CBDMD, INC.
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
W
ashington
,
D.C. 20549
FORM
10-K
|
(M
ark
O
ne
)
|
|
☑
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
|
F
or
the fiscal year ended September 30,
2020
|
or
|
☐
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
F
or
the transition period from
_______________
to
_______________
|
|
C
ommission
file number
:
001-38299
|
|
CBDMD,
INC.
|
|
(
Exact name of
registrant as specified in its charter
)
|
|
North
Carolina
|
47-3414576
|
|
(State or other jurisdiction of incorporation or
organization)
|
(I.R.S. Employer Identification No.)
|
8845
Red Oak Blvd, Charlotte, NC 28217
(Address of principal executive offices)(Zip Code)
Registrant's
telephone number, including area code:
(704) 445-3060
Securities
registered under Section 12(b) of the Act:
|
Title of each
class
|
Trading
Symbol(s)
|
Name of each
exchange on which registered
|
|
Common
stock
|
YCBD
|
NYSE
American
|
|
8%
Series A Cumulative Convertible Preferred Stock
|
YCBDpA
|
NYSE
American
|
Securities
registered under Section 12(g) of the Act:
|
None
|
|
(Title of
class)
|
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities
Act. ☐ Yes ☑ No
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. ☐ Yes ☑ No
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. ☑ Yes ☐
No
Indicate by check
mark whether the registrant has submitted electronically every
Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.4.05 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such
files). ☑ Yes ☐ No
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large accelerated
filer
|
☐
|
Accelerated
filer
|
☐
|
|
Non-accelerated
filer
|
☑
|
Smaller reporting
company
|
☑
|
|
Emerging growth
company
|
☑
|
|
|
|
If
an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
|
☐
|
|
Indicate
by check mark whether the registrant has filed a report on and
attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))
by the registered public accounting firm that prepared or issued
its audit report.
|
☐
|
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act) ☐ Yes ☑ No
State the aggregate
market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked prices of such
common equity, as of the last business day of the registrant's most
recently completed second fiscal quarter. $30,946,993 on March 31,
2020.
Indicate the number
of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date. 52,130,870 shares of
common stock are issued and outstanding as of December 18,
2020.
DOCUMENTS
INCORPORATED BY REFERENCE
Part
III of this report incorporates by reference certain portions of
the registrant’s definitive Proxy Statement for its 2020
Annual Meeting of Shareholders which the registrant currently
anticipates will be filed with the SEC on or before January 28,
2021.
TABLE
OF CONTENTS
|
|
|
Page No.
|
|
|
Part I
|
|
|
|
|
|
|
Item
1.
|
Business.
|
5
|
|
Item
1A.
|
Risk
Factors.
|
12
|
|
Item
1B.
|
Unresolved
Staff Comments.
|
18
|
|
Item
2.
|
Properties.
|
18
|
|
Item
3.
|
Legal
Proceedings.
|
18
|
|
Item
4.
|
Mine
Safety Disclosures.
|
18
|
|
|
|
|
|
|
Part II
|
|
|
|
|
|
|
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
|
19
|
|
Item
6.
|
Selected
Financial Data.
|
19
|
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
20
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
27
|
|
Item
8.
|
Financial
Statements and Supplementary Data.
|
27
|
|
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
|
27
|
|
Item
9A.
|
Controls
and Procedures.
|
27
|
|
Item
9B.
|
Other
Information.
|
28
|
|
|
|
|
|
|
Part III
|
|
|
|
|
|
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance.
|
29
|
|
Item
11.
|
Executive
Compensation.
|
29
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters.
|
29
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
29
|
|
Item
14.
|
Principal
Accounting Fees and Services.
|
29
|
|
|
|
|
|
|
Part IV
|
|
|
|
|
|
|
Item
15.
|
Exhibits,
Financial Statement Schedules.
|
29
|
|
Item
16.
|
Form 10-K
Summary
|
29
|
|
SIGNATURES
|
|
30
|
Unless the context
otherwise indicates, when used in this report, the terms the
“Company,” “cbdMD, “we,” “us,
“our” and similar terms refer to cbdMD, Inc., a North
Carolina corporation formerly known as Level Brands, Inc., and our
subsidiaries CBD Industries LLC, a North Carolina limited liability
company formerly known as cbdMD LLC, which we refer to as
“CBDI” and Paw CBD, Inc., a North Carolina corporation
which we refer to as “Paw CBD”. In addition, "fiscal
2019" refers to the year ended September 30, 2019, “fiscal
2020” refers to the year ended September 30,
2020.
We maintain a corporate website at
www.cbdmd.com
.
The information contained on our corporate website and our various
social media platforms are not part of this
report
.
3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION
This report
contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, or “Securities
Act” and Section 21E of the Securities Exchange Act of 1934,
as amended, or “Exchange Act.” These forward-looking
statements are subject to known and unknown risks, uncertainties
and other factors which may cause actual results, performance or
achievements to be materially different from any future results,
performance or achievements expressed or implied by such
forward-looking statements. These forward-looking statements were
based on various factors and were derived utilizing numerous
assumptions and other factors that could cause our actual results
to differ materially from those in the forward-looking statements.
These factors include, but are not limited to:
•
material risks
associated with our overall business, including:
•
our history of
losses;
•
the continuing
impact of COVID-19 on our company;
•
our reliance on
third party raw material suppliers and manufacturers and
compounders; and
•
our reliance on
third party compliance with our supplier verification program and
testing protocols.
•
material risks
associated with regulatory environment for CBD,
including:
•
change in state
laws pertaining to industrial hemp;
•
costs to us for
compliance with laws and the risks of increased litigation;
and
•
possible changes in
the use of CBD.
•
material risks
associated with the ownership of our securities,
including;
•
the impact of
changes in the fair value of our contingent liabilities associated
with the Earnout Shares;
•
dilution to our
shareholders upon the issuance of the Earnout Shares;
•
time devoted to our
company by one of our c0-Chief Executive Officers;
•
the designations,
rights and preferences of our 8% Series A Cumulative Convertible
Preferred Stock (“Series A Convertible Preferred
Stock”);
•
dilution upon the
issuance of shares of common stock underlying outstanding warrants,
options and the Series A Convertible Preferred Stock;
and
•
voting control held
by our directors and their affiliates.
Most of these
factors are difficult to predict accurately and are generally
beyond our control. You should consider the areas of risk described
in connection with any forward-looking statements that may be made
herein. Readers are cautioned not to place undue reliance on these
forward-looking statements and readers should carefully review this
report and our other filings with the Securities and Exchange
Commission (“SEC”) in their entirety. Except for our
ongoing obligations to disclose material information under the
federal securities laws, we undertake no obligation to release
publicly any revisions to any forward-looking statements, to report
events or to report the occurrence of unanticipated events. These
forward-looking statements speak only as of the date of this
report, and you should not rely on these statements without also
considering the risks and uncertainties associated with these
statements and our business.
4
PART
I
ITEM
1.
DESCRIPTION
OF BUSINESS.
We own and operate
the nationally recognized CBD (cannabidiol) brands cbdMD and Paw
CBD
.
We believe that we are the
industry leader in producing and distributing superior
broad-spectrum CBD products. Our mission is to enhance our
customer’s overall quality of life while bringing CBD
education, awareness and accessibility of high quality and
effective products to all. We source cannabinoids, including CBD,
which are extracted from non-GMO hemp grown on farms in the United
States and rigorously tested to ensure it meets our high standards
for quality and purity. Our innovative superior broad spectrum
formula combines the purest hemp extract, containing CBD, CBG
and CBN, while eliminating
the presence of te
trahydrocannabinol (THC)
1
. With the addition of terpenes, we
believe we have created a far more enhanced CBD product that
delivers on maintaining the perfect balance of health and wellness.
Our products offer all the benefits of CBD and trace cannabinoids
with no unknown or unwanted ingredients.
Our cbdMD brand of
products includes over 100 SKUs of high-grade, premium CBD
products, including
CBD tinctures, CBD
gummies, CBD topicals, CBD capsules, CBD bath bombs, CBD bath
salts, and CBD sleep aids.
Our
Paw CBD brand of products includes over 40 SKUs of
veterinarian-formulated products including tinctures, chews, and
topicals in varying strengths and formulas.
cbdMD and Paw CBD
products are distributed through our e-commerce websites, third
party ecommerce sites, select distributors and marketing partners
as well as a variety of brick and mortar retailers.
Growth Strategy
Despite the ongoing business challenges
the COVID-19 pandemic presents, we adapted our day to day business
and grew revenues during fiscal 2020. We continue to pursue many
strategies to grow our revenues and expand the scope of our
business in fiscal 2021 and beyond.
We regularly assess and
evaluate our product offering, new products within our existing
product categories, additional categories, as well as new and
innovative ways to provide CBD in a manner that meets consumer
demands. To that end, we are devoting resources to ongoing research
and development processes with the goal of expanding our product
offerings to meet these expanding consumer demands. In fiscal 2020,
we created offerings packaged for convenience stores, unique
products for certain customers. We currently have several products
in the research and development pipeline with targeted roll-outs
during fiscal 2021. During the first quarter of fiscal 2021, we
launched CBD lidocaine products including sprays as well as a CBD
bath salt line and will roll out a line of CBD skin care products
in the near future. Additionally, we anticipate launching a line of
water-soluble products during the second quarter of fiscal
2021.
_________________
1
Non-THC
is defined as below the level of detection using validated
scientific analytical tools.
5
During fiscal 2020
we saw the direct-to-consumer strength of cbdMD also translate into
significant growth for Paw CBD. Despite being launched less than
one year ago, we believe that Paw CBD is now one of America’s
leading CBD pet brands. Based on an article published on October
12, 2020, by Hemp Industry Daily, which used data provided by
market analytics firm Nielsen Global Connect, estimated the
hemp-derived CBD market for pets will total $40 million to $60
million in 2020. As this brand continues to grow, we are focusing
on cross-selling, customer retention and education, and expect to
introduce Paw CBD subscription and reward programs during fiscal
2021.
There are currently
several pieces of Federal legislation which would help clear the
way for CBD to become an approved dietary ingredient by the FDA
through amendment of the
Federal Food, Drug, and Cosmetic Act
(FDCA)
or the alternative rule making process available to
the FDA, however, it is uncertain if any of this legislation will
be considered prior to the end of the term of the current
Administration in January 2021. We are actively monitoring these
possible changes and will seek to rapidly expand our product lines
following any future approval of CBD as a dietary ingredient by the
FDA.
During fiscal 2021
and beyond we may also choose to further build and maintain our
brand portfolio by acquiring additional brands directly or through
joint ventures if opportunities arise that we believe are in our
best interests. As we are in an emerging market, opportunities
could be present as companies establish strong brands and begin to
obtain large market share. In assessing potential acquisitions or
investments, we expect to utilize our internal resources to
primarily evaluate growth potential, the strength of the target
brand, offerings of the target, as well as possible efficiencies to
gain. We believe that this approach will allow us to effectively
screen consumer brand candidates and strategically evaluate
acquisition targets and efficiently complete due diligence for
potential acquisitions. We are not a party, however at this time,
to any agreements or understandings regarding the acquisition of
additional brands or companies and there are no assurances we will
be successful in expanding our brand portfolio.
Marketing
Our business model
is designed first and foremost to build a strong brand as quickly
as possible as we operate in an emerging market. As CBD is a new
market, we believe the cost to acquire customers is most likely at
the lowest point it will be, therefore, as part of our overall
strategy we started with an internet and online marketing strategy
and have invested heavily in brand promotion and customer
acquisition. During fiscal 2020 and fiscal 2019 we spent
approximately $14,924,000 and $7,831,000, respectively, on brand
development, sponsorships and marketing.
We employ a what we
believe to be a
category-leading,
multi-channel media approach to market our products, which includes
sports sponsorship, social media, digital advertising, podcasts,
television advertising, affiliate marketing as well as athlete and
influencer endorsements.
According to the November 2020
report by Meltwater Media, an independent internationally
recognized media intelligence agency, cbdMD ranked as #1 for Share
of Voice by Reach, #1 in Share of Voice by Volume, and # 1 in
Competitive Media Exposure within our industry.
We believe our partnerships with professional
athletes are an effective way to build upon our already strong
brand recognition in the category.
We believe that our
sponsorship and influencer partnerships which include partners such
as 12 time PGA and two time Masters Champion Bubba Watson, Life
Time and Bellator (MMA), a wholly owned subsidiary of CBS Viacom,
Inc., are first-in-class in the CBD industry. We also have media
partnerships in place with the Joe Rogan Experience and Barstool
Sports podcasts among others.
6
During fiscal 2020
we signed an
exclusive
marketing and sponsorship agreement with Life Time, Inc., the
premier healthy lifestyle brand. As the exclusive CBD partner of
Life Time, Inc., cbdMD has an advertising presence within all Life
Time clubs, product sale within their in-club cafes, and branding
at key Life Time athletic events. Activation continues to evolve as
a result of impacts from COVID-19.
During the fourth
quarter of fiscal 2020 we expanded our marketing platforms to
include television.
Debuting nationwide
during the week of August 31, 2020, our 30-second commercial was
broadcast across multiple national cable networks. We anticipate
increasing our spend in this area throughout fiscal 2021 based on
preliminary results.
Sales
We distribute our
products both through our online sales channel as well as through a
number of wholesalers and retailers that resell our products both
in brick and mortar locations as well as via their online websites.
Sales of our products mainly come from online sales at our website
www.cbdmd.com
and
www.pawcbd.com
and through our inside sales department. Our inside sales team
concentrates on B2B wholesale distributors, who we believe can help
amplify our reach of cbdMD products at physical retail
locations.
7
During fiscal 2020,
our e-commerce business experienced continued rapid growth, with
quarter over quarter increases in new e-commerce customers. For
fiscal 2020, approximately 73% of our total revenues were
e-commerce sales as compared to approximately 62% in fiscal 2019.
On the B2B brick and mortar side of our business, we are currently
maintaining the level of stores we serve at approximately 6,300. In
fiscal 2020, we entered two new sales channels when we created an
exclusive cbdMD product for GNC as well as packaged products for
the convenience store market. While the COVID-19 pandemic initially
affected our overall B2B brick and mortar distribution channels,
since June 2020 we have seen the wholesale channel stabilize and
grow from the low point incurred during the third quarter of fiscal
2020.
In September 2020 we signed a
multi-year, exclusive retail distribution agreement with Life Time,
Inc., As part of the agreement, our products will be available for
sale in Life Time destinations in the near future.
Lastly, in
October 2020 PRO Group, Inc., a multidivisional international
merchandising and marketing organization, with over 79 distributors
operating over 140 distribution centers serving all 50 states and
combined sales volume exceeding $6 billion through its member
distributors and an alliance with the VAL-TEST Group, selected
cbdMD and Paw CBD as the CBD brands to distribute through its
national network. In November 2020, Save Mart expanded cbdMD
products from a test market to half of its footprint.
Our
hope is that once a vaccine is widely available sometime in 2021
and as a result of our increased branding efforts and expanding
product portfolio our B2B brick and mortar growth will return to
pre-COVID-19 levels or greater.
Product
manufacturing
We are committed to
producing a quality product and testing transparency. Our goals
include the optimization of our product manufacturing processes and
the sourcing of reliable, high-quality raw materials. We only use
cannabinoid extracts from hemp grown in the United States in our
products. We currently hold short term supply contracts with
preferred vendors for our critical raw materials. We have first
rights of refusal on purchases so that we can ensure the
availability of such materials as needed. Our preferred vendors are
extractors and brokers who have access to the sources of the
critical raw materials on the spot buy market to meet our growing
demands for raw materials. All suppliers and farms must verify
through our supplier verification program that their source
material was grown using strict standards of cultivation which is
confirmed through individual certificates of origin for all U.S.
biomass used in production.
Our testing
procedures are robust and comprehensive, starting with a supply
chain built through our supplier verification program. All incoming
cannabinoid ingredients are required to be first tested by the
supplier at an independent, ISO accredited, third-party laboratory
before they reach our production facilities and a Certificate of
Analysis provided with each delivery. We then have the cannabinoid
ingredients re-tested by an independent, ISO accredited,
third-party laboratory to verify the supplier results before they
are released into our production process. We test in-house
throughout the production process before sending the finished goods
off for final verification by an independent ISO accredited
third-party laboratory to ensure the finished products have no
detectible THC, and meet our high standards for purity and CBD
levels.
As a consumer goods manufacturer dedicated to
providing the highest quality CBD consumer products on the market,
we strive to meet or exceed the FDAs Good Manufacturing Practice
(GMP) guidelines. These guidelines provide a system of processes,
procedures and documentation to assure a product has the identity,
strength, composition, quality and purity that appear on its
label.
We either manufacture our premium line of products at
our Charlotte, NC facility or work with third party manufacturers.
Our manufacturing facility and
warehouse operations encompass 120,000 square feet and are fully
GMP compliant and NSF GMP registered. NSF GMP registration verifies
that the facility is audited at least once annually for quality and
safety in compliance with Federal regulations for dietary
supplements
good manufacturing practices.
To accommodate our growth, we
have also secured third party contract
manufacturing from FDA-registered facilities which are
independently GMP certified and subject to continuing independent
audit and certification, to handle our increased manufacturing
needs.
Research
and development and product enhancements
Our new product
development efforts are focused on both near-term and long-term
results for the company. The key objectives and input points that
drive cbdMD’s research and development process include
current product improvement efforts and new product development
activities. Our product improvement efforts include consumer
feedback analysis and feedback from panels of product testers,
among others. We also conduct in-depth market research on current
competitor campaigns and sample size testing and research. Our new
product development activities include market research, including
future product trends and research to develop new product
offerings, refinement of extraction and production methods for
product efficiency, ingredient research through sustainability
testing, manufacturing process optimization, in-depth product
testing, and package and graphic development.
8
Intellectual
property
We currently hold
18 U.S. trademark applications which are held for current and
future product offerings and extended branding capability, which
are set forth below:
|
Mark
|
Federal registration No.
|
Filing date
|
Description of Mark Usage
|
|
||
|
|
|
|
|
|
|
|
|
CBDMD
Synergy
|
|
87613823
|
|
9/19/2017
|
Standard
word mark
|
|
|
Synergy
CBDMD
|
|
87613850
|
|
9/19/2017
|
Standard
word mark
|
|
|
CBD
Synergy
|
|
87613876
|
|
9/19/2017
|
Standard
word mark
|
|
|
CBD
Paws
|
|
87614081
|
|
9/19/2017
|
Standard
word mark
|
|
|
Hemp
Synergy
|
|
87625996
|
|
9/28/2017
|
Standard
word mark
|
|
|
Mingo
Rad
|
|
88010754
|
|
6/22/2018
|
Standard
word mark
|
|
|
Powered
by Nature. Enhanced by Science
|
|
88363595
|
|
3/29/2019
|
Standard
word mark
|
|
|
cbdMD
|
|
88451429
|
|
5/29/2019
|
Stylized
word mark (logo in color)
|
|
|
cbdMD
|
|
88451502
|
|
5/29/2019
|
Standard
word mark
|
|
|
cbdMD
Premium CBD Oil
|
|
88451556
|
|
5/29/2019
|
Standard
word mark
|
|
|
CBDMD
Premium
|
|
88451595
|
|
5/29/2019
|
Design
mark
|
|
|
paw
cbd
|
|
88451641
|
|
5/29/2019
|
Design
mark
|
|
|
Paw
cbd
|
|
88451671
|
|
5/29/2019
|
Standard
word mark
|
|
|
Hemplex
Naturals
|
|
88575252
|
|
8/12/2019
|
Standard
word mark
|
|
|
Hemp
MD
|
|
88109782
|
|
9/09/2019
|
Standard
word mark
|
|
|
Paw
CBD
|
|
88697605
|
|
10/19/2019
|
Standard
word mark
|
|
|
Superior
CBD, Superior You
|
|
88826706
|
|
3/09/2020
|
Standard
word mark
|
|
|
CBDMD
|
|
88944504
|
|
6/02/2020
|
Standard
word mark
|
|
We currently hold a
Madrid Protocol foreign trademark application for CBDMD (based on
registration No. 88944504) and are prosecuting the CBDMD trademark
in the following countries: Australia, Brazil, Canada, China,
Colombia, Czech Republic, European Union, Spain, Mexico, New
Zealand, Norway, Switzerland, and the United Kingdom.
We further have
filed for trademark protection directly to the following countries
which are not a party to the Madrid Protocol: South Africa, Chile,
Peru, Argentina, Ecuador, and Costa Rica.
In July 2020, we filed a new patent application
with the U.S. Patent and Trademark Office which will allow us to
pursue patented protection in several key areas, including novel
formulations and delivery systems, as well as methods of
manufacturing and use
.
In
addition to these trademarks, we currently rely on a combination of
trade secret laws and restrictions on disclosure to protect our
intellectual property rights. Our success depends on the protection
of the proprietary aspects of our product development, formulation
and knowhow, as well as our ability to operate without infringing
on the proprietary rights of others. We also enter into proprietary
information and confidentiality agreements with our employees,
consultants and commercial partners and control access to, and
distribution of, our formulas and other proprietary
information.
In addition to
www.cbdmd.com
and
www.pawcbd.com
,
we own multiple domain names that we may or may not operate in the
future. However, as with phone numbers, we do not have and cannot
acquire any property rights in an Internet address. The regulation
of domain names in the United States and in other countries is
subject to change. Regulatory bodies could establish additional
top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. As a result, we
might not be able to maintain our domain names or obtain comparable
domain names, which could harm our business.
Competition
The market for the
sale of CBD-based products is fragmented and intensely competitive.
Currently, in the United States, cbdMD does not believe that there
are any businesses that can demonstrate or claim a dominant market
share of the growing CBD products market. Our competitors of
CBD-based products include a combination of public and private
companies including, but not limited to Charlotte’s Web, CV
Science, Green Roads, Medterra, CBDistillery, and Select/ Social
CBD, and in the digital space include Lazarus Naturals. We believe
we compete based upon the quality of our products. We expect that
the quantity and composition of the competitive environment will
continue to evolve as the industry matures and new customers enter
the marketplace.
9
Government regulations
On December 20,
2018 the President of the United States signed the Farm Bill into
law.
Among other things,
this new law changed certain federal authorities relating to the
production and marketing of hemp, defined as cannabis
(
Cannabis sativa
L.
), and derivatives
of cannabis with extremely low (less than 0.3 percent on a dry
weight basis) concentrations of the psychoactive compound
delta-9-tetrahydrocannabinol (THC).
These changes include
removing hemp and derivatives of hemp from the Controlled
Substances Act, which means that it is no longer an illegal
substance under federal law which has paved the way for the growth
of the industry. On October 31, 2019 the USDA issued an
interim final rule regarding the Establishment of a Domestic Hemp
Production Program which authorized hemp to be grown and processed
legally in the United States and made it legal to transport in
interstate commerce. Although this interim final rule became
effective on the date of publication, there is a possibility it
will be modified from its current application.
The Farm Bill
recognizes hemp as distinct from its genetic cousin, marijuana, and
specifically industrial hemp has been excluded from U.S. drug
laws. The Farm Bill allows for each individual state to
regulate industrial hemp and industrial hemp based products or
accept the USDA rules. Although no longer a controlled
substance under federal law, cannabinoids derived from industrial
hemp (other than THC) are still subject to a patchwork of state
regulations. We are actively monitoring the regulations and
proposed regulations in each state to ensure our operations are
compliant.
In conjunction with
the enactment of the Farm Bill, the FDA released a statement about
the status of CBD and the agency’s actions in the short term
with regards to CBD will guide the industry. The statement
noted that the Farm Bill
explicitly preserved the FDA’s authority to regulate products
containing cannabis or cannabis-derived compounds under the FDCA
and Section 351 of the Public Health Service Act. This authority
allows the FDA to continue enforcing the law to protect patients
and the public while also providing potential regulatory pathways
for products containing cannabis and cannabis-derived
compounds.
The statement also noted th
e growing public interest in cannabis
and cannabis-derived products, including CBD, and informed the
public that the FDA will treat products containing cannabis or
cannabis-derived compounds as it does any other FDA-regulated
products — meaning the products will be subject to the same
authorities and requirements as FDA-regulated products containing
any other substance, regardless of the source of the substance,
including whether the substance is derived from a plant that is
classified as hemp under the Farm Bill.
As of the date of
this report, and based upon publicly available information, to our
knowledge the FDA has not taken any enforcement actions against CBD
companies. The FDA, however, has sent warning letters to companies
demanding they cease and desist from the production, distribution,
or advertising of CBD products, only relating to instances that
such CBD companies have made misleading and unapproved label
claims. We will continue to monitor the FDA’s position
on CBD.
We are subject to
federal and state consumer protection laws, including laws
protecting the privacy of customer non-public information and the
handling of customer complaints and regulations prohibiting unfair
and deceptive trade practices. The growth and demand for online
commerce has and may continue to result in more stringent consumer
protection laws that impose additional compliance burdens on online
companies. These laws may cover issues such as user privacy,
spyware and the tracking of consumer activities, marketing e-mails
and communications, other advertising and promotional practices,
money transfers, pricing, product safety, content and quality of
products and services, taxation, electronic contracts and other
communications and information security.
There is also great
uncertainty over whether or how existing laws governing issues such
as sales and other taxes, auctions, libel, and personal privacy
apply to the internet and commercial online services. These issues
may take years to resolve. For example, tax authorities in a number
of states, as well as a Congressional advisory commission, are
currently reviewing the appropriate tax treatment of companies
engaged in online commerce, and new state tax regulations may
subject us to additional state sales and income taxes. New
legislation or regulation, the application of laws and regulations
from jurisdictions whose laws do not currently apply to our
business or the application of existing laws and regulations to the
internet and commercial online services could result in significant
additional taxes or regulatory restrictions on our business. These
taxes or restrictions could have an adverse effect on our cash
flows, results of operations and overall financial condition.
Furthermore, there is a possibility that we may be subject to
significant fines or other payments for any past failures to comply
with these requirements.
10
In November 2020 we
announced that we were on track to submit our Novel Foods dossier
with the United Kingdom’s Food Safety Agency (FSA) by the
required regulatory filing deadline of March 31, 2021. “Novel
Foods” are foods which have not been widely consumed in the
UK or the EU before May 1997. In December 2020 the EU FSA announced
it would begin accepting Novel Food dossiers for CBD after
suspending acceptance for most of the year. This change was due to
a recent EU Court of Justice opinion ruling that certain hemp
derived extracts should not be classified as narcotic controlled
substances. Before a Novel Food can be marketed in the UK or EU, it
is required to have a pre-market safety assessment and
authorization. The UK has waived the pre-market requirement and is
allowing post market submissions for products that were in the
marketplace since February 2020, which qualifies our products. We
are working in conjunction with a leading food safety and
regulatory consultant in the UK to prepare the dossiers which will
include detailed analysis of the quality and stability of our
products, our hemp sourcing and extraction controls, our labelling
and testing requirements, and the underlying intake and
toxicological data related to the safe consumption of the
proprietary cannabinoid blend ingredients in our cbdMD product
line. We believe this step important is the precursor for its
preparation of any future FDA NDIN submissions. The FDCA requires
that manufacturers and distributors who wish to market dietary
supplements that contain "new dietary ingredients" notify the FDA
about these ingredients. Generally, the notification must include
information that is the basis on which the manufacturer or
distributor has concluded that a dietary supplement containing a
new dietary ingredient will reasonably be expected to be safe under
the conditions of use recommended or suggested in the
labeling.
