Notes to the Consolidated Financial Statements

(Unaudited)

NOTE 1 – DESCRIPTION OF THE BUSINESS OF LFTD PARTNERS INC.

Description of the Business of LFTD Partners Inc. – LFTD Partners Inc. (hereinafter sometimes referred to as “LFTD Partners”, the “Company”, “LIFD”, the “Company”, “we”, “us”, “our”, etc.) was organized under the laws of the State of Nevada on January 2, 1986. Shares of the Company’s common stock are traded on the OTCQB Venture Market under the trading symbol LIFD.

On May 18, 2021, the Company changed its name to LFTD Partners Inc. from Acquired Sales Corp. On March 15, 2022, the Company changed its stock trading symbol to LIFD.

After acquiring, operating and then selling businesses involved in the defense sector, our business is currently involved in developing, manufacturing and selling a wide variety of branded products containing hemp-derived cannabinoids and non-hemp-derived psychedelic products. We are interested in acquiring rapidly growing, profitable companies that are also involved in manufacturing and selling branded products containing hemp-derived cannabinoids, and in acquiring companies that manufacture and sell branded products containing kratom, kava and non-hemp-derived psychedelic products (a “Canna-Infused Products Company”).

Management of the Company is open-minded to the concept of also acquiring operating businesses and/or assets involving products containing marijuana, distilled spirits, beer, wine, and real estate. In addition, management of the Company is open-minded to the concept of acquiring all or a portion of one or more operating businesses and/or assets that are considered to be “essential” businesses which are unlikely to be shut down by the government during pandemics such as COVID-19. We are currently engaged in discussions with potential acquisition targets, both within and outside the hemp-derived cannabinoid industry.

On February 24, 2020, we acquired 100% of the ownership interests in one Canna-Infused Products Company called Lifted Liquids, Inc. d/b/a Lifted Made (formerly Warrender Enterprise Inc. d/b/a Lifted Liquids) (www.LiftedMade.com), Kenosha, Wisconsin (“Lifted Made” or “Lifted”).

On April 30, 2019, we also closed on the acquisition of 4.99% of the common stock of each of CBD-infused beverages maker Ablis Holding Company (“Ablis”) (www.AblisCBD.com), and of distilled spirits manufacturers Bendistillery Inc. (“Bendistillery”) and Bend Spirits, Inc. (“Bend Spirits”), all located in Bend, Oregon.

Prior to February 9, 2022, Lifted Made had a 50% membership interest in SmplyLifted LLC, which sells tobacco-free nicotine pouches under the brand name FR3SH (www.GETFR3SH.com). On February 9, 2022, Lifted Made sold its 50% membership interest in SmplyLifted LLC to Corner Vapory LLC, an affiliate of Nicholas S. Warrender (“NWarrender”), CEO of Lifted, for $1, plus ninety-nine percent (99%) of any and all payments and other consideration received or owed to Corner Vapory LLC in regard to SmplyLifted’s existing inventory of FR3SH brand tobacco-free nicotine pouches. Lifted has the option to re-purchase the 50% membership interest in SmplyLifted LLC from Corner Vapory LLC for $1,000 in cash at any time on or before December 31, 2032.

Merger Related Promissory Note

On February 24, 2020, we acquired Lifted as a wholly-owned subsidiary for cash and stock paid to Lifted’s then owner NWarrender. The $7,500,000 money component of the purchase consideration was paid to NWarrender in the form of $3,750,000 in cash at closing and a $3,750,000 promissory note that accrued interest at the rate of 2% per annum (“$3.75M Note”).

The $3.75M Note was secured by (a) a first lien security interest in all of the assets of the Company and Lifted; and (b) a pledge of: (i) all of the capital stock of Lifted; (ii) all of the common stock of Bendistillery, Bend Spirits and Ablis that is owned by the Company; and (iii) all of the capital stock of any other entity owned by the Company, Lifted or any of their subsidiaries, pursuant to a Collateral Stock Pledge Agreement between NWarrender, as Secured Party, and the Company and Lifted, as Pledgors.

On December 30, 2021, the Company repaid all principal and interest due under the $3.75M Note.

NWarrender kept $1,000,000 of the repayment of the $3.75M Note, plus accrued interest, and on January 3, 2022, reloaned $2,750,000 to LIFD and Lifted (collectively “Payors”) at the rate of 2.5% (the “$2.75M Note”). The $2.75M Note payable jointly by the Company and Lifted to NWarrender was secured by a perfected first lien security interest (the “Security Interest”) that encumbers all of the assets of the Company and Lifted. The Company was obligated to pay off the principal of the $2.75M Note in five semi-annual payments to NWarrender of $458,333 and a sixth and final semi-annual payment to NWarrender of $458,335, in each case plus accrued interest, starting on June 30, 2022.

On June 7, 2022, LFTD Partners prepaid $916,666 of the principal of the $2.75M Note, and $29,384 of related accrued interest through that date, which left $1,833,334 remaining principal on the $2.75M Note. On July 5, 2022, we entered into an agreement (“Acceleration Agreement”) with NWarrender. Under the terms of the Acceleration Agreement, we were obligated to repay the remaining principal balance as follows: $1,374,999 on or before December 31, 2022, and $458,335 on or before December 31, 2024. Then, on July 8, 2022, we prepaid $916,666, along with accrued interest, and then, on July 25, 2022, we prepaid the remaining principal balance of $916,668 and accrued interest in full, and all collateral securing the $2.75M Note was released.

