cbdMD, Inc 10-K for FY2021
cbdMD, Inc. (YCBD)
About this 10-K
cbdMD, Inc filed this 10-K on December 17, 2021, covering the fiscal year ended September 30, 2021 (FY2021).
Headline figures
Fiscal year ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $44.48M
- up 6.2% from $41.88M a year earlier
- Net loss
- $23.39M
- compared with net income of $12.6M a year earlier
- Diluted EPS
- -$0.47
- compared with $0.28 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the fiscal year ended
or
For the transition period from _________ to __________
Commission file number
(Exact Name of Registrant as Specified in its Charter) |
| ||
State or Other Jurisdiction of Incorporation or Organization |
| I.R.S. Employer Identification No. |
|
|
|
| ||
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 |
common | ||
YCBDpA | NYSE American |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasonal issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant in note required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes ☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered publica accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $163,343,029 on March 31, 2021.
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.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates by reference certain portions of the registrant’s definitive Proxy Statement for its 2021 Annual Meeting of Shareholders which the registrant currently anticipates will be filed with the SEC on or before January 28, 2022.
TABLE OF CONTENTS
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 2020" refers to the year ended September 30, 2020, and “fiscal 2021” refers to the year ended September 30, 2021.
We maintain a corporate website at www.cbdmd.com. The information contained on our corporate website and our various social media platforms are not part of this report.
2 |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:
| · | material risks associated with our overall business, including: |
|
| · | our history of losses; |
|
| · | the continuing impact of COVID-19 on our company; |
|
| · | our reliance to market in key digital channels |
|
| · | our ability to acquire new customers at a profitable rate. |
|
| · | our reliance on third party raw material suppliers and manufacturers; |
|
| · | our reliance on third party compliance with our supplier verification program and testing protocols; and |
|
| · | risks associated with the changes to our enterprise resource planning system (ERP) away from Oracle NetSuite. |
| · | material risks associated with regulatory environment for CBD, including: | |
|
| · | change in federal laws as well as FDA or DEA interpretation of existing regulation |
|
| · | change in state laws pertaining to industrial hemp; |
|
| · | costs to us for compliance with laws and the risks of increased litigation; and |
|
| · | possible changes in the use of CBD. |
| · | material risks associated with the ownership of our securities, including; | |
|
| · | the impact of changes in the fair value of our contingent liabilities associated with the Earnout Shares; |
|
| · | dilution to our shareholders upon the issuance of the Earnout Shares; |
|
| · | time devoted to our company by one of our co-Chief Executive Officers; |
|
| · | the designations, rights and preferences of our 8% Series A Cumulative Convertible Preferred Stock; |
|
| · | dilution upon the issuance of shares of common stock underlying outstanding warrants, options and the Series A Convertible Preferred Stock; and |
|
| · | voting control held by our directors and their affiliates. |
Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risk factors contained herein. 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.
| 3 |
| Table of Contents |
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
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 over 130 SKUs of high-grade, premium CBD products, including CBD tinctures, CBD gummies, CBD topicals, CBD capsules, CBD bath bombs, CBD bath salts, and CBD sleep aids.
Our Paw CBD brand of products includes over 45 SKUs of 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 15 SKUs, including 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.
| 4 |
| Table of Contents |
cbdMD, Paw CBD and cbdMD Botanicals products are distributed through our e-commerce websites, third party ecommerce sites, select distributors and marketing partners as well as a variety of brick and mortar retailers.
Recent Developments
We launched a number of key product categories during fiscal 2021. In January 2021 we announced the launch of cbdMD Botanicals, our new beauty and skincare line featuring 15 luxury products, including facial oil and serum, toners, moisturizers, clear skin, facial masks, exfoliants and body care and just this week launched our improved skincare. In addition, during September 2021 we launched a new full spectrum line of tincture and soft gels targeting an untapped customer base of consumers of full spectrum CBD, effectively doubling the total addressable market for CBD.
cbdMD’s products were again recognized as awarded 2021 Product of the Year Awards by a national survey organized by Kantar, a global leader in research. cbdMD serves as the first CBD company to win Product of the Year in consecutive years, earning 2021 top honors in “CBD Ingestible” for its CBD Gummies, while its Paw CBD brand secures category first “CBD Pet” award with its CBD Hard Chews for Dogs.
In July 2021, we 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 this business we believe this acquisition will provide us with additional insight on consumer data and industry trends.
Growth Strategies
We continued to pursue many strategies to grow our revenues and expand the scope of our business in fiscal 2021 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. During the first quarter of fiscal 2021, we launched CBD lidocaine products including sprays, a CBD bath salt line, as well as our cbdMD Botanicals line of CBD skin care products. In April 2021 we announced our forthcoming 2021 product launches of which included an extension of our award-winning and best-selling gummies, as well as the first ever, and highly anticipated, cbdMD Drink Mixes. We successfully introduced our cbdMD Drink Mixes to the market during the fourth quarter of fiscal 2021. In June 2021 we launched an additional line of cbdMD sleep tinctures and softgels. In September 2021 we launched a new line of full spectrum tinctures and softgels. We have a robust pipeline of products to launch during fiscal 2022. |
|
|
|
| · | Expand our revenue channels: As the market continues to evolve, we are expanding our sales channels. During fiscal 2020, our wholesale business was impacted as the broader retail industry faced various headwinds tied to quarantining and COVID impacts. Despite this, we continued to pursue relationships with a number of key traditional retail accounts and believe our top brand awareness, effective marketing and strong balance sheet position us as the partner for CBD for key traditional retail accounts as this channel has continued to normalize during the fiscal year 2021 and the first part of fiscal year 2022. |
|
|
|
| · | International Expansion: We continue to explore sales into markets outside of the United States. Our products are currently available in 31 countries. We generally partner with local wholesalers 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 registrations and are focused on expanding our E-commerce business to consumers in the U.K. At the end of December 2020, we announced the expansion of our direct-to-consumer operations into the United Kingdom (U.K.) which allows U.K. consumers to shop for our products online, with all orders shipping directly from a U.K. with based warehouse. In March 2021, we officially filed our Novel Food Application with the United Kingdom’s Food Standards Agency (“FSA”). The Application included all of the requisite data to allow for a validated submission and thorough scientific assessment. A similar submission was simultaneously made to the European Food Safety Authority (EFSA) to ensure compliance for the European markets. During August 2021 we signed an exclusive agreement to enter Israeli Market with IM Cannabis Corp. a multi-country operator (“MCO”) in the medical and adult-use recreational cannabis sector with operations in Israel, Germany and Canada. |
| 5 |
| Table of Contents |
| · | Expand our Additional Brands: During fiscal 2020 we saw the direct-to-consumer strength of cbdMD also translate into significant growth for Paw CBD. We continue to add internal resources to enhance this division. As this brand continues to grow, we are focusing on cross-selling, customer retention and education. During 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. |
|
|
|
| · | Expand our sponsorships toward targeted segments: We have had significant success with attracting high profile sponsors and influencers and expect to continue to assess the segments we have covered with a focus on activation of the sponsorships and influencers which are producing the largest visibility and responsiveness. During 2021 we developed a key partnership with CrossFit. |
|
|
|
| · | Acquisitions: We seek to acquire brands that we believe we can optimize through our internal digital marketing agency and supply chain platform while we broaden our product assortment and increase our total addressable market. Our scalable supply chain and fulfillment operation allows our brands to deliver an exceptional end-to-end experience to our customers in a cost-effective manner. 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. As referenced above, we recently acquired directcbdonline.com and related intellectual property. We are currently not a party to any additional 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. |
Marketing
Our business model is designed first and foremost to build a strong brand as quickly as possible as we operate in an emerging CBD market. CBD is a relatively new market, we believe the cost to acquire customers is most likely at the lowest point it will be, therefore, as part of our overall strategy we started with an internet and online marketing strategy and have invested heavily in brand promotion and customer acquisition. During fiscal 2021 and fiscal 2020 we spent approximately $17,902,673 and $14,972,052, respectively, on brand development, sponsorships and marketing.
We have organized our Marketing Department into an internal agency capable of servicing and scaling multiple brands, now including cbdMD, Paw CBD, and cbdMD Botanicals. We employ a category-leading, industry-innovating, multi-channel media approach that allows us to market our brand and products through various distribution efforts, which includes sports and athletes sponsorships, professional partnerships, social media engagement, podcasts, digital and television advertising, affiliate marketing, and influencer endorsements. According to the latest report from Brightfield Group, cbdMD ranks in the top 5 of Brand Share for the entire CBD category, as well as #1 in Brand Share for the second-largest Market Size category (Topicals - valued at $700M) and #1 in Brand Share for Beauty and Personal Care.
We believe our partnerships with professional athletes are an effective way to build upon our already strong brand recognition in the category. We believe that our sponsorship and influencer partnerships which include partners such as 12-time PGA and two time Masters Champion Bubba Watson, NOBULL CrossFit Games and Bellator (MMA), a wholly owned subsidiary of CBS Viacom, Inc., are first-in-class in the CBD industry. We also have media partnerships in place with the Joe Rogan Experience and Barstool Sports podcasts among others.
