cbdMD, Inc. - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended March 31, 2021

or

For the transition period from ___________ to ___________

Commission file number                                           001-38299

 

cbdMD, INC.

(Exact Name of Registrant as Specified in its Charter)

North Carolina		47-3414576
State or Other Jurisdiction of Incorporation or Organization		I.R.S. Employer Identification No.
8845 Red Oak Blvd, Charlotte, NC		28217
Address of Principal Executive Offices		Zip Code

704-445-3060

Registrant’s Telephone Number, Including Area Code

 

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities registered pursuant to Section 12(b) of the Act:

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

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒    No ☐

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

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

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

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

56,418,287 shares of common stock are issued and outstanding as of May 12, 2021. 

TABLE OF CONTENTS

 

		Page
		No
	PART I-FINANCIAL INFORMATION
ITEM 1.	Financial Statements.	4
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	31
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.	39
ITEM 4.	Controls and Procedures.	39
	PART II - OTHER INFORMATION
ITEM 1.	Legal Proceedings.	40
ITEM 1A.	Risk Factors.	40
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	40
ITEM 3.	Defaults Upon Senior Securities.	40
ITEM 4.	Mine Safety Disclosures.	40
ITEM 5.	Other Information.	40
ITEM 6.	Exhibits.	41

 

 

OTHER PERTINENT INFORMATION

 

Unless the context otherwise indicates, when used in this report, the terms the “Company,” “cbdMD, “we,” “us, “our” and similar terms refer to cbdMD, Inc., a North Carolina corporation formerly known as Level Brands, Inc., and our subsidiaries CBD Industries LLC, a North Carolina limited liability company formerly known as cbdMD LLC, which we refer to as “CBDI”, and Paw CBD, Inc., a North Carolina corporation which we refer to as “Paw CBD” and cbdMD Therapeutics LLC, a North Carolina limited liability company which we refer to as “Therapeutics. In addition, "fiscal 2019" refers to the year ended September 30, 2019, “fiscal 2020” refers to the year ended September 30, 2020, “fiscal 2021” refers to the fiscal year ending September 30, 2021, "first quarter of 2020" refers to the three months ended December 31, 2019, "first quarter of 2021" refers to the three months ended December 31, 2020, "second quarter of 2020" refers to the three months ended March 31, 2020 and "second quarter of 2021" refers to the three months ended March 31, 2021.

 

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

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:

 

●	material risks associated with our overall business, including:
	●	our history of losses;
	●	the continuing impact of COVID-19 on our company;
	●	our reliance on third party raw material suppliers and manufacturers and compounders;
	●	our reliance on third party compliance with our supplier verification program and testing protocols; and
	●	risks associated with the implementation of our enterprise resource planning system (ERP) to Oracle NetSuite.
●	material risks associated with regulatory environment for CBD, including:
	●	change in state laws pertaining to industrial hemp;
	●	costs to us for compliance with laws and the risks of increased litigation; and
	●	possible changes in the use of CBD.
●	material risks associated with the ownership of our securities, including;
	●	the impact of changes in the fair value of our contingent liabilities associated with the Earnout Shares;
	●	dilution to our shareholders upon the issuance of the Earnout Shares;
	●	time devoted to our company by one of our co-Chief Executive Officers;
	●	the designations, rights and preferences of our 8% Series A Cumulative Convertible Preferred Stock;
	●	dilution upon the issuance of shares of common stock underlying outstanding warrants, options and the Series A Convertible Preferred Stock; and
	●	voting control held by our directors and their affiliates.

 

Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Part II, Item 1A. Risk Factors appearing later in this report, Part I, Item 1A. - Risk Factors appearing in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 as filed with the Securities and Exchange Commission (the “SEC”) on December 22, 2020 (the "2020 10-K"), and Quarterly Report on Form 10-Q for the period ended December 31, 2020 as filed with the SEC on February 9, 2021 as well as our other filings with the SEC. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.

 

PART 1 - FINANCIAL INFORMATION

 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2021 AND SEPTEMBER 30, 2020

 

 

	(Unaudited)
	March 31,	September 30,
	2021	2020
Assets
Current assets:
Cash and cash equivalents	$23,711,600	$14,824,644
Accounts receivable, net	1,848,465	911,482
Accounts receivable – discontinued operations	22,217	447,134
Marketable securities	32,034	26,472
Investment other securities	1,000,000	250,000
Inventory	4,331,545	4,603,360
Inventory prepaid	478,629	288,178
Prepaid software	-	174,308
Prepaid sponsorship	1,777,304	1,203,300
Prepaid expenses and other current assets	1,544,541	983,374
Total current assets	34,746,335	23,712,252
Other assets:
Property and equipment, net	2,976,904	3,183,487
Operating lease assets	6,240,059	6,851,357
Deposits for facilities	789,583	790,708
Intangible assets, net	21,635,000	21,635,000
Goodwill	54,669,997	54,669,997
Total other assets	86,311,543	87,130,549
Total assets	$121,057,878	$110,842,801

 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2021 AND SEPTEMBER 30, 2020

(continued)

 

