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 December 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
|
YCBDpA
|
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, a 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.
52,287,113 shares of common stock are issued and
outstanding as of February 8,
2021.
TABLE OF CONTENTS
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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”, and Paw CBD, Inc., a North Carolina
corporation which we refer to as “Paw CBD”. In
addition, "fiscal 2019" refers to the year ended September 30,
2019, “fiscal 2020” refers to the year ended September
30, 2020, “fiscal 2021” refers to the fiscal year
ending September 30, 2021, "first quarter of 2020" refers to the
three months ended December 31, 2019 and "first quarter of 2021"
refers to the three months ended December 31, 2020.
We maintain a corporate website at
www.cbdmd.com
.
The information contained on our websites and our various social
media platforms are not part of this report
.
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:
|
•
|
material risks associated with our overall business,
including:
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•
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our history of losses;
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•
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the continuing impact of COVID-19 on our company;
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|
•
|
our reliance on third party raw material suppliers and
manufacturers and compounders;
|
|
|
•
|
our reliance on third party compliance with our supplier
verification program and testing protocols; and
|
|
|
•
|
risks associated with the implementation of our enterprise resource
planning system (ERP) to Oracle NetSuite.
|
|
•
|
material risks associated with regulatory environment for CBD,
including:
|
|
|
|
•
|
change in state laws pertaining to industrial hemp;
|
|
|
•
|
costs to us for compliance with laws and the risks of increased
litigation; and
|
|
|
•
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possible changes in the use of CBD.
|
|
•
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material risks associated with the ownership of our securities,
including;
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|
|
|
•
|
the impact of changes in the fair value of our contingent
liabilities associated with the Earnout Shares;
|
|
|
•
|
dilution to our shareholders upon the issuance of the Earnout
Shares;
|
|
|
•
|
time devoted to our company by one of our co-Chief Executive
Officers;
|
|
|
•
|
the designations, rights and preferences of our 8.0% Series A
Cumulative Convertible Preferred Stock;
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|
|
•
|
dilution upon the issuance of shares of common stock underlying
outstanding warrants, options and our 8.0% Series A Cumulative
Convertible Preferred Stock; and
|
|
|
•
|
voting control held by our directors and their
affiliates.
|
Most
of these factors are difficult to predict accurately and are
generally beyond our control. You should consider the areas of risk
described in connection with any forward-looking statements that
may be made herein. Readers are cautioned not to place undue
reliance on these forward-looking statements and readers should
carefully review this report 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 appearing in our Annual
Report on Form 10-K for fiscal 2020 as filed with the Securities
and Exchange Commission (the “SEC”) on December 22,
2020 (the "2020 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 -
F
INANCIAL
INFORMATION
ITEM
1.
FINANCIAL
STATEMENTS.
cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2020 AND SEPTEMBER 30, 2020
|
|
(Unaudited)
|
|
|
|
December 31,
|
September 30,
|
|
|
2020
|
2020
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
28,763,812
|
$
14,824,644
|
|
Accounts
receivable
|
1,021,554
|
911,482
|
|
Accounts
receivable – discontinued operations
|
24,717
|
447,134
|
|
Marketable
securities
|
29,181
|
26,472
|
|
Investment
other securities
|
250,000
|
250,000
|
|
Deposits
|
-
|
40,198
|
|
Inventory
|
4,383,501
|
4,603,360
|
|
Inventory
prepaid
|
336,362
|
288,178
|
|
Prepaid
software
|
-
|
174,308
|
|
Prepaid
equipment deposits
|
-
|
40,197
|
|
Prepaid
sponsorship
|
1,069,600
|
1,203,300
|
|
Prepaid
expenses and other current assets
|
1,496,721
|
902,979
|
|
Total current assets
|
37,375,449
|
23,712,252
|
|
|
|
|
|
Other
assets:
|
|
|
|
Property
and equipment, net
|
3,084,321
|
3,183,487
|
|
Operating
lease assets
|
6,547,278
|
6,851,357
|
|
Deposits
for facilities
|
766,708
|
790,708
|
|
Intangible
assets, net
|
21,635,000
|
21,635,000
|
|
Goodwill
|
54,669,997
|
54,669,997
|
|
Total other assets
|
86,703,304
|
87,130,549
|
|
|
|
|
|
Total assets
|
$
124,078,753
|
$
110,842,801
|
See
Notes to Condensed Consolidated Financial Statements
4
cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2020 AND SEPTEMBER 30, 2019
(continued)
|
|
(Unaudited)
|
|
|
|
December 31,
|
September 30,
|
|
|
2020
|
2020
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
2,174,529
|
$
2,850,421
|
|
Deferred
revenue
|
22,440
|
45,141
|
|
Accrued
expenses
|
2,301,154
|
2,724,779
|
|
Operating
leases – current portion
|
1,242,608
|
1,159,098
|
|
Paycheck
Protection Program loan, current portion
|
939,826
|
854,000
|
|
Note
payable
|
56,573
|
55,639
|
|
Total current liabilities
|
6,737,130
|
7,689,078
|
|
|
|
|
|
Long
term liabilities:
|
|
|
|
Long
term liabilities
|
-
|
264,367
|
|
Note
payable
|
153,957
|
-
|
|
Paycheck
Protection Program loan
|
516,274
|
602,100
|
|
Operating
leases - long term portion
|
5,688,746
|
6,010,208
|
|
Contingent
liability
|
24,700,000
|
16,200,000
|
|
Deferred
tax liability
|
563,000
|
895,300
|
|
Total long term liabilities
|
31,621,977
|
23,971,675
|
|
|
|
|
|
Total liabilities
|
38,359,107
|
31,660,753
|
|
|
|
|
|
cbdMD,
Inc. shareholders' equity:
|
|
|
|
Preferred
stock, authorized 50,000,000 shares, $0.001 par value, 2,800,000
and 500,000 shares issued and outstanding,
respectively
|
2,800
|
500
|
|
Common
stock, authorized 150,000,000 shares, $0.001 par
value,
|
|
|
|
52,130,870
and 52,130,870 shares issued and outstanding,
respectively
|
52,131
|
52,131
|
|
Additional
paid in capital
|
142,548,752
|
126,517,784
|
|
Accumulated
deficit
|
(56,884,037
)
|
(47,388,367
)
|
|
Total cbdMD, Inc. shareholders' equity
|
85,719,646
|
79,182,048
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
124,078,753
|
$
110,842,801
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements
5
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2020 AND 2019
|
|
Three months
|
Three months
|
|
|
Ended
|
Ended
|
|
|
December 31,
2020
|
December 31,
2019
|
|
|
|
|
|
Gross
Sales
|
$
13,131,946
|
$
10,412,491
|
|
Allowances
|
(803,643
)
|
(264,255
)
|
|
Total Net Sales
|
12,328,303
|
10,148,236
|
|
Cost of sales
|
3,430,274
|
3,700,537
|
|
|
|
|
|
Gross
Profit
|
8,898,028
|
6,447,699
|
|
|
|
|
|
Operating
expenses
|
10,657,973
|
12,560,297
|
|
(
Loss)
from operations
|
(1,759,945
)
|
(6,112,598
)
|
|
Realized
and Unrealized gain (loss) on marketable & other
securities
|
542,710
|
(62,010
)
|
|
(Increase)
decrease of contingent liability
|
(8,500,000
)
|
16,898,006
|
|
Interest (expense)
income
|
(10,386
)
|
7,267
|
|
Income (loss) before
provision for income taxes
|
(9,727,621
)
|
10,730,665
|
|
|
|
|
|
Benefit
for income taxes
|
332,000
|
2,240,300
|
|
Net (Loss) Income
from continuing operations
|
(9,395,621
)
|
12,970,965
|
|
Net (Loss) from discontinued
operations, net of tax (Note 13)
|
-
|
(41,202
)
|
|
Net (Loss) Income
|
(9, 395,621
)
|
12,929,763
|
|
Preferred
dividends
|
100,050
|
66,734
|
|
|
|
|
|
Net (Loss) Income attributable to cbdMD, Inc. common
shareholders
|
$
(9,495,671
)
|
$
12,863,029
|
|
|
|
|
|
Net (Loss) Income per share:
|
|
|
|
Basic
earnings per share
|
$
(0.18
)
|
$
0.46
|
|
Diluted
earnings per share
|
(0.18
)
|
0.45
|
|
Weighted
average number of shares Basic:
|
52,130,870
|
27,720,356
|
|
Weighted
average number of shares Diluted:
|
52,130,870
|
28,553,856
|
See
Notes to Condensed Consolidated Financial Statements
6
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2020 AND 2019
(Unaudited)
|
|
Three months
|
Three months
|
|
|
Ended
|
Ended
|
|
|
December 31,
2020
|
December 31,
2019
|
|
|
|
|
|
Net
(Loss) Income
|
$
(9,395,621
)
|
$
12,929,763
|
|
Comprehensive (Loss) Income
|
(9,395,621
)
|
12,929,763
|
|
|
|
|
|
Preferred
dividends
|
(100,050
)
|
(66,734
)
|
|
Comprehensive (Loss) Income attributable to cbdMD, Inc. common
shareholders
|
$
(9,495,671
)
|
$
12,863,029
|
See
Notes to Condensed Consolidated Financial Statements
7
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2020 AND 2019
(unaudited)
|
|
Three Months Ended
December 31,
|
Three Months Ended
December 31,
|
|
|
2020
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
Net
(Loss) Income
|
$
(9,395,621
)
|
$
12,929,763
|
|
Adjustments to reconcile net (income) loss to net
