CBDMD, INC.
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2020
or
☐
TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ___________ to ___________
Commission 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
|
704-445-3060
Registrant’s Telephone Number, Including Area
Code
Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
|
common
|
YCBD
|
NYSE American
|
|
8% Series A Cumulative Convertible Preferred Stock
|
YCBD PR A
|
NYSE American
|
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
(§ 232.405 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 is a
shell company (as defined in Rule 12b-2 of the
Act). Yes ☐ No
☑
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable
date.
51,335,648 shares of common stock are issued and outstanding as of
May
11,
2020.
TABLE OF CONTENTS
|
|
|
Page
|
|
|
|
No
|
|
|
|
|
|
|
PART I-FINANCIAL INFORMATION
|
|
|
|
|
|
|
ITEM 1.
|
Financial Statements.
|
4
|
|
|
|
|
|
ITEM 2.
|
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
|
35
|
|
|
|
|
|
ITEM 3.
|
Quantitative and Qualitative Disclosures About Market
Risk.
|
44
|
|
|
|
|
|
ITEM 4.
|
Controls and Procedures.
|
44
|
|
|
|
|
|
|
PART II - OTHER INFORMATION
|
|
|
|
|
|
|
ITEM 1.
|
Legal Proceedings.
|
45
|
|
|
|
|
|
ITEM 1A.
|
Risk Factors.
|
45
|
|
|
|
|
|
ITEM 2.
|
Unregistered Sales of Equity Securities and Use of
Proceeds.
|
46
|
|
|
|
|
|
ITEM 3.
|
Defaults Upon Senior Securities.
|
46
|
|
|
|
|
|
ITEM 4.
|
Mine Safety Disclosures.
|
46
|
|
|
|
|
|
ITEM 5.
|
Other Information.
|
46
|
|
|
|
|
|
ITEM 6.
|
Exhibits.
|
47
|
OTHER PERTINENT INFORMATION
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”, Paw CBD, Inc., a recently formed
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, and "second quarter of 2019" refers to
the three months ended March 31, 2019 and "second quarter of 2020"
refers to the three months ended March 31, 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
.
2
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 (the
"Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). These forward-looking
statements that relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of
activity, performance or achievements to differ materially from any
future results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements. Words
such as, but not limited to, “believe,”
“expect,” “anticipate,”
“estimate,” “intend,” “plan,”
“targets,” “likely,” “aim,”
“will,” “would,” “could,” and
similar expressions or phrases identify forward-looking statements.
We have based these forward-looking statements largely on our
current expectations and future events and financial trends that we
believe may affect our financial condition, results of operation,
business strategy and financial needs. Forward-looking statements
include, but are not limited to, statements about:
●
our
history of losses;
●
the
impact and the unknown related to the COVID-19
pandemic;
●
the
impact of changes in the fair value of our contingent liabilities
associated with the Earnout Shares;
●
the
possible need to raise additional capital in the
future;
●
dilution
to our shareholders upon the issuance of the Earnout
Shares;
●
changes
in state laws, costs associated with compliance with applicable
laws and potential uncertain changes to regulations impacting our
industry;
●
risks
associated with any future failure to satisfy the NYSE American LLC
continued listing standards;
●
terms
of and provisions of our 8.0% Series A Cumulative Convertible
Preferred Stock;
●
risks
associated with developing a liquid market for our 8.0% Series A
Cumulative Convertible Preferred Stock and possible future
volatility in its trading price and the trading price of our common
stock;
●
risks
associated with our status as an emerging growth
company;
●
risks
associated with control by our executive officers, directors and
affiliates;
●
risks
associated with unfavorable research reports;
●
the
accounting treatment of securities we accept as partial
compensation for services;
●
our
ability to liquidate securities we accept as partial compensation
for services;
●
the
lack of long-term contracts for the purchase of our
products;
●
our
ability to protect our intellectual property;
●
additional
operational risks associated with our CBD business;
●
dilution
to our shareholders from the issuance of additional shares of
common stock by us, the conversion of shares of our 8.0% Series A
Cumulative Convertible Preferred Stock and/or the exercise of
outstanding options and warrants; and
●
risks
associated with our articles of incorporation, bylaws and North
Carolina law.
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 in its entirety, including the risks
described in Part II, Item 1A. Risk Factors appearing later in this
report, Part I, Item 1A. - Risk Factors in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2019 as filed
with the Securities and Exchange Commission (the “SEC”)
on December 18, 2019, as amended on January 24, 2020 (collectively,
the "2019 10-K") as well as our other filings with the SEC. 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.
3
PART 1 - FINANCIAL INFORMATION
ITEM
1.
FINANCIAL
STATEMENTS.
cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2020 AND SEPTEMBER 30, 2019
|
|
(Unaudited)
|
|
|
|
March 31,
|
September 30,
|
|
|
2020
|
2019
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
14,835,699
|
$
4,689,966
|
|
Accounts
receivable
|
662,531
|
1,425,697
|
|
Accounts
receivable other
|
-
|
160,137
|
|
Accounts
receivable – discontinued operations
|
791,998
|
1,080,000
|
|
Marketable
securities
|
83,375
|
198,538
|
|
Investment
other securities
|
-
|
600,000
|
|
Deposits
|
28,365
|
6,850
|
|
Merchant
reserve
|
280,322
|
519,569
|
|
Inventory
|
6,571,696
|
4,301,586
|
|
Inventory
prepaid
|
517,309
|
903,458
|
|
Deferred
issuance costs
|
-
|
93,954
|
|
Prepaid
software
|
167,852
|
206,587
|
|
Prepaid
equipment deposits
|
115,555
|
868,589
|
|
Prepaid
expenses and other current assets
|
830,565
|
688,104
|
|
Total current assets
|
24,885,267
|
15,743,035
|
|
|
|
|
|
Other
assets:
|
|
|
|
Property
and equipment, net
|
3,224,446
|
1,715,557
|
|
Operating
lease assets
|
7,413,256
|
-
|
|
Deposits
for facilities
|
755,383
|
754,533
|
|
Intangible
assets, net
|
21,635,000
|
21,635,000
|
|
Goodwill
|
54,669,997
|
54,669,997
|
|
Total other assets
|
87,698,082
|
78,775,087
|
|
|
|
|
|
Total assets
|
$
112,583,349
|
$
94,518,122
|
See
Notes to Condensed Consolidated Financial Statements
4
cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2020 AND SEPTEMBER 30, 2019
(continued)
|
|
(Unaudited)
|
|
|
|
March 31,
|
September 30,
|
|
|
2020
|
2019
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
3,506,663
|
$
3,021,271
|
|
Accrued
expenses
|
1,044,992
|
681,269
|
|
Operating
leases – short term liabilities
|
1,076,907
|
-
|
|
Note
payable
|
163,858
|
-
|
|
Customer
deposit – related party
|
-
|
7,339
|
|
Total current liabilities
|
5,792,420
|
3,709,878
|
|
|
|
|
|
Long
term liabilities:
|
|
|
|
Long
term liabilities
|
-
|
363,960
|
|
Note
payable
|
205,732
|
-
|
|
Operating
leases - long term liabilities
|
6,607,553
|
-
|
|
Contingent
liability
|
7,820,000
|
50,600,000
|
|
Deferred
tax liability
|
-
|
2,240,300
|
|
Total long term liabilities
|
14,633,285
|
53,204,260
|
|
|
|
|
|
Total liabilities
|
20,425,705
|
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,
|
|
|
|
51,335,648
and 27,720,356 shares issued and outstanding,
respectively
|
51,336
|
27,720
|
|
Additional
paid in capital
|
124,082,811
|
97,186,524
|
|
Accumulated
deficit
|
(31,977,003
)
|
(59,610,260
)
|
|
Total cbdMD, Inc. shareholders' equity
|
92,157,644
|
37,603,984
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
112,583,349
|
$
94,518,122
|
See
Notes to Condensed Consolidated Financial Statements
5
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2020 AND
2019
(Unaudited)
|
|
Three months
|
Three months
|
Six months
|
Six months
|
|
|
Ended
|
Ended
|
Ended
|
Ended
|
|
|
March 31,
2020
|
March 31,
2019
|
March 31,
2020
|
March 31,
2019
|
|
|
|
|
|
|
|
Total
Gross Sales
|
$
9,703,800
|
$
7,752,478
|
$
20,116,291
|
$
8,436,207
|
|
Allowances
|
(304,764
)
|
(2,115,900
)
|
(569,019
)
|
(2,333,942
)
|
|
Total Net Sales
|
9,399,036
|
5,636,578
|
19,547,272
|
6,102,265
|
|
Cost of sales
|
2,732,076
|
1,914,716
|
6,432,613
|
2,080,027
|
|
|
|
|
|
|
|
Gross
Profit
|
6,666,960
|
3,721,862
|
13,114,659
|
4,022,238
|
|
|
|
|
|
|
|
Operating
expenses
|
12,267,637
|
5,749,463
|
24,827,934
|
7,141,274
|
|
Income
(
Loss) from
operations
|
(5,600,677
)
|
(2,027,601
)
|
(11,713,275
)
|
(3,119,036
)
|
|
Realized
and Unrealized gain (loss) on marketable securities
|
(53,152
)
|
9,524
|
(115,162
)
|
(64,640
)
|
|
Impairment
on investment other securities
|
(600,000
)
|
-
|
(600,000
)
|
-
|
|
Impairment
accounts receivable other
|
(160,000
)
|
-
|
(160,000
)
|
-
|
|
(Increase)