During Fiscal 2021 we continued to build Team cbdMD and leverage key sponsorships and partnerships in the sport world to build our brand and drive customer awareness. We renewed our partnership with Ken Block, professional rally and rallycross driver currently with the Hoonigan Racing division. In April 2021, we announced cbdMD signed an exclusive CBD sponsorship with highly decorated professional golfer, and 9-time PGA TOUR winner, Patrick Reed, to become the latest high profile member of Team cbdMD. As the brand of champions, Team cbdMD also added CrossFit champions Justin Medeiros and Annie Thorisdottir during fiscal 2021.
During fiscal 2021 we renewed our exclusive partnership with Viacom owned Bellator MMA, a leading mixed martial arts and kickboxing organization, including branding inside the Bellator cate, and signed a new exclusive sponsorship agreement to be the Official CBD Partner of the NOBULL CrossFit Games. In September 2021, we announced the signing of a three-year exclusive strategic partnership agreement with Troon, LLC, whereby Troon will provide promotional and marketing services to our company to help access distribution opportunities to the more than 600 Troon-affiliated facilities.
During the second quarter of 2021 our Pet brand, Paw CBD, debuted its first-ever national TV advertising campaign during the live broadcast of Puppy Bowl XVII, which aired on Sunday, February 7, 2021 before a national audience on Discovery+ and Animal Planet. In addition, we developed a second commercial that debuted April 1, 2021 for our core cbdMD brand.
| 6 |
| Table of Contents |
Sales
We distribute our products both through our online sales channel as well as through a number of wholesalers and retailers that resell our products both in brick and mortar locations as well as via their online websites. Sales of our product primarily come from online sales at our websites www.cbdmd.com, www.pawcbd.com, cbdmdbotanicals.com and www.directcbdonline.com and through our inside sales department. Our inside sales team concentrates on B2B wholesale distributors, who we believe can help amplify our reach of cbdMD products at physical retail locations.
During fiscal 2021, our e-commerce business experienced continued growth, with year over year increases in new e-commerce customers. For fiscal 2021, approximately 74% or sales were e-commerce as compared to approximately 73% in 2020. On the B2B brick and mortar side of the business, our level of stores we serve has grown to approximately 3,366 locations at the end of fiscal 2021 as we’ve seen COVID-19 related restrictions continue to be lifted and B2B brick and mortar distribution channels continue to bounce back. In addition, we acquired www.directcbdonline.com during 2021 and signed an exclusive sponsorship agreement to be the Official CBD Partner of the NOBULL CrossFit Games in 2021. The acquisition of www.directcbdonline.com, which has allowed us to own a CBD online marketplace that sells various CBD brands, provides a unique transparency to better understand consumer spending habits and trends across the wider CBD and hemp marketplace, as well as enhances our overall direct to consumer capabilities. Through our sponsorship of the NOBULL CrossFit Games, we have gained access to the CrossFit Games audience of 11 million worldwide viewers, including millions of members across 14,000 affiliated gyms in 158 countries.
Product manufacturing
We are committed to producing a quality product and testing transparency. Our goals include the optimization of our product manufacturing processes and the sourcing of reliable, high-quality raw materials. We only use cannabinoid extract from hemp grown in the United States in our products. We currently hold short term supply contracts with preferred vendors for our critical raw materials. Our preferred vendors are extractors and brokers who have access to the sources of the critical raw materials on the spot buy market to meet our growing demands for raw materials. All suppliers and farms must verify through our supplier verification program that their source material was grown using strict standards of cultivation which is confirmed through individual certificates of origin for all U.S. biomass used in production.
Our testing procedures are robust and comprehensive, starting with a supply chain built through our supplier verification program. All incoming cannabinoid ingredients are required to be first tested by the supplier at an independent, ISO accredited, third-party laboratory before they reach out production facilities and a Certificate of Analysis provided with each delivery. We then have the cannabinoid ingredients re-tested by the independent, ISO accredited, third-party laboratory to verify the supplier results before they are released into our production process. We test in-house throughout the production process before sending the finished goods off for final verification by an independent ISO accredited third-party laboratory to ensure the finished products of our broad spectrum products have no detectable THC, and meet our high standards for purity and CBD levels, while full spectrum product meets the requirements of the 2018 Farm Bill.
| 7 |
| Table of Contents |
As a consumer good manufacturer dedicated to providing the highest quality CBD consumer products on the market, we strive to meet or exceed the FDAs Good Manufacturing Practice (GMP) guidelines. These guidelines provide a system of processes, procedures and documentation to assure a product has the identity, strength, composition, quality, and purity that appear on its label. We either manufacture our premium line of products at our Charlotte, NC facility or outsource to qualified third party manufacturers. Our manufacturing facility and warehouse operations encompass 120,000 square feet and are fully GMP compliant and NSF dietary supplements GMP. Quality products remains a key tenant of ours. During the second quarter we renewed our NSF GMP Manufacturing certification and underwent the US Hemp Authority audit, receiving our seal of approval on May 10, 2021. During fiscal 2021 we underwent the National Animal Supplement Counsel (“NASC”) Audit for our pet products and earned their prestigious Quality Seal Award. To accommodate our growth, we have also secured third party contract manufacturing from FDA-registered facilities which are independently GMP certified and subject to continuing independent audit and certification, to handle our increased manufacturing needs.
Research and development and product enhancements
Our new product development efforts are focused on both near-term and long-term results for the company. The key objectives and input points that drive cbdMD’s research and development process include current product improvement efforts and new product development activities. Our product improvement efforts include consumer feedback analysis and feedback from panels of product testers, among others. We also conduct in-depth market research campaigns and sample size testing and research. Out new product development activities include market research, including future product trends and research to develop new product offerings, refinement of extraction and productions methods for product efficiency, ingredient research through sustainability testing, manufacturing process optimization, in-depth product testing, and package and graphic development.
In March 2021, we announced the formation of Therapeutics for the purposes of isolating and quantifying the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications. In June 2021, cbdMD Therapeutics announced Launch Of Animal Health Study In Collaboration With Colorado State University’s Veterinary Program to explore the effects of cbdMD’s proprietary cannabinoid blend on pets who suffer from osteoarthritis. Therapeutics has also commenced a preclinical human study with researchers at the University of South Carolina to explore the effects of cbdMD’s proprietary broad spectrum cannabinoid blend on sleep, mood, and pain in healthy subjects to further support the efficacy of the Company’s products and announced research partnership with the University of Mississippi to identify novel cannabinoids.
We believe the formation of Therapeutics will assist us to identify and explore potential therapeutic uses for cannabinoids. The Company’s investments into therapeutics R&D will also benefit current products and dietary supplement development.
Intellectual property
We hold a portfolio of U.S. trademark applications which are held for current and future product offerings and extended branding capability. The portfolio includes but is not limited to trademarks set forth below:
Mark |
| Federal registration No. |
|
| Filing date |
| Description of Mark Usage | ||
DIRECT CBD ONLINE |
|
| 6324509 |
|
| 5/10/2019 |
| Service mark | |
DIRECT CBD ONLINE |
|
| 6399287 |
|
| 5/10/2019 |
| Service mark | |
cbdMD |
|
| 88451429 |
|
| 5/29/2019 |
| Stylized word mark (logo in color) | |
cbdMD |
|
| 88451502 |
|
| 5/29/2019 |
| Standard word mark | |
Paw CBD |
|
| 88697605 |
|
| 10/19/2019 |
| Standard word mark | |
CBDMD |
|
| 88944504 |
|
| 6/2/2020 |
| Standard word mark | |
We currently hold a Madrid Protocol foreign trademark application for CBDMD (based on registration No. 88944504) and have secured or are in the midst of prosecuting the CBDMD trademark in the following countries: Australia, Brazil, Canada, China, Colombia, Czech Republic, European Union, Spain, Mexico, New Zealand, Norway, Switzerland, and the United Kingdom. We further have filed for trademark protection directly and have secured or in process of prosecuting in the following countries which are not a part in the Madrid Protocol: South Africa, Chile, Peru, Argentina, Ecuador, and Costa Rica. Additionally, a growing number of our products hold sanitary registrations in certain Central and South American countries.
In July 2020, we filed a new patent application with the U.S. Patent and Trademark Office which will allow us to pursue patented protection in several key areas, including novel formulations and delivery systems, as well as methods of manufacturing and use. This application is still pending.
In addition to our trademarks and our patent filing, we rely on a combination of trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our success depends on the protection of the proprietary aspects of our product development, formulation and knowhow, as well as our ability to operate without infringing on the proprietary rights of others. We also enter into proprietary information and confidentiality agreements with our employees, consultants and commercial partners and control access to, and distribution of, our formulas and other proprietary information.
In addition to www.cbdmd.com, www.pawcbdmd.com, www.cbdmdbotanicals.com and www.directcbdonline.com, we own multiple domain names that we may or may not operate in the future. However, as with phone numbers, we do not have and cannot acquire any property rights in an Internet address. The regulation of domain names in the United States and in other countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registers or modify the requirements for holding domain names. As a result, we might not be able to maintain our domain names or obtain comparable domain names, which could harm our business.