Human Capital
At
December 1, 2020 we had 165 full-time employees. There are no
collective bargaining agreements covering any of our
employees.
We
believe that cbdMD’s success depends on our ability to
attract, develop and retain key personnel. We believe that the
skills, experience and industry knowledge of our key employees
significantly benefit our operations and performance.
Employee
health and safety in the workplace is one of our core values. The
COVID-19 pandemic has underscored for us the importance of keeping
our employees safe and healthy. In response to the pandemic, we
have taken actions aligned with the World Health Organization and
the Centers for Disease Control and Prevention in an effort to
protect our workforce so they can more safely and effectively
perform their work.
Employee
levels are managed to align with the pace of business and
management believes it has sufficient human capital to
operate its business successfully.
Additional
information
Information on the history of our company can be
found in Notes 1 and 2 to the notes to our consolidated financial
statements appearing later in this report.
We file annual, quarterly and other reports, proxy
statements and other information with the SEC. The SEC maintains a
website at
www.sec.gov
that
contains reports, proxy and information statements, and other
information regarding issuers such as our company that file
electronically with the SEC.
Our corporate website address
is
www.cbdmd.com
.
We make available free of charge, through the Investor section of
our website, annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
The information which appears on our corporate website is not part
of this report.
11
ITEM
1.A
RISK
FACTORS.
Investing in our securities involves risks. You should carefully
consider the risks described below in addition to the other
information set forth in this Annual Report on Form 10-K, including
the Management’s Discussion and Analysis of Financial
Conditions and Results of Operations section and the consolidated
financial statements and related notes. If any of the risks and
uncertainties described in the cautionary factors described below
actually occur or continue to occur, our business, financial
condition and results of operations and the trading price of our
common stock and our Series A Convertible Preferred Stock could be
materially and adversely affected. Moreover, the risks below are
not the only risks we face and additional risks not currently known
to us or that we presently deem immaterial may emerge or become
material at any time and may negatively impact our business,
reputation, financial condition, results of operations or the
trading price of our securities.
RISKS RELATED TO OUR OVERALL BUSINESS
We have a
history of losses from operations and there are no assurances we
will report profitable operations in future
periods
.
We
reported losses from operations of $17,581,856 and $14,796,890 for
fiscal 2020 and fiscal 2019, respectively. Not included in our loss
from operations for fiscal 2020 and fiscal 2019 is $48,983 and
$5,993,773, respectively, associated with losses from our
discontinued operations, and non-cash income of $29,780,000 and
non-cash expense of $32,461,680 for fiscal 2020 and fiscal 2019,
respectively, reflecting a change in value of the contingent
liability associated with the Earnout Shares (as hereinafter
defined) primarily as a result of the change in the market price of
our common stock . Until such time, if ever, that we are successful
in generating gross profits which are sufficient to pay our
operating expenses it is likely we will continue to report losses
from operations in future periods.
During fiscal 2020 COVID-19 materially impacted our business and
operations. Depending upon the continuing duration of the pandemic,
it may adversely impact our results of operations in fiscal 2021
and beyond.
On March 11, 2020, the World Health Organization
declared the COVID-19 outbreak to be a global pandemic. In response
to this declaration and the rapid spread of COVID-19 within the
United States, federal, state and local governments throughout the
country have imposed varying degrees of restriction on social and
commercial activity to promote social distancing in an effort to
slow the spread of the illness. These measures have had a
significant adverse impact upon many sectors of the economy,
including retail commerce. As a result of these circumstances, we
have restricted schedules and staggered staffing at our corporate
office and have altered work schedules at our warehouse and
manufacturing facilities. In addition, many of our office personnel
are working remotely. Beginning in the second quarter of fiscal
2020 we also began experiencing
a decline in our sales to
our B2B brick and mortar customers as many of the stores were
temporarily or permanently closed. In response, we increased our
marketing campaigns to support our e-commerce sales efforts by
increasing our initiatives with associated relevant messaging to
connect with our consumer base as well as increased website content
and various offerings and changes to make online ordering more
effective such as auto reorder capability, giveaways and free
shipping. These efforts have allowed us to continue to increase
sales by offsetting the decline in sales to B2B brick and mortar
customers with a substantial increase in our e-commerce sales to
consumers.
Conditions caused by
the continuing adverse impact of the COVID-19 pandemic could
adversely affect our customers’ ability or willingness to
purchase our products or services, delay prospective
customers’ purchasing decisions, adversely impact our ability
to provide or deliver products and on-site services to our
customers, delay the provisioning of our offerings, or lengthen
payment terms, all of which could adversely affect our future
sales, operating results and overall financial performance.
We continue to assess the situation on a daily basis and adjust our
business, priorities, and processes to enable us to continue to
operate effectively until we are able to resume regular operations.
We are unable to predict when and how
quickly we will be able to resume regular operations and when, or
if, our sales to B2B brick and mortar customers will return to
prior levels.
12
We rely on third-parties for raw materials and to manufacture and
compound some of our products. We have no control over these third
parties and if these relationships are disrupted our results of
operations in future periods will be adversely
impacted.
We currently hold
short term supply contracts with unaffiliated third-party vendors
for our critical raw materials. In addition,
some of our products are manufactured or
compounded by unaffiliated third parties and the use of these
third-party co-packers changes from time to time due to customer
demand and the composition of our product mix and product
portfolio. We do not have any long-term contracts with any of these
third parties, and we expect to compete with other companies for
raw materials, production and imported packaging material capacity.
If we experience significant increased demand, or need to replace
an existing raw material supplier or third-party manufacturer,
there can be no assurances that replacements for these third-party
vendors will be available when required on terms that are
acceptable to us, or at all, or that any manufacturer or compounder
would allocate sufficient capacity to us in order to meet our
requirements. In addition, even if we are able to expand existing
or find new sources, we may encounter delays in production and
added costs as a result of the time it takes to engage third
parties. Any delays, interruption or increased costs in raw
materials and/or the manufacturing or compounding of our products
could have an adverse effect on our ability to meet retail customer
and consumer demand for our products and result in lower revenues
and net income both in the short and long-term.
Failures in our third-party verification and testing protocols may
have an adverse impact on our brands which could suppress
sales.
The quality of our
products is essential to our business strategy. We require our raw
material suppliers and farms to participate in our supplier
verification program and to certify that their source material was
grown using strict standards of cultivation. We also employ
third-party testing procedures and all incoming cannabinoid
ingredients are first tested by an independent, third-party
laboratory before they reach our production facilities and then
re-tested in-house throughout the production process before sending
the ingredients off for final verification by an independent
accredited third party laboratories. We are reliant on these
third-parties to adhere to our supplier verification program and
properly perform the third-party testing procedures. Any
intentional or unintentional failure of any of these parties to
perform the functions for which we have engaged them would
adversely impact the quality of our products and could result in
delays in meeting consumer demand or a decline in our
sales.
We could be harmed by data loss or other security
breaches.
Some
of our systems have experienced past security incidents, including
a recent incident that compromised some customers' personal and
payment information. We conducted a forensic examination, made all
notices to customers, governments, banks and card associations as
required under local, state and federal laws, merchant agreements
and card association rules. We also offered free credit monitoring
and reporting to all affected customers and are maintaining a call
center to handle any customer issues. The total financial impact to
us, however, is unknown at this time. We have implemented all
remedial measures advised by the forensic examiner engaged by us,
and, although we do not believe that any of these incidents have
had a material adverse effect on our operating results, there can
be no assurance the remedial measures will be effective or of a
similar result in the future which could materially and adversely
impact our business and operations in future periods.
We face risks related to system interruption and lack of
redundancy.
From
time to time we experience occasional system interruptions and
delays that make our websites and product sales unavailable or slow
to respond, and prevent us from efficiently fulfilling orders which
could adversely impact our net sales and the attractiveness of our
products. If we are unable to add software and hardware as needed,
effectively upgrade our systems and network infrastructure, and
take other steps to improve the efficiency of our systems, these
failures could cause system interruptions or delays and adversely
affect our operating results in future periods. In addition, our
computer and communications systems and operations could be damaged
or interrupted by fire, flood, power loss, telecommunications
failure, earthquakes, acts of war or terrorism, acts of God,
computer viruses, physical or electronic break-ins, and similar
events or disruptions. Any of these events could cause system
interruption, delays, and loss of critical data, and could prevent
us from accepting and fulfilling customer orders which could make
our product offerings less attractive and subject us to liability.
Our systems are not fully redundant and our disaster recovery
planning may not be sufficient. In addition, we may have inadequate
insurance coverage to compensate for any related losses. Any of
these events could damage our reputation and be expensive to
remedy.
13
RISKS
RELATED TO THE REGULATORY ENVIRONMENT FOR CBD
Changes to Federal or state laws pertaining to industrial hemp
could slow the use of industrial hemp which would materially impact
our revenues in future periods.
As of the date
hereof, approximately 46 states authorized industrial hemp programs
pursuant to the United States of the Agricultural Improvement Act
of 2018, commonly known as the “Farm Bill.” Continued
development of the industrial hemp industry will be dependent upon
new legislative authorization of industrial hemp at the state
level, and further amendment or supplementation of legislation at
the federal level. Any number of events or occurrences could slow
or halt progress all together in this space. While progress within
the industrial hemp industry is currently encouraging, growth is
not assured. While there appears to be ample public support for
favorable legislative action, numerous factors may impact or
negatively affect the legislative process(es) within the various
states where we have business interests. Any one of these factors
could slow or halt use of industrial hemp, which could negatively
impact the business up to possibly causing us to discontinue
operations as a whole. In addition, changes in Federal or state
laws could require us to alter the way we conduct our business in
order to remain compliant with applicable state laws in ways we are
presently unable to foresee. These possible changes, if necessary,
could be costly and may adversely impact our results of operations
in future periods.
Costs associated with compliance with numerous laws and regulations
could impact our financial results. In addition, we could become
subject to increased litigation risks associated with the CBD
industry.
The manufacture,
labeling and distribution by us of the CBD products is regulated by
various federal, state and local agencies. These governmental
authorities may commence regulatory or legal proceedings, which
could restrict the permissible scope of our product claims or the
ability to sell products in the future. The FDA may regulate our
products to ensure that the products are not adulterated or
misbranded. We are subject to regulation by the federal government
and other state and local agencies as a result of our CBD products.
The shifting compliance environment and the need to build and
maintain robust systems to comply with different compliance in
multiple jurisdictions increases the possibility that we may
violate one or more of the requirements. If our operations are
found to be in violation of any of such laws or any other
governmental regulations that apply to our company, we may be
subject to penalties, including, without limitation, civil and
criminal penalties, damages, fines, the curtailment or
restructuring of our operations, any of which could adversely
affect the ability to operate our business and our financial
results. Failure to comply with FDA requirements may result in,
among other things, injunctions, product withdrawals, recalls,
product seizures, fines and criminal prosecutions. Our advertising
is subject to regulation by the U.S. Federal Trade Commission, or
FTC, under the Federal Trade Commission Act. Additionally, some
states also permit advertising and labeling laws to be enforced by
attorneys general who may seek relief for consumers, seek
class-action certifications, seek class-wide damages and product
recalls of products sold by us. For example, in November 2019 the
FDA issued warning letters to
15 companies for illegally selling
products containing CBD in ways that violate the Federal Food, Drug
& Cosmetic Act. Notwithstanding that we were not a recipient of
a warning letter, and we believe our products are properly labeled
as required under federal law, cbdMD, along with other of our
competitors who also did not receive FDA warning letters, have been
named in a class action lawsuit which we believe is without
merit.
Any actions against our company by governmental
authorities or private litigants could be time consuming, costly to
defend and could have a material adverse effect on our business,
financial condition and results of operations.
Uncertainty caused by potential changes to legal regulations could
impact the use of CBD products.
There is
substantial uncertainty and different interpretations among
federal, state and local regulatory agencies, legislators,
academics and businesses as to the scope of operation of Farm
Bill-compliant hemp programs relative to the emerging regulation of
cannabinoids. These different opinions include, but are not limited
to, the regulation of cannabinoids by the U.S. Drug Enforcement
Administration and/or the FDA and the extent to which manufacturers
of products containing Farm Bill-compliant cultivators and
processors may engage in interstate commerce. The uncertainties
cannot be resolved without further federal, and perhaps even
state-level, legislation, regulation or a definitive judicial
interpretation of existing legislation and rules. If these
uncertainties continue, they may have an adverse effect upon the
introduction of our products in different markets.
14
RISKS RELATED TO OWNERSHIP OF OUR SECURITIES
The impact of changes in the fair value of our non-cash contingent
liabilities associated with the Earnout Shares has, and may
continue to, materially impact our results of operations in future
periods.
As
described in Note 8 to the notes to our consolidated financial
statements appearing later in this report, at September 30, 2020,
we have a contractual obligation to issue up to an additional
10,122,208 shares of our common stock (the “Earnout
Shares”) as additional consideration for our acquisition of
Cure Based Development LLC in December 2018. Under U.S. generally
accepted accounting principles (“GAAP”) we are required
to record a non-cash contingent liability associated with the
Earnout Shares and at September 30, 2020, the total of this
contingent liability was $16,200,000. Under GAAP we are obligated
to reassess the obligations associated with the Earnout Shares on a
quarterly basis and, in the event our estimate of the fair value of
the contingent consideration changes, we will record increases or
decreases in the fair value as an adjustment to earnings. In
particular, changes in the market price of our common stock, which
is one of the inputs used in determining the amount of the non-cash
contingent liability, will result in increases or decreases in this
liability and positively or negatively impact our net loss or
profit for the period. The application of the accounting treatment
for the fair valuing of the Earnout Shares at September 30, 2020
resulted in a decrease in the amount of this non-cash contingent
liability of $34,400,000 for fiscal 2020 as compared to an increase
of $32,461,480 for fiscal 2019. While we do not believe investors
should place undue reliance on the impact of these non-cash changes
when evaluating our results of operations in future periods, as
they have no impact on the operations of the business, we expect
that the fair valuing of the Earnout Shares will continue to have a
material impact on our results of operations and our
shareholders’ equity in future periods, which may materially
impact the market price of our securities.
The issuances of the Earnout Shares will significantly dilute our
existing shareholders.
The possible
issuance of the remaining Earnout Shares will increase our issued
and outstanding shares of common stock by approximately 19%. In
addition, assuming the possible issuance of all of the additional
10,122,208 Earnout Shares, but giving effect to no other change to
the number of shares of our common stock issued and outstanding,
the members of Cure Based Development from the merger, which
includes Mr. R. Scott Coffman, and Mr. Martin Sumichrast, our
co-CEO’s and members of our board of directors, would own
approximately 40% of our then outstanding shares of common stock.
The issuance of all or a portion of the Earnout Shares will dilute
the ownership interests of our common shareholders and may
adversely impact the market price of our common stock
The Series A Convertible Preferred Stock ranks junior to all of our
indebtedness and other liabilities and is effectively junior to all
indebtedness and other liabilities of our
subsidiaries.
In the event of our
bankruptcy, liquidation, dissolution or winding-up of our affairs,
our assets will be available to pay obligations on the Series A
Convertible Preferred Stock only after all of our indebtedness and
other liabilities have been paid. The rights of holders of the
Series A Convertible Preferred Stock to participate in the
distribution of our assets will rank junior to the prior claims of
our current and future creditors and any future series or class of
preferred stock we may issue (subject to Series A Convertible
Preferred Stockholder approval) that ranks senior to the Series A
Convertible Preferred Stock. In addition, the Series A Convertible
Preferred Stock effectively ranks junior to all existing and future
indebtedness and other liabilities of our existing subsidiaries and
any future subsidiaries. Our existing subsidiaries are, and any
future subsidiaries would be, separate legal entities and have no
legal obligation to pay any amounts to us in respect of dividends
due on the Series A Convertible Preferred Stock. If we are forced
to liquidate our assets to pay our creditors, we may not have
sufficient assets to pay amounts due on any or all of the Series A
Convertible Preferred Stock then outstanding.
We may not be able to pay dividends on the Series A Convertible
Preferred Stock.
Our ability to pay
cash dividends on the Series A Convertible Preferred Stock requires
us to (i) either be able to pay our debts as they become due in the
usual course of business, or (ii) have total assets that are
greater than the sum of our total liabilities plus the amount that
would be needed if we were to be dissolved at the time of the
distribution to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those
receiving the distribution. Further, notwithstanding these factors,
we may not have sufficient cash to pay dividends on the Series A
Convertible Preferred Stock. Our ability to pay dividends may be
impaired if any of the risks described in this report were to
occur. Also, payment of our dividends depends upon our financial
condition and other factors as our board of directors may deem
relevant from time to time. We cannot assure you that our
businesses will generate sufficient cash flow from operations in an
amount sufficient to enable us to make distributions on our common
stock and preferred stock, including the Series A Convertible
Preferred Stock, or to fund our other liquidity needs.
15
Holders of the Series A Convertible Preferred Stock may be unable
to use the dividends-received deduction and may not be eligible for
the preferential tax rates applicable to “qualified dividend
income.”
Distributions paid
to corporate U.S. holders of the Series A Convertible Preferred
Stock may be eligible for the dividends-received deduction, and
distributions paid to non-corporate U.S. holders of the Series A
Convertible Preferred Stock may be subject to tax at the
preferential tax rates applicable to “qualified dividend
income,” if we have current or accumulated earnings and
profits, as determined for U.S. federal income tax purposes. We do
not currently have any accumulated earnings and profits.
Additionally, we may not have sufficient current earnings and
profits during future fiscal years for the distributions on the
Series A Convertible Preferred Stock to qualify as dividends for
U.S. federal income tax purposes. If the distributions fail to
qualify as dividends, U.S. holders would be unable to use the
dividends-received deduction and may not be eligible for the
preferential tax rates applicable to “qualified dividend
income.” If any distributions on the Series A Convertible
Preferred Stock with respect to any fiscal year are not eligible
for the dividends-received deduction or preferential tax rates
applicable to “qualified dividend income” because of
insufficient current or accumulated earnings and profits, it is
possible that the market value of the Series A Convertible
Preferred Stock might decline.
The Series A Convertible Preferred Stock represents perpetual
equity interests in us, and investors should not expect us to
redeem or convert the Series A Convertible Preferred Stock on the
date the Series A Convertible Preferred Stock becomes redeemable or
convertible by us or on any particular date
afterwards.
The Series A
Convertible Preferred Stock represents perpetual equity interests
in our company, and it has no maturity or mandatory redemption
except upon a Change of Control, and is not redeemable at the
option of investors under any other circumstances. A “Change
of Control” will generally be deemed to occur when, after the
original issuance of the Series A Convertible Preferred Stock, the
acquisition by any person, including any syndicate or group deemed
to be a “person” under Section 13(d)(3) of the Exchange
Act, of beneficial ownership, directly or indirectly, through a
purchase, merger or other acquisition transaction or series of
purchases, mergers or other acquisition transactions which were
pre-approved by our board of directors of our stock entitling that
person to exercise more than 50% of the total voting power of all
of our stock entitled to vote generally in the election of the our
directors, subject to certain exclusions. As a result, the Series A
Convertible Preferred Stock will not give rise to a claim for
payment of any amount at a particular date. As a result, holders of
the Series A Convertible Preferred Stock may be required to bear
the financial risks of an investment in the Series A Convertible
Preferred Stock for an indefinite period of time unless the holder
chooses to voluntarily convert the shares of Series A Convertible
Preferred Stock into shares of our common stock.
Change of Control redemption obligations of the Series A
Convertible Preferred Stock may make it more difficult for a party
to acquire us or discourage a party from acquiring us.
The Change of
Control redemption feature of the Series A Convertible Preferred
Stock may have the effect of discouraging a third party from making
an acquisition proposal for our company or of delaying, deferring
or preventing certain of change of control transactions under
circumstances that otherwise could provide the holders of our
common stock and Series A Convertible Preferred Stock with the
opportunity to realize a premium over the then-current market price
of such stock or that shareholders may otherwise believe is in
their best interests.
A holder of Series A Convertible Preferred Stock has extremely
limited voting rights.
The voting rights
for a holder of Series A Convertible Preferred Stock are limited.
Our shares of common stock are the only class of our securities
that carry full voting rights. Holders of the shares of Series A
Convertible Preferred Stock do not have any voting rights other
than as set forth below in the next two sentences or unless
dividends on the Series A Convertible Preferred Stock are in
arrears for each of 12 or more consecutive monthly periods, in
which case the holders of the Series A Convertible Preferred Stock
will be entitled to vote as a separate class for the election of
two additional directors to serve on the board of directors until
all dividends that are owed have been paid. Holders of shares of
Series A Convertible Preferred Stock, voting as a class, are also
entitled to vote if we should seek to issue or create any class or
series of capital stock ranking senior to the Series A Convertible
Preferred Stock with respect to dividends or distributions, in
which event the consent of holders of at least two thirds of the
then outstanding Series A Convertible Preferred Stock is required.
The consent of the holders of a majority of the Series A
Convertible Preferred Stock, voting as a class, is required if we
were to seek to
adopt any amendment to
our articles of incorporation or bylaws that would materially
affect existing terms of the Series A Convertible Preferred Stock,
or
increase the number of authorized shares of that series,
other than in connection with the anti-dilution provisions, or if
we seek to create a series or class which ranks pari passu with the
Series A Convertible Preferred Stock. Other than these limited
circumstances and except to the extent required by law, holders of
Series A Convertible Preferred Stock do not have any voting
rights.
16
We may redeem the Series A Convertible Preferred Stock at our
option, we will be required to redeem the Series A Convertible
Preferred Stock upon a Change of Control and we may convert shares
of Series A Convertible Preferred Stock upon a Market Trigger into
shares of our common stock. In the event of any of these
occurrences, you may not receive dividends that you
anticipate.
On or after October 16, 2023 we may, at our
option, redeem the Series A Convertible Preferred Stock, in whole
or in part, at any time or from time to time.
In addition,
upon the occurrence of a board approved Change of Control, we are
required to redeem any or all of the shares of Series A Convertible
Preferred Stock at a redemption price of $11.00 per share, plus any
accrued but unpaid dividends to, but excluding, the redemption
date. Furthermore,
upon a Market
Trigger (as that term is defined in the designations, rights and
preferences of the Series A Convertible Preferred Stock), we may
convert all or any portion of
those shares of Series A
Convertible Preferred Stock
into
shares of our common stock. We may have an incentive to redeem or
convert the Series A Convertible Preferred Stock voluntarily if
market conditions allow us to issue other preferred stock or debt
securities at a rate that is lower than the dividend rate on the
Series A Convertible Preferred Stock. If we redeem or convert the
Series A Convertible Preferred Stock, then from and after the
redemption date or conversion date, as applicable, dividends will
cease to accrue on shares of Series A Convertible Preferred Stock,
the shares of Series A Convertible Preferred Stock shall no longer
be deemed outstanding and all rights as a holder of those shares
will terminate, including the rights to receive dividend
payments.
The liquidation preference of the shares of our Series A
Convertible Preferred Stock would reduce the amount available to
our common shareholders in the event of our liquidation or winding
up.
Holders of our
Series A Convertible Preferred Stock have a liquidation preference
of $10.00 per share in the event of our liquidation or winding up.
This means that those holders are entitled to receive the
liquidation preference before any payment
or other distribution of assets to our common
shareholders, and the amount of any such payment or other
distribution will be reduced by that amount.
The issuance of shares upon exercise of our outstanding options,
restricted stock awards and warrants, or the conversion of the
Series A Convertible Preferred Stock may cause immediate and
substantial dilution to our existing shareholders.
In
addition to our obligation to issue the Earnout Shares if the goals
are met, we presently have options, unvested restricted stock
awards and warrants that if exercised would result in the issuance
of an additional 3,512,816 shares of our common stock, and our
Series A Convertible Preferred Stock is presently convertible into
an additional 4,667,600 shares of common stock. The issuance of
shares upon exercise of warrants and options and/or the conversion
of shares of our Series A Convertible Preferred Stock will result
in dilution to the interests of other shareholders.
Mr. Sumichrast may not devote his full time and attention to our
company.
Mr.
Sumichrast, our co-Chief Executive Officer, has business interests
outside our company, including serving as a member of the Board of
Directors and Chief Executive Officer of a company that has
recently filed a registration statement with the SEC for its
initial public offering. Accordingly, from time to time he may not
devote his full time and attention to our affairs. There are no
assurances that our business and operations may not be adversely
impacted in future periods as a result of the time he may devote to
his other business interests instead of a sole focus by him on the
affairs of our company.
Our executive officers, directors and their affiliates may exert
control over us and may exercise influence over matters subject to
shareholder approval.
Our
executive officers and directors, together with their respective
affiliates, beneficially own approximately 35% of our outstanding
common stock as of December 1, 2020. Accordingly, these
shareholders, if they act together, may exercise substantial
influence over matters requiring shareholder approval, including
the election of directors and approval of corporate transactions,
such as a merger. This concentration of ownership could have the
effect of delaying or preventing a change in control or otherwise
discourage a potential acquirer from attempting to obtain control
over us, which in turn could have a material adverse effect on the
market value of our common stock.
17
ITEM
1B.
UNRESOLVED
STAFF COMMENTS.
Not applicable to a
smaller reporting company.
ITEM
2.
DESCRIPTION
OF PROPERTY.
Our headquarters are located in approximately
50,000 square feet in a modern two-story building in Charlotte,
North Carolina which we sub-lease under an agreement which began
August 1, 2019 and goes through December 2026.
The agreement
calls for an annual base monthly rent of $76,041 for the first year
and escalates 3% annually. We have a manufacturing and warehouse
facility in Charlotte, North Carolina which we lease approximately
40,000 square feet under an agreement through December 2021. The
agreement calls for an annual base monthly rent of $18,700, as
amended April 2019, inclusive of monthly taxes insurance and common
area maintenance (“TICAM”) for the first year and the
rent escalates 3% annually. We also have an 80,000 square foot
warehouse in Charlotte, North Carolina under an agreement which
began November 2019 and goes through December 2024. The agreement
calls for an annual base monthly rent of $34,766, inclusive of
monthly TICAM for the first year and the rent escalates 3%
annually.
ITEM
3.
LEGAL
PROCEEDINGS.
In December 2019,
Cynthia Davis (“plaintiffs”) filed a purported
collective and class action lawsuit in the United States District
Court for the Central District of California against cbdMD and
certain of our competitors alleging violations of the
California’s Unfair Competition Law, California’s False
Advertising Law and California’s Consumer Legal Remedies Act,
as well as claims for Breach of Express Warranties, Breach of
Implied Warranty of Merchantability and Declaratory Relief. The
plaintiffs allege that the defendants violated the California laws
by unlawfully selling and marketing mislabeled products which have
not been approved by the FDA. The plaintiffs are seeking
compensatory, statutory, nominal and punitive damages, in an amount
to be determined by the court, as well as equitable relief
requiring restitution and disgorgement of revenues. The complaint
was brought as a nationwide “collective action,” and,
alternatively, as a “class action” under the laws of
the State of California. We intend to vigorously defend this action
and in April 2020 we filed a motion for dismissal which remains
pending.
