cbdMD, Inc. - Annual Report: 2019 (Form 10-K)

  UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

☑	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended September 30, 2019

 

or

 

☐	TRANSITION REPORT UNDER 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)

 

Registrant's telephone number, including area code: (704) 445-3060

 

Securities registered under Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock	YCBD	NYSE American
8% Series A Cumulative Convertible Preferred Stock	YCBD PR A	NYSE American

 

  Securities registered under Section 12(g) of the Act:

 

None

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes  ☑ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes  ☑ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☑  Yes   ☐  No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.4.05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes  ☐ No

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☑	Smaller reporting company	☑
Emerging growth company	☑

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ☐ Yes  ☑ No

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. $42,356,785 on March 31, 2019.

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 27,720,356 shares of common stock are issued and outstanding as of December 01, 2019.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III of this report incorporates by reference certain portions of the registrant’s definitive Proxy Statement for its 2020 Annual Meeting of Shareholders, which the registrant currently anticipates will be filed with the SEC on or before January 28, 2020.

 

 

TABLE OF CONTENTS

 

		Page No.
	Part I
Item 1.	Business.	5
Item 1A.	Risk Factors.	12
Item 1B.	Unresolved Staff Comments.	23
Item 2.	Properties.	23
Item 3.	Legal Proceedings.	23
Item 4.	Mine Safety Disclosures.	23
	Part II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	24
Item 6.	Selected Financial Data.	24
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	31
Item 8.	Financial Statements and Supplementary Data.	31
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	31
Item 9A.	Controls and Procedures.	31
Item 9B.	Other Information.	32
	Part III
Item 10.	Directors, Executive Officers and Corporate Governance.	33
Item 11.	Executive Compensation.	33
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.	33
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	33
Item 14.	Principal Accounting Fees and Services.	33
	Part IV
Item 15.	Exhibits, Financial Statement Schedules.	33
Item 16.	Form 10-K Summary	33
SIGNATURES		34

 

OTHER PERTINENT INFORMATION

 

Unless the context otherwise indicates, when used in this report, the terms the “Company,” “cbdMD, “we,” “us, “our” and similar terms refer to cbdMD, Inc., a North Carolina corporation formerly known as Level Brands, Inc., and our subsidiaries CBD Industries LLC, a North Carolina limited liability company formerly known as cbdMD LLC, which we refer to as “CBDI”, Paw CBD, Inc., a recently formed North Carolina corporation which we refer to as “Paw CBD”, Beauty and Pinups, LLC, a North Carolina limited liability company which we refer to as “BPU”, I | M 1, LLC, a California limited liability company, which we refer to as “IM1”, Encore Endeavor 1 LLC, a California limited liability company which we refer to as “EE1,” and Level H&W, LLC, a North Carolina limited liability company which we refer to as “Level H&W.” In addition, "fiscal 2018" refers to the year ended September 30, 2018, “fiscal 2019” refers to the year ended September 30, 2019, and “fiscal 2020” refers to the year ending September 30, 2020.

 

We maintain a corporate website at www.cbdmd.com. The information contained on our corporate website and our various social media platforms are not part of this report.

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or "Securities Act" and Section 21E of the Securities Exchange Act of 1934, as amended, or “Exchange Act.” These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to:

 

 

Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report and our other filings with the SEC in their entirety. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

 

 

PART I

 

 

Our Company

 

cbdMD was originally founded in 2015 as an innovative branding and marketing company with a focus on lifestyle-based brands. In December 2018 pursuant to a two-step merger (the “Mergers”), we acquired Cure Based Development LLC ("Cure Based Development”) following the passage of the United States Agricultural Improvement Act of 2018, commonly known as the “Farm Bill”, which contained a permanent declassification of cannabidiol (CBD) as a controlled substance under federal law. As a result of that transaction, we own and operate the nationally recognized CBD brand cbdMD which now represents our focus and substantially all of our revenues.

 

 

Through our CBDI subsidiary which succeeded to the business of Cure Based Development, we produce and distribute various high-grade, premium CBD products, including tinctures, capsules, gummies, bath bombs and topical creams. In the third quarter of fiscal 2019, we launched a line of pet related CBD products under our Paw CBD brand which includes tinctures, treats, and balms, with additional products under development. In October 2019, following the initial positive response to the Paw CBD brand from retailers and consumers, we organized Paw CBD as a separate wholly-owned subsidiary in an effort to take advantage of its early mover status in the CBD animal health industry. With over 40 SKU’s of premium pet CBD products for dogs, cats and horses, we are seeking to grow Paw CBD into a leading brand. We also anticipate that Paw CBD will also partner with existing pet brands seeking to leverage our experience in sales, marketing and distribution in the CBD industry.

 

We either manufacture our premium line of products at our Charlotte, NC facility or work with third party manufacturers.  We only source cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States.  We utilize a manufacturing process which creates hybrid broad-spectrum concentrations including CBD, other cannabinoids, and various other compounds, which we believe creates a superior product, while eliminating tetrahydrocannabinol (THC) content.

 

 

 

Since December 2018, we have significantly increased the number of locations cbdMD products are available in, and with the building momentum of retailer acceptance subsequent to the passage of the Farm Bill, we are pursuing multiple opportunities to expand our product distribution as we continue to work to build cbdMD into a top recognized brand in the industry. We are also utilizing partnerships and sponsorships with professional athletes as a way to gain brand recognition. During the third quarter of fiscal 2019 we signed several significant sponsorships, including, but not limited to, professional golfer and 12-time PGA Tour winner Bubba Watson, Ice Cube’s Big 3 basketball league, Bellator MMA, and Nitro Circus.

 

 

Discontinued operations

 

Historically our operations included our BPU, EE1, IM1 and Level H&W subsidiaries. These subsidiaries accounted for our licensing, entertainment, and products segments prior to fiscal 2019. As revenues from the operations of these subsidiaries continued to decline in fiscal 2019 from fiscal 2018 levels, and the revenues associated with CBDI began to represent substantially all of our revenues, effective September 30, 2019, we discontinued operations of EE1, IM1, BPU and Level H&W. The decision to exit these businesses has resulted in these businesses being accounted for as discontinued operations in our audited consolidated financial statements appearing later in this report. Continuing operations discussed below, now reported as one segment, refer to our CBD business unless otherwise indicated, and prior periods in such discussion have been restated to reflect results excluding EE1, IM1, BPU and Level H&W. See Note 15, “Discontinued Operations”, of the Notes to consolidated financial statements elsewhere in this report for additional disclosures related to the reclassification of prior period amounts related to discontinued operations to conform to the current period financial statement presentation.

 

 

Growth Strategies and Outlook

 

With the passage of the Farm Bill in December 2018, which removed hemp from the Controlled Substances Act, making it no longer an illegal substance under federal law, an opportunity to strategically position the Company in an emerging market was presented. With the acquisition of Cure Based Development described later in this report, we believe we have established a solid foundation which will allow us to significantly grow the Company and become a leader in a new market.

 

We are pursuing the following strategies to continue to grow our revenues and expand our business and operations in fiscal 2020 and beyond:

 

 

 

 

 

 

Our business

 

cbdMD produces and distributes various high-grade, premium CBD products, including:

 

 

 

cbdMD’s website provides up-to-date information about CBD quality and current industry events, as well as U.S. based customer service. We test our hybrid broad-spectrum CBD extractions through independent, third-party laboratories in an effort to achieve the highest of standards and we offer a 30-day, money-back guarantee. Our products are available online at www.cbdMD.com and over 4,000 non-affiliated stores.

 

Sales and marketing

 

Our business model is designed first and foremost to build a strong brand as quickly as possible as we operate in an emerging market. As CBD is a new market, we believe the cost to acquire customers is most likely at the lowest point it will be, therefore, as part of our overall strategy we started with an internet and online marketing strategy and are investing heavily in brand promotion and customer acquisition. In addition, we have been executing on our strategy to build and now expand our wholesale distribution channel as part of the overall business model.

 

Sales of our products mainly come from online sales at our website www.cbdmd.com and through our inside sales department which concentrates on wholesale distributors, who we believe can offer large quantities of cbdMD products at physical retail locations. cbdMD utilizes a broad-based marketing strategy across multiple platforms including:

 

 

Product manufacturing and distribution 

 

We either manufacture our premium line of products at our Charlotte, NC facility or work with third party manufacturers.  We only source cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States.  We utilize a manufacturing process which creates hybrid broad-spectrum concentrations including CBD, other cannabinoids, and various other compounds, which we believe creates a superior product while eliminating tetrahydrocannabinol (THC) content.

 

We currently hold short term supply contracts with preferred vendors for our critical raw materials.  We have first rights of refusal on purchases so that we can ensure the availability of such materials as needed.  Our preferred vendors are extractors and brokers who have access to the sources of the critical raw materials on the spot buy market to meet our growing demands for raw materials.

 

We distribute our products both through our online sales channel as well as through a number of wholesalers and retailers that resell our products both in brick and mortar locations as well as via their online websites.  

 

Research and development

 

The key objectives and input points that drive cbdMD’s research and development process include current product and new product development activities:

 

Our current product improvement efforts include:

 

 

 

Our new product development efforts are focused on both near-term and long-term results for the company:

 

With a view toward near-term results, our efforts include:

 

 

With a view towards long-term results, our efforts include:

 

 

In fiscal 2019 we introduced CBD PM and a pet line branded under Paw cbd with over 40 SKU’s.

 

Intellectual property

 

We currently hold fourteen U.S. trademark applications which are held for current and future product offerings and extended branding capability, which are set forth below:

 

Mark		Federal registration number		Filing Date		Description of Mark Usage
CBDMD Synergy		87613823		9/19/2017		Standard word mark
Synergy CBDMD		87613850		9/19/2017		Standard word mark
CBD Synergy		87613876		9/19/2017		Standard word mark
CBD Paws		87614081		9/19/2017		Standard word mark
Hemp Synergy		87625996		9/28/2017		Standard word mark
Mingo Rad		88010754		6/22/2018		Standard word mark
Powered by Nature. Enhanced by Science		88363595		3/29/2019		Standard word mark
cbdMD		88451429		5/29/2019		Stylized word mark (logo in color)
cbdMD Premium CBD Oil		88451556		5/29/2019		Standard word mark
CBDMD Premium		88451595		5/29/2019		Design mark
paw cbd		88451641		5/29/2019		Design mark
Paw cbd		88451671		5/29/2019		Standard word mark
Hemplex Naturals		88575252		8/12/2019		Standard word mark
Hemp MD		88109782		9/09/2019		Standard word mark

 

In addition to these trademarks, we currently rely on a combination of trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our success depends on the protection of the proprietary aspects of our product development, formulation and knowhow, as well as our ability to operate without infringing on the proprietary rights of others. We also enter into proprietary information and confidentiality agreements with our employees, consultants and commercial partners and control access to, and distribution of, our formulas and other proprietary information.