Competition
The market for the sale of CBD-based products is fragmented and intensely competitive. Currently, in the United States, cbdMD does not believe that there are any businesses that can demonstrate or claim a dominant market share of the growing CBD products market. According to the Brightfield Group’s US CBD Market Landscape (October 2021), there are approximately 2,000 CBD brands in the US and the top 20 companies in our industry hold a combined 19% of market share. Our competitors of CBD-based products include a combination of public and private companies who operate as combination of ecommerce and wholesale brands as well as brick and mortar retail operations.
| 8 |
| Table of Contents |
Government Regulations
On December 20, 2018, the President of the United States signed the Farm Bill into law. Among other things, this new law changed certain federal authorities relating to the production and marketing of hemp, defined as cannabis (Cannabis sativa L.), and hemp products containing less than 0.3 percent delta-9-tetrahydrocannabinol (THC, including removing hemp and derivatives of hemp from the Controlled Substance Act. January 15, 2021 the USDA issued its final rule regarding the Establishment of a Domestic Hemp Production Program which authorized hemp to be grown and processed legally in the United States and made it legal to transport in interstate commerce.
The Farm Bill recognizes hemp as distinct from its genetic cousin, marijuana, and specifically industrial hemp has been excluded from U.S. drug laws. The Farm Bill allows for each individual state to regulate industrial hemp and industrial hemp-based products or accept the USDA rules. Although no longer a controlled substance under federal law, cannabinoids derived from industrial hemp (other than THC) are still subject to a patchwork of state regulations. We are actively monitoring the regulations and proposed regulations in each state to ensure our operations are compliant.
In conjunction with the enactment of the Farm Bill, the FDA released a statement about the status of CBD and the agency’s actions in the short term with regards to CBD will guide the industry. The statement noted that the Farm Bill explicitly preserved the FDA’s authority to regulate products containing cannabis or cannabis-derived compounds under the FDCA and Section 351 of the Public Health Service Act. This authority allows the FDA to continue enforcing the law to protect patients and the public while also providing potential regulatory pathways for products containing cannabis and cannabis-derived compounds. The statement also noted the growing public interest in cannabis and cannabis-derived products, including CBD, and informed the public that the FDA will treat products containing cannabis or cannabis-derived compounds as it does any other FDA-regulated products — meaning the products will be subject to the same authorities and requirements as FDA-regulated products containing any other substance, regardless of the source of the substance, including whether the substance is derived from a plant that is classified as hemp under the Farm Bill.
As of the date of this report, and based upon publicly available information, to our knowledge the FDA has not taken any enforcement actions against CBD companies. The FDA, however, has sent warning letters to companies demanding they cease and desist from the production, distribution, or advertising of CBD products, only relating to instances that such CBD companies have made misleading and unapproved label claims. We will continue to monitor the FDA’s position on CBD. In December 2020, the FTC announced it was going to seek penalties against companies making deceptive marketing claims and named 6 companies which it had targeted for making egregious and unsupported health claims. On March 5, 2021the FTC approved the final administrative consent orders with all 6 companies. We are unaware of any further actions and we will continue to monitor the FTC’s position with regards to deceptive marketing claims.
We are subject to federal and state consumer protection laws, including laws protecting the privacy of customer non-public information and the handling of customer complaints and regulations prohibiting unfair and deceptive trade practices. The growth and demand for online commerce has and may continue to result in more stringent consumer protection laws that impose additional compliance burdens on online companies. These laws may cover issues such as user privacy, spyware and the tracking of consumer activities, marketing e-mails and communications, other advertising and promotional practices, money transfers, pricing, product safety, content and quality of products and services, taxation, electronic contracts and other communications and information security.
There is also great uncertainty over whether or how existing laws governing issues such as sales and other taxes, auctions, libel, and personal privacy apply to the internet and commercial online services. These issues may take years to resolve. For example, tax authorities in a number of states, as well as a Congressional advisory commission, are currently reviewing the appropriate tax treatment of companies engaged in online commerce, and new state tax regulations may subject us to additional state sales and income taxes. New legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the internet and commercial online services could result in significant additional taxes or regulatory restrictions on our business. These taxes or restrictions could have an adverse effect on our cash flows, results of operations and overall financial condition. Furthermore, there is a possibility that we may be subject to significant fines or other payments for any past failures to comply with these requirements.
On March 26, 2021, we submitted a Novel Foods dossier with both the EU Food Safety Agency (FSA) and the United Kingdom’s Food Safety Agency (UK FSA). “Novel Foods” are foods which have not been widely consumed in the UK or the EU before May 1997. In December 2020 the EU FSA announced it would begin accepting Novel Food dossiers for CBD after suspending acceptance for most of the year. This change was due to a recent EU Court of Justice opinion ruling that certain hemp derived extracts should not be classified as narcotic controlled substances. Before a Novel Food can be marketed in the UK or EU, it is required to have a pre-market safety assessment and authorization. The UK has waived the pre-market requirement and is allowing post market submissions for products that were in the marketplace prior to February 2020, which qualifies our products. We worked in conjunction with a leading food safety and regulatory consultant in the UK to prepare the dossiers which included detailed analysis of the quality and stability of our products, our hemp sourcing and extraction controls, our labelling and testing requirements, and the underlying intake and toxicological data related to the safe consumption of the proprietary cannabinoid blend ingredients in our cbdMD product line. Since April 26, 2021, the UK Government has yet to provide the industry any material public feedback or clarity on industry wide submissions. The Company strongly believes its products will ultimately be approved once the administration delays in the UK are cleared.
Human Capital
At December 17, 2021 we had 154 full-time employees. There are no collective bargaining agreements covering any of our employees.
We believe that cbdMD’s success depends on our ability to attract, develop and retain key personnel. We believe that the skills, experience and industry knowledge of our key employees significantly benefit our operations and performance.
Employee health and safety in the workplace is one of our core values. The COVID-19 pandemic has underscored for us the importance of keeping our employees safe and healthy. In response to the pandemic, we have taken actions aligned with the World Health Organization and the Centers for Disease Control and Prevention in an effort to protect our workforce so they can more safely and effectively perform their work.
Employee levels are managed to align with the pace of business and management believes it has sufficient human capital to operate its business successfully.
| 9 |
| Table of Contents |
Additional information
Information on the history of our company can be found in Notes 1 and 2 to the notes to our consolidated financial statements appearing later in this report.
We file annual, quarterly and other reports, proxy statements and other information with the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers such as our company that file electronically with the SEC.
Our corporate website address is www.cbdmd.com. We make available free of charge, through the Investor section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information which appears on our corporate website is not part of this report.
ITEM 1.A RISK FACTORS.
Investing in our securities involves risks. You should carefully consider the risks described below in addition to the other information set forth in this Annual Report on Form 10-K, including the Management’s Discussion and Analysis of Financial Conditions and Results of Operations section and the consolidated financial statements and related notes. If any of the risks and uncertainties described in the cautionary factors described below actually occur or continue to occur, our business, financial condition and results of operations and the trading price of our common stock and our Series A Convertible Preferred Stock could be materially and adversely affected. Moreover, the risks below are not the only risks we face and additional risks not currently known to us or that we presently deem immaterial may emerge or become material at any time and may negatively impact our business, reputation, financial condition, results of operations or the trading price of our securities.
RISKS RELATED TO OUR OVERALL BUSINESS
We have a history of losses from operations and there are no assurances we will report profitable operations in future periods.
We reported losses from operations of $19,615,990 and $17,581,856 for fiscal 2021 and fiscal 2020, respectively. Not included in our loss from operations for fiscal 2021 and fiscal 2020 is $0 and $48,983, respectively, associated with losses from our discontinued operations, and non-cash expense of $6,687,439 and non-cash income of $29,780,000 for fiscal 2021 and fiscal 2020, respectively, reflecting a change in value of the contingent liability associated with the Earnout Shares (as hereinafter defined) primarily as a result of the change in the market price of our common stock. Until such time, if ever, that we are successful in generating gross profits which are sufficient to pay our operating expenses it is likely we will continue to report losses from operations in future periods.
Our recent growth rates may not be sustainable or indicative of future growth and we may not be able to effectively manage our growth.
We have expanded our operations rapidly, especially over the last few years. Net sales increased $2.6 million, or 6%, to $44.5 million in 2021, compared to $41.9 million in 2020. This increase was primarily driven by an increase in total orders year over year. The increase in the number of orders was primarily due to our digital marketing strategy and by increased demand for CBD products. However, our historical growth rates are potentially not sustainable or indicative of future growth. We believe that our continued revenue growth will depend upon, among other factors:
| · | Increasing U.S. brand awareness; |
| · | Our ability to obtain adequate protections for our intellectual property; |
| · | Impacts of the COVID-19 pandemic and its aftermath; |
| · | Product innovation to expand our total addressable market; |
| · | International expansion. |
Disruptions related to the COVID-19 pandemic affected our business; however, this negative impact was offset by accelerating shift to online shopping that has continued through today, increasing our direct to consumer sales. These trends may not hold true in the future.
