CBDMD, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2021
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, 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.
56,418,287
shares of common stock are issued and outstanding as of May
12
,
2021.
TABLE
OF CONTENTS
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41
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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”
and cbdMD
Therapeutics LLC, a North Carolina limited
liability company
which we refer to as “Therapeutics. 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, "first quarter of 2021" refers
to the three months ended December 31, 2020, "second quarter
of 2020" refers to the three months ended March 31, 2020 and
"second quarter of 2021" refers to the three months ended
March 31, 2021.
We
maintain a corporate website at
www.cbdmd.com
.
The information contained on our corporate website and our various
social media platforms are not part of this report
.
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:
|
|
|
|
●
|
our
history of losses;
|
|
|
●
|
the
continuing impact of COVID-19 on our company;
|
|
|
●
|
our
reliance on third party raw material suppliers and manufacturers
and compounders;
|
|
|
●
|
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
|
|
|
●
|
possible
changes in the use of CBD.
|
|
●
|
material
risks associated with the ownership of our securities,
including;
|
|
|
|
●
|
the
impact of changes in the fair value of our contingent liabilities
associated with the Earnout Shares;
|
|
|
●
|
dilution
to our shareholders upon the issuance of the Earnout
Shares;
|
|
|
●
|
time
devoted to our company by one of our co-Chief Executive
Officers;
|
|
|
●
|
the
designations, rights and preferences of our 8% Series A Cumulative
Convertible Preferred Stock;
|
|
|
●
|
dilution
upon the issuance of shares of common stock underlying outstanding
warrants, options and the Series A Convertible Preferred Stock;
and
|
|
|
●
|
voting
control held by our directors and their affiliates.
|
Most
of these factors are difficult to predict accurately and are
generally beyond our control. You should consider the areas of risk
described in connection with any forward-looking statements that
may be made herein. Readers are cautioned not to place undue
reliance on these forward-looking statements and readers should
carefully review this report 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 the fiscal year ended September 30, 2020 as
filed with the Securities and Exchange Commission (the
“SEC”) on December 22, 2020 (the "2020 10-K"),
and Quarterly
Report on Form 10-Q for the period ended December 31, 2020 as filed
with the SEC on
February 9,
2021
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.
P
ART 1 - FINANCIAL
INFORMATION
I
TEM 1.
FINANCIAL STATEMENTS.
cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2021 AND SEPTEMBER 30, 2020
|
|
(Unaudited)
|
|
|
|
March 31,
|
September
30,
|
|
|
2021
|
2020
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
23,711,600
|
$
14,824,644
|
|
Accounts
receivable, net
|
1,848,465
|
911,482
|
|
Accounts
receivable – discontinued operations
|
22,217
|
447,134
|
|
Marketable
securities
|
32,034
|
26,472
|
|
Investment
other securities
|
1,000,000
|
250,000
|
|
Inventory
|
4,331,545
|
4,603,360
|
|
Inventory
prepaid
|
478,629
|
288,178
|
|
Prepaid
software
|
-
|
174,308
|
|
Prepaid
sponsorship
|
1,777,304
|
1,203,300
|
|
Prepaid
expenses and other current assets
|
1,544,541
|
983,374
|
|
Total current assets
|
34,746,335
|
23,712,252
|
|
|
|
|
|
Other
assets:
|
|
|
|
Property
and equipment, net
|
2,976,904
|
3,183,487
|
|
Operating
lease assets
|
6,240,059
|
6,851,357
|
|
Deposits
for facilities
|
789,583
|
790,708
|
|
Intangible
assets, net
|
21,635,000
|
21,635,000
|
|
Goodwill
|
54,669,997
|
54,669,997
|
|
Total other assets
|
86,311,543
|
87,130,549
|
|
|
|
|
|
Total assets
|
$
121,057,878
|
$
110,842,801
|
See Notes to Condensed Consolidated Financial
Statements
4
cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2021 AND SEPTEMBER 30, 2020
(continued)
|
|
(Unaudited)
|
|
|
|
March 31,
|
September
30,
|
|
|
2021
|
2020
|
|
Liabilities
and shareholders' equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
2,835,236
|
$
2,850,421
|
|
Accrued
expenses
|
1,729,594
|
2,769,920
|
|
Operating
leases – short term liabilities
|
1,213,891
|
1,159,098
|
|
Paycheck
Protection Program loan, current portion
|
1,027,403
|
854,000
|
|
Note
payable
|
57,522
|
55,639
|
|
Total
current liabilities
|
6,863,646
|
7,689,078
|
|
|
|
|
|
Long term
liabilities:
|
|
|
|
Long
term liabilities
|
-
|
264,367
|
|
Note
payable
|
139,215
|
-
|
|
Paycheck
Protection Program loan, net of current portion
|
428,697
|
602,100
|
|
Operating
leases - long term liabilities
|
5,414,751
|
6,010,208
|
|
Contingent
liability
|
22,300,000
|
16,200,000
|
|
Deferred
tax liability
|
27,000
|
895,000
|
|
Total
long term liabilities
|
28,309,663
|
23,971,675
|
|
|
|
|
|
Total
liabilities
|
35,173,309
|
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,
|
|
|
|
56,337,787 and
52,130,870 shares issued and outstanding, respectively
|
56,338
|
52,131
|
|
Additional paid in
capital
|
155,780,222
|
126,517,784
|
|
Accumulated
deficit
|
(69,954,791
)
|
(47,388,367
)
|
|
Total
cbdMD, Inc. shareholders' equity
|
85,884,569
|
79,182,048
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
$
121,057,878
|
$
110,842,801
|
|
|
|
|
See Notes to Condensed Consolidated Financial
Statements
5
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2021 AND
2020
|
|
Three
months
|
Three
months
|
Six
Months
|
Six
Months
|
|
|
Ended
|
Ended
|
Ended
|
Ended
|
|
|
March 31,
2021
|
March 31,
2020
|
March 31,
2021
|
March 31,
2020
|
|
|
|
|
|
|
|
Gross
Sales
|
$
12,457,386
|
$
9,703,800
|
$
25,520,568
|
$
20,116,291
|
|
Allowances
|
(658,775
)
|
(304,764
)
|
(1,393,654
)
|
(569,019
)
|
|
Total
Net Sales
|
11,798,611
|
9,399,036
|
24,126,914
|
19,547,272
|
|
Cost
of sales
|
3,643,127
|
2,732,076
|
7,073,402
|
6,432,613
|
|
Gross Profit
|
8,155,484
|
6,666,960
|
17,053,512
|
13,114,659
|
|
|
|
|
|
|
|
Operating
expenses
|
12,323,207
|
12,267,637
|
22,981,180
|
24,827,934
|
|
Loss from operations
|
(4,167,723
)
|
(5,600,677
)
|
(5,927,668
)
|
(11,713,275
)
|
|
Realized
and Unrealized gain (loss) on marketable and other securities,
including impairments
|
2,852
|
(813,152
)
|
545,562
|
(875,162
)
|
|
(Increase)
decrease of contingent liability
|
(8,871,000
)
|
21,261,994
|
(17,371,000
)
|
38,160,000
|
|
Interest (expense) income
|
(10,603
)
|
35,607
|
(20,990
)
|
42,875
|
|
(Loss) Income before provision for income taxes
|
(13,046,474
)
|
14,883,772
|
(22,774,096
)
|
25,614,438
|
|
|
|
|
|
|
|
Benefit for income
taxes
|
536,000
|
-
|
868,000
|
2,240,300
|
|
Net (Loss) Income from continuing operations
|
(12,510,474
)
|
14,883,772
|
(21,906,096
)
|
27,854,738
|
|
Net
(Loss) from discontinued operations, net of tax (Note
14)
|
-
|
-
|
-
|
(41,202
)
|
|
Net
(Loss) Income
|
(12,510,474
)
|
14,883,772
|
(21,906,096
)
|
27,813,536
|
|
Preferred
dividends
|
560,280
|
100,016
|
660,330
|
166,750
|
|
|
|
|
|
|
|
Net
(Loss) Income attributable to cbdMD, Inc. common
shareholders
|
$
(13,070,754
)
|
$
14,783,756
|
$
(22,566,426
)
|
$
27,646,786
|
|
|
|
|
|
|
|
Net
Income (Loss) per share:
|
|
|
|
|
|
Basic
earnings per share
|
$
(0.24
)
|
$
0.41
|
$
(0.43
)
|
$
0.76
|
|
Diluted
earnings per share
|
(0.24
)
|
0.40
|
(0.43
)
|
0.74
|
|
Weighted
average number of shares Basic:
|
53,471,607
|
36,503,005
|
52,793,872
|
36,503,005
|
|
Weighted
average number of shares Diluted:
|
53,471,607
|
37,336,505
|
52,793,872
|
37,336,505
|
See Notes to Condensed Consolidated Financial
Statements
6
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2021 AND
2020
(Unaudited)
|
|
Three
months
|
Three
months
|
Six
months
|
Six
months
|
|
|
Ended
|
Ended
|
Ended
|
Ended
|
|
|
March 31,
2021
|
March 31,
2020
|
March
31,
2021
|
March
31,
2020
|
|
|
|
|
|
|
|
Net (Loss)
Income
|
$
(12,510,474
)
|
$
14,883,772
|
$
(21,906,096
)
|
$
27,813,536
|
|
Comprehensive (Loss) Income
|
(12,510,474
)
|
14,883,772
|
(21,906,096
)
|
27,813,536
|
|
|
|
|
|
|
|
Preferred
dividends
|
(560,280
)
|
(100,016
)
|
(660,330
)
|
(116,750
)
|
|
Comprehensive
(Loss) Income attributable to cbdMD, Inc. common
shareholders
|
$
(13,070,754
)
|
$
14,783,756
|
$
(22,566,426
)
|
$
27,646,786
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial
Statements
7
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2021 AND 2020
(unaudited)
|
|
Six Months Ended March 31,
2021
|
Six Months Ended March 31,
2020
|
|
Cash flows from operating activities:
|
|
|
|
Net
(Loss) Income
|
$
(21,906,096
)
|
$
27,813,536
|
|
Adjustments to reconcile net (income) loss to net
|
|
|
|
cash used by operating activities:
|
|
|
|
Stock
based compensation
|
451,527
|
972,225
|
|
Restricted
stock expense
|
547,140
|
138,000
|
|
Issuance
of stock / warrants for service
|
155,695
|
28,250
|
|
Impairment
on discontinued operations asset
|
-
|
38,002
|
|
Depreciation
and amortization
|
473,324
|
287,457
|
|
Other
than temporary impairment other securities and