|
|
|
|
cash used by operating activities:
|
|
|
|
Stock
based compensation
|
248,894
|
542,574
|
|
Restricted
stock expense
|
15,279
|
138,000
|
|
Issuance
of stock / warrants for service
|
35,712
|
-
|
|
Impairment
on discontinued operations asset
|
-
|
38,002
|
|
Depreciation
and amortization
|
232,658
|
113,252
|
|
Increase/(Decrease)
in contingent liability
|
8,500,000
|
(16,898,006
)
|
|
Realized
and unrealized loss of marketable and other securities
|
(542,709
)
|
62,011
|
|
Termination
benefit
|
305,326
|
-
|
|
Non-cash
lease expense
|
304,080
|
382,432
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(110,072
)
|
755,515
|
|
Deposits
|
24,000
|
(22,365
)
|
|
Merchant
reserve
|
-
|
106,590
|
|
Inventory
|
219,859
|
(1,005,631
)
|
|
Prepaid
inventory
|
(48,184
)
|
(237,753
)
|
|
Prepaid
expenses and other current assets
|
(310,268
)
|
(100,803
)
|
|
Accounts
payable and accrued expenses
|
(1,500,755
)
|
454,490
|
|
Operating
lease liability
|
(237,952
)
|
(318,758
)
|
|
Note
payable
|
-
|
268,115
|
|
Deferred
revenue / customer deposits
|
(22,701
)
|
(7,339
)
|
|
Collection
on discontinued operations accounts receivable
|
422,417
|
166,667
|
|
Deferred
tax liability
|
(332,000
)
|
(2,240,300
)
|
|
Cash
used by operating activities
|
(2,192,038
)
|
(4,873,544
)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Proceeds
from the sale of other investment securities
|
540,000
|
-
|
|
Purchase
of property and equipment
|
(93,294
)
|
(555,674
)
|
|
Cash
provided (used) by investing activities
|
446,706
|
(555,674
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Proceeds
from issuance of preferred stock
|
15,798,115
|
4,421,928
|
|
Note
payable
|
(13,564
)
|
-
|
|
Preferred
dividend distribution
|
(100,050
)
|
(66,734
)
|
|
Deferred
issuance costs
|
-
|
45,368
|
|
Cash
provided by financing activities
|
15,684,500
|
4,400,562
|
|
Net
increase (decrease) in cash
|
13,939,168
|
(1,028,656
)
|
|
Cash
and cash equivalents, beginning of period
|
14,824,644
|
4,689,966
|
|
Cash and cash equivalents, end of period
|
$
28,763,812
|
$
3,661,310
|
Supplemental Disclosures of Cash Flow Information:
|
|
Three Months ended
December 31,
|
Three Months Ended
December 31,
|
|
|
2020
|
2019
|
|
Cash
Payments for:
|
|
|
|
Interest
expense
|
$
3,672
|
$
8,221
|
|
|
|
|
|
Non-cash
financial activities:
|
|
|
|
Warrants
issued to underwriter
|
$
254,950
|
$
178,513
|
See Notes to Condensed Consolidated
Financial Statements
8
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)
EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 2020
|
|
|
|
|
|
Additional
|
Other
|
|
|
|
|
Common stock
|
Preferred stock
|
Paid in
|
Comprehensive
|
Accumulated
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Income(loss)
|
Deficit
|
Total
|
|
Balance, September 30, 2020
|
52,130,870
|
$
52,131
|
500,000
|
$
500
|
$
126,517,784
|
-
|
$
(47,388,367
)
|
$
79,182,048
|
|
Issuance of
Preferred stock
|
-
|
-
|
2,300,000
|
2,300
|
15,795,815
|
-
|
-
|
15,798,115
|
|
Issuance of
options for share based compensation
|
-
|
-
|
|
|
219,875
|
-
|
-
|
219,875
|
|
Issuance of
stock costs
|
-
|
-
|
|
|
-
|
-
|
-
|
-
|
|
Issuance of
restricted stock for share based compensation
|
-
|
-
|
-
|
-
|
15,279
|
-
|
-
|
15,279
|
|
Preferred
dividend
|
-
|
-
|
-
|
-
|
-
|
-
|
(100,050
)
|
(100,050
)
|
|
Net Income
(loss)
|
-
|
-
|
|
|
-
|
-
|
(9,395,621
)
|
(9,395,621
)
|
|
Balance, December 31, 2020
|
52,130,870
|
$
52,131
|
2,800,000
|
$
2,800
|
$
142,548,752
|
-
|
$
(56,884,037
)
|
$
85,719,646
|
See
Notes to Condensed Consolidated Financial Statements
9
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)
EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 2019
|
|
|
|
|
|
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
|
See
Notes to Condensed Consolidated Financial Statements
10
cbdMD, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2020 AND 2019
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Nature of Business
cbdMD, Inc. ("cbdMD", "we", "us", “our”, 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
(“CBDI”), 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, CBDI survived and operates the
prior business of Cure Based Development. 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 unrestricted
voting rights to 8,750,000 of the shares 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 (the
“Earnout Shares”) in the future upon certain earnout
goals being achieved within five years from the closing of the
Mergers. The Company’s shareholders approved the issuance of
the 15,250,000 shares of common stock in April 2019 and these
shares were issued to members of Cure Based Development on April
19, 2019. In April 2019, our shareholders also approved the
possible issuance of the Earnout Shares. In addition, the first
marking period for the earnout was December 31, 2019 and based on
measurement criteria, 5,127,792 Earnout Shares had been earned and
were issued on February 27, 2020. A second marking period for the
earnout ended December 31, 2020 and we anticipate additional
Earnout Shares will be issued in the second quarter of fiscal
2021.
The Company owns and operates the nationally recognized CBD
(cannabidiol) brands cbdMD and Paw CBD. The Company sources
cannabinoids, including CBD, which are extracted from non-GMO hemp
grown on farms in the United States. CBD is a natural substance
produced from the hemp plant and the products manufactured by the
Company are non-psychoactive as they do not contain
tetrahydrocannabinol (THC).
On October 22, 2019, cbdMD formed 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 launched its new CBD pet brand, Paw
CBD.
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, 2020
(“2020 10-K”) as filed with the SEC on December 22,
2020. 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 2020 as reported in the 2020 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.
11
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, acquired intangible and long-lived
assets and the recoverability of intangible and long-lived assets
and income taxes, including deferred tax valuation allowances and
reserves for estimated tax liabilities, contingent liability and,
hence consideration for the Mergers is a material estimate. Actual
results could differ from these estimates.
On March 11, 2020, the World Health Organization declared the
COVID-19 outbreak to be a global pandemic. In response to this
declaration and the rapid spread of COVID-19 within the United
States, federal, state and local governments throughout the country
have imposed varying degrees of restriction on social and
commercial activity to promote social distancing in an effort to
slow the spread of the illness. These measures have had a
significant adverse impact upon many sectors of the economy,
including retail commerce.
The Company is
continuing to monitor data related to impact of the COVID-19
pandemic and a
t this time,
based upon the available data, does not believe there would be an
impact on inputs used for estimates and
assumptions.
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 December 31, 2020, we
have an allowance for doubtful accounts of $54,130, and had an
allowance of $20,664 at September 30, 2020.
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% and 5.2% of the transaction amounts
processed. Pursuant to this agreement, there can be a waiting
period between 2 to 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 December 31, 2020, the receivable from
payment processors included approximately $323,259 for the waiting
period amount and is recorded as accounts receivable in the
accompanying condensed consolidated balance sheet.
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.
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.
12
Fair value accounting
The Company utilizes accounting standards for fair value, which
include the definition of fair value, the framework for measuring
fair value, and disclosures about fair value measurements. Fair
value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be
determined based on the assumptions that market participants would
use in pricing the asset or liability. As a basis for considering
market participant assumptions in fair value measurements, fair
value accounting standards establish a fair value hierarchy that
distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting
entity (observable inputs that are classified within Levels 1
and 2 of the hierarchy) and the reporting entity’s own
assumptions about market participant assumptions (unobservable
inputs classified within Level 3 of the
hierarchy).
Level 1 inputs utilize quoted prices in active markets for
identical assets or liabilities that the Company has the ability to
access. Level 2 inputs are inputs other than quoted prices
included in Level 1 that are directly or indirectly observable
for the asset or liability. Level 2 inputs may include quoted
prices for similar assets and liabilities in active markets, as
well as inputs that are observable for the asset or liability.