Obligation to Purchase Headquarters Building

Toward the end of 2020, NWarrender, through his assigned entity 95th Holdings, LLC, purchased a building located at 5511 95th Avenue in Kenosha, Wisconsin (“5511 Building”) that was immediately leased to us to conduct our expanded operations. The 5511 Building includes office, laboratory and warehouse space. As part of the lease agreement with 95th Holdings, LLC, the parties agreed that our wholly owned subsidiary Lifted would eventually purchase the 5511 Building. The purchase price for the 5511 Building was originally subject to variation based on a formula agreed upon by the parties. Pursuant to an agreement with Warrender on December 30, 2021, the parties agreed to set the purchase price for the 5511 Building at $1,375,000. Prior to the Acceleration Agreement, Lifted had an obligation to complete the purchase of the 5511 Building on or before December 31, 2022. Pursuant to the Acceleration Agreement, the deadline to purchase the 5511 Building has been extended by one year to December 31, 2023. In addition, the Acceleration Agreement contains a provision that if we raise $5,000,000 of debt or equity capital, then Lifted or our designee shall purchase the 5511 Building from 95th Holdings, LLC at the agreed upon $1,375,000 purchase price within two days.

Sublease For Commuter Employees 

On July 6, 2022, Lifted entered into a sublease for office space in Chicago, Illinois located at 2701-09 West Fulton PH, Chicago, Illinois 60612. The sublease costs $3,000 per month, plus supplemental lease related charges such as real estate taxes and common expenses of the property that we anticipate will be commercially typical costs. The sublease was retroactively effective as of June 1, 2022 and for a five-month term that ended on October 31, 2022. The purpose of the sublease is to make available office space for the members of Lifted’s sales team who live in Chicago. These salespeople were spending significant time in their cars commuting from Chicago to Kenosha.

The sublessor is one of our affiliates, Bill McLaughlin, Lifted’s Chief Strategy Officer. The sublease is structured so that Mr. McLaughlin's lease payment obligations to the landlord are passed on to Lifted on a dollar-for-dollar basis, such that Mr. McLaughlin does not realize a cashflow profit or loss from the sublease.

As described in “NOTE 15 – SUBSEQUENT EVENTS”, the sublease is currently operating on a month-to-month basis. Management expects to extend the sublease once Mr. McLaughlin is presented a new lease from his landlord.

Termination of Letter of Intent relating to the proposed acquisition by the Company of Savage Enterprises, Premier Greens LLC and MKRC Holdings, LLC

On December 15, 2021, the Company, our Chairman and CEO Gerard M. Jacobs (“GJacobs”), our President and CFO William C. “Jake” Jacobs (“WJacobs”), and our Vice Chairman and COO NWarrender, Savage Enterprises, a Wyoming corporation (“Savage”), Premier Greens LLC, a California limited liability company (“Premier Greens”), MKRC Holdings, LLC, a Wyoming limited liability company (“MKRC”), Christopher G. Wheeler (“Wheeler”), and Matt Winters (“Winters”), mutually stipulated to terminate the Letter of Intent dated June 15, 2021 that set out the Company’s possible acquisition of Savage, Premier Greens and MKRC.

Termination of Letter of Intent relating to the proposed acquisition by the Company of Fresh Farms E-Liquid, LLC

On December 16, 2021, the Company, Fresh Farms E-Liquid, LLC, a California limited liability company (“Fresh Farms”), Anthony J. Devincentis (“Devincentis”), Jakob M. Audino (“Audino”), Forrest F. Town (“Town”), John Z. Petti (“Petti”), GJacobs, NWarrender, WJacobs, Wheeler and Winters mutually stipulated to terminate the Letter of Intent dated September 1, 2021 that set out the Company’s possible acquisition of Fresh Farms.

Capital Raise

Cash on hand is currently limited, so in order to close future acquisitions, and potentially also in order to pay other corporate obligations such as certain bonuses, our company-wide bonus pool, and/or income taxes, it may be necessary for us to raise substantial additional capital, and no guarantee or assurance can be made that such capital can be raised on acceptable terms, if at all.

We are currently exploring the possibility of raising $5 million or more through some combination of debt and equity offerings in order to purchase for $1.375 million the building located at 5511 95^th Avenue, Kenosha, Wisconsin, that is currently being rented by Lifted, to pay off other liabilities of the Company and Lifted such as certain bonuses, our company-wide bonus pool, and/or income taxes, and to pay transactional fees and expenses. If we proceed forward with an equity raise, it may be in conjunction with a potential listing of our common stock on a stock exchange. However, there can be no guarantee or assurance that any such debt and/or equity capital raise or listing will be completed on acceptable terms, if at all.