 

 

In addition to www.cbdmd.com and www.pawcbd.com, we own multiple domain names that we may or may not operate in the future. However, as with phone numbers, we do not have and cannot acquire any property rights in an Internet address. The regulation of domain names in the United States and in other countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we might not be able to maintain our domain names or obtain comparable domain names, which could harm our business.

 

Competition

 

The market for the sale of CBD-based products is fragmented and intensely competitive. Currently, in the United States, cbdMD does not believe that there are any businesses that can demonstrate or claim a dominant market share of the growing CBD products market. Our competitors in the retail location sales of CBD-based products include Green Roads, PlusCBD, and Select CBD, and in the digital space include Diamond CBD, CBDistillery, and Lazarus Naturals. We believe we compete based upon the quality of our products. We expect that the quantity and composition of the competitive environment will continue to evolve as the industry matures and new customers enter the marketplace.

 

Government regulations

 

On December 20, 2018 the President of the United States signed the Farm Bill into law. Among other things, this new law changed certain federal authorities relating to the production and marketing of hemp, defined as cannabis (Cannabis sativa L.), and derivatives of cannabis with extremely low (less than 0.3 percent on a dry weight basis) concentrations of the psychoactive compound delta-9-tetrahydrocannabinol (THC). These changes include removing hemp and derivatives of hemp from the Controlled Substances Act, which means that it is no longer an illegal substance under federal law. For the first time since 1937, industrial hemp has been legalized at the federal level and this paved the way for the growth of the industry.  With the recent publication of the USDA interim final rule regarding the Establishment of a Domestic Hemp Production Program on October 31, 2019, hemp can now be grown and processed legally in the United States, and is legal to transport in interstate commerce. Although this interim final rule became effective on the date of publication, it is still subject to comment and there is a possibility it will be modified from its current application.

 

The Farm Bill recognizes hemp as distinct from its genetic cousin, marijuana, and specifically industrial hemp has been excluded from U.S. drug laws.  The Farm Bill allows for each individual state to regulate industrial hemp and industrial hemp based products or accept the USDA rules.  Although no longer a controlled substance under federal law, cannabinoids derived from industrial hemp (other than THC) are still subject to a patchwork of state regulations.  We are actively monitoring the regulations and proposed regulations in each state to ensure our operations are compliant.

 

In conjunction with the enactment of the Farm Bill, the United States Food and Drug Administration (“FDA”) released a statement about the status of CBD and the agency’s actions in the short term with regards to CBD will guide the industry.  The statement noted that the Farm Bill explicitly preserved the FDA’s authority to regulate products containing cannabis or cannabis-derived compounds under the Federal Food, Drug, and Cosmetic Act (FD&C Act) and Section 351 of the Public Health Service Act. This authority allows the FDA to continue enforcing the law to protect patients and the public while also providing potential regulatory pathways for products containing cannabis and cannabis-derived compounds. The statement also noted the growing public interest in cannabis and cannabis-derived products, including CBD, and informed the public that the FDA will treat products containing cannabis or cannabis-derived compounds as it does any other FDA-regulated products — meaning the products will be subject to the same authorities and requirements as FDA-regulated products containing any other substance, regardless of the source of the substance, including whether the substance is derived from a plant that is classified as hemp under the Farm Bill.

 

Recently, both the U.S. House of Representatives (McNerney CA-09) and the Senate (McConnell R-KY) have passed amendments to the respective appropriations bills working their way through each chamber, which would help clear the way for cannabidiol (CBD) to become an approved dietary ingredient by the FDA through an alternative rule making process available to the FDA.  Although it is uncertain if either of these amendments will make it to the final federal appropriation bill, or if the President will ultimately sign the appropriations bill, this signifies the legislatures clear intent to pave a pathway for clear and consistent federal regulation for cannabidiol. 

 

 

As of the date of this report, and based upon publicly available information, to our knowledge the FDA has not taken any enforcement actions against CBD companies. The FDA, however, has sent warning letters to companies demanding they cease and desist from the production, distribution, or advertising of CBD products, only relating to instances that such CBD companies have made misleading and unapproved label claims.  We will continue to monitor the FDA’s position on CBD.

 

As a consumer goods manufacturer, we strive to meet or exceed the FDAs Good Manufacturing Practice (GMP) guidelines. With our growth and evolution, challenges could exist and we must continue to review processes and controls and adapt our day to day GMP policies and practices as our manufacturing volume increases.  We are dedicated to providing the highest quality CBD consumer goods on the market and therefore will continue to focus substantial efforts on GMP compliance. We are currently undergoing third party audit and consulting to ensure we are using best practices and we intend to seek multiple third party certifications possibly as early as the second quarter of 2020 from NSF and the U.S. Hemp Authority.  Additionally, we have secured third party contract manufacturing from an FDA registered facility which is GMP certified and subject to continuing independent audit and certification, to handle our increased manufacturing needs.  

 

We are subject to federal and state consumer protection laws, including laws protecting the privacy of customer non-public information and the handling of customer complaints and regulations prohibiting unfair and deceptive trade practices. The growth and demand for online commerce has and may continue to result in more stringent consumer protection laws that impose additional compliance burdens on online companies. These laws may cover issues such as user privacy, spyware and the tracking of consumer activities, marketing e-mails and communications, other advertising and promotional practices, money transfers, pricing, product safety, content and quality of products and services, taxation, electronic contracts and other communications and information security.

 

There is also great uncertainty over whether or how existing laws governing issues such as sales and other taxes, auctions, libel and personal privacy apply to the internet and commercial online services. These issues may take years to resolve. For example, tax authorities in a number of states, as well as a Congressional advisory commission, are currently reviewing the appropriate tax treatment of companies engaged in online commerce, and new state tax regulations may subject us to additional state sales and income taxes. New legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the internet and commercial online services could result in significant additional taxes or regulatory restrictions on our business. These taxes or restrictions could have an adverse effect on our cash flows, results of operations and overall financial condition. Furthermore, there is a possibility that we may be subject to significant fines or other payments for any past failures to comply with these requirements.

 

Employees

 

At December 01, 2019 we had 182 full-time employees. There are no collective bargaining agreements covering any of our employees.

 

Our history

 

Our company was formed under the laws of the state of North Carolina in March 2015 under the name Level Beauty Group, Inc. In November 2016 we changed the name of our parent company to Level Brands, Inc. In December 2016 we effected a 1:5 reverse stock split of our outstanding common stock. In December 2018, we completed the Mergers of Cure Based Development into our newly formed and wholly owned subsidiary cbdMD LLC. As part of the overall business strategy, in April 2019 we renamed cbdMD LLC to CBD Industries LLC and renamed Level Brands, Inc. to cbdMD, Inc. In October 2019 we formed a wholly owned subsidiary Paw CBD, Inc. which will operate the CBD pet line.

 

Additional information on the terms of material acquisitions may be found in Note 2 to the notes to our consolidated financial statements appearing elsewhere in this report.

 

Additional information

 

We file annual and quarterly reports on Forms 10-K and 10-Q, current reports on Form 8-K and other information with the Securities and Exchange Commission (“SEC” or the “Commission”). The Commission also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission.

 

Other information about cbdMD can be found on our website www.cbdmd.com. Reference in this document to that website address does not constitute incorporation by reference of the information contained on the website.

 

 

 

Investing in our securities involves risks. In addition to the other information contained in this report, you should carefully consider the following risks before deciding to purchase our securities. The occurrence of any of the following risks might cause you to lose all or a part of your investment. Some statements in this report, including statements in the following risk factors, constitute forward-looking statements. Please refer to “Cautionary Statement Regarding Forward-Looking Statements” for more information regarding forward-looking statements.

 

RISKS RELATED TO OUR OVERALL BUSINESS

 

We have a history of losses and there are no assurances we will report profitable operations in future periods.

 

We reported net losses to common shareholders of $50,428,226 and $412,075 for fiscal 2019 and fiscal 2018, respectively. Included in our net loss for fiscal 2019 is $5,993,773 associated with losses from our discontinued operations, and an expense reflecting an increase of $32,461,680 in the non-cash contingent liability associated with the Earnout Shares (as hereinafter defined) primarily as a result of the change in the market price of our common stock . Until such time, if ever, that we are successful in generating profits which are sufficient to pay our operating expenses it is likely we will continue to report losses in future periods. There are no assurances we will generate substantial revenues from the new businesses or that we will ever generate sufficient revenues to report profitable operations or a net profit.

 

We have a limited operating history in a new market segment that could impede our ability to achieve our goals for future performance and brand strategy.

 

Our wholly-owned subsidiary, CBDI, succeeded to the operations of Cure Based Development following the closing of the Mergers in December 2018. We formed this subsidiary in connection with the Mergers and it had no operating history prior to the Mergers. Cure Based Development was formed in 2017 and did not begin reporting any meaningful revenues until mid-2018. We are operating in a market segment that has experienced significant growth and competition since the passage of the Farm Bill in December 2018. We are experiencing all of the challenges of a company with a limited operating history in its current business seeking to effectively develop a brand in a market segment with growing competition. These challenges make it difficult for investors to evaluate our future business prospects and make decisions based on estimates of our future performance. To address these risks and uncertainties, we must do the following:

 

 

During fiscal 2019 we spent approximately $7,831,000 on brand development and marketing. In order to continue to develop brand recognition and grow our sales, we will need to continue to invest in our brand development and marketing strategies which will require us to raise additional capital. Even with our focus on brand development in an effort to increase our sales, our business strategy may not be successful and we may not successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition and results of operations may be materially and adversely affected.

 

 

The impact of changes in the fair value of our contingent liabilities associated with the Earnout Shares may materially impact our results of operations in future periods.