other
accounts receivable
|
-
|
760,000
|
|
Increase/(Decrease)
in contingent liability
|
17,371,000
|
(38,160,000
)
|
|
Realized
and unrealized loss of marketable and other securities
|
(5,562
)
|
115,162
|
|
Merchant
reserve settlement
|
-
|
132,657
|
|
Termination
benefit
|
352,279
|
-
|
|
Non-cash
lease expense
|
611,298
|
585,020
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(936,983
)
|
763,303
|
|
Deposits
|
1,125
|
(22,365
)
|
|
Merchant
reserve
|
-
|
106,590
|
|
Inventory
|
271,815
|
(2,270,110
)
|
|
Prepaid
inventory
|
(190,451
)
|
386,149
|
|
Prepaid
expenses and other current assets
|
44,408
|
649,308
|
|
Accounts
payable and accrued expenses
|
(1,366,373
)
|
849,113
|
|
Operating
lease liability
|
(540,664
)
|
(496,834
)
|
|
Note
payable
|
-
|
175,124
|
|
Deferred
revenue / customer deposits
|
(41,418
)
|
(7,339
)
|
|
Collection
on discontinued operations accounts receivable
|
424,917
|
250,000
|
|
Deferred
tax liability
|
(868,000
)
|
(2,240,300
)
|
|
Cash
used by operating activities
|
(5,151,019
)
|
(9,147,052
)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Purchase
of other investment securities
|
(750,000
)
|
-
|
|
Purchase
of property and equipment
|
(226,542
)
|
(1,796,346
)
|
|
Cash
provided (used) by investing activities
|
(976,542
)
|
(1,796,346
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Proceeds
from issuance of common stock
|
-
|
16,771,756
|
|
Proceeds
from issuance of preferred stock
|
15,798,115
|
4,421,928
|
|
Note
payable
|
(123,268
)
|
-
|
|
Preferred
dividend distribution
|
(660,330
)
|
(166,750
)
|
|
Deferred
issuance costs
|
-
|
62,197
|
|
Cash
provided by financing activities
|
15,014,517
|
21,089,131
|
|
Net
increase (decrease) in cash
|
8,886,956
|
10,145,733
|
|
Cash
and cash equivalents, beginning of period
|
14,824,644
|
4,689,966
|
|
Cash and cash equivalents, end of period
|
$
23,711,600
|
$
14,835,699
|
8
Supplemental Disclosures of Cash Flow Information:
|
|
Six Months ended March 31,
|
Six Months Ended March 31,
|
|
|
2021
|
2020
|
|
|
|
|
|
Cash
Payments for:
|
|
|
|
Interest
expense
|
$
7,117
|
$
17,097
|
|
|
|
|
|
Non-cash
financing activities:
|
|
|
|
Issuance
of Contingent earnout shares:
|
$
11,271,000
|
$
-
|
|
Warrants
issued to representative
|
$
254,950
|
$
524,113
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial
Statements
9
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)
EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2021
|
|
|
|
|
|
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
|
$
142,548,753
|
-
|
$
(56,884,038
)
|
$
85,719,646
|
|
Issuance of Common
stock
|
3,711,964
|
3,712
|
-
|
-
|
11,422,488
|
-
|
-
|
11,426,200
|
|
Exercise of options for share based
compensation
|
147,953
|
148
|
-
|
-
|
627,500
|
-
|
-
|
627,648
|
|
Issuance of restricted stock for
share based compensation
|
347,000
|
347
|
-
|
-
|
1,181,481
|
-
|
-
|
1,181,828
|
|
Preferred
dividend
|
-
|
-
|
-
|
-
|
-
|
-
|
(560,279
)
|
(560,279
)
|
|
Net Income
(loss)
|
-
|
-
|
-
|
-
|
-
|
-
|
(12,510,474
)
|
(12 510,474
)
|
|
Balance,
March 31, 2021
|
56,337,787
|
$
56,338
|
2,800,000
|
$
2,800
|
$
155,780,222
|
-
|
$
(69,954,791
)
|
$
85,884,569
|
See Notes to Condensed Consolidated Financial
Statements
10
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)
EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2020
|
|
|
|
|
|
Additional
|
Other
|
|
|
|
|
Common
stock
|
Preferred
stock
|
Paid
in
|
Comprehensive
|
Accumulated
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Income(loss)
|
Deficit
|
Total
|
|
Balance,
September 30, 2019
|
27,720,356
|
$
27,720
|
-
|
$
-
|
$
97,186,524
|
-
|
$
(59,610,260
)
|
$
37,603,984
|
|
Issuance of Preferred
stock
|
-
|
-
|
500,000
|
500
|
4,421,428
|
-
|
-
|
4,421,928
|
|
Issuance of options for share based
compensation
|
-
|
-
|
-
|
-
|
542,574
|
-
|
-
|
542,574
|
|
Issuance of stock
costs
|
-
|
-
|
-
|
-
|
(31,757
)
|
-
|
-
|
(31,757
)
|
|
Issuance of restricted stock for
share based compensation
|
-
|
-
|
-
|
-
|
138,000
|
-
|
-
|
138,000
|
|
Preferred
dividend
|
-
|
-
|
-
|
-
|
-
|
-
|
(66,734
)
|
(66,734
)
|
|
Adoption of ASU
2016-02
|
-
|
-
|
-
|
-
|
-
|
-
|
(13,528
)
|
(13,528
)
|
|
Net Income
(loss)
|
-
|
-
|
-
|
-
|
-
|
-
|
12,929,763
|
12,929,763
|
|
Balance,
December 31, 2019
|
27,720,356
|
$
27,720
|
500,000
|
$
500
|
$
102,256,769
|
-
|
$
(46,760,759
)
|
$
55,524,230
|
|
Issuance of Common
Stock
|
23,590,292
|
23,591
|
-
|
-
|
21,368,166
|
-
|
-
|
21,391,757
|
|
Issuance of options for share based
compensation
|
-
|
-
|
-
|
-
|
429,651
|
-
|
-
|
429,651
|
|
Issuance of stock/warrants for
services
|
25,000
|
25
|
-
|
-
|
28,225
|
-
|
-
|
28,250
|
|
Preferred
dividend
|
-
|
-
|
-
|
-
|
-
|
-
|
(100,016
)
|
(100,016
)
|
|
Net Income
(loss)
|
-
|
-
|
-
|
-
|
-
|
-
|
14,883,772
|
14,883,772
|
|
Balance of
March 31, 2020
|
51,335,648
|
$
51,336
|
500,000
|
$
500
|
(31,757
)
|
-
|
(31,977,003
)
|
92,157,644
|
See Notes to Condensed Consolidated Financial
Statements
11
cbdMD, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2021 AND
2020
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. 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.
The sole member of Cure Based
Development at the closing of the Mergers was CBD Holding LLC
(“CBDH”). In February 2020, in connection with its
liquidation, CBDH distributed the rights to the Earnout Shares (the
“Earnout Rights”) to its members based upon the
members’ pro pro-rata ownership interest in CBDH. Members of
CBDH at the time of its liquidation and this distribution included
affiliates of Martin A. Sumichrast and R. Scott Coffman, directors
and executive officers of cbdMD.
A second marking period for
the earnout ended December 31, 2020 and based on measurement
criteria an additional 3,348,520 Earnout Shares had been earned and
were issued on March 8, 2021.
The
Company owns and operates the nationally recognized CBD
(cannabidiol) brands cbdMD, Paw CBD and
cbdMD
Botanicals
. 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.
Following the initial positive response to the brand from retailers
and consumers, cbdMD, Inc. organized Paw CBD, Inc. as a separate
wholly owned subsidiary to take advantage of its early mover status
in the CBD animal health industry. On March 15
th
, 2021 cbdMD formed
a new wholly owned subsidiary, cbdMD Therapeutics, LLC
(“Therapeutics”) for the purposes of isolating and
quantifying the Company’s ongoing investments in science
related to its existing and future products, including research and
development activities for therapeutic applications.
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, Paw CBD and
Therapeutics. All material intercompany transactions and balances
have been eliminated in consolidation.
12
Use of Estimates
The
Company's condensed 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. We are cautiously optimistic with the positive trends on
infection rates, vaccinations and governmental restrictions and
continuing to monitor data
related to impact of the COVID-19 pandemic.
Cash and Cash Equivalents
For financial statements purposes, the Company considers all highly
liquid investments with a maturity of less than three months when
purchased to be cash equivalents.
Accounts Receivable and Accounts Receivable Other
Accounts receivable are stated at cost less an allowance for
doubtful accounts, if applicable. Credit is extended to customers
after an evaluation of the customer’s financial condition,
and generally collateral is not required as a condition of credit
extension. Management’s determination of the allowance for
doubtful accounts is based on an evaluation of the receivables,
past experience, current economic conditions, and other risks
inherent in the receivables portfolio.
As of March 31,
2021 and September 30,2020, we had an allowance for doubtful
accounts of $57,525 and $20,664, respectively.
Merchant Receivable and 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 March 31, 2021, the receivable from
payment processors included approximately $199,117 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 and three years for
software, computer, and furniture and equipment. The useful life
for 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.
13
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.
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 annual impairment analysis as of August 1 of
each fiscal year 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
there have been no events identified that would trigger an
impairment.
14
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
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 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.
The second marking period for the Earnout Shares
ended December 31, 2020 and based on measurement criteria,
3,348,520
Earnout Shares were
issued on March 8, 2021. The second marking period shares increased
in value by $3,100,012 during the quarter through the time of
issuance and had a value of $11,271,000, which was reclassified
from the contingent liability to additional paid in capital on the
consolidated balance sheet.