NOTE 2 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Consolidated Financial Statements – The consolidated financial statements of the Company should be read in conjunction with the Company’s consolidated financial statements and related notes that appear in the annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 31, 2022. In the opinion of management, all adjustments necessary for a fair presentation have been included in the accompanying unaudited consolidated financial statements and consist of only normal recurring adjustments, except as disclosed herein. As part of the consolidation, all significant intercompany transactions are eliminated, and on the Consolidated Statements of Operations, certain expenses are consolidated into the Other Operating Expenses category.

Use of Estimates – The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) typically requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results and outcomes may differ from management’s estimates and assumptions. Key estimates in these financial statements include the allowance for doubtful accounts, sales allowance, estimated useful lives of property, plant and equipment, valuation allowance on deferred income tax assets and the fair value of stock options and warrants.

Cash and Cash Equivalents – Cash and cash equivalents as of September 30, 2022 and December 31, 2021 included cash on-hand. The Company considers all highly liquid investments with an original maturity date within 90 days to be cash equivalents. Cash equivalents are carried at cost. The Company maintains its cash balance at a credit-worthy financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. Deposits with these banks may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk.  

Fair Value of Financial Instruments – The historical carrying amount of the financial instruments, which principally include cash, trade receivables, historical accounts payable and accrued expenses, approximates fair value due to the relative short maturity of such instruments.

Accounting Standards Codification (“ASC”) 820 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair-value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Ablis Holding Company, Bendistillery Inc. and Bend Spirits, Inc. are not publicly traded, and as such their financial instruments are 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.

Accounts Receivable – The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded (the “Allowance for Doubtful Accounts”), which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s recent loss history and an overall assessment of past due trade accounts receivable outstanding. As of December 31, 2021, the Company implemented a new policy regarding allowances for doubtful accounts, which is that all accounts receivable older than 90 days at quarter end are accrued for in allowances for doubtful accounts. Allowances for doubtful accounts of $128,589 and $239,101 were recorded at September 30, 2022 and December 31, 2021, respectively.

Inventory – Inventory is valued at the lower of average cost or market value (net realizable value). Inventory consisted of the following at September 30, 2022 and December 31, 2021:

Monthly overhead costs such as payments for rent, utilities, insurance, and indirect labor are allocated to finished goods based on the estimated percentage cost toward the finished goods. Depreciation expense related to certain machinery and equipment is also allocated to finished goods.

At September 30, 2022, $112,507 of overhead costs were allocated to finished goods. In comparison, during the quarter ended September 30, 2021, $36,457 of overhead costs were allocated to finished goods.

During the nine months ended September 30, 2022, $3,279,262 of obsolete and spoiled inventory was written off; this is compared to $234,351 of obsolete and spoiled inventory written off during the nine months ended September 30, 2021.

Of the $3,279,262 of obsolete inventory that was written off during the nine months ended September 30, 2022, $2,479,798 of it was recognized during the quarter ended September 30, 2022. This write-off primarily related to $2,313,902 worth of certain 2 mL disposable vapes written off due to clogging issues (the “Clogged Vapes”). Management believes that the clogging was caused by the summer heat wave (the third hottest summer on record in the USA). The heat caused the oil in the Clogged Vapes to lose viscosity, so more oil solidified in the coils as they were brought to room temperature. Because these Clogged Vapes did not have preheat or variable voltage settings, the oil could not be unclogged from the coils. Management discontinued the sale of the Clogged Vapes during the third quarter. Lifted’s 2 mL disposable vapes have now been superseded by 3 mL disposable vapes that do have preheat and variable voltage settings, so management expects that this write off of Clogged Vapes should be a one-time occurrence. Management is attempting to negotiate an agreement pursuant to which the manufacturer of the Clogged Vapes will subsidize or share, in some fashion, in the losses that have been sustained by Lifted due to the Clogged Vapes; however, there can be no guarantees or assurances whatsoever that such an agreement to subsidize or share in such losses can be successfully negotiated.

The process of determining obsolete inventory during the quarter involved:

Fixed Assets – Fixed assets are recorded and stated at cost. Fixed assets that cost less than $2,500 are expensed, and fixed assets that cost $2,500 or more are capitalized. Depreciation of machinery and equipment, furniture and fixtures, leasehold improvements, and computer equipment, is based on the asset’s estimated useful life and is calculated using the straight-line method. Normal repairs and maintenance costs are expensed as incurred. Expenditures that materially increase values or extend useful lives are capitalized. The related costs and accumulated depreciation of disposed assets are eliminated and any resulting gain or loss on disposition is included in net income.

Management regularly reviews property and equipment and other long-lived assets for possible impairment. This review occurs annually, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment, management then prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. The fair value is estimated using the present value of the future cash flows discounted at a rate commensurate with management’s estimates of the business risks.

Preparation of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning expected future conditions. Long-lived assets held for sale are recorded at the lower of their carrying amount or fair value less cost to sell.

Security Deposits – The Company has not paid a security deposit for its leased facility located at 5511 95^th Avenue, Kenosha, WI 53144 for the Company’s current office, manufacturing and warehouse space.

The Company has paid security deposits for its leased facilities located at 8920 58^th Place, Suite 850, Kenosha, WI 53144, 8910 58^th Place, Suites 600 and 700, Kenosha, WI 53144, 9560 58^th Place, Suite 360, Kenosha, WI 53144 and 2701-09 West Fulton PH, Chicago, Illinois 60612.