 

As consideration for the Mergers, we had a contractual obligation, after approval by our shareholders, to issue 15,250,000 shares of our common stock (the “Initial Shares”) to the members of Cure Based Development of which 8,750,000 of the shares will vest over a five year period and are subject to a voting proxy agreement, as well as to issue another 15,250,000 shares of our common stock (the “Earnout Shares”) in the future upon earnout goals being met within the next five years. Our shareholders approved the issuance of the both the Initial Shares and the Earnout Shares at our 2019 annual shareholder meeting and the Initial Shares were issued to members of Cure Based Development on April 19, 2019. Under US GAAP we were required to record a non-cash contingent liability associated with both the Initial Shares and the Earnout Shares. As of September 30, 2019, the Initial Shares have been issued and have been reclassified from contingent liability to additional paid in capital. At September 30, 2019, the total of this contingent liability was $32,461,680 and is reflective of the Earnout Shares. We are obligated to reassess the obligations associated with the Earnout Shares and, in the event our estimate of the fair value of the contingent consideration changes, we will record increases or decreases in the fair value as an adjustment to earnings, which could have a material impact on our results of operations, our shareholders’ equity and the market price of our securities. In particular, changes in the market price of our common stock, which is one of the inputs used in determining the amount of the non-cash contingent liability, will result in increases or decreases in this liability and positively or negatively impact our net loss or profit for the period. Investors should not place undue reliance on the impact of these non-cash changes when evaluating our results of operations in future periods, as they have no impact on the operations of the business.

 

We may require additional capital to finance operations or the acquisition of additional brands, and if we are unable to raise such capital on beneficial terms this could restrict our growth.

 

We may, in the future, require additional capital to help fund all or part of our operation or for potential acquisitions. If, at the time required, we do not have sufficient cash to finance those additional capital needs, we will need to raise additional funds through equity and/or debt financing. We cannot guarantee that, if and when needed, additional financing will be available to us on acceptable terms or at all. Further, if additional capital is needed and is either unavailable or cost prohibitive, our growth may be limited as we may need to change our business strategy to slow the rate of our expansion plans. In addition, any additional financing we undertake could impose additional covenants upon us that restrict our operating flexibility, and, if we issue equity securities to raise capital or as acquisition consideration, our existing shareholders may experience dilution or the new securities may have rights senior to those of our 8% Series A Cumulative Convertible Preferred Stock (“Series A Convertible Preferred Stock”), assuming the holders of the Series A Convertible Preferred Stock approve the issuance of such senior securities.

 

The issuances of the Earnout Shares to the Cure Based Development members will significantly dilute our existing shareholders.

 

Upon the terms set forth in the Merger Agreement, on the closing date the members of Cure Based Development received the right to receive 15,250,000 Initial Shares, representing approximately 60% of our outstanding common stock following such issuance at the time, as the consideration for the Mergers. The Merger Agreement also provides that we may issue up to an additional 15,250,000 Earnout Shares as part of the Mergers consideration upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the closing date. As of December 1, 2019, there were 27,720,356 shares of our common stock issued and outstanding, which includes the 15,250,000 Initial Shares which were issued in April 2019. Assuming the possible issuance of an additional 15,250,000 Earnout Shares, but giving effect to no other change to the number of shares of our common stock issued and outstanding, the members of Cure Based Development, which includes Mr. R. Scott Coffman, our co-CEO and member of our board of directors, would own approximately 64% of our then outstanding shares of common stock. Therefore, the ownership and voting rights of our existing shareholders will be proportionally reduced.

 

 

We may be unable to liquidate securities we accept as partial compensation under consulting agreements which could adversely impact our liquidity in future periods.

 

Our ability to sell any securities we had accepted as partial compensation under consulting agreements is dependent upon a number of factors, including the existence of a liquid market for the securities and our compliance with the resale provisions of federal securities laws which require us to hold the shares for at least six months, among other factors. If we accept securities, we expect to generally accept securities from issuers who are publicly traded or who are expecting to become a publicly traded company. There are no assurances a liquid market will exist in such securities at such time as we are able to resell the shares, or that the price we may receive will be commensurate with the value of the services we are providing. In that event, we would not benefit from the expected rise in the market price of the securities we own as a result of our efforts on behalf of the client company. In addition, depending upon the terms of our business relationship with the issuer of the securities, it is possible that from time to time we could be in possession of non-public information regarding the issuer which could prohibit us from disposing of the shares at a time when it is advantageous to us to do so. If we are unable to readily liquidate any securities we accept as compensation, we could be deprived of the cash value of those services and we would be required to write-off the carrying value of the securities which could adversely impact our results of operations in future periods.

 

We rely on third-parties to manufacture and to compound some of our products, we have no control over these manufactures and may not be able to obtain quality products on a timely basis or in sufficient quantity.

 

Some of our products are manufactured or compounded by unaffiliated third parties. We do not have any long-term contracts with any of these third parties, and we expect to compete with other companies for raw materials, production and import capacity. If we experience significant increased demand, or need to replace an existing manufacturer, there can be no assurance that additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any manufacturer or compounder would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new sources, we may encounter delays in production and added costs as a result of the time it takes to engage third parties. Any delays, interruption or increased costs in the manufacturing or compounding of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short and long-term.

 

We face risks associated with the manufacture of our products which could adversely affect our business and financial results.

 

We are subject to the risks inherent in manufacturing our products, including industrial accidents, environmental events, strikes and other labor disputes, disruptions in supply chain or information systems, loss or impairment of key manufacturing sites or suppliers, product quality control, safety, increase in commodity prices and energy costs, licensing requirements and other regulatory issues, as well as natural disasters and other external factors over which we have no control. If such an event were to occur, it could have an adverse effect on our business and financial results.

 

We could experience losses related to undisclosed liabilities of EE1 and I’M1.

 

Effective September 30, 2019 we discontinued the operations of EE1 and I’M1.  In November 2019 we entered into a Settlement and Release Agreement with the minority holders of EE1 and I’M1 and other related parties.  The terms of this agreement provided, in part, that the parties agreed to transfer the accounts receivable of EE1 and the minority interest of both EE1 and IM1 to us and we agreed to have all rights to certain past contracts or customers for those entities assigned to the minority holders.  As a result, we are now the sole member of these entities.  While the Settlement and Release Agreement contains an indemnification provision, if we should discover in the future that there are undisclosed liabilities in one or both of these entities, we could be liable for the payment of these undisclosed liabilities, which could be material , until such time, if ever, that we were able to recoup any such amounts from the indemnifying parties.

 

 

Risks Related to the Regulatory Environment

 

Changes to state laws pertaining to industrial hemp could slow the use of industrial hemp which would materially impact our revenues in future periods.

 

As of the date hereof, approximately 40 states authorized industrial hemp programs pursuant to the Farm Bill. Continued development of the industrial hemp industry will be dependent upon new legislative authorization of industrial hemp at the state level, and further amendment or supplementation of legislation at the federal level. Any number of events or occurrences could slow or halt progress all together in this space. While progress within the industrial hemp industry is currently encouraging, growth is not assured. While there appears to be ample public support for favorable legislative action, numerous factors may impact or negatively affect the legislative process(es) within the various states where we have business interests. Any one of these factors could slow or halt use of industrial hemp, which could negatively impact the business up to possibly causing us to discontinue operations as a whole.

 

Costs associated with compliance with numerous laws and regulations could impact our financial results. In addition, we could become subject to increased litigation risks associated with the CBD industry.

 

The manufacture, labeling and distribution by us of the CBD products is regulated by various federal, state and local agencies. These governmental authorities may commence regulatory or legal proceedings, which could restrict the permissible scope of our product claims or the ability to sell products in the future. The FDA may regulate our products to ensure that the products are not adulterated or misbranded. We are subject to regulation by the federal government andother state and local agencies as a result of our CBD products. The shifting compliance environment and the need to build and maintain robust systems to comply with different compliance in multiple jurisdictions increases the possibility that we may violate one or more of the requirements. If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to our company, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, any of which could adversely affect the ability to operate our business and our financial results. Failure to comply with FDA requirements may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions. Our advertising is subject to regulation by the U.S. Federal Trade Commission, or FTC, under the Federal Trade Commission Act. Additionally, some states also permit advertising and labeling laws to be enforced by attorneys general who may seek relief for consumers, seek class-action certifications, seek class-wide damages and product recalls of products sold by us. For example, in November 2019 the FDA issued warning letters to 15 companies for illegally selling products containing CBD in ways that violate the FD&C Act. Notwithstanding that we were not a recipient of a warning letter, and we believe our products are properly labeled as required under federal law, cbdMD, along with other of our competitors who also did not receive FDA warning letters, have been named in a class action lawsuit which we believe is without merit. Any actions against our company by governmental authorities or private litigants could be time consuming, costly to defend and could have a material adverse effect on our business, financial condition and results of operations.

 

Uncertainty caused by potential changes to legal regulations could impact the use of CBD products.

 

There is substantial uncertainty and different interpretations among federal, state and local regulatory agencies, legislators, academics and businesses as to the scope of operation of Farm Bill-compliant hemp programs relative to the emerging regulation of cannabinoids. These different opinions include, but are not limited to, the regulation of cannabinoids by the U.S. Drug Enforcement Administration, or DEA, and/or the FDA and the extent to which manufacturers of products containing Farm Bill-compliant cultivators and processorsmay engage in interstate commerce. The uncertainties cannot be resolved without further federal, and perhaps even state-level, legislation, regulation or a definitive judicial interpretation of existing legislation and rules. If these uncertainties continue, they may have an adverse effect upon the introduction of our products in different markets.

 

 

RISKS RELATED TO OWNERSHIP OF OUR SECURITIES

 

We are subject to the continued listing standards of the NYSE American and our failure to satisfy these criteria may result in delisting of our common stock.