decrease on contingent liability
|
21,261,994
|
(30,914,074
)
|
38,160,000
|
(30,914,074
)
|
|
Interest income
|
35,607
|
6,274
|
42,875
|
43,959
|
|
Income (loss) before provision for income taxes
|
14,883,772
|
(32,925,877
)
|
25,614,438
|
(34,053,791
)
|
|
|
|
|
|
|
|
Benefit
for income taxes
|
-
|
1,075,000
|
2,240,300
|
1,208,000
|
|
Net Income (Loss) from continuing
operations
|
14,883,772
|
(31,850,877
)
|
27,854,738
|
(32,845,791
)
|
|
Net Income (Loss) from discontinued
operations, net of tax (Note 15)
|
-
|
603
|
(41,202
)
|
(1,193,345
)
|
|
Net Income (Loss)
|
14,883,772
|
(31,850,274
)
|
27,813,536
|
(34,039,136
)
|
|
Net (Loss) attributable to
noncontrolling
interest
|
-
|
(58,536
)
|
-
|
(137,685
)
|
|
Preferred dividends
|
100,016
|
-
|
166,750
|
-
|
|
|
|
|
|
|
|
Net Income (Loss) attributable to cbdMD, Inc. common
shareholders
|
$
14,783,756
|
$
(31,791,738
)
|
$
27,646,786
|
$
(33,901,451
)
|
|
|
|
|
|
|
|
Net Income (Loss) per share:
|
|
|
|
|
|
Basic
earnings per share
|
$
0.41
|
$
(3.13
)
|
$
0.76
|
$
(3.35
)
|
|
Diluted
earnings per share
|
$
0.40
|
$
-
|
$
0.74
|
$
-
|
|
|
|
|
|
|
|
Weighted
average number of shares Basic:
|
36,503,005
|
10,160,947
|
36,503,005
|
10,107,144
|
|
Weighted
average number of shares Diluted:
|
37,336,505
|
10,160,947
|
37,336,505
|
10,107,144
|
See
Notes to Condensed Consolidated Financial Statements
6
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2020 AND
2019
(Unaudited)
|
|
Three months
|
Three months
|
Six months
|
Six months
|
|
|
Ended
|
Ended
|
Ended
|
Ended
|
|
|
March 31,
2020
|
March 31,
2019
|
March 31,
2020
|
March 31,
2019
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
$
14,883,772
|
$
(31,850,274
)
|
$
27,813,536
|
$
(34,039,136
)
|
|
Comprehensive Income (Loss)
|
14,883,772
|
(31,850,274
)
|
27,813,536
|
(34,039,136
)
|
|
|
|
|
|
|
|
Comprehensive
Income (loss) attributable to non-controlling interest
|
-
|
(58,536
)
|
-
|
(137,685
)
|
|
Preferred
dividends
|
(100,016
)
|
-
|
(166,750
)
|
-
|
|
Comprehensive Income (Loss) attributable to cbdMD, Inc. common
shareholders
|
$
14,783,756
|
$
(31,791,738
)
|
$
27,646,786
|
$
(33,901,451
)
|
See
Notes to Condensed Consolidated Financial Statements
7
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2020 AND 2019
(unaudited)
|
|
Six Months Ended March 31,
|
Six Months Ended March 31,
|
|
|
2020
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
Net
income (loss)
|
$
27,813,536
|
$
(34,039,136
)
|
|
Adjustments to reconcile net income (loss) to net
|
|
|
|
cash used by operating activities:
|
|
|
|
Stock
based compensation
|
972,225
|
163,148
|
|
Restricted
stock expense
|
138,000
|
-
|
|
Issuance
of stock / warrants for service
|
28,250
|
19,313
|
|
Impairment
on discontinued operations asset
|
38,002
|
-
|
|
Depreciation
and amortization
|
287,457
|
171,356
|
|
Gain
on settlement of Note
|
-
|
(20,000
)
|
|
Other
than temporary impairment other securities and other accounts
receivable
|
760,000
|
-
|
|
Increase/(Decrease)
in contingent liability
|
(38,160,000
)
|
30,914,074
|
|
Realized
and unrealized loss of marketable securities
|
115,162
|
1,207,617
|
|
Non-cash
lease expense
|
585,020
|
-
|
|
Merchant
reserve settlement
|
132,657
|
-
|
|
Non-cash
consideration received for services
|
-
|
(470,000
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
763,303
|
32,156
|
|
Accounts
receivable – related party
|
-
|
204,902
|
|
Other
accounts receivable
|
-
|
(137,043
)
|
|
Note
receivable
|
-
|
(18,000
)
|
|
Note
receivable – related party
|
-
|
156,147
|
|
Deposits
|
(22,365
)
|
-
|
|
Merchant
reserve
|
106,590
|
(199,907
)
|
|
Inventory
|
(2,270,110
)
|
(1,194,186
)
|
|
Prepaid
inventory
|
386,149
|
-
|
|
Prepaid
expenses and other current assets
|
649,308
|
168,041
|
|
Marketable
securities
|
-
|
440,211
|
|
Accounts
payable and accrued expenses
|
849,113
|
43,076
|
|
Accounts
payable and accrued expenses – related party
|
-
|
(393,016
)
|
|
Operating
lease liability
|
(496,834
)
|
-
|
|
Note
payable
|
175,124
|
-
|
|
Deferred
revenue / customer deposits
|
(7,339
)
|
(303,125
)
|
|
Cash
provided by discontinued operations
|
250,000
|
-
|
|
Deferred
tax liability
|
(2,240,300
)
|
(1,208,000
)
|
|
Cash
used by operating activities
|
(9,147,052
)
|
(4,462,372
)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Net
cash used for merger
|
-
|
(1,177,867
)
|
|
Purchase
of intangible assets
|
-
|
(79,999
)
|
|
Purchase
of property and equipment
|
(1,796,346
)
|
(102,204
)
|
|
Cash
used by investing activities
|
(1,796,346
)
|
(1,360,070
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Proceeds
from issuance of common stock
|
16,771,756
|
6,356,997
|
|
Proceeds
from issuance of preferred stock
|
4,421,928
|
-
|
|
Preferred
dividend distribution
|
(166,750
)
|
-
|
|
Deferred
issuance costs
|
62,197
|
(177,521
)
|
|
Cash
provided by financing activities
|
21,089,131
|
6,179,476
|
|
Net
increase (decrease) in cash
|
10,145,733
|
357,034
|
|
Cash
and cash equivalents, beginning of period
|
4,689,966
|
4,282,553
|
|
Cash and cash equivalents, end of period
|
$
14,835,699
|
$
4,639,587
|
See
Notes to Condensed Consolidated Financial Statements
8
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2020 AND 2019
(unaudited) (continued)
Supplemental Disclosures of Cash Flow Information:
|
|
Six Months ended
March 31,
|
Six Months Ended
March 31,
|
|
|
2020
|
2019
|
|
|
|
|
|
Cash
Payments for:
|
|
|
|
Interest
expense
|
$
17,097
|
$
23,938
|
|
|
|
|
|
Non-cash
financial activities:
|
|
|
|
Warrants
issued to secondary selling agent
|
$
524,113
|
$
86,092
|
|
Stock
received for prior period services, adjusted for other accounts
receivable write down prior to receipt
|
$
-
|
$
1,352,000
|
|
Adoption
of ASU 2016-01
|
$
-
|
$
2,512,539
|
See
Notes to Condensed Consolidated Financial Statements
9
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)
EQUITY
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2020
|
|
|
|
|
|
Additional
|
Other
|
|
|
|
|
Common stock
|
Preferred stock
|
Paid in
|
Comprehensive
|
Accumulated
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Income(loss)
|
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
|
23,590,292
|
23,591
|
-
|
-
|
21,368,166
|
-
|
-
|
21,391,757
|
|
Issuance of options for
share based compensation
|
-
|
-
|
-
|
-
|
429,651
|
-
|
-
|
429,651
|
|
Issuance of
stock/warrants for services
|
25,000
|
25
|
-
|
-
|
28,225
|
-
|
-
|
28,250
|
|
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
|
See
Notes to Condensed Consolidated Financial Statements
10
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)
EQUITY
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2019
|
|
Common Stock
|
Additional Paid in
|
Other Comprehensive
|
Accumulated
|
Non-controlling
|
|
|
|
|
Shares
|
Amount
|
Capital
|
Income(loss)
|
Deficit
|
Interest
|
Total
|
|
Balance, September 30, 2018
|
8,123,928
|
8,124
|
21,781,095
|
(2,512,539
)
|
(6,669,495
)
|
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
|
-
|
(11,291,749
)
|
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
|
-
|
(43,083,487
)
|
1,274,287
|
(13,415,656
)
|
See
Notes to Condensed Consolidated Financial Statements
11
cbdMD, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 2020 AND 2019
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Nature of Business
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. and on May 1, 2019 we changed the name of our Company to
“cbdMD, Inc.”. 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.
The accompanying unaudited interim condensed consolidated financial
statements of cbdMD have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“US GAAP”) and the rules of the Securities and
Exchange Commission (“SEC”) and should be read in
conjunction with the audited consolidated financial statements and
notes thereto contained in the Company’s Annual Report filed
with the SEC on Form 10-K for the year ended September 30, 2019
(“2019 10-K”). In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of consolidated financial position and the
consolidated results of operations for the interim periods
presented have been reflected herein. Notes to the financial
statements which would substantially duplicate the disclosure
contained in the audited consolidated financial statements for
fiscal year 2019 as reported in the 2019 10-K have been
omitted.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries CBDI and Paw CBD.
All material intercompany transactions and balances have been
eliminated in consolidation.
12
Use of Estimates
The preparation of the Company's consolidated financial statements
have been prepared in accordance with 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, common stock issued prior to the
Company’s initial public offering (the “IPO”),
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.
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.