In April 2019 CBDI
filed a cancellation proceeding before the U.S. Patent and
Trademark Office Trademark Trial and Appeal Board (TTAB) against
Majik Medicine, LLC to cancel its issued trademark for "CBD MD" on
multiple grounds. The TTAB recently rejected a motion to
dismiss by the defendant and the matter is
proceeding.
As previously
disclosed, effective November 8, 2019 we and certain of our
subsidiaries (collectively, the “Level Parties”)
entered into a Settlement Agreement and Mutual General Release
Agreement with EEI Holdings, LLC, IM1 Holdings, LLC, Sandbox
Properties, LLC (“Sandbox), kathy ireland Worldwide, Inc.,
B&B Bandwidth LLC, Erik Sterling and Jason Winters
(collectively, the “kiWW Parties”), the terms of which
provided, in part, that the parties agreed to transfer the accounts
receivable of EE1 and the minority interest of both EE1 and IM1 to
us and we agreed to have all rights to certain past contracts or
customers for those entities assigned to the minority holders.
Sandbox is affiliated with and managed by executives of kathy
ireland Worldwide, Inc. As consideration, Sandbox was obligated to
cause a total payment of $1,000,000 to be made to us, with
$83,333.34 due on or before November 14, 2019 and the remaining
amount due in equal installments of $83,334.34 by the 15th day
of each month. On February 26, 2020, after notice of
Sandbox’s non-payment of $83,333.34 due on February 15, 2020
and Sandbox’ continued failure to make such payment, we
notified the kiWW Parties of a default. Upon this default, under
the terms of the agreement the kiWW Parties are obligated to pay us
10% interest on the amount due and an administrative fee of $5,000.
The Settlement Agreement and Mutual General Release Agreement also
contains a confidentiality clause limiting our ability to disclose
certain terms of the agreement, including Sandbox’s
obligation to pay us $1,000,000. On February 26, 2020 we also
notified the kiWW Parties that the default triggered a reportable
event by us. We reached this conclusion given the material amount
owed to us by the kiWW Parties.
On April 29, 2020,
we filed a lawsuit in the Superior Court of the State of California
in and for Los Angeles Central District (Case No. 20STCV16290)
against the kiWW Parties and certain of their affiliates asserting
fraud, breach of written contract, fraudulent inducement, breach of
agreement, negligent misrepresentation, breach of fiduciary duty,
theft, violation of California Penal Code § 496(c), fraudulent
conveyance, unjust enrichment and constructive trust. We settled
the case and collected all past amounts due on October 16,
2020.
In October 2020,
Michael Warshawsky and Michael Steinhauser filed a purported
collective and class action lawsuit in the United States District
Court for the Western District of North Carolina against cbdMD
alleging the personal identifiable information of customers was
compromised via data breaches due to our negligent and/or careless
acts and omissions and failure to protect customer’s data.
The plaintiffs are seeking compensatory, statutory, nominal and
punitive damages, in an amount to be determined by the court, as
well as equitable relief requiring restitution and disgorgement of
revenues. The complaint was brought as a nationwide
“collective action,” and, alternatively, as a
“class action” under the laws of the State of North
Carolina. We intend to vigorously defend this action.
ITEM
4.
MINE
SAFETY DISCLOSURES.
Not applicable to
our company.
18
PART
II
ITEM
5.
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Since May 1, 2019,
commensurate with our name change, our common stock has been listed
on the NYSE American under the symbol “YCBD” and prior
to that, since November 17, 2017 was listed on the NYSE American
under the symbol "LEVB."
Our Series A
Convertible Preferred Stock has been listed on the NYSE American
since October 21, 2019 under the symbol
“YCBDpA.”
As of December 18,
2020, there were approximately 103 record owners of our common
stock and one record holder of our Series A Convertible Preferred
Stock.
These amounts do not
reflect persons or entities that hold our securities in nominee or
“street” name through various brokerage
firms.
Dividend policy
Common Stock
We
do not currently intend to pay dividends on our common stock. The
declaration, amount and payment of any future dividends on shares
of our common stock, if any, is subject to the designations, rights
and preferences of the Series A Convertible Preferred Stock and
will be at the sole discretion of our Board, which may take into
account general and economic conditions, our financial condition
and results of operations, our available cash and current and
anticipated cash needs, capital requirements, contractual, legal,
tax and regulatory restrictions, the implications of the payment of
dividends by us to our shareholders or by our subsidiaries to us,
and any other factors that our Board may deem
relevant.
Series A Convertible Preferred Stock
As of the date of this filing, there are 2,800,000
shares of our Series A Convertible Preferred Stock outstanding. The
designations, rights and preferences of our Series A Convertible
Preferred Stock provide that we will pay, when, as and if declared
by our board of directors, monthly cumulative cash dividends at an
annual rate of 8.0%, which is equivalent to $0.80 per annum per
share, based on the $10.00 liquidation preference. Dividends on the
Series A Convertible Preferred Stock will accrue daily and be
cumulative from, and including, the first day of the calendar month
in which the shares are issued and will be payable monthly in
arrears on the 15th day of each calendar month. Every month since
November 1, 2019 the Audit Committee of our board of directors has
declared a cash dividend of
$0.0667 per share of
Series A Convertible Preferred Stock payable on the
15
th
of each
month to holders of record on the first of each month. We expect
that our board of directors will continue to declare and pay
monthly cash dividends on our Series A Convertible Preferred Stock,
subject to the limitations to do so under North Carolina
law.
Recent
sales of unregistered securities
None,
except as previously reported.
Purchases
of equity securities by the issuer and affiliated
purchasers
None.
ITEM
6.
SELECTED
FINANCIAL DATA.
Not applicable to a
smaller reporting company.
19
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The
following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated
financial statements and the notes to those statements that are
included elsewhere in this report. Our discussion includes
forward-looking statements based upon current expectations that
involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of
events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors,
including those set forth under the Risk Factors, Cautionary Notice
Regarding Forward-Looking Statements and Business sections in this
report. We use words such as “anticipate,”
“estimate,” “plan,” “project,”
“continuing,” “ongoing,”
“expect,” “believe,” “intend,”
“may,” “will,” “should,”
“could,” and similar expressions to identify
forward-looking statements. Our future operating results, however,
are impossible to predict and no guaranty or warranty is to be
inferred from those forward-looking statements.
Overview
cbdMD owns and
operates the nationally recognized CBD brands cbdMD and Paw CBD.
Our cbdMD brand of products includes over 100 SKUs of high-grade,
premium CBD products, including
CBD
tinctures, CBD gummies, CBD topicals, CBD capsules, CBD bath bombs,
CBD bath salts, and CBD sleep aids, and
Our
Paw CBD brand of products includes over 49 SKUs of
veterinarian-formulated products including tinctures, chews, and
topicals in varying strengths and formulas.
Fiscal 2019 was a
transformative year for our company as we acquired the cbdMD brand,
launched our Paw CBD brand, invested heavily in efforts to build
our brand recognition, expanded the CBD product line, expanded our
sales channels, and invested in human and technology infrastructure
to build our current operations and support expected growth. In
fiscal 2020, our focus was on continuing growth of market share and
brand recognition, expanding our product offerings and sales
channels and executing what we believe to be a fundamentally sound
business model. With the impact of the COVID-19 pandemic, like
other businesses, we have had to adjust various aspects of our
business as described below. However, throughout fiscal 2020 we
believe we were able to stay on course and continue to grow our
revenues, increase our market share and brand recognition and move
the company closer to positive cash flow. Our business model
focuses on two main distribution channels a large direct to
consumer e-commerce business and a complimentary B2B wholesale
model which has a network of over 6,000 small and midsize brick and
mortar retailers. Our e-commerce sales continue to grow as we
utilize data to amplify the effectiveness of our touch points with
our consumers. Although the COVID-19 pandemic has impacted our
wholesale channel, we have continued to add wholesalers and our
fourth quarter of fiscal 2020 experienced increased wholesale
sales. In addition, during fiscal 2020 cbdMD was added to the NSF
International’s dietary supplements Good Manufacturing
Practice registration.
The Impact of the COVID-19 Pandemic on our Company
On March 11, 2020,
the World Health Organization declared the COVID-19 outbreak to be
a global pandemic. In response to this declaration and the rapid
spread of COVID-19 within the United States, federal, state and
local governments throughout the country have imposed varying
degrees of restrictions on social and commercial activity to
promote social distancing in an effort to slow the spread of the
illness. These measures have had a significant adverse impact upon
many sectors of the economy, including retail
commerce.
In response to
these measures, the “stay at home” order issued by the
Governor of the State of North Carolina where our business is
located, and for the protection of our employees and customers, we
temporarily closed our corporate office and altered work schedules
at our manufacturing and warehouse facilities. Beginning in June
2020 we implemented return to work policies following CDC
guidelines and we re-opened our corporate office with staggered
work schedules for all departments. To date these actions have not
adversely impacted our ability to operate our company. In mid March
2020 we took steps to increase production to build up our finished
goods inventory as well as purchased additional raw material
inventory items thereby allowing us to maintain production if
supply chain interruptions were to happen. At this time, we have
not had any impact on our supply chain. Since the pandemic we have
experienced an impact and decline on our wholesale sales to our B2B
brick and mortar customers as many of the stores have been
temporarily or permanently closed. In response, we have increased
our efforts regarding campaigns and marketing reach to support our
online sales efforts by upping our initiatives with associated
relevant messaging to connect with our consumer base as well as
increased website content and various offerings and changes to make
online ordering more effective including auto reorder capability,
giveaways, and free shipping, etc. This effort has allowed us to
continue to increase sales by offsetting the decline in wholesale
sales with substantial increase in our online sales to consumers.
We continue to assess the situation on a daily basis and adjust our
business, priorities, and processes to enable us to continue to
operate effectively until we are able to resume regular
operations.
20
During this time,
we had implemented several measures that we believe will lower our
fixed cash operating expenses, and focus on the growth of our
online consumer sales to improve profitability and liquidity.
Specific measures, among other things, include the
following:
●
Negotiating
with our vendors to defer payments as needed;
●
Suspending
sponsorship and affiliate agreements as well as renegotiating
various agreements based on current events, activities, and
trends;
●
Shifting
sales focus efforts to our online consumer sales while the
wholesale sales environment is impacted, this focus continues and
has been successful in allowing for continued sales growth to this
point;
●
Implementation
of various cost control measures across the company with a focus on
supporting the business growth while moving toward a positive cash
flow operation and we adjusted our budget for the balance of 2020
to reflect the changes;
●
Ensuring
we had sufficient inventory levels, (both raw and finished goods)
allowing us to continue to fulfill orders in the event we must shut
down our manufacturing facility or supply chains were impacted;
and
●
Prioritizing
our technology initiatives to align with an online sales
focus.
At the time of this report, The State of North Carolina is
experiencing an increase in COVID-19 positivity rates and
hospitalizations. While the Governor Cooper has issued modified
stay at home order, it currently does not impact our business
operations during the day. We have maintained flexible work
arrangements for much of our staff and continue follow CDC
guidelines for personal protective equipment, social distancing,
and other recommendations to help limit the spread of COVID-19. We
are monitoring the situation closely.
As the adverse impact of COVID-19 on our company, industry, and
country continues, our ability to meet customer demands for
products may be impaired or, similarly, our customers may
experience adverse business consequences due to the COVID-19
pandemic. Reduced demand for products or impaired ability to meet
customer demand (including as a result of disruptions at our
transportation service providers, third-party manufacturing
partners or vendors) could have a material adverse effect on our
business, operations and financial performance.
While we are not
able to estimate the ultimate impact of the COVID-19 pandemic on
our financial condition and future results of operations, depending
on the prolonged impact of the COVID-19 outbreak, this situation
could have a significant adverse effect on our future reported
results of operations. As indicated, we have implemented several
initiatives allowing us to increase our online direct to consumer
sales to date, which we will continue to use as we evaluate changes
in the wholesale channel.
The extent to which the coronavirus
impacts our results and financial condition, however, will depend
on future developments, which are highly uncertain and cannot be
predicted, including new information that may emerge and the
actions to contain and treat its impacts, among
others.
Discontinued Operations
Effective September
30, 2019, we discontinued operations of four business subsidiaries:
EE1, IM1, BPU and Level H&W. These subsidiaries accounted for
our licensing, entertainment, and products segments prior to fiscal
2019. Therefore, the results of operations related to these
subsidiaries for the Company are reported as discontinued
operations. Continuing operations discussed below refer to the
Company’s CBD business unless otherwise indicated, and prior
periods in such discussion have been restated to reflect results
excluding EE1, IM1, BPU and Level H&W. See Note 16,
“Discontinued Operations”, of the notes to consolidated
financial statements elsewhere in this report for additional
information. As a result, the discussion below is of our continuing
operations, which is comprised of the CBD business.
21
Results of Operations
The following
tables provide certain selected consolidated financial information
for the periods presented:
|
|
Fiscal 2020
|
Fiscal 2019
|
Change ($)
|
|
Total
net sales
|
$
41,883,734
|
$
23,651,551
|
$
18,232,183
|
|
Costs
of sales
|
$
15,514,727
|
$
9,136,677
|
$
6,378,050
|
|
Gross
profit as a percentage of net sales
|
62.9
%
|
61.4
%
|
1.5
%
|
|
Operating
expenses
|
$
43,950,862
|
$
29,311,764
|
$
14,639,098
|
|
(Increase)
decrease of contingent liability
|
$
29,780,000
|
$
(32,461,680
)
|
191.7
%
|
|
Net
income (loss) before taxes
|
$
11,305,955
|
$
(47,788,776
)
|
123.6
%
|
|
Net
income (loss) from continuing operations
|
$
12,651,255
|
$
(45,429,776
)
|
$
58,081,031
|
|
Net
income (loss) from discontinued operations, net of
taxes
|
$
(48,983
)
|
$
(5,927,773
)
|
$
5,878,790
|
|
Net
income (loss) attributable to common shareholders
|
$
12,235,422
|
$
(50,428,226
)
|
$
62,663,648
|
The following
tables provide certain selected unaudited consolidated financial
information for the three months ended September 30, 2020 and
2019:
|
|
September 30,
2020
|
September 30,
2019
|
Change($)
|
|
Total
net sales
|
$
11,699,917
|
$
9,544,137
|
$
2,155,780
|
|
Costs
of sales
|
$
5,334,090
|
$
4,127,491
|
$
1,206,599
|
|
Gross
profit as a percentage of net sales
|
54.4
%
|
56.7
%
|
(2.3
)%
|
|
Operating
expenses
|
$
10,896,899
|
$
10,266,281
|
$
630,618
|
|
(Increase)
decrease on contingent liability
|
$
(800,000
)
|
$
20,000,000
|
(104.0
)%
|
|
Net
income (loss) before taxes
|
$
(5,363,562
)
|
$
14,211,194
|
(137.7
)%
|
|
Net
income (loss) from continuing operations
|
$
(6,258,562
)
|
$
14,274,194
|
$
(20,532,756
)
|
|
Net
income (loss) from discontinued operations, net of
taxes
|
$
-
|
$
(5,927,773
)
|
$
5,927,773
|
|
Net
income (loss) attributable to common shareholders
|
$
(6,358,612
)
|
$
7,634,352
|
$
(13,992,964
)
|
Sales
We record product
sales primarily through two main delivery channels, direct to
consumers via online capabilities (E-commerce) and direct to
wholesalers utilizing our internal sales team. In addition, we can
record revenue upon delivery of services (consulting, marketing and
brand strategy). The following table provides information on the
contribution of net sales by type of sale to our total net sales
for fiscal 2020 and fiscal 2019.
|
|
Fiscal
2020
|
% of
total
|
Fiscal
2019
|
% of
total
|
|
|
|
|
|
|
|
Wholesale
sales
|
$
11,377,238
|
27.3
%
|
$
8,878,901
|
37.5
%
|
|
Consumer
sales
|
30,456,496
|
72.3
%
|
14,772,650
|
62.5
%
|
|
Total net
sales
|
$
41,883,734
|
|
$
23,651,551
|
|
Of
our total net sales as indicated above, during fiscal 2020 and
fiscal 2019 our Paw CBD line accounted for net sales of $4,492,833
and $1,931,653, respectively.
In
addition, the following table provides information on the
contribution of net sales by type of sale to our total net sales
for the fourth quarter of fiscal 2020 and fiscal 2019
(unaudited).
|
|
Fourth Quarter
Fiscal 2020
|
% of
total
|
Fourth Quarter
Fiscal 2019
|
% of
total
|
|
|
|
|
|
|
|
Wholesale
sales
|
$
3,111,161
|
26.6
%
|
$
4,137,049
|
43.3
%
|
|
Consumer
sales
|
8,588,755
|
73.4
%
|
5,407,077
|
55.7
%
|
|
Total net
sales
|
$
11,699,917
|
|
$
9,544,137
|
|
22
Total
net sales during the fourth quarter of fiscal 2020 represents a
22.6% increase from prior year and sequential quarterly growth of
10.0%. While wholesale sales were down 28.4% during the fourth
quarter of fiscal 2020 compared to prior year, as COVID-19 impacted
retailers, wholesale sales represented a 29.1% sequential quarterly
growth. Consumer sales during the fourth quarter represents a 58.8%
year over year growth and 4.4% sequential quarterly
growth.
Cost
of sales
Our cost of sales includes costs associated with
distribution, fill and labor expense, components, manufacturing
overhead, third-party providers, and outbound freight for our
product sales (consumer and wholesale sales), and includes labor
for our service sales.
The following table provides
information on the cost of sales to our net sales for fiscal 2020
and 2019:
|
|
Fiscal
2020
|
Fiscal
2019
|
change
($)
|
|
|
|
|
|
|
Product
sales
|
$
15,514,727
|
$
9,083,558
|
$
6,431,169
|
|
Service related
sales
|
-
|
53,119
|
(53,119
)
|
|
Total cost of
sales
|
$
15,514,727
|
$
9,136,677
|
$
6,378,050
|
Our
cost of sales as a percentage of sales was 37.0% and 38.6% for
fiscal 2020 and fiscal 2019, respectively. During the fourth
quarter of fiscal 2020, cost of sales includes non-cash inventory
charges of $1.663,000 relating to a net realizable value adjustment
to finished goods, a write down of certain raw materials and
establishing an inventory obsolescence reserve. The year over year
reduction in the cost of sales percentage reflects the growth and
maturation of the business and its manufacturing process, and
changes in the cost of raw materials as we continue to evaluate key
vendors to work with and leverage volume purchasing as we grow as
well as additional product offerings which continue to impact our
cost of production. In addition, as we continue to grow the online
direct to consumer sales as a percentage of our overall sales we
will continue to see a lower cost of sales. We expect we will
maintain cost of sales as a percentage of net sales, between 30%
and 37%, as we continue to manage our overall cost for
manufacturing and production.
Operating
expenses
Our principal operating expenses include staff
related expense, advertising (which includes expenses related to
industry distribution and trade shows), sponsorships, affiliate
commissions, merchant fees, technology, travel, rent, professional
service fees, business insurance expense, and non-cash stock
compensation expense.
Our operating expenses on a
consolidated basis increased 49.9% in fiscal 2020 from fiscal 2019
and is directly related to the acquisition of Cure Base Development
in December 2018 and the significant ramp up and maturation of our
business
following the
closing of that transaction
. The
overall increase in operating expenses in fiscal 2020 is related to
the continued ramping up of our business, which included increased
staff hiring, a full blown sales, advertising and marketing process
and expenses related to infrastructure expansion. With an
established business foundation and infrastructure, in fiscal 2020
we were targeted on activation of our assets to continue to build
our brand while we focus on overall execution and profitability.
Beginning in April 2020, however, we implemented various cost
control measures with a focus on supporting the business growth
while moving to a positive cash flow operation and in addition
adjusted other expenses in relation to the COVID-19 pandemic. These
actions have resulted in lowering our overall operating expenses
during the last six months of fiscal 2020 as we moved toward these
objectives.
The following table
provides information on our approximate operating expenses for
fiscal 2020 and fiscal 2019:
|
|
Fiscal
2020
|
Fiscal
2019
|
change
($)
|
|
|
|
|
|
|
Staff related
expense
|
$
14,854,072
|
$
8,995,969
|
$
5,858,103
|
|
Accounting/legal
expense
|
1,266,319
|
1,041,267
|
225,052
|
|
Professional
outside services
|
1,300,046
|
1,599,331
|
(299,285
)
|
|
Marketing /
advertising
|
9,946,755
|
5,151,795
|
4,794,960
|
|
Sponsorships
|
4,977,067
|
2,679,331
|
2,297,736
|
|
Affiliate
commissions
|
1,897,345
|
1,627,373
|
269,972
|
|
Merchant
fees
|
2,545,844
|
1,670,085
|
875,759
|
|
Technology
|
1,155,127
|
-
|
1,155,127
|
|
Travel
expense
|
410,150
|
712,811
|
(302,661
)
|
|
Rent
|
1,539,653
|
672,697
|
866,956
|
|
Business
insurance
|
544,218
|
344,432
|
199,786
|
|
Non-cash stock
compensation
|
1,985,804
|
2,688,530
|
(702,726
)
|
|
All other
expenses
|
1,528,462
|
2,128,143
|
(599,681
)
|
|
Totals
|
$
43,950,862
|
$
29,311,764
|
$
14,639,098
|
23
The increase in staff related expense is a direct
result of the build out of the CBDI team. The increase in
accounting and legal expenses is primarily attributable to an
increase of legal fees associated with regulatory compliance, new
products and intellectual property filings, together with
additional accounting services to assist as we built out the
organization and systems. The decrease in professional outside
services is related to a reduction in fiscal 2020 of the use of
outside agencies and firms to support the growth while we built our
infrastructure and added staff to handle certain functions. The
increase in advertising/marketing, sponsorships, affiliate
commissions, and technology are each the result of execution on the
business strategy and building of the CBD brand in an effort to
increase our market share. The increase in merchant fees is a
direct result of increased business through our E-commerce site.
The decline in travel expenses is a result in the impact of
COVID-19 and its corresponding quarantines and travel restrictions.
The increase in rent expenses is a result of a full year of our
corporate office lease, entered into August 2019, as well as the
addition of our warehouse in November 2019. Insurance expenses
increased as a result of our increase in operations and facilities
The non-cash stock compensation expense reflects the value of
restricted stock awards and options as they vest. For fiscal
2019, we also had an impairment of $436,578 on intangible assets
that no longer had a useful life or value for the business based on
the current business focus, included in all other expenses. During
the fourth quarter of fiscal 2020, all other expenses includes a
one-time $489,381 expense relating to severance for two
employees.
Corporate overhead
Included in our
consolidated operating expenses are expenses associated with our
corporate overhead which are not allocated to the operating
business unit, including (i) staff related expenses; (ii)
accounting and legal expenses; (iii) professional outside services;
(iv) travel and entertainment expenses; (v) rent; (vi) business
insurance; and (vii) non-cash stock compensation
expense.
The following table
provides information on our approximate corporate overhead for
fiscal 2020 and 2019:
|
|
Fiscal
2020
|
Fiscal
2019
|
change
($)
|
|
|
|
|
|
|
Staff related
expense
|
$
1,427,359
|
$
1,157,054
|
$
270,305
|
|
Accounting/legal
expense
|
769,119
|
931,373
|
(162,254
)
|
|
Professional
outside services
|
491,729
|
931,460
|
(439,731
)
|
|
Travel
expense
|
22,846
|
92,593
|
(69,747
)
|
|
Rent
|
-
|
175,592
|
(175,592
)
|
|
Business
insurance
|
388,878
|
262,200
|
126,678
|
|
Non-cash stock
compensation
|
1,985,804
|
2,688,530
|
(702,726
)
|
|
Totals
|
$
5,085,735
|
$
6,238,802
|
$
(1,153,067
)
|
The overall
decrease in corporate operating expenses is related to the overall
maturation of the business, a focus on cost controls as well as
less transactions (registration statements, merger activity) which
required more outside accounting, legal and professional. Rent
expenses have been all moved to the operating
business.
Other
income and other non-operating expenses
Interest income (expense)
Our interest income
(expense) was $39,877 and $75,071 for fiscal 2020 and fiscal 2019,
respectively.
Contingent liability
As described in Note 8 to the notes to the
consolidated financial statements appearing elsewhere in this
report, the
earn-out provision for the Earnout Shares is
accounted for and recorded as a contingent liability with increases
in the liability recorded as non-cash other expense and decreases
in the liability recorded as non-cash other income. The value of
the non-cash contingent liability was $16,200,000 at September 30,
2020, as compared to $50,600,000 at September 30, 2019,
respectively. During fiscal 2020 we had a decrease in value of
$29,780,000 of the continent liability and a reclassification out
of the liability of $4,620,000 for issuance of the first marking
period Earnout Shares. The decrease of $29,780,000 is recorded as
other expense in our consolidated statement of operations appearing
later in this report. We utilize both a market approach and a Monte
Carlo simulation in valuing the contingent liability and a key
input in both of those methods is the stock price. The main driver
of the change in the value of the contingent liability was the
decrease of our common stock price, which was $2.00 at September
30, 2020 as compared to $3.96 on September 30, 2019. We expect to
continue to record changes in the non-cash contingent liability
through the balance of the earnout period.
24
Realized and unrealized gain (loss) on marketable and other
securities
We
value investments in marketable securities at fair value and record
a gain or loss upon sale at each period in realized and unrealized
gain (loss) on marketable securities. For fiscal 2020 and fiscal
2019 we recorded $(172,066) and $(102,716) of realized and
unrealized gain (loss) on marketable and other securities. In
addition, we recorded an impairment for fiscal 2019 of $502,560 on
investment other securities. The discontinued operations recorded a
realized and unrealized gain (loss) of $(2,337,280) in fiscal 2019,
which is included in the net income (loss) from discontinued
operations on the statement of operations.
For
fiscal 2020 we had an impairment on other securities of $600,000 as
well as an impairment of $160,000 against other account receivable
representing an investment other security that was to be
received.
Liquidity and Capital Resources
We had cash and
cash equivalents on hand of $14,824,644 and working capital of
$16,023,174 at September 30, 2020, as compared to cash on hand of
$4,689,966 and working capital of $12,033,157 at September 30,
2019. Our current assets increased approximately 50.6% at September
30, 2020 from September 30, 2019, and is primarily attributable to
an increase in cash and prepaid expenses, offset by a decrease in
accounts receivable, marketable and other securities, merchant
reserve, inventory, and assets from discontinued operations. Our
current liabilities increased approximately 107.2% at September 30,
2020 from September 30, 2019. This increase is primarily
attributable to increases in accrued expenses, note payable, PPP
loan, and operating lease short term liability offset by decreases
in accounts payable.