The Company had paid a security deposit to its lessor for the Company’s former office, manufacturing and warehouse space in Zion, IL, that was rented on a month-to-month basis from June 1, 2021 through November 2021. The security deposit was written off at December 31, 2021.

State Licensing Deposits – The Company is required to pay deposits for certain licenses in various states.

Revenue – The Company recognizes revenue in accordance with Accounting Standards Codification 606.

The majority of the Company’s sales are of branded products goods to distributors, wholesalers, and end consumers. A minority of the Company’s sales are of raw goods to manufacturers, distributors and wholesalers. The majority of the Company’s sales are to distributors, followed by the Company’s sales to wholesalers, and then the Company’s sales to end consumers. Distributors primarily sell Lifted’s products to vape and smoke shops, stores specializing in cannabinoid-infused products, convenience stores, gas stations, health food stores, and other outlets.

Typically, the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. If the shipping terms on a sale are FOB destination, the revenue is deferred until the product reaches its destination.

The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.

Discounts and rebates to customers are recorded as a reduction to gross sales.

Management believes that adequate provision has been made for cash discounts, returns and spoilage based on the Company’s historical experience.

Described below are some of the reasons why a customer may want to return an ordered item, and how the Company responds in each situation:

As described above in the section “Inventory”, during the quarter ended September 30, 2022, some of Lifted’s customers returned certain Clogged Vapes. In total for the quarter ended September 30, 2022, the Company recorded a sales allowance of $841,269 for estimated future discounts/refunds and product returns, primarily associated with the Clogged Vapes. Please refer to the description in “Inventory” for more information regarding the Clogged Vapes.

Disaggregation of Revenue

During the quarter ended September 30, 2022, approximately 99% of the Company’s sales occurred inside of the United States of America. During the quarter ended September 30, 2021, approximately 99% of the Company’s sales occurred inside of the United States of America as well.

The Company has considered providing disaggregation of revenue by information regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments, such as type of good, geographical region, market or type of customer, type of contract, contract duration, timing of transfer of goods, and sales channels. Due to the rapidly evolving nature of our industry, the Company is constantly launching new products to stay ahead of trends, finding new sales channels, initiating new distribution networks and modifying the prices of its products.

Shown below is a table showing the approximate disaggregation of historical revenue:

Deferred Revenue

Amounts received from a customer before the purchased product is shipped to the customer is treated as deferred revenue. If cash is not received, an accounts receivable is recognized for the invoiced order, but revenue is not recognized until the order is fully shipped. Accounts receivable includes amounts associated with partially shipped orders, for which the unshipped portion is a contract asset. Contract assets represent invoiced but unfulfilled performance obligations.

The table shown below represents the composition of deferred revenue between contract assets (invoiced but unfulfilled performance obligations) and deposits from customers from unfulfilled orders as of September 30, 2022 and December 31, 2021.

Cost of Goods Sold – Cost of goods sold consists of the costs of raw materials utilized in the manufacture of products, direct labor, co-packing fees, repacking fees, freight and shipping charges, warehouse expenses incurred prior to the manufacture of Lifted’s finished products and certain quality control costs. Finished goods that are sold account for the largest portion of cost of sales. Raw materials include ingredients, product components and packaging materials. $3,279,262 and $234,351 of cost of goods sold relates to spoiled and obsolete inventory written off during the nine months ended September 30, 2022 and September 30, 2021, respectively.

Operating Expenses – Operating expenses include payroll, consulting and independent contractor expenses, the accrual for the company-wide management bonus pool, professional fees, bank charges and merchant fees, advertising and marketing, bad debt expense, and depreciation and amortization. Total operating expenses decreased to $318,474 for the quarter ended September 30, 2022, down from $1,782,858 during the quarter ended September 30, 2021, primarily as a result of the complete elimination of the company-wide bonus pool accrual of $2,121,532, which had been accrued through June 30, 2022. Moreover, no company-wide management bonus pool accrual was booked for the quarter ended September 30, 2022.

Income Taxes – Provisions for income taxes are based on taxes payable or refundable for the current year and deferred income taxes. Deferred income taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements and on tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is provided against deferred income tax assets when it is not more likely than not that the deferred income tax assets will be realized.

Basic and Diluted Earnings (Loss) Per Common Share – Basic earnings (loss) per common share is determined by dividing earnings (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per common share is calculated by dividing earnings (loss) by the weighted-average number of common shares and dilutive common share equivalents outstanding during the period. When dilutive, the incremental potential common shares issuable upon exercise of stock options and warrants are determined by the treasury stock method. The following table summarizes the calculations of basic and diluted earnings (loss) per common share for the three and nine months ended September 30, 2022 and September 30, 2021:

As of September 30, 2022, in addition to our outstanding common stock, we have issued (a) options to purchase 1,076,698 shares of common stock at $2.00 per share, (b) warrants to purchase 155,500 shares of common stock at $1.00 per share, (c) rights to purchase warrants to purchase 100,000 shares of common stock at $1.85 per share, and (d) warrants to purchase 2,295,000 shares of common stock at $5.00 per share.