We have a limited history operating our business at its current scale. As a result of our growth, our employee headcount and the scope and complexity of our business have increased substantially, and we are continuing to implement policies and procedures that we believe are appropriate for a company of our size. We may experience difficulties as we continue to implement changes to our business and related policies and procedures to keep pace with our recent growth and, if our operations continue to grow at a rapid pace, in managing such growth and building the appropriate processes and controls in the future. Continued growth may increase the strain on our resources, and we could experience operating difficulties, including difficulties in sourcing, logistics, recruiting, maintaining internal controls, marketing, designing innovative products, and meeting consumer needs. If we do not adapt to meet these evolving challenges, the strength of our brand may erode, the quality of our products may suffer, we may not be able to deliver products on a timely basis to our customers, and our corporate culture may be harmed.
In addition, we expect to make investments in our research and development and sales and marketing organizations, expand our operations and infrastructure both domestically and internationally, design and develop new products, and enhance our existing products with newly developed products and through acquisitions. If our sales do not increase at a sufficient rate to offset these increases in our operating expenses, our profitability may decline in future periods.
| 10 |
| Table of Contents |
During fiscal 2021 COVID-19 impacted our business and operations. Depending upon the continuing duration of the pandemic, it may adversely impact our results of operations in fiscal 2022 and beyond.
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restriction on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These measures have had a significant adverse impact upon many sectors of the economy, including retail commerce. As a result of these circumstances, we have restricted schedules and staggered staffing at our corporate office and have altered work schedules at our warehouse and manufacturing facilities. In addition, many of our office personnel are working remotely. Beginning in the second quarter of fiscal 2020 we also began experiencing a decline in our sales to our B2B brick and mortar customers as many of the stores were temporarily or permanently closed. In response, we increased our marketing campaigns to support our e-commerce sales efforts by increasing our initiatives with associated relevant messaging to connect with our consumer base as well as increased website content and various offerings and changes to make online ordering more effective such as auto reorder capability, giveaways and free shipping. These efforts have allowed us to continue to increase sales by offsetting the decline in sales to B2B brick and mortar customers with a substantial increase in our e-commerce sales to consumers. Conditions caused by the continuing adverse impact of the COVID-19 pandemic could adversely affect our customers’ ability or willingness to purchase our products or services, delay prospective customers’ purchasing decisions, adversely impact our ability to provide or deliver products and on-site services to our customers, delay the provisioning of our offerings, or lengthen payment terms, all of which could adversely affect our future sales, operating results and overall financial performance. During second half of 2021, work schedules began returning to normal. With ongoing COVID variants, we continue to assess the situation on a regular basis and adjust our business, priorities, and processes to enable us to continue to operate effectively. We are unable to predict the future impact of COVID-19 and any subsequent variant and when, or if, our sales to B2B brick and mortar customers will return to prior levels.
The potential ETS concerning mandatory COVID-19 vaccination of employees could have a material adverse impact on our business and results of operations.
On September 9, 2021, President Biden announced a proposed new rule requiring all employers with at least 100 employees to ensure that their employees are fully vaccinated or require unvaccinated workers to get a negative test at least once a week. Effective November 5, 2021, the Occupational Health and Safety Administration (OSHA) issued a COVID-19 Vaccination and Testing Emergency Temporary Standard (ETS) which would require employers with 100 or more employees, by January 4, 2022, to require their workers either to be fully vaccinated (or at least have received a final dose of a primary vaccine series) or to test weekly for COVID-19. However, a federal district court has issued a nationwide preliminary injunction prohibiting the U.S. government from enforcing the ETS mandate. It is currently not possible to predict with certainty the exact impact the ETS would have on us in the event the injunction is lifted. As a company with more than 100 employees, in the event the injunction is lifted, we would be required to mandate COVID-19 vaccination of our workforce or our unvaccinated employees would require weekly testing. This may result in employee attrition, which could be material as substantially all of our employees reside in North Carolina where vaccination rates are below the national average. If we were to lose employees, it could have an adverse effect on future revenues and costs, which could be material. Accordingly, the proposed new regulation when implemented could have a material adverse effect on our business and results of operations.
Our business depends on maintaining and strengthening our brand and generating and maintaining ongoing demand for our products, and a significant reduction in such demand could harm our results of operations.
We have developed a strong and trusted brand that we believe has contributed significantly to the success of our business, and we believe our continued success depends on our ability to maintain and grow the value and reputation of cbdMD. Maintaining, promoting and positioning our brand and reputation will depend on, among other factors, the success of our product offerings, quality assurance, marketing and merchandising efforts, the reliability and reputation of our supply chain, our ability to grow and capture share of the CBD category, and our ability to provide a consistent, high-quality consumer experience. We have made substantial investments in these areas in order to maintain and enhance our brand and these experiences, but such investments may not be successful. Any negative publicity, regardless of its accuracy, could materially adversely affect our business. For example, our business depends in part on our ability to maintain a strong community of engaged customers and social media and athlete influencers. We may not be able to maintain and enhance a loyal customer base if we receive customer complaints, negative publicity or otherwise fail to live up to consumers’ expectations, which could materially adversely affect our business, operating results and growth prospects.
The growing use of social and digital media by us, our consumers and third parties increases the speed and extent that information or misinformation and opinions can be shared. Negative publicity about us, our brand or our products on social or digital media could seriously damage our brand and reputation. For example, consumer perception could be influenced by negative media attention regarding any consumer complaints about our products, our management team, ownership structure, sourcing practices and supply chain partners, employment practices, ability to execute against our mission and values, and our products or brand, such as any advertising campaigns or media allegations that challenge the sustainability of our products and our supply chain, or that challenge our marketing efforts regarding the quality of our products, which could have an adverse effect on our business, brand and reputation. Similar factors or events could impact the success of any brands or products we introduce in the future.
Our company image and brands are very important to our vision and growth strategies, particularly our focus on being a “good company” and operating consistent with our mission and values. We will need to continue to invest in actions that support our mission and values and adjust our offerings to appeal to a broader audience in the future in order to sustain our business and to achieve growth, and there can be no assurance that we will be able to do so. If we do not maintain the favorable perception of our company and our brand, our sales and results of operations could be negatively impacted. Our brand and company image is based on perceptions of subjective qualities, and any incident that erodes the loyalty of our consumers, customers, suppliers or manufacturers, including adverse publicity or a governmental investigation or litigation, could significantly reduce the value of our brand and significantly damage our business, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.
| 11 |
| Table of Contents |
If we fail to attract new customers in a cost-effective manner, our business may be harmed.
A large part of our success depends on our ability to attract new customers in a cost-effective manner. We have made, and may continue to make, significant investments in attracting new customers through increased advertising spends on social media, radio, podcasts, and targeted email communications, other media and events, sponsorships, and influencer sponsorships. Marketing campaigns can be expensive and may not result in the cost-effective acquisition of customers. Further, as our brand becomes more widely known, future marketing campaigns may not attract new customers at the same rate as past campaigns and the cost of acquiring new customers may increase over time. Additionally, regulation, algorithms, or participants in the digital marketing ecosystem may change rules for our industry or access to available demographics which may result in significant changes in the ability to target key demographic pools, impacting our ability to target our customers effectively. If we are unable to attract new customers, or fail to do so in a cost-effective manner, our business may be harmed.
Our growth depends, in part, on expanding into additional consumer markets, and we may not be successful in doing so.
We believe that our future growth depends not only on continuing to provide our current customers with new products, but also continuing to enlarge our customer base. The growth of our business will depend, in part, on our ability to continue to expand in the United States, as well as into international markets. We are investing significant resources in these areas, and although we hope that our products will gain popularity, we may face challenges that are different from those we currently encounter, including competitive, merchandising, distribution, hiring, and other difficulties. We may also encounter difficulties in attracting customers due to a lack of consumer familiarity with or acceptance of our brand, or a resistance to paying for premium products, particularly in international markets. In addition, although we are investing in sales and marketing activities to further penetrate newer regions, including expansion of our dedicated sales force, we may not be successful. If we are not successful, our business and results of operations may be harmed.
Our plans for international expansion may not be successful.
Continued expansion into markets outside the United States is one of our key long-term strategies for the future growth of our business. This expansion requires significant investment of capital and human resources, new business processes and marketing platforms, legal compliance, and the attention of many managers and other employees who would otherwise be focused on other aspects of our business. There are significant costs and risks inherent in selling our products in international markets, including: (a) failure to effectively establish our core brand identity; (b) increased employment costs; (c) increased shipping and distribution costs, which could increase our expenses and reduce our margins; (d) potentially lower margins in some regions; (e) longer collection cycles in some regions; (f) increased competition from local providers of similar products; (g) compliance with foreign laws and regulations, including taxes and duties, laws governing the marketing and use of e-commerce websites and enhanced data privacy laws and security, rules, and regulations; (h) establishing and maintaining effective internal controls at foreign locations and the associated increased costs; (i) increased counterfeiting and the uncertainty of protection for intellectual property rights in some countries and practical difficulties of enforcing rights abroad; (j) compliance with anti-bribery, anti-corruption, and anti-money laundering laws, such as the FCPA, the Bribery Act, and OFAC regulations, by us, our employees, and our business partners; (k) currency exchange rate fluctuations and related effects on our results of operations; (l) economic weakness, including inflation, or political instability in foreign economies and markets; (m) compliance with tax, employment, immigration, and labor laws for employees living or traveling abroad; (n) workforce uncertainty in countries where labor unrest is more common than in the United States; (o) business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters, including earthquakes, typhoons, floods, fires, and public health issues, including the outbreak of a pandemic or contagious disease, such as COVID-19, or xenophobia resulting therefrom; (p) the imposition of tariffs on products that we import into international markets that could make such products more expensive compared to those of our competitors; (q) that our ability to expand internationally could be impacted by the intellectual property rights of third parties that conflict with or are superior to ours; (r) difficulty developing retail relationships; and (s) other costs and risks of doing business internationally.