During
fiscal 2020 we used cash primarily to fund our
operations.
We do not have any
commitments for capital expenditures. We have a commitment for
cumulative cash dividends at an annual rate of 8% payable monthly
in arrears for the prior month to our preferred shareholders, when,
and as declared. We have multiple endorsement or sponsorship
agreements for varying time periods up through December 2022 and
provide for financial commitments from our company based on
performance/participation (see Note 13 Commitments and
Contingencies). We have sufficient working capital to fund our
operations. In addition, subsequent to September 30, 2020 we raised
an additional approximately $16.9 million through the sale of
equity which we expect to use for additional working
capital.
Our goal from a
liquidity perspective is to use operating cash flows to fund day to
day operations and we have not met this goal as cash flow from
operations has been a net use of $10,664,336 and $15,377,467 for
fiscal 2020 and fiscal 2019, respectively. We are working to
control our overhead expenses while benefiting from the gross
profit from growing revenues in order to achieve positive operating
cash flow. However, due to our strong liquidity position we
constantly evaluate strategic marketing and advertising endeavors
as well as investments scientific R&D activity that we believe
can further enhance our market position, brand awareness, and
revenue growth, but may have short-term negative earnings
impact.
Related Parties
As described in Note 9 in notes to our
consolidated financial statements appearing elsewhere in this
report, we have engaged in a number of related party
transactions.
We have reported transactions with related
parties within the consolidated financial statements as well as
within the notes to the consolidated financial statements. These
transactions also are reported as sales with related parties (see
Note 9 Related Party Transactions in the consolidated financial
statements for more information).
Critical Accounting Policies
The preparation of
financial statements and related disclosures in conformity with US
GAAP and our discussion and analysis of our financial condition and
operating results require our management to make judgments,
assumptions and estimates that affect the amounts reported in its
consolidated financial statements and accompanying notes. Note 1,
“Organization and Summary of Significant Accounting
Policies,” of the notes to our consolidated financial
statements appearing elsewhere in this report describes the
significant accounting policies and methods used in the preparation
of our consolidated financial statements. Management bases its
estimates on historical experience and on various other assumptions
it believes to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities. Actual results may differ from
these estimates, and such differences may be material.
25
We believe that the following critical accounting
policies involve the more significant judgments and estimates used
in the preparation of our consolidated financial statements and are
the most critical to aid you in fully understanding and evaluating
our reported financial results.
Management considers these
policies critical because they are both important to the portrayal
of our financial condition and operating results, and they require
management to make judgments and estimates about inherently
uncertain matters.
Contingent
liability
A
significant component of the purchase price consideration for our
acquisition of Cure Based Development includes a fixed number of
future shares to be issued as well as a variable number of future
shares to be issued based upon the post-acquisition entity reaching
certain specified future revenue targets, as further described in
Note 8. We made a determination of the fair value of the contingent
liabilities as part of the valuation of the assets acquired and
liabilities assumed in the business combination.
We
recognize both the fixed number of shares to be issued, and the
variable number of shares to be potentially issued, as contingent
liabilities on our Consolidated Balance Sheets. These contingent
liabilities were recorded at fair value upon the acquisition date
and are remeasured quarterly based on the reassessed fair value as
of the end of that quarterly reporting period. Additionally, as the
fixed shares are issued, the value of the shares at that time are
reclassified from contingent liability to additional paid in
capital on the balance sheet.
Leases
Effective October 1, 2019, we have
adopted ASU No. 2016-02, Leases (Topic 842)
("ASU 2016-02") which provides guidance requiring lessees to
recognize a right-of-use asset and a lease liability on the balance
sheet for substantially all leases, with the exception of
short-term leases.
We determine whether an arrangement
is a lease at inception and classify it as finance or operating.
All of our leases are classified as operating leases. Our leases do
not contain any residual value guarantees.
Our current lease activities are recorded in
operating lease right-of-use (“ROU”) assets, operating
lease short term liabilities and operating lease long term
liabilities in the consolidated balance sheets.
ROU
assets represent our right to use an underlying asset for the lease
term and lease liabilities represent our obligation to make lease
payments arising from the lease. Operating lease ROU assets and
liabilities are recognized at commencement date based on the
present value of lease payments over the lease term. Variable lease
payments are not included in the calculation of the right-of-use
assets and lease liability due to uncertainty of the payment amount
and are recorded as lease expense in the period incurred. As most
of our leases do not provide an implicit rate, we use our
incremental borrowing rate based on the information available at
commencement date in determining the present value of lease
payments. We use the implicit rate when readily determinable. Our
lease terms may include options to extend or terminate the lease
when it is reasonably certain that we will exercise that option.
Lease expense for lease payments is recognized on a straight-line
basis over the lease term.
As
a lessee, we elected a short-term lease exception policy on all
classes of underlying assets, permitting us to not apply the
recognition requirements of this standard to
short-term leases (i.e. leases with terms of 12
months or less).
Inventory
Inventory is stated
at the lower of cost or net realizable value with cost being
determined on a weighted average basis. The cost of inventory
includes product cost, freight-in, and production fill and labor
(portions of which we outsource to third party manufacturers).
Write-offs of potentially slow moving or damaged inventory are
recorded based on management’s analysis of inventory levels,
forecasted future sales volume and pricing and through specific
identification of obsolete or damaged products. We assess inventory
quarterly for slow moving products and potential impairments and at
a minimum perform a physical inventory count annually near fiscal
year end.
26
Marketable
Securities
Marketable
securities that are equity securities are carried at fair value on
the consolidated balance sheets with changes in fair value recorded
as an unrealized gain or (loss) in the Statements of Operations in
the period of the change. Upon the disposition of a marketable
security, the Company records a realized gain or (loss) on the
Company’s consolidated statements of operations. On
October 1, 2018, as a result of the adoption of ASU 2016-01 –
Financial Instruments
, the
Company reclassified $2,512,539 of net unrealized losses on
marketable securities, that were formerly classified as
available-for-sale securities before the adoption of the new
standard, from Accumulated Other Comprehensive Loss to Accumulated
Deficit.
Recent Accounting Pronouncements
Please see Note 1–
Organization and
Summary of Significant Accounting Policies
appearing in the notes to our consolidated
financial statements included in this report for information on
accounting pronouncements.
Off Balance Sheet Arrangements
The
term “off-balance sheet arrangement” generally means
any transaction, agreement or other contractual arrangement to
which an entity unconsolidated with us is a party, under which we
have any obligation arising under a guarantee contract, derivative
instrument or variable interest or a retained or contingent
interest in assets transferred to such entity or similar
arrangement that serves as credit, liquidity or market risk support
for such assets. Please see Note 13 – Commitment and
Contingencies for a description of our off balance sheet
arrangements.
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for
a smaller reporting company.
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
Please see our
Financial Statements beginning on page F-1 of this annual
report.
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM
9A.
CONTROLS
AND PROCEDURES.
Evaluation of Disclosure Controls and
Procedures
.
We maintain
disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed pursuant
to the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the
Commission’s rules and forms and that such information is
accumulated and communicated to our management, including our
co-Chief Executive Officers and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and
procedures.
As required by
Exchange Act Rule 13a-15(e), we carried out an evaluation, under
the supervision and with the participation of our management,
including our co-Chief Executive Officers and our Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, our
co-Chief Executive Officers and our Chief Financial Officer
concluded that our disclosure controls were effective at September
30, 2020.
Management’s Report on Internal Control
over Financial Reporting
.
27
Our management is
responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under
the Exchange Act. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial
reporting includes those policies and procedures that:
●
pertain to the
maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our
assets;
●
provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorizations
of our management and directors; and
●
provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
As an emerging
growth company experiencing rapid growth, we have worked diligently
to improve processes within the Company which has created
continuous change, specifically including in our IT and
manufacturing environments that increase risk related to
transaction processing which can impact our financial reporting. We
have implemented a significant number of manual compensating
controls to address this risk.
Because of the
inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and
presentation. Because of the inherent limitations of internal
control, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over
financial reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though
not eliminate, this risk.
Our management,
including our co-CEOs and our CFO, assessed the effectiveness of
our internal control over financial reporting as of September 30,
2020. In making this assessment, our management used the criteria
set forth by the Committee of Sponsoring Organizations of the 2013
Treadway Commission (“COSO”) in
Internal Control-Integrated Framework
.
Based on that evaluation, they concluded that, during the period
covered by this report, such internal controls and procedures were
effective.
Changes in Internal Control over Financial Reporting
There have been no
changes in our internal control over financial reporting during our
last fiscal year that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
ITEM
9B.
OTHER
INFORMATION.
None.
28
PART
III
ITEM
10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information
required by this Item will be contained in our proxy statement for
our 2020 Annual Meeting of shareholders to be filed on or prior to
January 28, 2021 (the “Proxy Statement”) and is
incorporated herein by this reference.
ITEM
11.
EXECUTIVE
COMPENSATION.
The information
required by this item will be contained in our Proxy Statement and
is incorporated herein by this reference.
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The information
required by this item will be contained in our Proxy Statement and
is incorporated herein by this reference.
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The information
required by this item will be contained in our Proxy Statement and
is incorporated herein by this reference.
ITEM
14.
PRINCIPAL
ACCOUNTING FEES AND SERVICES.
The information
required by this item will be contained in our Proxy Statement and
is incorporated herein by this reference.
PART
IV
ITEM
15.
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
(a)
(1)
Financial
statements.
The consolidated
financial statements and Report of Independent Registered
Accounting Firm are listed in the “Index to Financial
Statements and Schedules” beginning on page F-1.
(2) Financial
statement schedules
All schedules for
which provision is made in the applicable accounting regulations of
the SEC are either not required under the related instructions, are
not applicable (and therefore have been omitted), or the required
disclosures are contained in the consolidated financial statements
herein.
(3)
Exhibits.
The exhibits that
are required to be filed or incorporated by reference herein are
listed in the Exhibit Index.
ITEM
16.
FORM
10-K SUMMARY.
None
29
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
|
|
|
||
|
Date:
December 22, 2020
|
cbdMD, Inc.
|
||
|
|
|
|
|
|
|
By:
|
/s/ Martin A.
Sumichrast
|
|
|
|
|
Martin
A. Sumichrast
|
|
|
|
|
Co-Chief
Executive Officer, (co-Principal Executive Officer)
|
|
|
|
|
||
|
Date:
December 22, 2020
|
cbdMD, Inc.
|
||
|
|
|
||
|
|
By:
|
/s/ Raymond
S. Coffman
|
|
|
|
Raymond
S. Coffman
|
||
|
|
Co-Chief
Executive Officer, (co-Principal Executive Officer)
|
||
|
|
|
||
|
Date:
December 22, 2020
|
cbdMD, Inc.
|
||
|
|
|
|
|
|
|
By:
|
/s/ Ronan
Kennedy
|
|
|
|
|
Ronan
Kennedy
|
|
|
|
|
Chief
Financial Officer, (Principal Accounting and Financial
Officer)
|
|
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each
person
whose signature appears below hereby constitutes and
appoints Ronan Kennedy his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to
sign any and all amendments and supplements to this report, and to
file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission,
and hereby grants to such attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
|
Name
|
|
Positions
|
|
Date
|
|
|
|
|
|
|
|
/s/ Martin A.
Sumichrast
|
|
Chairman
of the Board of Directors,
|
|
December
22, 2020
|
|
Martin A.
Sumichrast
|
|
co-Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
/s/ Raymond S,
Coffman
|
|
Co-Chief
Executive Officer, Director
|
|
December 22, 2020 |
|
Raymond S.
Coffman
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Bakari Sellers
|
|
Director
|
|
December 22, 2020 |
|
Bakari
Sellers
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Scott Stephen
|
|
Director
|
|
December 22, 2020 |
|
Scott
Stephen
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Peter Ghiloni
|
|
Director
|
|
December 22, 2020 |
|
Peter
Ghiloni
|
|
|
|
|
|
|
|
|
|
|
|
/s/
William Raines III
|
|
Director
|
|
December 22, 2020 |
|
William
Raines III
|
|
|
|
|
|
|
|
|
|
|
30
EXHIBIT
INDEX
|
|
|
|
|
Incorporated by Reference
|
|
Filed or
Furnished
|
||||
|
No.
|
|
Exhibit Description
|
|
Form
|
|
Date Filed
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Form of
Underwriting Agreement dated May 13, 2019 by and between cbdMD,
Inc. and ThinkEquity, a division of Fordman Financial Management,
Inc.
|
|
8-K
|
|
5/14/19
|
|
1.1
|
|
|
|
|
1.2
|
|
Underwriting
Agreement dated October 10, 2019 by and between cbdMD, Inc. and
ThinkEquity, a division of Fordham Financial Management,
Inc.
|
|
8-K
|
|
10.16
|
|
1.1
|
|
|
|
|
Underwriting
Agreement dated January 9, 2020 by and between cbdMD, Inc. and
ThinkEquity, a division of Fordham Financial Management,
Inc.
|
|
8-K
|
|
1/10/20
|
|
1.1
|
|
|
|
|
|
Underwriting
Agreement dated December 8, 2020 by and between cbdMD, Inc. and
ThinkEquity, a division of Fordham Financial Management,
Inc.
|
|
8-K
|
|
12/9/20
|
|
1.1
|
|
|
|
|
|
Merger Agreement
dated December 3, 2018 by and among Level Brands, Inc., AcqCo, LLC,
cbdMD LLC and Cure Based Development, LLC
|
|
8-K
|
|
12/4/18
|
|
2.1
|
|
|
|
|
|
Articles of Merger
dated December 20, 2018 as filed with the Secretary of State of
Nevada merging AcqCo, LLC with and into Cure Based Development,
LLC
|
|
10-Q
|
|
2/14/19
|
|
2.2
|
|
|
|
|
|
Articles of Merger
dated December 20, 2018 as filed with the Secretary of State of
North Carolina merging AcqCo, LLC with and into Cure Based
Development, LLC
|
|
10-Q
|
|
2/14/19
|
|
2.3
|
|
|
|
|
|
Articles of Merger
dated December 20, 2018 as filed with the Secretary of State of
Nevada merging Cure Based Development, LLC with an into cbdMD
LLC
|
|
10-Q
|
|
2/14/19
|
|
2.4
|
|
|
|
|
|
Articles of Merger
dated December 20, 2018 as filed with the Secretary of State of
North Carolina merging Cure Based Development, LLC with an into
cbdMD LLC
|
|
10-Q
|
|
2/14/19
|
|
2.5
|
|
|
|
|
|
Articles of
Incorporation
|
|
1-A
|
|
9/18/17
|
|
2.1
|
|
|
|
|
|
Articles of
Amendment to the Articles of Incorporation filed April 22,
2015
|
|
1-A
|
|
9/18/17
|
|
2.2
|
|
|
|
|
|
Articles of
Amendment to the Articles of Incorporation filed June 22,
2015
|
|
1-A
|
|
9/18/17
|
|
2.3
|
|
|
|
|
|
Articles of
Amendment to the Articles of Incorporation filed November 17,
2016
|
|
1-A
|
|
9/18/17
|
|
2.4
|
|
|
|
|
|
Articles of
Amendment to the Articles of Incorporation filed December 5,
2016
|
|
1-A
|
|
9/18/17
|
|
2.5
|
|
|
|
|
|
Bylaws, as
amended
|
|
1-A
|
|
9/18/17
|
|
2.6
|
|
|
|
|
|
Articles of
Amendment to Articles of Incorporation
|
|
8-K
|
|
4/29/19
|
|
3.7
|
|
|
|
|
|
Articles of
Amendment to the Articles of Incorporation including the
Certificate of Designations, Rights and Preferences of the 8%
Series A Cumulative Convertible Preferred Stock filed October 11,
2019
|
|
8-A
|
|
10/11/19
|
|
3.1(f)
|
|
|
|
|
|
Amended
Bylaw
|
|
10-Q
|
|
2/13/20
|
|
3.2
|
|
|
|
|
|
Form
of selling agents’ warrant issued in November 2017 initial
public offering
|
|
1-A/A
|
|
10/12/17
|
|
3.6
|
|
|
|
|
|
Form
of common stock certificate of the registrant
|
|
1-A
|
|
9/18/17
|
|
3.7
|
|
|
|
|
|
2015 Equity
Compensation Plan
|
|
1-A
|
|
9/18/17
|
|
3.8
|
|
|
|
|
|
Form of stock
option award under 2015 Equity Compensation Plan
+
|
|
1-A
|
|
9/18/17
|
|
3.9
|
|
|
|
|
|
Form of warrant
issued to Andre Carthen
|
|
1-A
|
|
9/18/17
|
|
3.10
|
|
|
|
|
|
Form of warrant
issued to Nicholas Walker
|
|
1-A
|
|
9/18/17
|
|
3.11
|
|
|
|
|
|
Form of
representative’s warrant dated November 16, 2018
|
|
S-1
|
|
9/26/18
|
|
4.10
|
|
|
|
|
|
Form of
Representative’s Warrant dated May 15, 2019
|
|
8-K
|
|
5/14/19
|
|
4.1
|
|
|
|
|
|
Form of
Representative’s Warrant dated October 16, 2019
|
|
8-K
|
|
10/16/19
|
|
4.1
|
|
|
|
|
|
Form of
Representative’s Warrant dated January 9, 2020
|
|
8-K
|
|
1/10/20
|
|
4.1
|
|
|
|
|
|
Form of
Representative’s Warrant dated December 11, 2020
|
|
8-K
|
|
12/9/20
|
|
4.1
|
|
|
|
|
|
Form
of Indemnification Agreement
|
|
1-A
|
|
9/18/17
|
|
6.21
|
|
|
|
|
10.2
|
|
Executive
Employment Agreement dated September 6, 2018 by and between cbdMD,
Inc. and Martin A. Sumichrast+
|
|
8-K
|
|
9/7/18
|
|
10.75
|
|
|
|
|
Amendment No. 1
effective November 13, 2020 to Executive Employment Agreement
between cbdMD, Inc. and Martin A. Sumichrast+
|
|
8-K
|
|
11/17/20
|
|
10.1
|
|
|
|
|
|
Executive
Employment Agreement dated December 20, 2018 by and between CBD
Industries LLC and R. Scott Coffman+
|
|
8-K
|
|
12/20/18
|
|
10.4
|
|
|
|
|
|
Amendment No. 1
effective November 13, 2020 to Executive Employment Agreement
between CBD Industries LLC and R. Scott Coffman+
|
|
8-K
|
|
11/17/20
|
|
10.2
|
|
|
|
|
10.6
|
|
Executive
Employment Agreement dated September 6, 2018 by and between cbdMD,
Inc. and Mark S. Elliott+
|
|
8-K
|
|
9/7/18
|
|
10.76
|
|
|
|
|
Separation
Agreement and General Release dated September 16, 2020 by and
between cbdMD, Inc. and Mark S. Elliott+
|
|
8-K
|
|
9/21/20
|
|
10.1
|
|
|
|
|
|
Executive
Employment Agreement dated September 15, 2020 by and between cbdMD,
Inc. and T. Ronan Kennedy+
|
|
8-K
|
|
9/21/20
|
|
10.2
|
|
|
|
|
|
Form of voting
proxy
|
|
8-K
|
|
12/20/18
|
|
10.2
|
|
|
|
|
|
Office Lease dated
July 11, 2019
|
|
10-Q
|
|
8/14/19
|
|
10.1
|
|
|
|
31
|
|
Warehouse Lease
dated August 27, 2019
|
|
10-Q
|
|
2/13/20
|
|
10.1
|
|
|
||
|
|
Form of
Distribution Agreement dated February 26, 2020 by and among cbdMD,
Inc., CBD Holdings, LLC and the members of CBD Holdings,
LLC
|
|
8-K
|
|
2/28/20
|
|
10.1
|
|
|
||
|
10.13
|
|
Endorsement
Agreement effective July 1, 2020
|
|
10-Q
|
|
8/21/20
|
|
10.1
|
|
|
|
|
|
Form of Lockup
Agreement
|
|
8-K
|
|
12/9/20
|
|
10.1
|
|
|
||
|
|
Code of Business
Conduct and Ethics
|
|
1-A
|
|
9/18/17
|
|
15.1
|
|
|
||
|
|
Subsidiaries of the
registrant
|
|
10-K
|
|
12/26/17
|
|
21.1
|
|
|
||
|
|
Consent of Cherry
Bekaert LLP
|
|
|
|
|
|
|
|
Filed
|
||
|
24.1
|
|
Power of attorney
(included on signature page of this report)
|
|
|
|
|
|
|
|
Filed
|
|
|
|
Rule
13a-14(a)/15d-14(a) Certification of Co-Chief Executive
Officer
|
|
|
|
|
|
|
|
Filed
|
||
|
|
Rule
13a-14(a)/15d-14(a) Certification of Co-Chief Executive
Officer
|
|
|
|
|
|
|
|
|
||
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
|
|
|
|
|
|
|
Filed
|
||
|
|
Section
1350 Certification of Chief Executive Officer and Chief Financial
Officer
|
|
|
|
|
|
|
|
Filed
|
||
|
101
INS
|
|
XBRL Instance
Document
|
|
|
|
|
|
|
|
Filed
|
|
|
101 SCH
|
|
XBRL Taxonomy
Extension Schema
|
|
|
|
|
|
|
|
Filed
|
|
|
101 CAL
|
|
XBRL Taxonomy
Extension Calculation Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
|
101
LAB
|
|
XBRL Taxonomy
Extension Label Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
|
101
PRE
|
|
XBRL Taxonomy
Extension Presentation Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
|
101
DEF
|
|
XBRL Taxonomy
Extension Definition Linkbase
|
|
||||||||
|
|
|
|
|
||||||||
|
+
|
|
Indicated
management contract or compensatory plan.
|
|
||||||||
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Shareholders of
cbdMD,
Inc. and subsidiaries
Charlotte,
North Carolina
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of cbdMD, Inc.
and subsidiaries (the “Company”) as of September 30,
2020 and 2019, and the related consolidated statements of
operations, comprehensive income (loss), shareholders’
equity, and cash flows for each of the years in the two-year period
ended September 30, 2020, and the related notes (collectively
referred to as the financial statements). In our opinion, the
financial statements present fairly, in all material respects, the
financial position of the Company as of September 30, 2020 and
2019, and the results of its operations and its cash flows for each
of the years in the two-year period ended September 30, 2020, in
conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
|
/s/
Cherry Bekaert LLP
|
|
|
|
|
|
We have
served as the Company’s auditor since 2016.
|
|
|
|
|
|
Charlotte,
North Carolina
|
|
|
December
22, 2020
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements
F-1
CBDMD, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2020 AND 2019
|
|
2020
|
2019
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
14,824,644
|
$
4,689,966
|
|
Accounts
receivable
|
911,482
|
1,425,697
|
|
Accounts
receivable other
|
-
|
160,137
|
|
Accounts
receivable – discontinued operations
|
447,134
|
1,080,000
|
|
Marketable
securities
|
26,472
|
198,538
|
|
Investment
other securities
|
250,000
|
600,000
|
|
Deposits
|
40,198
|
6,850
|
|
Merchant
reserve
|
-
|
519,569
|
|
Inventory
|
4,603,360
|
4,301,586
|
|
Inventory
prepaid
|
288,178
|
903,458
|
|
Deferred
issuance costs
|
-
|
93,954
|
|
Prepaid
software
|
174,308
|
206,587
|
|
Prepaid
equipment deposits
|
40,197
|
868,589
|
|
Prepaid
sponsorship
|
1,203,300
|
-
|
|
Prepaid
expenses and other current assets
|
902,979
|
688,104
|
|
Total
current assets
|
23,712,252
|
15,743,035
|
|
|
|
|
|
Other
assets:
|
|
|
|
Property
and equipment, net
|
3,183,487
|
1,715,557
|
|
Operating
lease right-of-use assets
|
6,851,357
|
-
|
|
Deposits
for facilities
|
790,708
|
754,533
|
|
Intangible
assets, net
|
21,635,000
|
21,635,000
|
|
Goodwill
|
54,669,997
|
54,669,997
|
|
Total
other assets
|
87,130,549
|
78,775,087
|
|
|
|
|
|
Total
assets
|
$
110,842,801
|
$
94,518,122
|
See
Notes to Consolidated Financial Statements
F-2
CBDMD, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2020 AND 2019
(continued)
|
|
2020
|
2019
|
|
Liabilities
and shareholders' equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
2,850,421
|
$
3,021,271
|
|
Deferred
revenue
|
45,141
|
-
|
|
Accrued
expenses
|
2,724,779
|
681,269
|
|
Operating
leases – short term liabilities
|
1,159,098
|
-
|
|
Paycheck
Protection Program Loan
|
854,000
|
-
|
|
Note
payable
|
55,639
|
-
|
|
Customer
deposit – related party
|
-
|
7,339
|
|
Total
current liabilities
|
7,689,078
|
3,709,878
|
|
|
|
|
|
Long term
liabilities
|
|
|
|
Long
term liabilities
|
264,367
|
363,960
|
|
Paycheck
Protection Program loan
|
602,100
|
-
|
|
Operating
leases – long term liabilities
|
6,010,208
|
-
|
|
Contingent
liability
|
16,200,000
|
50,600,000
|
|
Deferred
tax liability
|
895,000
|
2,240,300
|
|
Total long term
liabilities
|
23,971,675
|
53,204,260
|
|
|
|
|
|
Total
liabilities
|
31,660,753
|
56,914,138
|
|
|
|
|
|
cbdMD, Inc.