Regarding the aforementioned warrants to purchase 2,295,000 shares of our common stock at an exercise price of $5.00 per share: of the total, warrants to purchase 1,550,000 shares of our common stock are vested, while the remaining warrants to purchase 745,000 shares of our common stock are not vested and are subject to certain conditions and requirements.

At September 30, 2022, the Company had Series A Preferred Stock outstanding convertible into 450,000 shares of common stock; these are included in the diluted earnings calculation. Also at September 30, 2022, the Company had Series B Preferred Stock outstanding convertible into 40,000 shares of common stock; these are not included in the diluted earnings calculation because the exercise price ($5.00/share) was higher than the stock closing price at September 30, 2022 (3.40/share).

In comparison, as of September 30, 2021, in addition to our outstanding common stock, we have issued (a) options to purchase 1,086,698 shares of common stock at $2.00 per share, (b) warrants to purchase 205,500 shares of common stock at $1 per share, (c) rights to purchase warrants to purchase 1,375,000 shares of common stock at between $0.01 and $1.85 per share, and (d) warrants to purchase 2,295,000 shares of common stock at $5.00 per share.

Regarding the aforementioned rights to purchase warrants to purchase 1,375,000 shares of common stock at between $0.01 and $1.85 per share as of September 30, 2021: exercise rights to purchase 1.25 million shares of our common stock by exercise of the foregoing warrants are not vested and are not exercisable until a performance contingency is met.

Regarding the aforementioned warrants to purchase 2,295,000 shares of our common stock at an exercise price of $5.00 per share as of September 30, 2021: of the total, warrants to purchase 1,650,000 shares of our common stock are vested, while the remaining warrants to purchase 645,000 shares of our common stock are not vested and are subject to certain conditions and requirements.

Also outstanding at September 30, 2021, the Company had Series A Preferred Stock outstanding convertible into 575,000 shares of common stock; these are included in the diluted earnings calculation. At September 30, 2021, the Company also had Series B Preferred Stock outstanding convertible into 40,000 shares of common stock; these are not included in the diluted earnings calculation.

Recent Accounting Pronouncements – In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (codified as Accounting Standards Codification (“ASC”) Topic 326). ASC 326 adds to US GAAP the current expected credit loss model, a measurement model based on expected losses rather than incurred losses. Under this new guidance, an entity recognizes its estimate of expected credit losses as an allowance, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022, though early adoption is permitted. The Company believes the adoption will modify the way the Company analyzes financial instruments. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions to the general principles in Topic 740 and clarifies certain aspects of the current guidance to improve consistent application among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021 and interim periods within annual periods beginning after December 15, 2022, though early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company is currently evaluating the impact of ASU 2019-12 on its consolidated financial statements.

On August 5, 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is effective for public business entities that meet the definition of a SEC filer, excluding smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The FASB noted that an entity should adopt the guidance as of the beginning of its annual fiscal year. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements.

The Company is researching what other pronouncements may be applicable to the Company’s accounting and whether or not any other pronouncements should be adopted.

Advertising and Marketing Expenses – Advertising and marketing costs are expensed as incurred. During the three and nine months ended September 30, 2022, the Company incurred $334,215 and $550,612, respectively, in advertising and marketing expenses, which related to trade shows, marketing, promotional products and public relations. In comparison, during the three and nine months ended September 30, 2021, the Company incurred $86,438 and $236,598 in advertising and marketing expenses, of which were related to trade shows, public relations and digital marketing. 

Compensated Absences – During the year ended December 31, 2021, paid time off (“PTO”) was provided to employees who obtained approval for it from NWarrender. Any approved PTO was granted at NWarrender’s discretion, and mandatory PTO was zero days, thus no accrual was necessary at December 31, 2021. Effective January 1, 2022, certain PTO policies have been adopted by Lifted, and a PTO accrual of $13,912 was recognized at September 30, 2022.

Off-Balance Sheet Arrangements – The Company has no off-balance sheet arrangements.

Reclassifications – Some items from the prior period have been reclassified within the financial statements to conform with the current presentation.

NOTE 3 – RECEIPT OF LOANS UNDER THE ECONOMIC INJURY DISASTER LOAN PROGRAM AND THE PAYCHECK PROTECTION PROGRAM

Lifted also applied for and received a loan (the “PPP Loan”) under the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted March 27, 2020. The PPP Loan was issued by BMO Harris Bank (the “Lender”) in the aggregate principal amount of $149,622.50 and evidenced by a promissory note (the “Note”), dated April 14, 2020 issued by Lifted to the Lender. On April 20, 2021, the entire PPP Loan ($149,622) and the interest payable on the PPP Loan ($1,525) was forgiven by the SBA, and a related gain on forgiveness of debt in the amount of $151,147 was recorded. In accordance with its terms, the Note was originally scheduled to mature on April 14, 2022 and bore interest at a rate of 1.00% per annum, payable monthly commencing on November 14, 2020, following an initial deferral period as specified under the PPP. In addition, the Note could be prepaid by Lifted at any time prior to its original maturity with no prepayment penalties. Proceeds from the PPP Loan were available to Lifted to fund designated expenses, including certain payroll costs and other permitted expenses, in accordance with the PPP. Under the terms of the PPP, up to the entire amount of principal and accrued interest of the PPP Loan could be forgiven to the extent that at least 75% of the PPP Loan proceeds are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the SBA under the PPP. As of March 31, 2021, Lifted had an accrual of $1,443 for the interest on the PPP Loan. During the three months ended June 30, 2021, interest of $82 was accrued prior to the forgiveness of the Loan.