These and other factors could harm our international operations and, consequently, harm our business, results of operations, and financial condition. Further, we may incur significant operating expenses as a result of our planned international expansion, and it may not be successful. We have limited experience with regulatory environments and market practices internationally, and we may not be able to penetrate or successfully operate in new markets. We may also encounter difficulty expanding into international markets because of limited brand recognition, leading to delayed or limited acceptance of our products by customers in these markets, and increased marketing and customer acquisition costs to establish our brand. Accordingly, if we are unable to successfully expand internationally or manage the complexity of our global operations, we may not achieve the expected benefits of this expansion and our financial condition and results of operations could be harmed.
Fluctuations in the cost and availability of raw materials, equipment, labor, and transportation could cause manufacturing delays or increase our costs.
The price and availability of key components used to manufacture our products has been increasing and may continue to fluctuate significantly. In addition, the cost of labor within our company or at our third-party manufacturers could increase significantly due to regulation or inflationary pressures. Additionally, the cost of logistics and transportation fluctuates in large part due to the price of oil, and availability can be limited due to political and economic issues. Any fluctuations in the cost and availability of any of our raw materials, packaging, or other sourcing or transportation costs could harm our gross margins and our ability to meet customer demand. If we are unable to successfully mitigate a significant portion of these product cost increases or fluctuations, our results of operations could be harmed.
We rely on third-parties for raw materials and to manufacture and compound some of our products. We have no control over these third parties and if these relationships are disrupted our results of operations in future periods will be adversely impacted.
We currently hold short term supply contracts with unaffiliated third-party vendors for our critical raw materials. In addition, some of our products are manufactured or compounded by unaffiliated third parties and the use of these third-party co-packers changes from time to time due to customer demand and the composition of our product mix and product portfolio. We do not have any long-term contracts with any of these third parties, and we expect to compete with other companies for raw materials, production and imported packaging material capacity. If we experience significant increased demand or need to replace an existing raw material supplier or third-party manufacturer, there can be no assurances that replacements for these third-party vendors will be available when required on terms that are acceptable to us, or at all, or that any manufacturer or compounder would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new sources, we may encounter delays in production and added costs as a result of the time it takes to engage third parties. Any delays, interruption or increased costs in raw materials and/or the manufacturing or compounding of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short and long-term.
| 12 |
| Table of Contents |
Failures in our third-party verification and testing protocols may have an adverse impact on our brands which could suppress sales.
The quality of our products is essential to our business strategy. We require our raw material suppliers and farms to participate in our supplier verification program and to certify that their source material was grown using strict standards of cultivation. We also employ third-party testing procedures and all incoming cannabinoid ingredients are first tested by an independent, third-party laboratory before they reach our production facilities and then re-tested in-house throughout the production process before sending the ingredients off for final verification by an independent accredited third-party laboratories. We are reliant on these third parties to adhere to our supplier verification program and properly perform the third-party testing procedures. Any intentional or unintentional failure of any of these parties to perform the functions for which we have engaged them would adversely impact the quality of our products and could result in delays in meeting consumer demand or a decline in our sales.
We could be harmed by data loss or other security breaches.
Some of our systems have experienced past security incidents, including a recent incident that compromised some customers' personal and payment information. We conducted a forensic examination, made all notices to customers, governments, banks and card associations as required under local, state and federal laws, merchant agreements and card association rules. We also offered free credit monitoring and reporting to all affected customers and are maintaining a call center to handle any customer issues. We have implemented all remedial measures advised by the forensic examiner engaged by us, and, although we do not believe that any of these incidents have had a material adverse effect on our operating results, there can be no assurance the remedial measures will be effective or of a similar result in the future which could materially and adversely impact our business and operations in future periods.
We face risks related to system interruption and lack of redundancy.
From time to time we experience occasional system interruptions and delays that make our websites and product sales unavailable or slow to respond and prevent us from efficiently fulfilling orders which could adversely impact our net sales and the attractiveness of our products. If we are unable to add software and hardware as needed, effectively upgrade our systems and network infrastructure, and take other steps to improve the efficiency of our systems, these failures could cause system interruptions or delays and adversely affect our operating results in future periods. In addition, our computer and communications systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, earthquakes, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins, and similar events or disruptions. Any of these events could cause system interruption, delays, and loss of critical data, and could prevent us from accepting and fulfilling customer orders which could make our product offerings less attractive and subject us to liability. Our systems are not fully redundant, and our disaster recovery planning may not be sufficient. In addition, we may have inadequate insurance coverage to compensate for any related losses. Any of these events could damage our reputation and be expensive to remedy.
Our future success depends on the continuing efforts of our management and key employees, and on our ability to attract and retain highly skilled personnel and senior management.
We depend on the talents and continued efforts of our senior management and key employees. The loss of members of our management or key employees may disrupt our business and harm our results of operations. Furthermore, our ability to manage further expansion will require us to continue to attract, motivate, and retain additional qualified personnel. Competition for this type of personnel is intense, and we may not be successful in attracting, integrating, and retaining the personnel required to grow and operate our business effectively. There can be no assurance that our current management team, or any new members of our management team, will be able to successfully execute our business and operating strategies.
If our goodwill, other intangible assets, or fixed assets become impaired, we may be required to record a charge to our earnings.
We may be required to record future impairments of goodwill, other intangible assets, or fixed assets to the extent the fair value of these assets falls below their book value. Our estimates of fair value are based on assumptions regarding future cash flows, gross margins, expenses, discount rates applied to these cash flows, and current market estimates of value. Estimates used for future sales growth rates, gross profit performance, and other assumptions used to estimate fair value could cause us to record material non-cash impairment charges, which could harm our results of operations and financial condition.
The implementation of a new accounting system could interfere with our business and operations.
We will be implementing a new ERP system in fiscal 2022. The ERP implementation will encompass accounting, production, warehouse and customer resource management activities. The implementation of new systems and enhancements may be disruptive to our business and can be time consuming and divert management’s attention. Any disruptions relating to our systems or any problems with the implementation, particularly any disruptions impacting our operations or our ability to accurately report our financial performance on a timely basis during the implementation period, could materially and adversely affect our business and operations.
RISKS RELATED TO THE REGULATORY ENVIRONMENT FOR CBD
Changes to Federal or state laws pertaining to industrial hemp could slow the use of industrial hemp which would materially impact our revenues in future periods.
As of the date hereof, approximately 46 states have authorized industrial hemp programs pursuant to the United States of the Agricultural Improvement Act of 2018, commonly known as the “Farm Bill,” or under prior programs authorized under the 2014 Farm Bill, or have plans under review by the USDA. Effective January 1, 2022 several states without an approved plan under the Farm Bill, or a plan under review, will default to the USDA Hemp Producer License. Continued development of the industrial hemp industry will be dependent upon new legislative authorization of industrial hemp at the state level, and further amendment or supplementation of legislation at the federal level. Any number of events or occurrences could slow or halt progress all together in this space. While progress within the industrial hemp industry is currently encouraging, growth is not assured. While there appears to be ample public support for favorable legislative action, numerous factors may impact or negatively affect the legislative process(es) within the various states where we have business interests. Any one of these factors could slow or halt use of industrial hemp, which could negatively impact the business up to possibly causing us to discontinue operations as a whole. In addition, changes in Federal or state laws could require us to alter the way we conduct our business in order to remain compliant with applicable state laws in ways we are presently unable to foresee. These possible changes, if necessary, could be costly and may adversely impact our results of operations in future periods.
| 13 |
| Table of Contents |
Costs associated with compliance with numerous laws and regulations could impact our financial results. In addition, we could become subject to increased litigation risks associated with the CBD industry.
The manufacture, labeling and distribution by us of the hemp-based cannabinoid products is regulated by various federal, state and local agencies. These governmental authorities may commence regulatory or legal proceedings, which could restrict the permissible scope of our product claims or the ability to sell products in the future. We are subject to regulation by the federal government and other state and local agencies as a result of our hemp-based cannabinoid products. The shifting compliance environment and the need to build and maintain robust systems to comply with different compliance in multiple jurisdictions increases the possibility that we may violate one or more of the requirements. If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to our company, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, any of which could adversely affect the ability to operate our business and our financial results. Failure to comply with the various federal, state and local requirements may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions. We are seeing increasing state-level labeling requirements that may increase our costs with respect to monitoring and adhering to unique label requirements in addition to potential product and packaging obsolescence costs. Our advertising is subject to regulation by the U.S. Federal Trade Commission, or FTC, under the Federal Trade Commission Act, and is subject to various state regulations enforced by state agencies and state attorneys general. Additionally, some states also permit advertising and labeling laws to be enforced by private attorneys general who may seek relief for consumers, seek class-action certifications, seek class-wide damages and product recalls of products sold by us. Any actions against our company by governmental authorities or private litigants could be time consuming, costly to defend and could have a material adverse effect on our business, financial condition, and results of operations.