shareholders' equity:
|
|
|
|
Preferred stock,
authorized 50,000,000 shares, $0.001 par value, 500,000 and 0
shares issued and outstanding, respectively
|
500
|
-
|
|
Common stock,
authorized 150,000,000 shares, $0.001 par value,
|
|
|
|
52,130,870
and 27,720,356 shares issued and outstanding,
respectively
|
52,131
|
27,720
|
|
Additional paid in
capital
|
126,517,784
|
97,186,524
|
|
Accumulated
deficit
|
(47,388,367
)
|
(59,610,260
)
|
|
Total
cbdMD, Inc. shareholders' equity
|
79,182,048
|
37,603,984
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
$
110,842,801
|
$
94,518,122
|
|
|
|
|
See
Notes to Consolidated Financial Statements
F-3
CBDMD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019
|
|
2020
|
2019
|
|
Sales
|
$
43,172,778
|
$
28,023,848
|
|
Sales
related party
|
-
|
55,596
|
|
Total
Gross Sales
|
43,172,778
|
28,079,444
|
|
Allowances
|
(1,289,044
)
|
(4,427,893
)
|
|
Net
sales
|
41,883,734
|
23,595,955
|
|
Net
sales related party
|
-
|
55,596
|
|
Total Net Sales
|
41,883,734
|
23,651,551
|
|
Costs
of sales
|
15,514,727
|
9,136,677
|
|
Gross profit
|
26,369,006
|
14,514,873
|
|
|
|
|
|
Operating
expenses excluding impairment losses
|
43,950,862
|
28,875,186
|
|
Impairment
of intangible assets
|
-
|
436,578
|
|
Operating
expenses
|
43,950,862
|
29,311,764
|
|
Loss from operations
|
(17,581,856
)
|
(14,796,891
)
|
|
Realized
and unrealized loss on marketable securities
|
(172,066
)
|
(102,716
)
|
|
Impairment
on investment other securities
|
(760,000
)
|
(502,560
)
|
|
(Increase)
decrease of contingent liability
|
29,780,000
|
(32,461,680
)
|
|
Interest
income
|
39,877
|
75,071
|
|
Income (loss) before provision
for income taxes
|
11,305,955
|
(47,788,776
)
|
|
Benefit
from (provision for) income taxes
|
1,345,300
|
2,359,000
|
|
Net Income (loss) from
continuing operations
|
12,651,255
|
(45,429,776
)
|
|
Net
Income (loss) from discontinued operations, net of
tax
(Note 16)
|
(48,983
)
|
(5,927,773
)
|
|
|
|
|
|
Net Income (loss)
|
$
12,602,272
|
$
(51,357,549
)
|
|
Net Income (loss) attributable to non-controlling interest from
discontinued operations (Note 16)
|
-
|
(929,323
)
|
|
Preferred dividends
|
366,850
|
-
|
|
Net Income (loss) attributable to common shareholders
|
$
12,235,422
|
$
(50,428,226
)
|
|
|
|
|
|
Net Income (Loss) per share
|
|
|
|
Basic
earnings (loss) per share
|
$
0.28
|
$
(2.82
)
|
|
Diluted
earnings (loss) per share
|
$
0.28
|
$
-
|
|
|
|
|
|
Weighted
average number of shares basic
|
44,140,360
|
17,887,247
|
|
Weighted
average number of shares diluted
|
45,171,674
|
-
|
See
Notes to Consolidated Financial Statements
F-4
CBDMD, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019
|
|
2020
|
2019
|
|
|
|
|
|
Net
Income (Loss)
|
$
12,602,272
|
$
(51,357,549
)
|
|
Comprehensive Income (Loss)
|
12,602,272
|
(51,357,549
)
|
|
|
|
|
|
Comprehensive
Income (loss) attributable to non-controlling interest
|
-
|
(929,323
)
|
|
Preferred
dividends
|
(366,850
)
|
|
|
Comprehensive Income (Loss) attributable to cbdMD, Inc. common
shareholders
|
$
12,235,422
|
$
(50,428,226
)
|
See
Notes to Consolidated Financial Statements
F-5
CBDMD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019
|
|
2020
|
2019
|
|
Cash
flows from operating activities:
|
|
|
|
Net income
(loss)
|
$
12,602,272
|
$
(51,357,549
)
|
|
Adjustments
to reconcile net loss to net
|
|
|
|
cash
used by operating activities:
|
|
|
|
Stock
based compensation
|
1,900,194
|
2,458,530
|
|
Restricted
stock expense
|
138,000
|
230,000
|
|
Depreciation
and amortization
|
720,755
|
289,574
|
|
Issuance
of stock / warrants for services
|
338,400
|
289,750
|
|
Realized
and unrealized (gain)/loss on marketable securities
|
172,066
|
2,439,996
|
|
Impairment
on investment other securities
|
760,000
|
502,560
|
|
Inventory
impairment
|
233,372
|
-
|
|
Impairment
on discontinued operations asset
|
45,783
|
3,398,438
|
|
Payment
in-kind interest
|
-
|
(30,000
)
|
|
Loss on
sale of property and equipment -discontinued
operations
|
-
|
39,013
|
|
Severance
agreement
|
489,381
|
-
|
|
Increase/(decrease)
in contingent liability
|
(29,780,000
)
|
32,461,680
|
|
Intangible
impairment
|
-
|
436,578
|
|
Merchant
reserve settlement
|
132,657
|
-
|
|
Non-cash
consideration received for services provided
|
-
|
(470,000
)
|
|
Non-cash
lease expense
|
1,180,213
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
514,352
|
60,155
|
|
Accounts
receivable - related party
|
-
|
(462,137
)
|
|
Other
accounts receivable
|
-
|
2,737
|
|
Inventory
|
(535,146
)
|
(3,123,437
)
|
|
Note
receivable – related party
|
-
|
156,147
|
|
Deposits
|
(938,112
)
|
(761,383
)
|
|
Merchant
reserve
|
386,912
|
(93,316
)
|
|
Prepaid
inventory
|
615,280
|
(903,458
)
|
|
Proceeds
from sale of securities
|
-
|
410,094
|
|
Prepaid
rent
|
-
|
180,000
|
|
Prepaid
expenses and other current assets
|
645,796
|
(963,044
)
|
|
Accounts
payable and accrued expenses
|
1,479,189
|
2,280,726
|
|
Accounts
payable and accrued expenses – related party
|
-
|
(7,502
)
|
|
Operating
lease liability
|
(1,045,285
)
|
-
|
|
Deferred
Revenue/customer deposits
|
37,802
|
(416,619
)
|
|
Collection
on discontinued operations accounts receivable
|
587,083
|
-
|
|
Deferred
tax liability
|
(1,345,300
)
|
(2,425,000
)
|
|
Cash
used by operating activities
|
(10,664,336
)
|
(15,377,467
)
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Net
cash used for merger
|
-
|
(916,555
)
|
|
(250,000
)
|
-
|
|
|
Purchase
of intangible assets
|
-
|
(50,000
)
|
|
Purchase
of property and equipment
|
(1,320,095
)
|
(1,198,618
)
|
|
Cash used by
investing activities
|
(1,570,095
)
|
(2,133,850
)
|
|
|
|
|
F-6
CBDMD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019
(continued)
|
Cash
flows from financing activities:
|
|
|
|
Proceeds
from issuance of common stock
|
16,766,106
|
19,009,897
|
|
Proceeds
from issuance of preferred stock
|
4,421,928
|
-
|
|
Proceeds
from Paycheck Protection Program loan
|
1,456,100
|
-
|
|
Preferred
dividend distribution
|
(366,850
)
|
-
|
|
Proceeds
from Note payable
|
29,629
|
-
|
|
Payments
on Note payable – related party
|
-
|
(764,300
)
|
|
Deferred
issuance costs
|
62,197
|
(326,868
)
|
|
Cash provided by
financing activities
|
22,369,110
|
17,918,729
|
|
Net increase in
cash
|
10,134,678
|
407,413
|
|
Cash and cash
equivalents, beginning of year
|
4,689,966
|
4,282,553
|
|
Cash
and cash equivalents, end of year
|
$
14,824,644
|
$
4,689,966
|
Supplemental Disclosures of Cash Flow Information:
|
|
2020
|
2019
|
|
|
|
|
|
Cash Payments
for:
|
|
|
|
Interest
expense
|
$
33,693
|
$
39,295
|
|
Non-cash financial
/ investing activities:
|
|
|
|
Stock received for
prior period services, adjusted for other accounts receivable write
down prior to receipt – from discontinued
operations
|
$
-
|
$
1,352,000
|
|
Warrants issued to
secondary selling agent
|
$
524,113
|
309,592
|
|
Adoption of ASU
2016-01
|
$
-
|
$
2,512,539
|
|
Acquisition of
property and equipment through a capital finance
arrangement
|
$
-
|
$
249,100
|
|
Value of Earn Out
stock transferred for contingent liability
|
$
4,620,000
|
-
|
See
Notes to Consolidated Financial Statements
F-7
CBDMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)
EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019
|
|
Common stock
|
Preferred stock
|
Additional
|
Other Comprehensive
|
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Paid-in Capital
|
Income(loss)
|
Accumulated Deficit
|
Total
|
|
Balance, September 30, 2019
|
27,720,356
|
$
27,720
|
-
|
$
-
|
$
97,186,524
|
-
|
$
(59,610,260
)
|
$
37,603,984
|
|
Issuance of
Preferred stock
|
-
|
-
|
500,000
|
500
|
4,421,428
|
-
|
-
|
4,421,928
|
|
Issuance of
options for share based compensation
|
-
|
-
|
|
|
542,574
|
-
|
-
|
542,574
|
|
Issuance of
stock costs
|
-
|
-
|
|
|
(31,757
)
|
-
|
-
|
(31,757
)
|
|
Issuance of
restricted stock for share based compensation
|
-
|
-
|
-
|
-
|
138,000
|
-
|
-
|
138,000
|
|
Preferred
dividend
|
-
|
-
|
-
|
-
|
-
|
-
|
(66,734
)
|
(66,734
)
|
|
Adoption of
ASU 2016-02
|
-
|
-
|
-
|
-
|
-
|
-
|
(13,528
)
|
(13,528
)
|
|
Net Income
(loss)
|
-
|
-
|
|
|
-
|
-
|
12,929,763
|
12,929,763
|
|
Balance, December 31, 2019
|
27,720,356
|
27,720
|
500,000
|
500
|
102,256,769
|
-
|
(46,760,759
)
|
55,524,230
|
|
Issuance of
common stock
|
23,585,292
|
23,586
|
-
|
-
|
21,362,521
|
-
|
-
|
21,386,107
|
|
Issuance of
options for share based compensation
|
-
|
-
|
-
|
-
|
429,651
|
-
|
-
|
429,651
|
|
Issuance of
stock/warrants for services
|
30,000
|
30
|
-
|
-
|
33,870
|
-
|
-
|
33,900
|
|
Preferred
dividend
|
-
|
-
|
-
|
-
|
-
|
-
|
(100,016
)
|
(100,016
)
|
|
Net Income
(loss)
|
-
|
-
|
-
|
-
|
-
|
-
|
14,883,772
|
14,883,772
|
|
Balance, March 31, 2020
|
51,335,648
|
51,336
|
500,000
|
500
|
124,082,811
|
-
|
(31,977,003
)
|
92,157,644
|
|
Issuance of
options for share based compensation
|
-
|
-
|
-
|
-
|
419,045
|
-
|
-
|
419,045
|
|
Issuance of
stock/warrants for services
|
10,000
|
10
|
-
|
-
|
56,190
|
-
|
-
|
56,200
|
|
Preferred
dividend
|
-
|
-
|
-
|
-
|
-
|
-
|
(100,050
)
|
(100,050
)
|
|
Net Income
(loss)
|
-
|
-
|
-
|
-
|
-
|
-
|
(8,952,702
)
|
(8,952,702
)
|
|
Balance, June 30, 2020
|
51,345,648
|
51,346
|
500,000
|
500
|
124,558,046
|
-
|
(41,029,755
)
|
83,580,137
|
|
Issuance of
common stock
|
25,222
|
25
|
-
|
-
|
(25
)
|
-
|
-
|
-
|
|
Issuance of
options for share based compensation
|
-
|
-
|
-
|
-
|
508,923
|
-
|
-
|
508,923
|
|
Issuance of
stock/warrants for services
|
760,000
|
760
|
-
|
-
|
1,450,840
|
-
|
-
|
1,451,600
|
|
Preferred
dividend
|
-
|
-
|
-
|
-
|
-
|
-
|
(100,050
)
|
(100,050
)
|
|
Net Income
(loss)
|
-
|
-
|
-
|
-
|
-
|
-
|
(6,258,562
)
|
(6,258,562
)
|
|
Balance, September 30, 2020
|
52,130,870
|
$
52,131
|
500,000
|
$
500
|
$
126,517,784
|
-
|
$
(47,388,367
)
|
$
79,182,048
|
F-8
CBDMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)
EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019
|
|
Common Stock
|
Additional
|
Other Comprehensive
|
Accumulated
|
Non-controlling
|
|
|
|
|
Shares
|
Amount
|
Paid-in Capital
|
Income(loss)
|
Accumulated Deficit
|
Interest
|
Total
|
|
Balance, September 30, 2018
|
8,123,928
|
$
8,124
|
$
21,781,095
|
$
(2,512,539
)
|
$
(6,669,497
)
|
$
1,411,972
|
$
14,019,155
|
|
Issuance of
common stock
|
1,971,428
|
1,971
|
6,355,027
|
-
|
-
|
-
|
6,356,998
|
|
Issuance of
options for share based compensation
|
-
|
-
|
143,673
|
-
|
-
|
-
|
143,673
|
|
Issuance of
stock costs
|
-
|
-
|
(205,569
)
|
-
|
-
|
-
|
(205,569
)
|
|
Adoption of
ASU 2016-01
|
-
|
-
|
-
|
2,512,539
|
(2,512,539
)
|
-
|
-
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(2,109,715
)
|
(79,149
)
|
(2,188,864
)
|
|
Balance, December 31, 2018
|
10,095,356
|
10,095
|
28,074,224
|
-
|
(11,291,751
)
|
1,332,823
|
18,125,391
|
|
Issuance of
options for share based compensation
|
-
|
-
|
19,475
|
-
|
-
|
-
|
19,475
|
|
Issuance of
stock and warrants for services
|
75,000
|
75
|
289,675
|
-
|
-
|
-
|
289,750
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(31,791,738
)
|
(58,536
)
|
(31,850,274
)
|
|
Balance, March 31, 2019
|
10,170,356
|
10,170
|
28,383,374
|
-
|
(43,083,489
)
|
1,274,287
|
(13,415,658
)
|
|
Issuance of
common stock for merger
|
15,250,000
|
15,250
|
53,199,913
|
-
|
-
|
-
|
53,215,163
|
|
Issuance of
common stock
|
2,300,000
|
2,300
|
12,650,600
|
-
|
-
|
-
|
12,652,900
|
|
Issuance of
options for share based compensation
|
-
|
-
|
1,859,664
|
-
|
-
|
-
|
1,859,664
|
|
Issuance of
stock costs
|
-
|
-
|
(55,393
)
|
-
|
-
|
-
|
(55,393
)
|
|
Issuance of
stock and warrants for services
|
|
|
92,000
|
-
|
-
|
-
|
92,000
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(27,699,247
)
|
(1,503,707
)
|
(29,202,954
)
|
|
Balance, June 30, 2019
|
27,720,356
|
27,720
|
96,130,158
|
-
|
(70,782,736
)
|
(229,420
)
|
25,145,722
|
|
Issuance of
options for share based compensation
|
-
|
-
|
573,718
|
-
|
-
|
-
|
573,718
|
|
Transfer NCI
to APIC (see Note14)
|
-
|
-
|
482,648
|
-
|
-
|
(482,648
)
|
-
|
|
Net income
(loss)
|
-
|
-
|
-
|
-
|
11,172,476
|
712,068
|
11,884,544
|
|
Balance, September 30, 2019
|
27,720,356
|
$
27,720
|
$
97,186,524
|
$
-
|
$
(59,610,260
)
|
$
-
|
$
37,603,984
|
See
Notes to Consolidated Financial Statements
F-9
CBDMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
cbdMD,
Inc. ("cbdMD", "we", "us", “our”, "Parent
Company” or the “Company”) is a North Carolina
corporation formed on March 17, 2015 as Level Beauty Group, Inc. In
November 2016 we changed the name of the Company to Level Brands,
Inc.
On April 22, 2019, following
approval by our shareholders at the 2019 annual meeting held on
April 19, 2019, we filed Articles of Amendment to our Articles of
Incorporation changing the name of our Company to “cbdMD,
Inc.” effective May 1, 2019.
We operate from our
offices located in Charlotte, North Carolina. Our fiscal year end
is established as September 30.
On December 20, 2018 the Company, and its newly organized
wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, completed a
two-step merger (the “Mergers”) with Cure Based
Development, LLC, a Nevada limited liability company (“Cure
Based Development”). Upon completion of the Mergers, cbdMD
LLC survived and operates the prior business of Cure Based
Development. On April 10, 2019, cbdMD LLC was renamed to CBD
Industries LLC (“CBDI”). As consideration for the
Mergers, the Company had a contractual obligation, after approval
by our shareholders, to issue 15,250,000 shares of our common stock
to the members of Cure Based Development, of which 8,750,000 of the
shares will vest over a five year period and are subject to a
voting proxy agreement, as well as to issue another 15,250,000
shares of our common stock in the future upon earnout goals being
within the next 5 years. The Company’s shareholders approved
the issuance of the 15,250,000 shares of common stock and they were
issued to members of Cure Based Development on April 19, 2019. CBDI
produces
and distributes
various high-grade, premium
cannabidiol oil (“CBD”) products under the cbdMD brand.
CBD is a natural substance produced from the hemp plant and the
products manufactured by CBDI are non psychoactive as they do not
contain tetrahydrocannabinol (THC).
On October 22, 2019, cbdMD, Inc. filed Articles of Incorporation
with the Secretary of State of North Carolina to form a new
wholly-owned subsidiary, Paw CBD, Inc. (“Paw CBD”), in
conjunction with the organization of its animal health division. In
the third quarter of fiscal 2019 cbdMD, Inc. launched its new CBD
pet brand, Paw CBD. Following the initial positive response to the
brand from retailers and consumers, cbdMD, Inc. organized Paw CBD,
Inc. as a separate wholly-owned subsidiary in an effort to take
advantage of its early mover status in the CBD animal health
industry.
Effective
September 30, 2019, the Company abandoned and ceased operations of
four business subsidiaries: Encore Endeavor 1, LLC
(“EE1”), I’M1, LLC (“IM1”), Beauty
and Pin Ups, LLC (“BPU”) and Level H&W, LLC
(“Level H&W”). Therefore, the results of operations
related to these subsidiaries for the Company are reported as
discontinued operations.
Principles of Consolidation
The
consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary CBDI and Paw CBD. All
material intercompany transactions and balances have been
eliminated in consolidation.
Use of Estimates
The preparation of the Company's consolidated financial statements
have been prepared in accordance with
accounting principles
generally accepted in the United States (“
US GAAP”), and requires management to make
estimates and assumptions that affect amounts of assets and
liabilities and disclosures of contingent assets and liabilities as
of the date of the financial statements and reported amounts of
revenues and expenses during the periods presented. Estimates and
assumptions are reviewed periodically and the effects of revisions
are reflected in the consolidated financial statements in the
period they are determined to be necessary. Significant estimates
made in the accompanying consolidated financial statements include,
but are not limited to, allowances for doubtful accounts, inventory
valuation reserves, expected sales returns and allowances, certain
assumptions related to the valuation of investments other
securities, acquired intangible and long-lived assets and the
recoverability of intangible and long-lived assets and income
taxes, including deferred tax valuation allowances and reserves for
estimated tax liabilities, contingent liability and, hence
consideration for the Mergers is a material estimate. Actual
results could differ from these estimates.
On March 11, 2020, the World Health Organization declared the
COVID-19 outbreak to be a global pandemic (“COVID-19”).
In response to this declaration and the rapid spread of COVID-19
within the United States, federal, state and local governments
throughout the country have imposed varying degrees of restriction
on social and commercial activity to promote social distancing in
an effort to slow the spread of the illness. These measures have
had a significant adverse impact upon many sectors of the economy,
including retail commerce.
The
Company is continuing to monitor data related to impact of the
COVID-19 pandemic and a
t this
time, based upon the available data, does not believe there would
be an impact on inputs used for estimates and
assumptions.
F-10
Cash and Cash Equivalents
For
financial statements purposes, the Company considers all highly
liquid investments with a maturity of less than three months when
acquired to be cash equivalents.
Accounts receivable and Accounts receivable other
Accounts
receivable are stated at cost less an allowance for doubtful
accounts, if applicable. Credit can be extended to wholesale and
retail customers after an evaluation of customer’s financial
condition, and generally collateral is not required as a condition
of credit extension. Management’s determination of the
allowance for doubtful accounts is based on an evaluation of the
receivables, past experience, current economic conditions, and
other risks inherent in the receivable’s portfolio.
As of September 30, 2020, and 2019, we
have an allowance for doubtful accounts of $20,664 and $7,286,
respectively.
In
addition, the Company has in the past entered into contracts where
a portion of the consideration provided by the customer in exchange
for the Company's services is common stock, options or
warrants (an equity position). In these situations, upon
invoicing the customer for the stock or other instruments, the
Company will record the receivable as accounts receivable other and
use the value of the stock or other instrument upon invoicing to
determine the value. Where an accounts receivable is settled with
the receipt of the common stock or other instrument, the common
stock or other instrument will be classified as an asset on the
balance sheet as either an investment marketable security (when the
customer is a publicly traded entity) or as an investment other
security (when the customer is a privately held
entity).
Receivable and Merchant Reserve
The Company primarily sells its products through the internet and
has an arrangement to process customer payments with third-party
payment processors, and will negotiate the fee based on the market.
The arrangement with the payment processors requires that the
Company pay a fee between 4.0% - 5.2% of the transaction amounts
processed. Pursuant to this agreement, there can be a waiting
period between 2 - 5 days prior to reimbursement to the Company,
and as well as a calculated reserve which some payment processors
hold back. Fees and reserves can change periodically with notice
from the processors. At September 30, 2020, the receivable from
payment processors included approximately $240,798 for the waiting
period amount and is recorded as accounts receivable in the
accompanying consolidated balance sheets.
Marketable Securities
Marketable
securities that are equity securities are carried at fair value on
the consolidated balance sheets with changes in fair value recorded
as an unrealized gain or (loss) in the Consolidated Statements of
Operations in the period of the change. Upon the disposition of a
marketable security, the Company records a realized gain or (loss)
on the Company’s consolidated statements of
operations.
Investment Other Securities
For
equity investments where the Company neither controls nor has
significant influence over the investee and which are
non-marketable, which is without a readily determinable fair value,
the Company may elect to estimate its fair value at cost less
impairment plus or minus changes resulting from observable price
changes.
Inventory
Inventory
is stated at the lower of cost or net realizable value with cost
being determined on a weighted average basis. The cost of inventory
includes product cost, freight-in, and production fill and labor
(portions of which we outsource to third party manufacturers).
Write-offs of potentially slow moving or damaged inventory are
recorded based on management’s analysis of inventory levels,
forecasted future sales volume and pricing and through specific
identification of obsolete or damaged products. We assess inventory
quarterly for slow moving products and potential impairments and at
a minimum perform a physical inventory count annually near fiscal
year end.
Customer Deposits
Customer
deposits consist of payments received in advance of revenue
recognition. Revenue is recognized as revenue recognition criteria
are met.
F-11
Property and Equipment
Property and equipment items are stated at cost less accumulated
depreciation. Expenditures for routine maintenance and repairs are
charged to operations as incurred. Depreciation is charged to
expense over the estimated useful lives of the assets using the
straight-line method. Generally, the useful lives are five years
for manufacturing equipment and automobiles, three years for
computer, furniture and equipment, three years for software, and
leasehold improvements are over the term of the lease. The cost and
accumulated depreciation of property are eliminated from the
accounts upon disposal, and any resulting gain or loss is included
in the consolidated statements of operations for the applicable
period. Long-lived assets held and used by the Company are reviewed
for impairment whenever changes in circumstance indicate the
carrying value of an asset may not be recoverable.
Fair value accounting
The
Company utilizes accounting standards for fair value, which include
the definition of fair value, the framework for measuring fair
value, and disclosures about fair value measurements. Fair value is
a market-based measurement, not an entity-specific measurement.
Therefore, a fair value measurement should be determined based on
the assumptions that market participants would use in pricing the
asset or liability. As a basis for considering market participant
assumptions in fair value measurements, fair value accounting
standards establish a fair value hierarchy that distinguishes
between market participant assumptions based on market data
obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2
of the hierarchy) and the reporting entity’s own assumptions
about market participant assumptions (unobservable inputs
classified within Level 3 of the hierarchy).
Level 1
inputs utilize quoted prices in active markets for identical assets
or liabilities that the Company has the ability to access.
Level 2 inputs are inputs other than quoted prices included in
Level 1 that are directly or indirectly observable for the
asset or liability. Level 2 inputs may include quoted prices
for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability. Level 3
inputs are unobservable inputs for the asset or liability, which
are based on an entity’s own assumptions, as there is little,
if any, observable market activity. In instances where the fair
value measurement is based on inputs from different levels of the
fair value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value
measurement in its entirety. The Company’s assessment of the
significance of a particular input to the fair value measurement in
its entirety requires judgment and considers factors specific to
the asset or liability.
When
the Company records an investment in marketable securities the
carrying value is assigned at fair value. Any changes in fair
value for marketable securities during a given period will be
recorded as an unrealized gain or loss in the consolidated
statement of operations. For investment other securities without a
readily determinable fair value, the Company may elect to estimate
its fair value at cost less impairment plus or minus changes
resulting from observable price changes.
Goodwill
Goodwill
represents the excess of cost of an acquired business over the fair
value of the identifiable tangible and intangible assets acquired
and liabilities assumed in a business combination. Identifiable
intangible assets acquired in business combinations are recorded
based on their fair values at the date of acquisition. Goodwill is
not subject to amortization but must be evaluated for impairment
annually. The Company tests for goodwill impairment annually or
whenever events occur or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its
carrying amount.
In performing a goodwill test, the Company performs a qualitative
evaluation and if necessary, a quantitative evaluation. Factors
considered in the qualitative test include specific operating
results as well as new events and circumstances impacting the
operations or cash flows of the business acquired. For the
quantitative test, the Company assesses goodwill for impairment by
comparing the carrying value of the business to the respective fair
value. The Company determines the fair value of its acquired
business using a combination of income-based and market-based
approaches and incorporates assumptions it believes market
participants would utilize. The income-based approach utilizes
discounted cash flows while the market-based approach utilizes
market multiples. These approaches are dependent upon internally
developed forecasts that are based upon annual budgets and
longer-range strategic plans. The Company uses discount rates that
are commensurate with the risks and uncertainty inherent in the
respective acquired business and in the internally developed
forecasts. The Company has analyzed a variety of factors in light
of the known impact to date of the COVID-19 pandemic on its
business to determine if a circumstance could trigger an impairment
loss, and, at this time and based on the information presently
known, does not believe that it is more likely than not that an
impairment loss has been incurred.
F-12
Intangible Assets
The
Company's intangible assets consist of trademarks and other
intellectual property, all of which are accounted for in accordance
with ASC Topic 350, Intangibles – Goodwill and Other. The
Company employs the non-amortization approach to account for
purchased intangible assets having indefinite lives. Under the
non-amortization approach, intangible assets having indefinite
lives are not amortized into the results of operations, but instead
are reviewed annually or more frequently if events or changes in
circumstances indicate that the assets might be impaired, to assess
whether their fair value exceeds their carrying value. We perform
an impairment analysis at August 1 annually on the indefinite-lived
intangible assets following the steps laid out in ASC 350-30-35-18.
Our annual impairment analysis includes a qualitative assessment to
determine if it is necessary to perform the quantitative impairment
test. In performing a qualitative assessment, we review events and
circumstances that could affect the significant inputs used to
determine if the fair value is less than the carrying value of the
intangible assets. If a quantitative analysis is necessary, we
would analyze various aspects including revenues from the business,
associated with the intangible assets. In addition, intangible
assets will be tested on an interim basis if an event or
circumstance indicates that it is more likely than not that an
impairment loss has been incurred.
In
addition, the Company has analyzed a variety of factors in light of
the known impact to date of the COVID-19 pandemic on its business
to determine if a circumstance could trigger an impairment loss,
and, at this time has determined there has been no
impairment.