Additionally,
for the three months ended March 31, 2021, the remaining
contingent liabilities associated with the business combination,
after the issuance of the second marking period Earnout Shares,
were increased by $5,770,988 to reflect their reassessed fair
values as of March 31, 2021. This increase is reflective of a
change in value of the variable number of shares from December 31,
2020. In aggregate, the Company incurred an expense of $8,871,000
for the three months ended March 2021 between the increase in the
value of the second marking period Earnout Shares and the increase
in value of the remaining contingent liabilities. 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 7 would be met. The primary catalyst for the
$5,770,988 increase in contingent liabilities is the change in the
Company’s common share price between December 31, 2020
to March 31, 2021 from $2.95 per share to $4.14 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. As a qualifying business as defined by the SBA,
the Company is using the proceeds from this loan to primarily help
maintain its payroll as it navigates its business with a focus on
returning to normal operations. 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. The
Company used the SBA Loan for qualifying expenses and has applied
for forgiveness of the SBA Loan in accordance with the terms of the
CARES Act.
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. Based on the submitted
application for forgiveness, the Company qualifies for 100%
forgiveness of its PPP loan. It is currently under review and the
Company is awaiting a response from its lender and the
SBA.
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
Under
ASC 606,
Revenue from Contracts
with Customers,
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.
15
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
March 31, 2021, the Company has no future performance
obligations.
Allocation of Transaction Price
In the
Company’s current business model it does 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 has 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.
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.
Regarding
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
The
Company’s product revenue is generated primarily through two
sales channels, E-commerce sales (formerly referred to as consumer
sales) and wholesale sales. The Company believes 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 the Company’s principal revenue generating
activities are as follows:
|
|
-
|
E-commerce
sales - consumer products sold through the Company’s 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 the Company’s 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.
|
16
The
following table represents a disaggregation of revenue by sales
channel:
|
|
Three Months ended
March 31, 2021
|
% of
total
|
Three Months ended
March 31, 2020
|
% of
total
|
|
Wholesale
sales
|
$
3,436,176
|
29.1
%
|
$
2,617,860
|
27.9
%
|
|
E-commerce
sales
|
8,362,435
|
70.9
%
|
6,781,176
|
72.1
%
|
|
Total net
sales
|
$
11,798,611
|
|
$
9,399,036
|
|
|
|
Six Months ended
March 31, 2021
|
% of
total
|
Six Months ended
March 31, 2020
|
% of
total
|
|
Wholesale
sales
|
$
6,063,356
|
25.1
%
|
$
5,885,981
|
30.1
%
|
|
E-commerce
sales
|
18,063,558
|
74.9
%
|
13,661,291
|
69.9
%
|
|
Total net
sales
|
$
24,126,914
|
|
$
19,547,272
|
|
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. The Company has no material contract
assets nor contract liabilities at March 31,
2021.
Cost of Sales
The
Company’s cost of sales includes costs associated with
distribution, fill and labor expense, components, manufacturing
overhead, third-party providers, and outbound freight for the
Company’s products sales, and includes labor for its service
sales. For the Company’s 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.
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 were
wholly owned subsidiaries and are disregarded entities for tax
purposes and their entire share of taxable income or loss is
included in the tax return of the Company and as of March 15, 2021,
Therapeutics is also a wholly owned subsidiary and is a disregarded
entity for tax purposes and its entire share of taxable income or
loss is included in the tax return of the Company.
The
Company accounts for income taxes pursuant to the provisions of the
Accounting for Income Taxes
topic of the FASB ASC 740 which requires, among other things, an
asset and liability approach to calculating deferred income taxes.
The asset and liability approach requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. The 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 $23,138,353 uninsured balance at March 31,
2021 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 and six months ended March 31, 2021.
17
Stock-Based Compensation
The Company accounts for its 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.
The Company uses the Black-Scholes model for measuring the fair
value of options and warrants. The stock based fair value
compensation is determined as of the date of the grant or the date
at which the performance of the services is completed (measurement
date) and is recognized over the vesting periods. The Company
recognizes forfeitures when they occur.
Earnings (Loss) Per Share
The Company uses ASC 260-10,
Earnings Per Share
for calculating the basic and diluted
income (loss) per share. The Company computes basic income (loss)
per share by dividing net income (loss) and net income (loss)
attributable to common shareholders, after deducting preferred
stock dividends, by the weighted average number of common shares
outstanding. Common equivalent shares are excluded from the
computation of net loss per share if their effect is
anti-dilutive.
New Accounting Standards
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. The
Company adopted ASU 2018-13 on October 1, 2020. The adoption of
this standard had no material impact on the Company's consolidated
financial statements and disclosures.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes,
Simplifying the Accounting for Income Taxes (Topic 740). The ASU
eliminates certain exceptions to the guidance in Accounting
Standards Codification (ASC or Codification) 740 related to the
approach for intraperiod tax allocation, the methodology for
calculating income taxes in an interim period and the recognition
of deferred tax liabilities for outside basis differences. The new
guidance also simplifies aspects of the accounting for franchise
taxes and enacted changes in tax laws or rates and clarifies the
accounting for transactions that result in a step-up in the tax
basis of goodwill. The guidance also clarifies that single-member
limited liability companies and similar disregarded entities that
are not subject to income tax are not required to recognize an
allocation of consolidated income tax expense in their separate
financial statements, but they could elect to do so. ASU 2019-12 is
effective for fiscal years beginning after December 15, 2020,
including interim periods within those fiscal years. Early adoption
is permitted. The Company is currently in the process of evaluating
this standard update.
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. In determining fair value of marketable securities and
investment other securities, the Company utilizes valuation
techniques that maximize the use of observable inputs and minimize
the use of unobservable inputs to the extent possible and consider
counterparty credit risk in our assessment of fair value. The
Company determines the fair value fair value of marketable
securities and investment other securities based on assumptions
that market participants would use in pricing an asset or liability
in the principal or most advantageous market. When considering
market participant assumptions in fair value measurements, the
following fair value hierarchy distinguishes between observable and
unobservable inputs, which are categorized in one of the following
levels:
●
Level 1 Inputs:
Unadjusted quoted prices in active markets for identical assets or
liabilities accessible to the reporting entity at the measurement
date.
●
Level 2 Inputs:
Other than quoted prices included in Level 1 inputs that are
observable for the asset or liability, either directly or
indirectly, for substantially the full term of the asset or
liability.
●
Level 3 Inputs:
Unobservable inputs for the asset or liability used to measure fair
value to the extent that observable inputs are not available,
thereby allowing for situations in which there is little, if any,
market activity for the asset or liability at the measurement
date.
18
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
three months ended March 31, 2021 and March 31, 2020 the
Company recorded $2,852 and $(813,152), respectively and for the
six months ended March 31, 2021 and March 31, 2020 the
Company recorded $545,562 and $(875,162), respectively of realized
and unrealized gain (loss) on marketable and other securities,
including impairments. 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, while the loss in
the prior year was driven by the impairment from its investment in
Formula Four Beverages, Inc. and Kure Corp.
On
December 30, 2017, the Company entered into an Agreement with
Isodiol International, Inc., whereby the Company provided
pharmaceutical grade phytochemical compound development
services.
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 March 31, 2021,
the Company had 1,042,193 shares valued at $32,034.
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 (a “SPAC”).
On January 13, 2021, the Company
executed second tranche subscriptions agreements and funded the
remaining $750,000 commitment into Adara Sponsor, LLC. On February
9, 2021, the
public shares of Adara began trading on the
NYSE. Commencing March 24, 2021, holders of the 11,500,000 units
sold in the Adara’s initial public offering could elect to
separately trade shares of the Adara Class A common stock and
warrants included in the units. The shares of Class A common stock
and warrants that were separated now trade on NYSE American LLC
under the symbols “ADRA” and “ADRA WS”,
respectively. On March 31, 2021, the Company’s implied,
indirect ownership in Adara represented 4.4% (633,988 shares) and
10.1% (1 million) of the warrants. As of March 31, 2020 ADRA stock
closed at $9.90 while ADRA WS closed at $0.50.
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. While Adara is currently a listed company, the
Company’s investment is in Adara Sponsor, LLC and
consequently 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
March 31, 2021.
The
table below summarizes the assets valued at fair value as of
March 31, 2021:
|
|
In Active Markets
for Identical Assets and Liabilities
(Level
1)
|
Significant Other
Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
Total Fair Value at
March 31,
2021
|
|
|
|
|
|
|
|
Marketable
securities
|
$
32,034
|
-
|
$
-
|
$
32,034
|
|
Investment other
securities
|
-
|
-
|
$
1,000,000
|
$
1,000,000
|
|
|
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
|
|
Change in value of
equities
|
$
2,853
|
$
-
|
$
-
|
$
2,853
|
|
Additional
Investment
|
-
|
-
|
$
750,000
|
$
750,000
|
|
Balance at
March 31, 2021
|
$
32,034
|
$
-
|
$
1,000,000
|
$
1,032,034
|
19
NOTE 3
–
INVENTORY
Inventory
at March 31, 2021 and September 30, 2020 consists of the
following:
|
|
March 31,
|
September
30,
|
|
|
2021
|
2020
|
|
Finished
goods
|
$
3,014,499
|
$
2,706,518
|
|
Inventory
components
|
1,527,540
|
1,982,021
|
|
Inventory
reserve
|
(210,494
)
|
(85,179
)
|
|
Inventory
prepaid
|
478,629
|
288,178
|
|
Total
|
$
4,810,174
|
$
4,891,538
|
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 March 31, 2021 and
September 30, 2020 consist of the following:
|
|
March 31,
|
September
30,
|
|
|
2021
|
2020
|
|
Computers,
furniture and equipment
|
$
503,856
|
$
365,638
|
|
Manufacturing
equipment
|
2,955,724
|
2,873,598
|
|
Leasehold
improvements
|
849,516
|
832,465
|
|
Automobiles
|
35,979
|
24,892
|
|
|
4,345,075
|
4,096,594
|
|
Less accumulated
depreciation
|
(1,368,171
)
|
(913,106
)
|
|
Net property and
equipment
|
$
2,976,904
|
$
3,183,487
|
Depreciation
expense related to property and equipment was $240,517 and
$
174,206
for the three months
ended March 31, 2021 and 2020, respectively and was $473,323
and $
287,457
for the six months
ended March 31, 2021 and 2020, respectively.