Level 3 inputs are unobservable inputs for the asset or
liability, which are based on an entity’s own assumptions, as
there is little, if any, observable market activity. In instances
where the fair value measurement is based on inputs from different
levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is
based on the lowest level input that is significant to the fair
value measurement in its entirety. The Company’s assessment
of the significance of a particular input to the fair value
measurement in its entirety requires judgment and considers factors
specific to the asset or liability.
When the Company records an investment in marketable securities the
carrying value is assigned at fair value. Any changes in fair
value for marketable securities during a given period will be
recorded as an unrealized gain or loss in the consolidated
statement of operations. For investment other securities without a
readily determinable fair value, the Company may elect to estimate
its fair value at cost less impairment plus or minus changes
resulting from observable price changes.
Goodwill
Goodwill represents the excess of cost of an acquired business over
the fair value of the identifiable tangible and intangible assets
acquired and liabilities assumed in a business combination.
Identifiable intangible assets acquired in business combinations
are recorded based on their fair values at the date of acquisition.
Goodwill is not subject to amortization but must be evaluated for
impairment annually. The Company tests for goodwill impairment
annually or whenever events occur or circumstances change that
would more likely than not reduce the fair value of a reporting
unit below its carrying amount.
In performing a goodwill test, the Company performs a qualitative
evaluation and if necessary, a quantitative evaluation. Factors
considered in the qualitative test include specific operating
results as well as new events and circumstances impacting the
operations or cash flows of the business acquired. For the
quantitative test, the Company assesses goodwill for impairment by
comparing the carrying value of the business to the respective fair
value. The Company determines the fair value of its acquired
business using a combination of income-based and market-based
approaches and incorporates assumptions it believes market
participants would utilize. The income-based approach utilizes
discounted cash flows while the market-based approach utilizes
market multiples. These approaches are dependent upon internally
developed forecasts that are based upon annual budgets and
longer-range strategic plans. The Company uses discount rates that
are commensurate with the risks and uncertainty inherent in the
respective acquired business and in the internally developed
forecasts. The Company has analyzed a variety of factors in light
of the known impact to date of the COVID-19 pandemic on its
business to determine if a circumstance could trigger an impairment
loss, and, at this time and based on the information presently
known, does not believe that it is more likely than not that an
impairment loss has been incurred.
13
Intangible Assets
The Company's intangible assets consist of trademarks and other
intellectual property, all of which are accounted for in accordance
with Accounting Standards Codification (ASC) Topic 350,
Intangibles
– Goodwill and Other
. The
Company employs the non-amortization approach to account for
purchased intangible assets having indefinite lives. Under the
non-amortization approach, intangible assets having indefinite
lives are not amortized into the results of operations, but instead
are reviewed annually or more frequently if events or changes in
circumstances indicate that the assets might be impaired, to assess
whether their fair value exceeds their carrying value. We perform
an impairment analysis at August 1 annually on the indefinite-lived
intangible assets following the steps laid out in ASC
350
-30-35-18. Our annual
impairment analysis includes a qualitative assessment to determine
if it is necessary to perform the quantitative impairment test. In
performing a qualitative assessment, we review events and
circumstances that could affect the significant inputs used to
determine if the fair value is less than the carrying value of the
intangible assets.
If a
quantitative analysis is necessary, we would analyze various
aspects including revenues from the business, associated with the
intangible assets. In addition, intangible assets will be tested on
an interim basis if an event or circumstance indicates that it is
more likely than not that an impairment loss has been incurred. In
addition, the Company has analyzed a variety of factors in light of
the known impact to date of the COVID-19 pandemic on its business
to determine if a circumstance could trigger an impairment loss,
and, at this time has determined there has been no
impairment
Intangible assets with finite useful lives are amortized using the
straight-line method over their estimated period of benefit. In
accordance with ASC 360-10-35-21, definite lived intangibles are
reviewed annually or more frequently if events or changes in
circumstances indicate that the assets might be impaired, to assess
whether their fair value exceeds their carrying value.
In conjunction with any acquisitions, the Company refers to ASC-805
as amended by Accounting Standards Update (“ASU”)
2017-01 in determining if the Company is acquiring any inputs,
processes or outputs and the impact that such factors would have on
the classification of the acquisition as a business combination or
asset purchase. Additionally, the Company refers to the
aforementioned guidance in reviewing all acquired assets and
assumed liabilities for valuation in a business combination,
including the determination of intangible asset values and
contingent liabilities.
Contingent liability
A significant component of the purchase price consideration for the
Company’s acquisition of Cure Based Development includes a
fixed number of future shares to be issued as well as a variable
number of future shares to be issued based upon the
post-acquisition entity reaching certain specified future revenue
targets, as further described in Note 6. 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 consolidated balance sheet. In
addition, the first marking period for the Earnout Shares was
December 31, 2019 and based on measurement criteria, 5,127,792
Earnout 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 was recorded in the consolidated 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 consolidated balance sheet.
For the three months ended December 31, 2020, the contingent
liabilities associated with the business combination were increased
by $8,500,000 to reflect their reassessed fair values as of
December 31, 2020. This increase is reflective of a change in value
of the variable number of shares from September 30, 2020. In May
2020, 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 6 would be met. The primary catalyst for the
$8,500,000 increase in contingent liabilities is the change in the
Company’s common share price between September 30, 2020 and
December 31, 2020 from $2.00 per share to $2.95 per share. These
increases or decreases to the contingent liabilities are reflected
within other income (expenses) on the condensed consolidated
statements of operations.
Paycheck Protection Program Loan
On
April 27, 2020, we received
a loan in the principal amount of $1,456,100 (the
“SBA Loan”) in consideration of a Promissory Note,
under the Paycheck Protection Program (“PPP”), which
was established under the 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. The term of the
Promissory Note is two years, though it may be payable sooner in
connection with an event of default under the Promissory 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 used the SBA Loan for qualifying expenses
and intend to apply for forgiveness of the SBA Loan in accordance
with the terms of the CARES Act.
14
In June 2020, the Payroll Protection Program Flexibility Act
(“PPPFA”) was signed into law adjusting certain key
terms of loans issued under the PPP. Other changes and
modifications of the PPP have occurred since June 2020. As of
December 31, 2020 loan payments are deferred for borrowers who
apply for loan forgiveness until SBA remits the borrower's loan
forgiveness amount to the lender. If a borrower does not apply for
loan forgiveness, payments are deferred 10 months after the end of
the covered period for the borrower’s loan forgiveness
(either 8 weeks or 24 weeks) and PPP loans issued prior to June 5,
2020 have a maturity of two years.
As the legal form of the Promissory Note is a debt obligation, the
Company is accounting for it as debt under ASC
470,
Debt
and recorded an initial liability of $1,456,100 in
the condensed consolidated balance sheet upon receipt of the loan
proceeds. The Company is accruing interest over the term of the
loan and is not imputing additional interest at a market rate
because the guidance on imputing interest in ASC
835-30,
Interest
excludes transactions where interest rates
are prescribed by a government agency. If any amount of the loan is
ultimately forgiven, income from the extinguishment of debt would
be recognized as a gain on loan extinguishment in the consolidated
statement of operations and comprehensive
income.
Revenue Recognition
The Company adopted ASC 606,
Revenue from Contracts with
Customers
using the modified
retrospective method beginning with our quarter ended December 31,
2018. The adoption of the new revenue standards as of October 1,
2018 did not change the Company’s revenue recognition as the
majority of its revenues continue to be recognized when the
customer takes control of its product 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. 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.
At December 31, 2020, the Company has no future performance
obligations.
Allocation of transaction price
In our current business model we do not have contracts with
customers which have multiple elements as revenue is driven purely
by online product sales or purchase order based product sales.
However, at times in the past, the Company had entered into
contracts with customers wherein there were multiple elements that
may have disparate revenue recognition patterns. In such instances,
the Company must allocate the total transaction price to these
various elements. This is achieved by estimating the standalone
selling price of each element, which is the price at which we sell
a promised good or service separately to a customer.
In circumstances where we have not historically sold relevant
products or services on a standalone basis, the Company utilizes
the most situationally appropriate method of estimating standalone
selling price. These methods include (i) an adjusted market
assessment approach, wherein we refer to prices from our
competitors for similar goods or serves and adjust those prices as
necessary to reflect our typical costs and margins, (ii) an
expected cost plus margin approach, wherein we forecast the costs
that we will incur in satisfying the identified performance
obligation and adding an appropriate margin to such costs, and
(iii) a residual approach, wherein we adjust the total transaction
price to remove all observable standalone selling prices of other
goods or services included in the contract and allocate the
entirety of the remaining contract amount to the remaining
obligation.
15
Revenue recognition
The Company records revenue from the sale of its products when risk
of loss and title to the product are transferred to the customer,
which is upon shipping (and is typically FOB shipping) which is
when our performance obligation is met. Net sales are comprised of
gross revenues less product returns, trade discounts and customer
allowances, which include costs associated with off-invoice
mark-downs and other price reductions, as well as trade promotions.
These incentive costs are recognized at the later of the date on
which the Company recognizes the related revenue or the date on
which the Company offers the incentive. The Company currently
offers a 60-day, money back guarantee.
