cbdMD, Inc 10-Q for FY2022 Q3
cbdMD, Inc. (YCBD)
About this 10-Q
cbdMD, Inc filed this 10-Q on August 11, 2022, covering the quarter ended June 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended June 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $8.59M
- down 18.6% from $10.56M a year earlier
- Net loss
- $31.63M
- compared with net income of $1.54M a year earlier
- Diluted EPS
- -$0.55
- compared with $0.02 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended |
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from __________________ to _______________ |
Commission file number
| cbdMD, INC. |
| (Exact Name of Registrant as Specified in its Charter) |
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| State or Other Jurisdiction of Incorporation or Organization | I.R.S. Employer Identification No. | |
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| Address of Principal Executive Offices | Zip Code |
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 |
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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.
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).
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 | ☐ | |
| | ☒ | 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
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.
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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| Unregistered Sales of Equity Securities and Use of Proceeds. |
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OTHER PERTINENT INFORMATION
Unless the context otherwise indicates, when used in this report, the terms the “Company,” “cbdMD, “we,” “us, “our” and similar terms refer to cbdMD, Inc., a North Carolina corporation formerly known as Level Brands, Inc., and our subsidiaries CBD Industries LLC, a North Carolina limited liability company formerly known as cbdMD LLC, which we refer to as “CBDI”, 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:
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material risks associated with our overall business, including: |
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our history of losses; |
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the continuing impact of COVID-19 on our company; |
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our reliance to market to key digital channels; |
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our ability to acquire new customers at a profitable rate; |
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our reliance on third party raw material suppliers and manufacturers and compounders; |
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our reliance on third party compliance with our supplier verification program and testing protocols; and |
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material risks associated with regulatory environment for CBD, including: |
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federal laws as well as FDA or DEA interpretation of existing regulation; |
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state laws pertaining to industrial hemp and their derivatives; |
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costs to us for compliance with laws and the risks of increased litigation; and |
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possible changes in the use of CBD. |
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material risks associated with the ownership of our securities, including; |
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the impact of changes in the fair value of our contingent liabilities associated with the Earnout Shares; |
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dilution to our shareholders upon the issuance of the Earnout Shares; |
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the designations, rights and preferences of our 8% Series A Cumulative Convertible Preferred Stock; |
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dilution upon the issuance of shares of common stock underlying outstanding warrants, options and the Series A Convertible Preferred Stock; and |
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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 | $ | $ | ||||||
| Accounts receivable | ||||||||
| Accounts receivable – discontinued operations | ||||||||
| Marketable securities | ||||||||
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| Inventory | ||||||||
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| Other assets: | ||||||||
| Property and equipment, net | ||||||||
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| Deposits for facilities | ||||||||
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| Goodwill | ||||||||
| Investment other securities, noncurrent | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| 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 | $ | $ | ||||||
| Accrued expenses | ||||||||
| Operating leases – current portion | ||||||||
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| Long term liabilities: | ||||||||
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| cbdMD, Inc. shareholders' equity: | ||||||||
| Preferred stock, authorized shares, $ | ||||||||
| par value, and shares issued and outstanding, respectively | ||||||||
| Common stock, authorized shares, $ | ||||||||
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| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total cbdMD, Inc. shareholders' equity | ||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||
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 |
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Ended |
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2021 |
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| Gross Sales |
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| Allowances |
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| Cost of sales |
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| Gross Profit |
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| Operating expenses |
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| Impairment of goodwill and other intangible assets |
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| Loss from operations |
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| Realized and Unrealized (loss) gain on marketable and other securities, including impairments |
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| Gain (loss) on extinguishment of debt |
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| Decrease (increase) of contingent liability |
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| Restructuring expense |
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| Other income |
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| Interest expense |
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| Loss before provision for income taxes |
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| Benefit for income taxes |
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| Net (Loss) Income |
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| Preferred dividends |
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| Net (Loss) Income attributable to cbdMD, Inc. common shareholders |
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| Net (Loss) Income per share: |
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| Basic earnings per share |
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| Diluted earnings per share |
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| Weighted average number of shares Basic: |
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| Weighted average number of shares Diluted: |
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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 |
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| Ended |
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| June 30, |
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| 2022 |
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2021 |