NOTE 5 – INTANGIBLE ASSETS
On
December 20, 2018, the Company completed the Mergers with Cure
Based Development and acquired certain assets, including the
trademark "cbdMD" and its variants and certain other intellectual
property. The trademark is the cornerstone of this subsidiary and
is key as the Company creates and distributes products and continue
to build this brand. The Company believes the trademark does not
have limits on the time it will contribute to the generation of
cash flows and therefore has identified these as indefinite-lived
intangible assets (see Note 2 for more information).
In
September 2019, the Company purchased the rights to the trademark
name HempMD for $50,000. This trademark will be used in the
marketing and branding of certain products to be released under
this brand name. The Company believes the trademark does not have
limits on the time it will contribute to the generation of cash
flows and therefore has identified these as indefinite-lived
intangible assets.
Intangible
assets as of March 31, 2021 and September 30, 2020 consisted
of the following:
|
|
March 31,
|
September 30,
|
|
|
2021
|
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
|
20
NOTE 6 – CONTINGENT LIABILITY
As
consideration for the Mergers, described in Note 2, the Company had
a contractual obligation to issue 15,250,000 shares of its common
stock, after approval by its 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.
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 the Company’s 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 second marking
period for the Earnout Shares was December 31, 2020 and based
on measurement criteria, 3,348,520
Earnout Shares were issued on March
8, 2021 and had a value of $11,271,000 which was reclassified from
the contingent liability to additional paid in capital on the
consolidated balance sheet.
The third marking period was originally an 18 month period
commencing on January 1, 2021 and ending on June 30, 2022 (the
“Third Marking Period End Date”), after which time the
determination of the issuance of any remaining Earnout Shares would
be made pursuant to the terms of the Merger Agreement. On March 31,
2021 the Company entered into Addendum No. 1 to the Merger
Agreement (“Addendum No. 1”) with the holders of the
remaining Earnout Rights which amended the measurement periods
within the third marking period to change the determination of the
aggregate net revenues within the third marking period to a
quarterly basis for each of the six fiscal quarters within the
third marking period, beginning with the quarter ended March 31,
2021, instead of following Third Marking Period End Date. This
change in the measurement date, however, has no effect on the
number of remaining Earnout Shares issuable under the Earnout
Rights and no effect on the earnout targets; Addendum No. 1 simply
changes the physical issuance date(s) of the remaining Earnout
Shares, if in fact, such shares are earned pursuant to the terms of
the Merger Agreement. Addendum No. 1 did not change any of the
terms of the fourth marking period (as that term is defined in the
Merger Agreement).
This change did not impact the fair value
of the contingent liability.
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 Earnout Shares. The second marking period shares
were valued at $11,271,000 on March 8, 2021 as compared to
$8,170,988 on December 31, 2020. This increase in value of
$3,100,012 was recorded as an expense in the condensed consolidated
statement of operations for the three months ended March 31,
2021 prior to these shares being reclassified to additional paid in
capital. After the issuance of the Second Marking Period shares,
the remaining Earnout Shares for potential future issuance were
valued at $22,300,000 at March 31, 2021 as compared to $16,529,012
at December 31, 2020. The increase in value of the contingent
liability of $5,770,988 is recorded in consolidated statement of
operations for the three months ended March 31, 2021 and
represents the change in value of the remaining 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 stock price,
which was $4.14 at March 31, 2021 as compared to $2.95 on
December 31, 2020 and $2.00 on September 30, 2020.
21
NOTE 7 – RELATED PARTY TRANSACTIONS
The
Company, as noted in Note 2, and a number of its affiliates have
invested into Adara through Adara Sponsor. The Company’s
co-CEO is also CEO of Adara.
NOTE 8 – SHAREHOLDERS’ EQUITY
Preferred
Stock – The Company is 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 March 31, 2021 and September 30, 2020,
respectively.
The
total amount of dividends declared and paid were $560,280 and
$100,016, respectively, for the three months ended March 31,
2021 and 2020. The total amount of dividends declared and paid were
$660,330 and $166,750 for the six months ended March 31, 2021
and 2020.
Common
Stock – The Company is authorized to issue 150,000,000 shares
of common stock, par value $0.001 per share. There were 56,337,787
and 52,130,870 shares of common stock issued and outstanding at
March 31, 2021 and September 30, 2020,
respectively.
Preferred stock transactions:
In the
three and six months ended March 31, 2021:
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 and six months ended March 31, 2020:
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 $178,513 and
expire on October 10, 2024.
Common stock transactions:
In the three and six months ended March 31, 2021:
In
March of 2021, the Company issued 180,000 shares of restricted
common stock to a professional athlete to completely satisfy a
$800,000 obligation due between July and December of 2021. The
Company recorded a total prepaid expense of $649,800 in conjunction
with the issuances of shares and intends to amortize this over the
term of the athlete’s agreement.
In
March of 2021, the Company issued 27,000 of restricted stock awards
to the Company’s board of directors. Two thousand of the
shares vested at the time of the grant, while the balance vest one
fourth on June 30, 2021, one fourth, on September 30, 2021,
one fourth on December 31, 2021, and one fourth on
March 31, 2022. The stock awards were valued at the fair
market price of $118,800 upon issuance and will amortize over the
individual vesting periods.
In
March 2021, the Company issued 3,348,520 shares of common stock in
connection with the Earnout Shares as referenced in Note
6.
In February 2021 as partial compensation pursuant to the terms of a
Personal Services Agreement for the endorsement of the
Company’s products, the Company issued 40,000 common shares.
The Company recorded a total prepaid expense of $155,200 in
conjunction with the issuance of shares.
In
January of 2021 the Company issued 167,500 of restricted stock
awards to an aggregate of 15 employees. A majority vested
immediately with the balance vesting by April 6, 2021. The stock
awards were valued at the fair market price of $494,125 upon
issuance and amortized over the individual vesting
periods.
In
October of 2020 the Company issued 50,000 of restricted stock
awards to an executive officer, subject to a multi-year vesting
schedule with a minimum one year before the first tranche vests as
noted below in Note 9.
22
In the three and six months ended March 31, 2020:
In February 2020, the Company issued 25,000 shares of its common
stock to an investor relations firm for services. The shares were
valued at $28,250, based on the trading price upon issuance, and
are being amortized and expensed as professional services over the
service period ending January 2021. In February 2020, the Company
issued 5,000 shares of its common stock to an employee. The shares
were valued at $5,650, based on the trading price upon issuance,
and was expensed as stock-based compensation expense.
On January 14, 2020, the Company completed a follow-on firm
commitment underwritten public offering of 18,400,000 shares of its
common stock for aggregate gross proceeds of $18,400,000. The
Company received approximately $16.9 million in net proceeds after
deducting underwriting discounts and commissions. The Company also
issued to the representative of the underwriters warrants to
purchase in aggregate 480,000 shares of common stock with an
exercise price of $1.25. The warrants were valued at $345,600 and
expire on January 14, 2025.
Stock option transactions:
In the
three and six months ended March 31, 2021:
In
March 2021, the Company granted it’s board of directors an
aggregate of 150,000 common stock options. The options vested
immediately, have a strike price of $4.40 and a five-year term. The
Company has recorded a total prepaid expense of $395,850 and
intends to amortize the expense over the 12-month board
term.
In
January 2021, the Company granted an aggregate of 80,000 common
stock options to three employees. The options vest in three equal
tranches, the first on April 15, 2021, the second on April 15, 2022
and the third on April 14, 2023 and have an exercise price of $3.10
per share and a term of 10 years. The Company has recorded an
expense of $66,967 for the three months ended March 31, 2021
for these options.
In
October 2020, the Company granted an aggregate of 350,000 common
stock options to an executive officer. The options vest in three
equal tranches, the first on October 1, 2021, the second on October
1, 2022 and the third 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 these options of $31,054 and
$62,108 for the three and six months ended March 31, 2021,
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, the
Company will adjust the estimated forfeiture rate to its actual
experience. Management will continue to assess the assumptions and
methodologies used to calculate estimated fair value of share-based
compensation. Circumstances may change and additional data may
become available over time, which could result in changes to these
assumptions and methodologies, and thereby materially impact our
fair value determination.
The
following table summarizes the inputs used for the Black-Scholes
pricing model on the options issued in the six months ended
March 31, 2021 and 2020:
|
|
2021
|
2020
|
|
Weighted
average exercise price
|
$4.65
|
$3.15
|
|
Risk
free interest rate
|
0.16%
0.85%
|
1.41%-1.64%
|
|
Volatility
|
100.72%-105.43%
|
95.96%-99.03%
|
|
Expected
term
|
2.5-
6.2 years
|
3-5
years
|
|
Dividend
yield
|
None
|
None
|
Warrant transactions:
In the
three and six months ended March 31, 2021:
In
December 2020 in relation to the follow-on firm commitment
underwritten public offering of the 8.0% Series A Cumulative
Convertible Preferred Stock, the Company
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
.
23
In the
three and six months ended March 31, 2020:
In
October 2019 in relation to the firm commitment underwritten public
offering of the 8.0% Series A Cumulative Convertible Preferred
Stock, the Company
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
March 31, 2021 and 2020:
|
|
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 9 – 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 number 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.
On January 8, 2021, the Company’s Board of Directors approved
the 2021 Equity Compensation Plan (the “2021 Plan”) and
it was subsequently approved by its shareholders at its annual
meeting held on March 12, 2021. The purpose of the 2021 Plan is to
advance the interests of the Company by providing an incentive to
attract, retain and motivate highly qualified and competent persons
who are important to it and upon whose efforts and judgment the
success of the Company is largely dependent. The 2021 Plan made
5,000,000 common shares,
either unissued or reacquired by
the Company, available for awards of options, restricted stocks,
other stock grants, or any combination thereof. The 2021 Plan also
contains an “evergreen formula” pursuant to which the
number of shares of common stock available for issuance under the
2021 Plan will automatically increase on October 1 of each calendar
year during the term of the 2021 Plan, beginning with calendar year
2022, by an amount equal to 1% of the total number of shares of
common stock outstanding on September 30 of such calendar year, up
to a maximum of 250,000 shares.