In regard to sales for services provided, the Company records
revenue when the customer has accepted services and the Company has
a right to payment. Based on the contracted services, revenue is
recognized when the Company invoices customers for completed
services at agreed upon rates or revenue is recognized over a fixed
period of time during which the service is
performed.
Disaggregated Revenue
Our product revenue is generated primarily through two sales
channels, E-commerce sales (formerly referred to as consumer sales)
and wholesale sales. 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:
|
|
-
|
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; and
|
|
|
-
|
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.
|
The following table represents a disaggregation of revenue by sales
channel:
|
|
Three Months ended
December 31, 2020
|
% of total
|
Three Months ended
December 31, 2019
|
% of total
|
|
Wholesale
sales
|
$
2,627,180
|
21.3
%
|
$
3,284,459
|
32.4
%
|
|
E-commerce
sales
|
9,701,123
|
78.7
%
|
6,863,777
|
67.6
%
|
|
Total
net sales
|
$
12,328,303
|
|
$
10,148,236
|
|
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 material contract assets nor contract liabilities at
December 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.
16
Income Taxes
The Company is a North Carolina corporation that is treated as a
corporation for federal and state income tax purposes. Effective
September 30, 2019, the Company abandoned and ceased operations of
Beauty and Pinups, LLC, a North Carolina limited liability company
(“BPU”), I | M 1, LLC, a California limited liability
company(“IM1”), Encore Endeavor 1 LLC, a California
limited liability company (“EE1”) and Level H&W,
LLC, a North Carolina limited liability company (“Level
H&W”). As of October 1, 2019, CBDI and Paw CBD are wholly
owned subsidiaries and are disregarded entities for tax purposes
and their entire share of taxable income or loss is included in the
tax returns of the Company.
The Company accounts for income taxes pursuant to the provisions of
the
Accounting for Income
Taxes
topic of 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 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.
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 $28,235,654 uninsured balance at December 31,
2020 and a $14,287,810 uninsured balance at September 30,
2020.
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 months ended December 31,
2020.
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 pricing 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
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.
17
NOTE
2
– MARKETABLE SECURITIES AND INVESTMENT OTHER
SECURITIES
The Company has, from time to time, entered into contracts
where a portion of the consideration provided by the customer in
exchange for the Company's services was common stock, options or
warrants (an equity position). In these situations, upon
invoicing the customer for the stock or other instruments, the
Company recorded the receivable as accounts receivable other, and
used the value of the stock or other instrument upon invoicing to
determine the value. If there is insufficient data to support the
valuation of the security directly, the Company will value it, and
the underlying revenue, on the estimated fair value of the services
provided. Where an accounts receivable other is settled with the
receipt of the common stock or other instrument, the common stock
or other instrument was classified as an asset on the consolidated
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).
For the first quarter of fiscal 2021 and the first quarter of
fiscal 2020 we recorded $542,710 and $(62,010), respectively, of
realized and unrealized gain (loss) on marketable and other
securities. The realized gain was driven by the sale of our
investment in Formula Four Beverages, Inc. that was previously
written to zero based on prior information related to the
company’s performance and COVID-19 impacts.
On December 30, 2017 the Company entered into an Agreement with
Isodiol International Inc. which was 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’s common stock between
December 31, 2017 and January 2019. The Company also received
38,095 shares of Isodiol’s common stock upon Isodiol’s
acquisition of Kure Corp., giving the Company a total of 1,264,530
shares. At December 31, 2020, the Company had 1,042,193 shares
valued at $29,181.
In September 2020, the Company purchased a membership interest in
Adara Sponsor LLC for $250,000, which along with proceeds from
other investors was utilized as an investment in Adara Acquisition
Corporation (“Adara”), a newly organized blank check
company formed for the purpose of effecting a merger, capital stock
exchange, asset acquisition, stock purchase, reorganization or
similar business combination. The Company has the right to purchase
an additional $750,000 of membership interest in Adara Sponsor LLC
and as disclosed in the subsequent events, the Company exercised
its right during January 2021. The investment in Adara is part of a
planned initial public offering and Adara intends to list on the
NYSE American once completed. The focus of targets to pursue for
the business combination are expected to be in the consumer
products industry including business in the health and wellness,
ecommerce, discretionary spending, information technology sectors
and related channels of distribution. The Company has classified
this investment as Level 3 for fair value measurement purposes as
there are no observable inputs. In valuing the investment, the
Company used the value paid, which was the price offered to all
third-party investors. The Company assessed the common stock and
determined there was not an impairment for the period ended
December 31, 2020.
The table below summarizes the assets valued at fair value as of
December 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 December 31,
2020
|
|
|
|
|
|
|
|
Marketable
securities
|
$
29,181
|
-
|
$
-
|
$
29,181
|
|
Investment
other securities
|
-
|
-
|
$
250,000
|
$
250,000
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Balance
at September 30, 2020
|
$
26,472
|
$
-
|
$
250,000
|
$
276,472
|
|
Change
in value of equities
|
$
2,710
|
$
-
|
$
-
|
$
2,710
|
|
Balance
at December 31, 2020
|
$
29,181
|
$
-
|
$
250,000
|
$
279,181
|
NOTE 3 – INVENTORY
Inventory at December 31, 2020 and September 30, 2020 consists of
the following:
|
|
December 31,
|
September 30,
|
|
|
2020
|
2020
|
|
Finished
goods
|
$
2,548,903
|
$
2,706,518
|
|
Inventory
components
|
2,022,272
|
1,982,021
|
|
Inventory
reserve
|
(187,674
)
|
(85,179
)
|
|
Inventory
prepaid
|
336,362
|
288,178
|
|
Total
|
$
4,719,863
|
$
4,891,538
|
18
Abnormal amounts of idle facility expense, freight, handling
costs, scrap, and wasted material (spoilage) are expensed in the
period they are incurred.
NOTE 4 – PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31, 2020 and
September 30, 2019 consist of the following:
|
|
December 31,
|
September 30,
|
|
|
2020
|
2020
|
|
Computers,
furniture and equipment
|
$
406,963
|
$
365,638
|
|
Manufacturing
equipment
|
2,955,724
|
2,873,598
|
|
Leasehold
improvements
|
842,655
|
832,465
|
|
Automobiles
|
24,892
|
24,892
|
|
|
4,230,234
|
4,096,594
|
|
Less
accumulated depreciation
|
(1,145,912
)
|
(913,106
)
|
|
Net
property and equipment
|
$
3,084,321
|
$
3,183,487
|
Depreciation expense related to property and equipment was $232,806
and $113,251 for the three months ended December 31, 2020 and 2019,
respectively.
NOTE 5 – 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 1 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 December 31, 2020 and September 30, 2020
consisted of the following:
|
|
December 31,
|
September 30,
|
|
|
2020
|
2020
|
|
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 6 – CONTINGENT LIABILITY
As
consideration for the Mergers, described in Note 1, 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 shares and
8,750,000 shares, 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 Earnout Shares can be issued upon the
satisfaction of certain aggregate net revenue criteria by cbdMD
within 60 months following the Closing Date.
19
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
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 issuance of the initial 15,250,000 shares and the 15,250,000
Earnout Shares were approved by our shareholders in April 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 consolidated balance
sheet. In addition, the first marking period for the Earnout Shares
was December 31, 2019 and based on measurement criteria, 5,127,792
Earnout Shares were issued on February 27, 2020 and had a value of
$4,620,000 which was reclassified from the contingent liability to
additional paid in capital on the consolidated balance
sheet.
The value of the contingent liability was $24,700,000 and
$16,200,000 at December 31, 2020 and September 30, 2020,
respectively, and represents the balance of Earnout Shares for
potential future issuance.
The
increase in value of the contingent liability of $8,500,000 is
recorded in consolidated statement of operations for the three
months ended December 31, 2020 and represents the change in value
of the Earnout Shares. The Company utilized both a market approach
and a Monte Carlo simulation in valuing the contingent liability
and a key input in both of those methods is the stock price. The
main driver of the change in the value of the Earnout Shares within
the contingent liability was the increase of the Company’s
common stock price, which was $2.95 at December 31, 2020 as
compared to $2.00 on September 30, 2020.
NOTE 7 – 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 2,800,000 and 500,000 shares of 8.0% Series A
Cumulative Convertible Preferred Stock issued and outstanding at
December 31, 2020 and September 30, 2020,
respectively.
20
The total amount of dividends declared and paid were $100,050 and
$66,734, respectively, for the three months ended December 31, 2020
and December 31, 2019.
Common Stock – We are authorized to issue 150,000,000 shares
of common stock, par value $0.001 per share. There were 52,130,870
and 52,130,870 shares of common stock issued and outstanding at
December 31, 2020 and September 30, 2020,
respectively.
Preferred stock transactions:
In the three months ended December 31, 2020:
On December 8, 2020, the Company completed a follow-on firm
commitment underwritten public offering of 2,300,000 shares of
its
8.0% Series A Cumulative
Convertible Preferred Stock
for
aggregate gross proceeds of $17.25 million. The Company received
approximately $15.8 million in net proceeds after deducting
underwriting discounts and commissions. The Company also issued to
the representative of the underwriters warrants to purchase in
aggregate 150,502 shares of common stock with an exercise price of
$3.74. The warrants were valued at $254,950 and expire on December
8, 2025.