Cash and Cash Equivalents
For financial statements purposes, the Company considers all highly
liquid investments with a maturity of less than three months when
purchased 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 is extended to customers
after an evaluation of the 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 receivables portfolio. As of March 31, 2020, we
have an allowance for doubtful accounts of $14,318, and had an
allowance of $7,286 at September 30, 2019.
In addition, the Company has and may, from time to time, enter
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 a marketable security
(when the customer is a publicly traded entity) or as an investment
other security (when the customer is a private
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 March 31, 2020, the receivable from payment
processors included approximately $160,013 for the waiting period
amount and is recorded as accounts receivable in the accompanying
consolidated balance sheet and $280,322 for the reserve amount for
a total receivable of $440,335.
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.
13
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.
14
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. 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 it is more likely
that an impairment loss has been incurred.
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. The value of the issued Earnout Shares as of
February 27, 2020 was $4,620,000 and the decrease in value of
$6,924,503 from December 31, 2019 related to those shares is
recorded in the Statement of Operations for the three months ended
March 31, 2020. Additionally, as the 5,127,792 Earnout Shares were
issued on February 27, 2020, the value of the shares in the amount
of $4,620,000 was reclassified from the contingent liability to
additional paid in capital on the balance sheet.
For the three months ended March 31, 2020, the contingent
liabilities associated with the business combination were decreased
by $21,261,994 to reflect their reassessed fair values as of March
31, 2020. This decrease is reflective of a change in value of the
variable number of shares from December 31, 2019, including the
change in value of the Earnout Shares from December 31, 2019 until
issued February 27, 2020. In December 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 $21,261,994 decrease in
contingent liabilities is the change in the Company’s common
share price between March 31, 2020 and December 31, 2019. These
increases or decreases to the contingent liabilities are reflected
within Other Income (Expenses) on the consolidated statements of
operations.
15
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 or the services have been
rendered. 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. For our CBD products, the
Company meets that obligation when it has shipped products which
have been ordered to the customer. The Company has reviewed its
various revenue streams for its other contracts under the five-step
approach.
The below table summarizes amounts related to future performance
obligations under fixed contractual arrangements as of March 31,
2020:
|
|
At March 31,
2020
|
2020 and
thereafter
|
|
|
|
|
|
Future
performance obligations
|
$
0
|
$
0
|
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 30 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.
16
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:
|
|
Three Months ended March 31,
2020
|
% of total
|
Three Months ended March 31,
2019
|
% of total
|
|
Wholesale
product sales
|
$
2,617,860
|
27.9
%
|
$
1,375,045
|
24.4
%
|
|
Consumer
product sales
|
6,781,176
|
72.1
%
|
4,261,533
|
75.6
%
|
|
Service
related sales
|
-
|
0
%
|
-
|
0
%
|
|
Total
net sales
|
$
9,399,036
|
|
$
5,636,578
|
|
|
|
Six Months ended
March 31,
2020
|
% of total
|
Six Months ended
March 31,
2019
|
% of total
|
|
Wholesale
product sales
|
$
5,885,981
|
30.1
%
|
$
1,375,045
|
22.5
%
|
|
Consumer
product sales
|
13,661,291
|
69.9
%
|
4,727,220
|
77.5
%
|
|
Service
related sales
|
-
|
0
%
|
-
|
0
%
|
|
Total
net sales
|
$
19,547,272
|
|
$
6,102,265
|
|
Contract Balances
Contract assets represent unbilled receivables and are presented
within accounts receivable, net on the condensed consolidated
balance sheets. Contract liabilities represent unearned revenues
and are presented as deferred revenue or customer deposits on the
condensed consolidated balance sheets.
We have no contract assets and contract liabilities at March 31,
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.
17
Advertising Costs
The Company expenses all costs of advertising and related marketing
and promotional costs as incurred. The Company incurred
approximately $3,398,777 and $1,475,696 in advertising and related
marketing and promotional costs included in operating expenses
during the three months ended March 31, 2020 and 2019,
respectively. The Company incurred approximately $5,809,498 and
$1,557,838 in advertising and related marketing and promotional
costs included in operating expenses during the six months ended
March 31, 2020 and 2019, respectively.
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. Prior
to April 2017, BPU was a multi-member limited liability company
that was treated as a partnership for federal and state income tax
purposes. As such, the Parent Company’s partnership share in
the taxable income or loss of BPU was included in the tax return of
the Parent Company. Beginning in April 2017, the Parent Company
acquired the remaining interests in BPU. As a result of the
acquisition, BPU became a disregarded entity for tax purposes and
its entire share of taxable income or loss was included in the tax
return of the Parent Company. CBDI, Paw CBD, and Level H&W 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. IM1 and EE1 are
multi-member limited liability companies that are treated as
partnerships for federal and state income tax purposes. As such,
the Parent Company’s partnership share in the taxable income
or loss of IM1 and EE1 are 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. The Parent Company uses the inside
basis approach to determine deferred tax assets and liabilities
associated with its investment in a consolidated pass-through
entity. 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 March 31, 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 $14,344,758 uninsured balance at March 31, 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 three and six months ended March 31, 2020. We
have three customers whose aggregate accounts receivable balance
was approximately 69% of the combined total accounts receivable and
accounts receivable discontinued operations as of March 31, 2020,
of which one customer is from the discontinued operations and
accounts for approximately 51%. The aggregate accounts receivable
balance of such customers represented approximately 51% of the
Company’s total accounts receivable as of September 30,
2019.
18
Stock-Based Compensation
We account for our stock compensation under the 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. The Company recognizes
forfeitures when they occur.
Earnings (Loss) Per Share
The Company uses ASC 260-10,
Earnings Per Share
for calculating the basic and diluted
income (loss) per share. The Company computes basic income (loss)
per share by dividing net income (loss) and net income (loss)
attributable to common shareholders, after deducting preferred
stock dividends, by the weighted average number of common shares
outstanding. Common equivalent shares are excluded from the
computation of net loss per share if their effect is
anti-dilutive.
New Accounting Standards
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 $13,528 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.
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.
19
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.
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, for the tax effect of the
acquired intangible assets from Cure Base Development. This
liability was recorded 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.
20
NOTE 3 – MARKETABLE SECURITIES AND INVESTMENT OTHER
SECURITIES
The Company may, from time to time, enter 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. 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 will be 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).
On June 23, 2017, I’M1 and EE1 in aggregate exercised a
warrant for 1,600,000 shares of common stock for services delivered
to a customer and accounted for this in Investment other
securities. The common stock was issued to the Company’s
subsidiaries I’M1 and EE1. The customer is a private entity
and the stock was valued at $912,000, which was based on its recent
financing in June 2017 at $0.57 per share. The Company has
classified this common stock as Level 3 for fair value measurement
purposes as there are no observable inputs. In valuing the stock
the Company used the fair value of the services provided, utilizing
an analysis of vendor specific objective evidence of its selling
price. In August 2017, each of I’M1 and EE1 distributed the
shares to its majority owner, cbdMD, and also distributed shares
valued at $223,440 to its non-controlling interests. In August
2017, the Company also provided referral services for kathy
Ireland® Worldwide and this customer. As compensation the
Company received an additional 200,000 shares of common stock
valued at $114,000 using the pricing described above. On December
21, 2017, the Company purchased 300 shares of preferred stock in a
private offering from this customer for $300,000. The preferred
shares are convertible into common stock at a 20% discount of a
defined subsequent financing, or an initial public offering of a
minimum $15 million, or at a company valuation of $45 million
whichever is the least. The Company has classified this stock as
Level 3 for fair value measurement purposes as there are no
observable inputs. In valuing the stock the Company used the value
paid, which was the price offered to all third party investors.
Subsequently, the Company has recently met with other investors of
the customer and has indicated desire to sell the equity interest
of the Company. As of September 30, 2019, based on conversations
with other investors, the market for this equity, and potential
selling prices negotiated, the Company determined that the value at
September 30, 2019 was $600,000 and an impairment of $502,560 was
appropriate for the year ended September 30, 2019. In November
2019, the Company entered into an option to sell the shares by June
30, 2020 to a third party for $600,000. The option required the
buyer to provide a non refundable deposit of $30,000. Based upon
updates received from the customer during the three months ended
March 31, 2020, the Company has determined that it is likely to not
realize a return on this asset and has made the determination to
take a full impairment of $600,000 at March 31, 2020.
In December 2017, the Company completed services per an advisory
services agreement with Kure Corp (“Kure”), formerly a
related party. As payment for these services, Kure issued 800,000
shares of its stock to the Company. The customer was a private
entity and the stock was valued at $400,000, which was based on
financing activities by Kure in September 2017 in which shares were
valued at $0.50 per share. The Company had classified this common
stock, cumulative value of $400,000, as Level 3 for fair value
measurement purposes as there were no observable inputs. In valuing
the stock the Company used factors including information provided
by the issuer regarding their recent results and future plans as
well as their most recent financing transactions. On April 30,
2018, Kure. merged with Isodiol International, Inc. (CSE: ISOL,
OTCQB: ISOLF, FSE:LB6A.F), a Canadian company
(“Isodiol”). Details can be reviewed in our 2018 Form
10-K previously filed. As a result of this merger we received the
first issuance of 380,952 shares from Isodiol and valued them based
on the trading price on April 30, 2018 of $0.63 per share which
totaled $240,000. We also removed the value of the Kure equity of
$400,000 from our Level 3 investments as part of the exchange
described above. As the full value of the Kure equity will not be
received until the future issuances based on earn out goals, we
recorded an accounts receivable other of $160,000 as of December
31, 2018. On March 31, 2019, Isodiol spun off Kure to its original
shareholders by issuing back all original Kure stock. As a result
of the spin off, the Company received 800,000 shares of Kure stock
which we valued at the $160,000, and as Kure is private, when the
shares are received they will be treated as a Level 3 stock and
will be accounted for as the $160,000 accounts receivable other. In
light of the difficulties of the vaping industry, Kure Corp’s
ability to continue to raise capital, and uncertainty for future
strategy, the Company has assessed the value of the common stock to
be received and made the determination to take a full impairment of
the $160,000 against the other accounts receivable at March 31,
2020.