The
Company accounts 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 the Company’s
stock option awards or modifications is estimated at the date of
grant using the Black-Scholes option pricing model.
Eligible
recipients include employees, officers, directors and consultants
who are deemed to have rendered or to be able to render significant
services to the Company or its subsidiaries and who are deemed to
have contributed or to have the potential to contribute to the
success of the Company. Options granted generally have a
five-to-ten-year term and have vesting terms that cover one to
three years from the date of grant. Certain of the stock options
granted under the plan have been granted pursuant to various stock
option agreements. Each stock option agreement contains specific
terms.
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.
24
The following table summarizes stock option activity under both
plans:
|
|
Number
of shares
|
Weighted-average
exercis eprice
|
Weighted-average
remainin gcontractual term (in years)
|
Aggregate
intrinsic value (in thousands)
|
|
Outstanding
at September 30, 2020
|
1,750,000
|
4.68
|
|
|
|
Granted
|
580,000
|
4.65
|
|
|
|
Exercised
|
(147,953
)
|
2.60
|
|
|
|
Forfeited
|
(167,047
)
|
3.04
|
|
|
|
Outstanding
at March 31, 2021
|
2,015,000
|
$
4.95
|
5.90
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2021
|
1,311,668
|
$
4.86
|
5.91
|
$
—
|
As of March 31, 2021, there was approximately $952,603 of
total unrecognized compensation cost related to non-vested stock
options which vest over a period of approximately 2.5
years.
Restricted Stock Award transactions:
In
March of 2021, the Company issued 27,000 of restricted stock awards
to the members of the Company’s board of directors. Two
thousand shares vested at the time of the grant, while the balance
vest in four equal tranches, the first of which vests on
June 30, 2021, the second on September 30, 2021, on the
third on December 31, 2021, and the fourth on March 31,
2022. The stock awards were valued at the fair market price of
$118,800 upon issuance and amortized over the individual vesting
periods.
In
March of 2021, the Company issued 180,000 shares of restricted
common stock to a professional athlete to completely satisfy a
$800,000 obligation due between July and December of 2021. The
Company recorded a total prepaid expense of $649,800 in conjunction
with the issuances of shares and intends to amortize this over the
term of the athlete’s agreement as a marketing
expense.
In
January of 2021, the Company issued 167,500 of restricted stock
awards to an aggregate of 15 employees. A majority vested upon
issuance with the balance vesting by April 6, 2021. The stock
awards were valued at the fair market price of $494,125 upon
issuance at and amortized over the individual vesting
periods.
In
October 2020, the Company issued 50,000 of restricted stock awards
to an executive officer. The restricted stock vests in three equal
tranches, the first of which vests on October 1, 2021, on the
second on October 1, 2022 and the third 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.
The
Company recognized $532,028 and $0 of restricted stock compensation
expense for the three months ended March 31, 2021 and 2020,
respectively. The Company recognized $547,250 and $138,000 of
restricted stock compensation expense for the six months ended
March 31, 2021 and 2020, respectively.
25
NOTE 10 – 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
|
(323,444
)
|
1.25
|
|
|
|
Forfeited
|
(82,632
)
|
1.25
|
|
|
|
Outstanding
at March 31, 2021
|
658,611
|
$
5.48
|
2.52
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2021
|
508,190
|
$
5.99
|
1.88
|
$
—
|
The following table summarizes outstanding common stock purchase
warrants as of March 31, 2021:
|
|
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
|
47,882
|
$
3.9125
|
October
2024
|
|
Exercisable
at $1.25 per share
|
36,682
|
$
1.25
|
January
2025
|
|
Exercisable
at $3.74 per share
|
150,502
|
$
3.74
|
December
2025
|
|
|
658,611
|
5.48
|
|
NOTE 11 – 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, requirements to provide production days for
advertising creation and attendance of 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, the Company and
professional athlete mutually agreed to suspend payments from March
2020 through June 2020. Effective July 1, 2020, the parties entered
into a new endorsement agreement 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. 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. In March 2021, the
parties entered into an additional amendment to the endorsement
agreement whereby the Company issued the professional athlete
180,000 common shares to completely satisfy the $800,000 payment
options between July 2021 and December 2021. The Company has
recorded expense of $273,236 and $166,667 for the three months
ended March 31, 2021 and 2020, respectively and $526,936 and
$283,334 for the six months ended March 31, 2021 and
2020.
In
September 2019, the Company entered into a sponsorship agreement
with Life Time, Inc, an operator of fitness clubs, facilities and
events. The term of the agreement is through December 31, 2022
and is tied to the Company being the exclusive CBD company, as well
as 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 are
$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, the
Company and Life Time Inc. 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 on the re-opening of Life Time
Inc. facilities and decisions on Life Time Inc. hosted events
during calendar 2020. During the second quarter of fiscal 2021, the
Company elected to terminate the Life Time agreement. The Company
has recorded expense related to the agreement of $186,000 and
$208,000 for the three months ended March 31, 2021 and 2020,
respectively and $336,000 and $1,173,000 for the six months ended
March 31, 2021 and 2020, respectively.
26
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, the United States AMA Supercross, the FIM World
Championship events 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 are to be
paid for the periods ending: December 2019 - $150,000, December
2020 - $800,000 and December 2021 - $800,000. In light of the
impact of COVID-19 on these events, both parties entered into an
amendment to the sponsorship agreement during October 2020. The
revised total aggregate payments are $1,013,625 during the term of
the contract, ending May 2021, and are to be paid for periods
ending: 2019 Season - $150,000, 2020 Season - $503,625 and December
2021 - $360,000. The Company has recorded expenses related to this
agreement of $154,287 and $298,957 for the three months ended
March 31, 2021 and 2020, respectively and $257,145 and
$528,831 for the six months ended March 31, 2021 and 2020,
respectively.
NOTE 12 – NOTE PAYABLE
In July
2019, the Company entered into a loan arrangement in the amount of
$249,100 for a line of equipment, of which $122,524 is a long term
note payable at March 31, 2021. Payments are for 60 months and
have a financing rate of 7.01 %, which requires a monthly payment
of $4,905. In January 2020, the Company entered into a loan
arrangement for $35,660 for equipment, of which $16,691 is a long
term note payable at March 31, 2021. Payments are for 48
months and have a financing rate of 6.2%, which requires a monthly
payment of $841.
NOTE 13 – LONG TERM LIABILITY
In April 2020, The Company applied for an unsecured loan pursuant
to the PPP administered by 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, the Company received the
loan from Truist Bank (the “Lender”) in the principal
amount of $1,456,100 (the “SBA Loan”). The SBA
Loan is evidenced by a promissory note issued by the Company (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 March 31, 2021 the
Company accrued interest expense of $3,590 related to the SBA Loan
within accrued expenses on the condensed consolidated balance sheet
at March 31, 2021. In addition, $1,027,403 of the loan has
been reclassified as a short-term on the condensed consolidated
balance sheet at March 31, 2021.
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. 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.
Based
on the submitted application for forgiveness, the Company qualifies
for 100% forgiveness of its PPP loan. The forgiveness process is
currently under review and the Company is awaiting a response from
its Lender and the SBA.
NOTE 14 – 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.
At
September 30, 2020 the balance in accounts receivable related to
discontinued operations was $447,134, which reflects payments made
and an impairment of $45,783. At March 31, 2021 the balance in
accounts receivable related to discontinued operations totaled
$22,217.
NOTE 15 – LEASES
The Company has lease agreements for its 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. The Company determines whether an arrangement is a
lease at inception and classify it as finance or operating. All of
the Company’s leases are classified as operating leases. The
Company’s 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, the
Company determined 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.
The Company’s lease terms may include
options to extend or terminate the lease.
27
In addition to the monthly base amounts in the lease agreements,
the Company is required to pay real estate taxes, insurance and
common area maintenance expenses during the lease
terms.
Lease costs on operating leases are recognized on a straight-line
basis over the lease term and included as a selling, general and
administrative expense in the condensed consolidated statements of
operations.