In the three months ended December 31, 2019:
On October 16, 2019, the Company completed a 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 net proceeds after deducting underwriting discounts
and commissions. The Company also 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 were
valued at $103,801 and expire on October 10,
2024.
Common stock transactions:
During the first quarter of fiscal 2021 the Company issued 50,000
of restricted stock awards to an executive, subject to a multi-year
vesting schedule with a minimum one year before the first tranche
vests as noted below in Note 10. No common stock was issued in the
three months ended December 31, 2020 and December 31,
2019.
Stock option transactions:
In the three months ended December 31, 2020:
In October 2020, we granted an aggregate of 350,000 common stock
options to an executive. The options vest 1/3 on October 1, 2021,
1/3 on October 1, 2022 and 1/3 on October 1, 2023, and have an
exercise price of $3,50, $5.00, and $6.50 per share and a term of 5
years. We have recorded an expense for the options of $31,054 for
the three months ended December 31, 2020.
In the three months ended December 31, 2019:
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 these options of $71,540 and $190,776 for the three
months ended December 31, 2020 and 2019, respectively.
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.
21
The following table summarizes the inputs used for the
Black-Scholes pricing model on the options issued in the three
months ended December 31, 2020 and 2019:
|
|
2020
|
2019
|
|
Weighted
average exercise price
|
$
5.11
|
$
3.15
|
|
Risk
free interest rate
|
0.16
%
|
1.64
%
|
|
Volatility
|
100.72
%
|
95.96
%
|
|
Expected
term
|
4 years
|
5 years
|
|
Dividend
yield
|
None
|
None
|
Warrant transactions:
In the three months ended December 31, 2020:
In December 2020 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 150,502 shares of
common stock with an exercise price of $3.74. The warrants expire
on December 8, 2025.
In the three months ended December 31, 2019:
In October 2019 in relation to the 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.
The following table summarizes the inputs used for the
Black-Scholes pricing model on the warrants issued in the three
months ended December 31, 2020 and 2019:
|
|
2020
|
2019
|
|
Weighted
average exercise price
|
$
3.74
|
$
3.9125
|
|
Risk
free interest rate
|
0.39
%
|
1.48
%
|
|
Volatility
|
103.42
%
|
95.36
%
|
|
Expected
term
|
2.75 years
|
5 years
|
|
Dividend
yield
|
None
|
None
|
NOTE 8 – STOCK-BASED COMPENSATION
Equity Compensation Plan – On June 2, 2015, the Board of
Directors of the Company approved the 2015 Equity Compensation Plan
(“2015 Plan”). The 2015 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 2015 Plan shall
automatically increase on the first trading day of our fiscal year
during the term of the 2015 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
2015 Plan and increased the amount of shares available for issuance
under the 2015 Plan to 2,000,000 and retained the annual evergreen
increase provision of the plan. Subsequent thereto, on August 7,
2019 the Company’s Board of Directors approved an amendment
to the 2015 Plan changing the date the automatic evergreen increase
is determined to the first trading day of October each calendar
year during the term of the 2015 Plan to coincide with the
Company’s fiscal year.
We account for stock-based compensation using the provisions of ASC
718. ASC 718 codification requires companies to
recognize the fair value of stock-based compensation expense in the
financial statements based on the grant date fair value of the
options. 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.
22
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 intrinsi cvalue (in thousands)
|
|
Outstanding
at September 30, 2020
|
1,750,000
|
4.68
|
|
|
|
Granted
|
350,000
|
5.11
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
-
|
-
|
|
|
|
Outstanding
at December 31, 2020
|
2,100,000
|
$
4.75
|
5.59
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2020
|
1,358,334
|
$
4.54
|
5.92
|
$
—
|
As of December 31, 2020, there was approximately $684,202 of total
unrecognized compensation cost related to non-vested stock options
which vest over a period of approximately 2.8 years.
Restricted Stock Award transactions:
In October 2020, the Company issued 50,000 of restricted stock
awards to an executive. The restricted stock vest 1/3 on October 1,
2021, 1/3 on October 1, 2022 and 1/3 on October 1, 2023 and were
valued at fair market value upon issuance at $100,000 which will be
amortized over the vesting period.
In June 2020, the Company issued 10,000 restricted stock awards to
a company sponsor. The restricted stock awards vested June 30,
2020. The stock awards were valued at fair market upon issuance at
$56,200 and amortized over the vesting period and were expensed to
sponsorship expense.
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 $15,278 and $138,000 of restricted stock compensation
expense for the three months ended December 31, 2020 and 2019,
respectively.
23
NOTE 9 – 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, 2020
|
914,184
|
$
3.88
|
|
|
|
Issued
|
150,502
|
3.74
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
-
|
-
|
|
|
|
Outstanding
at December 31, 2020
|
1,064,686
|
$
3.86
|
3.25
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2020
|
914,184
|
$
3.88
|
3.23
|
$
—
|
The following table summarizes outstanding common stock purchase
warrants as of December 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
|
47,923
|
$
3.9125
|
October
2024
|
|
Exercisable
at $1.25 per share
|
442,656
|
$
1.25
|
January
2025
|
|
Exercisable
at $3.74 per share
|
150,502
|
$
3.74
|
December
2025
|
|
|
1,064,686
|
3.86
|
|
NOTE 10 – 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 had
mutually agreed to suspend payments at minimum from March 2020
until June 2020. Effective July 1, 2020, the parties entered into a
new endorsement agreement with the professional athlete amending
certain of the contract terms which superseded the original
agreement. Under the current endorsement agreement potential
payments to the professional athlete are as follows from July 2020
to December 2022 – up to $2,867,000 to be paid in common
stock in three issuances, based on a Volume Weighed Average Price
(“VWAP”) calculation, of which the last two issuances
can be paid in cash at the Company’s option - $1,400,000 paid
in July 2020, $800,000 paid between July 2021 and December 2021,
and $667,000 paid between July 2022 and December 2022. In addition,
the Company will make monthly cash payments as follows from: July
2020 to December 2020 - $40,000, from January 2021 to June 2021 -
$50,000, from July 2021 to December 2021 - $75,000, from January
2022 to June 2022 - $85,000, and from July 2022 to December 2022 -
$100,000. We have recorded expense of $253,700 and $166,666 for the
three months ended December 31, 2020 and 2019,
respectively.
In September 2019, the Company entered into a sponsorship agreement
with Life Time, Inc, an operator of fitness clubs, facilities and
events. The term of the agreement is through December 31, 2022 and
is tied to the Company being the exclusive CBD company and
performance of Life Time Inc. regarding advertisement, marketing
and display within facilities and at identified events. The
potential payments, if all commitments are met, in aggregate is
$4,900,000 and is to be paid for the period ending: December 2019 -
$1,125,555, December 2020 - $1,258,148, December 2021 - $1,258,148
and December 2022 - $1,258,149. In light of the impact of COVID-19
on the operation of fitness clubs, facilities and events, we had
mutually agreed to suspend payments at minimum from March 2020
until June 2020. Subsequently, in December 2020 the Company and
Life Time, Inc. entered into a 2020 amendment that adjusted the
calendar 2020 obligation to a total of $508,000 as a result of the
COVID-19 impacts to opening of Life Time Inc. facilities and
decisions on Life Time Inc. hosted events during calendar 2020. We
have recorded expense of $150,000 and $965,000 for the three months
ended December 31, 2020 and 2019, respectively.
24
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 entered into an
amendment to the sponsorship agreement during October 2020. The
revised the total aggregate payments are $1,013,625 during the term
of the contract, ending May 2021, and is be paid for period ending:
2019 Season - $150,000, 2020 Season 2020 - $503,625 and December
2021 - $360,000. We have recorded expense of $102,858 and $63,206
for the three months ended December 31, 2020 and 2019,
respectively.
NOTE 11 – NOTE PAYABLE
In July 2019, we entered into a loan arrangement for $249,100 for a
line of equipment, of which $135,025 is a long term note payable at
December 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 $18,932 is a long term note payable at December
31, 2020. Payments are for 48 months and have a financing rate of
6.2%, which requires a monthly payment of $841.
NOTE 12 – LONG TERM LIABILITY
In April 2020, we applied for an unsecured loan pursuant to the PPP
administered by the SBA and authorized by the
CARES Act
.
Section 1106 of the Act provides for forgiveness
of up to the full principal amount of qualifying loans guaranteed
under the Paycheck Protection Program. On April 27,
2020, we received the SBA loan from the Lender in the
principal amount of $1,456,100. The SBA Loan is evidenced by the
Promissory Note to the Lender.