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 March 31, 2020,
the Company has 1,042,193 shares valued at
$83,375.
21
The table below summarizes the assets valued at fair value as of
March 31, 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 March 31, 2020
|
|
|
|
|
|
|
|
Marketable
securities
|
$
83,375
|
-
|
$
-
|
$
83,375
|
|
Investment
other securities
|
-
|
-
|
$
-
|
$
-
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Balance
at September 30, 2019
|
$
198,538
|
$
-
|
$
600,000
|
$
798,538
|
|
Change
in value of equities
|
$
(62,011
)
|
$
-
|
$
-
|
$
(62,011
)
|
|
Balance
at December 31, 2019
|
$
136,527
|
$
-
|
$
600,000
|
$
736,527
|
|
Change
in value of equities
|
$
(53,152
)
|
$
-
|
$
(600,000
)
|
$
(653,152
)
|
|
Balance
at March 31, 2020
|
$
83,375
|
$
-
|
$
-
|
$
83,375
|
NOTE 4 – INVENTORY
Inventory at March 31, 2020 and September 30, 2019 consists of the
following:
|
|
March 31,
|
September 30,
|
|
|
2020
|
2019
|
|
Finished
goods
|
$
2,518,633
|
$
3,050,120
|
|
Inventory
components
|
4,053,063
|
1,251,466
|
|
Inventory
prepaid
|
517,309
|
903,458
|
|
Total
|
$
7,089,005
|
$
5,205,044
|
NOTE 5 – PROPERTY AND EQUIPMENT
Major classes of property and equipment at March 31, 2020 and
September 30, 2019 consist of the following:
|
|
March 31,
|
September 30,
|
|
|
2020
|
2019
|
|
Computers,
furniture and equipment
|
$
280,925
|
$
131,077
|
|
Manufacturing
equipment
|
2,591,440
|
1,375,986
|
|
Leasehold
improvements
|
806,998
|
375,954
|
|
Automobiles
|
24,892
|
24,892
|
|
|
3,704,255
|
1,907,909
|
|
Less
accumulated depreciation
|
(479,809
)
|
(192,352
)
|
|
Net
property and equipment
|
$
3,224,446
|
$
1,715,557
|
Depreciation expense for continuing operations related to property
and equipment was $174,206 and $49,936 for the three months ended
March 31, 2020 and 2019, respectively and was $287,457 and $54,039
for the six months ended March 31, 2020 and 2019, respectively.
Depreciation expense for discontinued operations related to
property and equipment was $2,938 and $7,654 for the three and six
months ended March 31, 2019, respectively.
22
NOTE 6 – INTANGIBLE ASSETS
With the Mergers of Cure Based Development, the Company made a
strategic shift toward the CBD business and all entities and their
associated intangibles were assessed during the year ended
September 30, 2019 with that focus and their ability to support
that business line.
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 (see 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.
Intangible assets as of March 31, 2020 and September 30, 2019
consisted of the following:
|
|
March 31,
|
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
|
NOTE 7 – PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro-forma data summarizes the results of
operations for the three and six months ended March 31, 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.
|
|
Three Months Ended March 31,
2020
|
Three Months Ended March 31,
2019
|
|
|
|
|
|
Net
revenues
|
$
N/A*
|
$
N/A*
|
|
Operating
income (loss)
|
$
N/A*
|
$
N/A*
|
|
Net
income (loss)
|
$
N/A*
|
$
N/A*
|
|
Net
loss per share – basic and fully diluted
|
$
N/A*
|
$
N/A*
|
|
|
Six Months Ended
March 31,
2020
|
Six Months Ended
March 31,
2019
|
|
|
|
|
|
Net
revenues
|
$
N/A*
|
$
9,185,693
|
|
Operating
income (loss)
|
$
N/A*
|
$
(4,320,089
)
|
|
Net
income (loss)
|
$
N/A*
|
$
(35,298,514
)
|
|
Net
loss per share – basic and fully diluted
|
$
N/A*
|
$
(1.39
)
|
* All entities were consolidated effective December 21, 2018
therefore, the results of operations are included in these
condensed 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.
23
NOTE 8 – CONTINGENT LIABILITY
As
consideration for the Mergers, described in Note 2, the Company had
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
unrestricted voting rights to 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 have been
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 (each a
“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
|
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 and the initial shares were issued on April 19,
2019. 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.
The 15,250,000 Earnout Shares which would be issued in the future,
upon the satisfaction of net revenue criteria have been valued
using a Monte Carlo Simulation. Inputs used included: stock price,
volatility, interest rates, revenue projections, and likelihood of
obtaining revenue projections, amongst others.
The value of the contingent liability was $33,701,994 and
$50,600,000 at December 31, 2019 and September 30, 2019,
respectively, and represents the Earnout Shares.
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. The
value of the issued Earnout Shares as of February 27, 2020 was
$4,620,000 and the decrease in value of $6,924,503 from December
31, 2019 related to those shares is recorded in the Statement of
Operations for the three months ended March 31, 2020. Additionally,
as the 5,127,792 Earnout Shares were issued on February 27, 2020,
the value of the shares in the amount of $4,620,000 was
reclassified from the contingent liability to additional paid in
capital on the balance sheet. The remaining Earnout Shares for
future evaluation were valued at $7,820,000 on March 31, 2020 as
compared to $22,157,491 at December 31, 2019, a decrease of
$14,337,491. The decrease in value of $6,924,503 and $14,337,491
combined represent the decrease of the total contingent liability
of $21,261,994 and is recorded in the Statement of Operations for
the three months ended March 31, 2020. 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 decrease in the value of
the Earnout Shares within the contingent liability was the decrease
of the Company’s stock price, which was $0.93 at March 31,
2020 as compared to $2.26 on December 31, 2019 and the issuance on
February 27, 2020 of the Earnout Shares for the first marking
period.
24
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, at that time, was 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 as
customer deposits - related party on the accompanying balance sheet
and was $0 and 7,339 at March 31, 2020 and September 30, 2019,
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.
Cure
Based Development leases its manufacturing facility from an entity
partially owned by an individual who now 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.
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 March 31,
2020.
The total amount of dividends declared and paid were $100,016 and
$100,016, respectively, for the three months ended March 31, 2020.
The total amount of dividends declared and paid were $166,750 and
$166,750, respectively, for the six months ended March 31,
2020.
Common Stock – We are authorized to issue 150,000,000 shares
of common stock, par value $0.001 per share. There were 51,335,648
and 27,720,356 shares of common stock issued and outstanding at
March 31, 2020 and September 30, 2019, respectively.
Preferred stock transactions:
In the three and six months ended March 31, 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.
No preferred stock was issued in the three and six months ended
March 31, 2019.
Common stock transactions:
In the three and six months ended March 31, 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 selling agent 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.
25
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 the three and six months ended March 31, 2019:
On October 2, 2018, the Company completed a follow-on firm
commitment underwritten 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 representatives 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.
Stock option transactions:
In the three and six months ended March 31, 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 $71,540 and $262,316 for the three
and six months ended March 31, 2020, respectively.
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 $6,312 for the three months ended
March 31, 2020.
No options were issued in the three and six months ended March 31,
2019.
The expected volatility rate was estimated based on comparison to
the volatility of a peer group of companies in similar industries.
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.
26
The following table summarizes the inputs used for the
Black-Scholes pricing model on the options issued in the six months
ended March 31, 2020 and 2019:
|
|
2020
|
2019
|
|
Exercise price
|
$3.15
|
-
|
|
Risk free interest rate
|
1.41%
- 1.64%
|
-
|
|
Volatility
|
95.96% - 99.03%
|
-
|
|
Expected term
|
3 - 5 years
|
-
|
|
Dividend yield
|
None
|
-
|
Warrant transactions:
In the three and six months ended March 31, 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.
In the three and six months ended March 31, 2019:
On October 2, 2018 in relation to the follow-on firm commitment
underwritten 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.
The following table summarizes the inputs used for the
Black-Scholes pricing model on the warrants issued in the six
months ended March 31, 2020 and 2019:
|
|
2020
|
2019
|
|
Exercise price
|
$1.25
- $3.9125
|
$4.375
|
|
Risk free interest rate
|
1.48% - 1.63%
|
2.90%
|
|
Volatility
|
95.36% - 96.85%
|
70.61%
|
|
Expected term
|
5 years
|
5
years
|
|
Dividend yield
|
None
|
None
|
NOTE 11 – STOCK-BASED COMPENSATION
Equity Compensation Plan – On June 2, 2015, the Board of
Directors of the Company 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 stocks, 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 our fiscal 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 September of the immediately
preceding fiscal year, but in no event shall any such annual
increase exceed 100,000 shares of common stock. 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
FASB ASC 718. FASB 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.
Corporate Governance and Nominating 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.
27
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.
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:
|
|
Number of shares
|
Weighted-average exercise price
|
Weighted-average remaining contractual term (in years)
|
Aggregate intrinsic value (in thousands)
|
|
Outstanding
at September 30, 2019
|
1,219,650
|
6.07
|
|
|
|
Granted
|
310,000
|
3.15
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
14,650
|
5.70
|
|
|
|
Outstanding
at March 31, 2020
|
1,515,000
|
$
5.48
|
7.17
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2020
|
898,334
|
$
5.28
|
6.80
|
$
—
|
As of March 31, 2020, there was approximately $1,171,704 of total
unrecognized compensation cost related to non-vested stock options
which vest over a period of approximately 2.0 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 $0 and $138,000 of stock based compensation expense for
the three and six months ended March 31, 2020,
respectively.