 

Both the shares of our common stock and our Series A Convertible Preferred Stock are listed on the NYSE American. In order to maintain these listings, we must maintain certain share prices, financial and share distribution targets, including maintaining a minimum amount of shareholders’ equity and a minimum number of public shareholders. In addition to these objective standards, the NYSE American may delist the securities of any issuer (i) if, in its opinion, the issuer’s financial condition and/or operating results appear unsatisfactory; (ii) if it appears that the extent of public distribution or the aggregate market value of the security has become so reduced as to make continued listing on the NYSE American inadvisable; (iii) if the issuer sells or disposes of principal operating assets or ceases to be an operating company; (iv) if an issuer fails to comply with the NYSE American’s listing requirements; (v) if an issuer’s securities sell at what the NYSE American considers a “low selling price” and the issuer fails to correct this via a reverse split of shares after notification by the NYSE American; or (vi) if any other event occurs or any condition exists which makes continued listing on the NYSE American, in its opinion, inadvisable. If the NYSE American delists either our common stock and/or our Series A Convertible Preferred Stock, investors may face material adverse consequences, including, but not limited to, a lack of trading market for our securities, reduced liquidity, decreased analyst coverage of our securities, and an inability for us to obtain additional financing to fund our operations.

 

The Series A Convertible Preferred Stock ranks junior to all of our indebtedness and other liabilities and is effectively junior to all indebtedness and other liabilities of our subsidiaries.

 

In the event of our bankruptcy, liquidation, dissolution or winding-up of our affairs, our assets will be available to pay obligations on the Series A Convertible Preferred Stock only after all of our indebtedness and other liabilities have been paid. The rights of holders of the Series A Convertible Preferred Stock to participate in the distribution of our assets will rank junior to the prior claims of our current and future creditors and any future series or class of preferred stock we may issue (subject to Series A Convertible Preferred Stockholder approval) that ranks senior to the Series A Convertible Preferred Stock. In addition, the Series A Convertible Preferred Stock effectively ranks junior to all existing and future indebtedness and other liabilities of our existing subsidiaries and any future subsidiaries. Our existing subsidiaries are, and any future subsidiaries would be, separate legal entities and have no legal obligation to pay any amounts to us in respect of dividends due on the Series A Convertible Preferred Stock. If we are forced to liquidate our assets to pay our creditors, we may not have sufficient assets to pay amounts due on any or all of the Series A Convertible Preferred Stock then outstanding.

 

Future offerings of debt may adversely affect the market price of the Series A Convertible Preferred Stock.

 

If we decide to issue debt securities in the future, it is possible that these securities will be governed by an indenture or other instruments containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of the Series A Convertible Preferred Stock and may result in dilution to owners of the Series A Convertible Preferred Stock. We and, indirectly, our shareholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. The holders of our securities may bear the risk of our future offerings, potentially reducing the market price of the Series A Convertible Preferred Stock and diluting the value of their holdings in us.

 

We may not be able to pay dividends on the Series A Convertible Preferred Stock.

 

Our ability to pay cash dividends on the Series A Convertible Preferred Stock requires us to (i) either be able to pay our debts as they become due in the usual course of business,  or (ii) have total assets that are greater than the sum of our total liabilities plus the amount that would be needed if we were to be dissolved at the time of the distribution to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. Further, notwithstanding these factors, we may not have sufficient cash to pay dividends on the Series A Convertible Preferred Stock. Our ability to pay dividends may be impaired if any of the risks described in this report were to occur. Also, payment of our dividends depends upon our financial condition and other factors as our board of directors may deem relevant from time to time. We cannot assure you that our businesses will generate sufficient cash flow from operations in an amount sufficient to enable us to make distributions on our common stock and preferred stock, including the Series A Convertible Preferred Stock, or to fund our other liquidity needs.

 

 

Market interest rates may materially and adversely affect the value of the Series A Convertible Preferred Stock.

 

One of the factors that influences the price of the Series A Convertible Preferred Stock is the dividend yield on the Series A Convertible Preferred Stock (as a percentage of the market price of the Series A Convertible Preferred Stock) relative to market interest rates. Continued increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of the Series A Convertible Preferred Stock to expect a higher dividend yield (and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for dividend payments). Thus, higher market interest rates could cause the market price of the Series A Convertible Preferred Stock to materially decrease, assuming a market is established of which there are no assurances.

 

Holders of the Series A Convertible Preferred Stock may be unable to use the dividends-received deduction and may not be eligible for the preferential tax rates applicable to “qualified dividend income.”

 

Distributions paid to corporate U.S. holders of the Series A Convertible Preferred Stock may be eligible for the dividends-received deduction, and distributions paid to non-corporate U.S. holders of the Series A Convertible Preferred Stock may be subject to tax at the preferential tax rates applicable to “qualified dividend income,” if we have current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. We do not currently have any accumulated earnings and profits. Additionally, we may not have sufficient current earnings and profits during future fiscal years for the distributions on the Series A Convertible Preferred Stock to qualify as dividends for U.S. federal income tax purposes. If the distributions fail to qualify as dividends, U.S. holders would be unable to use the dividends-received deduction and may not be eligible for the preferential tax rates applicable to “qualified dividend income.” If any distributions on the Series A Convertible Preferred Stock with respect to any fiscal year are not eligible for the dividends-received deduction or preferential tax rates applicable to “qualified dividend income” because of insufficient current or accumulated earnings and profits, it is possible that the market value of the Series A Convertible Preferred Stock might decline.

 

The Series A Convertible Preferred Stock represents perpetual equity interests in us, and investors should not expect us to redeem or convert the Series A Convertible Preferred Stock on the date the Series A Convertible Preferred Stock becomes redeemable or convertible by us or on any particular date afterwards.

 

The Series A Convertible Preferred Stock represents perpetual equity interests in our Company, and it has no maturity or mandatory redemption except upon a Change of Control, and is not redeemable at the option of investors under any other circumstances. A “Change of Control” will generally be deemed to occur when, after the original issuance of the Series A Convertible Preferred Stock, the acquisition by any person, including any syndicate or group deemed to be a “person” under Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions which were pre-approved by our board of directors of our stock entitling that person to exercise more than 50% of the total voting power of all of our stock entitled to vote generally in the election of the our directors, subject to certain exclusions. As a result, the Series A Convertible Preferred Stock will not give rise to a claim for payment of any amount at a particular date. As a result, holders of the Series A Convertible Preferred Stock may be required to bear the financial risks of an investment in the Series A Convertible Preferred Stock for an indefinite period of time unless the holder chooses to voluntarily convert the shares of Series A Convertible Preferred Stock into shares of our common stock.

 

The Series A Convertible Preferred Stock has not been rated.

 

We have not sought to obtain a rating for the Series A Convertible Preferred Stock. However, one or more rating agencies may independently determine to issue such a rating or such a rating, if issued, may adversely affect the market price of the Series A Convertible Preferred Stock. In addition, we may elect in the future to obtain a rating for the Series A Convertible Preferred Stock, which could adversely affect the market price of the Series A Convertible Preferred Stock. Ratings only reflect the views of the rating agency or agencies issuing the ratings and such ratings could be revised downward, placed on a watch list or withdrawn entirely at the discretion of the issuing rating agency if in its judgment circumstances so warrant. Any such downward revision, placing on a watch list or withdrawal of a rating could have an adverse effect on the market price of the Series A Convertible Preferred Stock.

 

 

Change of Control redemption obligations may make it more difficult for a party to acquire us or discourage a party from acquiring us.

 

The Change of Control redemption feature of the Series A Convertible Preferred Stock may have the effect of discouraging a third party from making an acquisition proposal for our Company or of delaying, deferring or preventing certain of change of control transactions under circumstances that otherwise could provide the holders of our common stock and Series A Convertible Preferred Stock with the opportunity to realize a premium over the then-current market price of such stock or that shareholders may otherwise believe is in their best interests.

 

If our Series A Convertible Preferred Stock is delisted, the ability to transfer or sell shares of the Series A Convertible Preferred Stock may be limited and the market value of the Series A Convertible Preferred Stock will likely be materially adversely affected.

 

The Series A Convertible Preferred Stock does not contain provisions that are intended to protect investors if our Series A Convertible Preferred Stock is delisted from the NYSE American. If our Series A Convertible Preferred Stock is delisted from the NYSE American, investors’ ability to transfer or sell shares of the Series A Convertible Preferred Stock will be limited and the market value of the Series A Convertible Preferred Stock will likely be materially adversely affected. Moreover, since the Series A Convertible Preferred Stock has no stated maturity date, absent a holder’s voluntary conversion of the Series A Convertible Preferred Stock investors may be forced to hold shares of the Series A Convertible Preferred Stock indefinitely while receiving stated dividends thereon when, as and if authorized by our board of directors and paid by us with no assurance as to ever receiving the liquidation value thereof.

 

A holder of Series A Convertible Preferred Stock has extremely limited voting rights.

 

The voting rights for a holder of Series A Convertible Preferred Stock are limited. Our shares of common stock are the only class of our securities that carry full voting rights. Holders of the shares of Series A Convertible Preferred Stock do not have any voting rights other than as set forth below in the next two sentences or unless dividends on the Series A Convertible Preferred Stock are in arrears for each of 12 or more consecutive monthly periods, in which case the holders of the Series A Convertible Preferred Stock will be entitled to vote as a separate class for the election of two additional directors to serve on the board of directors until all dividends that are owed have been paid. Holders of shares of Series A Convertible Preferred Stock, voting as a class, are also entitled to vote if we should seek to issue or create any class or series of capital stock ranking senior to the Series A Convertible Preferred Stock with respect to dividends or distributions, in which event the consent of holders of at least two thirds of the then outstanding Series A Convertible Preferred Stock is required. The consent of the holders of a majority of the Series A Convertible Preferred Stock, voting as a class, is required if we were to seek to adopt any amendment to our articles of incorporation or bylaws that would materially affect existing terms of the Series A Convertible Preferred Stock, or increase the number of authorized shares of that series, other than in connection with the anti-dilution provisions, or if we seek to create a series or class which ranks pari passu with the Series A Convertible Preferred Stock. Other than these limited circumstances and except to the extent required by law, holders of Series A Convertible Preferred Stock do not have any voting rights.

 

We may redeem the Series A Convertible Preferred Stock at our option, we will be required to redeem the Series A Convertible Preferred Stock upon a Change of Control and we may convert shares of Series A Convertible Preferred Stock upon a Market Trigger into shares of our common stock. In the event of any of these occurrences, you may not receive dividends that you anticipate.