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| Net (Loss) Income |
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| Comprehensive (Loss) Income |
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| Preferred dividends |
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| Comprehensive (Loss) Income attributable to cbdMD, Inc. common shareholders |
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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 | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||
| Stock based compensation | ||||||||
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| Issuance of stock / warrants for service | ||||||||
| Inventory and materials impairment | ||||||||
| Intangibles Amortization | ||||||||
| Depreciation | ||||||||
| Impairment of goodwill and other intangible assets | ||||||||
| Increase/(Decrease) in contingent liability | ( | ) | ||||||
| Realized and unrealized loss of marketable and other securities | ( | ) | ||||||
| Termination benefit | ||||||||
| Extinguishment of Paycheck Protection Program Loan | ( | ) | ||||||
| Amortization of operating lease asset | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Deposits | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Deferred revenue / customer deposits | ||||||||
| Collection on discontinued operations accounts receivable | ||||||||
| Deferred tax liability | ( | ) | ||||||
| Cash used by operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of other investment securities | ||||||||
| Purchase of other investment securities | ( | ) | ||||||
| Proceeds from sale of assets | ( | ) | ||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Cash provided (used) by investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of preferred stock | ||||||||
| Note payable | ( | ) | ( | ) | ||||
| Preferred dividend distribution | ( | ) | ( | ) | ||||
| Cash provided by financing activities | ( | ) | ||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
Supplemental Disclosures of Cash Flow Information:
| 2022 |
2021 |
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| Cash Payments for: |
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| Interest expense |
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| Non-cash financial/investing activities: |
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| Issuance of Contingent earnout shares: |
$ | $ | ||||||
| Warrants issued to representative |
$ | $ | ||||||
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 |
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| Common Stock |
Preferred Stock |
Paid in |
Accumulated |
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| Shares |
Amount |
Shares |
Amount |
Capital |
Deficit |
Total |
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| Balance, September 30, 2021 |
$ | $ | $ | ( |
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| Issuance of Common stock |
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| Issuance of options for share based compensation |
- | - | ||||||||||||||||||||||||||
| Issuance of restricted stock for share based compensation |
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| Preferred dividend |
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| Net Loss |
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| Balance, December 31, 2021 |
$ | $ | $ | ( |
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| Issuance of Common stock |
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| Issuance of options for share based compensation |
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| Issuance of restricted stock for share based compensation |
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| Preferred dividend |
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| Net Loss |
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| Balance, March 31, 2022 |
$ | $ | $ | ( |
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| Issuance of Common stock |
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| Issuance of options for share based compensation |
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| Issuance of restricted stock for share based compensation |
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| Preferred dividend |
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| Net Loss |
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| Balance, June 30, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||||||||||
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 |
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| Common Stock |
Preferred Stock |
Paid in |
Accumulated |
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| Shares |
Amount |
Shares |
Amount |
Capital |
Deficit |
Total |
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| Balance, September 30, 2020 |
$ | $ | $ | $ | ( |
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| Issuance of Preferred Stock |
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| Issuance of options for share based compensation |
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| Issuance of restricted stock for share based compensation |
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| Preferred dividend |
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| Net Loss |
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| Balance, December 31, 2020 |
$ | $ | $ | $ | ( |
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| Issuance of Common Stock |
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| Exercise of options for share based compensation |
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| Issuance of restricted stock for share based compensation |
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| Preferred dividend |
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| Net Loss |
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| Balance, March 31, 2021 |
$ | $ | $ | $ | ( |
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| Issuance of Common stock |
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| Exercise of options for share based compensation |
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| Issuance of restricted stock for share based compensation |
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| Preferred dividend |
- | - | ( |
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| Net Income |
- | - | ||||||||||||||||||||||||||
| Balance, June 30, 2021 |
$ | $ | $ | ( |
) | $ | ||||||||||||||||||||||
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
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.
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 $
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
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 years for manufacturing equipment and automobiles and 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.
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 $
Revenue Recognition
Under ASC 606, Revenue from Contracts with Customers, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The Company meets that obligation when it has shipped products which have been ordered to the customer. The Company has reviewed its various revenue streams for its other contracts under the five-step approach. At June 30, 2022, the Company has 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 | |
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| - | 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 material contract assets nor contract liabilities at June 30, 2022.
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 | $ | % | $ | % | ||||||||||||
| E-commerce sales | % | % | ||||||||||||||
| Total Net Sales | $ | % | $ | % | ||||||||||||
| Nine Months | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | % of total | 2021 | % of total | |||||||||||||
| Wholesale sales | $ | % | $ | % | ||||||||||||
| E-commerce sales | % | % | ||||||||||||||
| Total Net Sales | $ | % | $ | % | ||||||||||||
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 $
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 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.
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 $
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. | |
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| ● | 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. | |
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| ● | 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 $
In September 2020, the Company purchased a membership interest in Adara Sponsor LLC for $
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 $
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 | $ | - | $ | - | $ | $ | ||||||||||
| Balance at September 30, 2021 | ||||||||||||||||
| Change in value of equities | ( | ) | ( | ) | ||||||||||||
| Additional Investment | - | - | - | - | ||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ||||||||||||
| Change in value of equities | - | - | - | - | ||||||||||||
| Additional Investment | - | - | - | |||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ||||||||||||
| Change in value of equities | - | - | - | - | ||||||||||||
| Additional Investment | ||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ||||||||||||
NOTE 3 - INVENTORY
Inventory at June 30, 2022 and September 30, 2021 consists of the following:
| June 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Finished Goods | $ | $ | ||||||
| Inventory Components | ||||||||
| Inventory Reserve | ( | ) | ( | ) | ||||
| Inventory prepaid | ||||||||
| Total Inventory | $ | $ | ||||||
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 | $ | $ | ||||||
| Manufacturing equipment | ||||||||
| Leasehold improvements | ||||||||
| Automobiles | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation expense related to property and equipment was $
NOTE 5 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company had goodwill at December 31, 2021 of $
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 $
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
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
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 | $ | $ | ||||||
| Trademark for HempMD | ||||||||
| Technology Relief from Royalty related to DirectCBDOnline.com | ||||||||
| Tradename related to DirectCBDOnline.com | ||||||||
| Amortization of definite lived intangible assets: | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Amortization expense related to definite lived intangible assets was $
NOTE 6 – CONTINGENT CONSIDERATION
As consideration for the Mergers, described in Note 1, the Company had a contractual obligation to issue
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
The Merger Agreement also provides that an additional
| Aggregate Net Revenues | Shares Issued/ Each $ of Aggregate Net Revenue Ratio | ||
| $1 - $20,000,000 | . | ||
| $20,000,001 - $60,000,000 | . | ||
| $60,000,001 - $140,000,000 | . | ||
| $140,000,001 - $300,000,000 | . |
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
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 $
As part of the Twenty Two acquisition in July 2021, the Company has a contractual obligation to issue up to an additional
In November of 2021 the Company entered into a contractual obligation to issue up to
In April 2022, the Company entered into a contractual obligation to issue up to
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
The total amount of preferred dividends declared and paid were $
Common Stock – The Company is authorized to issue
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
Common stock transactions:
In the nine months ended June 30, 2022:
In May 2022, the Company issued
In March 2022 the Company issued
In January 2022, the Company issued
In January 2022, the Company issued
On December 28, 2021, the Company issued
In October 2021, the Company issued
In the nine months ended June 30, 2021:
In June 2021, the Company issued
In May 2021, the Company issued
In April 2021, the Company entered into an endorsement agreement with a professional athlete. As part of the endorsement agreement, the Company issued
In March 2021, the Company issued
In March 2021, the Company issued
In March 2021, the Company issued
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
In January 2021 the Company issued
In October 2020 the Company issued
Stock option transactions:
In the nine months ended June 30, 2022:
In May 2022, the Company granted a new executive an aggregate of
In April 2022, the Company issued
In April 2022, the Company issued
In March 2022, the Company granted its board of directors an aggregate of
In January 2022, the Company granted an aggregate of
In October 2021, the Company granted an aggregate of
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
In April 2021, the Company issued
In March 2021, the Company granted its board of directors an aggregate of
In January 2021, the Company granted an aggregate of
In October 2020, the Company granted an aggregate of
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 | | $ | ||||||
| Risk free interest rate | ||||||||
| Volatility | ||||||||
| Expected term (in years) | ||||||||
| Dividend yield | None | None | ||||||
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
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 | $ | |||
| Risk free interest rate | % | |||
| Volatility | % | |||
| Expected term (in years) | ||||
| 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
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
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 -to--year term and have vesting terms that cover to years from the date of grant. Certain of the stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.
Stock Options:
The Company currently has awards outstanding with service conditions and graded-vesting features. We recognize compensation cost on a straight-line basis over the requisite service period.
The fair value of each time-based award is estimated on the date of grant using the Black-Scholes option valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model for equity awards with time-based vesting provisions granted during the year.
The following table summarizes stock option activity under 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 | $ | $ | - | |||||||||||||
| Granted | - | |||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Outstanding at June 30, 2022 | - | |||||||||||||||
| Exercisable at June 30, 2022 | $ | $ | - | |||||||||||||
As of June 30, 2022, there was approximately $
Restricted Stock Award transactions:
In the nine months ended June 30, 2022:
In June 2022, the Company issued
In May 2022 the Company issued
In May 2022 the Company issued
In March 2022, the Company issued
In January 2022, the Company issued
In January 2022, the Company issued
In November 2021, the Company issued
In October 2021 the Company issued
In October 2021 the Company issued
In the nine months ended June 30, 2021:
In June 2021, the Company issued
In April 2021, the Company issued
In April 2021, the Company entered into an endorsement agreement with a professional athlete. As part of the endorsement agreement, the Company issued
In March 2021, the Company issued
In January 2021 the Company issued
In October 2020, the Company issued
The Company recognized $(
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 | $ | $ | - | |||||||||||||
| Granted | - | - | - | |||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | - | - | ||||||||||||||
| Outstanding at June 30, 2022 | - | |||||||||||||||
| Exercisable at June 30, 2022 | $ | - | $ | - | ||||||||||||
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 | September 2022 | ||||||||
| Exercisable at $7.50 per share | October 2022 | ||||||||
| Exercisable at $4.375 per share | September 2023 | ||||||||
| Exercisable at $7.50 per share | May 2024 | ||||||||
| Exercisable at $3.9125 per share | October 2024 | ||||||||
| Exercisable at $1.25 per share | January 2025 | ||||||||
| Exercisable at $3.74 per share | December 2025 | ||||||||
| Exercisable at $3.75 per share | June 2026 | ||||||||
| $ | |||||||||
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 $
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 $
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 $
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 $
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 $
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 | $ | $ | ||||||
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 | $ | $ | ||||||
As of June 30, 2022, our operating leases had a weighted average remaining lease term of
| For the year ended September 30, | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total future lease payments | ||||
| Less interest | ( | ) | ||
| Total lease liabilities | $ |
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 | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Preferred dividends paid | ||||||||||||||||
| Net (loss) income continuing operations adjusted for preferred dividend | ( | ) | ( | ) | ( | ) | ||||||||||
| Net (loss) income attributable to cbdMD Inc. common shareholders | ( | ) | ( | ) | ( | ) | ||||||||||
| Diluted: | ||||||||||||||||
| Net (loss) income continuing operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Net (loss) income continuing operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Shares used in computing basic earnings per share | ||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Options | ||||||||||||||||
| Warrants | ||||||||||||||||
| Convertible preferred shares | ||||||||||||||||
| Shares used in computing diluted earnings per share | ||||||||||||||||
| Earnings per share Basic: | ||||||||||||||||
| Continued operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Basic earnings per share | ( | ) | ( | ) | ( | ) | ||||||||||
| Earnings per share Diluted: | - | - | ||||||||||||||
| Continued operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Diluted earnings per share | ( | ) | ( | ) | ( | ) | ||||||||||
At June 30, 2022,
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
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 $
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
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
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations for the three and 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.
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.
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.
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.
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. |
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| ● |
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. |
|
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| ● |
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. |
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| ● |
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. |
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| ● |
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. |
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| ● |
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.
None.
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.
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.
| 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.
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. |
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| August 11, 2022 | By: |
/s/ T. Ronan Kennedy |
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| T. Ronan Kennedy, interim Principal Executive Officer |
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| August 11, 2022 | By: |
/s/ T. Ronan Kennedy |
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| T. Ronan Kennedy, Chief Financial Officer, |
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| principal financial and accounting officer |
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Exhibit 10.22
EXHIBIT 31.1
Rule 13a-14(a)/15d-14(a) Certification
I, T. Ronan Kennedy, certify that:
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1. |
I have reviewed this report on Form 10-Q for the period ended June 30, 2022 of cbdMD, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Dated: August 11, 2022 |
/s/ T. Ronan Kennedy |
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| T. Ronan Kennedy, | |||
| principal executive officer | |||
EXHIBIT 31.2
Rule 13a-14(a)/15d-14(a) Certification
I, T. Ronan Kennedy, certify that:
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1. |
I have reviewed this report on Form 10-Q for the period ended June 30, 2022 of cbdMD, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Dated: August 11, 2022 |
/s/ T. Ronan Kennedy |
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T. Ronan Kennedy, |
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Chief Financial Officer, |
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principal financial and accounting officer |
EXHIBIT 32.1
Section 1350 Certification
In connection with the Quarterly Report of cbdMD, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2022 as filed with the Securities and Exchange Commission (the “Report”), I, T. Ronan Kennedy, principal executive officer and Chief Financial Officer, of the Company, do hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes- Oxley Act of 2002, that:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and |
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2. |
The information contained in the Report fairly presents, in all material respects, the financial conditions and results of operations of the Company. |
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/s/ T. Ronan Kennedy |
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T. Ronan Kennedy, |
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principal executive officer, Chief Financial Officer, |
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principal financial and accounting officer |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.