NOTE 12 – WARRANTS
Transactions involving our equity-classified warrants 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, 2019
|
423,605
|
$
6.64
|
|
|
|
Issued
|
527,923
|
1.49
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
-
|
-
|
|
|
|
Outstanding
at March 31, 2020
|
951,528
|
$
3.78
|
3.77
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2020
|
423,605
|
$
6.64
|
2.53
|
$
—
|
28
The following table summarizes outstanding common stock purchase
warrants as of March 31, 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
|
47,000
|
$
3.9125
|
October
2024
|
|
Exercisable
at $1.25 per share
|
480,000
|
$
1.25
|
January
2025
|
|
|
951,528
|
3.78
|
|
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 so
many professional events annually, 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 have
mutually agreed to suspend payments at minimum from April 2020
until June 2020 and will determine if a contract amendment is
warranted based on the professional league’s future
direction. We have recorded expense of $116,667 and $283,334 for
the three and six months ended March 31, 2020.
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 have
mutually agreed to suspend payments at minimum from April 202 until
June 2020 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 have recorded expense of $208,000
and $1,173,000 for the three and six months ended March 31,
2020.
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 $465,625 and $528,625 for the three and six
months ended March 31, 2020.
NOTE 14 – NOTE PAYABLE
In July 2019, we entered into a loan arrangement for $249,100 for a
line of equipment, of which $172,051 is a long term note payable at
March 31, 2020. 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, of which $25,448 is a long term note payable at March
31, 2020. Payments are for 48 months and have a financing rate of
6.2%, which requires a monthly payment of $783.93.
29
NOTE 15 – 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 are not able to provide support or value
to the CBD business, which the Company is now strategically focused
on.
Therefore, the Company 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 three and six months ended March
31, 2020 and 2019:
|
|
Three months
|
Three months
|
Six months
|
Six months
|
|
|
Ended
|
Ended
|
Ended
|
Ended
|
|
|
March 31,
2020
|
March 31,
2019
|
March 31,
2020
|
March 31,
2019
|
|
|
|
|
|
|
|
Total
Gross Sales
|
$
-
|
$
37,958
|
$
-
|
$
821,691
|
|
Allowances
|
-
|
(1,184
)
|
-
|
(1,576
)
|
|
Total Net Sales
|
-
|
36,774
|
-
|
820,115
|
|
Cost of sales
|
-
|
219,947
|
-
|
545,643
|
|
|
|
|
|
|
|
Gross
Profit
|
-
|
(183,173
)
|
-
|
274,473
|
|
|
|
|
|
|
|
Operating
expenses
|
-
|
189,870
|
41,202
|
342,999
|
|
Income
(
Loss) from
operations
|
-
|
(373,043
)
|
(41,202
)
|
(68,526
)
|
|
Realized
and Unrealized gain (loss) on marketable
securities
|
-
|
361,835
|
-
|
(1,142,978
)
|
|
Interest income (expense)
|
-
|
11,811
|
-
|
18,159
|
|
Income (loss) before provision for income taxes
|
-
|
603
|
(41,202
)
|
(1,193,345
)
|
|
|
|
|
|
|
|
Benefit
(Provision) for income
taxes
|
-
|
-
|
-
|
-
|
|
Net Income (Loss)
|
|
603
|
(41,202
)
|
(1,193,345
)
|
|
Net Gain (Loss) attributable to
noncontrolling
interest
|
-
|
(58,536
)
|
-
|
(137,685
)
|
30
The following table shows the summary assets and liabilities of the
discontinued operations as of March 31, 2020 and September 30,
2019.
|
|
March 31,
|
September 30,
|
|
|
2020
|
2019
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
-
|
$
-
|
|
Accounts
receivable
|
791,998
|
1,080,000
|
|
Total current assets included as part of discontinued
operations
|
791,998
|
1,080,000
|
|
|
|
|
|
Other
assets:
|
|
|
|
Total other assets included as part of discontinued
operations
|
-
|
-
|
|
|
|
|
|
Total assets included as part of discontinued
operations
|
$
791,998
|
$
1,080,000
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
-
|
$
-
|
|
Total current assets included as part of discontinued
operations
|
-
|
-
|
|
|
|
|
|
Long
term liabilities:
|
|
|
|
Total long term liabilities 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 six months ended March
31,:
|
|
2020
|
2019
|
|
Depreciation/
amortization
|
$
-
|
$
19,992
|
|
Realized/unrealized
(gain) loss on securities expenditures
|
$
-
|
$
1,142,978
|
|
Impairment
on discontinued operations assets
|
$
(38,002
)
|
$
-
|
|
Non
cash consideration received for services
|
$
-
|
$
(470,000
)
|
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 March 31,
2020 the balance on the accounts receivable is $791,998, which
reflects payments made and an impairment of $38,002. As of March
31, 2020, one customer has breached their formal agreement on
payments, with an accounts receivable balance of $750,000, and on
April 29, 2020, the Company filed a lawsuit for collection of this
amount and legal fees. The customer is Sandbox Properties LLC and
is an affiliate of Kathy Ireland and kathy ireland Worldwide. As of
March 31, 2020, we believe this amount will be collected 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 16 – LEASES
We have lease agreements for our corporate, warehouse and
laboratory offices 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.
31
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, which are
variable lease costs.
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 condensed consolidated statements of
operations.
Components of operating lease costs are summarized as
follows:
|
|
Three Months Ended
|
Six Months Ended
|
|
|
March 31,
2020
|
March 31,
2020
|
|
Operating
lease costs
|
$
382,433
|
$
764,866
|
|
Variable
lease costs
|
25,791
|
48,891
|
|
Total
operating lease costs
|
$
408,224
|
$
813,757
|
Supplemental cash flow information related to operating leases is
summarized as follows:
|
|
Three Months Ended
|
Six Months Ended
|
|
|
March 31,
2020
|
March 31,
2020
|
|
Cash paid for
amounts included in the measurement of operating lease
liabilities
|
$
357,922
|
$
676,681
|
As of March 31, 2020, our operating leases had a weighted average
remaining lease term of 6.13 years and a weighted average discount
rate of 4.66%. Future minimum aggregate lease payments under
operating leases as of March 31, 2020 are summarized as
follows:
|
For the year ended September 30,
|
|
|
2020
(remaining six months)
|
$
718,122
|
|
2021
|
1,452,434
|
|
2022
|
1,392,837
|
|
2023
|
1,380,204
|
|
2024
|
1,421,610
|
|
Thereafter
|
2,532,811
|
|
Total
future lease payments
|
8,898,018
|
|
Less
interest
|
(1,213,558
)
|
|
Total
lease liabilities
|
$
7,684,460
|
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
|
|
Thereafter
|
2,532,811
|
|
Total
obligations and commitments
|
$
9,574,702
|
32
NOTE 17 – EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted
earnings per share for the following periods:
|
|
Three Months Ended
|
Six Months Ended
|
||
|
|
March 31,
2020
|
March 31,
2019
|
March 31,
2020
|
March 31,
2019
|
|
Basic:
|
|
|
|
|
|
Net
income (loss) continuing operations
|
$
14,883,772
|
$
(31,850,877
)
|
$
27,854,738
|
$
(32,845,791
)
|
|
Net
income (loss) discontinued operations
|
-
|
59,139
|
(41,202
)
|
(1,055,660
)
|
|
Net
income (loss) attributable to cbdMD, Inc. common
shareholders
|
14,883,772
|
(31,791,738
)
|
27,813,536
|
(33,901,451
)
|
|
|
|
|
|
|
|
Preferred
dividends paid
|
100,016
|
-
|
166,750
|
-
|
|
Diluted:
|
|
|
|
|
|
Net
income (loss) continuing operations adjusted for preferred
dividend
|
14,783,756
|
-
|
27,687,988
|
-
|
|
Net
income(loss) adjusted for preferred dividend
|
14,783,756
|
-
|
27,646,786
|
-
|
|
|
|
|
|
|
|
Shares
used in computing basic earnings per share
|
36,503,005
|
10,160,947
|
36,503,005
|
10,107,144
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
Options
|
-
|
-
|
-
|
-
|
|
Warrants
|
-
|
-
|
-
|
-
|
|
Convertible
preferred shares
|
833,500
|
-
|
833,500
|
-
|
|
Shares
used in computing diluted earnings per share
|
37,336,505
|
10,160,947
|
37,336,505
|
10,107,144
|
|
|
|
|
|
|
|
Earnings
per share Basic:
|
|
|
|
|
|
Continued
operations
|
0.41
|
(3.13
)
|
0.76
|
(3.24
)
|
|
Discontinued
operations
|
(0.00
)
|
(0.00
)
|
(0.00
)
|
(0.11
)
|
|
Basic
earnings per share
|
0.41
|
(3.13
)
|
0.76
|
(3.35
)
|
|
|
|
|
|
|
|
Earnings
per share Diluted:
|
|
|
|
|
|
Continued
operations
|
0.40
|
-
|
0.74
|
-
|
|
Discontinued
operations
|
-
|
-
|
(0.00
)
|
-
|
|
Diluted
earnings per share
|
0.40
|
-
|
0.74
|
-
|
At the three and six months ended March 31, 2019, 833,255 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.
NOTE 18 – INCOME TAXES
On November 17, 2017, the Company completed an IPO of its common
stock. The Company conducted a Section 382 analysis and determined
an ownership change occurred upon the IPO. On October 2, 2018 the
Company completed a follow-on firm commitment underwritten public
offering of its common stock. On May 16, 2019 the Company completed
a follow-on firm commitment underwritten public offering of its
common stock. On October 16, 2019 the Company completed a follow-on
firm commitment underwritten public offering of its 8.0% Series A
Cumulative Convertible Preferred Stock.