 

On or after October 16, 2023 we may, at our option, redeem the Series A Convertible Preferred Stock, in whole or in part, at any time or from time to time. In addition, upon the occurrence of a board approved Change of Control, we are required to redeem any or all of the shares of Series A Convertible Preferred Stock at a redemption price of $11.00 per share, plus any accrued but unpaid dividends to, but excluding, the redemption date. Furthermore, upon a Market Trigger (as that term is defined in the designations, rights and preferences of the Series A Convertible Preferred Stock), we may convert all or any portion of those shares of Series A Convertible Preferred Stock into shares of our common stock. We may have an incentive to redeem or convert the Series A Convertible Preferred Stock voluntarily if market conditions allow us to issue other preferred stock or debt securities at a rate that is lower than the dividend rate on the Series A Convertible Preferred Stock. If we redeem or convert the Series A Convertible Preferred Stock, then from and after the redemption date or conversion date, as applicable, dividends will cease to accrue on shares of Series A Convertible Preferred Stock, the shares of Series A Convertible Preferred Stock shall no longer be deemed outstanding and all rights as a holder of those shares will terminate, including the rights to receive dividend payments.

 

 

The liquidation preference of the shares of our Series A Convertible Preferred Stock would reduce the amount available to our common shareholders in the event of our liquidation or winding up.

 

Holders of our Series A Convertible Preferred Stock have a liquidation preference of $10.00 per share in the event of our liquidation or winding up. This means that those holders are entitled to receive the liquidation preference before any payment or other distribution of assets to our common shareholders, and the amount of any such payment or other distribution will be reduced by that amount.

 

The issuance of shares upon exercise of our outstanding options and warrants, or the conversion of the Series A Convertible Preferred Stock may cause immediate and substantial dilution to our existing shareholders.

 

In addition to our obligation to issue the Earnout Shares if the goals are met, we presently have options and warrants that if exercised would result in the issuance of an additional 1,691,178 shares of our common stock, and our Series A Convertible Preferred Stock is presently convertible into an additional 833,500 shares of common stock. The issuance of shares upon exercise of warrants and options and/or the conversion of shares of our Series A Convertible Preferred Stock will result in dilution to the interests of other shareholders.

 

 

The price of our securities may be volatile, and you could lose all or part of your investment.

 

Stock markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock and/or our Series A Convertible Preferred Stock. In addition, limited trading volume of our stock may contribute to its future volatility. Price declines in our securities could result from general market and economic conditions, some of which are beyond our control, and a variety of other factors, including any of the risk factors described in this report. These broad market and industry factors may harm the market price of our securities, regardless of our operating performance, and could cause you to lose all or part of your investment in our securities since you might be unable to sell your shares at or above the price you paid. Factors that could cause fluctuations in the market price of our securities include the following:

 

 

In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

  

 

We are an “emerging growth company,” and the reduced reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies but not to “emerging growth companies,” including, but not limited to:

 

 

 

 

 

 

Investors may find our securities less attractive if we choose to rely on these exemptions. If some investors find our securities less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and/or our Series A Convertible Preferred Stock and the price of either or both of these securities may be more volatile. 

 

Our executive officers, directors and their affiliates may exert control over us and may exercise influence over matters subject to shareholder approval.

 

Our executive officers and directors, together with their respective affiliates, beneficially own approximately 54% of our outstanding common stock as of December 01, 2019. Accordingly, these shareholders, if they act together, may exercise substantial influence over matters requiring shareholder approval, including the election of directors and approval of corporate transactions, such as a merger. This concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discourage a potential acquirer from attempting to obtain control over us, which in turn could have a material adverse effect on the market value of our common stock.

 

If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, our securities share prices and trading volumes could decline.

 

An active trading market for our securities will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We may be unable to attract or sustain coverage by well-regarded securities and industry analysts. If either none or only a limited number of securities or industry analysts cover us or our business, or if these securities or industry analysts are not widely respected within the general investment community, the trading price for our common stock and/or our Series A Convertible Preferred Stock would be materially and negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who cover us or our business downgrade our securities or publish inaccurate or unfavorable research about us or our business, the price of our securities would likely decline. If one or more of these analysts cease coverage of us or our business, or fail to publish reports on us or our business regularly, demand for our securities could decrease, which might cause the price of our securities and trading volume to decline.

  

 

Some provisions of our charter documents and North Carolina law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our shareholders and may prevent attempts by our shareholders to replace or remove our current management.

 

Provisions in our articles of incorporation and bylaws, as well as provisions of North Carolina law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our shareholders, or remove our current management. These include provisions that:

 

 

 

 

 

These provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our board of directors, who are responsible for appointing the members of our management. In addition, North Carolina has two primary anti-takeover statutes, the Shareholder Protection Act and the Control Share Acquisition Act, which govern the shareholder approval required for certain business combinations. As permitted by North Carolina law, we have opted out of both these provisions. Accordingly, we are not subject to any anti-takeover effects of the North Carolina Shareholder Protection Act or Control Share Acquisition Act. Any provision of our articles of incorporation, bylaws or North Carolina law that has the effect of delaying or deterring a change in control could limit the opportunity for our shareholders to receive a premium for their shares of common stock, and could also affect the price that some investors are willing to pay for our shares of common stock.

 

We have additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our securities. 

 

Our articles of incorporation, as amended, authorizes the issuance of 150,000,000 shares of our common stock and 50,000,000 shares of preferred stock. As of the date hereof, we have designated 5,000,000 shares of the preferred stock as Series A Convertible Preferred Stock and have issued 500,000 of those shares. In certain circumstances, the common stock and/or the Series A Convertible Preferred Stock, as well as the awards available for issuance under our equity incentive plans, can be issued by our board of directors, without shareholder approval. Any future issuances of such stock would further dilute the percentage ownership of us held by holders of either class of our securities. In addition, the issuance of certain securities, may be used as an “anti-takeover” device without further action on the part of our shareholders, and may adversely affect the holders of the securities.

 

 

 

Not applicable to a smaller reporting company.

 

 

Our headquarters are located in approximately 50,000 square feet in a modern two-story building in Charlotte, North Carolina which we sub-lease under an agreement through December 2026. The agreement calls for an annual base monthly rent of $76,041 for the first year and escalates 3% annually. We have a manufacturing and warehouse facility in Charlotte, North Carolina which we lease approximately 40,000 square feet under an agreement through December 2021. The agreement calls for an annual base monthly rent of $18,700, inclusive of monthly taxes insurance and common area maintenance (“TICAM”) for the first year and the rent escalates 3% annually. We also have an 80,000 square foot warehouse in Charlotte, North Carolina under an agreement through December 2024. The agreement calls for an annual base monthly rent of $34,766, inclusive of monthly TICAM for the first year and the rent escalates 3% annually.

 

 

In December 2019, Cynthia Davis (“plaintiffs”) filed a purported collective and class action lawsuit (the “Complaint”) in the United States District Court for the Central District of California against the Company and certain of the Company’s competitors alleging violations of the California’s Unfair Competition Law, California’s False Advertising Law and California’s Consumer Legal Remedies Act, as well as claims for Breach of Express Warranties, Breach of Implied Warranty of Merchantability and Declaratory Relief (the “California Laws”). The plaintiffs allege that the Company violated the California Laws by unlawfully selling and marketing mislabeled products which have not been approved by the FDA. The Complaint was brought as a nationwide “collective action,” and, alternatively, as a “class action” under the laws of the State of California. The Company intends to vigorously defend this action. This case is at an early stage, and the Company is therefore unable to make a reasonable estimate of the probable loss or range of losses, if any, that might arise from this matter.

 

In April 2019 CBD Industries LLC sued Majik Medicine, LLC to cancel their issued trademark for "CBD MD" on multiple grounds.  This matter is currently pending a decision from the USPTO Trial and Appeal Board (TTAB) on a motion to dismiss by Majik Medicine, LLC.  We believe this motion will be denied or we will be granted leave to amend the complaint and the matter will continue.

 

 

Not applicable to our company.

 

 

PART II

 

 

Since November 17, 2017 our common stock had been listed on the NYSE American under the symbol "LEVB." With our name change in July 2019 we also changed our symbol and our common stock is now listed under the symbol “YCBD”.

 

Our Series A Convertible Preferred Stock has been listed on the NYSE American since October 21, 2019 under the symbol “YCBD PR A.”

 

As of December 01, 2019, there were approximately 101 record owners of our common stock and one record holder of our Series A Convertible Preferred Stock. These amounts do not reflect persons or entities that hold our securities in nominee or “street” name through various brokerage firms.

 

Dividend policy

 

Common Stock

 

We do not currently intend to pay dividends on our common stock. The declaration, amount and payment of any future dividends on shares of our common stock, if any, is subject to the designations, rights and preferences of the Series A Convertible Preferred Stock and will be at the sole discretion of our Board, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our shareholders or by our subsidiaries to us, and any other factors that our Board may deem relevant.

 

Series A Convertible Preferred Stock

  

In October 2019 we closed a firm commitment underwritten public offering of our Series A Convertible Preferred Stock. The designations, rights and preferences of our Series A Convertible Preferred Stock provide that we will pay, when, as and if declared by our board of directors, monthly cumulative cash dividends at an annual rate of 8.0%, which is equivalent to $0.80 per annum per share, based on the $10.00 liquidation preference. Dividends on the Series A Convertible Preferred Stock will accrue daily and be cumulative from, and including, the first day of the calendar month in which the shares are issued and will be payable monthly in arrears on the 15th day of each calendar month. On November 1, 2019 the Audit Committee of our board of directors declared a cash dividend of $0.0667 per share of Series A Convertible Preferred Stock payable on November 15, 2019 to holders of record on November 1, 2019. We expect that our board of directors will continue to declare and pay monthly cash dividends on our Series A Convertible Preferred Stock, subject to the limitations to do so under North Carolina law. See Item 1A. Risk Factors.

 

The total amount of dividends declared and paid were $67,000 and $33,500, respectively, as of December 01, 2019.

 

Recent sales of unregistered securities

 

None, except as previously reported.

Purchases of equity securities by the issuer and affiliated purchasers

None.

 

 

Not applicable to a smaller reporting company.

 

 

 

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Our future operating results, however, are impossible to predict and no guaranty or warranty is to be inferred from those forward-looking statements.

 

Overview

 

cbdMD was originally founded in 2015 as an innovative branding and marketing company with a focus on lifestyle-based brands. In December 2018 we acquired Cure Based Development following the passage of the Farm Bill which contained a permanent declassification of cannabidiol (CBD) as a controlled substance under Federal law. As a result of that transaction, we own and operate the nationally recognized CBD brand cbdMD which now represents our focus and substantially all of our revenues.

 

Fiscal 2019 was a transformative year for our company. Following the closing of the Mergers in December 2018, we began a concerted effort to build our brand recognition, expand the CBD product line, expand our sales channels, and invest in human and technology infrastructure to support our current operations and expected growth. These efforts included:

 

 

 

 

 

 

Our revenue guidance for fiscal 2019 was $24 million to $26 million. While our net sales were $23.7 million, we attribute the difference to our decision to discontinue the operations of our legacy divisions effective September 30, 2019 and focus all of our time, attention and resources on our CBD business. As disclosed in our consolidated financial statements appearing later in this report, revenues from these discontinued businesses were approximately $888,000 which, if added to our net sales for fiscal 2019, would have put us within our expected net sales range for fiscal 2019.

 

 

Discontinued Operations

 

Effective September 30, 2019, we discontinued operations of four business subsidiaries: EE1, IM1, BPU and Level H&W. These subsidiaries accounted for our licensing, entertainment, and products segments prior to fiscal 2019. Therefore, the results of operations related to these subsidiaries for the Company are reported as discontinued operations. Continuing operations discussed below refer to the Company’s CBD business unless otherwise indicated, and prior periods in such discussion have been restated to reflect results excluding EE1, IM1, BPU and Level H&W. See Note 15, “Discontinued Operations”, of the notes to consolidated financial statements elsewhere in this report for additional information. As a result, the discussion below is of the Company’s continuing operations, which is comprised of the CBD business and the Company’s corporate office.

 

Results of Operations

 

The following tables provide certain selected consolidated financial information for the periods presented:

 

	Fiscal 2019	Fiscal 2018	Change
Net sales	$23,595,955	$-	$23,595,955
Net sales related party	$55,596	459,091	$(403,495)
Total net sales	$23,651,551	$459,091	$23,192,460
Costs of sales	$9,136,677	$104,010	$9,032,667
Gross profit as a percentage of net sales	61.4%	77.3%	(15.9)%
Operating expenses	$29,311,764	$2,152,149	$27,159,615
Other income (expenses)	$(32,991,885)	$-	$(32,991,885)
Net income (loss) before taxes	$(47,788,776)	$(1,797,068)	$(45,991,708)
Net income (loss) from continuing operations	$(45,429,776)	$(1,781,068)	$(43,648,708)
Net income (loss) from discontinued operations, net of taxes	$(5,927,773)	$1,843,902	$(7,771,675)
Net income (loss)	$(50,428,226)	$(412,075)	$(50,016,151)

 

The following tables provide certain selected unaudited consolidated financial information for the three months ended September 30, 2019 and 2018:

 

	September 30, 2019	September 30, 2018	Change
Net sales	$9,518,687	$-	$9,518,687
Net sales related party	$25,450	-	$25,450
Total net sales	$9,544,137	$-	$9,544,137
Costs of sales	$4,127,491	$17,311	$4,110,180
Gross profit as a percentage of net sales	56.7%	0%	56.7%
Operating expenses	$10,266,281	$605,718	$9,660,563
Other income (expenses)	$19,060,830	$-	$19,060,830
Net income (loss) before taxes	$14,211,194	$(623,030)	$14,834,224
Net income (loss) from continuing operations	$14,274,194	$(601,030)	$14,875,224
Net income (loss) from discontinued operations, net of taxes	$(5,927,773)	$203,994	$(6,131,767)
Net income (loss)	$7,634,352	$(412,075)	$8,046,427

 

Sales

 

We record product sales primarily through two main delivery channels, direct to consumers via online capabilities (E-commerce) and direct to wholesalers utilizing our internal sales team. In addition, we record revenue upon delivery of services (consulting, marketing and brand strategy). The following table provides information on the contribution of net sales by type of sale to our total net sales.

 

	Fiscal 2019	% of total	Fiscal 2018	% of total
Wholesale sales	$8,878,901	37.5%	$-	0%
Consumer sales	14,772,650	62.5%	-	0%
Service oriented sales	-		459,091	100%
Total net sales	$23,651,551		$459,091

 

 

 

The increase in net sales attributable to our wholesale and consumer sales are directly related to the Mergers in December 2018.

 

As described elsewhere in this report, from time to time we have accepted equity positions as compensation for our services. The following table provides information for fiscal 2019 and fiscal 2018 regarding the amount of our total net sales in each of those periods for which we received an equity position in lieu of cash.

 

Fiscal 2019		Fiscal 2018
Amount	% total net sales	Amount	% total net sales
$-	-%	$200,000	43.5%

 

While our management believes this policy could potentially benefit our company, this practice has had an adverse impact on our cash flow from operations and holding these securities could subject our company to additional valuation impacts in future periods as a result of the need to value these holdings on a quarterly basis.

 

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.  The following table provides information on the cost of sales to our net sales for fiscal 2019 and 2018:

 

 

	Fiscal 2019	Fiscal 2018	change
Product sales	$9,083,558	$-	$9,083,558
Service related sales	53,119	104,010	(50,891)
Total cost of sales	$9,136,677	$104,010	$9,032,667

 

Operating expenses

 

Our principal operating expenses include staff related expense, advertising (which includes expenses related to industry distribution and trade shows), sponsorships, affiliate commissions, merchant fees, travel, rent, professional service fees, and business insurance expense. Our operating expenses on a consolidated basis increased 1,262% in fiscal 2019 from fiscal 2018 and is directly related to the Mergers and the significant ramp up of that business.

 

The following table provides information on our approximate operating expenses for fiscal 2019 and fiscal 2018:

 

	Fiscal 2019	Fiscal 2018	change
Staff related expense	$8,995,969	$1,105,102	$7,890,867
Accounting/legal expense	1,041,267	397,630	643,637
Professional outside services	1,559,330	336,273	1,263,057
Advertising/marketing/social media/events/tradeshows	5,151,795	143,701	5,008,094
Sponsorships	2,679,330	-	2,679,330
Affiliate commissions	1,627,372	-	1,627,372
Merchant fees	1,670,085	-	1,670,085
Travel expense	712,811	158,357	554,453
Rent	672,697	213,697	459,000
Business insurance	344,432	201,171	143,261
Non-cash stock compensation	2,688,530	598,581	2,089,949
Totals	$27,183,620	$3,154,513	$24,029,107

 

 

The increase in staff related expense is a direct result of the build out of the CBDI team. The increase in professional outside services is related to the use of outside agencies and firms to support the growth while we built our infrastructure. The increase in advertising/marketing, sponsorships, affiliate commissions, and travel are a result of execution on the business strategy and building of the CBD brand while increasing market share. The increase in merchant fees is a direct result of increased business through our E-commerce site. For the year ended September 30, 2019, the Company also had an impairment of $436,578 on intangible assets that no longer have a useful life or value for the business based on the current business focus.

 

Corporate overhead

 

Included in our consolidated operating expenses are expenses associated with our corporate overhead which are not allocated to the operating business unit, including (i) staff related expenses; (ii) accounting and legal expenses; (iii) professional outside services; (iv) travel and entertainment expenses; (v) rent; (vi) business insurance; and (vii) non-cash stock compensation expense.

 

The following table provides information on our approximate corporate overhead for fiscal 2019 and 2018:

 

	Fiscal 2019	Fiscal 2018	change
Staff related expense	$1,157,054	$1,105,102	$51,952
Accounting/legal expense	931,373	397,630	533,743
Professional outside services	931,460	336,273	595,187
Travel expense	92,593	158,357	(65,764)
Rent	175,592	213,697	(38,105)
Business insurance	262,200	201,171	61,029
Non-cash stock compensation	2,688,530	598,581	2,089,949
Totals	$6,238,802	$3,010,811	$3,227,992

 

The overall increase in corporate operating expenses is related to the maturation of the entire organization and ongoing pubic company related expenses. Specifically, the accounting/legal expense and professional outside services increases are related to the Mergers, two additional registration statement filings and secondary financings by the company. The increase in non-cash stock compensation reflects the issuance of options relevant to the increased employee count.

 

Other income and other non-operating expenses

 

Interest income (expense)

 

Our interest income (expense) was $75,071 and $0 for fiscal 2019 and fiscal 2018, respectively.

 

Contingent liability

 

As consideration for the Mergers, under the terms of the Merger Agreement, we had a contractual obligation to issue 15,250,000 Initial Shares of our common stock, after approval by our shareholders, to the members of Cure Based Development, issued in two tranches 6,500,000 shares and 8,750,000 shares, both of which are subject to leak out provisions, and the 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 of our common stock can be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the closing date of the Mergers.

 

The Initial Shares and Earnout Shares were approved by our shareholders and the Initial Shares were issued on April 19, 2019. The Initial Shares value at April 19, 2019 was $53,215,163, and with the issuance of the Initial Shares, the contingent liability related to the Initial Shares was reclassified to shareholders’ equity by $53,215,163.

 

 

The earn-out provision 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 contingent liability is $50,600,000 at September 30, 2019, as compared to $74,353,484 at the merger date, December 20, 2018. During the year we had an increase in value of $32,461,680 of the continent liability and a reclassification out of the liability of $56,215,164 for issuance of the Initial Shares and settlement of acquired liabilities. The increase of $32,461,680 is recorded as other expense in our consolidated statement of operations appearing later in this report. The Company utilizes both a market approach and a Monte Carlo simulation in valuing the contingent liability and a key input in both of those methods is the stock price. The main driver of the increase in the value of the contingent liability was the increase of the Company’s common stock price, which was $3.96 at September 30, 2019 as compared to $3.11 on December 20, 2018.

 

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 gain (loss) on marketable securities. On October 1, 2018, as a result of the adoption of ASU 2016-01 – Financial Instruments, the Company now records changes in fair value of equities held as unrealized gains (losses) on marketable securities in the statement of operations at each period beginning October 1, 2018 and prior to that recorded unrealized gain or loss in other comprehensive income (loss). For fiscal 2019 and 2018 we recorded $(605,276) and $0 of realized and unrealized gain (loss) on marketable and other securities, which includes an impairment of $502,560. The discontinuing operations recorded an realized and unrealized gain (loss) of $(2,337,280) which is included in the net gain (loss) from discontinued operations on the statement of operations. For fiscal 2018 we recorded other comprehensive loss of $(2,512,539).