NOTE 4 - RISKS AND UNCERTAINTIES

Going Concern – Prior to the acquisition of Lifted on February 24, 2020, the Company had no sources of revenue, and the Company had a history of recurring losses, which has resulted in an accumulated deficit of $4,842,407 as of September 30, 2022. Bankruptcy of the Company at some point in the future is a possibility. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management plans to sustain the Company as a going concern by taking the following actions: (1) acquiring and/or developing profitable businesses that will create positive income from operations; and/or (2) completing private placements of the Company’s common stock and/or preferred stock. Management believes that by taking these actions, the Company will be provided with sufficient future operations and cash flow to continue as a going concern. However, there can be no assurances or guarantees whatsoever that the Company will be successful in consummating such actions on acceptable terms, if at all. Moreover, any such actions can be expected to result in substantial dilution to the existing shareholders of the Company.

The Company’s investments in Ablis, Bendistillery and Bend Spirits made the Company a minority owner of these companies. As a minority owner, the Company is not able to recognize any portion of Ablis’, Bendistillery’s or Bend Spirits’ revenues or earnings in the Company’s financial statements. The Company monitors its investments in Ablis, Bendistillery and Bend Spirits, and from time to time and will evaluate whether there has been a potential impairment of value.

The COVID-19 pandemic and its ramifications, combined with the expenses and potential liabilities associated with litigation involving Lifted, combined with the regulatory risks and uncertainties associated with the cannabinoid-infused products, vaping and nicotine products industries, combined with the risks associated with internet hacking or sabotage, combined with the risks of employee and/or independent contractor disloyalty or theft of Company information and opportunities, have created significant adverse risks to the Company, which have caused substantial doubt about the Company’s ability to continue as a going concern.

Prior to the Acceleration Agreement, Lifted had an obligation to complete the purchase of the 5511 Building on or before December 31, 2022. Pursuant to the Acceleration Agreement, the deadline to purchase the 5511 Building has been extended by one year to December 31, 2023. In addition, the Acceleration Agreement contains a provision that if we raise $5,000,000 of debt or equity capital, then Lifted or our designee shall purchase the Property from 95th Holdings, LLC at the agreed upon $1,375,000 purchase price within two days.

The Company is also accruing 3% annual dividends on its Series A and Series B Convertible Preferred Stock.

Also, on February 14, 2022, NWarrender, GJacobs and WJacobs (together the “Parties”) and LFTD Partners, entered into an agreement (the “Amended Omnibus Agreement”) that amends in part the Agreement dated as of December 30, 2021 entered into by and among LFTD Partners Inc., the Parties, Lifted Liquids, Inc. d/b/a Lifted Made and 95th Holdings, LLC (the “Omnibus Agreement”). The Amended Omnibus Agreement (1) terminates the right for the Parties to receive bonus compensation in regard to 2021 that is in excess of the Modified 2021 Bonus Pool Amount of $1,556,055 set out in the Omnibus Agreement; (2) places a cap on the 2022 company-wide bonus pool such that the 2022 company-wide bonus pool shall not be allowed to be accrued or paid by LIFD if and to the extent that doing so would decrease LIFD’s 2022 diluted earnings per share of common stock below $0.56 per share; and (3) the $500,000 of additional bonus set out in the Omnibus Agreement, is now allocated and defined as a retention bonus of $166,667 to each of NWarrender, GJacobs and WJacobs to be paid at the end of 2022 so long as each respective executive has not earlier resigned from LFTD Partners (the “2022 Retention Bonuses”).

Moreover, LFTD Partners agrees and covenants that the Chairman of the Compensation Committee is authorized to negotiate and agree on behalf of LFTD Partners in regard to a 2023 supplemental retention bonus for NWarrender, GJacobs and WJacobs (in addition to the company-wide Bonus Pool) (the “2023 Retention Bonuses”), and if and only if the amounts of the 2023 Retention Bonuses are mutually agreed upon in writing among the Chairman of the Compensation Committee, NWarrender, GJacobs and WJacobs, then one-third of the 2023 Retention Bonuses shall be paid by LFTD Partners to each of NWarrender, GJacobs and WJacobs on or before March 15, 2024, provided that such officer shall not have earlier resigned as an officer of LFTD Partners.

During 2022, Lifted for the first time hired an outside laboratory to conduct research and development on a potential new, non-hemp-derived, synthetic psychedelic product (the “New Psychedelic Product”) for a total of $19,800. Such research and development of the New Psychedelic Product has been put on indefinite hold, as Lifted has recently successfully purchased from third parties a natural equivalent of the New Psychedelic Product.

In addition, factors that could materially affect future operating results include, but are not limited to, changes to laws and regulations, especially any future changes to the so-called “Farm Bill” at the federal level, and any other federal or state laws and regulations related to hemp-derived cannabinoids, nicotine products, kratom, psychedelic products and/or vaping. The company is also subject to vendor concentration risk, customer concentration risk, customer credit risk, and counterparty risk.