Uncertainty caused by potential changes to legal regulations could impact the use of CBD products.
There is substantial uncertainty and different interpretations among federal, state and local regulatory agencies, legislators, academics and businesses as to the scope of operation of Farm Bill-compliant hemp programs relative to the emerging regulation of cannabinoids. These different opinions include, but are not limited to, the regulation of cannabinoids by the U.S. Drug Enforcement Administration and/or the FDA and the extent to which manufacturers of products containing Farm Bill-compliant cultivators and processors may engage in interstate commerce. The uncertainties cannot be resolved without further federal, and perhaps even state-level, legislation, regulation or a definitive judicial interpretation of existing legislation and rules. If these uncertainties continue, they may have an adverse effect upon the introduction of our products in different markets.
RISKS RELATED TO OWNERSHIP OF OUR SECURITIES
The impact of changes in the fair value of our non-cash contingent liabilities associated with the Earnout Shares has, and may continue to, materially impact our results of operations in future periods.
As described in Note 6 to the notes to our consolidated financial statements appearing later in this report, at September 30, 2021, we have a contractual obligation to issue up to an additional 5,708,135 shares of our common stock (the “Earnout Shares”) as additional consideration for our acquisition of Cure Based Development LLC in December 2018. Under U.S. generally accepted accounting principles (“GAAP”) we are required to record a non-cash contingent liability associated with the Earnout Shares and at September 30, 2021, the total of this contingent liability was $9,440,000. Under GAAP we are obligated to reassess the obligations associated with the Earnout Shares on a quarterly basis and, in the event our estimate of the fair value of the contingent consideration changes, we will record increases or decreases in the fair value as an adjustment to earnings. In particular, changes in the market price of our common stock, which is one of the inputs used in determining the amount of the non-cash contingent liability, will result in increases or decreases in this liability and positively or negatively impact our net loss or profit for the period. The application of the accounting treatment for the fair valuing of the Earnout Shares, in addition to the issuance of earnout shares for the first, second, third and fourth marking periods, at September 30, 2021 resulted in a decrease in the amount of this non-cash contingent liability of $6,760,000 for fiscal 2021 as compared to an increase of $29,780,000 for fiscal 2020. While we do not believe investors should place undue reliance on the impact of these non-cash changes when evaluating our results of operations in future periods, as they have no impact on the operations of the business, we expect that the fair valuing of the Earnout Shares will continue to have a material impact on our results of operations and our shareholders’ equity in future periods, which may materially impact the market price of our securities.
Also as described in Note 8 to the notes of our consolidated financial statements appearing later in this report, at September 30, 2021, we have a contractual obligation to issue up to an additional 200,000 shares of our common stock (the “Twenty Two Earnout Shares”) as additional consideration for our acquisition of www.DirectCBDOnline.com in July 2021. Under GAAP we are required to record a non-cash contingent liability associated with the Twenty Two Earnout Shares and at the date of the acquisition, recorded a total contingent liability of $488,561. Under GAAP we are obligated to reassess the obligations associated with the Twenty Two Earnout Shares on a quarterly basis and, in the event our estimate of the fair value of the contingent consideration changes, we will record increases or decreases in the fair value as an adjustment to earnings. In particular, changes in the market price of our common stock, which is one of the inputs used in determining the amount of the non-cash contingent liability, will result in increases or decreases in this liability and positively or negatively impact our net loss or profit for the period. At September 30, 2021, we recorded a decrease in value of the contingent liability of $73,561 related to a decrease in the market price of our common stock, which adjusted the total contingent liability related to the Twenty Two Earnout Shares to $416,000.
The issuances of the Earnout Shares will significantly dilute our existing shareholders.
The possible issuance of the remaining Earnout Shares will increase our issued and outstanding shares of common stock by approximately 10%. In addition, assuming the possible issuance of all of the additional remaining 5,708,135 Earnout Shares but giving effect to no other change to the number of shares of our common stock issued and outstanding, the members of Cure Based Development from the merger, which includes Mr. R. Scott Coffman, and Mr. Martin Sumichrast, our co-CEO’s and members of our board of directors, would own approximately 35% of our then outstanding shares of common stock. The issuance of all or a portion of the Earnout Shares will dilute the ownership interests of our common shareholders and may adversely impact the market price of our common stock. The Twenty Two Earnout Shares may further add to this dilution.
| 14 |
| Table of Contents |
The Series A Convertible Preferred Stock ranks junior to all of our indebtedness and other liabilities and is effectively junior to all indebtedness and other liabilities of our subsidiaries.
In the event of our bankruptcy, liquidation, dissolution or winding-up of our affairs, our assets will be available to pay obligations on the Series A Convertible Preferred Stock only after all of our indebtedness and other liabilities have been paid. The rights of holders of the Series A Convertible Preferred Stock to participate in the distribution of our assets will rank junior to the prior claims of our current and future creditors and any future series or class of preferred stock we may issue (subject to Series A Convertible Preferred Stockholder approval) that ranks senior to the Series A Convertible Preferred Stock. In addition, the Series A Convertible Preferred Stock effectively ranks junior to all existing and future indebtedness and other liabilities of our existing subsidiaries and any future subsidiaries. Our existing subsidiaries are, and any future subsidiaries would be, separate legal entities and have no legal obligation to pay any amounts to us in respect of dividends due on the Series A Convertible Preferred Stock. If we are forced to liquidate our assets to pay our creditors, we may not have sufficient assets to pay amounts due on any or all of the Series A Convertible Preferred Stock then outstanding.
We may not be able to pay dividends on the Series A Convertible Preferred Stock.
Our ability to pay cash dividends on the Series A Convertible Preferred Stock requires us to (i) either be able to pay our debts as they become due in the usual course of business, or (ii) have total assets that are greater than the sum of our total liabilities plus the amount that would be needed if we were to be dissolved at the time of the distribution to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. Further, notwithstanding these factors, we may not have sufficient cash to pay dividends on the Series A Convertible Preferred Stock. Our ability to pay dividends may be impaired if any of the risks described in this report were to occur. Also, payment of our dividends depends upon our financial condition and other factors as our board of directors may deem relevant from time to time. We cannot assure you that our businesses will generate sufficient cash flow from operations in an amount sufficient to enable us to make distributions on our common stock and preferred stock, including the Series A Convertible Preferred Stock, or to fund our other liquidity needs.
Holders of the Series A Convertible Preferred Stock may be unable to use the dividends-received deduction and may not be eligible for the preferential tax rates applicable to “qualified dividend income.”
Distributions paid to corporate U.S. holders of the Series A Convertible Preferred Stock may be eligible for the dividends-received deduction, and distributions paid to non-corporate U.S. holders of the Series A Convertible Preferred Stock may be subject to tax at the preferential tax rates applicable to “qualified dividend income,” if we have current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. We do not currently have any accumulated earnings and profits. Additionally, we may not have sufficient current earnings and profits during future fiscal years for the distributions on the Series A Convertible Preferred Stock to qualify as dividends for U.S. federal income tax purposes. If the distributions fail to qualify as dividends, U.S. holders would be unable to use the dividends-received deduction and may not be eligible for the preferential tax rates applicable to “qualified dividend income.” If any distributions on the Series A Convertible Preferred Stock with respect to any fiscal year are not eligible for the dividends-received deduction or preferential tax rates applicable to “qualified dividend income” because of insufficient current or accumulated earnings and profits, it is possible that the market value of the Series A Convertible Preferred Stock might decline.
The Series A Convertible Preferred Stock represents perpetual equity interests in us, and investors should not expect us to redeem or convert the Series A Convertible Preferred Stock on the date the Series A Convertible Preferred Stock becomes redeemable or convertible by us or on any particular date afterwards.
The Series A Convertible Preferred Stock represents perpetual equity interests in our company, and it has no maturity or mandatory redemption except upon a Change of Control, and is not redeemable at the option of investors under any other circumstances. A “Change of Control” will generally be deemed to occur when, after the original issuance of the Series A Convertible Preferred Stock, the acquisition by any person, including any syndicate or group deemed to be a “person” under Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions which were pre-approved by our board of directors of our stock entitling that person to exercise more than 50% of the total voting power of all of our stock entitled to vote generally in the election of the our directors, subject to certain exclusions. As a result, the Series A Convertible Preferred Stock will not give rise to a claim for payment of any amount at a particular date. As a result, holders of the Series A Convertible Preferred Stock may be required to bear the financial risks of an investment in the Series A Convertible Preferred Stock for an indefinite period of time unless the holder chooses to voluntarily convert the shares of Series A Convertible Preferred Stock into shares of our common stock.