 

Liquidity and Capital Resources

 

 We had cash and cash equivalents on hand of $4,689,966 and working capital of $12,033,157 at September 30, 2019 as compared to cash on hand of $4,282,553 and working capital of $10,820,192 at September 30, 2018. Our current assets increased approximately 33.5% at September 30, 2019 from September 30, 2018, and is primarily attributable to an increase of cash, accounts receivable, deposits, merchant reserve, inventory, and prepaid expenses, offset by a decrease in marketable and other securities and assets from discontinued operations. Our current liabilities increased approximately 282.5% at September 30, 2019 from September 30, 2018. This increase is primarily attributable to increases in accounts payable and accrued expenses, offset by decreases in liabilities from discontinued operations. Both the changes in our current assets and current liabilities are also reflective of the change in focus to the CBD business during fiscal 2019.

 

During fiscal 2019 we used cash primarily to fund our operations in addition to increases in our accounts receivable.

 

We do not have any commitments for capital expenditures. We have multiple endorsement or sponsorship agreements for varying time periods up through December 2022 and provide for financial commitments from the Company based on performance/participation (see Note 13 Commitments and Contingencies). We have sufficient working capital to fund our operations.

 

Our goal from a liquidity perspective is to use operating cash flows to fund day to day operations and we have not met this goal as cash flow from operations has been a net use of $15,377,467 and $5,573,094 for fiscal 2019 and fiscal 2018, respectively.

 

On November 16, 2017 we closed an IPO and raised net proceeds of $10,932,535. On October 2, 2018 we closed a follow-on firm underwritten public offering of shares of our common stock resulting in total net proceeds to us of $6,356,998. On May 15, 2019 we closed a follow-on firm underwritten public offering of shares of our common stock resulting in total net proceeds to us of $12,650,600. On October 16, 2019 we closed a follow-on firm underwritten public offering of shares of our Series A Convertible Preferred Stock resulting in total net proceeds to us of $4,525,100. We are using the net proceeds from the offerings for brand development and expansion, advertising, marketing, and general working capital.

 

 

Related Parties

 

As described in Note 9 notes to our consolidated financial statements appearing elsewhere in this report, we have engaged in a number of related party transactions. We have reported transactions with related parties within the consolidated financial statements as well as within the notes to the consolidated financial statements. These transactions also are reported as sales with related parties (see Note 9 Related Party Transactions in the consolidated financial statements for more information).

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“US GAAP”) and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1, “Organization and Summary of Significant Accounting Policies,” of the notes to our consolidated financial statements appearing elsewhere in this report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.

 

We believe that the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.

 

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.

 

Marketable Securities

 

Marketable securities that are equity securities are carried at fair value on the consolidated balance sheets with changes in fair value recorded as an unrealized gain or (loss) in the Statements of Operations in the period of the change. Upon the disposition of a marketable security, the Company records a realized gain or (loss) on the Company’s consolidated statements of operations.  On October 1, 2018, as a result of the adoption of ASU 2016-01 – Financial Instruments, the Company reclassified $2,512,539 of net unrealized losses on marketable securities, that were formerly classified as available-for-sale securities before the adoption of the new standard, from Accumulated Other Comprehensive Loss to Accumulated Deficit.

 

Investment Other Securities

 

For equity investments where the Company neither controls nor has significant influence over the investee and which are non-marketable, which is without a readily determinable fair value, the Company may elect to estimate its fair value at cost less impairment plus or minus changes resulting from observable price changes.

 

Recent Accounting Pronouncements

 

Please see Note 1–Organization and Summary of Significant Accounting Policies appearing in the notes to our consolidated financial statements included in this report for information on accounting pronouncements.

 

 

Off Balance Sheet Arrangements

 

We have multiple leases for office, warehouse and lab facilities with varying termination dates up through December 2027. These leases provide for standard annual increases and are described further in Note 17 – Leases.

 

In addition, we have multiple endorsement or sponsorship agreements for varying time periods up through December 2022 and provide for financial commitments from the Company based on performance/participation (see Note 13 Commitments and Contingencies).

 

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.

 

 

Not applicable for a smaller reporting company.

 

 

Please see our Financial Statements beginning on page F-1 of this annual report.

 

 

None.

 

 

Evaluation of Disclosure Controls and Procedures.

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to our management, including our co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As required by Exchange Act Rule 13a-15(e), we carried out an evaluation, under the supervision and with the participation of our management, including our co-Chief Executive Officers and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our co-Chief Executive Officers and our Chief Financial Officer concluded that our disclosure controls were effective at September 30, 2019.

 

 

Management’s Report on Internal Control over Financial Reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

 

 

As an emerging growth company experiencing rapid growth, we have worked diligently to improve processes within the Company which has created continuous change, specifically including in our IT and manufacturing environments that increase risk related to transaction processing which can impact our financial reporting. We have implemented a significant number of manual compensating controls to address this risk.

 

Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

Our management, including our co-CEOs and our CFO, assessed the effectiveness of our internal control over financial reporting as of September 30, 2019. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the 2013 Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during our last fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

None.

 

 

PART III

 

 

The information required by this Item will be contained in our proxy statement for our 2020 Annual Meeting of Shareholders to be filed on or prior to January 28, 2020 (the “Proxy Statement”) and is incorporated herein by this reference.

 

 

The information required by this item will be contained in our Proxy Statement and is incorporated herein by this reference.

 

 

The information required by this item will be contained in our Proxy Statement and is incorporated herein by this reference.

 

 

The information required by this item will be contained in our Proxy Statement and is incorporated herein by this reference.

 

 

The information required by this item will be contained in our Proxy Statement and is incorporated herein by this reference.

 

PART IV

 

 

 

The consolidated financial statements and Report of Independent Registered Accounting Firm are listed in the “Index to Financial Statements and Schedules” beginning on page F-1.

 

  (2)          Financial statement schedules

 

All schedules for which provision is made in the applicable accounting regulations of the SEC are either not required under the related instructions, are not applicable (and therefore have been omitted), or the required disclosures are contained in the consolidated financial statements herein.

 

 

The exhibits that are required to be filed or incorporated by reference herein are listed in the Exhibit Index.

 

 

None

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	cbdMD, Inc.
Date: December 18, 2019	By:	/s/ Martin A. Sumichrast
		Martin A. Sumichrast
		Co-Chief Executive Officer (co-Principal Executive Officer)

 

	cbdMD, Inc.
Date: December 18, 2019	By:	/s/ Raymond S. Coffman
		Raymond S. Coffman
		Co-Chief Executive Officer (co-Principal Executive Officer)

 

	cbdMD, Inc.
Date: December 18, 2019	By:	/s/ Mark S. Elliott
		Mark S. Elliott
		Chief Financial Officer, (Principal Accounting and Financial Officer)

 

POWER OF ATTORNEY

 

KNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Mark S. Elliott his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments and supplements to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Name		Positions		Date
/s/ Martin A. Sumichrast		Chairman of the Board of Directors, Co-Chief Executive Officer
Martin A. Sumichrast				December 18, 2019
/s/ Raymond S, Coffman		Co-Chief Executive Officer, Director
Raymond S. Coffman				December 18, 2019
/s/ Anthony K. Shriver		Director
Anthony K. Shriver				December 18, 2019
/s/ Seymour G. Siegel		Director
Seymour G. Siegel				December 18, 2019
/s/ Bakari Sellers		Director
Bakari Sellers				December 18, 2019
/s/ Gregory C. Morris		Director
Gregory C. Morris				December 18, 2019
/s/ Scott Stephen		Director
Scott Stephen				December 18, 2019
/s/ Peter Ghiloni		Director
Peter Ghiloni				December 18, 2019
/s/ William Raines III		Director
William Raines III				December 18, 2019

 

 

EXHIBIT INDEX

 

Incorporated by Reference

Filed or Furnished Herewith

No.

Exhibit Description

Form

Date Filed

Number

1.1

Form of Underwriting Agreement dated September 28, 2018 by and between Level Brands, Inc. and ThinkEquity, a Division of Fordman Financial Management, Inc.

S-1

9/26/18

1.1

1.2

Form of Underwriting Agreement dated May 13, 2019 by and between cbdMD, Inc. and ThinkEquity, a Division of Fordman Financial Management, Inc.

8-K

5/14/19

1.1

1.3

Underwriting Agreement dated October 10, 2019 by and between cbdMD, Inc. and ThinkEquity, a Division of Fordham Financial Management, Inc.

8-K

10.16

1.1

2.1

Merger Agreement dated December 3, 2018 by and among Level Brands, Inc., AcqCo, LLC, cbdMD LLC and Cure Based Development, LLC

8-K

12/4/18

2.1

2.2

Articles of Merger dated December 20, 2018 as filed with the Secretary of State of Nevada merging AcqCo, LLC with and into Cure Based Development, LLC

10-Q

2/14/19

2.2

2.3

Articles of Merger dated December 20, 2018 as filed with the Secretary of State of North Carolina merging AcqCo, LLC with and into Cure Based Development, LLC

10-Q

2/14/19

2.3

2.4

Articles of Merger dated December 20, 2018 as filed with the Secretary of State of Nevada merging Cure Based Development, LLC with an into cbdMD LLC

10-Q

2/14/19

2.4

2.5

Articles of Merger dated December 20, 2018 as filed with the Secretary of State of North Carolina merging Cure Based Development, LLC with an into cbdMD LLC

10-Q

2/14/19

2.5

3.1

Articles of Incorporation

1-A

9/18/17

2.1

3.2

Articles of Amendment to the Articles of Incorporation filed April 22, 2015

1-A

9/18/17

2.2

3.3

Articles of Amendment to the Articles of Incorporation filed June 22, 2015

1-A

9/18/17

2.3

3.4

Articles of Amendment to the Articles of Incorporation filed November 17, 2016

1-A

9/18/17

2.4

3.5

Articles of Amendment to the Articles of Incorporation filed December 5, 2016

1-A

9/18/17

2.5

3.6

Bylaws, as amended

1-A

9/18/17

2.6

3.7

Articles of Amendment to Articles of Incorporation

8-K

4/29/19

3.7

3.8

Articles of Amendment to the Articles of Incorporation including the Certificate of Designations, Rights and Preferences of the 8% Series A Cumulative Convertible Preferred Stock filed October 11, 2019

8-A

10/11/19

3.1(f)