The Company maintains levels of cash bank accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and it believes that it is not exposed to any significant credit risk on cash.

No assurance or guarantee whatsoever can be given that the net income of the Company’s wholly-owned subsidiary Lifted will be sufficient to allow the Company to pay all of its operating expenses, the dividends accruing on the Company’s preferred stock, the company-wide bonus pool, and the 2022 Retention Bonuses and the 2023 Retention Bonuses. As a result, there is substantial doubt that the Company will be able to continue as a going concern. Bankruptcy of the Company at some point in the future is a possibility. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The Company currently has one revenue-generating subsidiary, Lifted. If and to the extent that the revenue generated by Lifted is not adequate to pay the Company’s operating expenses and the dividends accruing on its preferred stock, then Company management plans to sustain the Company as a going concern by taking the following actions: (1) acquiring and/or developing additional profitable businesses that will create positive income from operations; and/or (2) completing private placements of the Company’s common stock and/or preferred stock. Management believes that by taking these actions, the Company will be provided with sufficient future operations and cash flow to continue as a going concern. However, there can be no assurances or guarantees whatsoever that the Company will be successful in consummating such actions on acceptable terms, if at all. Moreover, any such actions can be expected to result in substantial dilution to the existing shareholders of the Company.

Customer Concentration Risk – During the quarter ended September 30, 2022, twelve customers made up approximately 50% of Lifted Made’s sales. In comparison, during the quarter ended September 30, 2021, eight customers made up approximately 50% of Lifted Made’s sales. During the nine months ended September 30, 2022, 15 customers made up approximately 50% of Lifted Made’s sales. In comparison, during the nine months ended September 30, 2021, five customers made up approximately 50% of Lifted Made’s sales.

Vendor Dependence – Regarding the purchases of raw goods and finished goods (“Inventory”), during the quarter ended September 30, 2022, approximately 88% of the Inventory that Lifted purchased were from five vendors. In comparison, regarding the purchases of Inventory during the quarter ended September 30, 2021, approximately 70% of the Inventory purchases were from six vendors. Regarding the purchases of Inventory during the nine months ended September 30, 2022, approximately 73% of the Inventory purchases were from five vendors. In comparison, regarding the purchases of Inventory during the nine months ended September 30, 2021, approximately 62% of the Inventory purchases were from five vendors.

The loss of Lifted’s relationships with these customers and vendors could have a material adverse effect on Lifted’s business.

NOTE 5 – THE COMPANY’S INVESTMENTS

The Company’s Investments in Ablis, Bendistillery and Bend Spirits

On April 30, 2019, the Company purchased 4.99% of the common stock of each of Ablis Holding Company, Bendistillery Inc., and Bend Spirits, Inc. for an aggregate purchase price of $1,896,200.

Under US Generally Accepted Accounting Principles (“GAAP”), the Company uses the cost method to account for our minority equity ownership interests in businesses in which the Company owns less than 20% of equity ownership, and have no substantial influence over the management of the businesses. Under the cost method of accounting, the Company reports the historical costs of the investments as assets on its balance sheet. However, US GAAP does not permit the consolidation of its financial statements with the financial statements of companies in which the Company owns minority equity ownership interests.

As such, the Company’s investments in Ablis, Bendistillery and Bend Spirits made the Company a minority owner of these companies. As a minority owner, the Company will not be able to recognize any portion of Ablis’, Bendistillery’s or Bend Spirits’ revenues or earnings in the Company’s financial statements. US GAAP also requires the Company to record these types of investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. As such, the Company will not be allowed to consolidate into its financial statements any portion of the revenues, earnings or assets of companies in which it owns minority equity ownership interests such as Ablis, Bendistillery and Bend Spirits. Moreover, even if there is evidence that the fair market values of the investments have increased above their historical costs, US GAAP does not allow increasing the recorded values of the investments. Under US GAAP, the only adjustments that may be made to the historical costs of the investments are write downs of the values of the investments, which must be made if there is evidence that the fair market values of the investments have declined to below the recorded historical costs.

At each reporting period, the Company makes a qualitative assessment considering impairment indicators to evaluate whether its investments are impaired. Factors that the Company would consider indicators of impairment include: (1) a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee, (2) a significant adverse change in the regulatory, economic, or technological environment of the investee, (3) a significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates, (4) a bona fide offer to purchase, an offer by the investee to sell, or a completed auction process for the same or similar investment for an amount less than the carrying amount of that investment, and (5) factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants. Up to the date of this report on Form 10-Q, none of the above the above factors have been applicable to the Company’s investments.

The qualitative assessments at the end of quarters one, two and three are done via conference or video calls with the management teams of Ablis, Bendistillery and Bend Spirits. The qualitative assessment at the end of quarter four relating to these entities also includes review of their respective financial statements that have been reviewed by a third party accounting firm. At that time, the Company performs an annual impairment assessment. The reviewed financial statements of these companies are not audited, and the Company is not active in the management of these companies, and except for these companies’ quarterly meetings with the management of the Company, the Company’s assessment of these companies is inherently limited to infrequent and relatively brief conversations with officers of these companies and to reviews of those reviewed financial statements.