	(Unaudited)
	March 31,	September 30,
	2021	2020
Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$2,835,236	$2,850,421
Accrued expenses	1,729,594	2,769,920
Operating leases – short term liabilities	1,213,891	1,159,098
Paycheck Protection Program loan, current portion	1,027,403	854,000
Note payable	57,522	55,639
Total current liabilities	6,863,646	7,689,078
Long term liabilities:
Long term liabilities	-	264,367
Note payable	139,215	-
Paycheck Protection Program loan, net of current portion	428,697	602,100
Operating leases - long term liabilities	5,414,751	6,010,208
Contingent liability	22,300,000	16,200,000
Deferred tax liability	27,000	895,000
Total long term liabilities	28,309,663	23,971,675
Total liabilities	35,173,309	31,660,753
cbdMD, Inc. shareholders' equity:
Preferred stock, authorized 50,000,000 shares, $0.001 par value, 2,800,000 and 500,000 shares issued and outstanding, respectively	2,800	500
Common stock, authorized 150,000,000 shares, $0.001 par value,
56,337,787 and 52,130,870 shares issued and outstanding, respectively	56,338	52,131
Additional paid in capital	155,780,222	126,517,784
Accumulated deficit	(69,954,791)	(47,388,367)
Total cbdMD, Inc. shareholders' equity	85,884,569	79,182,048
Total liabilities and shareholders' equity	$121,057,878	$110,842,801

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2021 AND 2020

 

	Three months	Three months	Six Months	Six Months
	Ended	Ended	Ended	Ended
	March 31, 2021	March 31, 2020	March 31, 2021	March 31, 2020
Gross Sales	$12,457,386	$9,703,800	$25,520,568	$20,116,291
Allowances	(658,775)	(304,764)	(1,393,654)	(569,019)
Total Net Sales	11,798,611	9,399,036	24,126,914	19,547,272
Cost of sales	3,643,127	2,732,076	7,073,402	6,432,613
Gross Profit	8,155,484	6,666,960	17,053,512	13,114,659
Operating expenses	12,323,207	12,267,637	22,981,180	24,827,934
Loss from operations	(4,167,723)	(5,600,677)	(5,927,668)	(11,713,275)
Realized and Unrealized gain (loss) on marketable and other securities, including impairments	2,852	(813,152)	545,562	(875,162)
(Increase) decrease of contingent liability	(8,871,000)	21,261,994	(17,371,000)	38,160,000
Interest (expense) income	(10,603)	35,607	(20,990)	42,875
(Loss) Income before provision for income taxes	(13,046,474)	14,883,772	(22,774,096)	25,614,438
Benefit for income taxes	536,000	-	868,000	2,240,300
Net (Loss) Income from continuing operations	(12,510,474)	14,883,772	(21,906,096)	27,854,738
Net (Loss) from discontinued operations, net of tax (Note 14)	-	-	-	(41,202)
Net (Loss) Income	(12,510,474)	14,883,772	(21,906,096)	27,813,536
Preferred dividends	560,280	100,016	660,330	166,750
Net (Loss) Income attributable to cbdMD, Inc. common shareholders	$(13,070,754)	$14,783,756	$(22,566,426)	$27,646,786
Net Income (Loss) per share:
Basic earnings per share	$(0.24)	$0.41	$(0.43)	$0.76
Diluted earnings per share	(0.24)	0.40	(0.43)	0.74
Weighted average number of shares Basic:	53,471,607	36,503,005	52,793,872	36,503,005
Weighted average number of shares Diluted:	53,471,607	37,336,505	52,793,872	37,336,505

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2021 AND 2020

(Unaudited)

 

	Three months	Three months	Six months	Six months
	Ended	Ended	Ended	Ended
	March 31, 2021	March 31, 2020	March 31, 2021	March 31, 2020
Net (Loss) Income	$(12,510,474)	$14,883,772	$(21,906,096)	$27,813,536
Comprehensive (Loss) Income	(12,510,474)	14,883,772	(21,906,096)	27,813,536
Preferred dividends	(560,280)	(100,016)	(660,330)	(116,750)
Comprehensive (Loss) Income attributable to cbdMD, Inc. common shareholders	$(13,070,754)	$14,783,756	$(22,566,426)	$27,646,786

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED MARCH 31, 2021 AND 2020

(unaudited)

	Six Months Ended March 31, 2021	Six Months Ended March 31, 2020
Cash flows from operating activities:
Net (Loss) Income	$(21,906,096)	$27,813,536
Adjustments to reconcile net (income) loss to net
cash used by operating activities:
Stock based compensation	451,527	972,225
Restricted stock expense	547,140	138,000
Issuance of stock / warrants for service	155,695	28,250
Impairment on discontinued operations asset	-	38,002
Depreciation and amortization	473,324	287,457
Other than temporary impairment other securities and     other accounts receivable	-	760,000
Increase/(Decrease) in contingent liability	17,371,000	(38,160,000)
Realized and unrealized loss of marketable and other securities	(5,562)	115,162
Merchant reserve settlement	-	132,657
Termination benefit	352,279	-
Non-cash lease expense	611,298	585,020
Changes in operating assets and liabilities:
Accounts receivable	(936,983)	763,303
Deposits	1,125	(22,365)
Merchant reserve	-	106,590
Inventory	271,815	(2,270,110)
Prepaid inventory	(190,451)	386,149
Prepaid expenses and other current assets	44,408	649,308
Accounts payable and accrued expenses	(1,366,373)	849,113
Operating lease liability	(540,664)	(496,834)
Note payable	-	175,124
Deferred revenue / customer deposits	(41,418)	(7,339)
Collection on discontinued operations accounts receivable	424,917	250,000
Deferred tax liability	(868,000)	(2,240,300)
Cash used by operating activities	(5,151,019)	(9,147,052)
Cash flows from investing activities:
Purchase of other investment securities	(750,000)	-
Purchase of property and equipment	(226,542)	(1,796,346)
Cash provided (used) by investing activities	(976,542)	(1,796,346)
Cash flows from financing activities:
Proceeds from issuance of common stock	-	16,771,756
Proceeds from issuance of preferred stock	15,798,115	4,421,928
Note payable	(123,268)	-
Preferred dividend distribution	(660,330)	(166,750)
Deferred issuance costs	-	62,197
Cash provided by financing activities	15,014,517	21,089,131
Net increase (decrease) in cash	8,886,956	10,145,733
Cash and cash equivalents, beginning of period	14,824,644	4,689,966
Cash and cash equivalents, end of period	$23,711,600	$14,835,699