The term of the Promissory Note is two years, though it may be
payable sooner in connection with an event of default under the
Note. The SBA Loan carries a fixed interest rate of one percent per
year, with the first payment due seven months from the date of
initial cash receipt. For the three months ended December 31, 2020
we accrued interest expense of $3,670 related to the SBA Loan and
is recorded in accrued expenses on the condensed consolidated
balance sheet at December 31, 2020. In addition, $939,826 of the
loan has been reclassified as short-term on the condensed
consolidated balance sheet at December 31, 2020.
Under the CARES Act and the PPP, certain amounts of loans made
under the PPP may be forgiven if the recipients use the loan
proceeds for eligible purposes, including payroll costs and certain
rent or utility costs, and meet other requirements regarding, among
other things, the maintenance of employment and compensation
levels. We have used the SBA Loan for qualifying expenses and
intend to apply for forgiveness of the SBA Loan in accordance with
the terms of the CARES Act.
The Promissory Note provides for customary events of default,
including, among others, those relating to failure to make payment,
bankruptcy, materially false or misleading representations to the
Lender or the SBA, and adverse changes in our financial condition
or business operations that the Lender believes may materially
affect our ability to pay the SBA Loan.
NOTE 13 – 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.
25
The following table shows the summary operating results of the
discontinued operations for the three months ended December 31,
2020 and 2019:
|
|
Three months ended December 31,
|
|
|
2019
|
|
Total Net Sales
|
$
-
|
|
Costs
of sales
|
-
|
|
Gross profit
|
-
|
|
Operating
expenses
|
41,202
|
|
Income (loss) from
operations
|
(41,202
)
|
|
Provision
for income taxes
|
-
|
|
Net Income (loss)
|
$
(41,202
)
|
The following table shows the summary assets of the discontinued
operations as of December 31, 2020 and September 30, 2020. There
are no liabilities of the discontinued operations at September 30,
2020 and later.
|
|
September 30, 2020
|
|
Assets
|
|
|
Current
assets:
|
|
|
Cash
and cash equivalents
|
$
-
|
|
Accounts
receivable
|
447,134
|
|
Total current assets included as part of discontinued
operations
|
447,134
|
|
|
|
|
other assets included as part of discontinued
operations
|
-
|
|
|
|
|
Total assets included as part of discontinued
operations
|
$
447,134
|
The following table shows the significant cash flow items from
discontinued operations for the three months ended December
31:
|
|
2020
|
2019
|
|
Impairment
on discontinued operations assets
|
$
-
|
$
(45,783
)
|
At September 30, 2020 the balance on the accounts receivable
related to discontinued operations was $447,134, which reflects
payments made and an impairment of $45,783. At December 31, 2020
the balance on the accounts receivable is $24,717.
NOTE 14 – 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 consolidated balance sheet as right-of-use assets and
liabilities pertaining to the rights and obligations created by the
leased assets. We determine whether an arrangement is a lease at
inception and classify it as finance or operating. All of our
leases are classified as operating leases. Our leases do not
contain any residual value guarantees.
Right-of-use lease assets and corresponding lease liabilities are
recognized at commencement date based on the present value of lease
payments over the expected lease term. Since the interest rate
implicit in our lease arrangements is not readily determinable, we
determine an incremental borrowing rate for each lease based on the
approximate interest rate on a collateralized basis with similar
remaining terms and payments as of the lease commencement date to
determine the present value of future lease payments. Our lease
terms may include options to extend or terminate the
lease.
In addition to the monthly base amounts in the lease agreements,
the Company is required to pay real estate taxes, insurance and
common area maintenance expenses during the lease
terms.
26
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
|
|
|
December 31, 2020
|
|
Total
Operating lease costs
|
$
386,783
|
Supplemental cash flow information related to operating leases is
summarized as follows:
|
|
Three Months Ended
|
|
|
December 31, 2020
|
|
Cash
paid for amounts included in the measurement of operating lease
liabilities
|
$
320,654
|
As of December 31, 2020, our operating leases had a weighted
average remaining lease term of 5.4 years and a weighted average
discount rate of 4.66%. Future minimum aggregate lease payments
under operating leases as of December 31, 2020 are summarized as
follows:
|
For the year ended September 30,
|
|
|
2021
(remaining nine months)
|
$
1,149,179
|
|
2022
|
1,405,887
|
|
2023
|
1,380,204
|
|
2024
|
1,421,610
|
|
2025
|
1,159,949
|
|
Thereafter
|
1,372,862
|
|
Total
future lease payments
|
7,889,691
|
|
Less
interest
|
(958,336
)
|
|
Total
lease liabilities
|
$
6,931,355
|
27
NOTE 15 – EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted
earnings per share for the following periods:
|
|
Three Months Ended
|
|
|
|
December 31,
2020
|
December 31,
2019
|
|
Basic:
|
|
|
|
Net
income (loss) continuing operations
|
$
(9,395,621
)
|
$
12,970,965
|
|
Preferred
dividends paid
|
100,050
|
66,734
|
|
Net
income (loss) continuing operations adjusted for preferred
dividend
|
(9,495,671
)
|
12,904,231
|
|
Net
income (loss) discontinued operations
|
-
|
(41,202
)
|
|
Net
income (loss) attributable to cbdMD, Inc. common
shareholders
|
(9,495,671
)
|
12,929,763
|
|
|
|
|
|
Diluted:
|
|
|
|
Net
income (loss) continuing operations
|
(9,395,621
)
|
12,970,965
|
|
Net
income (loss) discontinued operations
|
-
|
(41,202
)
|
|
Net
income(loss)
|
(9,395,621
)
|
12,929,763
|
|
|
|
|
|
Shares used in computing basic earnings per share
|
52,130,870
|
27,720,356
|
|
Effect
of dilutive securities:
|
|
|
|
Options
|
-
|
-
|
|
Warrants
|
-
|
-
|
|
Convertible
preferred shares
|
-
|
833,500
|
|
Shares used in computing diluted earnings per share
|
52,130,870
|
28,553,856
|
|
|
|
|
|
Earnings per share Basic:
|
|
|
|
Continued
operations
|
(0.18
)
|
0.46
|
|
Discontinued
operations
|
(0.00
)
|
(0.00
)
|
|
Basic
earnings per share
|
(0.18
)
|
0.46
|
|
|
|
|
|
Earnings per share Diluted:
|
|
|
|
Continued
operations
|
(0.18
)
|
0.45
|
|
Discontinued
operations
|
-
|
-
|
|
Diluted
earnings per share
|
(0.18
)
|
0.45
|
At the three months ended December 31, 2020, 3,214,686 potential
shares underlying options, unvested RSUs and warrants as well as
4,667,600 shares of our 8.0% Series A Cumulative Convertible
Preferred Stock were excluded from the shares used to calculate
diluted loss per share as their inclusion would reduce net loss per
share.
28
NOTE 16 – 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 an additional 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 an ownership change
has occurred under Internal Revenue Code (IRC) Section 382
resulting in limitations on the utilization of Company's
federal and state net operating loss (NOL)
carryovers.
On December 20, 2018, the Company completed a two-step merger with
Cure Based Development (see Note 1). 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 quarters
ending December 31, 2019, March 31, 2020 , and June 30, 2020,
provided for a wide range of potential annual effective rates.
Therefore, the Company had calculated the tax provision on a
discrete basis under ASC 740-270-30-36(b) for the quarters ending
December 31, 2019, March 31, 2020 , and June 30, 2020. At, December
31, 2020 the company's expectation is that it will generate enough
indefinite life deferred tax assets from post-merger NOLs to reduce
the naked credits from $895,000 to $543,000 and resulted in a
deferred tax provision benefit of $332,000.
NOTE 17 – SUBSEQUENT EVENTS
The Company has analyzed its operations subsequent to December 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. To date, COVID-19 has mostly impacted our wholesale
sales to third-party brick and mortar retailers, while E-commerce
sales have increased. We continue to monitor the evolving situation
carefully and its potential impacts on our financial condition,
liquidity, operations, suppliers, industry and
workforce.
On January 8, 2021, our Board of Directors approved the 2021 Equity
Compensation Plan (the “2021 Plan”) and recommended the
approval of the 2021 Plan by our shareholders at our annual meeting
to be held on March 12, 2021. The purpose of the 2021 Plan is to
advance the interests of our Company by providing an incentive to
attract, retain and motivate highly qualified and competent persons
who are important to us and upon whose efforts and judgment the
success of our company is largely dependent. The 2021 Plan reserves
5,000,000 shares of our common stock for issuance pursuant to the
terms of the plan and also contains an annual evergreen
increase.
On January 13, 2021, the Company executed second tranche
subscriptions agreements and funded the remaining $750,000
commitment into Adara Sponsor, LLC. Adara Sponsor, LLC continues to
support efforts to raise capital into the blank check company,
Adara. On February 8
th
,
2020 Adara (NYSE: ADRA.U) announced pricing of its $100 million
initial public offering and that it will begin trading on the NYSE
on February 9
th
,
2020.
Our Board of Directors approved an award of 167,500 RSUs to 15
employees under our 2015 Plan, effective January 4, 2020. The
Company accrued an expense of $494,125 in conjunction with the
issuance of these RSUs and will amortize over the vesting schedule.