On October 19, 2022, a video conference meeting of the board of directors and management of Ablis, Bendistillery and Bend Spirits, and GJacobs and WJacobs was held. During this meeting, the management of Ablis, Bendistillery and Bend Spirits discussed the performance of Ablis, Bendistillery and Bend Spirits during the three months ended September 30, 2022. Based upon the financial and non-financial information that was shared with LFTD Partners during that conference call, the management of LFTD Partners believes that no impairment of the value of Bendistillery, Bend Spirits or Ablis is warranted at this point in time. The information that was shared by the management of Ablis included, among other things: new product launches and expansion into more stores. The information that was shared by the management of Bendistillery and Bend Spirits included, among other things: increased on-premise sales are up from the third quarter of 2021, Bendistillery’s in-house sales team is making up for the loss of revenue from third party distributors who have fired their own sales people as a result of the pandemic, and existing markets and new markets opening up. It is our understanding that the management of Bendistillery periodically receives inquiries regarding from large competitors about potentially investing in or acquiring Bendistillery.

The Company’s Investment in Lifted Made

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.

Goodwill is not amortized but is subject to annual impairment testing unless circumstances dictate more frequent assessments. The Company performs an annual impairment assessment for goodwill during the fourth quarter of each year and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than the carrying amount. Goodwill impairment testing is a two-step process performed at the reporting unit level. Step one compares the fair value of the reporting unit to its carrying amount. The fair value of the reporting unit is determined by considering both the income approach and market approaches. The fair values calculated under the income approach and market approaches are weighted based on circumstances surrounding the reporting unit. Under the income approach, the Company determines fair value based on estimated future cash flows of the reporting unit, which are discounted to the present value using discount factors that consider the timing and risk of cash flows. For the discount rate, the Company relies on the capital asset pricing model approach, which includes an assessment of the risk-free interest rate, the rate of return from publicly traded stocks, the Company’s risk relative to the overall market, the Company’s size and industry and other Company-specific risks. Other significant assumptions used in the income approach include the terminal value, growth rates, future capital expenditures and changes in future working capital requirements. The market approaches use key multiples from guideline businesses that are comparable and are traded on a public market. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount exceeds its fair value, then the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit as calculated in step one. In this step, the fair value of the reporting unit is allocated to all of the reporting unit’s assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired on that date. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal to the excess.

Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic plans, and future market conditions, among others. There can be no assurance that the Company’s estimates and assumptions made for purposes of the goodwill impairment testing will prove to be accurate predictions of the future. Changes in assumptions and estimates could cause the Company to perform an impairment test prior to scheduled annual impairment tests.

The Company performed its annual fair value assessment at December 31, 2021 on the goodwill recognized as part of the acquisition of Lifted, and determined that no impairment was necessary. The factors that led the Company to this conclusion include, among other things: continued growth in sales and profitability year-over-year, the launch of first-to-market, ground-breaking new products, the addition of more and more wholesalers and distributors nationwide, increased sales to wholesalers and end consumers, the continued growth of Lifted’s flagship brand Urb Finest Flowers, and continued positive publicity of Lifted.

The Company’s Investment in SmplyLifted LLC

On September 22, 2020, LFTD Partners Inc. and Lifted Made and privately-held SMPLSTC, Costa Mesa, CA formed an equally-owned new entity called SmplyLifted LLC, which sold tobacco-free nicotine pouches in several flavors and nicotine strengths under the brand name FR3SH (www.GETFR3SH.com).

Lifted had a 50% membership interest in SmplyLifted LLC. The other 50% of SmplyLifted is owned by SMPLSTC LLC and its principals, who are located in Costa Mesa, California. Under US GAAP, the Company used the equity method to account for its 50% membership interest in SmplyLifted. Under the equity method of accounting, the Company recorded its share (50%) of SmplyLifted’s earnings (or losses) as income (or losses) on the Consolidated Statements of Operations. The Company recorded its initial investment in SmplyLifted, which was $200,000, as an asset at historical cost. Under the equity method, the investment’s value was periodically adjusted to reflect the changes in value due to Lifted’s share in SmplyLifted’s income or losses.

During the year ended December 31, 2020, the Company recognized a loss of $4,429 from its 50% membership interest in SmplyLifted, and wrote down the value of its investment in SmplyLifted to $195,571. During the year ended December 31, 2021, the Company recognized a loss of $195,571 from its 50% membership interest in SmplyLifted. At December 31, 2021, Lifted Made wrote off its receivables from SmplyLifted, and its loans to SmplyLifted, which totaled $388,727.

On February 9, 2022, Lifted Made signed an Agreement to sell its 50% membership interest in SmplyLifted LLC to Corner Vapory LLC, an affiliate of NWarrender, CEO of Lifted, for $1, plus ninety-nine percent (99%) of any and all payments and other consideration received or owed to Corner Vapory LLC in regard to SmplyLifted’s existing inventory of FR3SH brand tobacco-free nicotine pouches. Lifted has the option to re-purchase the 50% membership interest in SmplyLifted LLC from Corner Vapory LLC for $1,000 in cash at any time on or before December 31, 2032.