Intangible
assets with finite useful lives are amortized using the
straight-line method over their estimated period of benefit. In
accordance with ASC 360-10-35-21, definite lived intangibles are
reviewed annually or more frequently if events or changes in
circumstances indicate that the assets might be impaired, to assess
whether their fair value exceeds their carrying value.
In
conjunction with any acquisitions, the Company refers to ASC-805 as
amended by Accounting Standards Update (“ASU”) 2017-01
in determining if the Company is acquiring any inputs, processes or
outputs and the impact that such factors would have on the
classification of the acquisition as a business combination or
asset purchase. Additionally, the Company refers to the
aforementioned guidance in reviewing all acquired assets and
assumed liabilities for valuation in a business combination,
including the determination of intangible asset values and
contingent liabilities.
Contingent liability
A significant component of the purchase price consideration for the
Company’s acquisition of Cure Based Development includes a
fixed number of future shares to be issued as well as a variable
number of future shares to be issued based upon the
post-acquisition entity reaching certain specified future revenue
targets, as further described in Note 8. The Company made a
determination of the fair value of the contingent liabilities as
part of the valuation of the assets acquired and liabilities
assumed in the business combination.
The Company recognized both the fixed number of shares to be
issued, and the variable number of shares to be potentially issued,
as contingent liabilities on its Consolidated Balance Sheets. These
contingent liabilities were recorded at fair value upon the
acquisition date and are remeasured quarterly based on the
reassessed fair value as of the end of that quarterly reporting
period. Additionally, as the fixed shares were issued on April 19,
2019, the value of the shares at that time, in the amount of
$53,215,163, was reclassified from contingent liability to
additional paid in capital on the balance sheet. In addition, the
first marking period for the Earnout Shares was December 31, 2019
and based on measurement criteria, 5,127,792 shares were issued on
February 27, 2020
and the value of the shares at that time
in the amount of $4,620,000 was reclassified from the contingent
liability to additional paid in capital on the balance
sheet.
For the fiscal year ended September 30, 2020, the contingent
liabilities associated with the business combination were decreased
by $29,780,000 to reflect their reassessed fair values as of
September 30, 2020. This decrease is reflective of a change in
value on the variable number of shares from September 30, 2019. The
Company updated the forecasts for performance of the
post-acquisition entity based on current trends and performance
that would impact the estimated likelihood that the revenue targets
disclosed in Note 8 would be met. The primary catalyst for the
$29,780,000 decrease in contingent liabilities is the change in the
Company’s share price between September 30, 2019 and
September 30, 2020. These increases or reductions to the contingent
liabilities are reflected within Other Expenses on the consolidated
statements of operations.
Paycheck Protection Program Loan
On
April 27, 2020, we received
a loan in the principal amount of $1,456,100 (the
“SBA Loan”), under the Paycheck Protection Program
(“PPP”), which was established under the recently
enacted Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”) administered by the U.S. Small Business
Administration (the “SBA”). The intent and purpose of
the PPP is to support companies, during the COVID-19 pandemic, by
providing funds for certain specified business expenses, with a
focus on payroll. As a qualifying business as defined by the SBA,
we used the proceeds from this loan to primarily help maintain our
payroll as we navigate our business with a focus on returning to
normal operations. The term of the SBA Loan under a Promissory Note
is two years, though it may be payable sooner in connection with an
event of default. The SBA Loan carries a fixed interest rate of one
percent per year, with the first payment due seven months from the
date of initial cash receipt. Under the CARES Act and the PPP,
certain amounts of loans made under the PPP may be forgiven if the
recipients use the loan proceeds for eligible purposes, including
payroll costs and certain rent or utility costs, and meet other
requirements regarding, among other things, the maintenance of
employment and compensation levels. We used the SBA Loan for
qualifying expenses and intend to apply for forgiveness of the SBA
Loan in accordance with the terms of the CARES
Act.
F-13
In June 2020, the Payroll Protection Program Flexibility Act
(“PPPFA”) was signed into law adjusting certain key
terms of loans issued under the PPP. In accordance with the PPPFA,
the initial deferral period may be extended from six to up to ten
months and the loan maturity may be extended from two to five
years. The PPPFA also provided for certain other changes, including
the extent to which the loan may be forgiven.
As the legal form of the Promissory Note is a debt obligation, the
Company is accounting for it as debt under Accounting Standards
Codification (ASC) 470,
Debt
and recorded an initial liability of $1,456,100 in
the Consolidated Balance Sheet upon receipt of the loan proceeds.
The Company is accruing interest over the term of the loan and is
not imputing additional interest at a market rate because the
guidance on imputing interest in ASC
835-30,
Interest
excludes transactions where interest rates
are prescribed by a government agency. If any amount of the loan is
ultimately forgiven, income from the extinguishment of debt would
be recognized as a gain on loan extinguishment in the consolidated
statement of operations and comprehensive
income.
Revenue Recognition
The
Company adopted ASC 606,
Revenue
from Contracts with Customers
using the modified
retrospective method beginning with our quarter ended December 31,
2018. The adoption of the new revenue standards as of October 1,
2018 did not change the Company’s revenue recognition as the
majority of its revenues continue to be recognized when the
customer takes control of its product, the services have been
rendered, or the usage-based royalty has been earned. As the
Company did not identify any accounting changes that impacted the
amount of reported revenues with respect to any of its revenue
streams, no adjustment to retained earnings was required upon
adoption.
Under
ASC 606, the Company recognizes revenues when its customer obtains
control of promised goods or services, in an amount that reflects
the consideration which it expects to receive in exchange for those
goods. The Company recognizes revenues following the five step
model prescribed under ASC 606: (i) identify contract(s) with a
customer; (ii) identify the performance obligations in the
contract; (iii) determine the transaction price; (iv) allocate the
transaction price to the performance obligations in the contract;
and (v) recognize revenues when (or as) we satisfy the performance
obligation.
Performance Obligations
A
performance obligation is a promise in a contract to transfer a
distinct good or service to a customer. The Company has reviewed
its various revenue streams for its existing contracts under the
five-step approach. The Company has entered into various license
agreements that provide revenues based on guaranteed minimum
royalty payments with additional royalty revenues based on a
percentage of defined sales. Guaranteed minimum royalty payments
(fixed revenue) are recognized on a straight-line basis over the
term of the contract, as defined in each license agreement. Earned
royalties and earned royalties in excess of the fixed revenue
(variable revenue) are recognized as income during the period
corresponding to the licensee’s sales. Earned royalties in
excess of fixed revenue are only recognized when the Company is
reasonably certain that the guaranteed minimums payments for the
period will be exceeded. At September 30, 2020, the Company has no
future performance obligations.
Allocation of transaction price
In our
current business model we do not have contracts with customers
which have multiple elements as revenue is driven purely by online
product sales or purchase order based product sales. However, at
times in the past, the Company had entered into contracts with
customers wherein there were multiple elements that may have
disparate revenue recognition patterns. In such instances, the
Company must allocate the total transaction price to these various
elements. This is achieved by estimating the standalone selling
price of each element, which is the price at which we sell a
promised good or service separately to a customer.
In
circumstances where we have not historically sold relevant products
or services on a standalone basis, the Company utilizes the most
situationally appropriate method of estimating standalone selling
price. These methods include (i) an adjusted market assessment
approach, wherein we refer to prices from our competitors for
similar goods or serves and adjust those prices as necessary to
reflect our typical costs and margins, (ii) an expected cost plus
margin approach, wherein we forecast the costs that we will incur
in satisfying the identified performance obligation and adding an
appropriate margin to such costs, and (iii) a residual approach,
wherein we adjust the total transaction price to remove all
observable standalone selling prices of other goods or services
included in the contract and allocate the entirety of the remaining
contract amount to the remaining obligation.
Revenue recognition
The
Company records revenue from the sale of its products when risk of
loss and title to the product are transferred to the customer,
which is upon shipping (and is typically FOB shipping) which is
when our performance obligation is met. Net sales are comprised of
gross revenues less product returns, trade discounts and customer
allowances, which include costs associated with off-invoice
mark-downs and other price reductions, as well as trade promotions.
These incentive costs are recognized at the later of the date on
which the Company recognizes the related revenue or the date on
which the Company offers the incentive. The Company currently
offers a 60 day, money back guarantee.
In
regard to sales for services provided, the Company records revenue
when the customer has accepted services and the Company has a right
to payment. Based on the contracted services, revenue is recognized
when the Company invoices customers for completed services at
agreed upon rates or revenue is recognized over a fixed period of
time during which the service is performed.
F-14
Disaggregated Revenue
Our
product revenue is generated primarily through two sales channels,
consumer (E-commerce) and wholesale channels. We also generate
service related sales, although this type of revenue is not a
primary focus. We believe that these categories appropriately
reflect how the nature, amount, timing and uncertainty of revenue
and cash flows are impacted by economic factors.
A description of our principal revenue generating activities are as
follows:
-
Consumer
(E-commerce) sales - consumer products sold through our online and
telephonic channels. Revenue is recognized when control of the
merchandise is transferred to the customer, which generally occurs
upon shipment. Payment is typically due prior to the date of
shipment.
-
Wholesale
sales - products sold to our wholesale customers for subsequent
resale. Revenue is recognized when control of the goods is
transferred to the customer, in accordance with the terms of the
applicable agreement. Payment terms vary and can typically be 30
days from the date control over the product is transferred to the
customer.
-
Service
related sales – services provided to organizations typically
consulting services related to branding, marketing, or advisory.
Revenue is recognized when services are delivered to the customer,
in accordance with the terms of the applicable agreement. Payment
terms vary and typically are based on deliverables and agreed upon
timelines.
The
following table represents a disaggregation of revenue by sales
channel:
|
|
Fiscal
2020
|
% of
total
|
Fiscal
2019
|
% of
total
|
|
Wholesale product
sales
|
$
11,377,238
|
27.3
%
|
$
8,878,901
|
37.5
%
|
|
Consumer
(E-commerce) product sales
|
30,456,496
|
72.7
%
|
14,772,650
|
62.5
%
|
|
Total net
sales
|
$
41,883,734
|
|
$
23,651,551
|
|
Contract Balances
Contract
assets represent unbilled receivables and are presented within
accounts receivable, net on the Consolidated Balance Sheets.
Contract liabilities represent unearned revenues and are presented
as deferred revenue or customer deposits on the Consolidated
Balance Sheets.
We have no material contract assets nor contract liabilities at
September 30, 2020.
Cost of Sales
Our cost of sales includes costs associated with distribution, fill
and labor expense, components, manufacturing overhead, third-party
providers, and outbound freight for our products sales, and
includes labor for our service sales. For our product sales
,
cost of sales also includes the cost of refurbishing products
returned by customers that will be offered for resale, if any, and
the cost of inventory write-downs associated with adjustments of
held inventories to their net realizable value. These expenses are
reflected in the Company’s Consolidated Statements of
Operations when the product is sold and net sales revenues are
recognized or, in the case of inventory write-downs, when
circumstances indicate that the carrying value of inventories is in
excess of their net realizable value.
Advertising Costs
The
Company expenses all costs of advertising and related marketing and
promotional costs as incurred. The Company incurred approximately
$9,946,755 and $5,151,795 in advertising and related marketing and
promotional costs included in operating expenses during the years
ended September 30, 2020 and 2019, respectively.
F-15
Shipping and Handling Fees and Costs
All
fees billed to customers for shipping and handling are classified
as a component of sales. All costs associated with shipping and
handling are classified as a component of cost of goods
sold.
Income Taxes
The Parent Company is a North Carolina corporation that is treated
as a corporation for federal and state income tax purposes.
Effective September 30, 2019, the Company abandoned and ceased
operations of EE1, IM1, BPU and Level H&W. As of October 1,
2019, CBDI and Paw CBD are wholly owned subsidiaries and are
disregarded entities for tax purposes and their entire share of
taxable income or loss is included in the tax return of the Parent
Company.
The
Parent Company accounts for income taxes pursuant to the provisions
of the Accounting for Income Taxes topic of the FASB ASC 740 which
requires, among other things, an asset and liability approach to
calculating deferred income taxes. The asset and liability approach
requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and
liabilities. A valuation allowance is provided to offset any net
deferred tax assets for which management believes it is more likely
than not that the net deferred asset will not be
realized.
US GAAP
requires management to evaluate tax positions taken by the Company
and recognize a tax liability (or asset) if the Company has taken
an uncertain tax position that more likely than not would not be
sustained upon examination by the Internal Revenue Service.
Management has analyzed the tax positions taken by the Company, and
has concluded that as of September 30, 2020 and 2019, there were no
uncertain tax positions taken or expected to be taken that would
require recognition of a liability (or asset) or disclosure in the
consolidated financial statements.
Concentrations
Financial
instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and cash equivalents,
accounts receivable, and securities.
The
Company places its cash and cash equivalents on deposit with
financial institutions in the United States. The Federal Deposit
Insurance Corporation (“FDIC”) covers $250,000 for
substantially all depository accounts. The Company from time to
time may have amounts on deposit in excess of the insured limits.
The Company had a $14,287,810 uninsured balance at September 30,
2020 and a $4,097,190 uninsured balance at September 30,
2019.
Concentration
of credit risk with respect to receivables is principally limited
to trade receivables with corporate customers that meet specific
credit policies. Management considers these customer receivables to
represent normal business risk. The Company did not have any
customers that represented a significant amount of our sales for
the year ended September 30, 2020. We have three customers whose
aggregate accounts receivable balance was approximately 56% of the
combined total accounts receivable and accounts receivable
discontinued operations as of September 30, 2020, of which one
customer is from the discontinued operations and accounts for
approximately 31%. The Company did not have any customers that
represented a significant amount of our sales for the year ended
September 30, 2019. We had four customers whose aggregate accounts
receivable balance was approximately 84% of the combined total
accounts receivable and accounts receivable discontinued operations
as of September 30, 2019.
Stock-Based Compensation
We
account for our stock compensation under ASC -718-10-30
“
Compensation - Stock
Compensation
” using the fair value based method. Under
this method, compensation cost is measured at the grant date based
on the value of the award and is recognized over the service
period, which is usually the vesting period. This guidance
establishes standards for the accounting for transactions in which
an entity exchanges its equity instruments for goods or services.
It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the
fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments.
We use
the Black-Scholes model for measuring the fair value of options and
warrants. The stock based fair value compensation is determined as
of the date of the grant or the date at which the performance of
the services is completed (measurement date) and is recognized over
the vesting periods. We recognize forfeitures when they
occur.
F-16
Earnings (Loss) Per Share
The
Company uses ASC 260-10,
“Earnings Per Share”
for
calculating the basic and diluted earnings (loss) per share. The
Company computes basic earnings (loss) per share by dividing net
earnings (loss) attributable to common shareholders by the weighted
average number of common shares outstanding. Common equivalent
shares are excluded from the computation of net earnings (loss) per
share if their effect is anti-dilutive.
Deferred IPO or issuance costs
In
following the guidance under ASC 340-10-S99-1, IPO or issuance
costs directly attributable to an offering of equity securities
have been deferred and charged against the gross proceeds of the
offering as a reduction of additional paid-in capital. These costs
include legal fees related to the registration drafting and
counsel, independent audit costs directly related to the
registration and offering, SEC filing and print related costs,
exchange listing costs, and IPO/issuance roadshow related
costs.
New Accounting Standards
In August 2018, the FASB issued ASU No.
2018-13,
Fair Value Measurement (Topic
820).
The ASU modifies,
removes, and adds several disclosure requirements on fair value
measurements in Topic 820, Fair Value Measurement. The ASU 2018-13
is effective for all entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. The
amendments on changes in unrealized gains and losses, the range and
weighted average of significant unobservable inputs used to develop
Level 3 fair value measurements, and the narrative description of
measurement uncertainty should be applied prospectively for only
the most recent interim or annual period presented in the initial
fiscal year of adoption. All other amendments should be applied
retrospectively to all periods presented upon their effective date.
Early adoption is permitted upon issuance of ASU 2018-13. An entity
is permitted to early adopt any removed or modified disclosures
upon issuance of ASU 2018-13 and delay adoption of the additional
disclosures until their effective date. The Company is evaluating
the effect ASU 2018-13 will have on its consolidated financial
statements and disclosures and has not yet determined the effect of
the standard on its ongoing financial reporting at this
time.
NOTE 2 – ACQUISITIONS
On December 20, 2018 (the “Closing”), the Company, and
its newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD
LLC, both North Carolina limited liability companies, completed a
two-step merger (the “Merger Agreement”) with Cure
Based Development. The Merger Agreement provided that AcqCo LLC
merged with and into Cure Based Development with Cure Based
Development as the surviving entity (the “Merger”), and
immediately thereafter Cure Based Development merged with and into
cbdMD LLC with cbdMD LLC as the surviving entity (the
“Secondary Merger” and collectively with the Merger,
the “Mergers”). cbdMD LLC was renamed on April 10, 2019
to CBDI and has continued as a wholly-owned subsidiary of the
Company and maintains the operations of Cure Based Development
pre-closing. As consideration for the Merger, the Company had a
contractual obligation, after approval by our shareholders, to
issue 15,250,000 shares of our common stock to the members of Cure
Based Development, of which unrestricted voting rights to 8,750,000
of the shares vest over a five year period and are subject to a
voting proxy agreement. The Merger Agreement also provides that an
additional 15,250,000 shares of our common stock can be issued upon
the satisfaction of aggregate net revenue criteria by CBDI, within
60 months following the Closing. The net revenue criteria are:
$20.0, $40.0, $80.0 and $160.0 million, in aggregate $300.0 million
(See Note 8 for more information).
The initial 15,250,000 shares were approved by our shareholders and
issued on April 19, 2019. On February 27, 2020, 5,127,792 shares
were issued upon satisfaction of aggregate net revenue criteria per
the Merger Agreement.
The Company owns 100% of the equity interest of CBDI. The valuation
and purchase price allocation for the Mergers was finalized at
September 30, 2019.
F-17
The
following table presents the final purchase price
allocation:
|
Consideration
|
$
74,353,483
|
|
|
|
|
Assets
acquired:
|
|
|
Cash
and cash equivalents
|
$
1,822,331
|
|
Accounts
receivable
|
850,921
|
|
Inventory
|
1,054,926
|
|
Other
current assets
|
38,745
|
|
Property
and equipment, net
|
723,223
|
|
Intangible
assets
|
21,585,000
|
|
Goodwill
|
54,669,997
|
|
Total
assets acquired
|
80,745,143
|
|
|
|
|
Liabilities
assumed:
|
|
|
Accounts
payable
|
257,081
|
|
Notes
payable – related party
|
764,300
|
|
Customer
deposits - related party
|
265,000
|
|
Accrued
expenses
|
460,979
|
|
Deferred
tax liability
|
4,644,300
|
|
Total
Liabilities assumed
|
6,391,660
|
|
|
|
|
Net
Assets Acquired
|
$
74,353,483
|
The
goodwill generated from this transaction can be attributed to the
benefits the Company expects to realize from the growth strategies
the acquired Company had developed and the entry into an emerging
market with high growth potential. See Note 8 regarding contingent
liability.
In connection with the purchase price allocation, the Company
recorded a deferred tax liability of approximately $4,644,000, with
a corresponding increase to goodwill. The deferred tax liability
established upon the Merger was mainly related to the tax effect of
the acquired intangible assets from Cure Base Development as there
will be no future tax deductions related to the acquired
intangibles, and we have identified these as indefinite-lived
intangible assets.
The
Company also acquired estimated net operating loss carryforwards of
approximately $1,996,000, Under Internal Revenue Code (IRC) Section
382, the use of net operating loss (“NOL”)
carryforwards may be limited to an annual limit if a change in
ownership of a company occurs. The company has recently determined
that an ownership change has occurred, and the annual Section 382
limit related to these NOLs is $0 - (See Note 17 for more
information).
NOTE 3 – MARKETABLE SECURITIES AND INVESTMENT OTHER
SECURITIES
The
Company has, from time to time, entered into contracts where a
portion of the consideration provided by the customer in exchange
for the Company's services was common stock, options or
warrants (an equity position). In these situations, upon
invoicing the customer for the stock or other instruments, the
Company recorded the receivable as accounts receivable other, and
used the value of the stock or other instrument upon invoicing to
determine the value. If there is insufficient data to support the
valuation of the security directly, the Company will value it, and
the underlying revenue, on the estimated fair value of the services
provided. Where an accounts receivable other is settled with the
receipt of the common stock or other instrument, the common stock
or other instrument was classified as an asset on the balance sheet
as either an investment marketable security (when the customer is a
public entity) or as an investment other security (when the
customer is a privately held entity).
F-18
On December 30, 2017 the Company entered into an Agreement with
Isodiol which is a developer of
pharmaceutical grade
phytochemical compounds and a manufacturer and developer of
phytoceutical consumer products.
As payment for these services, the Company has
received 1,226,435 shares of Isodiol common stock between December
31, 2017 and January 2019. The Company also received 38,095 shares
of Isodiol stock upon Isodiol’s acquisition of Kure Corp,
giving the Company a total of 1,264,530 shares. At September 30,
2020 and 2019, the Company had 1,042,193 shares valued at $26,472
and $198,538, respectively.
In September 2020, the Company purchased a membership interest in
Adara Sponsor LLC for $250,000, which along with proceeds from
other investors was utilized as an investment in Adara Acquisition
Corporation (“Adara”), a newly organized blank check
company formed for the purpose of effecting a merger, capital stock
exchange, asset acquisition, stock purchase, reorganization or
similar business combination. The Company has the right to purchase
an additional $750,000 of membership interest in Adara Sponsor LLC.
The investment in Adara is part of a planned initial public
offering and Adara intends to list on the NYSE American once
completed. The focus of targets to pursue for the business
combination are expected to be in the consumer products industry
including business in the health and wellness, ecommerce,
discretionary spending, information technology sectors and related
channels of distribution.
The Company has classified this
investment as Level 3 for fair value measurement purposes as there
are no observable inputs. In valuing the investment, the Company
used the value paid, which was the price offered to all third party
investors.
The
table below summarizes the assets valued at fair value as of
September 30, 2020:
|
|
In Active Markets
for Identical Assets and Liabilities
(Level
1)
|
Significant Other
Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
Total Fair Value at
September 30, 2020
|
|
|
|
|
|
|
|
Marketable
securities
|
$
26,472
|
-
|
$
-
|
$
26,472
|
|
Investment other
securities
|
-
|
-
|
$
250,000
|
$
250,000
|
|
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
Balance at
September 30, 2018
|
$
1,050,961
|
$
-
|
$
1,159,112
|
$
2,210,073
|
|
Receipt of equity
investment upon completion of services
|
$
470,000
|
$
-
|
$
-
|
$
470,000
|
|
Transfer from AR
Other
|
$
1,500,000
|
$
-
|
$
-
|
$
1,500,000
|
|
Sale of
equities
|
$
(382,428
)
|
$
-
|
$
-
|
$
(382,428
)
|
|
Change in value of
equities,
|
$
(2,439,995
)
|
$
-
|
$
(559,112
)
|
$
(2,999,107
)
|
|
Balance at
September 30, 2019
|
$
198,538
|
$
-
|
$
600,000
|
$
798,538
|
|
Change in value of
equities
|
$
(172,066
)
|
$
-
|
$
(600,000
)
|
$
(772,066
)
|
|
Purchase of
Investment
|
$
-
|
$
-
|
$
250,000
|
$
250,000
|
|
Balance at
September 30, 2020
|
$
26,472
|
$
-
|
$
250,000
|
$
276,472
|
F-19
NOTE 4
–
INVENTORY
Inventory at September 30, 2020 and 2019 consists of the
following:
|
|
September
30,
|
September
30,
|
|
|
2020
|
2019
|
|
Finished
goods
|
$
2,706,518
|
$
3,050,120
|
|
Inventory
components
|
1,982,021
|
1,251,466
|
|
Inventory
reserve
|
(85,179
)
|
-
|
|
Inventory
prepaid
|
288,178
|
903,458
|
|
Total
|
$
4,891,538
|
$
5,205,044
|
Abnormal amounts of idle facility expense, freight, handling
costs, scrap, and wasted material (spoilage) are expensed in the
period they are incurred, and an inventory reserve has been
established for this purpose. For fiscal 2020 the Company wrote off
approximately $1,703,000 of inventory due to scrap, discontinued
product, and net realizable value adjustments as compared to
approximately $376,000 for fiscal 2019. During the years ended
September 30, 2020 and 2019, the Company incurred a one-time
abnormal charge of $233,372 and $0, respectively due to the
scrapping of certain inventory during the period. This charge was
recorded in Operating Expense.
NOTE 5
–
PROPERTY AND EQUIPMENT
Major classes of property and equipment at September 30, 2020 and
2019 consist of the following:
|
|
September
30,
|
September
30,
|
|
|
2020
|
2019
|
|
Computers,
furniture and equipment
|
$
365,638
|
$
131,077
|
|
Manufacturing
equipment
|
2,873,598
|
1,375,986
|
|
Leasehold
improvements
|
832,465
|
375,954
|
|
Automobiles
|
24,892
|
24,892
|
|
|
4,096,594
|
1,907,909
|
|
Less
accumulated depreciation
|
(913,106
)
|
(192,352
)
|
|
Total
Net property and equipment
|
$
3,183,487
|
$
1,715,557
|
Depreciation expense for continuing operations related to property
and equipment was $720,755 and $187,987 for the years ended
September 30, 2020 and 2019, respectively. Depreciation expense for
discontinued operations related to property and equipment was
$9,861 for the year ended September 30, 2019.
NOTE 6 – INTANGIBLE ASSETS
On
December 20, 2018, the Company completed the Mergers with Cure
Based Development and acquired certain assets, including the
trademark "cbdMD" and its variants and certain other intellectual
property. The trademark is the cornerstone of this subsidiary and
is key as we create and distribute products and continue to build
this brand. We believe the trademark does not have limits on the
time it will contribute to the generation of cash flows and
therefore we have identified these as indefinite-lived intangible
assets (s
ee Note 2 for more
information).
In September 2019, the Company purchased the rights to the
trademark name HempMD for $50,000. This trademark will be used in
the marketing and branding of certain products to be released under
this brand name. We believe the trademark does not have limits on
the time it will contribute to the generation of cash flows and
therefore we have identified these as indefinite-lived intangible
assets.
F-20
Intangible
assets as of September 30, 2020 and 2019 consisted of the
following:
|
|
September
30,
|
September
30,
|
|
|
2020
|
2019
|
|
Trademark related
to cbdMD
|
$
21,585,000
|
$
21,585,000
|
|
Trademark for
HempMD
|
50,000
|
50,000
|
|
Total
|
21,635,000
|
21,635,000
|
The
Company performs an impairment analysis at August 1 annually on the
indefinite-lived intangible assets following the guidance in ASC
350-30-35-18. Fair value referenced here is determined using the
guidance in FASB ASC Topic 820. Our annual impairment analysis
includes a qualitative assessment to determine if it is necessary
to perform the quantitative impairment test. In performing a
qualitative assessment, we review events and circumstances that
could affect the significant inputs used to determine if the fair
value is less than the carrying value of the intangible assets. In
addition, intangible assets will be tested on an interim basis if
an event or circumstance indicates that it is more likely than not
that an impairment loss has been incurred and the Company evaluates
the indefinite-lived intangible assets each reporting period to
determine whether events and circumstances continue to support an
indefinite useful life. All assets related to the discontinued
operations were impaired at September 30, 2019 – see Note 16
for impairments related to discontinued operations.