Components
of operating lease costs are summarized as follows:
|
|
Three Months
Ended
|
Six Months
Ended
|
|
|
March 31,
2021
|
March 31,
2021
|
|
Total Operating
lease costs
|
$
386,783
|
$
773,567
|
Supplemental
cash flow information related to operating leases is summarized as
follows:
|
|
Three Months
Ended
|
Six Months
Ended
|
|
|
March 31,
2021
|
March 31,
2021
|
|
Cash paid for
amounts included in the measurement of operating lease
liabilities
|
$
382,277
|
702,931
|
As of
March 31, 2021, our operating leases had a weighted average
remaining lease term of 5.24 years and a weighted average discount
rate of 4.66%. Future minimum aggregate lease payments under
operating leases as of March 31, 2021 are summarized as
follows:
|
For
the year ended September 30,
|
|
|
2021 (remaining six
months)
|
$
766,903
|
|
2022
|
1,405,887
|
|
2023
|
1,380,204
|
|
2024
|
1,421,610
|
|
2025
|
1,159,949
|
|
Thereafter
|
1,372,862
|
|
Total future lease
payments
|
7,507,415
|
|
Less
interest
|
(878,773
)
|
|
Total lease
liabilities
|
$
6,628,642
|
Future
minimum lease payments (including interest) under non-cancelable
operating leases as of September 30, 2020 are summarized as
follows:
|
For
the year ended September 30,
|
|
|
2020
|
$
1,394,806
|
|
2021
|
1,452,434
|
|
2022
|
1,392,837
|
|
2023
|
1,380,204
|
|
2024
|
1,421,610
|
|
Thereafter
|
2,532,811
|
|
Total obligations
and commitments
|
$
9,574,702
|
28
NOTE 16 – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the following periods:
|
|
Three
Months Ended
|
Six
Months Ended
|
||
|
|
March
31,
|
March
31,
|
March
31,
|
March
31,
|
|
|
2021
|
2020
|
2021
|
2020
|
|
Basic:
|
|
|
|
|
|
Net
income (loss) continuing operations
|
$
(12,510,474
)
|
$
14,883,772
|
$
(21,906,096
)
|
$
27,854,738
|
|
Preferred
dividends paid
|
560,280
|
100,016
|
660,330
|
166,750
|
|
Net
income (loss) continuing operations adjusted for preferred
dividend
|
(13,070,754
)
|
14,783,756
|
(22,566,426
)
|
27,687,988
|
|
Net
income (loss) discontinued operations
|
-
|
-
|
-
|
(41,202
)
|
|
Net
income (loss) attributable to cbdMD, Inc. common
shareholders
|
(13,070,754
)
|
14,783,756
|
(22,566,426
)
|
27,646,786
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Net
income (loss) continuing operations
|
(13,070,754
)
|
14,783,756
|
(22,566,426
)
|
27,687,988
|
|
Net
income (loss) discontinued operations
|
-
|
-
|
-
|
(41,202
)
|
|
Net
income(loss)
|
(13,070,754
)
|
14,783,756
|
(22,566,426
)
|
27,646,786
|
|
|
|
|
|
|
|
Shares
used in computing basic earnings per share
|
53,471,607
|
36,503,005
|
52,793,872
|
36,503,005
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Options
|
-
|
-
|
-
|
-
|
|
Warrants
|
-
|
-
|
-
|
-
|
|
Convertible
preferred shares
|
-
|
833,500
|
-
|
833,500
|
|
Shares
used in computing diluted earnings per share
|
53,471,607
|
37,336,505
|
52,793,872
|
37,336,505
|
|
|
|
|
|
|
|
Earnings per share Basic:
|
|
|
|
|
|
Continued
operations
|
(0.24
)
|
0.41
|
(0.43
)
|
0.76
|
|
Discontinued
operations
|
-
|
-
|
-
|
0
|
|
Basic
earnings per share
|
(0.24
)
|
0.41
|
(0.43
)
|
0.76
|
|
|
|
|
|
|
|
Earnings per share Diluted:
|
|
|
|
|
|
Continued
operations
|
(0.24
)
|
0.40
|
(0.43
)
|
0.74
|
|
Discontinued
operations
|
-
|
-
|
-
|
0
|
|
Diluted
earnings per share
|
(0.24
)
|
0.40
|
(0.43
)
|
0.74
|
At the
three and six months ended March 31, 2021, 2,751,111 potential
shares underlying options, unvested RSUs and warrants as well as
4,667,600 convertible preferred shares were excluded from the
shares used to calculate diluted loss per share as their inclusion
would reduce net loss per share.
NOTE 17 – 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 NOL carryovers. The Company is continuing
to evaluate the extent of limitations of NOLs that the Company will
have the ability to utilize future earnings.
29
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. For the six
months ended March 31, 2021 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
$88,000 and resulted in a deferred tax provision benefit of
$868,000.
NOTE 18 – SUBSEQUENT EVENTS
The Company has analyzed its operations subsequent to
March 31, 2021 to the date these unaudited condensed
consolidated financial statements were issued.
On April 9, 2021 the Company entered into an endorsement agreement
with a professional athlete. A part of the endorsement agreement,
the Company issued 40,000 common shares of restricted stock. The
Company recorded $143,600 prepaid expense and intends to amortize
over the term of the agreement.
On
April 19, 2021 the Company entered into an Amended and Restated
Executive Employment Agreement with
Martin
A. Sumichrast, the
Corporation’s Chairman and co-Chief Executive Officer, and on
April 19, 2021 CBD Industries LLC, a wholly owned subsidiary of the
Corporation, entered into an Amended and Restated Executive
Employment Agreement with R. Scott Coffman, Chief Executive Officer
of CBD Industries and co-Chief Executive Officer and President of
the Corporation. Both Amended and Restated Employment
Agreements extended the term until December 31, 2023, include
compensation increases, and performance-based incentive targets.
In addition, Mr. Sumichrast
was issued 750,000 RSUs that vest in three equal tranches, the
first of which vests on January 1, 2022, the second on January 1,
2023 and the third on January 1, 2024 as well as 750,000 common
stock options that vest in three equal tranches, the first of which
vests on January 1, 2022, the second on January 1, 2023 and the
third on January 1, 2024, both under the Corporation’s 2021
Equity Compensation Plan. The Company will incur a $2,520,000 and
$1,693,000 non-cash expense during the course of the vesting period
associated with the restricted stock and stock options
respectively.
In May 2021, cdbMD signed an exclusive sponsorship agreement to be
the Official CBD Partner of the NOBULL CrossFit Games in
2021.
30
I
TEM 2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The
following discussion of our financial condition and results of
operations for the three and six months ended March 31, 2021 and
the three and six months ended March 31, 2020 should be read in
conjunction with the unaudited 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
Securities and Exchange Commission. We use words such as
“anticipate,” “estimate,”
“plan,” “project,”
“continuing,” “ongoing,”
“expect,” “believe,” “intend,”
“may,” “will,” “should,”
“could,” and similar expressions to identify
forward-looking statements. In addition, any statements that refer
to projections of our future financial performance, our anticipated
growth and trends in our businesses, and other characterizations of
future events or circumstances are forward-looking statements. Such
statements are based on our current expectations and could be
affected by the uncertainties and risk factors described throughout
this report.
Our Company
General
We own and operate the nationally recognized CBD (cannabidiol)
brands cbdMD, Paw CBD and cbdMD Botanicals. 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 methods.
31
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.
Our
cbdMD Botanicals
brand of beauty
and skincare products features 15 SKUs, including facial oil and
serum, toners, moisturizers, clear skin, facial masks, exfoliants
and body care.
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, Paw CBD and cbdMD Botanicals 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 second quarter our Pet brand,
Paw CBD, debuted
its
first-ever
national TV advertising campaign
during the live broadcast of Puppy Bowl XVII, which aired on
Sunday, February 7, 2021 before a national audience on Discovery+
and Animal Planet. In addition we developed a second commercial
that debuted April 1, 2020 for our core cbdMD brand.
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
In
March 2021, we officially
filed our Novel Food Application with the United Kingdom’s
Food Standards Agency (“FSA”). The Application included
all of the requisite data to allow for a validated submission and
thorough scientific assessment. A similar submission was
simultaneously made to the European Food Safety Authority (EFSA) to
ensure compliance for the European markets.
During the remainder of fiscal 2021 we will be
accelerating our efforts to increase revenue in the
U.K.
32
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. We continue to invest in
the line of products and have a number of additional SKUs launching
during the balance of fiscal 2021.
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 migrated
our ERP system to NetSuite in an effort to obtain more-robust,
real-time visibility into our operation.
In
February 2021, two of cbdMD’s products
were awarded
2021 Product of the Year
Awards by a national survey organized by Kantar, a
global
leader in research. cbdMD serves as the first CBD company to win
Product of the Year in consecutive years, earning 2021 top honors
in “CBD Ingestible” for its CBD Gummies, while its Paw
CBD brand secures category first “CBD Pet” award with
its CBD
Hard Chews for
Dogs.
In March 2021, we announced the formation of Therapeutics
for the purposes of isolating and
quantifying the Company’s ongoing investments in science
related to its existing and future products, including research and
development activities for therapeutic
applications.
In April 2021, we announced cbdMD s
igned an exclusive CBD sponsorship with highly
decorated professional golfer, and 9-time PGA TOUR winner, Patrick
Reed, to become the latest high profile member of Team
cbdMD
.
In May 2021, cbdMD signed an exclusive sponsorship agreement to be
the Official CBD Partner of the NOBULL CrossFit Games to be held
during 2021.
During the second quarter we
renewed our NSF certification and underwent the US Hemp Authority
audit, receiving our seal of approval
on May 10,
2021.
Earnout Shares
As
described in Note 6 to the unaudited condensed consolidated
financial statements appearing earlier in this report, on March 31,
2021
we entered into
Addendum No. 1 to the Merger Agreement with the holders of the
remaining Earnout Rights which amended the measurement periods
within the third marking period to change the determination of the
aggregate net revenues within the third marking
period to a
quarterly basis for each of the six fiscal quarters within the
third marking period, beginning with the quarter ended March 31,
2021, instead of the initial 18 month period. While this change in
the measurement date has no effect on the number of
remaining
Earnout Shares
issuable under the Earnout Rights, nor the revenue targets, it will
result in the issuance of the Earnout Shares associated with the
third marketing period (assuming the revenue targets are met under
the terms of the Merger Agreement) on a quarterly basis instead of
at the end of the 18 month period. Because Tthe Earnout Shares are
earned based on the Company’s earned revenue and by
issuing
these shares quarterly, as compared to at the end of the eight
quarters, we expect that this change has the potential to reduce
the volatile impact of the contingent liability on our Net Income
results and consequentially its non-cash impact to our
financial
statements with
each subsequent quarter.
Growth Strategies
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, a CBD bath salt line, as well as our
cbdMD Botanicals line of CBD skin care products. In April 2021 we
announced our forthcoming 2021 product launches of which included
an extension of our award-winning and best-selling gummies, as well
as the first ever, and highly anticipated, cbdMD Drink
Mixes.
●
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
latter half of fiscal 2021.
During the second quarter of
fiscal 2021 our
wholesale sales, including sales to our retail brick and mortar
customers, increased by 30.8% from the first
quarter of fiscal
2021.
●
Expand
to markets outside the United States:
We continue to explore sales into markets outside
of the United States. Our products are currently available
in
31
countries. 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
U.K.
●
Expand
PAW CBD:
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. During the second quarter of fiscal 2021 we began
advertising on TV and introduced our Paw CBD rewards program and
expect to introduce a Paw CBD subscription program during the
latter part of fiscal 2021.
33
●
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.