On January 14, 2020, the Company completed a
follow-on firm commitment underwritten public offering of its
common stock. Management has determined that the Company's federal
and state NOL carryovers established up through the date of each of
these ownership changes may be subject to an annual limitation;
however, this limitation is not material to these condensed
consolidated financial statements.
33
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. 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.
NOTE 19 – SUBSEQUENT EVENTS
The Company has analyzed its operations subsequent to March 31,
2020 to the date these unaudited condensed 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.
On March 27, 2020, Congress passed and the President of the United
States signed into law the Coronavirus Aid, Relief, and Economic
Security Act, which is commonly known as the CARES Act
which provides a stimulus package to
certain business and individuals affected by the novel COVID-19
emergency
. The Company is
currently evaluating how these provisions in the CARES Act will
impact its financial position, results of operations and cash
flows.
In April 2020, the Company applied for an unsecured loan in the
amount of approximately $1.5 million pursuant to the Paycheck
Protection Program administered by the United States Small Business
Administration and authorized by the Keeping American Workers
Employed and Paid Act, which is part of 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.
The Company
received the loan proceeds on April 27, 2020.
34
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The
following discussion of our financial condition and results of
operations for the second quarters of fiscal 2020 and fiscal 2019
should be read in conjunction with the condensed 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 because of several factors, including
those set forth under the Part I, Item 1A, Risk Factors and
Business sections in our 2019 10-K, this report, and our other
filings with the Securities and Exchange Commission. 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. In addition, any statements that refer
to projections of our future financial performance, our anticipated
growth and trends in our businesses, and other characterizations of
future events or circumstances are forward-looking statements. Such
statements are based on our current expectations and could be
affected by the uncertainties and risk factors described throughout
this report.
Overview
Business
Through our subsidiary, CBDI, we produce
and
distribute
various high-grade,
premium CBD products, including tinctures, capsules, gummies, bath
bombs and topical creams. In the third quarter of fiscal 2019, we
launched a line of pet related CBD products under our Paw CBD brand
which includes tinctures, treats, and balms, with additional
products under development. In October 2019, following the initial
positive response to the Paw CBD brand from retailers and
consumers, we organized Paw CBD as a separate wholly-owned
subsidiary in an effort to take advantage of its early mover status
in the CBD animal health industry. With over 40 SKU’s of
premium pet CBD products for dogs, cats and horses, we are seeking
to grow Paw CBD into a leading brand.
We
either manufacture our premium line of products at our Charlotte,
NC facility or work with third party manufacturers. We only
source cannabinoids, including CBD, which are extracted
from non-GMO hemp grown on farms in the United
States. We utilize a manufacturing process which
creates hybrid broad-spectrum concentrations including CBD, other
cannabinoids, and various other compounds, which we believe creates
a superior product, while eliminating tetrahydrocannabinol
(THC) content.
Since
December 2018, we have significantly increased the number of
locations cbdMD products are available in, and with the building
momentum of retailer acceptance subsequent to the passage of the
Farm Bill, we are pursuing multiple opportunities to expand our
product distribution as we continue to work to build cbdMD into a
top recognized brand in the industry. We also continue to utilize
partnerships and sponsorships with professional athletes as a way
to gain brand recognition.
The Impact of the COVID-19 Pandemic on our Company
On
March 11, 2020, the World Health Organization declared the current
coronavirus (“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 begun to have 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 have temporarily closed our corporate office and
altered work schedules at our manufacturing and warehouse
facilities. In addition, our senior management and our office
personnel are working remotely. To date these adjustments have not
adversely impacted our ability to operate our company. In mid March
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. During the second quarter of fiscal
2020 we experienced an impact on our wholesale sales to our brick
and mortar customers as many of the stores have been temporarily
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 increased website content
and various offerings and changes to make online ordering more
effective (auto reorder capability, giveaways, free shipping,
etc.). The impact of COVID-19 on the quarter ended March 31, 2020
has been a small decline in our wholesale sales with relatively no
impact to our online sales. We continue to assess the situation on
a daily basis, but we are unable to predict when and how quickly we
will be able to resume regular operations.
35
During
this time, we have implemented several measures that we believe
will ensure sufficient liquidity and support the business for the
next several months. Specific measures, among other things, include
the following:
●
Negotiating
with our landlords to receive temporary rent deferrals on our
facilities;
●
Negotiating
with our vendors to defer payments;
●
Suspending
sponsorship and affiliate agreements;
●
Shifting
sales focus efforts to our online consumer sales while the
wholesale sales environment is impacted;
●
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
●
Furloughing
employees in areas impacted (wholesale sales, warehouse, marketing
and events)
To further bolster our
working capital, 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 are using 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 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. 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.
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 may have a significant
adverse effect on our reported results of operations for our third
fiscal quarter of 2020 and possibly beyond.
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.
36
Growth Strategies and Outlook
We
continue to pursue the following strategies to grow our revenues
and expand our business and operations in the balance of fiscal
2020 and beyond:
●
Increase our base of product
offerings
: We currently have a
broad offering of CBD products, including topicals, tinctures,
gummies, bath bombs, vape oils, capsules, and pet products and
continue to evaluate additional offerings within these categories
as well as new 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 addition, on
April 8, 2020 we announced that in the coming weeks, we would offer
third party manufactured single use alcohol-based hand sanitizers
(which will not contain CBD) free with the purchase of cbdMD
products, while supplies last. This has been accomplished. In
addition, we also announced that in the coming 60 days from date of
the announcement that we intend to begin manufacturing of our own
branded alcohol-based hand sanitizer products (which will not
contain CBD) pursuant to the authorization provided in the
FDA’s Temporary Policy for Preparation of Certain
Alcohol-Based Hand Sanitizer Products During the Public Health
Emergency (COVID-19) Guidance for Industry, which was issued on
March 27, 2020. We have begun the manufacturing and marketing
process and expect the product to be available in May 2020. We also
have other new products and bundled packages which will be
available starting in May 2020 as well as several products in the
research and development phase with targeted roll-out during
2020;
●
Expand our sales
channels
: As the market
continues to evolve, we are expanding our sales channels. During
fiscal 2019, we moved from a 100% online sales channel to working
with wholesalers and retail channels. Big box retailers are
beginning to explore CBD products and we believe this will provide
another significant opportunity. In addition, sales channels for
the pet line include expanding to not only retail stores but
veterinary and pet care professionals;
●
Expand our recently formed CBD
animal health division
: With
the formation in October 2019 of Paw CBD as a separate wholly-owned
subsidiary, we have committed resources to branding and marketing
the Paw CBD product line, which we believe will enable us to more
effectively target new sales channels as well as utilize our
marketing efforts in a more defined manner that we believe will
generate other sales opportunities;
●
Expand our sponsorships toward
targeted segments:
We have had
significant success with attracting high profile sponsors and
influencers and expect to continue to assess the segments we have
covered with a focus on activation of the sponsorships and
influencers which are producing the largest visibility and
responsiveness; and
●
Acquisitions.
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.
As
a consumer goods manufacturer, we strive to meet or exceed the FDAs
Good Manufacturing Practice (GMP) guidelines. Good Manufacturing
Practices (GMPs) are guidelines that 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.
These GMP requirements are listed in Section 8 of NSF/ANSI 173
which is the only American National Standard in the dietary
supplement industry developed in accordance with the FDA’s 21
CFR part 111.
37
With our growth and evolution, challenges could
exist and we must continue to review processes and controls and
adapt our day to day GMP policies and practices as our
manufacturing volume increases. We are dedicated to providing
the highest quality CBD consumer goods on the market and therefore
will continue to focus substantial efforts on GMP
compliance. Our manufacturing facility and warehouse
operations are fully GMP compliant and NSF GMP
registered. NSF GMP registration verifies that the
facility is audited twice annually for quality and safety in
compliance with Federal Regulations for
dietary
supplements good
manufacturing practices.
We have applied for an
additional third-party certification from the U.S. Hemp Authority
and are awaiting scheduling of the audit.
Additionally, we have 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.
Results of operations
The
following tables provide certain selected consolidated financial
information for the periods presented:
|
|
Three Months Ended March 31,
|
Six Months Ended March 31,
|
||||
|
|
2020
|
2019
|
change
|
2020
|
2019
|
change
|
|
|
(unaudited)
|
(unaudited)
|
|
(unaudited)
|
(unaudited)
|
|
|
Total net
sales
|
$
9,399,036
|
$
5,636,578
|
3,762,458
|
$
19,547,272
|
$
6,102,265
|
13,445,007
|
|
Cost of
sales
|
2,732,076
|
1,914,716
|
817,360
|
6,432,613
|
2,080,027
|
4,352,586
|
|
Gross profit
as a percentage of net sales
|
70.9
%
|
66.0
%
|
4.1
%
|
67.0
%
|
65.9
%
|
1.1
%
|
|
Operating
expenses
|
12,267,637
|
5,749,464
|
6,518,173
|
24,827,934
|
7,141,276
|
17,686,658
|
|
(Increase)
decrease on contingent liability
|
21,261,994
|
(30,914,074
)
|
168.8
%
|
38,160,000
|
(30,914,074
)
|
223.4
%
|
|
Net income
(loss) before taxes
|
14,883,772
|
(32,925,877
)
|
145.2
%
|
25,614,438
|
(33,978,793
)
|
175.4
%
|
|
Net income
(loss) attributable to cbdMD, Inc. common
shareholders
|
$
14,783,756
|
$
(31,791,738
)
|
146.5
%
|
$
27,646,786
|
$
(33,901,451
)
|
181.5
%
|
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
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.