In
light of the COVID-19 global pandemic and the impact of volatility
resulting in a downturn in general business conditions, we have
assessed the current environment, business operations and reviewed
various items including those listed below to determine whether the
current circumstances indicate that it is more likely than not that
an impairment has been incurred to an indefinite lived intangible
asset:
●
Our current
business revenue has not declined;
●
Our supply chains
have not been impacted;
●
Our workforce has
been able to successfully conduct business, manufacture products
and service our customers;
●
We have not had an
impact on customer payments for products;
●
The business has
continued to exceed internal projections;
●
Our market
capitalization has not declined during COVID-19; and
●
Finally, we
assessed the current state of COVID-19. As this is a relatively new
development, approximately six months old, we do not believe there
is enough information to determine the overall long term impact on
business, the economy and the market,
The
Company performed a qualitative and quantitative analysis for the
year ended September 30, 2020 and has determined there has been no
impairment.
F-21
NOTE 7 – PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The
following unaudited pro-forma data summarizes the results of
operations for the year ended September 30, 2020 and 2019, as if
the Mergers with Cure Based Development had been completed on
October 1, 2017. The pro-forma financial information is presented
for informational purposes only and is not indicative of the
results of operations that would have been achieved if the Mergers
had taken place on October 1, 2017. The pro-forma financial
information represents the continuing operations only.
|
|
Fiscal
Year Ended
September
30, 2020
|
Fiscal
Year Ended
September
30, 2019
|
|
|
|
|
|
Net
sales
|
$
N/A*
|
$
26,734,979
|
|
Operating
income (loss)
|
$
N/A*
|
$
(15,997,942
)
|
|
Net
income (loss)
|
$
N/A*
|
$
(51,687,603
)
|
|
Net
income per share – average weighted shares
|
$
N/A*
|
$
(1.86
)
|
|
Net
income per share – fully diluted
|
$
N/A*
|
$
(1.86
)
|
* All
entities were consolidated effective December 20, 2018 therefore,
the results of operations are included in these consolidated
financial statements.
For the
per share calculation prior to April 2019, it is being assumed that
the shares to be issued contractually under the Merger Agreement,
upon shareholder approval, were issued at the beginning of each
period. This would account for an additional 6,500,000 shares
issued directly to the members of Cure Based Development and
another 8,750,000 shares issued which would have a voting proxy and
leak out on voting rights over a 5 year period.
NOTE 8 – CONTINGENT LIABILITY
As consideration for the Mergers, described in Note 2, the Company
has a contractual obligation to issue 15,250,000 shares of our
common stock, after approval by our shareholders, to the members of
Cure Based Development, issued in two tranches 6,500,000 and
8,750,000, both of which are subject to leak out provisions, and
the 8,750,000 tranche of shares will also vest over a five year
period and are subject to a voting proxy agreement. The Merger
Agreement also provides that an additional 15,250,000 shares of our
common stock can be issued upon the satisfaction of certain
aggregate net revenue criteria by cbdMD within 60 months following
the Closing Date (“earn out”).
The
contractual obligations and earn out provision are accounted for as
a contingent liability and fair value is determined using Level 3
inputs, as estimating the fair value of these contingent
liabilities require the use of significant and subjective inputs
that may and are likely to change over the duration of the
liabilities with related changes in internal and external market
factors.
The
initial two tranches totaling 15,250,000 shares were valued using a
market approach method and included the use of the following
inputs: share price upon contractual obligation, discount for lack
of marketability to address leak out restrictions, and probability
of shareholder disapproval. In addition, the 8,750,000 shares in
the second tranche also included an input for a discount for lack
of voting rights during the vest periods.
The
Merger Agreement also provides that an additional 15,250,000 shares
(Earnout Shares) would be issued as part of the consideration for
the Mergers, upon the satisfaction of certain aggregate net revenue
criteria by cbdMD within 60 months following the Closing Date as
follows, as measured at four intervals (Marking Period): the
completion of 12, 24, 42, and 59 calendar months from the Closing
Date, and based upon the ratios set forth below:
|
Aggregate Net Revenues
|
|
Shares Issued / Each $ of Aggregate Net Revenue
Ratio
|
|
|
|
|
|
$1 -
$20,000,000
|
|
.190625
|
|
$20,000,001
- $60,000,000
|
|
.0953125
|
|
$60,000,001
- $140,000,000
|
|
.04765625
|
|
$140,000,001
- $300,000,000
|
|
.023828125
|
F-22
For
clarification purposes, the Aggregate Net Revenues during a Marking
Period shall be multiplied by the applicable Shares Issued/Each $
of Aggregate Net Revenue Ratio, minus, the number of shares issued
as a result of Aggregate Net Revenues during the prior Marking
Periods.
The initial 15,250,000 shares and the Earnout Shares were approved
by our shareholders. The initial shares were issued upon
shareholder approval on April 19, 2019 and had a carrying value of
$53,215,163. Additionally, as the 15,250,000 initial shares were
issued, the value of the shares in the amount of $53,215,163 was
reclassified from the contingent liability to additional paid in
capital on the balance sheet. In addition, the first marking period
for the Earnout Shares was December 31, 2019 and based on
measurement criteria, 5,127,792 shares were issued on February 27,
2020 and had a value of
$4,620,000 which was reclassified
from the contingent liability to additional paid in capital on the
balance sheet.
The
Earnout Shares were valued at $16,200,000 on September 30, 2020 as
compared to $50,600,000 at September 30, 2019. The decrease in
value of the contingent liability of $34,400,000 is recorded in the
Consolidated Balance Sheets and Statement of Operations for the
year ended September 30, 2020 and represents the change in value of
the Earnout Shares of $29,780,000 and the change in value in the
previously issued earnout shares recorded until issuance of
$4,620,000. The Company utilized both a market approach and a Monte
Carlo simulation in valuing the contingent liability and a key
input in both of those methods is the stock price. The main driver
of the change in the value of the Earnout Shares within the
contingent liability was the decrease of the Company’s stock
price, which was $2.00 at September 30, 2020 as compared to $3.96
on September 30, 2019.
NOTE 9 – RELATED PARTY TRANSACTIONS
On December 20, 2018, with the closing of the Merger Agreement with
Cure Based Development, we recognized the following related party
transactions which happened prior to the Mergers:
Cure
Based Development received $90,000 from Verdure Holdings LLC for
future orders of the Company’s products. Verdure Holdings LLC
is an affiliate of the CEO of Cure Based Development. This amount
has been adjusted based on sales to Verdure Holdings subsequent to
the mergers and is recorded at September 30, 2020 and 2019 as
customer deposits - related party on the accompanying balance sheet
of $0 and $7,339, respectively;
Cure
Based Development entered a lease for office space, which also
provides administrative and IT services, from an affiliate of the
CEO of Cure Based Development. The lease was a month to month lease
for $9,166 per month and ended September 2019; and
Cure
Based Development leases its manufacturing facility from an entity
partially owned by an individual who has a contractual right to
receive shares of the Company as part of the Mergers. The current
lease was entered into on December 15, 2018 and ends December 15,
2021 and has been amended at an annual base rent rate of $199,200
allowing for a 3% annual increase. In addition, common area
maintenance rent is set at $25,200 annually. For the years ended
September 30, 2020 and 2019, we had rent expense of approximately
$260,508 and $152,300, respectively.
NOTE 10 – SHAREHOLDERS’ EQUITY
Preferred Stock – We are authorized to issue 50,000,000
shares of preferred stock, par value $0.001 per share. In October
2019, the Company designated 5,000,000 of these shares as 8.0%
Series A Cumulative Convertible Preferred Stock. Our 8.0% Series A
Cumulative Convertible Preferred Stock ranks senior to our common
stock for liquidation or dividend provisions and holders are
entitled to receive cumulative cash dividends at an annual rate of
8.0% payable monthly in arrears for the prior month. The Company
reviewed ASC 480 –
Distinguishing Liabilities
from Equity
in order to
determine the appropriate accounting treatment for the preferred
stock and determined that the preferred stock should be treated as
equity. There were 500,000 shares of 8.0% Series A Cumulative
Convertible Preferred Stock issued and outstanding at September 30,
2020.
The total amount of dividends declared and paid were $366,850 and
$0 for the years ended September 30, 2020 and 2019,
respectively.
Common Stock – We are authorized to issue 150,000,000 shares
of common stock, par value $0.001 per share. There were 52,130,870
and 27,720,356 shares of common stock issued and outstanding at
September 30, 2020 and 2019, respectively.
Preferred stock transactions:
Fiscal 2020:
On October 16, 2019, the Company completed a follow-on firm
commitment underwritten public offering of 500,000 shares of
its
8.0% Series A Cumulative
Convertible Preferred Stock
for
aggregate gross proceeds of $5,000,000. The Company received
approximately $4.5 million in gross proceeds after deducting
underwriting discounts and commissions. The Company also issued to
the selling agent warrants to purchase in aggregate 47,923 shares
of common stock with an exercise price of $3.9125. The warrants
were valued at $178,513 and expire on October 10,
2024.
F-23
Fiscal 2019:
No preferred stock was issued in fiscal 2019.
Common stock transactions:
Fiscal 2020:
On January 14, 2020, the Company completed a
follow-on firm commitment underwritten public
offering of 18,400,000 shares of its common
stock
for aggregate gross proceeds of $18,400,000. The
Company received approximately $16.9 million in net proceeds after
deducting underwriting discounts and commissions. The Company also
issued to the representative of the underwriters warrants to
purchase in aggregate 480,000 shares of common stock with an
exercise price of $1.25. The warrants were valued at $345,600 and
expire on January 14, 2025.
In February 2020, we issued 25,000 shares of our common stock to an
investor relations firm for services. The shares were valued at
$28,250, based on the trading price upon issuance, and is being
amortized and expensed as professional services over the service
period ending January 2021.
In February 2020, we issued 5,000 shares of our common stock to an
employee. The shares were valued at $5,650, based on the trading
price upon issuance, and was expensed as stock based compensation
expense.
In June 2020, we issued 10,000 shares of our common stock, which
were granted as restricted stock awards in June 2019 to an athletic
sponsor. The restricted stock awards vested on June 30, 2020. The
shares were valued at fair market value upon issuance at $56,200
and amortized upon vesting at June 30, 2020 and expensed as
sponsorship expense.
In July 2020, we issued 60,000 shares of our common stock to an
investment banking firm for general financial advisory services.
The shares were valued at $114,600, based on the trading price upon
issuance, and is being amortized and expensed as professional
services over the service period ending June 2021.
In July 2020, we issued 700,000 shares of our common stock to a
company as part of an athletic endorsement agreement. The shares
were valued at fair market value upon issuance at $1,337,000 and
are amortized per the contract ending December 2022 and expensed as
sponsorship expense.
In August 2020, we issued 25,222 shares of our common stock upon
cashless exercise of 37,344 placement warrants previously granted
to an investment banking firm and its affiliates.
Fiscal 2019:
On
October
2, 2018, the Company completed
a secondary public offering of 1,971,428 shares of its common stock
for aggregate gross proceeds of approximately $6.9 million. The
Company received approximately $6.3 million in net proceeds after
deducting underwriting discounts and commissions and other
estimated offering expenses payable by us. The Company also issued
to the representative of the underwriters warrants to purchase in
aggregate 51,429 shares of common stock with an exercise price of
$4.375. The warrants were valued at $86,092 and expire on September
28, 2023.
In January 2019, we issued 25,000 shares of our common stock to an
investment banking firm for general financial advisory services.
The shares were valued at $77,250, based on the trading price upon
issuance, and is being amortized and expensed as professional
services over the service period ending December 2019.
In January 2019, we issued 50,000 shares of our common stock to an
investment banking firm for general advisory and investment bank
services. The shares were valued at $212,500, based on the trading
price upon issuance, and is being amortized and expensed as
professional services over the service period ending April
2020.
F-24
In April 2019, we issued 15,250,000 shares or our common stock as
consideration for the Mergers with Cure Based Development, of which
8,750,000 of the shares will vest over a five year period and are
subject to a voting proxy agreement.
In May 2019, the Company completed a follow-on public offering of
2,300,000 shares of its common stock for aggregate gross proceeds
of $13.8 million. The Company received approximately $12.5 million
in net proceeds after deducting underwriting discounts and
commissions and other estimated offering expenses payable by us.
The Company also issued to the representative of the underwriters
warrants to purchase in aggregate 60,000 shares of common stock
with an exercise price of $7.50. The warrants were valued at
$223,500 and expire on May 15, 2024.
Stock option transactions:
Fiscal 2020:
In December 2019, we granted an aggregate of 280,000 common stock
options to two executives. The options vest 1/3 on January 1, 2020,
1/3 on January 1, 2021 and 1/3 on January 1, 2022, have an exercise
price of $3.15 per share and a term of five years. We have recorded
an expense for the options of $405,396 for the fiscal year ended
September 30, 2020.
In February 2020, we granted an aggregate of 30,000 common stock
options to an employee. The options vest 1/3 at grant, 1/3 on
February 7, 2021, and 1/3 on February 7, 2022, have an exercise
price of $3.15 per share and a term of five years. We have recorded
an expense for the options of $10,100 for the fiscal year ended
September 30, 2020.
In May 2020, we granted per the annual board compensation plan, an
aggregate of 80,000 common stock options to four independent
directors and are expensed over the annual board term. The options
vest immediately, have an exercise price of $1.57 per share and a
term of ten years. We have recorded an expense for the options of
$58,040 for the fiscal year ended September 30, 2020.
In September 2020, we granted an aggregate of 300,000 common stock
options to an employee as part of a severance agreement. The
options vest immediately, have an exercise price of $2.60 per share
and a term of three years. We have recorded an expense for the
options of $273,600 for the fiscal year ended September 30,
2020.
Fiscal 2019:
In August 2019 we granted per the annual board compensation plan,
20,000 common stock options to one non-management director. The
options vest immediately, have an exercise price of $5.41 per share
and a term of ten years. We have recorded an expense for the
options of $83,920 and $0 for the fiscal years ended September 30,
2019 and 2020, respectively.
In May 2019 we granted per the annual board compensation plan, an
aggregate of 120,000 common stock options to six independent
directors. The options vest immediately, have an exercise price of
$5.41 per share and a term of ten years. We have recorded an
expense for the options of $562,440 and $0 for the fiscal years
ended September 30, 2019 and 2020, respectively.
In May 2019 we granted an aggregate of 610,000 common stock options
to twelve employees. The options vary in amounts issued and vesting
tiers, which include no vesting with an exercise price of $6.40,
vesting at May 15, 2020 with an exercise price of $7.00, vesting at
May 15, 2021 with an exercise price of $7.50, and vesting at May
15, 2022 with an exercise price of $7.50. The options have a term
of ten years. We have recorded an expense for the options of
$1,642,530 and $1,095,018 for the fiscal years ended September 30,
2019 and 2020, respectively.
The
expected volatility rate was estimated based on comparison to the
volatility of a peer group of companies in the similar industry.
The expected term used was the full term of the contract for the
issuances. The risk-free interest rate for periods within the
contractual life of the option is based on U.S. Treasury
securities. The pre-vesting forfeiture rate of zero is based upon
the experience of the Company. As required under ASC 718, we will
adjust the estimated forfeiture rate to our actual experience.
Management will continue to assess the assumptions and
methodologies used to calculate estimated fair value of share-based
compensation. Circumstances may change and additional data may
become available over time, which could result in changes to these
assumptions and methodologies, and thereby materially impact our
fair value determination.
The following table summarizes the inputs used for the
Black-Scholes pricing model on the options issued in the years
ended September 30, 2020 and 2019:
|
|
2020
|
2019
|
|
Exercise
price
|
$
1.57-3.15
|
$
5.41-7.50
|
|
Risk free
interest rate
|
0.16-1.64
%
|
2.41-2.47
%
|
|
Volatility
|
95.96-111.31
%
|
89.60-90.68
%
|
|
Expected
term
|
3-10 years
|
10 years
|
|
Dividend
yield
|
None
|
None
|
F-25
Warrant transactions:
Fiscal 2020:
In October 2019 in relation to the follow-on firm commitment
underwritten public offering of the 8.0% Series A Cumulative
Convertible Preferred Stock, we
issued to the representative
of the underwriters warrants to purchase in aggregate 47,923 shares
of common stock with an exercise price of $3.9125. The warrants
expire on October 10, 2024
.
In January 2020 in relation to the follow-on firm commitment
underwritten public offering of the Company’s common stock,
we
issued to the representative of the underwriters warrants
to purchase in aggregate 480,000 shares of common stock with an
exercise price of $1.25. The warrants expire on January 14,
2025
.
Fiscal 2019:
On October 2, 2018 in relation to the secondary public offering,
we
issued to the representative of the underwriters warrants
to purchase in aggregate 51,429 shares of common stock with an
exercise price of $4.375. The warrants expire on September
28
, 2023.
In May 2019 in relation to the secondary public offering, we
issued to the representative of the underwriters warrants to
purchase in aggregate 60,000 shares of common stock with an
exercise price of $7.50. The warrants expire on May 15,
2024
.
The following table summarizes the inputs used for the
Black-Scholes pricing model on the warrants issued in the years
ended September 30, 2020 and 2019:
|
|
2020
|
2019
|
|
Exercise
price
|
$
1.25-3.9125
|
$
4.375-7.50
|
|
Risk free
interest rate
|
1.48-1.63
%
|
2.15-2.90
%
|
|
Volatility
|
95.36-96.85
%
|
70.61-75.03
%
|
|
Expected
term
|
5 years
|
5 years
|
|
Dividend
yield
|
None
|
None
|
NOTE 11 – STOCK-BASED COMPENSATION
Equity Compensation Plan – On June 2, 2015, the
Company’s board of directors approved the 2015 Equity
Compensation Plan (“Plan”). The Plan made 1,175,000
common stock shares, either unissued or reacquired by the Company,
available for awards of options, restricted stock, other stock
grants, or any combination thereof. The number of shares of common
stock available for issuance under the Plan shall automatically
increase on the first trading day of January each calendar year
during the term of the Plan, beginning with calendar year 2016, by
an amount equal to one percent (1%) of the total number of shares
of common stock outstanding on the last trading day in December of
the immediately preceding calendar year, but in no event shall any
such annual increase exceed 100,000 shares of common stock.
Effective September 30, 2019, the adjustment date was changed to
October 1
st
of each year based on total number of
shares outstanding on September 30 of each year. On April 19, 2019,
shareholders approved an amendment to the Plan and increased the
amount of shares available for issuance under the Plan to 2,000,000
and retained the annual evergreen increase provision of the
Plan.
We account for stock-based compensation using the provisions of ASC
718. ASC 718 codification requires companies to
recognize the fair value of stock-based compensation expense in the
financial statements based on the grant date fair value of the
options. We have only awarded stock options since December 2015.
All options are approved by the Compensation Nominating and
Governance Committee of the board of directors. Restricted stock
awards that vest in accordance with service conditions are
amortized over their applicable vesting period using the
straight-line method. The fair value of our stock option awards or
modifications is estimated at the date of grant using the
Black-Scholes option pricing model.
Eligible recipients include employees, officers, directors and
consultants who are deemed to have rendered or to be able to render
significant services to the Company or its subsidiaries and who are
deemed to have contributed or to have the potential to contribute
to the success of the Company. Options granted generally have a
five to ten year term and have vesting terms that cover one to
three years from the date of grant. Certain of the stock options
granted under the plan have been granted pursuant to various stock
option agreements. Each stock option agreement contains specific
terms.
F-26
Stock Options – The Company currently has awards outstanding
with service conditions and graded-vesting features. We recognize
compensation cost on a straight-line basis over the requisite
service period.
The fair value of each time-based award is estimated on the date of
grant using the Black-Scholes option valuation model. Our
weighted-average assumptions used in the Black-Scholes valuation
model for equity awards with time-based vesting provisions granted
during the year.
The
following table summarizes stock option activity under the Plan for
the fiscal years ended September 30, 2020 and 2019:
|
|
Number of
shares
|
Weighted-average
exercise price
|
Weighted-average
remaining contractual term(in years)
|
Aggregate intrinsic
value (in thousands)
|
|
Outstanding at
September 30, 2018
|
469,650
|
$
5.13
|
|
|
|
Granted
|
750,000
|
6.66
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
-
|
-
|
|
|
|
Outstanding at
September 30, 2019
|
1,219,650
|
6.07
|
|
|
|
Granted
|
690,000
|
2.73
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
159,650
|
6.90
|
|
|
|
Outstanding at
September 30, 2020
|
1,750,000
|
$
4.68
|
6.01
|
$
—
|
|
|
|
|
|
|
|
Exercisable at
September 30, 2020
|
1,358,334
|
$
4.54
|
5.92
|
$
—
|
We
recognized $1,900,194 and $2,458,530 of non-cash stock option
expense for the years ended September 30, 2020 and 2019,
respectively. As of September 30, 2020, there was approximately
$669,760 of total unrecognized compensation cost related to
non-vested stock options which vest over a period of approximately
1.6 years.
Restricted Stock Award transactions:
In May 2019 the Company issued 57,500 restricted stock awards in
aggregate to eleven employees. The restricted stock awards vested
January 1, 2020. The stock awards were valued at fair market upon
issuance at $368,000 and amortized over the vesting
period.
We
recognized $138,000 and $230,000 of stock based compensation
expense for the restricted stock awards for the years ended
September 30, 2020 and 2019, respectively.
In June 2019, the Company issued 10,000 restricted stock awards to
a company sponsor. The restricted stock awards vested June 30,
2020. The stock awards were valued at fair market upon issuance at
$56,200 and amortized over the vesting period and were expensed to
sponsorship expense.
F-27
NOTE 12 – WARRANTS
Transactions
involving our equity-classified warrants for the fiscal years
ending September 30, 2020 and 2019 are summarized as
follows:
|
|
Number of
shares
|
Weighted-average
exercise price
|
Weighted-
average remaining
contractual term (in years)
|
Aggregate intrinsic
value (in thousands)
|
|
Outstanding at
September 30, 2018
|
312,176
|
$
6.84
|
|
|
|
Issued
|
111,429
|
6.06
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
-
|
-
|
|
|
|
Outstanding at
September 30, 2019
|
423,605
|
6.64
|
|
|
|
Issued
|
527,923
|
1.49
|
|
|
|
Exercised
|
(37,344
)
|
1.25
|
|
|
|
Forfeited
|
—
|
—
|
|
|
|
Outstanding at
September 30, 2020
|
914,184
|
$
3.88
|
3.23
|
$
—
|
|
|
|
|
|
|
|
Exercisable at
September 30, 2020
|
914,184
|
$
3.88
|
3.23
|
$
—
|
The
following table summarizes outstanding common stock purchase
warrants as of September 30, 2020:
|
|
Number of
shares
|
Weighted-average
exercise price
|
Expiration
|
|
|
|
|
|
|
Exercisable at
$7.80 per share
|
141,676
|
$
7.80
|
September
2021
|
|
Exercisable at
$4.00 per share
|
70,500
|
$
4.00
|
September
2022
|
|
Exercisable at
$7.50 per share
|
100,000
|
$
7.50
|
October
2022
|
|
Exercisable at
$4.375 per share
|
51,429
|
$
4.375
|
September
2023
|
|
Exercisable at
$7.50 per share
|
60,000
|
$
7.50
|
May
2024
|
|
Exercisable at
$3.9125 per share
|
47,923
|
$
3.9125
|
October
2024
|
|
Exercisable at
$1.25 per share
|
442,656
|
$
1.25
|
January
2025
|
|
|
914,184
|
3.89
|
|
NOTE 13 – COMMITMENTS AND CONTINGENCIES
In May 2019, the Company entered into an endorsement agreement with
a professional athlete. The term of the agreement is through
December 31, 2022 and is tied to performance of the athlete in a
number of annual professional events, and also includes promotion
of the Company via social media, wearing of logo during
competition, provide production days for advertising creation and
attend meet and greets. The potential payments, if all services are
provided, in aggregate is $4,900,000 and is paid based on the
services above for the period ending: December 2019 - $400,000,
December 2020 - $800,000, December 2021 - $1,800,000, and December
2022 - $1,900,000. In light of the impact of COVID-19 on events, we
mutually agreed to suspend payments at minimum from March 2020
until June 2020. Effective July 1, 2020, the parties entered into a
new endorsement agreement with the professional athlete amending
certain of the contract terms which superseded the original
agreement. Under the current endorsement agreement potential
payments to the professional athlete are as follows from July 2020
to December 2022 – up to $2,867,000 to be paid in common
stock in three issuances, based on a Volume Weighed Average Price
(“VWAP”) calculation, of which the last two issuances
can be paid in cash at the Company’s option – 700,000
shares valued at $1,337,000 were issued on July 1, 2020, $800,000
paid between July 2021 and December 2021, and $667,000 paid between
July 2022 and December 2022. In addition the Company will make
monthly cash payments as follows from: July 2020 to December 2020 -
$40,000, from January 2021 to June 2021 - $50,000, from July 2021
to December 2021 - $75,000, from January 2022 to June 2022 -
$85,000, and from July 2022 to December 2022 - $100,000. We
recorded sponsorship expense of $577,034 and $150,000 for the
fiscal years ending September 30, 2020 and 2019, respectively, to
sponsorships.
F-28
In September 2019, the Company entered into a sponsorship agreement
with Life Time, Inc, an operator of fitness clubs, facilities and
events. The term of the agreement is through December 31, 2022 and
is tied to the Company being the exclusive CBD company and
performance of Life Time Inc. regarding advertisement, marketing
and display within facilities and at identified events. The
potential payments, if all commitments are met, in aggregate is
$4,900,000 and is to be paid for the period ending: December 2019 -
$1,125,555, December 2020 - $1,258,148, December 2021 - $1,258,148
and December 2022 - $1,258,149. In light of the impact of COVID-19
on the operation of fitness clubs, facilities and events, we had
mutually agreed to suspend payments and will determine if a
contract amendment is warranted based on the opening of Life Time
Inc. facilities and decisions on Life Time Inc. hosted events. We
recorded sponsorship expense of $1,323,000 and $160,555 for the
fiscal years ending September 30, 2020 and 2019,
respectively.
In October 2019, the Company entered into a sponsorship agreement
with Feld Motor Sports to be an official sponsor of the Monster
Energy Cup events through 2021, the United States AMA Supercross
and FIM World Championship events through 2021, and US Supercross
Futures event through 2021. The sponsorship includes various media,
marketing, and promotion activities. The payments in aggregate are
$1,750,000 and is to be paid for the period ending: December 2019 -
$150,000, December 2020 - $800,000 and December 2021 - $800,000. In
light of the impact of COVID-19 on the events, we have provided
notice of termination for the entire agreement and have agreed to
make three monthly payments of $77,430 from April 2020 to June 2020
for services provided in the quarter ending March 31, 2020. We have
recorded expense of $666,831 and $0 for the fiscal years ending
September 30, 2020 and 2019, respectively.