Change of Control redemption obligations of the Series A Convertible Preferred Stock may make it more difficult for a party to acquire us or discourage a party from acquiring us.
The Change of Control redemption feature of the Series A Convertible Preferred Stock may have the effect of discouraging a third party from making an acquisition proposal for our company or of delaying, deferring or preventing certain of change of control transactions under circumstances that otherwise could provide the holders of our common stock and Series A Convertible Preferred Stock with the opportunity to realize a premium over the then-current market price of such stock or that shareholders may otherwise believe is in their best interests.
A holder of Series A Convertible Preferred Stock has extremely limited voting rights.
The voting rights for a holder of Series A Convertible Preferred Stock are limited. Our shares of common stock are the only class of our securities that carry full voting rights. Holders of the shares of Series A Convertible Preferred Stock do not have any voting rights other than as set forth below in the next two sentences or unless dividends on the Series A Convertible Preferred Stock are in arrears for each of 12 or more consecutive monthly periods, in which case the holders of the Series A Convertible Preferred Stock will be entitled to vote as a separate class for the election of two additional directors to serve on the board of directors until all dividends that are owed have been paid. Holders of shares of Series A Convertible Preferred Stock, voting as a class, are also entitled to vote if we should seek to issue or create any class or series of capital stock ranking senior to the Series A Convertible Preferred Stock with respect to dividends or distributions, in which event the consent of holders of at least two thirds of the then outstanding Series A Convertible Preferred Stock is required. The consent of the holders of a majority of the Series A Convertible Preferred Stock, voting as a class, is required if we were to seek to adopt any amendment to our articles of incorporation or bylaws that would materially affect existing terms of the Series A Convertible Preferred Stock, or increase the number of authorized shares of that series, other than in connection with the anti-dilution provisions, or if we seek to create a series or class which ranks pari passu with the Series A Convertible Preferred Stock. Other than these limited circumstances and except to the extent required by law, holders of Series A Convertible Preferred Stock do not have any voting rights.
| 15 |
| Table of Contents |
We may redeem the Series A Convertible Preferred Stock at our option, we will be required to redeem the Series A Convertible Preferred Stock upon a Change of Control and we may convert shares of Series A Convertible Preferred Stock upon a Market Trigger into shares of our common stock. In the event of any of these occurrences, you may not receive dividends that you anticipate.
On or after October 16, 2023 we may, at our option, redeem the Series A Convertible Preferred Stock, in whole or in part, at any time or from time to time. In addition, upon the occurrence of a board approved Change of Control, we are required to redeem any or all of the shares of Series A Convertible Preferred Stock at a redemption price of $11.00 per share, plus any accrued but unpaid dividends to, but excluding, the redemption date. Furthermore, upon a Market Trigger (as that term is defined in the designations, rights and preferences of the Series A Convertible Preferred Stock), we may convert all or any portion of those shares of Series A Convertible Preferred Stock into shares of our common stock. We may have an incentive to redeem or convert the Series A Convertible Preferred Stock voluntarily if market conditions allow us to issue other preferred stock or debt securities at a rate that is lower than the dividend rate on the Series A Convertible Preferred Stock. If we redeem or convert the Series A Convertible Preferred Stock, then from and after the redemption date or conversion date, as applicable, dividends will cease to accrue on shares of Series A Convertible Preferred Stock, the shares of Series A Convertible Preferred Stock shall no longer be deemed outstanding and all rights as a holder of those shares will terminate, including the rights to receive dividend payments.
The liquidation preference of the shares of our Series A Convertible Preferred Stock would reduce the amount available to our common shareholders in the event of our liquidation or winding up.
Holders of our Series A Convertible Preferred Stock have a liquidation preference of $10.00 per share in the event of our liquidation or winding up. This means that those holders are entitled to receive the liquidation preference before any payment or other distribution of assets to our common shareholders, and the amount of any such payment or other distribution will be reduced by that amount.
The issuance of shares upon exercise of our outstanding options, restricted stock awards and warrants, or the conversion of the Series A Convertible Preferred Stock may cause immediate and substantial dilution to our existing shareholders.
In addition to our obligation to issue the Earnout Shares if the goals are met, we presently have options, unvested restricted stock awards and warrants that if exercised would result in the issuance of an additional 4,175,417 shares of our common stock, and our Series A Convertible Preferred Stock is presently convertible into an additional 8,335,000 shares of common stock. The issuance of shares upon exercise of warrants and options and/or the conversion of shares of our Series A Convertible Preferred Stock will result in dilution to the interests of other shareholders.
Mr. Sumichrast may not devote his full time and attention to our company.
Mr. Sumichrast, our co-Chief Executive Officer, has business interests outside our company, including serving as a member of the Board of Directors and Chief Executive Officer of a company that has recently filed a registration statement with the SEC for its initial public offering. Accordingly, from time to time he may not devote his full time and attention to our affairs. There are no assurances that our business and operations may not be adversely impacted in future periods as a result of the time he may devote to his other business interests instead of a sole focus by him on the affairs of our company.
Our executive officers, directors and their affiliates may exert control over us and may exercise influence over matters subject to shareholder approval.
Our executive officers and directors, together with their respective affiliates, beneficially own approximately 31% of our outstanding common stock as of December 1, 2021. Accordingly, these shareholders, if they act together, may exercise substantial influence over matters requiring shareholder approval, including the election of directors and approval of corporate transactions, such as a merger. This concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discourage a potential acquirer from attempting to obtain control over us, which in turn could have a material adverse effect on the market value of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable to a smaller reporting company.
ITEM 2. DESCRIPTION OF PROPERTY.
Our headquarters are located in approximately 50,000 square feet in a modern two-story building in Charlotte, North Carolina which we sub-lease under an agreement which began August 1, 2019 and goes through December 2026. The agreement calls for an annual base monthly rent of $76,041 for the first year and escalates 3% annually. We have a manufacturing and warehouse facility in Charlotte, North Carolina which we lease approximately 40,000 square feet under an agreement through December 2021. The agreement calls for an annual base monthly rent of $18,700, as amended April 2019, inclusive of monthly taxes insurance and common area maintenance (“TICAM”) for the first year and the rent escalates 3% annually. We also have an 80,000 square foot warehouse in Charlotte, North Carolina under an agreement which began November 2019 and goes through December 2024. The agreement calls for an annual base monthly rent of $34,766, inclusive of monthly TICAM for the first year and the rent escalates 3% annually.
| 16 |
| Table of Contents |
ITEM 3. LEGAL PROCEEDINGS.
In December 2019, Cynthia Davis filed a purported collective and class action lawsuit in the United States District Court for the Central District of California against cbdMD and certain of our competitors alleging violations of the California’s Unfair Competition Law, California’s False Advertising Law and California’s Consumer Legal Remedies Act, as well as claims for Breach of Express Warranties, Breach of Implied Warranty of Merchantability and Declaratory Relief. The plaintiff alleges that the defendants violated the California laws by unlawfully selling and marketing mislabeled products which have not been approved by the FDA. The plaintiff is seeking compensatory, statutory, nominal and punitive damages, in an amount to be determined by the court, as well as equitable relief requiring restitution and disgorgement of revenues. The complaint was brought as a nationwide “collective action,” and, alternatively, as a “class action” under the laws of the State of California. We intend to vigorously defend this action and in April 2020 we filed a motion for dismissal which remains pending.
In April 2019 our wholly owned subsidiary, CBDI, filed a cancellation proceeding before the U.S. Patent and Trademark Office Trademark Trial and Appeal Board (TTAB) against Majik Medicine, LLC to cancel its issued trademark for "CBD MD" on multiple grounds. The TTAB recently rejected a motion to dismiss by the defendant and the matter is proceeding.
In October 2020, Michael Warshawsky and Michael Steinhauser filed a purported collective and class action lawsuit in the United States District Court for the Western District of North Carolina against cbdMD alleging the personal identifiable information of customers was compromised due to our negligent and/or careless acts and omissions and failure to protect customer’s data. The complaint was brought as a nationwide “collective action,” and, alternatively, as a “class action” under the laws of the State of North Carolina. The Company reached a global settlement with the plaintiffs within our policy limits which was executed by both parties on April 30, 2021 and the settlement is now with the court for final approval. Once approved by the court, the Company anticipates the case will be dismissed during the fiscal year of 2022.
On February 12, 2021 CBDI filed a complaint against Majik Medicine in Federal Court in North Carolina seeking, among other things, the cancellation of Majik Medicine’s CBD MD mark on various grounds (the “Civil Action”). On April 28, 2021 the TTAB ruled in favor of a motions filed by CBDI to suspend the cancellation proceeding pending final determination in the Civil Action. Subsequent to filing the Civil Action, Majik Medicine brought counter claims against CBDI and the Company has filed a Motion to Dismiss the counter claims. The parties have fully briefed the court and the Motion to Dismiss counter claims of Majik Medicine is under consideration for a ruling.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable to our company.
| 17 |
| Table of Contents |
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Since May 1, 2019, commensurate with our name change, our common stock has been listed on the NYSE American under the symbol “YCBD” and prior to that, since November 17, 2017 was listed on the NYSE American under the symbol "LEVB."