|
|
Three months ended
March 31,
2020
|
% of total
|
Three months ended
March 31,
2019
|
% of total
|
|
|
|
|
|
|
|
Wholesale
sales
|
$
2,617,860
|
27.9
%
|
$
1,375,045
|
24.4
%
|
|
Consumer
sales
|
6,781,176
|
72.1
%
|
4,261,533
|
75.6
%
|
|
Service
oriented sales
|
-
|
0
%
|
-
|
0
%
|
|
Total
net sales
|
$
9,399,036
|
|
$
5,636,578
|
|
|
|
Six months ended
March 31,
2020
|
% of total
|
Six months ended
March 31,
2019
|
% of total
|
|
|
|
|
|
|
|
Wholesale
sales
|
$
5,885,981
|
30.1
%
|
$
1,375,045
|
22.5
%
|
|
Consumer
sales
|
13,661,291
|
69.9
%
|
4,727,220
|
77.5
%
|
|
Service
oriented sales
|
-
|
0
%
|
-
|
0
%
|
|
Total
net sales
|
$
19,547,272
|
|
$
6,102,265
|
|
38
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 the three and
six months ended March 31, 2020 and 2019:
|
|
Three months ended
March 31,
2020
|
Three months ended
March 31,
2019
|
change
|
|
|
|
|
|
|
Product
sales
|
$
2,732,076
|
$
1,893,927
|
$
838,149
|
|
Service
related sales
|
-
|
20,789
|
(20,789
)
|
|
Total
cost of sales
|
$
2,732,076
|
$
1,914,716
|
$
817,360
|
|
|
|
|
|
|
|
Six months ended
March 31,
2020
|
Six months ended
March 31,
2019
|
change
|
|
|
|
|
|
|
Product
sales
|
$
6,432,613
|
$
2,040,767
|
$
4,391,846
|
|
Service
related sales
|
-
|
39,260
|
(39,260
)
|
|
Total
cost of sales
|
$
6,432,613
|
$
2,080,027
|
$
4,352,586
|
In
our product sales, our cost of sales as a percentage of sales was
29.0% and 33.9% for the three months ended March 31, 2020 and 2019,
respectively, and was 32.9% and 34.0% for the six months ended
March 31, 2020 ad 2019, respectively. The change 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. During the three months ended March
31, 2020 we had a inventory adjustment which decreased our cost of
sales for the same period, without this adjustment our cost of
sales as a percentage of sales would have been 33.1% and 34.8% for
the three and six months ended March 31, 2020. We expect product
sales will maintain cost of sales as a percentage of net sales,
between 25% and 40%, 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, travel, rent, professional service fees, and
business insurance expense. Our operating expenses on a
consolidated basis increased approximately 110% and 245% in the
three and six months ended March 31, 2020 from the same periods
ended March 31, 2019, respectively, and is directly related to the
Mergers on December 20, 2018 and the significant growth and ramp up
of that business.
The
following table provides information on our approximate operating
expenses for the three and six months ended March 31, 2020 and
2019:
|
|
Three months ended
|
Three months ended
|
|
|
|
March 31,
2020
|
March 31,
2019
|
change
|
|
|
|
|
|
|
Staff
related expense
|
$
3,969,976
|
$
2,220,790
|
$
1,749,186
|
|
Accounting/legal
expense
|
382,673
|
226,628
|
156,045
|
|
Professional
outside services
|
329,019
|
427,271
|
(98,252
)
|
|
Advertising/marketing/social
media/events/tradeshows
|
3,398,776
|
1,475,695
|
1,923,081
|
|
Sponsorships
|
1,442,472
|
-
|
1,442,472
|
|
Affiliate
commissions
|
385,341
|
477,838
|
(92,497
)
|
|
Merchant
fees
|
674,469
|
372,363
|
302,106
|
|
Technology
|
280,899
|
34,648
|
246,251
|
|
Travel
expense
|
164,325
|
129,281
|
35,044
|
|
Rent
|
394,598
|
112,510
|
282,088
|
|
Business
insurance
|
121,202
|
94,498
|
26,704
|
|
Non-cash
stock compensation
|
435,301
|
19,475
|
415,826
|
|
All
other expenses
|
288,586
|
158,467
|
130,119
|
|
Totals
|
$
12,267,637
|
$
5,749,464
|
$
6,518,173
|
39
|
|
Six months ended
|
Six months ended
|
|
|
|
March 31,
2020
|
March 31,
2019
|
change
|
|
|
|
|
|
|
Staff
related expense
|
$
7,902,979
|
$
2,515,330
|
$
5,387,649
|
|
Accounting/legal
expense
|
726,093
|
537,821
|
188,272
|
|
Professional
outside services
|
842,104
|
681,636
|
160,468
|
|
Advertising/marketing/social
media/events/tradeshows
|
5,809,498
|
1,557,837
|
4,251,661
|
|
Sponsorships
|
3,572,308
|
-
|
3,572,308
|
|
Affiliate
commissions
|
929,608
|
477,838
|
451,770
|
|
Merchant
fees
|
1,415,462
|
403,808
|
1,011,654
|
|
Technology
|
540,895
|
46,788
|
494,107
|
|
Travel
expense
|
369,043
|
136,351
|
232,692
|
|
Rent
|
744,191
|
174,215
|
569,976
|
|
Business
insurance
|
265,663
|
157,362
|
108,301
|
|
Non-cash
stock compensation
|
1,115,875
|
163,148
|
952,727
|
|
All
other expenses
|
594,215
|
289,142
|
305,073
|
|
Totals
|
$
24,827,934
|
$
7,141,276
|
$
17,686,658
|
The
increase in staff related expense is a direct result of the build
out of the CBDI team. The increase in professional outside services
is related to the use of outside agencies and firms to support the
growth while we built our infrastructure. The increase in
advertising/marketing, sponsorships, affiliate commissions,
technology, and travel are a result of execution on the business
strategy and building of the CBD brand while increasing market
share. The increase in merchant fees is a direct result of
increased business through our E-commerce site. The non-cash stock
compensation expense reflects the value of restricted stock awards
and options as they vest.
The
significant increase in operating expenses is related to the
Mergers as well as the ramping up of the CBDI 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, we are now focused on activation of our assets to
continue to build our brand while we transition with a focus on
overall execution and profitability.
Corporate overhead and allocation of management fees to our
segments
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 three and six months ended March 31, 2020 and
2019:
|
|
Three months ended
|
Three months ended
|
|
|
|
March 31,
2020
|
March 31,
2019
|
change
|
|
|
|
|
|
|
Staff
related expense
|
$
292,833
|
$
553,595
|
$
(260,762
)
|
|
Accounting/legal
expense
|
163,878
|
224,335
|
(60,457
)
|
|
Professional
outside services
|
144,522
|
240,722
|
(96,200
)
|
|
Travel
expense
|
4,160
|
37,031
|
(32,871
)
|
|
Business
insurance
|
108,748
|
80,628
|
28,120
|
|
Non-cash
stock compensation
|
435,301
|
19,475
|
415,826
|
|
Totals
|
$
1,149,442
|
$
1,155,786
|
$
(6,344
)
|
|
|
Six months ended
|
Six months ended
|
|
|
|
March 31,
2020
|
March 31,
2019
|
change
|
|
|
|
|
|
|
Staff
related expense
|
$
710,240
|
$
765,802
|
$
(55,562
)
|
|
Accounting/legal
expense
|
435,892
|
535,528
|
(99,636
)
|
|
Professional
outside services
|
320,030
|
486,141
|
(166,111
)
|
|
Travel
expense
|
22,684
|
43,956
|
(21,272
)
|
|
Business
insurance
|
182,465
|
140,814
|
41,651
|
|
Non-cash
stock compensation
|
1,115,875
|
163,148
|
952,727
|
|
Totals
|
$
2,787,186
|
$
2,135,389
|
$
651,797
|
40
The
overall increase in corporate operating expenses is related to the
maturation of the entire organization and ongoing public company
related expenses.
Other income and other non-operating expenses
Interest income (expense)
Our
interest income (expense) was $35,607 and $6,274 for the three
months ended March 31, 2020 and 2019, respectively. For the six
months ended March 31, 2020 and 2019, our interest income (expense)
was $42,875 and $43,959, respectively.
Contingent liability
As
consideration for the Mergers, under the terms of the Merger
Agreement, we had a contractual obligation to issue 15,250,000
initial shares of our common stock (the “Initial
Shares”), after approval by our shareholders, to the members
of Cure Based Development, to be issued in two tranches 6,500,000
shares and 8,750,000 shares, both of which are subject to leak out
provisions. The unrestricted voting rights to 8,750,000 tranche of
shares vest over a five year period and until those voting rights
vest are subject to voting proxy agreements. As of March 31, 2020,
unrestricted voting rights to 2,187,500 shares have vested and
those shares are no longer subject to voting proxy agreements. The
Merger Agreement also provided that an additional 15,250,000
Earnout 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 of the
Mergers.
The
Initial Shares and Earnout Shares were approved by our shareholders
and the Initial Shares were issued on April 19, 2019. The Initial
Shares value at April 19, 2019 was $53,215,163, and with the
issuance of the Initial Shares, the contingent liability related to
the Initial Shares was reclassified to shareholders’ equity
by $53,215,163.