 

Supplemental Disclosures of Cash Flow Information:

	Six Months ended March 31,	Six Months Ended March 31,
	2021	2020
Cash Payments for:
Interest expense	$7,117	$17,097
Non-cash financing activities:
Issuance of Contingent earnout shares:	$11,271,000	$-
Warrants issued to representative	$254,950	$524,113

cbdMD, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY

FOR THE SIX MONTHS ENDED MARCH 31, 2021

 

 

					Additional	Other
	Common stock		Preferred stock		Paid in	Comprehensive	Accumulated
	Shares	Amount	Shares	Amount	Capital	Income(loss)	Deficit	Total
Balance, September 30, 2020	52,130,870	$52,131	500,000	$500	$126,517,784	-	$(47,388,367)	$79,182,048
Issuance of Preferred stock	-	-	2,300,000	2,300	15,795,815	-	-	15,798,115
Issuance of options for share based compensation	-	-	-	-	219,875	-	-	219,875
Issuance of stock costs	-	-	-	-	-	-	-	-
Issuance of restricted stock for share based compensation	-	-	-	-	15,279	-	-	15,279
Preferred dividend	-	-	-	-	-	-	(100,050)	(100,050)
Net Income (loss)	-	-	-	-	-	-	(9,395,621)	(9,395,621)
Balance, December 31, 2020	52,130,870	$52,131	2,800,000	$2,800	$142,548,753	-	$(56,884,038)	$85,719,646
Issuance of Common stock	3,711,964	3,712	-	-	11,422,488	-	-	11,426,200
Exercise of options for share based compensation	147,953	148	-	-	627,500	-	-	627,648
Issuance of restricted stock for share based compensation	347,000	347	-	-	1,181,481	-	-	1,181,828
Preferred dividend	-	-	-	-	-	-	(560,279)	(560,279)
Net Income (loss)	-	-	-	-	-	-	(12,510,474)	(12 510,474)
Balance, March 31, 2021	56,337,787	$56,338	2,800,000	$2,800	$155,780,222	-	$(69,954,791)	$85,884,569

 

 

cbdMD, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY

FOR THE SIX MONTHS ENDED MARCH 31, 2020

 

 

					Additional	Other
	Common stock		Preferred stock		Paid in	Comprehensive	Accumulated
	Shares	Amount	Shares	Amount	Capital	Income(loss)	Deficit	Total
Balance, September 30, 2019	27,720,356	$27,720	-	$-	$97,186,524	-	$(59,610,260)	$37,603,984
Issuance of Preferred stock	-	-	500,000	500	4,421,428	-	-	4,421,928
Issuance of options for share based compensation	-	-	-	-	542,574	-	-	542,574
Issuance of stock costs	-	-	-	-	(31,757)	-	-	(31,757)
Issuance of restricted stock for share based compensation	-	-	-	-	138,000	-	-	138,000
Preferred dividend	-	-	-	-	-	-	(66,734)	(66,734)
Adoption of ASU 2016-02	-	-	-	-	-	-	(13,528)	(13,528)
Net Income (loss)	-	-	-	-	-	-	12,929,763	12,929,763
Balance, December 31, 2019	27,720,356	$27,720	500,000	$500	$102,256,769	-	$(46,760,759)	$55,524,230
Issuance of Common Stock	23,590,292	23,591	-	-	21,368,166	-	-	21,391,757
Issuance of options for share based compensation	-	-	-	-	429,651	-	-	429,651
Issuance of stock/warrants for services	25,000	25	-	-	28,225	-	-	28,250
Preferred dividend	-	-	-	-	-	-	(100,016)	(100,016)
Net Income (loss)	-	-	-	-	-	-	14,883,772	14,883,772
Balance of March 31, 2020	51,335,648	$51,336	500,000	$500	(31,757)	-	(31,977,003)	92,157,644

 

cbdMD, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2021 AND 2020

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Nature of Business

 

cbdMD, Inc. ("cbdMD", "we", "us", “our”, or the “Company”) is a North Carolina corporation formed on March 17, 2015 as Level Beauty Group, Inc. In November 2016 we changed the name of the Company to Level Brands, Inc. and on May 1, 2019 we changed the name of our Company to cbdMD, Inc. We operate from our offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30.

 

On December 20, 2018, the Company, and its newly organized wholly owned subsidiaries AcqCo, LLC and cbdMD LLC (“CBDI”), completed a two-step merger (the “Mergers”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). Upon completion of the Mergers, CBDI survived and operates the prior business of Cure Based Development. As consideration for the Mergers, the Company had a contractual obligation, after approval by our shareholders, to issue 15,250,000 shares of our common stock to the members of Cure Based Development, of which unrestricted voting rights to 8,750,000 of the shares vest over a five-year period and are subject to a voting proxy agreement, as well as to issue another 15,250,000 shares of our common stock (the “Earnout Shares”) in the future upon certain earnout goals being achieved within five years from the closing of the Mergers. The Company’s shareholders approved the issuance of the 15,250,000 shares of common stock in April 2019 and these shares were issued to members of Cure Based Development on April 19, 2019. In April 2019, our shareholders also approved the possible issuance of the Earnout Shares. The first marking period for the earnout was December 31, 2019 and based on measurement criteria, 5,127,792 Earnout Shares had been earned and were issued on February 27, 2020. The sole member of Cure Based Development at the closing of the Mergers was CBD Holding LLC (“CBDH”). In February 2020, in connection with its liquidation, CBDH distributed the rights to the Earnout Shares (the “Earnout Rights”) to its members based upon the members’ pro pro-rata ownership interest in CBDH. Members of CBDH at the time of its liquidation and this distribution included affiliates of Martin A. Sumichrast and R. Scott Coffman, directors and executive officers of cbdMD. A second marking period for the earnout ended December 31, 2020 and based on measurement criteria an additional 3,348,520 Earnout Shares had been earned and were issued on March 8, 2021.

 

The Company owns and operates the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and cbdMD Botanicals. The Company sources cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States. CBD is a natural substance produced from the hemp plant and the products manufactured by the Company are non-psychoactive as they do not contain tetrahydrocannabinol (THC).

 

On October 22, 2019, cbdMD formed a new wholly owned subsidiary, Paw CBD, Inc. (“Paw CBD”), in conjunction with the organization of its animal health division. In the third quarter of fiscal 2019 cbdMD launched its new CBD pet brand, Paw CBD. Following the initial positive response to the brand from retailers and consumers, cbdMD, Inc. organized Paw CBD, Inc. as a separate wholly owned subsidiary to take advantage of its early mover status in the CBD animal health industry. On March 15th, 2021 cbdMD formed a new wholly owned subsidiary, cbdMD Therapeutics, LLC (“Therapeutics”) for the purposes of isolating and quantifying the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications.

 

The accompanying unaudited interim condensed consolidated financial statements of cbdMD have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report filed with the SEC on Form 10-K for the year ended September 30, 2020 (“2020 10-K”) as filed with the SEC on December 22, 2020. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of consolidated financial position and the consolidated results of operations for the interim periods presented have been reflected herein. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2020 as reported in the 2020 10-K have been omitted.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries CBDI, Paw CBD and Therapeutics. All material intercompany transactions and balances have been eliminated in consolidation.

 

 

Use of Estimates

 

The Company's condensed consolidated financial statements have been prepared in accordance with US GAAP and requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, certain assumptions related to the valuation of investments other securities, acquired intangible and long-lived assets and the recoverability of intangible and long-lived assets and income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities, contingent liability and, hence consideration for the Mergers is a material estimate. Actual results could differ from these estimates.

 

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restriction on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. We are cautiously optimistic with the positive trends on infection rates, vaccinations and governmental restrictions and continuing to monitor data related to impact of the COVID-19 pandemic.

 

Cash and Cash Equivalents

 

For financial statements purposes, the Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents.

 

Accounts Receivable and Accounts Receivable Other

 

Accounts receivable are stated at cost less an allowance for doubtful accounts, if applicable. Credit is extended to customers after an evaluation of the customer’s financial condition, and generally collateral is not required as a condition of credit extension. Management’s determination of the allowance for doubtful accounts is based on an evaluation of the receivables, past experience, current economic conditions, and other risks inherent in the receivables portfolio. As of March 31, 2021 and September 30,2020, we had an allowance for doubtful accounts of $57,525 and $20,664, respectively.

 

Merchant Receivable and Reserve

 

The Company primarily sells its products through the internet and has an arrangement to process customer payments with third-party payment processors and will negotiate the fee based on the market. The arrangement with the payment processors requires that the Company pay a fee between 4.0% and 5.2% of the transaction amounts processed. Pursuant to this agreement, there can be a waiting period between 2 to 5 days prior to reimbursement to the Company, and as well as a calculated reserve which some payment processors hold back. Fees and reserves can change periodically with notice from the processors. At March 31, 2021, the receivable from payment processors included approximately $199,117 for the waiting period amount and is recorded as accounts receivable in the accompanying condensed consolidated balance sheet.

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. The cost of inventory includes product cost, freight-in, and production fill and labor (portions of which we outsource to third party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management’s analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. We assess inventory quarterly for slow moving products and potential impairments and at a minimum perform a physical inventory count annually near fiscal year end.

 

Customer Deposits

 

Customer deposits consist of payments received in advance of revenue recognition. Revenue is recognized as revenue recognition criteria are met.

 

Property and Equipment

 

Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are five years for manufacturing equipment and automobiles and three years for software, computer, and furniture and equipment. The useful life for leasehold improvements are over the term of the lease. The cost and accumulated depreciation of property are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the consolidated statements of operations for the applicable period. Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstance indicate the carrying value of an asset may not be recoverable.

 

 

Fair Value Accounting 

 

The Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

 

Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, observable market activity. In instances where the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

When the Company records an investment in marketable securities the carrying value is assigned at fair value.  Any changes in fair value for marketable securities during a given period will be recorded as an unrealized gain or loss in the consolidated statement of operations. For investment other securities without a readily determinable fair value, the Company may elect to estimate its fair value at cost less impairment plus or minus changes resulting from observable price changes.

 

Goodwill

 

Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Identifiable intangible assets acquired in business combinations are recorded based on their fair values at the date of acquisition. Goodwill is not subject to amortization but must be evaluated for impairment annually. The Company tests for goodwill impairment annually or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

 

In performing a goodwill test, the Company performs a qualitative evaluation and if necessary, a quantitative evaluation. Factors considered in the qualitative test include specific operating results as well as new events and circumstances impacting the operations or cash flows of the business acquired. For the quantitative test, the Company assesses goodwill for impairment by comparing the carrying value of the business to the respective fair value. The Company determines the fair value of its acquired business using a combination of income-based and market-based approaches and incorporates assumptions it believes market participants would utilize. The income-based approach utilizes discounted cash flows while the market-based approach utilizes market multiples. These approaches are dependent upon internally developed forecasts that are based upon annual budgets and longer-range strategic plans. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the respective acquired business and in the internally developed forecasts. The Company has analyzed a variety of factors in light of the known impact to date of the COVID-19 pandemic on its business to determine if a circumstance could trigger an impairment loss, and, at this time and based on the information presently known, does not believe that it is more likely than not that an impairment loss has been incurred.

 

Intangible Assets

 

The Company's intangible assets consist of trademarks and other intellectual property, all of which are accounted for in accordance with Accounting Standards Codification (ASC) Topic 350, Intangibles – Goodwill and Other. The Company employs the non-amortization approach to account for purchased intangible assets having indefinite lives. Under the non-amortization approach, intangible assets having indefinite lives are not amortized into the results of operations, but instead are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value. We perform an annual impairment analysis as of August 1 of each fiscal year on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. If a quantitative analysis is necessary, we would analyze various aspects including revenues from the business, associated with the intangible assets. In addition, intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. In addition, the Company has analyzed a variety of factors in light of the known impact to date of the COVID-19 pandemic on its business to determine if a circumstance could trigger an impairment loss, and, at this time there have been no events identified that would trigger an impairment.

 

 

Contingent Liability

 

A significant component of the purchase price consideration for the Company’s acquisition of Cure Based Development includes a fixed number of future shares to be issued as well as a variable number of future shares to be issued based upon the post-acquisition entity reaching certain specified future revenue targets, as further described in Note 6. The Company made a determination of the fair value of the contingent liabilities as part of the valuation of the assets acquired and liabilities assumed in the business combination.

 

The Company recognized both the fixed number of shares to be issued, and the variable number of shares to be potentially issued, as contingent liabilities on its consolidated balance sheets. These contingent liabilities were recorded at fair value upon the acquisition date and are remeasured quarterly based on the reassessed fair value as of the end of that quarterly reporting period. Additionally, as the fixed shares were issued on April 19, 2019, the value of the shares at that time, in the amount of $53,215,163, was reclassified from contingent liability to additional paid in capital on the consolidated balance sheet. In addition, the first marking period for the Earnout Shares was December 31, 2019 and based on measurement criteria, 5,127,792 shares were issued on February 27, 2020. The value of the issued Earnout Shares as of February 27, 2020 was $4,620,000 and the decrease in value of $6,924,503 from December 31, 2019 related to those shares was recorded in the Statement of Operations for the three months ended March 31, 2020. Additionally, as the 5,127,792 Earnout Shares were issued on February 27, 2020, the value of the shares in the amount of $4,620,000 was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The second marking period for the Earnout Shares ended December 31, 2020 and based on measurement criteria, 3,348,520 Earnout Shares were issued on March 8, 2021. The second marking period shares increased in value by $3,100,012 during the quarter through the time of issuance and had a value of $11,271,000, which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet.

 

Additionally, for the three months ended March 31, 2021, the remaining contingent liabilities associated with the business combination, after the issuance of the second marking period Earnout Shares, were increased by $5,770,988 to reflect their reassessed fair values as of March 31, 2021. This increase is reflective of a change in value of the variable number of shares from December 31, 2020. In aggregate, the Company incurred an expense of $8,871,000 for the three months ended March 2021 between the increase in the value of the second marking period Earnout Shares and the increase in value of the remaining contingent liabilities. In May 2020, the Company updated the forecasts for performance of the post-acquisition entity based on current trends and performance that would impact the estimated likelihood that the revenue targets disclosed in Note 7 would be met. The primary catalyst for the $5,770,988 increase in contingent liabilities is the change in the Company’s common share price between December 31, 2020 to March 31, 2021 from $2.95 per share to $4.14 per share. These increases or decreases to the contingent liabilities are reflected within Other Income (Expenses) on the condensed consolidated statements of operations.

 

Paycheck Protection Program Loan

 

On April 27, 2020, we received a loan in the principal amount of $1,456,100 (the “SBA Loan”) in consideration of a Promissory Note, under the Paycheck Protection Program (“PPP”), which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). The intent and purpose of the PPP is to support companies, during the COVID-19 pandemic, by providing funds for certain specified business expenses, with a focus on payroll. As a qualifying business as defined by the SBA, the Company is using the proceeds from this loan to primarily help maintain its payroll as it navigates its business with a focus on returning to normal operations. The term of the Promissory Note is two years, though it may be payable sooner in connection with an event of default under the Promissory Note. The SBA Loan carries a fixed interest rate of one percent per year, with the first payment due seven months from the date of initial cash receipt. Under the CARES Act and the PPP, certain amounts of loans made under the PPP may be forgiven if the recipients use the loan proceeds for eligible purposes, including payroll costs and certain rent or utility costs, and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. The Company used the SBA Loan for qualifying expenses and has applied for forgiveness of the SBA Loan in accordance with the terms of the CARES Act.

 

In June 2020, the Payroll Protection Program Flexibility Act (“PPPFA”) was signed into law adjusting certain key terms of loans issued under the PPP. Other changes and modifications of the PPP have occurred since June 2020. As of December 31, 2020 loan payments are deferred for borrowers who apply for loan forgiveness until SBA remits the borrower's loan forgiveness amount to the lender. If a borrower does not apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness (either 8 weeks or 24 weeks) and PPP loans issued prior to June 5, 2020 have a maturity of two years. Based on the submitted application for forgiveness, the Company qualifies for 100% forgiveness of its PPP loan. It is currently under review and the Company is awaiting a response from its lender and the SBA.

 

As the legal form of the Promissory Note is a debt obligation, the Company is accounting for it as debt under ASC 470, Debt and recorded an initial liability of $1,456,100 in the condensed consolidated balance sheet upon receipt of the loan proceeds. The Company is accruing interest over the term of the loan and is not imputing additional interest at a market rate because the guidance on imputing interest in ASC 835-30, Interest excludes transactions where interest rates are prescribed by a government agency. If any amount of the loan is ultimately forgiven, income from the extinguishment of debt would be recognized as a gain on loan extinguishment in the consolidated statement of operations and comprehensive income.

 

Revenue Recognition

 

Under ASC 606, Revenue from Contracts with Customers, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

 

 

Performance Obligations

 

A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The Company meets that obligation when it has shipped products which have been ordered to the customer. The Company has reviewed its various revenue streams for its other contracts under the five-step approach. At March 31, 2021, the Company has no future performance obligations.

 

Allocation of Transaction Price

 

In the Company’s current business model it does not have contracts with customers which have multiple elements as revenue is driven purely by online product sales or purchase order-based product sales. However, at times in the past, the Company has entered into contracts with customers wherein there were multiple elements that may have disparate revenue recognition patterns. In such instances, the Company must allocate the total transaction price to these various elements. This is achieved by estimating the standalone selling price of each element, which is the price at which we sell a promised good or service separately to a customer.

 

Revenue Recognition

 

The Company records revenue from the sale of its products when risk of loss and title to the product are transferred to the customer, which is upon shipping (and is typically FOB shipping) which is when our performance obligation is met. Net sales are comprised of gross revenues less product returns, trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions. These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company currently offers a 60-day, money back guarantee.

 

Regarding sales for services provided, the Company records revenue when the customer has accepted services and the Company has a right to payment. Based on the contracted services, revenue is recognized when the Company invoices customers for completed services at agreed upon rates or revenue is recognized over a fixed period of time during which the service is performed. 

 

Disaggregated Revenue

 

The Company’s product revenue is generated primarily through two sales channels, E-commerce sales (formerly referred to as consumer sales) and wholesale sales. The Company believes that these categories appropriately reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors.

 

A description of the Company’s principal revenue generating activities are as follows:

 

-

E-commerce sales - consumer products sold through the Company’s online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due prior to the date of shipment; and

 

-

Wholesale sales - products sold to the Company’s wholesale customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms vary and can typically be 30 days from the date control over the product is transferred to the customer.

 

 

 

The following table represents a disaggregation of revenue by sales channel:

 

	Three Months ended March 31, 2021	% of total	Three Months ended March 31, 2020	% of total
Wholesale sales	$3,436,176	29.1%	$2,617,860	27.9%
E-commerce sales	8,362,435	70.9%	6,781,176	72.1%
Total net sales	$11,798,611		$9,399,036

 

	Six Months ended March 31, 2021	% of total	Six Months ended March 31, 2020	% of total
Wholesale sales	$6,063,356	25.1%	$5,885,981	30.1%
E-commerce sales	18,063,558	74.9%	13,661,291	69.9%
Total net sales	$24,126,914		$19,547,272

 

Contract Balances

 

Contract assets represent unbilled receivables and are presented within accounts receivable, net on the condensed consolidated balance sheets. Contract liabilities represent unearned revenues and are presented as deferred revenue or customer deposits on the condensed consolidated balance sheets. The Company has no material contract assets nor contract liabilities at March 31, 2021.

 

Cost of Sales

 

The Company’s cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third-party providers, and outbound freight for the Company’s products sales, and includes labor for its service sales. For the Company’s product sales, cost of sales also includes the cost of refurbishing products returned by customers that will be offered for resale, if any, and the cost of inventory write-downs associated with adjustments of held inventories to their net realizable value. These expenses are reflected in the Company’s consolidated statements of operations when the product is sold and net sales revenues are recognized or, in the case of inventory write-downs, when circumstances indicate that the carrying value of inventories is in excess of their net realizable value.

 

Income Taxes

 

The Company is a North Carolina corporation that is treated as a corporation for federal and state income tax purposes. Effective September 30, 2019, the Company abandoned and ceased operations of Beauty and Pinups, LLC, a North Carolina limited liability company (“BPU”), I | M 1, LLC, a California limited liability company(“IM1”), Encore Endeavor 1 LLC, a California limited liability company (“EE1”) and Level H&W, LLC, a North Carolina limited liability company (“Level H&W”). As of October 1, 2019, CBDI and Paw CBD were wholly owned subsidiaries and are disregarded entities for tax purposes and their entire share of taxable income or loss is included in the tax return of the Company and as of March 15, 2021, Therapeutics is also a wholly owned subsidiary and is a disregarded entity for tax purposes and its entire share of taxable income or loss is included in the tax return of the Company.

 

The Company accounts for income taxes pursuant to the provisions of the Accounting for Income Taxes topic of the FASB ASC 740 which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Company uses the inside basis approach to determine deferred tax assets and liabilities associated with its investment in a consolidated pass-through entity. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.

 

Concentrations

 

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and securities.

 

The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. The Company had a $23,138,353 uninsured balance at March 31, 2021 and a $14,287,810 uninsured balance at September 30, 2020.

 

Concentration of credit risk with respect to receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management considers these customer receivables to represent normal business risk. The Company did not have any customers that represented a significant amount of our sales for the three and six months ended March 31, 2021.

 

 

Stock-Based Compensation

 

The Company accounts for its stock compensation under the ASC 718-10-30, Compensation - Stock Compensation using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments.

 

The Company uses the Black-Scholes model for measuring the fair value of options and warrants. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods. The Company recognizes forfeitures when they occur.

 

Earnings (Loss) Per Share

 

The Company uses ASC 260-10, Earnings Per Share for calculating the basic and diluted income (loss) per share. The Company computes basic income (loss) per share by dividing net income (loss) and net income (loss) attributable to common shareholders, after deducting preferred stock dividends, by the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.

 

New Accounting Standards

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The ASU modifies, removes, and adds several disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. The Company adopted ASU 2018-13 on October 1, 2020. The adoption of this standard had no material impact on the Company's consolidated financial statements and disclosures.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes, Simplifying the Accounting for Income Taxes (Topic 740). The ASU eliminates certain exceptions to the guidance in Accounting Standards Codification (ASC or Codification) 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance also clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently in the process of evaluating this standard update.

 

NOTE 2 – MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES

 

The Company has, from time to time, entered into contracts where a portion of the consideration provided by the customer in exchange for the Company's services was common stock, options or warrants (an equity position).  In these situations, upon invoicing the customer for the stock or other instruments, the Company recorded the receivable as accounts receivable other, and used the value of the stock or other instrument upon invoicing to determine the value. If there is insufficient data to support the valuation of the security directly, the Company will value it, and the underlying revenue, on the estimated fair value of the services provided. In determining fair value of marketable securities and investment other securities, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in our assessment of fair value. The Company determines the fair value fair value of marketable securities and investment other securities based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

​

​

 

 

Where an accounts receivable other is settled with the receipt of the common stock or other instrument, the common stock or other instrument was classified as an asset on the consolidated balance sheet as either an investment marketable security (when the customer is a public entity) or as an investment other security (when the customer is a privately held entity). 

 

For the three months ended March 31, 2021 and March 31, 2020 the Company recorded $2,852 and $(813,152), respectively and for the six months ended March 31, 2021 and March 31, 2020 the Company recorded $545,562 and $(875,162), respectively of realized and unrealized gain (loss) on marketable and other securities, including impairments. The realized gain was driven by the sale of our investment in Formula Four Beverages, Inc. that was previously written to zero based on prior information related to the company’s performance and COVID-19 impacts, while the loss in the prior year was driven by the impairment from its investment in Formula Four Beverages, Inc. and Kure Corp.

 

On December 30, 2017, the Company entered into an Agreement with Isodiol International, Inc., whereby the Company provided pharmaceutical grade phytochemical compound development services. As payment for these services, the Company has received 1,226,435 shares of Isodiol's common stock between December 31, 2017 and January 2019. The Company also received 38,095 shares of Isodiol's common stock upon Isodiol’s acquisition of Kure Corp., giving the Company a total of 1,264,530 shares. At March 31, 2021, the Company had 1,042,193 shares valued at $32,034.

 

In September 2020, the Company purchased a membership interest in Adara Sponsor LLC for $250,000, which along with proceeds from other investors was utilized as an investment in Adara Acquisition Corporation (“Adara”), a newly organized blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination (a “SPAC”). On January 13, 2021, the Company executed second tranche subscriptions agreements and funded the remaining $750,000 commitment into Adara Sponsor, LLC. On February 9, 2021, the public shares of Adara began trading on the NYSE. Commencing March 24, 2021, holders of the 11,500,000 units sold in the Adara’s initial public offering could elect to separately trade shares of the Adara Class A common stock and warrants included in the units. The shares of Class A common stock and warrants that were separated now trade on NYSE American LLC under the symbols “ADRA” and “ADRA WS”, respectively. On March 31, 2021, the Company’s implied, indirect ownership in Adara represented 4.4% (633,988 shares) and 10.1% (1 million) of the warrants. As of March 31, 2020 ADRA stock closed at $9.90 while ADRA WS closed at $0.50.

 

The focus of targets to pursue for the business combination are expected to be in the consumer products industry including business in the health and wellness, ecommerce, discretionary spending, information technology sectors and related channels of distribution. While Adara is currently a listed company, the Company’s investment is in Adara Sponsor, LLC and consequently the Company has classified this investment as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the investment, the Company used the value paid, which was the price offered to all third-party investors. The Company assessed the common stock and determined there was not an impairment for the period ended March 31, 2021.

 

The table below summarizes the assets valued at fair value as of March 31, 2021:

 

	In Active Markets for Identical Assets and Liabilities (Level 1)	Significant Other Observable Inputs  (Level 2)	Significant Unobservable Inputs  (Level 3)	Total Fair Value at March 31, 2021
Marketable securities	$32,034	-	$-	$32,034
Investment other securities	-	-	$1,000,000	$1,000,000

 

	Level 1	Level 2	Level 3	Total
Balance at September 30, 2020	$26,472	$-	$250,000	$276,472
Change in value of equities	$2,710	$-	$-	$2,710
Balance at December 31, 2020	$29,181	$-	$250,000	$279,181
Change in value of equities	$2,853	$-	$-	$2,853
Additional Investment	-	-	$750,000	$750,000
Balance at March 31, 2021	$32,034	$-	$1,000,000	$1,032,034

 

 

NOTE 3 – INVENTORY

 

Inventory at March 31, 2021 and September 30, 2020 consists of the following:

 

	March 31,	September 30,
	2021	2020
Finished goods	$3,014,499	$2,706,518
Inventory components	1,527,540	1,982,021
Inventory reserve	(210,494)	(85,179)
Inventory prepaid	478,629	288,178
Total	$4,810,174	$4,891,538

 

Abnormal amounts of idle facility expense, freight, handling costs, scrap, and wasted material (spoilage) are expensed in the period they are incurred.

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Major classes of property and equipment at March 31, 2021 and September 30, 2020 consist of the following:

 

	March 31,	September 30,
	2021	2020
Computers, furniture and equipment	$503,856	$365,638
Manufacturing equipment	2,955,724	2,873,598
Leasehold improvements	849,516	832,465
Automobiles	35,979	24,892
	4,345,075	4,096,594
Less accumulated depreciation	(1,368,171)	(913,106)
Net property and equipment	$2,976,904	$3,183,487

 

Depreciation expense related to property and equipment was $240,517 and $174,206 for the three months ended March 31, 2021 and 2020, respectively and was $473,323 and $287,457 for the six months ended March 31, 2021 and 2020, respectively.

 

NOTE 5 – INTANGIBLE ASSETS

 

On December 20, 2018, the Company completed the Mergers with Cure Based Development and acquired certain assets, including the trademark "cbdMD" and its variants and certain other intellectual property. The trademark is the cornerstone of this subsidiary and is key as the Company creates and distributes products and continue to build this brand. The Company believes the trademark does not have limits on the time it will contribute to the generation of cash flows and therefore has identified these as indefinite-lived intangible assets (see Note 2 for more information).

 

In September 2019, the Company purchased the rights to the trademark name HempMD for $50,000. This trademark will be used in the marketing and branding of certain products to be released under this brand name. The Company believes the trademark does not have limits on the time it will contribute to the generation of cash flows and therefore has identified these as indefinite-lived intangible assets.

 

Intangible assets as of March 31, 2021 and September 30, 2020 consisted of the following:

 

	March 31,	September 30,
	2021	2020
Trademark related to cbdMD	$21,585,000	$21,585,000
Trademark for HempMD	50,000	50,000
Total	$21,635,000	$21,635,000

 

 

NOTE 6 – CONTINGENT LIABILITY

 

As consideration for the Mergers, described in Note 2, the Company had a contractual obligation to issue 15,250,000 shares of its common stock, after approval by its shareholders, to the members of Cure Based Development, issued in two tranches 6,500,000 shares and 8,750,000 shares, both of which are subject to leak out provisions, and the unrestricted voting rights to 8,750,000 tranche of shares will also vest over a five year period and are subject to a voting proxy agreement. The Merger Agreement also provides that an additional 15,250,000 Earnout Shares can be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date.

 

The contractual obligations and earn out provision are accounted for as a contingent liability and fair value is determined using Level 3 inputs, as estimating the fair value of these contingent liabilities require the use of significant and subjective inputs that may and are likely to change over the duration of the liabilities with related changes in internal and external market factors.

 

The initial two tranches totaling 15,250,000 shares have been valued using a market approach method and included the use of the following inputs: share price upon contractual obligation, discount for lack of marketability to address leak out restrictions, and probability of shareholder disapproval. In addition, the 8,750,000 shares in the second tranche also included an input for a discount for lack of voting rights during the vest periods.

 

The Merger Agreement also provides that an additional 15,250,000 Earnout Shares would be issued as part of the consideration for the Mergers, upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date as follows, as measured at four intervals (each a “marking period”): the completion of 12, 24, 42, and 59 calendar months from the Closing Date, and based upon the ratios set forth below:

 

Aggregate Net Revenues		Shares Issued / Each $ of Aggregate Net Revenue Ratio
$1 - $20,000,000		.190625
$20,000,001 - $60,000,000		.0953125
$60,000,001 - $140,000,000		.04765625
$140,000,001 - $300,000,000		.023828125