●
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
March 31,
|
||
|
|
2021
|
2020
|
change
|
|
|
(unaudited)
|
(unaudited)
|
|
|
Total net
sales
|
$
11,798,611
|
$
9,399,036
|
2,399,575
|
|
Cost of
sales
|
3,643,127
|
2,732,076
|
911,051
|
|
Gross profit as a
percentage of net sales
|
69.1
%
|
70.9
%
|
(1.8
)%
|
|
Operating
expenses
|
12,323,207
|
12,267,637
|
55,570
|
|
Operating income
from operations
|
(4,167,723
)
|
(5,600,677
)
|
1,432,954
|
|
(Increase) decrease
on contingent liability
|
(8,871,000
)
|
21,261,994
|
(141.7
)%
|
|
Net income (loss)
before taxes
|
(13,046,474
)
|
14,883,772
|
(187.7
)%
|
|
Net income (loss)
attributable to cbdMD, Inc. common shareholders
|
$
(13,070,754
)
|
$
14,783,756
|
(188.4
)%
|
|
|
Six Months Ended
March 31,
|
|
|
|
|
2021
|
2020
|
change
|
|
|
(unaudited)
|
(unaudited)
|
|
|
Total net
sales
|
$
24,126,914
|
$
19,547,272
|
4,579,642
|
|
Cost of
sales
|
7,073,402
|
6,432,613
|
640,789
|
|
Gross profit as a
percentage of net sales
|
70.7
%
|
67.1
%
|
3.6
%
|
|
Operating
expenses
|
22,981,180
|
24,827,934
|
(1,846,754
)
|
|
Operating income
from operations
|
(5,927,668
)
|
(11,713,275
)
|
5,785,607
|
|
(Increase) decrease
on contingent liability
|
(17,371,000
)
|
38,160,000
|
(145.5
)%
|
|
Net income (loss)
before taxes
|
(22,774,096
)
|
25,614,438
|
(188.9
)%
|
|
Net income (loss)
attributable to cbdMD, Inc. common shareholders
|
$
(22,566,426
)
|
$
27,696,786
|
(181.5
)%
|
Net 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
March 31, 2021
|
% of
total
|
Three months ended
March 31, 2020
|
% of
total
|
|
|
|
|
|
|
|
Wholesale
sales
|
$
3,436,176
|
29.1
%
|
$
2,617,860
|
27.9
%
|
|
E-commerce
sales
|
8,362,435
|
70.9
%
|
6,781,176
|
72.1
%
|
|
Total net
sales
|
$
11,798,611
|
|
$
9,399,036
|
|
|
|
Six months ended
March 31, 2021
|
% of
total
|
Six months ended
March 31, 2020
|
% of
total
|
|
|
|
|
|
|
|
Wholesale
sales
|
$
6,063,356
|
25.1
%
|
$
5,885,981
|
30.1
%
|
|
E-commerce
sales
|
18,063,558
|
74.9
%
|
13,661,291
|
69.9
%
|
|
Total net
sales
|
$
24,126,914
|
|
$
19,547,272
|
|
34
Total net sales for the three months ended March 31, 2021 grew
25.5% year over year and decreased 4.3% over the first quarter of
fiscal
2021. Historically, sales in our March quarter are
impacted by seasonality. e-commerce net sales for the second
quarter of fiscal 2021 grew 23.3% year over year. The growth in
this channel is driven by our continued optimization of our
multifaceted marketing investments and growing brand awareness. We
are starting to see some increase in our Wholesale business and
sales 36to our brick and mortar retail customers experienced a
31.3% increase in net sales year over year for the quarter and a
30.8% sequential quarterly net sales increase. We are starting to
see an uptick in wholesale activity and year over year increase is
mainly attributed to increase confidence and economic outlook when
compared to significant uncertainty brought about by the onset of
the COVID-19 pandemic in the prior year period. We are starting to
see For the six months ended March 31, 2021 overall net sales
increased 23.4%, while net sales from of our E-commerce and
wholesale grew 32.2% and 3.0% respectively. Overall, we believe the
ongoing brand and market efforts continue to build momentum and
traction with consumers and an increase in activity from our
wholesale business has contributed to our year over year
growth.
Of our
total net sales as indicated above, during the three months ended
March 31, 2021 and 2020 our Paw CBD line accounted for net
sales of $1,415,171 and $768,979, respectively. In addition, during
the six months ended March 31, 2021 and 2020 our Paw CBD line
accounted for net sales of $2,882,649 and $1,589,554, respectively.
The year over year growth in our Paw CBD brand is due to the
expansion of products, increase in marketing efforts specific to
the brand, including TV, as well as further adoptions from our
wholesale customers.
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, and includes
labor for our service sales.
Our cost of sales as a
percentage of net sales was 30.9% and 29.1% for three months ended
March 31, 2021 and 2020, respectively and 29.3% and 32.9% for
the six months ended March 31, 2021 and 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 during the
balance of fiscal 2021.
Operating expenses
Our
principal operating expenses include staff related expenses,
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 expenses. Our operating expenses on a
consolidated basis increased approximately 0.5% for the second
quarter of fiscal 2021 from the same period in fiscal 2020 and
decreased approximately 7.4% for the six months ended March 31,
2021 as compared to the six months ended March 31, 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 tables provide information on our approximate operating
expenses for the three and six months ended March 31, 2021 and
2020:
|
|
Three months
ended
|
Three months
ended
|
|
|
|
March 31,
2021
|
March 31,
2020
|
Change
($)
|
|
|
|
|
|
|
Staff related
expense
|
$
3,916,730
|
$
3,969,976
|
$
(53,246
)
|
|
Accounting/legal
expense
|
330,854
|
382,674
|
(51,820
)
|
|
Professional
outside services
|
287,411
|
329,019
|
(41,608
)
|
|
Advertising/marketing/social
media/events/tradeshows
|
4,044,812
|
3,611,347
|
433,465
|
|
Sponsorships
|
595,372
|
1,442,472
|
(847,100
)
|
|
Affiliate
commissions
|
417,382
|
385,341
|
32,041
|
|
Merchant
fees
|
492,093
|
674,469
|
(182,376
)
|
|
R&D and
regulatory
|
82,025
|
-
|
82,025
|
|
Non-cash stock
compensation
|
825,833
|
435,301
|
390,532
|
|
Depreciation
|
240,517
|
174,205
|
66,312
|
|
All other
expenses
|
1,090,178
|
862,832
|
227,346
|
|
Totals
|
$
12,323,207
|
$
12,267,637
|
$
55,571
|
35
|
|
Six months
ended
|
Six months
ended
|
|
|
|
March 31,
2021
|
March 31,
2020
|
Change
($)
|
|
|
|
|
|
|
Staff related
expense
|
$
7,620,385
|
$
7,919,370
|
$
(298,985
)
|
|
Accounting/legal
expense
|
535,563
|
726,093
|
(190,530
)
|
|
Professional
outside services
|
594,625
|
819,448
|
(224,823
)
|
|
Advertising/marketing/social
media/events/tradeshows
|
7,032,907
|
6,244,464
|
788,443
|
|
Sponsorships
|
1,109,429
|
3,572,308
|
(2,462,879
)
|
|
Affiliate
commissions
|
872,076
|
929,608
|
(57,532
)
|
|
Merchant
fees
|
1,121,137
|
1,415,462
|
(294,325
)
|
|
R&D and
regulatory
|
385,731
|
-
|
385,731
|
|
Non-cash stock
compensation
|
1,090,007
|
1,115,875
|
(25,868
)
|
|
Depreciation
|
473,323
|
287,457
|
185,866
|
|
All other
expenses
|
2,145,997
|
1,797,849
|
348,148
|
|
Totals
|
$
22,981,180
|
$
24,827,934
|
$
(1,846,754
)
|
For the
three months ended March 31, 2021, the overall operating expenses
were relatively constant year over year. We re-negotiated and
reduced many of our sponsorships and worked to reduce many of our
operational expenses. While our merchant fees continue to drop year
over year as a percent of net sales, during the fiscal third
quarter we have opened up some additional relationships that should
further reduce our merchant fees going forward. Included in all
other expenses for the quarter is a $299,609 severance expense
accrual for a former non-management employee pursuant to the terms
of a separation agreement entered into with a former employee in
January 2021.
For the
six months ended March 31, 2021, we made progress reducing many of
our operation expenses while increasing our spend on R&D and
marketing expenses to help drive revenue. We believe that we have
built a strong business foundation and infrastructure, and we are
now focused on activation of our assets to continue to build our
brand while we focus on overall execution and
profitability.
Corporate overhead and allocation of management fees to our
segments
Included
in our consolidated operating expenses are expenses associated with
our corporate overhead which are not allocated to the operating
business unit, including (i) staff related expenses; (ii)
accounting and legal expenses; (iii) professional outside services;
(iv) travel and entertainment expenses; (v) rent; (vi) business
insurance; and (vii) non-cash stock compensation
expense.
36
The
following table provides information on our approximate corporate
overhead for the three and six months ended March 31, 2021 and
2020:
|
|
Three months
ended
|
Three months
ended
|
|
|
|
March 31,
2021
|
March 31,
2020
|
change
($)
|
|
|
|
|
|
|
Staff related
expense
|
$
302,225
|
$
292,833
|
$
9,391
|
|
Accounting/legal
expense
|
255,074
|
163,878
|
91,196
|
|
Professional
outside services
|
104,834
|
144,522
|
(39,688
)
|
|
Travel
expense
|
2
|
4,160
|
(4,158
)
|
|
Business
insurance
|
149,275
|
108,748
|
40,527
|
|
Non-cash stock
compensation
|
825,833
|
435,301
|
390,533
|
|
Totals
|
$
1,637,243
|
$
1,149,442
|
$
487,801
|
|
|
|
|
|
|
|
Six months
ended
|
Six months
ended
|
|
|
|
March 31,
2021
|
March 31,
2020
|
change
($)
|
|
|
|
|
|
|
Staff related
expense
|
$
850,395
|
$
710,240
|
$
140,155
|
|
Accounting/legal
expense
|
465,740
|
435,892
|
29,848
|
|
Professional
outside services
|
171,685
|
320,030
|
(148,345
)
|
|
Travel
expense
|
2
|
22,684
|
(22,682
)
|
|
Business
insurance
|
269,866
|
182,464
|
87,402
|
|
Non-cash stock
compensation
|
1,090,007
|
1,115,875
|
(25,868
)
|
|
Totals
|
$
2,847,695
|
$
2,787,185
|
$
60,510
|
|
|
|
|
|
The
increase in corporate related expenses for the three months ended
March 2021 over prior year is primarily due to the increase in
non-cash stock compensation to employees and directors. Corporate
expenses were relatively flat for the six months ended March 31,
2021 as compared to prior year. While there was an increase in
staff related expenses, this was driven by executive incentive
accrued during the first quarter of fiscal 2021,which was partially
offset by a reduction in professional expenses.
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 three months ended
March 31, 2021 and 2020, we recorded $2,852 and $(813,152),
respectively and for the six months ended March 31, 2021 and
2020 we recorded $545,562 and $(875,162), respectively, of realized
and unrealized gain (loss) on marketable and other securities,
including impairments. The realized gain was driven by the sale of
our investment in Formula Four Beverages, Inc. that was previously
written to zero in the prior year based on prior information
related to the company’s performance and COVID-19 impacts.
The loss in the prior year was driven by the impairment from its
investment in Formula Four Beverages, Inc.
37
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 $22,300,000 at March 31, 2021, as compared to
$16,200,000 at September 30, 2020, respectively. During the second
quarter of fiscal 2021 we had an increase in value of $8,871,000 to
the contingent liability which is recorded as other expense in our
consolidated statement of operations for the second quarter of
fiscal year 2021. The increase in value is comprised of $3,100,012
associated with the increase of the value of the Second Marking
Period shares prior to their issuance on March 8, 2021, while the
remaining $5,770,988 is associated with the increase in the
remaining contingent shares as of March 31, 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 $4.14 at March 31, 2021 as compared to $2.95 on
December 31, 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 $23,711,600 and working
capital of $27,882,688 at March 31, 2021 as compared to cash
and cash equivalents on hand of $14,824,644 and working capital of
$16,023,174 at September 30, 2020. Our current assets increased
approximately 46.5% at March 31, 2021 from September 30, 2020,
which is primarily attributable to an increase in cash received
under the public offering of our shares of our 8.0% Series A
Convertible Preferred Stock in December 2020 and an increase in
accounts receivables as wholesale net sales picked up at the end of
the quarter. Our current liabilities decreased approximately 10.7%
at March 31, 2021 from September 30, 2020. This decrease is
primarily attributable to decrease in accounts payables and 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 Convertible
Preferred Stock resulting in total net proceeds to us of
approximately $15.7 million.
During
the three and six months ended March 31, 2021 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 11 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 $3,654,674 and
$4,273,508 for the three months ended March 31, 2021 and 2020,
respectively and $4,279,309 (excluding the reclassification of
$1,027,403 of the PPP loan to short term liabilities) and
$9,147,052 for the six months ended March 31, 2021 and 2020,
respectively.
38
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.
I
TEM 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
applicable for a smaller reporting company.
I
TEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
. We maintain “disclosure controls and
procedures” as such term is defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934. In designing and evaluating
our disclosure controls and procedures, our management recognized
that disclosure controls and procedures, no matter how well
conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of disclosure controls and procedures
are met. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure
controls and procedures also is based in part upon certain
assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Based on their
evaluation as of the end of the period covered by this report, our
co-Chief Executive Officers and our Chief Financial Officer have
concluded that our disclosure controls and procedures were
effective to ensure that the information relating to our company,
required to be disclosed in our SEC reports (i) is recorded,
processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated and
communicated to our management, including our co-Chief Executive
Officers and our Chief Financial Officer, to allow timely decisions
regarding required disclosure.
Changes in Internal Control Over Financial
Reporting
. There were no
changes in our internal control over financial reporting during our
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting.
39
P
ART II - OTHER INFORMATION
I
TEM
1.
LEGAL PROCEEDINGS.
None.
I
TEM
1A.
RISK FACTORS.
We
desire to take advantage of the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995.
Accordingly, we incorporate by reference the risk factors disclosed
in Part I, Item 1A of our 2020 10-Kand the risk factor included in
our Quarterly Report on Form 10-Q for the three months ended
December 31, 2020 as filed with the SEC on February 9,
2021.
I
TEM
2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
In
addition to unregistered sales previously reported by the Company
during the period covered by this report, the Company issued the
unregistered equity securities disclosed below. The securities were
issued pursuant to the exemption provided by Section 4(a)2 of the
Securities Act of 1933, as amended.
On
January 23, 2021 as partial
compensation pursuant to the terms of a
Personal Services Agreement for the endorsement of the
Company’s products, the Company issued 40,000 shares of
restricted common stock. The Company recorded a total prepaid
expense of $155,200 in conjunction with the issuance of shares. The
recipient was an accredited investor.
On
March 25, 2021, the Company issued 180,000 restricted shares of
common stock to a professional athlete to completely satisfy a
$800,000 obligation due between July and December of 2021. The
Company recorded a total prepaid expense of $649,800 in conjunction
with the issuances of shares. The recipient was an accredited
investor.
I
TEM
3.
DEFAULTS UPON SENIOR SECURITIES.
None.
I
TEM
4.
MINE SAFETY DISCLOSURES.
Not
applicable to our Company’s operations.
I
TEM
5.
OTHER INFORMATION.
None.
40
I
TEM
6.
EXHIBITS.
|
|
|
|
|
Incorporated by Reference
|
|
Filed or
Furnished
|
||||||
|
No.
|
|
Exhibit Description
|
|
Form
|
|
Date Filed
|
|
Number
|
|
Herewith
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Merger
Agreement dated December 3, 2018 by and among Level Brands, Inc.,
AcqCo, LLC, cbdMD LLC and Cure Based Development, LLC
|
|
8-K
|
|
12/3/18
|
|
2.1
|
|
|
|||
|
|
Articles
of Merger dated December 20, 2018 as filed with the Secretary of
State of Nevada merging AcqCo, LLC with and into Cure Based
Development, LLC
|
|
10-Q
|
|
02/14/19
|
|
2.2
|
|
|
|||
|
|
Articles
of Merger dated December 20, 2018 as filed with the Secretary of
State of North Carolina merging AcqCo, LLC with and into Cure Based
Development, LLC
|
|
10-Q
|
|
02/14/19
|
|
2.3
|
|
|
|||
|
|
Articles
of Merger dated December 20, 2018 as filed with the Secretary of
State of Nevada merging Cure Based Development, LLC with an into
cbdMD LLC
|
|
10-Q
|
|
02/14/19
|
|
2.4
|
|
|
|||
|
|
Articles
of Merger dated December 20, 2018 as filed with the Secretary of
State of North Carolina merging Cure Based Development, LLC with an
into cbdMD LLC
|
|
10-Q
|
|
02/14/19
|
|
2.5
|
|
|
|||
|
|
Addendum
No. 1 to Agreement and Plan of Merger dated March 31,
2021
|
|
8-K
|
|
04/01/21
|
|
10.1
|
|
|
|||
|
|
Articles
of Incorporation
|
|
1-A
|
|
9/18/17
|
|
2.1
|
|
|
|||
|
|
Articles
of Amendment to the Articles of Incorporation – filed April
22, 2015
|
|
1-A
|
|
9/18/17
|
|
2.2
|
|
|
|||
|
|
Articles
of Amendment to the Articles of Incorporation – filed June
22, 2015
|
|
1-A
|
|
9/18/17
|
|
2.3
|
|
|
|||
|
|
Articles
of Amendment to the Articles of Incorporation – filed
November 17, 2016
|
|
1-A
|
|
9/18/17
|
|
2.4
|
|
|
|||
|
|
Articles
of Amendment to the Articles of Incorporation – filed
December 5, 2016
|
|
1-A
|
|
9/18/17
|
|
2.5
|
|
|
|||
|
|
Articles
of Amendment to Articles of Incorporation
|
|
8-K
|
|
4/29/19
|
|
3.7
|
|
|
|||
|
|
Articles
of Amendment to the Articles of Incorporation including the
Certificate of Designations, Rights and Preferences of the 8.0%
Series A Cumulative Convertible Preferred Stock
|
|
8-A
|
|
10/11/19
|
|
3.1(f)
|
|
|
|||
|
|
Bylaws,
As amended
|
|
1-A
|
|
9/18/17
|
|
2.6
|
|
|
|||
|
|
2021
Equity Compensation Plan
|
|
8-K
|
|
1/14/21
|
|
10.1
|
|
|
|||
|
|
Amendment
No. 1 to the Executive Employment Agreement dated March 3, 2021 by
and between cbdMD, Inc. and T. Ronan Kennedy
|
|
8-K
|
|
3/4/21
|
|
10.1
|
|
|
|||
|
|
Amended
and Restated Executive Employment Agreement dated April 19,
2021 by and between cbdMD, Inc. and Martin A.
Sumichrast
|
|
8-K
|
|
04/21/21
|
|
10.1
|
|
|
|||
|
|
Amended
and Restated Executive Employment Agreement by and between CBD
Industries LLC and R. Scott Coffman
|
|
8-K
|
|
04/21/21
|
|
10.2
|
|
|
|||
|
|
Certification
of co-Principal Executive Officer (Section 302)
|
|
|
|
|
|
|
|
Filed
|
|||
|
|
Certification
of co-Principal Executive Officer (Section 302)
|
|
|
|
|
|
|
|
Filed
|
|||
|
|
Certification
of Principal Financial Officer (Section 302)
|
|
|
|
|
|
|
|
Filed
|
|||
|
|
Certification
of Principal Executive Officer and Principal Financial Officer
(Section 906)
|
|
|
|
|
|
|
|
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
|
||
41
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
|
cbdMD, INC.
|
|
|
|
|
|
|
May 12,
2021
|
By:
|
/s/
Martin A. Sumichrast
|
|
|
|
Martin
A. Sumichrast, Co-Chief Executive Officer, co-principal executive
officer
|
|
|
|
|
|
May 12,
2021
|
By:
|
/s/
Raymond S. Coffman
|
|
|
|
Raymond
S. Coffman, Co-Chief Executive Officer, co-principal executive
officer
|
|
May 12,
2021
|
By:
|
/s/ T.
Ronan Kennedy
|
|
|
|
T.
Ronan Kennedy, Chief Financial Officer, principal financial and
accounting officer
|
42
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 Related Party TransactionsNote 8 Shareholders EquityNote 9 Stock-based CompensationNote 10 WarrantsNote 11 Commitments and ContingenciesNote 12 Note PayableNote 13 Long Term LiabilityNote 14 Discontinued OperationsNote 15 LeasesNote 16 Earnings Per ShareNote 17 Income TaxesNote 18 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