance payments and billings in excess of revenue recognized represents deferred revenue and is recorded as a liability when customers remit cash payments in advance before the Company satisfies its performance obligations under contractual or other sales arrangements. Deferred revenue is derecognized when revenue is recognized and the performance obligation is satisfied and is generally classified as current based on the timing of when the Company expects to recognize the revenue. Deferred revenue is made up of the following as of March 31, 2024 and December 31, 2023 (in thousands): March 31, 2024 December 31, 2023 Advance payments and customer deposits for commercial products $ 414 $ 416 The following table summarizes the changes in deferred revenue during the period presented (in thousands): Balance at December 31, 2023 $ 416 Additions 17 Customer deposits returned - Transfers to revenue (19 ) Balance at March 31, 2024 $ 414 Cost of Goods Sold Cost of goods sold primarily consists of costs for our products incurred to third-party manufacturers and in-bound freight. Advertising Expense The Company expenses marketing, promotions and advertising costs as incurred. Such costs are included in selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations. The Company recorded advertising costs of $244 thousand and $497 thousand for the three months ended March 31, 2024 and 2023, respectively. Income Taxes The Company utilizes ASC 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is recorded when it is “more likely-than-not” that a deferred tax asset will not be realized. The Company generated a deferred tax asset through net operating loss carry-forward. However, a valuation allowance of 100% has been established due to the uncertainty of the Company’s realization of the net operating loss carry-forward prior to its expiration. Share-based Payments Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718, “Stock Compensation” (“ASC 718”) which requires recognition in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). ASC 718 also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award. Pursuant to ASC 2018-07 (Topic 718) for share-based payments to employees, consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the grant date. For awards of restricted stock, the Company determines grant date fair value based on the closing price of the Company’s common stock on the grant date as reported on the over-the-counter market (the “OTC Market”). For awards of stock options, the Company uses the Black-Scholes option valuation model to estimate grant date fair value. Compensation expense is recognized for the portion of the award that is ultimately expected to vest over the period during which the recipient renders the required services to the Company using the straight-line single option method. See Note 15 – Share-based Payments for additional information. Fair Value Measurements The Company follows ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements and establishes a framework for measuring fair value and expands disclosure about such fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The carrying amounts of cash equivalents, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate fair values because of the short-term nature of these items. Valuation techniques used to measure fair value, when required, must maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. ASC 820 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, which are the following: · Level 1 – Quoted prices in active markets for identical assets and liabilities. · Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market 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. When a portion of the purchase consideration consists of shares of the Company’s common stock, the Company calculates the purchase price attributable to those shares, a Level 1 security, by determining the fair value of those shares quoted on the OTC Market as of the acquisition date. The Company recognizes estimated fair values of the tangible assets and identifiable intangible assets acquired and liabilities assumed, including any contingent consideration, as of the acquisition date. Goodwill is recognized as any amount of consideration transferred in excess of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. In determining fair value, the Company also considers counterparty credit risk in its assessment of fair value. At March 31, 2024 and December, 31, 2023, the Company had no financial assets or liabilities recorded at fair value on a recurring basis, except for the Series A and B Notes, for which we elected the fair value option, and the contingent stock consideration. These liabilities are measured at fair value using the period-end quoted market prices of the Company’s common stock as a Level 3 input and are marked-to-market at each reporting date with the change in fair value reported as a gain (loss) in the unaudited condensed consolidated statement of operations. The following table summarizes fair value measurements by level at March 31, 2024 for assets and liabilities measured at fair value on a recurring basis (in thousands): Total Level 1 Level 2 Level 3 Fair value of Series A Note $ 4,836 $ - $ - $ 4,836 Fair value of Series B Note $ 3,684 $ - $ - $ 3,684 The following table summarizes fair value measurements by level at December 31, 2023 for assets and liabilities measured at fair value on a recurring basis (in thousands): Total Level 1 Level 2 Level 3 Fair value of Series A Note $ 4,597 $ - $ - $ 4,597 Fair value of Series B Note $ 3,502 $ - $ - $ 3,502 The following table summarizes the changes in Level 3 financial instruments during the three months ended March 31, 2024 (in thousands): Fair value of Series A and B Notes at December 31, 2023 $ 8,099 Change in fair value of Series A Note 239 Change in fair value of Series B Note 182 Fair value of Series A and B Notes at March 31, 2024 $ 8,520 A summary of the weighted average (in aggregate) significant unobservable inputs used in measuring the Series A and B Notes that are categorized within Level 3 of the fair value hierarchy is as follows: March 31, 2024 December 31, 2023 Stock price $ 0.0304 $ 0.0744 Conversion price $ 1.32 $ 1.32 Term (in years) – Series A Note 0.0 0.0 Term (in years) – Series B Note 0.0 0.0 Volatility – Series A Note 69.0 % 78.0 % Volatility – Series B Note 69.0 % 78.0 % Risk-free interest rate – Series A Note 5.07 % 5.13 % Risk-free interest rate – Series B Note 5.07 % 5.13 % Interest rate 18.0 % 18.0 % Contingencies We are exposed to claims and litigation arising in the ordinary course of business and use various methods to resolve these matters in a manner that we believe serves the best interest of our stockholders and other constituents. When a loss is probable, we record an accrual based on the reasonably estimable loss or range of loss. When no point of loss is more likely than another, we record the lowest amount in the estimated range of loss and, if material |