NOTE 14 – NOTE PAYABLE
In July 2019, we entered into a loan arrangement for $249,100 for a
line of equipment (“Equipment Loan 1”), of which
$147,317 and $194,466 are a long term note payable at September 30,
2020 and 2019, respectively, and is included in Long term
liabilities on the Consolidated Balance Sheets. Payments are for 60
months and have a financing rate of 7.01 %, which requires a
monthly payment of $4,905. In January 2020, we entered into a loan
arrangement for $35,660 for equipment (Equipment Loan 2”), of
which $21,138 is a long term note payable at September 30, 2020 and
is included in Long term liabilities on the Consolidated Balance
Sheets. Payments are for 48 months and have a financing rate of
6.2%, which requires a monthly payment of $841.
Future
Loan payment schedule:
|
Note
Payable
|
Total Loan
Balance
|
Fiscal
2021
|
Fiscal
2022
|
Fiscal
2023
|
Fiscal
2024
|
|
Equipment Loan
1
|
$
194,438
|
$
47,148
|
$
50,437
|
$
53,956
|
$
42,897
|
|
Equipment Loan
2
|
$
29,624
|
$
8,491
|
$
9,032
|
$
9,609
|
$
2,492
|
NOTE 15 – LONG TERM LIABILITIES
In April 2020, we applied for an unsecured loan pursuant to the
Paycheck Protection Program (“PPP”) administered by the
United States Small Business Administration (the “SBA”)
and authorized by the Keeping American Workers Employed and Paid
Act, which is part of the
Coronavirus Aid, Relief, and Economic Security Act
(the “CARES Act”)
.
Section 1106 of the Act provides for forgiveness
of up to the full principal amount of qualifying loans guaranteed
under the Paycheck Protection Program. On April 27,
2020, we received the loan from Truist Bank (the
“Lender”) in the principal amount of $1,456,100 (the
“SBA Loan”). The SBA Loan is evidenced by a
promissory note issued by us (the “Note”) to the
Lender.
The term of the Note is two years, though it may be payable sooner
in connection with an event of default under the Note. The SBA Loan
carries a fixed interest rate of one percent per year, with the
first payment due seven months from the date of initial cash
receipt. For the fiscal year ended September 30, 2020 we accrued
interest expense of $6,343 related to the SBA Loan and this is
recorded in accrued expenses on the Consolidated Balance Sheets at
September 30, 2020.
Under the CARES Act and the PPP, certain amounts of loans made
under the PPP may be forgiven if the recipients use the loan
proceeds for eligible purposes, including payroll costs and certain
rent or utility costs, and meet other requirements regarding, among
other things, the maintenance of employment and compensation
levels. We intend to use the SBA Loan for qualifying expenses and
to apply for forgiveness of the SBA Loan in accordance with the
terms of the CARES Act.
F-29
The Note provides for customary events of default, including, among
others, those relating to failure to make payment, bankruptcy,
materially false or misleading representations to the Lender or the
SBA, and adverse changes in our financial condition or business
operations that the Lender believes may materially affect our
ability to pay the SBA Loan.
PPP
Loan payment schedule if not forgiven:
|
|
Total Loan
Balance
|
Fiscal
2021
|
Fiscal
2022
|
|
SBA
Loan
|
$
1,456,100
|
$
854,000
|
$
602,100
|
In June 2020, the Company entered into a separation agreement with
its President. On September 16, 2020, the Company agreed to a
separation agreement with its CFO whereby the Company agreed to pay
compensation and benefits through December 31, 2021 and the CFO
agreed to provide ongoing transition services through February
2021. Included in Long Term liabilities is $95,911 and in accrued
expense is $393,469 related to these separation
agreements
NOTE 16 – DISCONTINUED OPERATIONS
Effective
September 30, 2019, the Company ceased operations of four business
subsidiaries: EE1, IM1, BPU and Level H&W. These subsidiaries
accounted for our licensing, entertainment, and products segments
prior to fiscal 2019 and the Company determined that these business
units were not able to provide support or value to the CBD
business, which the Company is now strategically focused
on.
Therefore,
the Company has classified the operating results of these
subsidiaries as discontinued operations, net of tax in the
Consolidated Statements of Operations.
The
following table shows the summary operating results of the
discontinued operations for the years ended:
|
|
September 30,
|
September 30,
|
|
|
2020
|
2019
|
|
|
|
|
|
Gross
Sales
|
$
-
|
$
888,254
|
|
Allowances
|
-
|
(12,129
)
|
|
Total Net Sales
|
-
|
876,126
|
|
Costs
of sales
|
-
|
604,714
|
|
Gross profit
|
-
|
271,412
|
|
Operating
expenses
|
3,200
|
539,581
|
|
Income (loss) from
operations
|
(3,200
)
|
(268,169
)
|
|
|
|
|
|
Other
income
|
-
|
20,000
|
|
Realized
and Unrealized gain (loss) on marketable securities
|
-
|
(2,337,280
)
|
|
Impairment
on discontinued operations
|
(45,783
)
|
(3,398,450
)
|
|
Loss
on disposal of property
|
-
|
(39,015
)
|
|
Interest
income (expense)
|
-
|
29,141
|
|
Income (loss) before provision
for income taxes
|
(48,983
)
|
(5,993,773
)
|
|
Provision
for income taxes
|
-
|
66,000
|
|
Net Income (loss)
|
(48,983
)
|
(5,927,773
)
|
|
Net
Income (loss) attributable to non-controlling interest
|
$
-
|
$
(929,323
)
|
F-30
The
following table shows the summary assets and liabilities of the
discontinued operations as of September 30, 2020 and
2019.
|
|
2020
|
2019
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
-
|
$
-
|
|
Accounts
receivable
|
447,134
|
1,080,000
|
|
Total
current assets included as part of discontinued
operations
|
447,134
|
1,080,000
|
|
|
|
|
|
Other
assets:
|
|
|
|
Total
other assets included as part of discontinued
operations
|
-
|
-
|
|
|
|
|
|
Total
assets included as part of discontinued operations
|
$
447,134
|
$
1,080,000
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
-
|
$
-
|
|
Total
current liabilities included as part of discontinued
operations
|
-
|
-
|
|
|
|
|
|
Long term
liabilities
|
|
|
|
Total
long term liabilities included as part of discontinued
operations
|
-
|
-
|
|
|
|
|
|
Total
liabilities included as part of discontinued
operations
|
$
-
|
$
-
|
The
following table shows the significant cash flow items from
discontinued operations for the years ended September
30,:
|
|
2020
|
2019
|
|
Depreciation/
amortization
|
$
-
|
$
22,199
|
|
Realized/unrealized
(gain) loss on securities expenditures
|
$
-
|
$
2,337,280
|
|
Impairment on
discontinued operations assets
|
$
45,783
|
$
762,629
|
|
Impairment on
intangibles
|
$
-
|
$
2,635,821
|
|
Non cash
consideration received for services
|
$
-
|
$
(470,000
)
|
On June
26, 2018 the Company entered into an Agreement with Boston
Therapeutics, Inc. (OTC: BTHE), a pharmaceutical company focused on
the development, manufacturing and commercialization of novel
compounds to address unmet medical needs in diabetes.
The agreement involved a licensing
agreement and required the Company to create IP for a branding /
marketing campaign.
As payment for these services, Boston
Therapeutics agreed to pay $850,000, of which $450,000 was issued
as a note due no later than December 31, 2019 and $400,000 to be
paid thru the issuance of BTI common stock based on the trading
price at the agreement date ($0.075). As the stock has not been
issued this is recorded as an other accounts receivable. In June
2019 the Company began the arbitration process to collect amounts
owed and at September 30, 2019 determined the amounts were not
collectible and recorded an impairment for the carrying value of
$53,333 for the other accounts receivable and $450,000 for the note
receivable.
F-31
Effective
September 30, 2019, the Company ceased operations of four business
subsidiaries: EE1, IM1, BPU and Level H&W. Level H&W had an
intangible asset with a carrying value of $958,065 which the
Company recorded an impairment charge at September 30, 2019 for the
full value of $958,065. Previously in fiscal 2019, impairments on
intangible assets in the subsidiaries included $971,667 in IM1,
$471,667 in EE1, and $234,422. In addition, for all subsidiaries,
we had an aggregate impairment on discontinued assets: accounts
receivable, note receivable, and investment other security and
property and equipment of $762,629.
At September 30, 2019, EE1 had an accounts receivable for prior
services delivered to two customers in aggregate of $1,080,000 of
which $1,000,000 was from a related party at the time. At September
30, 2020 the balance on the accounts receivable is $447,134, which
reflects payments made and an impairment of $45,783. At March 31,
2020, one customer has breached their formal agreement on payments
and on April 29, 2020, the Company filed a lawsuit for collection
of this amount and legal fees. On October 16, 2020, the account
receivable balance for this customer of $416,666 was paid in
full.
As two
of the subsidiaries, EE1 and IM1, had minority interests
(non-controlling interests) and all parties agreed to transfer the
non-controlling interest to the Company, we have reclassified the
non-controlling interest balance of $(482,648) to additional paid
in capital as of September 30, 2019.
NOTE 17 – INCOME TAXES
The Company generated operating losses for the years ended
September 30, 2020 and 2019 on which it has recognized a full
valuation allowance. The Company accounts for its state franchise
and minimum taxes as a component of its general and administrative
expenses.
The following table presents the components of the provision for
income taxes from continuing operations for the periods
presented:
|
|
Years Ended
September 30,
|
|
|
|
2020
|
2019
|
|
Current
|
|
|
|
Federal
|
$
—
|
$
—
|
|
State
|
—
|
—
|
|
Total
current
|
—
|
—
|
|
Deferred
|
|
|
|
Federal
|
(1,345,300
)
|
(2,359,000
)
|
|
State
|
-
|
-
|
|
Total
deferred
|
(1,345,300
)
|
(2,359,000
)
|
|
Total
provision
|
$
(1,345,300
)
|
$
(2,359,000
)
|
A reconciliation of the federal statutory income tax rate to the
Company's effective income tax rate is as follows:
|
|
Years Ended
September 30,
|
|
|
|
2020
|
2019
|
|
Federal statutory
income tax rate
|
21.0
%
|
21.0
%
|
|
State income taxes,
net of federal benefit
|
(1.1
)
|
(1.2
)
|
|
Permanent
differences
|
3.1
|
(1.0
)
|
|
Contingent
derivative expense
|
(55.3
)
|
(14.3
)
|
|
Limitation on net
operating losses
|
21.3
|
-
|
|
Tax impact of
non-controlling interest
|
-
|
-
|
|
Change in valuation
allowance
|
(0.9
)
|
0.4
|
|
Reclassification
to discontinued operations
|
-
|
-
|
|
Benefit from
(provision for) income taxes
|
(11.9
)%
|
4.9
%
|
F-32
Significant components of the Company's deferred income taxes are
shown below:
|
|
Years Ended
September 30,
|
|
|
|
2020
|
2019
|
|
Deferred tax
assets:
|
|
|
|
Net operating loss
carryforwards
|
$
5,914,000
|
$
4,933,000
|
|
Capital loss
carryforward
|
616,000
|
485,000
|
|
Allowance for
doubtful accounts
|
5,000
|
95,000
|
|
Stock
compensation
|
691,000
|
510,000
|
|
Investments
|
685,000
|
608,000
|
|
Accrued
expenses
|
444,000
|
66,000
|
|
Inventory
reserve
|
20,000
|
0
|
|
Capitalized
expenses
|
60,000
|
66,000
|
|
Charitable
contributions
|
42,000
|
41,700
|
|
|
|
|
|
Total deferred tax
assets
|
8,477,000
|
6,804,700
|
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
Prepaid
expenses
|
(434,000
)
|
(405,000
)
|
|
Management
fees
|
0
|
0
|
|
Intangibles
|
(4,650,000
)
|
(4,604,000
)
|
|
Fixed
assets
|
(709,000
)
|
(360,000
)
|
|
Total deferred tax
liabilities
|
(5,793,000
)
|
(5,369,000
)
|
|
Net deferred tax
assets
|
2,684,000
|
1,435,700
|
|
Valuation
allowance
|
(3,579,000
)
|
(3,676,000
)
|
|
|
|
|
|
Net
deferred tax liability
|
$
(895,000
)
|
$
(2,240,300
)
|
The Company has established a valuation allowance against net
deferred tax assets due to the uncertainty that such assets will be
realized. The deferred tax liabilities that result from indefinite
life intangibles cannot be offset by deferred tax assets. The
Company periodically evaluates the recoverability of the deferred
tax assets. At such time as it is determined that it is more likely
than not that deferred tax assets will be realizable, the valuation
allowance will be reduced.
Under Internal Revenue Code (IRC) Section 382, the use of net
operating loss (“NOL”) carryforwards may be limited if
a change in ownership of a company occurs. During the year ending
September 30, 2018, the company determined that a change of
ownership under IRC Section 382 had occurred during the years
ending September 30, 2017 and 2015. As a result of these ownership
changes, the pre-ownership change NOL carryforwards would be
limited and approximately $2.1 million of such NOLs will expire
before being utilized. Therefore, at September 30, 2018 the Company
reduced the deferred tax asset and related valuation allowance
associated with these NOLs by approximately $0.5 million due to IRC
Section 382.
During the year ended September 30, 2020, the Company determined
that a change in ownership under IRC had occurred during the year
ending September 30, 2019. As a result of these ownership changes,
the pre-ownership change NOL carryforwards would be limited and
approximately $11.4 million of such NOLs will expire before being
utilized. Therefore, at September 30, 2020 the Company reduced the
deferred tax asset and related valuation allowance associated with
these NOLs by approximately $2.7 million due to IRC Section
382.
The total valuation allowance decreased by $97,000 and increased by
$1,359,000 as of September 30, 2020 and 2019,
respectively.
At September 30, 2020, the Company has utilizable NOL
carryforwards of approximately $25.3 million which for federal
purposes will carryforward indefinitely.
F-33
The Company accounts for its state franchise and minimum taxes as a
component of its general and administrative expenses.
The Company files income tax returns in the United States, and
various state jurisdictions. The Company’s policy is to
recognize interest expense and penalties related to income tax
matters as tax expense. At September 30, 2020 and 2019, there
are no unrecognized tax benefits, and there are no significant
accruals for interest related to unrecognized tax benefits or tax
penalties.
The
CARES Act, which was enacted on March 27, 2020, includes several
significant provisions for corporations, including the usage of net
operating losses and payroll benefits. The Company analyzed the
provisions of the CARES Act and determined there was no effect on
its provision for the year ended September 30, 2020 and will
continue to evaluate the impact, if any, the CARES Act may have on
the Company’s consolidated financial statements and
disclosures.
On December 20, 2018, the Company completed a two-step merger with
Cure Based Development (see Note 2). As a result of the Mergers the
Company established as part of the purchase price allocation a net
deferred tax liability related to the book-tax basis of certain
assets and liabilities of approximately $4.6 million.
The
Company has had a valuation allowance against the net deferred tax
assets, with the exception of the deferred tax liabilities that
result from indefinite-life intangibles ("naked credits"). The
Company has determined that using the general methodology for
calculating income taxes during an interim period for the quarter
ending December 31, 2019, provided for a wide range of potential
annual effective rates. Therefore, the Company has calculated the
tax provision on a discrete basis under ASC 740-270-30-36(b) for
the quarter ending December 31, 2019, March 31, 2020, and June 30,
2020. Given available information to date and the most probable
scenario given the facts and circumstances, management’s
expectation is that the Company will generate enough indefinite
life deferred tax assets from post-merger NOLs to reduce the naked
credits to zero during the year, and continue to record a valuation
allowance on remaining DTAs. As a result, the Company decreased the
deferred tax liability from $2,240,300 to $0 and a recorded a
deferred tax benefit of $2,240,300 for the quarter ending December
31, 2019. The Company recorded $0 income tax provision for the
quarter ending March 31, 2020 and June 30, 2020. During the quarter
ending September 30, 2020 the Company completed a study and
determined there was ownership changes under IRC section 382 in the
year ending September 30, 2019. These ownership changes under
section 382 resulted in a decrease in the amount of indefinite-life
deferred tax assets available to offset the indefinite-life
deferred tax liabilities and the recognition of $895,000 of naked
credits for the quarter.
NOTE 18 – LEASES
On October 1, 2019, the Company adopted ASU No.
2016-02,
Leases
, and all subsequently issued clarifying guidance.
Under the new guidance, lessees are required to recognize assets
and lease liabilities for the rights and obligations created by
leased assets previously classified as operating leases. In July
2018, the FASB issued ASU No. 2018-11, which permitted entities to
record the impact of adoption using a modified retrospective method
with any cumulative effect as an adjustment to retained earnings
(accumulated deficit) as opposed to restating comparative periods
for the effects of applying the new standard. The Company elected
this transition approach; therefore, the Company’s prior
period reported results are not restated to include the impact of
this adoption. We also elected the practical expedient permitted
under the transition guidance which permits companies not to
reassess prior conclusions on lease identification, historical
lease classification and initial direct costs.
In connection with the
adoption of the new guidance, the Company recognized an operating
lease asset for $7,704,109 and operating lease liability of
$7,950,803 and a reduction of retained earnings of $13,527 in its
balance sheet as of December 31, 2019, with no impact to its
results of operations and cash flows. The difference between the
leased assets and lease liabilities represents the net position of
existing prepaid rent and deferred rent liabilities balance,
resulting from historical straight-lining of operating leases,
which were effectively reclassified upon adoption to reduce the
measurement of the leased assets.
We have
lease agreements for our corporate, warehouse and laboratory
offices and a truck lease with lease periods expiring between 2021
and 2026. ASC 842 requires the recognition of leasing arrangements
on the balance sheet as right-of-use assets and liabilities
pertaining to the rights and obligations created by the leased
assets. We determine whether an arrangement is a lease at inception
and classify it as finance or operating. All of our leases are
classified as operating leases. Our leases do not contain any
residual value guarantees.
Right-of-use
lease assets and corresponding lease liabilities are recognized at
commencement date based on the present value of lease payments over
the expected lease term. Since the interest rate implicit in our
lease arrangements is not readily determinable, we determine an
incremental borrowing rate for each lease based on the approximate
interest rate on a collateralized basis with similar remaining
terms and payments as of the lease commencement date to determine
the present value of future lease payments.
Our lease terms may include options to extend or
terminate the lease.
In addition to the monthly base amounts in the lease agreements,
the Company is required to pay real estate taxes, insurance and
common area maintenance expenses during the lease
terms.
Lease
costs on operating leases are recognized on a straight-line basis
over the lease term and included as a selling, general and
administrative expense in the consolidated statements of
operations.
F-34
Components of operating lease costs are summarized as
follows:
|
|
Year
Ended
|
|
|
September
30, 2020
|
|
Operating
lease costs
|
$
1,534,083
|
|
|
|
|
Total
operating lease costs
|
$
1,534,083
|
Supplemental cash flow information related to operating leases is
summarized as follows:
|
|
Year
Ended
|
|
|
September
30, 2020
|
|
Cash
paid for amounts included in the measurement of operating lease
liabilities
|
$
1,399,156
|
As of September 30, 2020, our operating leases had a weighted
average remaining lease term of 5.7 years and a weighted average
discount rate of 4.66%. Future minimum aggregate lease payments
under operating leases as of September 30, 2020 are summarized as
follows:
|
For the year ended September 30,
|
|
|
2021
|
$
1,469,834
|
|
2022
|
1,405,887
|
|
2023
|
1,380,204
|
|
2024
|
1,421,610
|
|
2025
|
1,159,949
|
|
Thereafter
|
1,372,862
|
|
Total
future lease payments
|
8,210,346
|
|
Less
interest
|
(1,041,040
)
|
|
Total
lease liabilities
|
$
7,169,306
|
Future minimum lease payments (including interest) under
non-cancelable operating leases as of September 30, 2019 are
summarized as follows:
|
For the year ended September 30,
|
|
|
2020
|
$
1,394,806
|
|
2021
|
1,452,434
|
|
2022
|
1,392,837
|
|
2023
|
1,380,204
|
|
2024
|
1,421,610
|
|
2025
|
1,159,949
|
|
Thereafter
|
1,372,862
|
|
Total
obligations and commitments
|
$
9,574,702
|
F-35
NOTE 19 – EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted
earnings per share for the following periods:
|
|
Year
Ended
|
|
|
|
September
30,
2020
|
September
30,
2019
|
|
Basic:
|
|
|
|
Net income (loss)
continuing operations
|
$
12,651,255
|
$
(45,429,776
)
|
|
Preferred dividends
paid
|
366,850
|
-
|
|
Net income (loss)
continuing operations adjusted for preferred dividend
|
12,284,405
|
|
|
Net income (loss)
discontinued operations
|
(48,983
)
|
(4,998,450
)
|
|
Net income (loss)
attributable to cbdMD, Inc. common shareholders
|
$
12,235,422
|
$
(50,428,226
)
|
|
|
|
|
|
Diluted:
|
|
|
|
Net income (loss)
continuing operations
|
12,651,255
|
-
|
|
Net income (loss)
discontinued operations
|
(48,983
)
|
-
|
|
Net income
(loss)
|
12,602,,272
|
-
|
|
|
|
|
|
Shares
used in computing basic earnings per share
|
44,140,360
|
17,887,247
|
|
Effect of dilutive
securities:
|
|
|
|
Options
|
19,904
|
-
|
|
Warrants
|
177,910
|
-
|
|
Convertible
preferred shares
|
833,500
|
-
|
|
Shares
used in computing diluted earnings per share
|
45,171,674
|
17,887,247
|
|
|
|
|
|
Earnings
(loss) per share Basic:
|
|
|
|
Continued
operations
|
$
0.28
|
$
(2.54
)
|
|
Discontinued
operations
|
(0.00
)
|
(0.28
)
|
|
Basic earnings
(loss) per share
|
$
0.28
|
$
(2.82
)
|
|
|
|
|
|
Earnings
(loss) per share Diluted:
|
|
|
|
Continued
operations
|
$
0.28
|
$
-
|
|
Discontinued
operations
|
(0.00
)
|
-
|
|
Diluted earnings
(loss) per share
|
$
0.28
|
$
-
|
At the year ended September 30, 2019, 1,643,255 potential shares
underlying options and warrants were excluded from the shares used
to calculate diluted loss per share as their inclusion would reduce
net loss per share, respectively.
F-36
NOTE 20 – SUBSEQUENT EVENTS
The Company has analyzed its operations subsequent to September 30,
2020 to the date these audited consolidated financial statements
were issued, and with the rapid spread of COVID-19 around the world
and the continuously evolving responses to the pandemic, we have
witnessed the significant and growing negative impact of COVID-19
on the global economic and operating environment. We find that the
impact of COVID-19 on the Company is unknown at this time and the
financial consequences of this situation cause uncertainty as to
the future and its effects on the economy and the Company. However,
we are monitoring the rapidly evolving situation and its potential
impacts on our financial condition, liquidity, operations,
suppliers, industry and workforce.
At March 31, 2020, one customer related to our discontinued
operations had breached their formal agreement on payments owed and
on April 29, 2020, the Company filed a lawsuit for collection. On
October 16, 2020, the lawsuit was settled and the account
receivable balance for this customer of $416,666 was paid in
full.
Effective November 13, 2020 the Company entered into amendments to
the employment agreements with Messrs. Martin A. Sumichrast and R.
Scott Coffman, its co-Chief Executive Officers. Under the terms of
Amendment No. 1 to the Executive Employment Agreement dated
September 6, 2018 between the Company and Mr. Sumichrast, the
Company increased Mr. Sumichrast’s annual base salary to
$335,000 and awarded him a discretionary cash bonus of $250,000,
payable in January 2021,
provided that (a) the Executive Employment
Agreement with Mr. Sumichrast has not otherwise been terminated by
either party for any reason, (b) the Company’s audited
financial statements for the year ended September 30, 2020 shall
have been completed and the Company’s independent registered
public accounting firm shall have issued an unqualified opinion on
such financial statements, and (c) the Company shall have timely
filed its Annual Report on Form 10-K for the fiscal year ended
September 30, 2020. Under the terms of Amendment No. 1 to the
Executive Employment Agreement dated December 20, 2018 between CBD
Industries, LLC, a wholly-owned subsidiary of the Company, and Mr.
Coffman, Mr. Coffman’s annual base salary was also increased
to $335,000 and he was also awarded a discretionary bonus of
$250,000, payable in January 2021, provided that (a) the Executive
Employment Agreement with Mr. Coffman has not otherwise been
terminated by either party for any reason, (b) the Company’s
audited financial statements for the year ended September 30, 2020
shall have been completed and the Company’s independent
registered public accounting firm shall have issued an unqualified
opinion on such financial statements, and (c) the Company shall
have timely filed its Annual Report on Form 10-K for the fiscal
year ended September 30, 2020.
On December 8, 2020, the Company entered into an underwriting
agreement with ThinkEquity, a division of Fordham Financial
Management, Inc., as representative of the underwriters, pursuant
to which the Company agreed to sell to the underwriters in a firm
commitment underwritten public offering an aggregate of 2,000,000
shares of its 8.0% Series A Cumulative Convertible Preferred Stock
at an offering price of $7.50 per share, and to grant the
underwriters a 45-day option to purchase up to an additional
300,000 shares of 8.0% Series A Cumulative Convertible Preferred
Stock to cover over-allotments, if any. On December 11, 2020, the
offering closed, and the Company issued an aggregate of 2,300,000
shares of its 8.0% Series A Cumulative Convertible Preferred Stock,
which included the exercise of the full over-allotment option by
the underwriters. At closing the Company issued the designees of
the representative of the underwriters
warrants to purchase an
aggregate of 150,502 shares of the Company’s common stock
exercisable at $3.74 per share.
The net proceeds to the Company from the offering
were approximately $15.7 million, after deducting underwriting
discounts and commissions and other estimated expenses of the
offering.
The
Company
intends to use the
net proceeds of the offering for general working
capital.
F-37
TABLE OF CONTENTS
Part IItem 1. Description Of BusinessItem 1. A Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. Description Of PropertyItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement SchedulesItem 16. Form 10-k SummaryNote 1 Organization and Summary Of Significant Accounting PoliciesNote 2 AcquisitionsNote 3 Marketable Securities and Investment Other SecuritiesNote 4 InventoryNote 5 Property and EquipmentNote 6 Intangible AssetsNote 7 Pro Forma Financial Information (unaudited)Note 8 Contingent LiabilityNote 9 Related Party TransactionsNote 10 Shareholders EquityNote 11 Stock-based CompensationNote 12 WarrantsNote 13 Commitments and ContingenciesNote 14 Note PayableNote 15 Long Term LiabilitiesNote 16 Discontinued OperationsNote 17 Income TaxesNote 18 LeasesNote 19 Earnings Per ShareNote 20 Subsequent Events