4.1

Form of placement agent warrant issued in June 2015 private placement

1-A

9/18/17

3.3

4.2

Form of placement agent warrant issued in December 2015 private placement

1-A

9/18/17

3.4

4.3

Form of warrant issued in 8% convertible promissory note offering

1-A

9/18/17

3.5

4.4

Form of selling agents’ warrant issued in November 2017 initial public offering

1-A/A

10/12/17

3.6

4.5

Form of common stock certificate of the registrant

1-A

9/18/17

3.7

4.6

2015 Equity Compensation Plan

1-A

9/18/17

3.8

4.7

Form of stock option award under 2015 Equity Compensation Plan+

1-A

9/18/17

3.9

4.8

Form of warrant issued to Andre Carthen

1-A

9/18/17

3.10

4.9

Form of warrant issued to Nicholas Walker

1-A

9/18/17

3.11

4.10

Form of representative’s warrant dated November 16, 2018

S-1

9/26/18

4.10

4.11

Form of Representative’s Warrant dated May 15, 2019

8-K

5/14/19

4.1

4.12

Form of Representative’s Warrant dated October 16, 2019

8-K

10/16/19

4.1

10.1

Contribution Agreement by and between Beauty & Pin-Ups, Inc. and Beauty and Pin Ups LLC dated April 13, 2015

1-A

9/18/17

7.1

 

 

10.2		Operating Agreement of Beauty and Pin Ups LLC, as amended		1-A		9/18/17		6.1
10.3		Executive Employment Agreement dated January 1, 2017 by and between Level Brands, Inc. and Martin A. Sumichrast +		1-A		9/18/17		6.10
10.4		Executive Employment Agreement dated January 2, 2017 by and between Level Brands, Inc. and Mark S. Elliott +		1-A		9/18/17		6.11
10.5		Master Advisory and Consulting Agreement dated February 8, 2017 by and between Level Brands, Inc. and kathy Ireland® Worldwide		1-A		9/18/17		6.12
10.6		Sublease dated January 1, 2017 by and between Kure Franchise, LLC and Level Brands, Inc.		1-A		9/18/17		6.16
10.7		Wholesale License Agreement dated January 12, 2017 by and between kathy ireland ®Worldwide and I'M1, LLC		1-A		9/18/17		6.18
10.8		Amended and Restated Limited Liability Company Agreement of I'M1, LLC effective January 1, 2017		1-A		9/18/17		6.19
10.9		Amended and Restated Limited Liability Company Agreement of Encore Endeavor 1 LLC effective January 1, 2017		1-A		9/18/17		6.20
10.10		Amended and Restated Membership Interest Exchange Agreement dated March 24, 2017, effective January 6, 2017, by and among IM1 Holdings, LLC, I'M1, LLC and Level Brands, Inc.		1-A		9/18/17		7.2
10.11		Amended and Restated Membership Interest Exchange Agreement dated March 24, 2017, effective January 6, 2017, by and among EE1 Holdings, LLC, Encore Endeavor I LLC and Level Brands, Inc.		1-A		9/18/17		7.3
10.12		Form of Indemnification Agreement		1-A		9/18/17		6.21
10.13		Amendment to Executive Employment Agreement dated April 1, 2017 by and between Level Brands, Inc. and Martin A. Sumichrast +		1-A		9/18/17		6.27
10.14		License Agreement dated March 29, 2017 by and among I'M1, LLC, Kure Corp. and Kure Franchise, LLC		1-A		9/18/17		6.28
10.15		Television Series Consulting Agreement dated March 1, 2017 by and between Multi-Media Productions Inc. and Encore Endeavor 1, LLC		1-A		9/18/17		6.30
10.16		Advisory Agreement dated May 9, 2017 by and between Formula Four Beverages Inc., I'M1, LLC and Encore Endeavor 1, LLC		1-A		9/18/17		6.31
10.17		Membership Interest Sale and Purchase Agreement by and among Priel Maman, Level Brands, Inc. and Beauty and Pin-Ups, LLC dated April 26, 2017		1-A		9/18/17		6.33
10.18		License Agreement dated March 29, 2017 by and between I'M1, LLC and Andre Phillipe, Inc.		1-A		9/18/17		6.35
10.19		Recording Master License Agreement dated May 23, 2017 by and between McCoo & Davis, Inc. and Encore Endeavor 1 LLC		1-A		9/18/17		6.36
10.20		License Agreement dated June 27, 2017 by and between I'M1, LLC and Loose Leaf Eyewear and Accessories LLC.		1-A		9/18/17		6.42
10.21		Advisory Agreement dated August 9, 2017 by and among Damiva Inc., I'M1, LLC and Encore Endeavor 1, LLC		1-A		9/18/17		6.43
10.22		Representation Agreement dated August 1, 2017 by and among Encore Endeavor 1 LLC, Romero Britto and Britto Central, Inc.		1-A		9/18/17		6.44
10.23		Amended and Restated Representation Agreement dated September 12, 2017 by and among Encore Endeavor 1 LLC, Dada Media, Inc. and David Tutera		1-A		9/18/17		6.45
10.24		Amendment dated September 8, 2017 to Master Advisory and Consulting Agreement by and between Level Brands, Inc. and kathy Ireland® Worldwide		1-A		9/18/17		6.47
10.25		Wholesale License Agreement dated September 8, 2017 by and between Level Brands, Inc. and kathy ireland® Worldwide+		1-A		9/18/17		6.48
10.26		Wholesale License Agreement dated September 8, 2017 by and between Level Brands, Inc. and Andre Carthen		1-A		9/18/17		6.49
10.27		Wholesale License Agreement dated September 8, 2017 by and between Level Brands, Inc. and Nicholas Walker		1-A		9/18/17		6.50
10.28		Advisory Agreement dated September 1, 2017 by and between Level Brands, Inc. and Jon Carrasco +		1-A		9/18/17		6.52

 

 

10.29		Production Services Agreement dated September 19, 2017 by and between Multimedia Productions, Inc. and Encore Endeavor 1, LLC		1-A/A		10/12/17		6.53
10.30		License Agreement dated September 8, 2017 by and between Level Brands, Inc. and kathy ireland® Worldwide		1-A		9/18/17		6.54
10.31		Advisory Agreement dated September 22, 2017 by and between SG Blocks, Inc. and Encore Endeavor 1, LLC		1-A/A		10/12/17		6.55
10.32		Form of Revolving Line of Credit Loan Agreement dated December 12, 2017 by and between Level Brands, Inc. and Kure Corp.		8-K		12/12/17		10.64
10.33		Form of Security Agreement dated December 12, 2017 by and between Level Brands, Inc. and Kure Corp.		8-K		12/12/17		10.65
10.34		Form of Promissory Note in the principal amount of $500,000 dated December 12, 2017 due from Kure Corp.		8-K		12/12/17		10.66
10.35		Sublease dated December 21, 2017 by and between Kure Franchise, LLC and Level Brands, Inc.		10-K		12/26/17		10.66
10.36		License Agreement dated December 30, 2017 by and between Level Brands, Inc. and Isodiol International, Inc.		8-K		1/5/18		10.67
10.37		Advisory Agreement dated March 8, 2018 by and between Level Brands, Inc. and Nic Mendoza		10-Q		5/15/18		10.69
10.38		Advisory Agreement dated March 8, 2018 by and between Level Brands, Inc. and Tommy Meharey		10-Q		5/15/18		10.70
10.39		Advisory Agreement dated March 8, 2018 by and between Level Brands, Inc. and Stephen Roseberry		10-Q		5/15/18		10.71
10.40		Sublease effective April 11, 2018 by and between 4th Floor Properties LLC and Level Brands, Inc.		10-Q		5/15/18		10.72
10.41		Amendment to promissory note with Stone Street Partners LLC		10-Q		8/14/18		10.74
10.42		License Agreement dated June 26, 2018 by and between Level Brands, Inc. and Boston Therapeutics, Inc.		8-K		6/27/18		10.73
10.43		First Amendment to License Agreement dated January 19, 2018 by and between Level Brands, Inc. and Isodiol International, Inc.		8-K		1/22/18		10.69
10.44		Executive Employment Agreement dated September 6, 2018 by and between Level Brands, Inc. and Martin A. Sumichrast+		8-K		9/7/18		10.75
10.45		Executive Employment Agreement dated September 6, 2018 by and between Level Brands, Inc. and Mark S. Elliott+		8-K		9/7/18		10.76
10.46		Secured Promissory Note dated December 4, 2018 in the principal amount of $2,000,000 from Cure Based Development LLC		8-K		12/4/18		10.1
10.47		Security Agreement dated December 4, 2018 by and between Level Brands, Inc. and Cure Based Development, LLC		8-K		12/4/18		10.2
10.48		Form of leak out agreement		8-K		12/20/18		10.1
10.49		Form of voting proxy		8-K		12/20/18		10.2
10.50		6% promissory note dated December 20, 2018 to Edge of Business, LLC		8-K		12/20/18		10.3
10.51		Executive Employment Agreement dated December 20, 2018 by and between cbdMD LLC and R. Scott Coffman+		8-K		12/20/18		10.4
10.52		Executive Employment Agreement dated December 20, 2018 by and between cbdMD LLC and Caryn Dunayer+		8-K		12/20/18		10.5
10.53		Mutual Termination of License Agreement dated January 7, 2019 by and between Level Brands, Inc. and Isodiol International, Inc		8-K		1/1/19		10.1
10.54		Amendment to Advisory Agreement dated January 14, 2019 with Maxim Group LLC		10-Q		2/14/19		10.85
10.55		Advisory Agreement dated January 15, 2019 with Joseph Gunnar LLC		10-Q		2/14/19		10.86
10.56		Amendment to Wholesale License Agreement dated September 8, 2017 by and between Level Brands, Inc., and kathy ireland ® Worldwide		10-Q		2/15/19		10.87
10.57		Office Lease, dated July 11, 2019		10-Q		8/14/19		10.1
10.58		Form of Lock-Up Agreement with the Affiliates		8-K		5/14/19		10.1
10.59		Form of Lock-Up Agreement with the FINRA Member		8-K		5/14/19		10.2
10.60		Form of Lock-Up Agreement		8-K		10/16/19		10.1
14.1		Code of Business Conduct and Ethics		1-A		9/18/17		15.1
21.1		Subsidiaries of the registrant								Filed
23.1		Consent of Cherry Bekaert LLP								Filed