On January 8, 2021 the Board of Directors approved the issuance of
80,000 stock options to three employees under our 2021 Plan,
vesting over multi-year periods and subject to certain shareholder
approval and vesting conditions. The Company accrued a $243,947
expense in conjunction with the issuance of these options and will
amortize this over the vesting periods.
On February 1, 2021, the Company converted its accounting and ERP
from QuickBooks and Fishbowl to Oracle’s
NetSuite.
29
ITEM 2.
M
ANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
following discussion of our financial condition and results of
operations for the first quarter of 2021 and first quarter of 2020
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 2020 10-K, this report, and our other
filings with the SEC. 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.
Business
Our Company
We own and operate the nationally recognized CBD (cannabidiol)
brands cbdMD and Paw CBD. We believe that we are an industry leader
in producing and distributing broad spectrum CBD products. Our
mission is to enhance our customer’s overall quality of life
while bringing CBD education, awareness and accessibility of high
quality and effective products to all. We source cannabinoids,
including CBD, which are extracted from non-GMO hemp grown on farms
in the United States. Our innovative broad spectrum formula
utilizes one of the purest hemp extracts, containing CBD,
CBG
and CBN, while
eliminating the presence of te
trahydrocannabinol (THC)
.
Non-THC is defined as below the level of detection
using validated scientific analytical tools.
Our cbdMD brand of products includes over 130 SKUs of high-grade,
premium CBD products, including CBD tinctures, CBD gummies, CBD
topicals, CBD capsules, CBD bath bombs, CBD bath salts, and CBD
sleep aids.
30
Our Paw CBD brand of products includes over 45 SKUs of
veterinarian-formulated products including tinctures, chews,
topicals products in varying strengths and
formulas.
cbdMD and Paw CBD products are distributed through our e-commerce
websites, third party ecommerce sites, select distributors and
marketing partners as well as a variety of brick and mortar
retailers.
Recent Developments
During
the fourth quarter of fiscal 2020 we expanded our marketing
platforms to include television.
Debuting nationwide
during the week of August 31, 2020, our 30-second commercial was
broadcast across multiple national cable networks. We continued to
expand our TV marketing during the first quarter of fiscal 2021 and
our spots aired on 25 different networks during the quarter. We are
seeing very encouraging return on advertising spend despite the
limited time frame and are continuing to optimize our strategy. We
anticipate increasing our spend in this area throughout fiscal 2021
based on preliminary results.
In December 2020 we announced we had expended our partnership with
the Joe Rogan Experience podcast and have extended our sponsorship
for 2021 and are now the exclusive CBD partner of the Joe Rogan
Experience podcast.
At the end of December 2020, we announced the expansion of our
direct-to-consumer operations into the United Kingdom (U.K.) which
allows U.K. consumers to shop for our products online, with all
orders shipping directly from a U.K.-based warehouse. During the
second quarter of fiscal 2021 we will be accelerating our efforts
to drive revenue through the UK.
In January 2021 we announced the launch of cbdMD Botanicals, our
new beauty and skincare line featuring 15 luxury products,
including facial oil and serum, toners, moisturizers, clear skin,
facial masks, exfoliants and body care.
In January 2021 we also announced that we renewed our partnership
with Ken Block, professional rally and rallycross driver currently
with the Hoonigan Racing Division. Through this renewed sponsorship
with cbdMD, the brand is set to become synonymous with Mr.
Block’s rally car races, with the cbdMD logo to appear on his
official fire suit and rally car. The extended sponsorship deal
will also include a wide range of additional integrated marketing
opportunities to promote the cbdMD brand.
In February 2021 we retained former US Food and Drug Administration
(FDA) official Dr. Sibyl Swift as a regulatory consultant to
oversee our regulatory initiatives and prepare its products for
further certifications.
Growth Strategies
Despite the ongoing business challenges the COVID-19 pandemic
presents, we adapted our day to day business and grew revenues
during fiscal 2020 and the first quarter of fiscal 2021. We
continue to pursue many strategies to grow our revenues and expand
the scope of our business in fiscal 2021 and beyond:
●
Increase
our base product offering.
We regularly assess and evaluate our product
offering, new products within our existing product categories,
additional categories, as well as new and innovative ways to
provide CBD in a manner that meets consumer demands. To that end,
we are devoting resources to ongoing research and development
processes with the goal of expanding our product offerings to meet
these expanding consumer demands. In fiscal 2020, we created
offerings packaged for convenience stores and lip balm and other
topicals as well as several unique products for certain customers.
During the first quarter of fiscal 2021, we launched CBD lidocaine
products including sprays, CBD bath salt line, as well as a line of
CBD skin care products. We currently have several products in the
research and development pipeline with targeted roll-outs during
fiscal 2021, including a line of water-soluble products during the
coming quarters;
●
Expand
our revenue channels:
As the
market continues to evolve, we are expanding our sales channels.
During fiscal 2020, our Wholesale business was impacted as the
broader retail industry faced various headwinds tied to
quarantining and COVID impacts. Despite this, we continue to pursue
relationships with a number of key traditional retail accounts and
believe our top brand awareness, effective marketing and strong
balance sheet position us as the partner for CBD for key
traditional retail accounts as this channel normalizes during the
later half of fiscal 2021;
●
Expand
to markets outside the United States:
We
continue to explore sales into markets outside of the United
States. We generally partner with local wholesalers who can help
navigate the laws and regulatory requirements within their
jurisdiction. We continue to pursue key wholesale accounts in a
number of international markets and are focused on expanding our
E-commerce business to consumers in the UK.
31
●
Expand
our Paw CBD Division:
During
fiscal 2020 we saw the direct-to-consumer strength of cbdMD also
translate into significant growth for Paw CBD. We continue to add
internal resources to enhance this division. As this brand
continues to grow, we are focusing on cross-selling, customer
retention and education, and expect to introduce Paw CBD
subscription and reward programs during fiscal
2021.
●
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:
During fiscal 2021 and beyond we may
also choose to further build and maintain our brand portfolio by
acquiring additional brands directly or through joint ventures if
opportunities arise that we believe are in our best interests. As
we are in an emerging market, opportunities could be present as
companies establish strong brands and begin to obtain large market
share. In assessing potential acquisitions or investments, we
expect to primarily utilize our internal resources to 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.
Results of operations
The
following tables provide certain selected consolidated financial
information for the periods presented:
|
|
Three Months Ended December 31,
|
||
|
|
2020
|
2019
|
change
|
|
|
(unaudited)
|
(unaudited)
|
|
|
Total net
sales
|
$
12,328,303
|
$
10,148,236
|
2,180,067
|
|
Cost of
sales
|
3,430,274
|
3,700,537
|
(270,263
)
|
|
Gross profit
as a percentage of net sales
|
72.2
%
|
63.5
%
|
8.6
%
|
|
Operating
expenses
|
10,657,973
|
12,560,297
|
(1,902,323
)
|
|
Operating
income from operations
|
(1,759,945
)
|
(6,112,597
)
|
4,352,652
|
|
(Increase)
decrease on contingent liability
|
(8,500,000
)
|
16,898,006
|
(150.3
)%
|
|
Net income
(loss) before taxes
|
(9,727,621
)
|
10,730,665
|
(190.7
)%
|
|
Net income
(loss) attributable to cbdMD, Inc. common
shareholders
|
$
(9,495,671
)
|
$
12,863,029
|
(173.8
)%
|
Sales
We
record product sales primarily through two main delivery channels,
direct to consumers via our E-commerce sales and direct to
wholesalers utilizing our internal sales team. The following table
provides information on the contribution of net sales by type of
sale to our total net sales.
|
|
Three months ended December 31, 2020
|
% of total
|
Three months ended December 31, 2019
|
% of total
|
|
|
|
|
|
|
|
Wholesale
sales
|
$
2,627,180
|
21.3
%
|
$
3,284,459
|
32.4
%
|
|
E-commerce
sales
|
9,701,123
|
78.7
%
|
6,863,777
|
67.6
%
|
|
Total
net sales
|
$
12,328,303
|
|
$
10,148,236
|
|
Total
net sales for the first quarter of fiscal 2021 grew 21.5% year over
year and increased 5.4% over the fourth quarter of fiscal 2020. Net
sales of our E-commerce revenue grew 41.3% year over year. Ongoing
COVID-19 impacts to the overall brick and mortar retail industry
impacted our wholesale sales revenue resulting in a 20% drop in
year over year for the quarter and a 15.6% sequential quarterly
revenue decline.
32
Of
our total net sales as indicated above, during the first quarter of
fiscal 2021 and the first quarter of fiscal 2020 our Paw CBD line
accounted for net sales of $1,465,864 and $820,575,
respectively.
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 (E-commerce and wholesale sales), and includes labor
for our service sales.