The
earn out provision is accounted for and recorded as a contingent
liability with increases in the liability recorded as a non cash
other expense and decreases in the liability recorded as a non cash
other income. The first marking period for the Earnout Shares was
December 31, 2019 and based on measurement criteria, 5,127,792
shares were earned and issued on February 27, 2020. The value of
the issued Earnout Shares as of February 27, 2020 was $4,620,000
and the decrease in value of $6,924,503 related to those shares is
recorded in the Statement of Operations for the three months ended
March 31, 2020. Additionally, as the 5,127,792 Earnout Shares were
issued on February 27, 2020, the value of the shares in the amount
of $4,620,000 was reclassified from the contingent liability to
additional paid in capital on the balance sheet. The remaining
Earnout Shares for future evaluations represent the contingent
liability and were valued at $7,820,000 at March 31, 2020, as
compared to $22,157,491 at December 31, 2019, a decrease of
$14,337,491. The decrease in value of $6,924,503 and $14,337,491
combined represent the decrease of the total contingent liability
of $21,261,994 and is recorded as other income in the Statement of
Operations for the three months ended March 31, 2020. The Company
utilizes 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 decrease in the
value of the contingent liability was the decrease of the
Company’s stock price, which was $0.93 at March 31, 2020 as
compared to $2.26 on December 31, 2019 and the issuance on February
27, 202 of the Earnout Shares for the first marking
period.
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 the three months ended
March 31, 2020 and 2019 we recorded $(53,152) and $9,524 of
realized and unrealized gain (loss) on marketable and other
securities. For the six months ended March 31, 2020 and 2019 we
recorded $(115,162) and $(64,640) of realized and unrealized gain
(loss) on marketable and other securities. The discontinued
operations recorded a realized and unrealized gain (loss) of
$361,835 and $(1,142,978), for the three and six months ended March
31, 2019, which is included in the net income (loss) from
discontinued operations on the statement of
operations.
For
the three and six months ended March 31, 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. (see Note 3
Marketable Securities and Investment Other Securities in the
consolidated financial statements for more
information).
41
Liquidity and Capital Resources
We
had cash and cash equivalents on hand of $14,835,699 and working
capital of $19,092,846 at March 31, 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 58.1% at March
31, 2020 from September 30, 2019, and is primarily attributable to
an increase in cash and inventory, offset by a decrease in accounts
receivable, marketable and other securities, merchant reserve,
prepaid expenses, and assets from discontinued operations. Our
current liabilities increased approximately 56.1% at March 31, 2020
from September 30, 2019. This increase is primarily attributable to
increases in accounts payable, accrued expenses, note payable and
operating lease short term liability.
During
the three and six months ended March 31, 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. We have multiple endorsement or sponsorship
agreements for varying time periods up through December 2022 and
provide for financial commitments from the Company based on
performance/participation (see Note 13 Commitments and
Contingencies). We have sufficient working capital to fund our
operations.
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 $9,147,052 and
$4,462,372 for six months ended March 31, 2020 and 2019,
respectively.
On
October 16, 2019 we closed a follow-on firm commitment underwritten
public offering of shares of our 8.0% Series A Convertible
Preferred Stock resulting in total net proceeds to us of
$4,525,100. On January 15, 2020, we closed a follow-on firm
underwritten public offering of shares of our common stock
resulting in total net proceeds to us of $16,928,100. We are using
the net proceeds from the offerings for brand development and
expansion, advertising, marketing, and general working capital. In
addition, as described earlier in this section, in April 2020 we
received a PPP Loan of $1,456,100
Related Parties
As
described in Note 9 in notes to our consolidated financial
statements appearing elsewhere in this report, we have engaged in
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
(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 our 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.
Please
see Part II, Item 7 – Critical Accounting Policies appearing
in our 2019 10-K for the critical accounting policies we believe
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.
Recent accounting pronouncements
Please
see Note 1 –Organization and Summary of Significant
Accounting Policies appearing in the consolidated financial
statements included in this report for information on accounting
pronouncements.
42
Off balance sheet arrangements
As
of the date of this report, we do not have any off-balance sheet
arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to
investors. 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.
43
ITEM 3.
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
applicable for a smaller reporting company.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation of Disclosure
Controls and Procedures
. We
maintain “disclosure controls and procedures” as such
term is defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934. In designing and evaluating our disclosure controls and
procedures, our management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of
disclosure controls and procedures are met. Additionally, in
designing disclosure controls and procedures, our management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential
future conditions. Based on their evaluation as of the end of the
period covered by this report, our co-Chief Executive Officers and
our Chief Financial Officer have concluded that our disclosure
controls and procedures were effective to ensure that the
information relating to our company, required to be disclosed in
our SEC reports (i) is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and (ii)
is accumulated and communicated to our management, including our
co-Chief Executive Officers and our Chief Financial Officer, to
allow timely decisions regarding required
disclosure.
Changes in Internal Control
Over Financial Reporting
. There
were no changes in our internal control over financial reporting
during our most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal control
over financial reporting.
44
PART II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
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
15
th
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 are seeking actual, compensatory and
consequential damages, together with an order violating
defendants’ fraudulent transfers.
ITEM
1A. RISK FACTORS.
We desire to take advantage of the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995.
Accordingly, we incorporate by reference the risk factors disclosed
in Part I, Item 1A of our 2019 Form 10-K.
The coronavirus global pandemic has caused a significant disruption
in retail commerce and may have a material adverse impact upon our
financial condition and results of operations.
On March 11, 2020, the World Health Organization declared the
current 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 temporarily closed our corporate office and have altered work
schedules at our warehouse and manufacturing facilities. In
addition, many of our office personnel are working remotely. We are
unable to predict when and how quickly we will be able to resume
regular operations. While we are not able to estimate the full
impact of the COVID-19 outbreak on our financial condition and
results of operations, we expect that this situation will have a
significant adverse impact on the Company’s results of
operations for the third fiscal quarter of 2020 and possibly
beyond. Should these conditions persist for a prolonged period
beyond the third quarter, this may have a material adverse impact
on our ultimate financial condition and liquidity.
Major disruptions to our logistics capability or to the operations
of our key vendors or customers could have a material adverse
impact on our operations.
Conditions caused by 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.
45
A recession or long-term market correction as a result of COVID-19
could have a material impact on our business
While the potential economic impact brought by COVID-19 may be
difficult to assess or predict, the pandemic has resulted in
significant disruption of global financial markets, and a recession
or long-term market correction resulting from the spread of
COVID-19 could materially impact the value of our common stock,
impact our access to capital and affect our business in the near
and long-term.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
None
ITEM
3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM
4. MINE SAFETY DISCLOSURES.
Not
applicable to our Company’s operations.
ITEM
5. OTHER INFORMATION.
In April 2020 following our 2020 annual meeting of
shareholders, our board of directors approved the consolidation of
two previously constituted Board committees, the Compensation
Committee and the Nominating and Corporate Governance Committee,
into one consolidated committee titled the Compensation, Nominating
and Corporate Governance Committee. In connection therewith, the
Board adopted a new committee charter, a copy of which is posted on
our corporate website at
www.cbdmd.com
.
Following this action, the following independent directors were
appointed to the committees of the Board, to serve at the pleasure
of the board of directors:
|
Director
|
Audit Committee Member
|
Compensation, Corporate Governance and Nominating Committee
Member
|
|
|
|
|
|
Bakari Sellers
|
✓
|
✓
*
|
|
Peter J. Ghiloni
|
✓
|
✓
|
|
Scott G. Stephen
|
✓
|
✓
|
|
William F. Raines, III
|
✓
*
|
✓
|
*
denotes
Committee chairperson.
46
ITEM
6.
EXHIBITS.
|
|
|
|
|
Incorporated by Reference
|
|
Filed or
Furnished
|
||||
|
No.
|
|
Exhibit Description
|
|
Form
|
|
Date Filed
|
|
Number
|
|
Herewith
|
|
|
|
8-K
|
|
12/3/2018
|
|
2.1
|
|
|
||
|
|
|
10-Q
|
|
02/14/2019
|
|
2.2
|
|
|
||
|
|
|
10-Q
|
|
02/14/2019
|
|
2.3
|
|
|
||
|
|
|
10-Q
|
|
02/14/2019
|
|
2.4
|
|
|
||
|
|
|
10-Q
|
|
02/14/2019
|
|
2.5
|
|
|
||
|
|
|
1-A
|
|
9/18/17
|
|
2.1
|
|
|
||
|
|
|
1-A
|
|
9/18/17
|
|
2.2
|
|
|
||
|
|
|
1-A
|
|
9/18/17
|
|
2.3
|
|
|
||
|
|
|
1-A
|
|
9/18/17
|
|
2.4
|
|
|
||
|
|
|
1-A
|
|
9/18/17
|
|
2.5
|
|
|
||
|
|
|
1-A
|
|
9/18/17
|
|
2.6
|
|
|
||
|
|
|
8-K
|
|
2/28/20
|
|
10.1
|
|
|
||
|
|
|
|
|
|
|
|
|
Filed
|
||
|
|
|
|
|
|
|
|
|
Filed
|
||
|
|
|
|
|
|
|
|
|
Filed
|
||
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
Filed
|
47
SIGNATURES
Pursuant
to the requirements 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.
|
|
cbdMD, INC.
|
|
|
|
|
|
|
May 15, 2020
|
By:
|
/s/ Martin A. Sumichrast
|
|
|
|
Martin A. Sumichrast, Co-Chief Executive Officer, co-principal
executive officer
|
|
|
|
|
|
May 15, 2020
|
By:
|
/s/ Raymond S. Coffman
|
|
|
|
Raymond S. Coffman, Co-Chief Executive Officer, co-principal
executive officer
|
|
May 15, 2020
|
By:
|
/s/ Mark S. Elliott
|
|
|
|
Mark S. Elliott, Chief Operating Officer, Chief Financial Officer,
principal financial and accounting officer
|
48
TABLE OF CONTENTS
Part 1 - Financial InformationItem 1. Financial StatementsNote 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 Discontinued OperationsNote 16 LeasesNote 17 Earnings Per ShareNote 18 Income TaxesNote 19 Subsequent EventsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits