Annual Statements Open main menu

cbdMD, Inc. - Quarter Report: 2022 June (Form 10-Q)

ycbd20220630_10q.htm

 

 

 

 

Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

☒ 

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

 

 

 

For the quarterly period ended June 30, 2022

 

or

 

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

 

 

 

For the transition period from __________________ to _______________

 

Commission file number 001-38299

 

ycbd_10qimg5.jpg
 

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.

 

60,555,595 shares of common stock are issued and outstanding as of August 11, 2022.

 



 

 

 

TABLE OF CONTENTS

 

   

Page No

 
         

PART I-FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements.

 

5

 
         

ITEM 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

29

 
         

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

36

 
         

ITEM 4.

Controls and Procedures.

 

36

 

PART II - OTHER INFORMATION

 
         

ITEM 1.

Legal Proceedings.

 

37

 
         

ITEM 1A.

Risk Factors.

 

37

 
         

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

37

 
         

ITEM 3.

Defaults Upon Senior Securities.

 

37

 
         

ITEM 4.

Mine Safety Disclosures.

 

37

 
         

ITEM 5.

Other Information.

 

37

 
         

ITEM 6.

Exhibits.

 

38

 
 

 

 

 

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 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 2021” refers to the year ended September 30, 2021, “fiscal 2022” refers to the fiscal year ending September 30, 2022, “first quarter of 2021” refers to the three months ended December 31, 2020, “first quarter of 2022” refers to the three months ended December 31, 2021, “second quarter of 2021” refers to the three months ended March 31, 2021, “second quarter of 2022” refers to the three months ended March 31, 2022, “third quarter of 2021” refers to the three months ended June 30, 2021, and “third quarter of 2022” refers to the three months ended June 30, 2022.

 

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 to market to key digital channels;

   

 

 

our ability to acquire new customers at a profitable rate;

   

 

 

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

 

 

 
 

material risks associated with regulatory environment for CBD, including:

 

 

federal laws as well as FDA or DEA interpretation of existing regulation;

   

 

 

state laws pertaining to industrial hemp and their derivatives;

   

 

 

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;

   

 

 

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, 2021 as filed with the Securities and Exchange Commission (the “SEC”) on December 17, 2021 (the “2021 10-K”), as well as our other filings with the SEC. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.

 

 

 

PART 1 FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

cbdMD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2022 AND September 30, 2021

 

  

(Unaudited)

     
  

June 30,

  

September 30,

 
  

2022

  

2021

 

Assets

        
         

Current assets:

        

Cash and cash equivalents

 $9,553,670  $26,411,424 

Accounts receivable

  1,630,233   1,113,372 

Accounts receivable – discontinued operations

  1,375   10,967 

Marketable securities

  -   33,351 

Investment other securities

  1,000,000   1,000,000 

Inventory

  4,318,204   5,021,867 

Inventory prepaid

  548,580   551,519 

Prepaid sponsorship

  1,749,083   1,212,682 

Prepaid expenses and other current assets

  1,057,183   1,147,178 

Total current assets

  19,858,328   36,502,360 
         

Other assets:

        

Property and equipment, net

  775,477   2,561,574 

Operating lease assets

  4,751,192   5,614,960 

Deposits for facilities

  244,606   529,583 

Intangible assets

  18,111,903   23,003,929 

Goodwill

  11,996,249   56,670,970 

Investment other securities, noncurrent

  1,400,000   - 

Total other assets

  37,279,427   88,381,016 
         

Total assets

 $57,137,755  $124,883,376 

 

See Notes to Condensed Consolidated Financial Statements

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2022 AND September 30, 2021

(continued)

 

  

(Unaudited)

     
  

June 30,

  

September 30,

 
  

2022

  

2021

 

Liabilities and shareholders' equity

        
         

Current liabilities:

        

Accounts payable

 $2,310,244  $2,978,914 

Accrued expenses

  2,250,549   2,727,612 

Operating leases – current portion

  1,155,020   1,151,150 

Note payable

  9,461   59,470 

Total current liabilities

  5,725,274   6,917,146 
         

Long term liabilities:

        

Long term liabilities

  127,949   108,985 

Operating leases - long term portion

  3,982,532   4,859,058 

Contingent liability

  702,000   9,856,000 

Total long term liabilities

  4,812,481   14,824,043 
         

Total liabilities

  10,537,755   21,741,189 
         

cbdMD, Inc. shareholders' equity:

        

Preferred stock, authorized 50,000,000 shares, $0.001

        

par value, 5,000,000 and 5,000,000 shares issued and outstanding, respectively

  5,000   5,000 

Common stock, authorized 150,000,000 shares, $0.001

        

par value, 59,946,090 and 57,783,340 shares issued and outstanding, respectively

  59,946   57,783 

Additional paid in capital

  178,326,685   176,417,269 

Accumulated deficit

  (131,791,631)  (73,337,865)

Total cbdMD, Inc. shareholders' equity

  46,600,000   103,142,187 
         

Total liabilities and shareholders' equity

 $57,137,755  $124,883,376 

 

See Notes to Condensed Consolidated Financial Statements 

 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE three and nine months ended June 30, 2022 and 2021

(Unaudited)

 

   

Three months

   

Three months

   

Nine Months

   

Nine Months

 
   

Ended

   

Ended

   

Ended

   

Ended

 
   

June 30,

   

June 30,

   

June 30,

   

June 30,

 
   

2022

   

2021

   

2022

   

2021

 
                                 

Gross Sales

  $ 8,868,093     $ 11,352,585     $ 28,673,718     $ 36,941,917  

Allowances

    (275,200 )     (792,062 )     (1,130,117 )     (2,254,481 )

Total Net Sales

    8,592,893       10,560,523       27,543,601       34,687,436  

Cost of sales

    2,660,185       3,370,952       10,176,085       10,444,353  

Gross Profit

    5,932,708       7,189,571       17,367,516       24,243,083  
                                 

Operating expenses

    8,282,931       13,865,191       31,690,915       36,846,371  

Impairment of goodwill and other intangible assets

    30,776,436       -       48,959,721       -  

Loss from operations

    (33,126,659 )     (6,675,620 )     (63,283,120 )     (12,603,288 )

Realized and Unrealized (loss) gain on marketable and other securities, including impairments

    -       (18,623 )     (33,352 )     526,940  

Gain (loss) on extinguishment of debt

    -       1,466,113             1,466,113  

Decrease (increase) of contingent liability

    1,943,000       6,871,000       8,246,000       (10,500,000 )

Gain (loss) on sale of assets

    88,769             88,769        

Restructuring expense

    (602,092 )     -       (602,092 )     -  

Other income

    64,390       -       137,377       -  

Interest expense

    (1,551 )     (2,582 )     (6,871 )     (23,573 )

Loss before provision for income taxes

    (31,634,143 )     1,640,288       (55,453,289 )     (21,133,808 )
                                 

Benefit for income taxes

    -       (103,000 )     -       765,000  

Net (Loss) Income

    (31,634,143 )     1,537,288       (55,453,289 )     (20,368,808 )
                                 

Preferred dividends

    1,000,501       560,281       3,001,503       1,220,610  
                                 

Net (Loss) Income attributable to cbdMD, Inc. common shareholders

  $ (32,634,644 )   $ 977,007     $ (58,454,792 )   $ (21,589,418 )
                                 

Net (Loss) Income per share:

                               

Basic earnings per share

    (0.55 )     0.02       (0.99 )     (0.40 )

Diluted earnings per share

    (0.55 )     0.02       (0.99 )     (0.40 )

Weighted average number of shares Basic:

    59,316,762       56,676,326       59,229,208       54,089,263  

Weighted average number of shares Diluted:

    59,316,762       61,431,643       59,229,208       54,089,263  

 

See Notes to Condensed Consolidated Financial Statements 

 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE three and nine months ended June 30, 2022 and 2021

(Unaudited)

 

   

Three months

   

Three months

   

Nine Months

   

Nine Months

 
   

Ended

   

Ended

   

Ended

   

Ended

 
   

June 30,

   

June 30,

   

June 30,

   

June 30,

 
   

2022

   

2021

   

2022

   

2021

 
                                 

Net (Loss) Income

  $ (31,634,143 )   $ 1,537,288     $ (55,453,289 )   $ (20,368,808 )

Comprehensive (Loss) Income

    (31,634,143 )     1,537,288       (55,453,289 )     (20,368,808 )
                                 

Preferred dividends

    (1,000,501 )     (560,281 )     (3,001,503 )     (1,220,610 )

Comprehensive (Loss) Income attributable to cbdMD, Inc. common shareholders

  $ (32,634,644 )   $ 977,007     $ (58,454,792 )   $ (21,589,418 )

 

See Notes to Condensed Consolidated Financial Statements 

 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE nine months ended June 30, 2022 and 2021

(Unaudited)

 

  

Nine Months

  

Nine Months

 
  

Ended

  

Ended

 
  

June 30,

  

June 30,

 
  

2022

  

2021

 

Cash flows from operating activities:

        

Net Loss

 $(55,453,289) $(20,368,808)

Adjustments to reconcile net loss to net cash used by operating activities:

        

Stock based compensation

  424,455   807,523 

Restricted stock expense

  504,650   1,137,583 

Marketing stock amortization

  717,174   660,232 

Issuance of stock / warrants for service

  -   98,605 

Inventory and materials impairment

  878,142   - 

Intangibles Amortization

  607,025   - 

Depreciation

  770,335   719,856 

Impairment of goodwill and other intangible assets

  48,959,721   - 

Increase/(Decrease) in contingent liability

  (8,246,000)  10,500,000 

Realized and unrealized loss of marketable and other securities

  33,350   (526,939)

Termination benefit

  -   495,568 

Extinguishment of Paycheck Protection Program Loan

     (1,466,113)

Amortization of operating lease asset

  863,768   922,057 

Changes in operating assets and liabilities:

        

Accounts receivable

  (116,861)  (556,116)

Deposits

  284,977   261,125 

Inventory

  (174,479)  (135,058)

Prepaid inventory

  2,939   (385,410)

Prepaid expenses and other current assets

  (1,088,579)  (141,393)

Accounts payable and accrued expenses

  (1,149,456)  (603,216)

Operating lease liability

  (872,656)  (846,914)

Deferred revenue / customer deposits

  3,723   4,478 

Collection on discontinued operations accounts receivable

  9,592   428,667 

Deferred tax liability

  -   (765,000)

Cash used by operating activities

  (13,041,469)  (9,759,273)

Cash flows from investing activities:

        

Proceeds from sale of other investment securities

  -   540,000 

Purchase of other investment securities

  -   (750,000)

Proceeds from sale of assets

  (322,017)  - 

Purchase of property and equipment

  (462,221)  (311,572)

Cash provided (used) by investing activities

  (784,238)  (521,572)

Cash flows from financing activities:

        

Proceeds from issuance of preferred stock

  -   15,798,115 

Note payable

  (31,044)  (137,292)

Preferred dividend distribution

  (3,001,003)  (1,220,610)

Cash provided by financing activities

  (3,032,047)  14,440,213 

Net increase (decrease) in cash

  (16,857,754)  4,159,368 

Cash and cash equivalents, beginning of period

  26,411,424   14,824,644 

Cash and cash equivalents, end of period

 $9,553,670  $18,984,012 

 

Supplemental Disclosures of Cash Flow Information:                 

 

   

2022

   

2021

 
                 

Cash Payments for:

               

Interest expense

  $ 6,817     $ 23,573  
                 

Non-cash financial/investing activities:

               

Issuance of Contingent earnout shares:

  $ 908,000     $ 12,596,089  

Warrants issued to representative

  $ -     $ 254,950  

                  

See Notes to Condensed Consolidated Financial Statements 

 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY

FOR THE nine months ended June 30, 2022

(Unaudited)

 

                                   

Additional

                 
   

Common Stock

   

Preferred Stock

   

Paid in

   

Accumulated

         
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Deficit

   

Total

 

Balance, September 30, 2021

    57,783,340     $ 57,783       5,000,000       5,000     $ 176,417,269     $ (73,337,865 )   $ 103,142,187  

Issuance of Common stock

    494,630       495       -       -       404,505       -       405,000  

Issuance of options for share based compensation

    -       -       -       -       505,466       -       505,466  

Issuance of restricted stock for share based compensation

    -       -       -       -       508,754       -       508,754  

Preferred dividend

    -       -       -       -       -       (1,000,502 )     (1,000,502 )

Net Loss

    -       -       -       -       -       (19,160,904 )     (19,160,904 )

Balance, December 31, 2021

    58,277,970     $ 58,278       5,000,000       5,000     $ 177,835,993     $ (93,499,271 )   $ 84,400,000  

Issuance of Common stock

    1,074,240       1,074       -       -       659,926       -       661,000  

Issuance of options for share based compensation

    -       -       -       -       291,630       -       291,630  

Issuance of restricted stock for share based compensation

    -       -       -       -       328,514       -       328,514  

Preferred dividend

    -       -       -       -       -       (1,000,500 )     (1,000,500 )

Net Loss

    -       -       -       -       -       (4,657,215 )     (4,657,216 )

Balance, March 31, 2022

    59,352,210     $ 59,352       5,000,000       5,000     $ 179,116,064     $ (99,156,986 )   $ 80,023,429  

Issuance of Common stock

    593,880       594       -       -       177,406       -       178,000  

Issuance of options for share based compensation

    -       -       -       -       (373,168 )     -       (373,168 )

Issuance of restricted stock for share based compensation

    -       -       -       -       (593,617 )     -       (593,617 )

Preferred dividend

    -       -       -       -       -       (1,000,501 )     (1,000,501 )

Net Loss

    -       -       -       -       -       (31,634,143 )     (31,634,143 )

Balance, June 30, 2022

    59,946,090     $ 59,946       5,000,000       5,000     $ 178,326,685     $ (131,791,631 )   $ 46,600,000  

 

See Notes to Condensed Consolidated Financial Statements

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY

FOR THE nine months ended June 30, 2021

(Unaudited)

 

                                   

Additional

                 
   

Common Stock

   

Preferred Stock

   

Paid in

   

Accumulated

         
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

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       -       15,795,815  

Issuance of options for share based compensation

    -       -       -       -       219,875       -       219,875  

Issuance of restricted stock for share based compensation

    -       -       -       -       15,279       -       15,279  

Preferred dividend

    -       -       -       -       -       (100,050 )     (100,050 )

Net 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       -       15,795,815  

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 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  

Issuance of Common stock

    608,528       609       -       -       1,471,991       -       1,472,600  

Exercise of options for share based compensation

    -       -       -       -       355,565       -       355,565  

Issuance of restricted stock for share based compensation

    27,500       28       -             590,264       -       590,291  

Preferred dividend

    -       -       -       -       -       (560,281 )     (560,281 )

Net Income

    -       -       -       -       -       1,537,288       1,537,288  

Balance, June 30, 2021

    56,973,815     $ 56,975       2,800,000       2,800     $ 158,198,042     $ (68,977,784 )   $ 89,280,032  

 

See Notes to Condensed Consolidated Financial Statements  

 

 

cbdMD, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE three and nine months ended June 30, 2022 and 2021(unaudited)

 

 

NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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 “Closing Date”), 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 in April of 2019, the Company issued 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 4,338,302 shares remain subject to a voting proxy agreement as of June 30,2022, as well as to issue another 15,250,000 shares of our common stock (the “Earnout Shares”) in the future upon certain earnout goals (the “Earnout Rights”) being achieved within five years from the closing of the Mergers.

 

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. The products manufactured by and for the Company comply with the 2018 Farm Bill - our full spectrum products contain trace amounts of THC under the 0.3% by dry weight limit in the 2018 Farm Act while our broad spectrum products are non-psychoactive as they do not contain detectable levels of tetrahydrocannabinol (THC).

 

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. (“Paw CBD”) as a separate wholly owned subsidiary on October 22, 2019, to take advantage of its early mover status in the CBD animal health industry. On March 15, 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.

 

In July 2021, the Company acquired the assets of Twenty Two Capital, LLC (“Twenty Two”) d/b/a directcbdonline.com (“DCO”). This business operates a CBD marketplace through directcbdonline.com. In addition to the revenue contribution from the business the Company believes this acquisition will provide additional insight on consumer data and industry trends.

 

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 2021 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of consolidated financial position and the consolidated results of operations for the interim periods presented have been reflected herein. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2021 as reported in the 2021 10-K have been omitted.

 

Principles of Consolidation

 

The condensed 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.

 

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 the 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 condensed 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 intangibles 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.

 

While the Company has been relatively successful in navigating the impact of COVID-19, it had previously been affected by temporary manufacturing closures, changes in product distribution and employment and compensation adjustments. There are also ongoing related risks to the Company’s business depending on any resurgence of the pandemic. The Company continues to monitor macroeconomic conditions to remain flexible and to optimize and evolve its business as appropriate.

 

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.

 

12

 

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 June 30, 2022 and September 30, 2021, we had an allowance for doubtful accounts of $18,156 and $3,633, 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 negotiate the fee based on the market. The arrangement with the payment processors requires that the Company pay a fee between 2.6% and 5.0% 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, as well as a calculated reserve which some payment processors hold back. Fees and reserves can change periodically with notice from the processors. At June 30, 2022, the receivable from payment processors included approximately $298,659 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.

 

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, or the remaining economic life of the asset, whichever is shorter. 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.

 

13

 

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. 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 the 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 on its business to determine if a circumstance could trigger an impairment loss. See Note 5 for further information on the impairment testing procedures performed.

 

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. Prior to December 31, 2021, the Company employed 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. The Company performed 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. The annual impairment analysis included a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, the Company reviewed 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, the Company would analyze various aspects including revenues from the business, associated with the intangible assets. In addition, intangible assets were tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. The Company analyzed a variety of factors on its business to determine if a circumstance could trigger an impairment loss, and, at this time and based on the information presently known, has determined that is it more likely than not that an impairment loss has occurred. See Note 5 more further information on the impairment testing procedures performed at December 31, 2021 and the Company’s decision to change from indefinite to definite lived status for its trademarks. The Company now accounts for its trademarks in accordance with Accounting Standards Codification (ASC) Topic 360, Property, Plant and Equipment. The Company began amortizing its trademarks over 20 years beginning January 1, 2022 and will perform impairment tests as prescribed by ASC 360, which states that impairment testing should be completed whenever events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. If there are indications that the asset’s carrying value may not be recoverable, there are two further steps involved in long-lived asset impairment testing. Step I of the impairment test, as per ASC 360, involves estimating the Recoverable Amount of the Asset Group and determining the potential for impairment. Step II of the impairment test, as per ASC 360, if necessary, involves quantifying the fair value of the asset group.  The Company notes that there are no indications of impairment related to its trademarks as of June 30, 2022.

 

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.

 

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 Company used the SBA Loan for qualifying expenses and on May 17, 2021 it received notice from the SBA that the loan had been forgiven. The Company subsequently booked a $1,466,113 gain for unpaid principal and accrued interest.

 

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.

 

14

 

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 June 30, 2022, the Company has no unfulfilled 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.

 

Revenue Recognition

 

The Company records revenue from the sale of its products when its customer obtains control, 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

 

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.

 

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 June 30, 2022.

 

15

 

The following tables represent a disaggregation of revenue by sales channel:

 

  

Three Months

      

Three Months

     
  

Ended

      

Ended

     
  

June 30,

      

June 30,

     
  

2022

  

% of total

  

2021

  

% of total

 
                 

Wholesale sales

 $2,079,592   24.2% $2,740,523   26.0%

E-commerce sales

  6,513,301   75.8%  7,820,000   74.0%

Total Net Sales

 $8,592,893   100.0% $10,560,523   100.0%

 

  

Nine Months

      

Nine Months

     
  

Ended

      

Ended

     
  

June 30,

      

June 30,

     
  

2022

  

% of total

  

2021

  

% of total

 
                 

Wholesale sales

 $7,382,880   26.8% $9,049,068   26.1%

E-commerce sales

  20,160,721   73.2%  25,638,368   73.9%

Total Net Sales

 $27,543,601   100.0% $34,687,436   100.0%

 

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. 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 an $8,644,186 uninsured balance at June 30, 2022 and a $23,508,953 uninsured balance at September 30, 2021.

 

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 nine months ended June 30, 2022.

 

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.

 

16

 

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.

 

Liquidity and Going Concern Considerations

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company experienced a loss of $59,939,934 for the nine months ended June 30, 2022. Excluding one time non-cash goodwill and intangibles impairment charges of $48,959,721, the Company's loss was $10,980,213, resulting in working capital of $14,133,054.

 

While the Company is taking strong action, believes in the viability of its strategy and path to profitability, and in its ability to raise additional funds, there can be no assurances to that effect.  The Company’s working capital position may not be sufficient to support the Company’s daily operations for the twelve months subsequent to the issuance of these quarterly financial statements. The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability and the ability to acquire additional funding. These and other factors raise potential concern about the Company’s ability to continue as a going concern within twelve months after the date that the quarterly financial statements are issued. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result in the Company not being able to continue as a going concern

 

New Accounting Standards

 

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. The adoption of this standard had no material impact on the Company's consolidated financial statements and disclosures.

 

 

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 of marketable securities and investment other securities based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

 

 

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

  

 

 

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

  

 

 

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

 

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 June 30, 2022 and 2021, the Company recorded $0 and $2,852, respectively, and for the nine months ended June 30, 2022 and 2021 the Company recorded $(33,350) and $545,562 respectively, of realized and unrealized gain (loss) on marketable and other securities, including impairments. The realized loss in the first quarter of fiscal 2022 was a result of marking the Company’s holdings of 1,042,193 shares of Isodiol International, Inc. (“Isodiol”) down to zero after Isodiol was delisted from the TSX during December 2021. The gain in the prior year 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.

 

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. Certain affiliates of the Company have also invested in 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 June 30, 2022, the Company’s implied, indirect ownership in Adara represented 4.4% (633,988 shares) and 10.1% (1 million) of the warrants. As of June 30, 2022, ADRA stock closed at $9.89 while ADRA WS closed at $0.18.  On June 22, 2022, the Company executed a transfer agreement with affiliates of Adara Sponsor, LLC whereby the Company's interest would be transferred to the affiliates of Adara Sponsor, LLC upon Adara's acquisition of Allliance Entertainment, Inc. (the "Target") in consideration of the Company's original purchase price. As a result of the SEC litigation against our former CEO, the Target provided a demand to Adara that it required cbdMD and Mr. Sumichrast to dispose of our interests in Adara Sponsor, LLC as a condition of proceeding with any business combination. On June 23, 2022, Adara announced it had entered into business combination agreements with the Target subject to a number of conditions to closing, including shareholder SEC approval. There are no assurances the business combination will be completed. If the business combination is not completed, Adara will continue to pursue other targets for a potential business combination.

 

Adara’s 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.

 

On April 7, 2022, CBD Industries, LLC entered into an asset sale agreement to sell substantially all its manufacturing assets to a subsidiary of Steady State, LLC ("Steady State"). The equipment sale is initially valued at approximately $1.8 million for accounting purposes, the sale price consisting of products to be provided to the Company under the manufacturing and supply agreement and $1.4 million of which the Company invested into Steady State in the form of an equity investment consistent with the terms of Steady State's recently completed series C financing. The Company has classified this investment as Level 3 for fair value measurement purposes as there are no observable inputs and has included in noncurrent assets on the accompanying condensed consolidated balance sheets as the company intends to hold this investment for longer than a year.

 

 

 

 

In valuing both investments, the Company used the value paid, which was the price offered to all third-party investors. The Company also assessed the common stock of Adara and determined there was not an impairment for the period ended June 30, 2022.The table below summarized the assets valued at fair value as of June 30, 2022:

 

  

In Active

             
  

Markets for

  

Significant Other

  

Significant

     
  Identical Assets  Observable  Unobservable     
  and Liabilities  Inputs  Inputs     
  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

 

Investment other securities

 $-  $-  $1,000,000  $1,000,000 
                 

Balance at September 30, 2021

  33,351   -   1,000,000   1,033,351 

Change in value of equities

  (33,351)  -   -   (33,351)

Additional Investment

  -   -   -   - 

Balance at December 31, 2021

 $-  $-  $1,000,000  $1,000,000 

Change in value of equities

  -   -   -   - 

Additional Investment

  -   -   -     

Balance at March 31, 2022

 $-  $-  $1,000,000  $1,000,000 

Change in value of equities

  -   -   -   - 

Additional Investment

  -   -   1,400,000   1,400,000 

Balance at June 30, 2022

 $-  $-  $2,400,000  $2,400,000 

 

 

NOTE 3 - INVENTORY

 

Inventory at June 30, 2022 and September 30, 2021 consists of the following:

 

  

June 30,

  

September 30,

 
  

2022

  

2021

 

Finished Goods

 $3,083,043  $3,362,897 

Inventory Components

  1,314,646   1,729,176 

Inventory Reserve

  (79,485)  (70,206)

Inventory prepaid

  548,580   551,519 

Total Inventory

 $4,866,783  $5,573,386 

 

Abnormal amounts of idle facility expense, freight, handling costs, scrap and wasted material (spoilage) are expensed in the period they are in incurred and no material expenses related to these items occurred in the three months ended June 30, 2022.

 

 

NOTE 4 PROPERTY AND EQUIPMENT

 

Major classes of property and equipment at June 30, 2022 and September 30, 2021 consist of the following:

 

  

June 30,

  

September 30,

 
  

2022

  

2021

 

Computers, furniture and equipment

 $861,731  $549,910 

Manufacturing equipment

  284,275   2,968,838 

Leasehold improvements

  487,081   870,621 

Automobiles

  35,979   35,979 
   1,669,066   4,425,348 

Less accumulated depreciation

  (893,589)  (1,863,774)

Property and equipment, net

 $775,477  $2,561,574 

 

Depreciation expense related to property and equipment was $158,555 and $246,532 for the three months ended June 30, 2022 and 2021, respectively and was $770,335 and $719,856 for the nine months ended June 30, 2022 and 2021, respectively.  During the quarter, the Company sold substantially all the assets of its manufacturing facility and as a result the gross investment and accumulated depreciation was removed from the balance sheet, reducing net PP&E.

 

18

 
 

NOTE 5 GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

The Company had goodwill at December 31, 2021 of $56,670,970. The Company performs a Step 0 goodwill impairment analysis at least annually following the steps laid out in ASC 350-20-35-3C. 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 goodwill. From time to time the Company also evaluates goodwill impairment on a quarterly basis if any triggering events have occurred that would require such analysis. For the three months ended December 31, 2021, the Company performed a Step 0 goodwill impairment analysis on consolidated goodwill and determined that a triggering event had occurred to necessitate performing the quantitative impairment test. After performing the quantitative impairment test in accordance with ASC 350-20-35-3C, the Company determined that goodwill was impaired by $13,898,285. The Company has recorded this impairment to reduce total goodwill on its condensed consolidated balance sheets and has recorded the corresponding impairment expense on its condensed consolidated statement of operations as of December 31, 2021. The Company performed the same analysis as of June 30, 2022 and determined that goodwill was impaired by $30,776,436. The Company has recorded this impairment to reduce total goodwill on its condensed consolidated balance sheets and has recorded the corresponding impairment expense on its condensed consolidated statement of operations as of June 30, 2022.

 

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 believed the trademark did not have limits on the time it would contribute to the generation of cash flows and therefore identified these as indefinite lived intangible assets.

 

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. At the time of acquisition, 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.

 

In July 2021, the Company completed the acquisition of DCO and acquired certain assets, including the trade name, domains and certain other intellectual property. The tradename will be used in marketing and branding of the website. The Company believes the trade name has a 10 year life. In addition to the trade name, DCO has a technology platform used to market to its customer and the Company believes it has a 4 year life.

 

As of December 31, 2021, the Company has re-assessed the “cbdMD” and “HempMD” trademarks and have determined that the trademarks should be classified as definite lived intangible assets with useful lives of 20 years versus indefinite lived intangible assets. The Company used a variety of factors in determining the reclassifications and have made the reclassifications following guidance prescribed by ASC 350-30-35-17, which states that when a reporting entity subsequently determines that in indefinite-lived intangible asset has a finite useful life, the reporting entity should test the asset for impairment as an indefinite lived asset prior to commencing amortization. As of December 31, 2021, the Company has prepared a tradename impairment analysis in accordance with ASC 350 and has determined that the “cbdMD” trademark was impaired by $4,285,000. The Company has recorded this impairment charge as a reduction in the carrying value of the intangible assets on its condensed consolidated balance sheets with the corresponding impairment expense recorded on its condensed consolidated statements of operations. The Company began amortizing the trademarks over their useful lives of 20 years as of January 2022.

 

Intangible assets as of June 30, 2022 and September 30, 2021 consisted of the following:

 

  

June 30,

  

September 30,

 
  

2022

  

2021

 

Trademark related to cbdMD

 $17,300,000  $21,585,000 

Trademark for HempMD

  50,000   50,000 

Technology Relief from Royalty related to DirectCBDOnline.com

  667,844   667,844 

Tradename related to DirectCBDOnline.com

  749,567   749,567 

Amortization of definite lived intangible assets:

  (655,508)  (48,482)

Total

 $18,111,903  $23,003,929 

 

Amortization expense related to definite lived intangible assets was $277,354 and $0 for the three months ended June 30, 2022 and 2021, respectively and was $607,025 and $0 for the nine months ended June 30, 2022 and 2021, respectively. 

 

19

 
 

NOTE 6 CONTINGENT CONSIDERATION

 

As consideration for the Mergers, described in Note 1, 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 were 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

 .23828125 

    

For clarification purposes, the Aggregate Net Revenues during a Marking Period shall be multiplied by the applicable Shares Issued/Each $ of Aggregate Net Revenue Ratio, minus, the number of shares issued as a result of Aggregate Net Revenues during the prior marking periods.

 

The issuance of the initial 15,250,000 shares and the 15,250,000 Earnout Shares were approved by the Company’s shareholders in April 2019. The initial shares were issued upon shareholder approval on April 19, 2019 and had a carrying value of $ 53,215,163. Additionally, as the 15,250,000 initial shares were issued, the value of the shares in the amount of $53,215,163 was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet.The third quarter of the third marketing period ended on September 30, 2021 and based on the measurement criteria an additional 466,713 Earnout Shares were earned and issued in December 2021. These shares decreased in value by $366,841 during the quarter through the time of issuance and had a value of $405,000, which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The fourth quarter of the third marketing period ended on December 31, 2021 and based on the measurement criteria an additional 444,243 Earnout Shares were earned and issued in March 2022. These shares increased in value by $41,914 during the quarter through the time of issuance and had a value of $325,000, which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The fifth quarter of the third marketing period ended on March 31, 2022 and based on the measurement criteria an additional 458,877 Earnout Shares were earned and issued in May 2022. These shares decreased in value by $90,792during the quarter through the time of issuance and had a value of $178,000, which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet.

 

The third marking period was originally an 18 month period commencing on January 1, 2021 and ending on June 30, 2022 (the “Third Marking Period End Date”), after which time the determination of the issuance of any remaining Earnout Shares would be made pursuant to the terms of the Merger Agreement. On March 31, 2021 the Company entered into Addendum No. 1 to the Merger Agreement (“Addendum No. 1”) with the holders of the remaining Earnout Rights which amended the measurement periods within the third marking period to change the determination of the aggregate net revenues within the third marking period to a quarterly basis for each of the six fiscal quarters within the third marking period, beginning with the quarter ended March 31, 2021, instead of following Third Marking Period End Date. This change in the measurement date, however, has no effect on the number of remaining Earnout Shares issuable under the Earnout Rights and no effect on the earnout targets; Addendum No. 1 simply changes the physical issuance date(s) of the remaining Earnout Shares, if in fact, such shares are earned pursuant to the terms of the Merger Agreement. Addendum No. 1 did not change any of the terms of the fourth marking period (as that term is defined in the Merger Agreement). This change did not impact the fair value of the contingent liability. The value of the contingent liability was $702,000 and $9,440,000 at June 30, 2022 and September 30, 2021, respectively. At June 30, 2022, up to 4,338,302 remaining Earnout Shares are subject to issuance by the Company.

 

20

 

As part of the Twenty Two acquisition in July 2021, the Company has a contractual obligation to issue up to an additional 200,000 shares of its common stock as additional consideration, dependent upon the acquisition entity meeting future revenue targets. Under GAAP the Company is required to record a non-cash contingent liability associated with the Twenty Two Earnout Shares and at the date of the acquisition, recorded a total contingent liability of $488,561. Under GAAP the Company is obligated to reassess the obligations associated with the Twenty Two Earnout Shares on a quarterly basis and, in the event its estimate of the fair value of the contingent consideration changes, the Company will record increases or decreases in the fair value as an adjustment to earnings. In particular, changes in the market price of the Company’s 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 the Company’s net loss or profit for the period. At September 30, 2021, the Company recorded a decrease in value of the contingent liability of $73,561 related to a decrease in the market price of our common stock, which adjusted the total contingent liability related to the Twenty Two Earnout Shares to $416,000. At December 31, 2021, the Company recorded a decrease in value of the contingent liability of $255,000 related to a decrease in the market price of our common stock, which adjusted the total contingent liability related to the Twenty Two Earnout Shares to $161,000. At March 30, 2022 the Company recorded a decrease in value of the contingent liability of $148,000 related to a decrease in the market price of our common stock, which adjusted the total contingent liability related to the Twenty Two Earnout Shares to $13,000. At June 30, 2022, the Company recorded a decrease in value of the contingent liability of $13,000 related to a decrease in the market price of our common stock, which adjusted the total contingent liability related to the Twenty Two Earnout Shares to $0.

 

In November of 2021 the Company entered into a contractual obligation to issue up to 120,000 RSUs to an employee. During the twelve month period ending December 31, 2022, the employee shall receive RSUs that are dependent upon a minimum $3 million and up to $8 million of net sales generated by the employee through accounts established and opened by the employee. The shares will be subject to meeting the minimum $3 million of net sales as well as to calculations including volume-weighted average stock price minimum and maximum. As of December 31, 2021 the estimated revenue target to be met by the employee through December 31, 2022 was below the minimum threshold for earning RSUs, and therefore, the Company recorded a zero liability related to this contingent liability at December 31, 2021. During the three months ended March31, 2022,the employee resigned their position with the Company. As such, this contractual obligation was terminated. 

 

In April 2022, the Company entered into a contractual obligation to issue up to 100,000 options to an employee.  The shares are subject to meeting a minimum direct to consumer revenue of $12.0 million for the December 2022 calendar quarter. The Company is not expecting to meet this revenue metric for the December 2022 calendar quarter and has therefore valued this liability at $0 as of June 30, 2022. 

 

 

NOTE 7 RELATED PARTY TRANSACTIONS

 

As noted in Note 2, the Company, and a number of its affiliates have invested into Adara through Adara Sponsor.

 

 

NOTE 8 SHAREHOLDERS EQUITY

 

Preferred Stock – The Company is authorized to issue 50,000,000 shares of preferred stock, par value $0.001 per share. In October 2019, the Company designated 5,000,000 of these shares as 8.0% Series A Cumulative Convertible Preferred Stock. Our 8.0% Series A Cumulative Convertible Preferred Stock ranks senior to our common stock for liquidation or dividend provisions and holders are entitled to receive cumulative cash dividends at an annual rate of 8.0% payable monthly in arrears for the prior month. The Company reviewed ASC 480Distinguishing Liabilities from Equity in order to determine the appropriate accounting treatment for the preferred stock and determined that the preferred stock should be treated as equity. There were 5,000,000 shares of 8.0% Series A Cumulative Convertible Preferred Stock issued and outstanding at June 30, 2022 and September 30, 2021.

 

The total amount of preferred dividends declared and paid were $1,000,501 and $560,281, respectively, for the three months ended June 30, 2022 and 2021. The total amount of dividends declared and paid were $3,001,503 and $1,220,610 for the nine months ended June 30, 2022 and June 30, 2021, respectively.

 

Common Stock – The Company is authorized to issue 150,000,000 shares of common stock, par value $0.001 per share. There were 59,946,090 and 57,783,340 shares of common stock issued and outstanding at June 30, 2022 and September 30, 2021, respectively.   

 

Preferred stock transactions:

 

The Company had no preferred stock transactions in the three and nine months ended June 30, 2022.

 

In the nine months ended June 30, 2021:

 

On December 8, 2020, the Company completed a follow-on firm commitment underwritten public offering of 2,300,000 shares of its 8.0% Series A Cumulative Convertible Preferred Stock for aggregate gross proceeds of $17.25 million. The Company received approximately $15.8 million in net proceeds after deducting underwriting discounts and commissions. The Company also issued to the representative of the underwriters warrants to purchase in aggregate 150,502 shares of common stock with an exercise price of $3.74. The warrants were valued at $254,950 and expire on December 8, 2025.

 

Common stock transactions:

 

In the nine months ended June 30, 2022:

 

In May 2022, the Company issued 458,887 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.

 

In March 2022 the Company issued 444,243 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.

 

In January 2022, the Company issued 30,000 shares of restricted stock awards to six employees. The stock awards were valued at the fair market price of $29,250 and vested at the grant date.

 

In January 2022, the Company issued 320,000 shares to a professional athlete in conjunction with an amendment to the athlete’s sponsorship agreement as referenced in Note 11. The stock grant was valuated at the fair market price of $336,000 upon issuance and will be amortized over the remaining term of the agreement.

 

On December 28, 2021, the Company issued 466,713 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.

 

In October 2021, the Company issued 25,000 shares of restricted common stock to an executive officer of the Company, subject to vesting on January 1, 2022.

 

21

 

In the nine months ended June 30, 2021:

 

In June 2021, the Company issued 25,000 shares of restricted stock awards in connection with a consulting arrangement with an industry professional. The Company recorded a total prepaid expense of $80,500 in conjunction with the issuance of shares and intends to amortize this over the term of the agreement.

 

In May 2021, the Company issued 562,278 common shares in connection with the Earnout Shares as referenced in Note 6.

 

In April 2021, the Company entered into an endorsement agreement with a professional athlete. As part of the endorsement agreement, the Company issued 40,000 common shares of restricted common stock. The Company recorded $143,600 prepaid expense and amortized over the term of the agreement.

In March 2021, the Company issued 180,000 shares of restricted common stock to a professional athlete to completely satisfy a $800,000 obligation due between July and December of 2021. The Company recorded a total prepaid expense of $649,800 in conjunction with the issuances of shares and intends to amortize this over the term of the athlete’s agreement.

In March 2021, the Company issued 27,000 of restricted stock awards to the Company’s board of directors. Two thousand of the shares vested at the time of the grant, while the balance vest one fourth on June 30, 2021, one fourth, on September 30, 2021, one fourth on December 31, 2021, and one fourth on March 31, 2022. The stock awards were valued at the fair market price of $118,800 upon issuance and will amortize over the individual vesting periods.

In March 2021, the Company issued 3,348,520 shares of common stock in connection with the Earnout Shares as referenced in Note 6.

 

In February 2021 as partial compensation pursuant to the terms of a Personal Services Agreement for the endorsement of the Company’s products, the Company issued 40,000 common shares. The Company recorded a total prepaid expense of $155,200 in conjunction with the issuance of shares.

 

In January 2021 the Company issued 167,500 of restricted stock awards to an aggregate of 15 employees. A majority vested immediately with the balance vesting by April 6, 2021. The stock awards were valued at the fair market price of $494,125 upon issuance and amortized over the individual vesting periods.

 

In October 2020 the Company issued 50,000 of restricted stock awards to an executive officer, subject to a multi-year vesting schedule with a minimum one year before the first tranche vests as noted below in Note 9.

 

Stock option transactions:

 

In the nine months ended June 30, 2022:

 

In May 2022, the Company granted a new executive an aggregate of 405,000 common stock options. The options vest equally over 1, 2, and 3 years from the grant date. The options have a strike price $0.84 and a five year term. The total expense of these options totaled $176,985 and will be amortized over the term of the vesting periods.

 

In April 2022, the Company issued 200,000 options to a consultant as part of an advisory agreement under the Company's Equity Compensation Plan. Fifty thousand of the shares vested upon the grant, 50,000 vest and 6 months from the effective date and 100,000 upon renewal of the consulting agreement in March 2023. The options have a strike price of $1 and five year term. The total expense of these options totaled $131,300 and will be amortized over the term of the vesting periods.

 

In April 2022, the Company issued 100,000 common stock options to an employee that vest upon the Company achieving certain direct to consumer revenue growth targets for the quarter ended December 2022. The options have a $1 strike price. The Company performs analysis on these options and as of June 30, 2020 no expense was ascribed to these options.

 

In March 2022, the Company granted its board of directors an aggregate of 120,000 common stock options. The options vested immediately, have a strike price of $0.818 and a five-year term. The Company has recorded a total prepaid expense of $57,000 and intends to amortize the expense over the 12-month board term.

 

In January 2022, the Company granted an aggregate of 130,000 common stock options to a group of 9 employees.  These options vest upon grant and the Company has recorded an expense for these options of $79,500 for the three months ended June 30, 2022

 

In October 2021, the Company granted an aggregate of 75,000 common stock options to an executive officer. These options vest on October 1, 2022. The Company has recorded an expense for these options of $23,025 and $46,050 for the three and nine months ended June 30, 2022.

 

In the nine months ended June 30, 2021:

 

In June 2021, the Company entered into a consulting arrangement with an industry professional. As part of the agreement, the Company issued 50,000 options and recorded total prepaid expenses of $125,250 and intends to amortize over the 12-month vesting term.

 

In April 2021, the Company issued 750,000 common stock options to an executive officer in conjunction with an Amended and Restated Executive Employment Agreement. The common stock options vest in three equal tranches, the first of which vests on January 1, 2022; the second on January 1, 2023; and the third on January 1, 2024, both under the Corporations 2021 Equity Compensation Plan. The Company has recorded an expense of $195,346 for the three months ended June 30, 2021 for these options.

 

In March 2021, the Company granted its board of directors an aggregate of 150,000 common stock options. The options vested immediately, have a strike price of $4.40 and a five-year term. The Company has recorded a total prepaid expense of $395,850 and intends to amortize the expense over the 12-month board term.

 

In January 2021, the Company granted an aggregate of 80,000 common stock options to three employees. The options vest in three equal tranches, the first on April 15, 2021, the second on April 15, 2022 and the third on April 14, 2023 and have an exercise price of $3.10 per share and a term of 10 years. The Company has recorded an expense of $66,967 for the three months ended June 30, 2021 for these options.

 

In October 2020, the Company granted an aggregate of 350,000 common stock options to an executive officer. The options vest in three equal tranches, the first on October 1, 2021, the second on October 1, 2022 and the third on October 1, 2023, and have an exercise price of $3,50, $5.00, and $6.50 per share and a term of 5 years. The Company has recorded an expense for these options of $31,054 for both the three months ended December 31, 2021 and 2020, respectively.

 

The expected volatility rate was estimated based on a weighted average mix of the volatilities of the Company and a peer group of companies in similar industries. The expected term used was the full term of the contract for the issuances. The risk-free interest rate for periods within the contractual life of the option is based on U.S. Treasury securities. The pre-vesting forfeiture rate of zero is based upon the experience of the Company. As required under ASC 718, the Company will adjust the estimated forfeiture rate to its actual experience. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.

 

The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the three months ended June 30, 2022 and 2021:

 

  

June 30,

  

June 30,

 
  

2022

  

2021

 

Weighted average exercise price

 

0.844 -1.0000

  $3.91 

Risk free interest rate

  2.56% - 2.83%   0.16% - 0.85% 

Volatility

  101.23% - 102.00  100.72% - 105.43% 

Expected term (in years)

  2.5 - 4   2.5 - 6.2 

Dividend yield

 

None

  

None

 

 

22

 

Warrant Transactions:

 

The Company has no warrant transactions during the three and nine months ended June 30, 2022.

 

In the nine months ended June 30, 2021:

 

In December 2020 in relation to the follow-on firm commitment underwritten public offering of the 8.0% Series A Cumulative Convertible Preferred Stock, the Company issued to the representative of the underwriters warrants to purchase in aggregate 150,502 shares of common stock with an exercise price of $3.74. The warrants expire on December 8, 2025.

 

The following table summarizes the inputs used for the Black-Scholes pricing model on the warrants issued in the nine months ended June 30, 2022 and 2021:

 

  

June 30,

 
  

2021

 

Weighted average exercise price

 $3.74 

Risk free interest rate

  0.39%

Volatility

  103.42%

Expected term (in years)

  2.8 

Dividend yield

 

None

 

 

 

NOTE 9 STOCK BASED COMPENSATION

 

Equity Compensation Plan – On June 2, 2015, the Board of Directors of the Company approved the 2015 Equity Compensation Plan (“2015 Plan”). The 2015 Plan initially made 1,175,000 common stock shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The number of shares of common stock available for issuance under the 2015 Plan shall automatically increase on the first trading day of October each calendar year during the term of the 2015 Plan, beginning with calendar year 2016, by an amount equal to one percent (1%) of the total number of shares of common stock outstanding on the last trading day in September of the immediately preceding fiscal year, but in no event shall any such annual increase exceed 100,000 shares of common stock. On April 19, 2019, shareholders approved an amendment to the 2015 Plan and increased the number of shares available for issuance under the 2015 Plan to 2,000,000 and retained the annual evergreen increase provision of the plan.

 

On January 8, 2021, the Company’s Board of Directors approved the 2021 Equity Compensation Plan (the “2021 Plan”) and it was subsequently approved by its shareholders at its annual meeting held on March 12, 2021. The purpose of the 2021 Plan is to advance the interests of the Company by providing an incentive to attract, retain and motivate highly qualified and competent persons who are important to it and upon whose efforts and judgment the success of the Company is largely dependent. The 2021 Plan made 5,000,000 common shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The 2021 Plan also contains an “evergreen formula” pursuant to which the number of shares of common stock available for issuance under the 2021 Plan will automatically increase on October 1 of each calendar year during the term of the 2021 Plan, beginning with calendar year 2022, by an amount equal to 1.0% of the total number of shares of common stock outstanding on September 30 of such calendar year, up to a maximum of 250,000 shares.

 

The Company accounts for stock-based compensation using the provisions of ASC 718. ASC 718 codification requires companies to recognize the fair value of stock-based compensation expense in the financial statements based on the grant date fair value of the options. All options are approved by the Compensation, Corporate Governance and Nominating Committee of the Board of Directors. Restricted stock awards that vest in accordance with service conditions are amortized over their applicable vesting period using the straight-line method. The fair value of the Company’s stock option awards or modifications is estimated at the date of grant using the Black-Scholes option pricing model.

 

Eligible recipients include employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company. Options granted generally have a five-to-ten-year term and have vesting terms that cover one to three years from the date of grant. Certain of the stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.

 

Stock Options:

 

The Company currently has awards outstanding with service conditions and graded-vesting features. We recognize compensation cost on a straight-line basis over the requisite service period.

 

23

 

The fair value of each time-based award is estimated on the date of grant using the Black-Scholes option valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model for equity awards with time-based vesting provisions granted during the year.

 

The following table summarizes stock option activity under both plans for the nine months ended June 30, 2022:

 

          

Weighted-average

     
          

remaining

  

Aggregate

 
      

Weighted-average

  

contractual term

  

intrinsic value

 
  

Number of shares

  

exercise price

  

(in years)

  

(in thousands)

 

Outstanding at September 30, 2021

  2,702,500  $4.42   5.13  $- 

Granted

  1,030,000   0.99       - 

Exercised

  -   -         

Forfeited

  (930,000)  3.59         

Outstanding at June 30, 2022

  2,802,500   3.43   3.39   - 
                 

Exercisable at June 30, 2022

  1,822,500  $4.19   4.63  $- 

 

As of June 30, 2022, there was approximately $419,241 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 2.8 years.

 

Restricted Stock Award transactions:

 

In the nine months ended June 30, 2022:

 

In June 2022, the Company issued 400,000 shares of restricted common stock in connection with the Separation Agreement with a former executive officer in which the former employee forfeited 500,000 shares of unvested restricted stock awards and 500,000 unvested options. These shares are subject to vest one-half on July 1, 2022 and the balance January 1, 2023. The fair market value of these shares totaled $172,000 and will be amortized over the vesting periods. The forfeited RSUs and options had an unrecognized value of $799,572 and $555,286, respectively. The Company recognized contra-expense of $880,428 and $604,714 for the forfeited RSUs and options, respectively, related to the previously amortized expense for these RSUs and options.

 

In May 2022 the Company issued 125,000 shares of restricted common stock to an executive office of the Company as part of a new hire compensation package.

 

In May 2022 the Company issued 5,000 of restricted common stock to an employee of the Company. The stock award was valued at the fair market price $3,350 of and expensed upon issuance.

 

In March 2022, the Company issued 20,000 of restricted stock awards to the Company’s board of directors. The shares vest quarterly one fourth on June 30, 2022, one fourth, on September 30, 2022, one fourth on December 31, 2022, and one fourth on March 31, 2023. The stock awards were valued at the fair market price of $16,360 upon issuance and will amortize over the individual vesting periods.

 

In January 2022, the Company issued 30,000 shares of restricted stock awards to six employees.  The stock awards were valued at the fair market price of $29,250 and vested at the grant date.

 

In January 2022, the Company issued 320,000 shares to a professional athlete in conjunction with an amendment to the athlete’s sponsorship agreement as referenced in Note 11. The stock grant was valuated at the fair market price of $336,000 upon issuance and will be amortized over the remaining term of the agreement.

 

In November 2021, the Company issued 120,000 shares of restricted stock awards to an employee, subject to certain revenue performances metrics through December 2022, as referenced in Note 6. These shares were forfeited during January 2022.

 

In October 2021 the Company issued 5,000 shares of restricted stock awards to an employee, which vested immediately upon issuance.

 

In October 2021 the Company issued 25,000 shares of restricted stock awards to an executive officer, subject to a four-month vesting schedule.

 

In the nine months ended June 30, 2021:

 

In June 2021, the Company issued 25,000 shares of restricted stock awards in connection with a consulting arrangement with an industry professional. The Company recorded a total prepaid expense of $80,500 in conjunction with the issuance of shares and intends to amortize this over the term of the agreement.

 

In April 2021, the Company issued 750,000 shares of restricted common stock to an executive officer, subject to a multi-year vesting schedule as noted below in Note 9.

 

In April 2021, the Company entered into an endorsement agreement with a professional athlete. As part of the endorsement agreement, the Company issued 40,000 common shares of restricted common stock. The Company recorded $143,600 prepaid expense and amortized over the term of the agreement.

 

In March 2021, the Company issued 27,000 of restricted stock awards to the Company’s board of directors. Two thousand of the shares vested at the time of the grant, while the balance vest one fourth on June 30, 2021, one fourth, on September 30, 2021, one fourth on December 31, 2021, and one fourth on March 31, 2022. The stock awards were valued at the fair market price of $118,800 upon issuance and will amortize over the individual vesting periods.

 

In January 2021 the Company issued 167,500 of restricted stock awards to an aggregate of 15 employees. A majority vested immediately with the balance vesting by April 6, 2021. The stock awards were valued at the fair market price of $494,125 upon issuance and amortized over the individual vesting periods.

 

In October 2020, the Company issued 50,000 of restricted stock awards to an executive officer. The restricted stock vests in three equal tranches, the first of which vests on October 1, 2021, on the second on October 1, 2022 and the third on October 1, 2023 and were valued at fair market value upon issuance at $100,000 which will be amortized over the vesting period.

 

The Company recognized $(593,617) and $641,267 of restricted stock compensation expense for the three months ended June 30, 2022 and 2021, respectively.  The Company recognized $242,382 and $1,218,110 of restricted stock compensation expense for the nine months ended June 30, 2022 and 2021, respectively.

 

24

 
 

NOTE 10 - WARRANTS

 

Transactions involving the Company equity-classified warrants for the nine months ended June 30, 2022 and 2021 are summarized as follows:

 

          

Weighted-average

     
          

remaining

  

Aggregate

 
      

Weighted-average

  

contractual term

  

intrinsic value

 
  

Number of shares

  

exercise price

  

(in years)

  

(in thousands)

 

Outstanding at September 30, 2021

  660,417  $4.60   3.05  $- 

Granted

  -   -       - 

Exercised

  -   -         

Forfeited

  -   -         

Outstanding at June 30, 2022

  660,417   4.60   2.79   - 
                 

Exercisable at June 30, 2022

  660,417  $4.60   -  $- 

 

The following table summarizes outstanding common stock purchase warrants as of June 30, 2022:

 

      

Weighted-average

  
  

Number of shares

  

exercise price

 

Expiration

Exercisable at $4.00 per share

  70,500   4.00 

September 2022

Exercisable at $7.50 per share

  100,000   7.50 

October 2022

Exercisable at $4.375 per share

  51,429   4.375 

September 2023

Exercisable at $7.50 per share

  60,000   7.50 

May 2024

Exercisable at $3.9125 per share

  47,822   3.9125 

October 2024

Exercisable at $1.25 per share

  36,682   1.25 

January 2025

Exercisable at $3.74 per share

  150,502   3.74 

December 2025

Exercisable at $3.75 per share

  143,482   3.75 

June 2026

   660,417  $4.60  

 

 

NOTE 11 COMMITMENTS AND CONTINGENCIES

 

In May 2019, the Company entered into an endorsement agreement with a professional athlete. The term of the agreement is through December 31, 2022 and is tied to performance of the athlete in so many professional events annually, and also includes promotion of the Company via social media, wearing of logo during competition, requirements to provide production days for advertising creation and attendance of meet and greets. The potential payments, if all services are provided, in aggregate is $4,900,000 and is paid based on the services above for the period ending: December 2019 - $400,000, December 2020 - $800,000, December 2021 - $1,800,000, and December 2022 - $1,900,000. In light of the impact of COVID-19 on events, the Company and professional athlete mutually agreed to suspend payments from March 2020 through June 2020. Effective July 1, 2020, the parties entered into a new endorsement agreement amending certain of the contract terms which superseded the original agreement. Under the current endorsement agreement potential payments to the professional athlete are as follows from July 2020 to December 2022 – up to $2,867,000 to be paid in common stock in three issuances, based on a Volume Weighed Average Price (“VWAP”) calculation, of which the last two issuances can be paid in cash at the Company’s option - $1,400,000 paid in July 2020, $800,000 paid between July 2021 and December 2021, and $667,000 paid between July 2022 and December 2022. The Company will make monthly cash payments as follows from: July 2020 to December 2020 - $40,000, from January 2021 to June 2021 - $50,000, from July 2021 to December 2021 - $75,000, from January 2022 to June 2022 - $85,000, and from July 2022 to December 2022 - $100,000. In March 2021, the parties entered into an additional amendment to the endorsement agreement whereby the Company issued the professional athlete 180,000 common shares to completely satisfy the $800,000 payment options between July 2021 and December 2021. The Company has recorded expense of $422,309 and $253,700 for the three months ended December 31, 2021 and 2020, respectively. In January of 2022, the parties entered into an additional amendment to the endorsement agreement, whereby the Company has foregone certain rights to logo wearing during events while retaining other performance of the athlete through December 2024. In exchange for change in obligations and term, the parties re-amortized the balance owed during 2022 through 2024, including issuing 320,000 of the Company’s common stock as part of the total compensation.

 

In April 2022, effective February 2022, the Company entered into an endorsement agreement with a professional athlete. The term of the agreement is through February 2025 and is tied to performance of the athlete in so many professional events annually, and also includes promotion of the Company via social media, wearing of logo during competition, requirement to provide production days for advertising creation and attendance at meet and greets. The potential base payments, if all services are provided is $1,500,000 over the term of the agreement, in addition to some incentives for sales directly influenced by the athlete.

 

As previously disclosed, during June of 2022, the Company's CEO resigned from the board of directors and his role as an executive for the Company in June of 2022 under the terms of a separation agreement with the Company.

 

 

NOTE 12 NOTE PAYABLE

 

In July 2019, the Company entered into a loan arrangement in the amount of $249,100 for a line of equipment, as part of the sale of manufacturing equipment during April 2022, the balance of this loan was paid off resulting in a balance of $0 as of June 30, 2022. In January 2020, the Company entered into a loan arrangement for $35,660 for equipment, of which $5,051 is a long term note payable at June 30, 2022. Payments are for 48 months and have a financing rate of 6.2%, which requires a monthly payment of $841.

 

25

 
 

NOTE 13 PAYCHECK PROTECTION PROGRAM LOAN

 

In April 2020, the Company applied for an unsecured loan pursuant to the PPP administered by and authorized by the CARES Act. Section 1106 of the Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the Paycheck Protection Program. On April 27, 2020, the Company received the loan from Truist Bank (the “Lender”) in the principal amount of $1,456,100. The SBA Loan is evidenced by a promissory note issued by the Company to the Lender. During May of 2021, the Company received notice from the SBA the loan principal and any accrued interest was completely forgiven.

 

 

NOTE 14 LEASES

 

The Company has lease agreements for its corporate offices and warehouse with lease periods expiring between 2021 and 2026. ASC 842 requires the recognition of leasing arrangements on the consolidated balance sheet as right-of-use assets and liabilities pertaining to the rights and obligations created by the leased assets. The Company determines whether an arrangement is a lease at inception and classify it as finance or operating. All of the Company’s leases are classified as operating leases. The Company’s leases do not contain any residual value guarantees. During the June 2022 quarter, the Company exited its laboratory facility as all R&D is conducted in its corporate offices. This lease expired in December 2022, and as a result we incurred an exit fee of $80,000 tied to the landlord's right to holdover rent which was booked as an offset to gain on the sold assets for the quarter ending June 30, 2022.

 

Right-of-use lease assets and corresponding lease liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term. Since the interest rate implicit in our lease arrangements is not readily determinable, the Company determined an incremental borrowing rate for each lease based on the approximate interest rate on a collateralized basis with similar remaining terms and payments as of the lease commencement date to determine the present value of future lease payments. The Company’s lease terms may include options to extend or terminate the lease.

 

In addition to the monthly base amounts in the lease agreements, the Company is required to pay real estate taxes, insurance and common area maintenance expenses during the lease terms.

 

Lease costs on operating leases are recognized on a straight-line basis over the lease term and included as a selling, general and administrative expense in the condensed consolidated statements of operations.

 

Components of operating lease costs are summarized as follows:

 

  

Three Months

  

Nine Months

 
  

Ended

  

Ended

 
  

June 30,

  

June 30,

 
  

2022

  

2022

 

Total Operating Lease Costs

 $336,474  $1,059,732 

 

Supplemental cash flow information related to operating leases is summarized as follows:

 

  

Three Months

  

Nine Months

 
  

Ended

  

Ended

 
  

June 30,

  

June 30,

 
  

2022

  

2022

 

Cash paid for amounts included in the measurement of operating lease liabilities

 $339,194  $1,068,620 

    

26

 

As of June 30, 2022, our operating leases had a weighted average remaining lease term of 4.38 years and a weighted average discount rate of 4.66%.

 

For the year ended September 30,

    

2022

 $337,267 

2023

  1,380,204 

2024

  1,421,610 

2025

  1,159,949 

Thereafter

  1,372,862 

Total future lease payments

  5,671,892 

Less interest

  (534,340)

Total lease liabilities

 $5,137,552 

 

Future minimum aggregate lease payments under operating leases as of June 30, 2022 are summarized as follows:

 

 

NOTE 15 EARNINGS PER SHARE

 

The following table sets forth the computation of basic and diluted earnings per share for the following periods:

 

  

Three Months Ended

  

Nine Months Ended

 
  

June 30,

  

June 30,

  

June 30,

  

June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Basic:

                

Net loss continuing operations

 $(31,634,143) $1,537,288  $(55,453,289) $(20,368,808)

Preferred dividends paid

  1,000,501   560,281   3,001,503   1,220,610 

Net (loss) income continuing operations adjusted for preferred dividend

  (32,634,644)  977,007   (58,454,792)  (21,589,418)

Net (loss) income attributable to cbdMD Inc. common shareholders

  (32,634,644)  977,007   (58,454,792)  (21,589,418)
                 

Diluted:

                

Net (loss) income continuing operations

  (32,634,644)  977,007   (58,454,792)  (21,589,418)

Net (loss) income continuing operations

  (32,634,644)  977,007   (58,454,792)  (21,589,418)
                 

Shares used in computing basic earnings per share

  59,316,762   56,676,326   59,229,208   54,089,263 

Effect of dilutive securities:

                

Options

  -   64,833   -   - 

Warrants

  -   22,884   -   - 

Convertible preferred shares

  -   4,667,600   -   - 

Shares used in computing diluted earnings per share

  59,316,762   61,431,643   59,229,208   54,089,263 
                 

Earnings per share Basic:

                

Continued operations

  (0.55)  0.02   (0.99)  (0.40)

Basic earnings per share

  (0.55)  0.02   (0.99)  (0.40)
                 

Earnings per share Diluted:

      -   -     

Continued operations

  (0.55)  0.02   (0.99)  (0.40)

Diluted earnings per share

  (0.55)  0.02   (0.99)  (0.40)

 

At June 30, 2022, 4,888,667potential shares underlying options, unvested RSUs and warrants as well as 8,335,000 convertible preferred shares were excluded from the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.

 

27

 
 

NOTE 16 INCOME TAXES

 

On November 17, 2017, the Company completed an IPO of its common stock. The Company conducted a Section 382 analysis and determined an ownership change occurred upon the IPO. On October 2, 2018, the Company completed a follow-on firm commitment underwritten public offering of its common stock. On May 16, 2019, the Company completed an additional follow-on firm commitment underwritten public offering of its common stock. On October 16, 2019, the Company completed a follow-on firm commitment underwritten public offering of its 8.0% Series A Cumulative Convertible Preferred Stock. On January 14, 2020, the Company completed a follow-on firm commitment underwritten public offering of its common stock. Management has determined that an ownership change has occurred under Internal Revenue Code (IRC) Section 382 resulting in limitations on the utilization of Company’s federal and state NOL carryovers.

 

On December 20, 2018, the Company completed a two-step merger with Cure Based Development (see Note 1). As a result of the Mergers the Company established as part of the purchase price allocation a net deferred tax liability related to the book-tax basis of certain assets and liabilities of approximately $4.6 million.

 

The Company has a valuation allowance against the net deferred tax assets, with the exception of the deferred tax liabilities that result from indefinite-life intangibles (“naked credits”). The Company has determined that using the general methodology for calculating income taxes during an interim period for the quarters ending December 31, 2019, March 31, 2020, and June 30, 2020, provided for a wide range of potential annual effective rates. Therefore, the Company had calculated the tax provision on a discrete basis under ASC 740-270-30- 36(b) for the quarters ending December 31, 2019, March 31, 2020, and June 30, 2020. At September 30, 2021 the Company recorded a net deferred tax asset of zero as the cumulative net deferred tax asset had a full valuation on it and there was not enough positive evidence that would warrant recognizing the benefit of the net deferred tax asset. In addition, the net indefinite lived deferred tax items were a deferred tax asset so there was not any recognition of a deferred tax liability related to indefinite lived deferred tax liabilities. At June 30, 2022, the Company determined the same circumstances to be true and therefore recorded a net deferred tax asset of zero.

 

 

NOTE 17 SUBSEQUENT EVENTS

 

On August 1, 2022, the Company successfully made the transition from Oracle Netsuite to Acumatica for its ERP system.  During the past year, Oracle terminated our license agreement and requested we find an alternative ERP solution.

 

On August 9, 2022, T. Ronan Kennedy, our Chief Financial Officer and Chief Operating Officer, was appointed interim principal executive officer.

 

Effective August 9, 2022, Dr. Sybil Swift, a key employee of the Company, was appointed to serve on the board of directors, filling a vacancy on the board, in accordance with the bylaws of the Company.  Dr. Swift has served as the Company’s Vice President for Scientific & Regulatory Affairs and the co-chair of cbdMD Therapeutics, LLC, since March of 2021. She initially joined the Company as a Regulatory Consultant in Jan 2021. Prior to joining the Company, from Jan 2020 to Dec 2020, Dr. Swift was the Senior Vice President for Scientific & Regulatory Affairs at the Natural Products Association. Dr. Swift served in multiple roles during her 5 years within the U.S. Food and Drug Administration's Office of Dietary Supplement Programs; the last role was the Associate Director for Research and Strategy. As Associate Director, Dr. Swift directed the office’s research portfolio and was responsible for ensuring alignment between its science, research, compliance, enforcement, and policy initiatives. Dr. Swift was also the co-chair of the Botanical Safety Consortium, a collaboration between scientists from government agencies, academia and industry. Dr. Swift earned her Ph.D. in Nutrition has and M.S. in Kinesiology at Texas A&M University. She is currently a member of the American Society for Nutrition, the Global Retailer & Manufacturer Alliance (GRMA), the Natural Products Association (NPA) ComPLI Committee, the Council for Federal Cannabis Regulation's (CFCR) SRAC. Dr. Swift is not considered an “independent director” within the meaning of Section 803 of the NYSE American Company Guide. As an employee director, she will not be appointed to any committee of our board of directors.  She shall receive a restricted stock grant of 5,000 shares of our common stock and five options to purchase 30,000 shares of our common stock, exercisable at $0.568 per share.  The restricted stock grant and options vest on the date of issuance.   In keeping with the Company’s stated commitment to increase diversity on the board which it believes supports the Company’s core values and is an essential measure of sound governance and critical to a well-functioning board, the board of directors recognizes that Dr. Swift is a minority.

 

As previously reported, on December 20, 2018 we closed that certain Merger Agreement, as amended, by and among our company, our subsidiaries and Cure Based Development, LLC (“Cure Based Development”). Pursuant to the terms of the Merger Agreement, as partial merger consideration CBD Holding, LLC (“CBDH”), the then sole member of Cure Based Development, was entitled to receive (the “Earnout Rights”) up to 15,250,000 additional shares of our common stock (the “Earnout Shares”) upon the satisfaction of certain aggregate net revenue criteria within 60 months (marking periods) following the Closing Date. The possible issuance of the Earnout Shares was approved by our shareholders in April 2019. In February 2020 CBDH distributed the Earnout Rights to its members which included affiliates of Martin A. Sumichrast (our former officer and director) and R. Scott Coffman (a current member of our board of directors and former officer).  Following the completion of the June 30, 2022 quarter within the third marking period, and in accordance with the terms of the Merger Agreement, as amended, we determined that the net revenues for the June 30, 2022 quarter within the third marking period were $8,592,893 and on August 9, 2022 we issued the members an aggregate of 409,505 shares of our common stock. The recipients were accredited investors and the issuances were exempt from registration under the Securities Act of 1933, as amended, in reliance on an exemption provided by Section 4(a)(2) of that act.

 

 

 

 

 

 

 

 

 

 

 

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion of our financial condition and results of operations for the three and nine months ended June 30, 2022 and the three and nine months ended June 30, 2021 should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties such as our plans, objectives, expectations and intentions.

 

Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements because of several factors, including those set forth under the Part I, Item 1A, Risk Factors and Business sections in our 2021 10-K, this report, and our other filings with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report.

 

ycbd_10qimg1.jpg

 

Our Company

 

General

 

We own and operate the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and cbdMD Botanicals. We believe that we are an industry leader producing and distributing broad spectrum CBD products and now full spectrum CBD products. Our mission is to enhance our customer’s overall quality of life while bringing CBD education, awareness and accessibility of high quality and effective products to all. We source cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States. Our innovative broad spectrum formula utilizes one of the purest hemp extracts, containing CBD, CBG and CBN, while eliminating the presence of tetrahydrocannabinol (THC). Non-THC is defined as below the level of detection using validated scientific analytical methods. Our full spectrum products contain a variety of cannabinoids and terpenes in addition to CBD while maintaining trace amounts of THC that falls within the limits set in the 2018 Farm Bill. In addition to our core brands, we also operate cbdMD Therapeutics, LLC to capture the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications

 

Our cbdMD brand of products includes high-grade, premium CBD products, including CBD tinctures, CBD gummies, CBD topicals, CBD capsules, CBD bath bombs, and CBD sleep aids.

 

productlineup062022copy425.jpg

 

Our Paw CBD brand of products includes veterinarian-formulated products including tinctures, chews, topicals products in varying strengths and formulas. Paw CBD products have undergone the National Animal Safety Council’s rigorous audit and meet their Quality Seal standard.

 

ycbd_10qimg3.jpg

 

 

Our cbdMD Botanicals brand of beauty and skincare products features facial oil and serum, toners, moisturizers, clear skin, facial masks, exfoliants and body care. cbdMD Botanicals is dedicated to creating clean CBD skin care products combining the best of Mother Nature with the precision of scientific innovation. All of our products are 100% cruelty-free and have no parabens, sulfates, or gluten – just pure botanical ingredients carefully crafted into gentle beauty products for all skin types.

 

ycbd_10qimg4.jpg

 

cbdMD, Paw CBD and cbdMD Botanicals products are distributed through our e-commerce websites, third party e-commerce sites, select distributors and marketing partners as well as a variety of brick-and-mortar retailers. In addition, we operate a CBD marketplace through directcbdonline.com, our own e-commerce website.

 

Recent Developments

 

During the first quarter of 2022 we eliminated a number of product lines and SKUs as we work to streamline line our offering to higher velocity products and eliminate slow moving and aging SKUs.

 

During January 2022 we completed a renewal of our NSF cGMP quality certification and are now NSF 455 cGMP certified.  Additionally, we earned the prestigious NSF product certification for our soft gel products and received the NSF certified for Sport for our 500mg and 1000mg sleep softgels and 1500mg and 3000mg soft gels.

 

During the second quarter of 2022 we took steps to right size our cost structure to our current revenue base and worked to remove over $10 million of annualized costs.  We achieved this through a combination of reductions in payroll, renegotiating freight rates, rationalizing marketing expenses, reducing regulatory spend, exited our lab and overall tightening of all expenditures.  We started enacting these steps during the second quarter resulting in sequential reductions in operating costs in both the second and third quarters of 2022. We expect continued roll off of expenses during the fourth quarter from the full quarter benefit of adjustments made during the third quarter coupled with additional rationalization we are working on.

 

During April 2022, in an effort to reduce costs, we sold our manufacturing equipment and outsourced certain products previously produced in-house. This change had a significant reduction in our fixed labor and overhead, positively impacting cost of goods sold, and increased flexibility in our supply chain and was part of our overall cost structure rationalization plan.

 

During May 2022 our Co-CEO and cbdMD brand Founder retired and we hired a new President.

 

The Company's management mandate is to achieve profitability and increase revenue by the end of the calendar year.  Significant headway was made on cost controls over the last two quarter and we believe additional opportunities to improve our cost structure exist: we are working to lower our facility costs, we are taking further opportunities to improve freight rates, and we continue to reassess our marketing costs and make improvements to our product portfolio.  In addition to these efforts, the Company continues to invest in a strong pipeline of accretive revenue opportunities.

 

 

Growth Strategies

 

We continued to pursue many strategies to grow our revenues and expand the scope of our business in fiscal 2022 and beyond:

 

 

Product Innovation: Our goal is to provide our customers superior functional based products with greater efficacy, absorption and claims. We regularly assess and evaluate our product portfolio, and devote resources to ongoing research and development processes with the goal of expanding our product offerings to meet these expanding consumer demands. We have a robust pipeline of products set to launch during fiscal 2022. In February 2022 we launched our line of functional gummies and curcumin capsules, followed by an initial rollout of several full spectrum gummies starting in March 2022 and a 2018 Farm Act compliant hemp extracted Delta 9 product assortment in April 2022, and our mood and focus products in May 2022.

   

 

 

Expand our revenue channels: We continued to pursue relationships with a number of key traditional retail accounts and believe our top brand awareness, and effective marketing position us as the CBD partner for key traditional retail accounts as this channel has continued to normalize. During the second quarter we added a number of our top selling ingestible SKUs throughout GNC’s retail footprint. We continue to have discussions with key retailers and have expanded our sales organization to include deep channel-specific experience, and expect to have additional announcement in calendar 2022.

   

 

 

International Expansion: We continue to explore sales into markets outside of the United States. Our products are currently available in 31 countries. We generally partner with local wholesalers and local legal counsel who can help navigate the laws and regulatory requirements within their jurisdiction. We continue to pursue key wholesale accounts in a number of international markets and are gaining market share in Central America through our sanitary registration approvals. We are also expanding our E-commerce business to consumers in the United Kingdom (U.K.). In March 2021, we officially filed our Novel Food Application with the United Kingdom’s Food Standards Agency (“FSA”) and the European Union’s (“E.U.”) Food Safety Agency (“EFSA”). In March 2022, we received notice that the products we submitted have been validated in the UK as well as in the EU. based warehouse. During August 2021 we signed an exclusive agreement to enter the Israeli Market with IM Cannabis Corp. a multi-country operator in the medical and adult- use recreational cannabis sector with operations in Israel, Germany and Canada. In March 2022, the Israeli Health Ministry announced it has begun the process of exempting CBD from its banned substances list and will be permitting CBD to be included into food and cosmetic products.  We anticipate additional international announcements before the end of the calendar year.

   

 

 

Expand our Additional Brands: During fiscal 2021 we took additional steps to grow the Paw CBD business which included advertising on TV, introducing our Paw CBD rewards program and introducing a Paw CBD subscription program which offers additional savings to customers that enroll in the service. During 2021 we launched cbdMD Botanicals as a separate brand and continue to build out the product portfolio and distribution channels.

   

 

 

Maintain our sponsorships toward targeted segments: We have had significant success with attracting high profile sponsors and influencers and expect to continue to assess the segments we have covered with a focus on maintaining key sponsorships and influencers which are producing the largest visibility and responsiveness.

   

 

 

Acquisitions: We seek to acquire (i) brands that we believe we can optimize through our internal digital marketing agency and fulfillment platform to increase our total addressable market or (ii) technology or intellectual property that will further enhance our product portfolio and create product differentiation. We may acquire brands directly or through joint ventures if opportunities arise that we believe are in our best interest. In assessing potential acquisitions or investments, we expect to primarily utilize our internal resources to evaluate growth potential, the strength of the target brand, offerings of the target, as well as possible efficiencies to gain. We believe that this approach will allow us to effectively screen consumer brand candidates and strategically evaluate acquisition targets and efficiently complete due diligence for potential acquisitions. We are currently not a party to any agreements or understandings regarding the acquisition of additional brands or companies and there are no assurances we will be successful in expanding our brand portfolio.

 

 

Results of operations

 

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

 

   

Three Months Ended June 30,

 
   

2022

   

2021

   

Change

 

Total net sales

  $ 8,592,893     $ 10,560,523     $ (1,967,630 )

Cost of sales

    2,660,185       3,370,952       (710,767 )

Gross profit as a percentage of net sales

    69.0 %     68.1 %     1.0 %

Operating expenses

    8,282,931       13,865,191       (5,582,260 )

Impairment of goodwill and other intangible assets

    30,776,436       -       30,776,436  

Operating income from operations

    (33,126,659 )     (6,675,620 )     (26,451,039 )

(Increase) decrease on contingent liability

    1,943,000       6,871,000       (4,928,000 )

Net (loss) income before taxes

    (31,634,143 )     1,640,288       (33,274,431 )

Net (loss) income attributable to cbdMD Inc. common shareholders

  $ (32,634,644 )   $ 977,007     $ (33,611,651 )

 

   

Nine Months Ended June 30,

 
   

2022

   

2021

   

Change

 

Total net sales

  $ 27,543,601     $ 34,687,436     $ (7,143,835 )

Cost of sales

    10,176,085       10,444,353       (268,268 )

Gross profit as a percentage of net sales

    63.1 %     69.9 %     -6.8 %

Operating expenses

    31,690,915       36,846,371       (5,155,456 )

Impairment of goodwill and other intangible assets

    48,959,721       -       48,959,721  

Operating income from operations

    (63,283,120 )     (12,603,288 )     (50,679,832 )

(Increase) decrease on contingent liability

    8,246,000       (10,500,000 )     18,746,000  

Net loss before taxes

    (55,453,289 )     (21,133,808 )     (34,319,481 )

Net loss attributable to cbdMD Inc. common shareholders

  $ (58,454,792 )   $ (21,589,418 )   $ (36,865,374 )

 

We record product sales primarily through two main delivery channels, direct to consumers via our E-commerce sales and direct to wholesalers utilizing our internal sales team. The following table provides information on the contribution of net sales by type of sale to our total net sales.

 

   

Three Months

           

Three Months

         
   

Ended

           

Ended

         
   

June 30,

           

June 30,

         
   

2022

   

% of total

   

2021

   

% of total

 

Wholesale sales

  $ 2,079,592       24.2 %   $ 2,740,523       26.0 %

E-commerce sales

    6,513,301       75.8 %     7,820,000       74.0 %

Total Net Sales

  $ 8,592,893             $ 10,560,523          

 

   

Nine Months

           

Nine Months

         
   

Ended

           

Ended

         
   

June 30,

           

June 30,

         
   

2022

   

% of total

   

2021

   

% of total

 
                                 

Wholesale sales

  $ 7,382,880       26.8 %   $ 9,049,068       26.1 %

E-commerce sales

    20,160,721       73.2 %     25,638,368       73.9 %

Total Net Sales

  $ 27,543,601             $ 34,687,436          

 

Net Sales

 

We had total net sales of $8,592,893 and $10,560,523 for the three months ended June 30, 2022 and 2021, respectively, resulting in a quarter over quarter decrease in net sales of $1,967,631 or 18.6%. This decrease is attributable to a decrease of $1.3 million in e-commerce sales and a decrease of $0.66 million in wholesale sales quarter over quarter.  While management is disappointed with the year over year net sales decrease, the revenue is generally in line with macro competitive trends in the overall CBD industry.  Sequentially, the Company's revenue declined 11%. Our Wholesale declined approximately $661,000, in-part related to revenue associated with a pipeline fill during the second quarter, as well as additional orders on the books that were delayed at the end of the quarter.  We have successfully implemented a $1.0 million reduction in marketing expenses, while e-commerce remained consistent with our previous calendar quarter. We believe the current macro inflationary environment is impacting discretionary spending with consumers as well as wholesale customers.  We continue to work on a pipeline of opportunities both domestically and internationally and believe we will see revenue growth in the coming quarters.

 

 

We had total net sales of $27,543,599 and $34,687,436 for the nine months ended June 30, 2022 and 2021 respectively, resulting in a year over year decrease in net sales of $7.1 million, primarily attributable to a $1.7 million, or 20.4% reduction in wholesale sales and reduction in e-commerce sales of $5.5 million.  We continue to invest in new channels and sales relationships and work to expand the life time value of our customers.

 

Cost of sales

 

Our cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third party providers, and freight for our product sales. Our cost of sales as a percentage of net sales was 31.0% and 31.9% for three months ended June 30, 2022 and 2021, respectively and  36.9% and 30.1% for the nine months ended June 30, 2022 and 2021, respectively.  Year over year, the reduction in our cost of sales for the June 30, 2022 quarter is a result of operational gains from the elimination of overhead and lower freight costs that were partially offset by increase in unabsorbed overhead resulting from the $1.9 million drop in revenues. The decrease in our cost of sales for the nine months ended June 30, 2022 over prior year is also the result of operational gains from the elimination of overhead and lower freight costs, partially offset by an increase in unabsorbed overhead resulting from the $7.4 million drop in revenues, as well as a one-time charge of $878,142 related to the rationalization of a number of SKUs and product lines during the first quarter of fiscal 2022.

 

The changes made during the last quarters have eliminated significant fixed overhead and were aimed at lowering overall costs and making our cost of sale more variable in nature we believe ultimately more predictable.

 

Operating expenses

 

Our principal operating expenses include staff related expenses, advertising (which includes expenses related to industry distribution and trade shows), sponsorships, affiliate commissions, merchant fees, technology, travel, rent, professional service fees, and business insurance expenses.

 

Consolidated Operating Expenses

 

The following tables provide information on our operating expenses for the three and nine months ended June 30, 2022 and 2021:

 

   

Three Months

   

Three Months

         
   

Ended

   

Ended

         
   

June 30,

   

June 30,

         
   

2022

   

2021

   

Change

 

Staff related expense

  $ 2,874,938     $ 4,455,640     $ (1,580,702 )

Accounting/legal expense

    262,307       237,357       24,950  

Professional outside services

    237,877       304,570       (66,693 )

Advertising/marketing/social media/events/tradeshows

    3,415,575       4,796,929       (1,381,354 )

Sponsorships

    227,084       520,208       (293,124 )

Affiliate commissions

    287,026       482,026       (195,000 )

Merchant fees

    255,956       496,963       (241,007 )

R&D and regulatory

    113,751       674,874       (561,123 )

Non-cash stock compensation

    (938,285 )     959,319       (1,897,604 )

Intangibles Amortization

    277,354       -       277,354  

Depreciation

    158,556       246,533       (87,977 )

All other expenses

    1,110,792       690,772       420,020  

Totals

  $ 8,282,931     $ 13,865,191     $ (5,582,260 )

 

 

   

Nine Months

   

Nine Months

         
   

Ended

   

Ended

         
   

June 30,

   

June 30,

         
   

2022

   

2021

   

Change

 

Staff related expense

  $ 10,119,111     $ 12,076,025     $ (1,956,914 )

Accounting/legal expense

    828,016       772,921       55,095  

Professional outside services

    648,764       899,195       (250,431 )

Advertising/marketing/social media/events/tradeshows

    11,839,584       11,856,233       (16,649 )

Sponsorships

    1,012,767       1,629,637       (616,870 )

Affiliate commissions

    853,559       1,354,102       (500,543 )

Merchant fees

    751,328       1,618,100       (866,772 )

R&D and regulatory

    550,268       1,060,605       (510,337 )

Non-cash stock compensation

    851,517       2,049,326       (1,197,809 )

Intangibles Amortization

    607,025       -       607,025  

Depreciation

    770,336       719,856       50,480  

All other expenses

    2,858,641       2,810,371       48,270  

Totals

  $ 31,690,915     $ 36,846,371     $ (5,155,456 )

 

Our overall operating expenses decreased by $5,582,260 or 40% three months ended June 30, 2022 over the three months ended June 30, 2021 and decreased $5,155,456 or 14% for the nine months ended June 30, 2022 versus the nine months ended June 30, 2021.   The quarter over quarter decrease was primarily driven by management's ongoing efforts to reduce our cost structure including decreases in staff related expenses ($1.58 million), advertising, marketing, sponsorships and affiliate commission expenses ($1.89 million) well as a merchant processing fees ($241,000) attributable to (i) on boarding new processors during the third quarter of 2021 at much lower rates as well as (ii) lower volume, reduction in stock expense ($1,897,142) which includes $1,485,142 of contra-expense for stock compensation related to forfeited RSUs and options, and R&D and regulatory spend ($561,000).  These decreases were offset by an increase in other expenses ($420,000) and an increase in the amortization of intangibles ($277,000) that increased this quarter as we began amortizing our trade names as referenced in Note 5. The reduction of $3.67 million for the nine months ended June 30, 2022 versus June 30, 2021 is due to an reduction in compensation ($1.9 million), advertising, marketing, sponsorships and affiliate commission expenses ($1.13 million), merchant fees ($867,000), and R&D and Regulatory ($510,000), partially offset by increase in stock compensation ($287,000) as well as depreciation and amortization ($862,000).

 

Excluding non-cash depreciation, intangible amortization, and non-cash stock expenses, we reduced our adjusted operating expenses from $12.7 million to $8.8 million for the three months ended June 30, 2021 and June 30, 2022 respectively and from $34.1 million to $29.2 million the nine months ended June 30, 2021 and June 30, 2022 respectively.

 

While our goal is to continue to improve year-over-year performance, management is also very much focused on improving the sequential performance and cash flow of the business.  Excluding the stock compensation expense reversal of $1,485,142 related to forfeited RSUs and stock options, sequentially we reduced our expenses by $1.68 million. We reduced marketing expense by over $1.0 million while increasing traffic to our websites.  Marketing costs will continue to come down during the fourth quarter as we rationalize expiring influencer contracts and focus on the most profitable customer acquisition and retention activities.  In the third quarter of 2022, we took further steps to reduce our overall headcount, including the outsourcing of our production facility, resulting in a reduction of of 16 positions (105 employees by June 30, 2022). These steps coupled with the full quarter benefit of reductions during the second quarter of fiscal 2022 resulted in over $608,000 in sequential payroll cost savings.  Since the reductions occurred over the course of the quarter, we expect to realize additional savings during the fourth quarter of fiscal 2022 as we benefit from a full quarter of savings. We are active in working to rightsize our corporate office and warehouse and believe significant additional savings exist should we be successful in our efforts.   We continue to pursue all avenues that will help lower our costs while maintaining our quality, efficacy and service for our customers; position us for revenue growth; and promote a culture of performance and success.

 

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 tables provide information on our approximate corporate overhead for the three and nine months ended June 30, 2022 and 2021:

 

   

Three Months

   

Three Months

         
   

Ended

   

Ended

         
   

June 30,

   

June 30,

         
   

2022

   

2021

   

Change

 

Staff related expense

  $ 288,570     $ 432,844     $ (144,274 )

Accounting/Legal expense

    195,056       190,199       4,857  

Professional outside services

    119,330       100,370       18,960  

Travel expense

    2,526       6,972       (4,446 )

Business insurance

    167,387       155,838       11,549  

Non-cash stock compensation

    (938,285 )     959,319       (1,897,604 )

Totals

  $ (165,417 )   $ 1,845,542     $ (2,010,959 )

 

   

Nine Months

   

Nine Months

         
   

Ended

   

Ended

         
   

June 30,

   

June 30,

         
   

2022

   

2021

   

Change

 

Staff related expense

  $ 917,144     $ 1,283,240     $ (366,096 )

Accounting/legal expense

    578,356       655,939       (77,584 )

Professional outside services

    282,030       272,055       9,975  

Travel expense

    3,933       6,974       (3,041 )

Business insurance

    530,742       425,704       105,038  

Non-cash stock compensation

    851,517       2,049,326       (1,197,809 )

Totals

  $ 3,163,721     $ 4,693,238     $ (1,529,517 )

 

Excluding the $1,485,142 contra-expense for stock compensation related to forfeited RSUs and stock options, our corporate operating expenses are down quarter over quarter and year over year as a result of our ongoing efforts to reduce our cost structure across the board.

 

The corporate operating expenses are primarily related to the ongoing public company related activities.

 

Therapeutics Overhead

 

Included in our consolidated operating expenses are expenses associated with Therapeutics including staff related expenses and R&D and regulatory expenses. The Therapeutic operating expenses include research and development activities for therapeutic applications.

 

The following tables provide information on our approximate corporate overhead for the three and nine months ended June 30, 2022 and 2021:

 

   

Three Months

   

Three Months

         
   

Ended

   

Ended

         
   

June 30,

   

June 30,

         
   

2022

   

2021

   

Change

 

Staff related expense

  $ 80,346     $ 90,041     $ (9,695 )

Accounting/legal expense

    3,119     $ -       3,119  

R&D and Regulatory

    112,364       615,497       (503,133 )

Totals

  $ 195,829     $ 705,538     $ (509,709 )

 

   

Nine Months

   

Nine Months

         
   

Ended

   

Ended

         
   

June 30,

   

June 30,

         
   

2022

   

2021

   

Change

 

Staff related expense

  $ 251,787     $ 90,041     $ 161,746  

Accounting/legal expense

    3,119     $ -       3,119  

R&D and Regulatory

    482,579       615,497       (132,918 )

Totals

  $ 737,485     $ 705,538     $ 31,947  

 

The Therapeutic operating expenses include research and development activities for therapeutic applications.  This division was formed during the third quarter of fiscal 2021. Our human and pet clinical studies remain underway and we anticipate initial results during the fourth quarter of 2022 and the first quarter of 2023.

 

Goodwill Impairment

 

We had goodwill at December 31, 2021 of $56,670,970. We perform a Step 0 goodwill impairment analysis annually following the steps laid out in ASC 350-20-35-3C. 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 goodwill. From time to time we also evaluate goodwill impairment on a quarterly basis if any triggering events have occurred that would require such analysis. For the three months ended December 31, 2021, we performed a Step 0 goodwill impairment analysis on consolidated goodwill and determined that a triggering event had occurred to necessitate performing the quantitative impairment test. After performing the quantitative impairment test in accordance with ASC 350-20-35-3C, we determined that goodwill was impaired by $13,898,285. We recorded this impairment to reduce total goodwill on its condensed consolidated balance sheets and has recorded the corresponding impairment expense on its condensed consolidated statement of operations as of December 31, 2021. We performed the same analysis as of June 30, 2022 and determined that goodwill was impaired by $30,776,436. We has recorded this impairment to reduce total goodwill on its condensed consolidated balance sheets and has recorded the corresponding impairment expense on its condensed consolidated statement of operations as of June 30, 2022.

 

Other income and other non-operating expenses

 

We also record income and expenses associated with non-operating items. The material components of those are set forth below.

 

 

Realized and unrealized gain (loss) on marketable and other securities

 

We value investments in marketable securities at fair value and record a gain or loss upon sale at each period in realized and unrealized gain (loss) on marketable securities. For the three months ended June 30, 2022 and 2021, we recorded $0 and $2,852, respectively, and for the nine months ended June 30, 2022 and 2021 we recorded $(33,350) and $545,562, respectively, including impairments. The realized loss in 2022 was a result of our shares in Isodiol being delisted while the realized gain in 2021 was driven by the sale of our investment in Formula Four Beverages, Inc. that was previously written to zero in the prior year based on prior information related to the company’s performance and COVID-19 impacts.

 

Restructuring expenses

 

During the quarter the Company entered into a separating agreement with its former CEO. The Company booked a onetime restructuring charge of $602,000 related to the cash payments required by separation agreement. This expense was booked as outside of operating expenses and included in a one of our other expenses outside of operating income.

 

Gain on the sale of assets

 

As mentioned in Note 2, the Company sold it manufacturing assets during the quarter for a total value of $1.8 million. The Company realized a net book gain of $88,000 after the net depreciated value and expenses associated with the sale.

 

Decrease in contingent liability

 

As described in Note 6 to the notes to the consolidated financial statements appearing elsewhere in this report, the earn-out provision for the Earnout Shares is accounted for and recorded as a contingent liability with increases in the liability recorded as non-cash other expense and decreases in the liability recorded as non- cash other income. The value of the non-cash contingent liability was $702,000 at June 30, 2022, as compared to $16,200,000 at September 30, 2021, respectively. First quarter adjustment to the the contingent liability comprised of $366,841 associated with the decrease of the value of the Third Marking Period shares prior to their issuance in December 2021, while the remaining $5,329,159 is associated with the decrease in the remaining contingent shares as of December 31, 2021. Second quarter adjustment to the contingent liability comprised of $41,916 associated with the decrease of the value of the Third Marking Period shares prior to their issuance in March 2022, while the remaining $246,915 is associated with the decrease in the remaining contingent shares as of March 31, 2022.During the third quarter of fiscal 2022 we had a decrease in value of $1,943,000 to the contingent liability which is recorded as other income in our consolidated statement of operations for the third quarter of fiscal year 2022. The decrease in value is comprised of $90,792 associated with an increase of the value of the Fourth Marking Period shares prior to their issuance in May 2022, while the remaining $1,839,2072 is associated with the decrease in the remaining contingent shares as of June 30, 2022. We utilize both a market approach and a Monte Carlo simulation in valuing the contingent liability and a key input in both of those methods is the stock price. The main driver of the change in the value of the contingent liability was the decrease of our common stock price, which was $0.44 at June 30, 2022 as compared to $2.08 at September 30, 2021. We expect to continue to record changes in the non-cash contingent liability through the balance of the earnout period.

 

As described in Note 6 to the notes to the consolidated financial statements appearing elsewhere in the report, the earn-out provision for the Twenty Two Earnout Shares is accounted for and recorded as a contingent liability with increases in the liability recorded as non-cash other expense and decreases in the liability recorded as non-cash other income. The value of the non-cash contingent liability was $0 at June 30, 2022 as compared to $416,000 at September 30, 2021 respectively.

 

Liquidity and Capital Resources

 

We had cash and cash equivalents on hand of $9,553,670 and working capital of $14,133,054 at June 30, 2022 as compared to cash and cash equivalents on hand of $26,411,424 and working capital of $29,595,214 at September 30, 2021. Our current assets decreased approximately 45.6% at June 30, 2022 from September 30, 2021, which is primarily attributable to a decrease in cash used to fund operations. Our current liabilities decreased by 17.2% at June 30, 2022 from September 30, 2021, and is primarily attributable to decreases in accounts payable and accrued expenses.

 

During the three and nine months ended June 30, 2022 we used cash primarily to fund our operations.

 

We do not have any commitments for capital expenditures. We have a commitment for cumulative cash dividends at an annual rate of 8% payable monthly in arrears for the prior month to our preferred shareholders. We have multiple endorsement or sponsorship agreements for varying time periods up through December 2022 and provide for financial commitments from the Company based on performance/participation (see Note 11 Commitments and Contingencies).

 

While the Company is taking strong action and believes that it can execute it's strategy and path to profitability within it's balance sheet, and in its ability to raise additional funds, there can be no assurances to that effect.  The Company’s working capital position may not be sufficient to support the Company’s daily operations for the twelve months subsequent to the issuance of these quarterly financial statements. The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability and the ability to acquire additional funding. These and other factors raise potential concern about the Company’s ability to continue as a going concern within twelve months after the date that the quarterly financial statements are issued. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result in the Company not being able to continue as a going concern

 

Our goal from a liquidity perspective is to use operating cash flows to fund day to day operations and we have not met this goal as cash flow from operations has been a net use of $3.7 million and $4.6 million (excluding the reclassification of $939,826 of the SBA loan to short term liabilities) for the three months ended June 30, 2022 and 2021, respectively and $16.8 million and $8.3 million for the nine months ended June 30, 2022 and 2021, respectively. Management believes the quarterly cash consumption will continue to improve in subsequent quarters and we have sufficient capital to execute our plan to profitability.

 

 

 

 

 

Adjusted EBITDA

 

Adjusted EBITDA for the three and nine months ended June 30, 2022 and June 30, 2021 is as follows:

 

   

Three months

   

Three months

   

Nine Months

   

Nine Months

 
   

Ended

   

Ended

   

Ended

   

Ended

 
   

June 30,

   

June 30,

   

June 30,

   

June 30,

 
   

2022

   

2021

   

2022

   

2021

 

(Unaudited)

                               
                                 

GAAP (loss) from operations

  $ (33,126,659 )   $ (6,675,620 )   $ (63,283,120 )   $ (12,603,288 )

Adjustments:

                               

Depreciation & Amortization

    435,910       246,533       1,377,361       719,856  

Employee and director stock compensation (1)

    (938,285)       959,319       851,517       2,049,326  

Other non-cash stock compensation for services (2)

    -       28,650       -       97,721  

Inventory adjustment(3)

    -       50,000       878,142       50,000  

Write down of legacy accounts receivable (4)

    -       -       -       -  

Impairment of Goodwill and other intangible assets (5)

    30,776,436               48,805,436       -  

Accrual for severance

    107,261       -       129,761       703,022  

Accrual / expenses for discretionary bonus

    -       150,000       150,000       450,000  

Non-GAAP adjusted (loss) from operations

  $ (2,745,337 )   $ (5,241,118 )   $ (11,090,9031 )   $ (8,533,363 )
                                 

(1) Represents non-cash expense related to options, warrants, restricted stock expenses that have been amortized during the period.

(2) Represents non-cash expense related to options, warrants, restricted stock expenses that have been amortized during the period.

(3) Represents an operating expense related to inventory loss related to regulatory changes impacting labels and packaging and obsolete/expired inventory.

(4) Write down of legacy accounts receivable.

(5) Represents non-cash goodwill impairment of $13,744,000 and impairment of the cbdMD trademark of $4,285,000.

 

Adjusted EBITDA for the quarter ending June 2022 improved by over $2.5 million over prior year as a result of over $4.0 million in improvement operating costs that were partially offset by a reduction in revenue and corresponding gross profit. Year to date Adjusted EBITDA declined by $2.5 million mostly related to a reduction in gross profit that was partially offset by reduction in operating costs.  This is the fourth consecutive quarter of Adjusted EBITDA improvement and a $1 million improvement over the prior sequential quarter.  Management expects continuous improvement in future quarters as a result of ongoing improvements in operating costs and improving revenue.

 

Critical accounting policies

 

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

 

Please see Part II, Item 7 – Critical Accounting Policies appearing in our 2021 10-K for the critical accounting policies we believe involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.

 

Recent accounting pronouncements

 

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

 

Off balance sheet arrangements

 

As of the date of this report, we have no undisclosed off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable for a smaller reporting company.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this report, our interim principal executive officer and Chief Financial Officer has concluded that our disclosure controls and procedures were effective to ensure that the information relating to our company, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our interim principal executive officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

None.

 

ITEM 1A. RISK FACTORS.

 

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Accordingly, we incorporate by reference the risk factors disclosed in Part I, Item 1A of our 2021 10-K.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

Except for those unregistered securities previously disclosed in reports filed with the SEC during the period covered by this report, we have not sold any securities without registration under the Securities Act during the period covered by this report.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable to our Company’s operations.

 

ITEM 5. OTHER INFORMATION.

 

On August 9, 2022, T. Ronan Kennedy, our Chief Financial Officer and Chief Operating Officer, was appointed interim principal executive officer.

 

Effective August 9, 2022, Dr. Sybil Swift, a key employee of the Company, was appointed to serve on the board of directors, filling a vacancy on the board, in accordance with the bylaws of the Company.  Dr. Swift has served as the Company’s Vice President for Scientific & Regulatory Affairs and the co-chair of cbdMD Therapeutics, LLC, since March of 2021. She initially joined the Company as a Regulatory Consultant in Jan 2021. Prior to joining the Company, from Jan 2020 to Dec 2020, Dr. Swift was the Senior Vice President for Scientific & Regulatory Affairs at the Natural Products Association. Dr. Swift served in multiple roles during her 5 years within the U.S. Food and Drug Administration's Office of Dietary Supplement Programs; the last role was the Associate Director for Research and Strategy. As Associate Director, Dr. Swift directed the office’s research portfolio and was responsible for ensuring alignment between its science, research, compliance, enforcement, and policy initiatives. Dr. Swift was also the co-chair of the Botanical Safety Consortium, a collaboration between scientists from government agencies, academia and industry. Dr. Swift earned her Ph.D. in Nutrition has and M.S. in Kinesiology at Texas A&M University. She is currently a member of the American Society for Nutrition, the Global Retailer & Manufacturer Alliance (GRMA), the Natural Products Association (NPA) ComPLI Committee, the Council for Federal Cannabis Regulation's (CFCR) SRAC. Dr. Swift is not considered an “independent director” within the meaning of Section 803 of the NYSE American Company Guide. As an employee director, she will not be appointed to any committee of our board of directors.  She shall receive a restricted stock grant of 5,000 shares of our common stock and five options to purchase 30,000 shares of our common stock, exercisable at $0.568 per share.  The restricted stock grant and options vest on the date of issuance.   In keeping with the Company’s stated commitment to increase diversity on the board which it believes supports the Company’s core values and is an essential measure of sound governance and critical to a well-functioning board, the board of directors recognizes that Dr. Swift is a minority.

 

As previously reported, on December 20, 2018 we closed that certain Merger Agreement, as amended, by and among our company, our subsidiaries and Cure Based Development, LLC (“Cure Based Development”). Pursuant to the terms of the Merger Agreement, as partial merger consideration CBD Holding, LLC (“CBDH”), the then sole member of Cure Based Development, was entitled to receive (the “Earnout Rights”) up to 15,250,000 additional shares of our common stock (the “Earnout Shares”) upon the satisfaction of certain aggregate net revenue criteria within 60 months (marking periods) following the Closing Date. The possible issuance of the Earnout Shares was approved by our shareholders in April 2019. In February 2020 CBDH distributed the Earnout Rights to its members which included affiliates of Martin A. Sumichrast (our former officer and director) and R. Scott Coffman (a current member of our board of directors and former officer).  Following the completion of the June 30, 2022 quarter within the third marking period, and in accordance with the terms of the Merger Agreement, as amended, we determined that the net revenues for the June 30, 2022 quarter within the third marking period were $8,592,892 and on August 9, 2022 we issued the members an aggregate of 409,505 shares of our common stock. The recipients were accredited investors and the issuances were exempt from registration under the Securities Act of 1933, as amended, in reliance on an exemption provided by Section 4(a)(2) of that act.

 

 

 

 

ITEM 6. EXHIBITS.

 

 

 

       

Incorporated by Reference

 

Filed or Furnished

No.

 

Exhibit Description

 

Form

 

Date Filed

 

Number

 

Herewith

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

 

12/3/18

 

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

   
                     

2.6

 

Addendum No. 1 to Agreement and Plan of Merger dated March 31, 2021

 

8-K

 

4/1/21

 

10.1

   
                     

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

 

Articles of Amendment to Articles of Incorporation

 

8-K

 

4/29/19

 

3.7

   
                     

3.7

 

Articles of Amendment to the Articles of Incorporation including the Certificate of Designations, Rights and Preferences of the 8.0% Series A Cumulative Convertible Preferred Stock

 

8-A

 

10/11/19

 

3.1(f)

   
                     

3.8

 

Bylaws, As amended

 

1-A

 

9/18/17

 

2.6

   
                     

10.21

 

Equipment Purchase Agreement dated April 7, 2022 +

  10-Q   5/13/22   10.21  

 

                     
10.22   Membership Interest Transfer Agreement effective June 22, 2022               Filed
                     
31.1   Certification of Principal Executive Officer (Section 302)               Filed
                     
31.2   Certification of Principal Financial Officer (Section 302)               Filed
                     

32.1

 

Certification of Principal Executive Officer and Principal Financial Officer (Section 906)

             

Filed

 

101.INS

 

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

Filed

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

Filed

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

Filed

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

Filed

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

Filed

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

Filed

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101)

Filed

 

+ Exhibits and/or schedules have been omitted.  The Company hereby agrees to furnish to the staff of the Securities and Exchange Commission upon request any omitted information.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

cbdMD, INC.

 
     

 

 

 

 
       
August 11, 2022

By:

/s/ T. Ronan Kennedy

 
   

T. Ronan Kennedy, interim Principal Executive Officer

 
   

 

 
       
August 11, 2022

By:

/s/ T. Ronan Kennedy

 
   

T. Ronan Kennedy, Chief Financial Officer,

 
   

principal financial and accounting officer

 

 

 

 

 

 

39