Our cost of sales as a percentage of
net sales was 27.8% and 36.6% for first quarter of fiscal 2021 and
the first quarter of fiscal 2020, respectively. The change reflects
the increasing revenue percentage of E-commerce sales, growth and
maturation of the business and its manufacturing process, changes
in the cost of raw materials, evaluating key vendors, negotiating
volume pricing, as well as additional product offerings which
continue to impact our cost of production. We expect product sales
will maintain a normal cost of sales as a percentage of net sales,
between 30% and 37%, as we continue to manage our overall cost for
manufacturing and production and maintain as we anticipate
wholesale sales revenues during fiscal 2021.
Operating expenses
Our
principal operating expenses include staff related expense,
advertising (which includes expenses related to industry
distribution and trade shows), sponsorships, affiliate commissions,
merchant fees, technology, travel, rent, professional service fees,
and business insurance expense. Our operating expenses on a
consolidated basis decreased approximately 15.1% for the first
quarter of fiscal 2021 from the same period in fiscal 2020. The
decrease can be attributed to the implementation of various cost
control measures while supporting continued revenue growth and
driving the business to a positive cash flow
operation.
The
following table provides information on our approximate operating
expenses for the three months ended December 31, 2020 and
2019:
|
|
Three months ended
|
Three months ended
|
|
|
|
December 31, 2020
|
December 31, 2019
|
change
|
|
|
|
|
|
|
Staff
related expense
|
$
3,703,654
|
$
3,933,002
|
$
(229,348
)
|
|
Accounting/legal
expense
|
204,709
|
343,420
|
(138,711
)
|
|
Professional
outside services
|
307,214
|
513,085
|
(205,870
)
|
|
Advertising/marketing/social
media/events/tradeshows
|
3,014,492
|
2,410,721
|
603,770
|
|
Sponsorships
|
514,056
|
2,129,835
|
(1,615,779
)
|
|
Affiliate
commissions
|
454,694
|
544,266
|
(89,572
)
|
|
Merchant
fees
|
629,044
|
740,994
|
(111,950
)
|
|
R&D
and regulatory
|
303,706
|
7,729
|
295,977
|
|
Non-cash
stock compensation
|
264,174
|
680,574
|
(416,400
)
|
|
All
other expenses
|
1,262,229
|
1,256,669
|
5,560
|
|
Totals
|
$
10,657,973
|
$
12,560,297
|
$
(1,902,323
)
|
|
|
|
|
|
The decrease in operating expenses is related to
management’s ongoing efforts to control costs and drive key
performance metrics of the business. Included in all other expenses
is a $
403,412 severance expense
accrual for a former non-management employee pursuant to the terms
of a separation agreement entered into with a former employee in
November 2020. We believe that we have built a strong business
foundation and infrastructure, and we are now focused on activation
of our assets to continue to build our brand while we 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.
33
The
following table provides information on our approximate corporate
overhead for the first quarter of fiscal 2021 and the first quarter
of fiscal 2020:
|
|
Three months ended
|
Three months ended
|
|
|
|
December 31, 2020
|
December 31, 2019
|
change
|
|
|
|
|
|
|
Staff
related expense
|
$
548,171
|
$
417,407
|
$
130,764
|
|
Accounting/legal
expense
|
210,667
|
272,014
|
(61,348
)
|
|
Professional
outside services
|
66,851
|
175,508
|
(108,657
)
|
|
Travel
expense
|
-
|
18,523
|
(18,523
)
|
|
Business
insurance
|
120,591
|
73,716
|
46,875
|
|
Non-cash
stock compensation
|
264,174
|
680,574
|
(416,400
)
|
|
Totals
|
$
1,210,453
|
$
1,637,742
|
$
(427,291
)
|
The
increase in staff related expenses is primarily due to the increase
in executive pay including the annual discretionary bonus expense
during the fiscal first quarter of 2021. Overall, the reduction in
expenses is tied to ongoing efforts to minimize the Company’s
operating expenses as well a reduction in the non-cash stock
compensation expense over prior year quarter.
The
corporate operating expenses are primarily related to the ongoing
public company related activities.
Other income and other non-operating expenses
We
also record income and expenses associated with non-operating
items. The material components of those are set forth
below.
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 first
quarter of fiscal 2021 and the first quarter of fiscal 2020 we
recorded $542,710 and $(62,010) of realized and unrealized gain
(loss) on marketable and other securities. The realized gain was
driven by the sale of our investment in Formula Four Beverages,
Inc. that was previously written to zero based on prior information
related to the company’s performance and COVID-19
impacts.
Increase in contingent liability
As
described in Note 6 to the notes to the consolidated financial
statements appearing elsewhere in this report, the earn-out
provision for the Earnout Shares is accounted for and recorded as a
contingent liability with increases in the liability recorded as
non-cash other expense and decreases in the liability recorded as
non-cash other income. The value of the non-cash contingent
liability was $24,700,000 at December 31, 2020, as compared to
$16,200,000 at September 30, 2020, respectively. During the first
quarter of fiscal 2021 we had an increase in value of $8,500,000 of
the contingent liability which is recorded as other expense in our
consolidated statement of operations for the first quarter of
fiscal 2021. We utilize both a market approach and a Monte Carlo
simulation in valuing the contingent liability and a key input in
both of those methods is the stock price. The main driver of the
change in the value of the contingent liability was the increase of
our common stock price, which was $2.95 at December 31, 2020 as
compared to $2.00 on September 30, 2020. We expect to continue to
record changes in the non-cash contingent liability through the
balance of the earnout period.
Liquidity and Capital Resources
We
had cash and cash equivalents on hand of $28,763,812 and working
capital of $30,638,319 at December 31, 2020 as compared to cash on
hand of $14,824,644 and working capital of $16,023,174 at September
30, 2020. Our current assets increased approximately 57.6% at
December 31, 2020 from September 30, 2020, and is primarily
attributable to an increase in cash. Our current liabilities
decreased approximately 12.4% at December 31, 2020 from September
30, 2020. This decrease is primarily attributable to decrease in
accounts payables in accrued expenses, note payable and operating
lease short term liability offset by increases in accrued expenses,
note payables and operating lease short term
liability.
On
December 8, 2020 we closed a follow-on firm commitment underwritten
public offering of shares of our 8.0% Series A Cumulative
Convertible Preferred Stock resulting in total net proceeds to us
of approximately $15.8 million.
34
During
the three months ended December 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 10 Commitments and
Contingencies). In addition, in January 2021 we entered into a
separation agreement with a former consultant which provides for a
severance payment of $300,000, of which $150,000 was paid in
January 2021 and the balance is due in June 2021.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 $712,211 (excluding the
reclassification of $939,826 of the SBA Loan to short term
liabilities) and $4,873,544 for the three months ended December 31,
2020 and 2019, respectively.
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 2020 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.
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.
ITEM 3.
Q
UANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
Not
applicable for a smaller reporting company.
35
ITEM
4.
C
ONTROLS 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.
36
P
ART II - OTHER
INFORMATION
ITEM
1.
L
EGAL PROCEEDINGS.
None.
ITEM
1A.
R
ISK 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 2020 10-K.
The implementation of a new accounting system could interfere with
our business and operations.
We
have recently implemented a new ERP system, NetSuite. The ERP
initial implementation encompassed accounting, production,
warehouse and customer resource management activities. The
implementation of new systems and enhancements may be disruptive to
our business and can be time-consuming and divert
management’s attention. Any disruptions relating to our
systems or any problems with the implementation, particularly any
disruptions impacting our operations or our ability to accurately
report our financial performance on a timely basis during the
implementation period, could materially and adversely affect our
business and operations.
ITEM
2.
U
NREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
None.
ITEM
3.
D
EFAULTS UPON SENIOR SECURITIES.
None.
ITEM
4.
M
INE SAFETY DISCLOSURES.
Not
applicable to our Company’s operations.
ITEM
5.
O
THER INFORMATION.
None.
37
ITEM
6.
E
XHIBITS.
|
|
|
|
|
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
|
|
1/14/21
|
|
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
|
38
S
IGNATURES
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.
|
|
|
|
|
|
|
February 9,
2021
|
By:
|
/s/ Martin A. Sumichrast
|
|
|
|
Martin A. Sumichrast, Co-Chief Executive Officer, co-principal
executive officer
|
|
|
|
|
|
February 9, 2021
|
By:
|
/s/ Raymond S. Coffman
|
|
|
|
Raymond S. Coffman, Co-Chief Executive Officer, co-principal
executive officer
|
|
February 9, 2021
|
By:
|
/s/ T. Ronan Kennedy
|
|
|
|
T. Ronan Kennedy, Chief Financial Officer, principal financial and
accounting officer
|
39
TABLE OF CONTENTS
Part 1 - Financial InformationItem 1. Financial StatementsNote 1 Organization and Summary Of Significant Accounting PoliciesNote 2 Marketable Securities and Investment Other SecuritiesNote 3 InventoryNote 4 Property and EquipmentNote 5 Intangible AssetsNote 6 Contingent LiabilityNote 7 Shareholders EquityNote 8 Stock-based CompensationNote 9 WarrantsNote 10 Commitments and ContingenciesNote 11 Note PayableNote 12 Long Term LiabilityNote 13 Discontinued OperationsNote 14 LeasesNote 15 Earnings Per ShareNote 16 Income TaxesNote 17 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