Our Series A Convertible Preferred Stock has been listed on the NYSE American since October 21, 2019 under the symbol “YCBDpA.”
As of December 17, 2021, there were approximately 105 record owners of our common stock and one record holder of our Series A Convertible Preferred Stock. These amounts do not reflect persons or entities that hold our securities in nominee or “street” name through various brokerage firms.
Dividend policy
Common Stock
We do not currently intend to pay dividends on our common stock. The declaration, amount and payment of any future dividends on shares of our common stock, if any, is subject to the designations, rights and preferences of the Series A Convertible Preferred Stock and will be at the sole discretion of our Board, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our shareholders or by our subsidiaries to us, and any other factors that our Board may deem relevant.
Series A Convertible Preferred Stock
As of the date of this filing, there are 5 million shares of our Series A Convertible Preferred Stock outstanding. The designations, rights and preferences of our Series A Convertible Preferred Stock provide that we will pay, when, as and if declared by our board of directors, monthly cumulative cash dividends at an annual rate of 8.0%, which is equivalent to $0.80 per annum per share, based on the $10.00 liquidation preference. Dividends on the Series A Convertible Preferred Stock will accrue daily and be cumulative from, and including, the first day of the calendar month in which the shares are issued and will be payable monthly in arrears on the 15th day of each calendar month. Every month since November 1, 2019 the Audit Committee of our board of directors has declared a cash dividend of $0.0667 per share of Series A Convertible Preferred Stock payable on the 15th of each month to holders of record on the first of each month. We expect that our board of directors will continue to declare and pay monthly cash dividends on our Series A Convertible Preferred Stock, subject to the limitations to do so under North Carolina law.
Recent sales of unregistered securities
None, except as previously reported.
Purchases of equity securities by the issuer and affiliated purchasers
None.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable to a smaller reporting company.
| 18 |
| Table of Contents |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements because of several factors, including those set forth under the Part I, Item 1A, Risk Factors and Business sections in our 2020 10-K, this report, and our other filings with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report.
Overview
We own and operate the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and cbdMD Botanicals. We believe that we are an industry leader in producing and distributing broad spectrum CBD products 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
We saw significant growth during fiscal 2020 as we benefited from strong online growth and customer acquisition, while COVID-19 put pressure on our wholesale business. During 2021 we continued to grow cbdMD, our core brand as well as Paw CBD. Additionally during 2021 we began our international expansion efforts, launched our cbdMD Botanicals line, added a line of full spectrum products , and began investing in Therapeutics. Our E-commerce business remained steady despite the volatility of COVID-19 and its variants. During 2021, we rationalized some of our sponsorships but continued to invest heavily in brand building in other channels. Operationally we continued to build out our product portfolio and invested in ongoing quality certification, adding the US Hemp Authority certification as well as the NASC Quality Seal of approval.
Results of operations
The following tables provide certain selected consolidated financial information for the fiscal years ended September 30, 2021 and 2020:
|
| Fiscal |
|
| Fiscal |
|
|
|
| |||
|
| 2021 |
|
| 2020 |
|
| Change |
| |||
Total net sales |
| $ | 44,480,763 |
|
| $ | 41,883,734 |
|
| $ | 2,597,029 |
|
Cost of sales |
|
| 14,495,063 |
|
|
| 15,514,727 |
|
|
| (1,019,664 | ) |
Gross profit as a percentage of net sales |
|
| 67.4 | % |
|
| 63.0 | % |
|
| 4.5 | % |
Operating expenses |
|
| 49,601,690 |
|
|
| 43,950,862 |
|
|
| 5,650,828 |
|
Operating loss from operations |
|
| (19,615,990 | ) |
|
| (17,581,855 | ) |
|
| (2,034,135 | ) |
(Increase) decrease on contingent liability |
|
| (6,687,439 | ) |
|
| 29,780,000 |
|
|
| (36,467,439 | ) |
Net (loss) income before taxes |
|
| (24,289,889 | ) |
|
| 11,305,956 |
|
|
| (35,595,845 | ) |
Net (loss) income attributable to cbdMD Inc. common shareholders |
| $ | (25,949,498 | ) |
| $ | 12,235,423 |
|
| $ | (38,184,921 | ) |
The following tables provide certain selected unaudited consolidated financial information for the three months ended September 30, 2021 and 2020:
|
| September 30, |
|
| September 30, |
|
|
|
| |||
|
| 2021 |
|
| 2020 |
|
| Change |
| |||
Total net sales |
| $ | 9,793,327 |
|
| $ | 11,699,917 |
|
| $ | (1,906,590 | ) |
Cost of sales |
|
| 4,050,710 |
|
|
| 5,334,090 |
|
|
| (1,283,380 | ) |
Gross profit as a percentage of net sales |
|
| 58.6 | % |
|
| 54.4 | % |
|
| 4.2 | % |
Operating expenses |
|
| 12,755,319 |
|
|
| 10,896,899 |
|
|
| 1,858,420 |
|
Operating loss from operations |
|
| (7,012,702 | ) |
|
| (4,531,072 | ) |
|
| (2,481,630 | ) |
(Increase) decrease on contingent liability |
|
| 3,740,000 |
|
|
| (800,000 | ) |
|
| 4,540,000 |
|
Net (loss) income before taxes |
|
| (3,156,081 | ) |
|
| (5,363,562 | ) |
|
| 2,207,481 |
|
Net (loss) income attributable to cbdMD Inc. common shareholders |
| $ | (4,360,080 | ) |
| $ | (6,358,612 | ) |
| $ | 1,998,532 |
|
| 19 |
| Table of Contents |
Sales
We record product sales primarily through two main delivery channels, direct to consumers via our E-commerce sales and direct to wholesalers utilizing our internal sales team. The following table provides information on the contribution of net sales by type of sale to our total net sales for the fiscal years ended September 30, 2021 and 2020.
|
| Fiscal 2021 |
|
| % of total |
|
| Fiscal 2020 |
|
| % of total |
| ||||
Wholesale sales |
| $ | 11,572,807 |
|
|
| 26.0 | % |
| $ | 11,377,238 |
|
|
| 27.2 | % |
E-commerce sales |
|
| 32,907,956 |
|
|
| 74.0 | % |
|
| 30,456,496 |
|
|
| 72.8 | % |
Total Net Sales |
| $ | 44,480,763 |
|
|
|
|
|
| $ | 41,833,734 |
|
|
|
|
|
In addition, the following table provides information on the contribution of net sales by type of sale to our total net sales for the three months ended September 30, 2021 and 2020 (unaudited):
|
| September 30, |
|
|
|
|
| September 30, |
|
|
|
| ||||
|
| 2021 |
|
| % of total |
|
| 2020 |
|
| % of total |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Wholesale sales |
| $ | 2,523,739 |
|
|
| 25.8 | % |
| $ | 3,111,161 |
|
|
| 26.6 | % |
E-commerce sales |
|
| 7,269,588 |
|
|
| 74.2 | % |
|
| 8,588,755 |
|
|
| 73.4 | % |
Total Net Sales |
| $ | 9,793,327 |
|
|
|
|
|
| $ | 11,699,917 |
|
|
|
|
|
Total net sales during the fiscal year ended September 30, 2021 increased by $2,597,029, or 6% as compared to fiscal year ended September 30,2020. Wholesale sales remained nominally the same year over year while E-commerce sales increased by $2,451,461 or 8.0%, partially driven by ongoing brand and market efforts, the addition of multiple products during the year and the acquisition of the assets of Twenty Two during the fourth quarter. Net sales for the fourth quarter declined 16% year over year and were impacted due to changing consumer purchasing habits tied to the dynamic COVID-19 environment as well as supply chain challenges which created some out of stocking and delayed a number of new product launches, impacted marketing plans during the second half of Fiscal 2021.
Of our total net sales as indicated above, during the fiscal years ended September 30, 2021 and 2020 our Paw CBD line accounted for net sales of $5,659,796 and $4,492,833, respectively. The year over year growth in our Paw CBD brand is due to the expansion of products and increase in marketing efforts specific to the brand.
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, and includes labor for our service sales. Our cost of sales as a percentage of net sales was 32.6% and 37.0% for fiscal years ended September 30, 2021 and 2020, respectively. The change reflects the increasing revenue percentage of E-commerce sales, driving purchasing and manufacturing efficiencies, tighter inventory management, changes in the cost of raw materials, evaluating key vendors, negotiating volume pricing, as well as additional product offerings which continue to impact our cost of production.
Operating expenses
Our principal operating expenses include staff related expenses, advertising (which includes expenses related to industry distribution and trade shows), sponsorships, affiliate commissions, merchant fees, technology, travel, rent, professional service fees, and business insurance expenses. Our operating expenses on a consolidated basis increased approximately 12.4% for the fiscal year ended September 30,2021 versus the fiscal year ended September 30, 2020. The increase can be attributed to an increase in advertising and marketing expenses, and increase in payroll, increase in R&D and regulatory expenses (mostly due to cbdMD Therapeutics, LLC) as well as an increase in non-cash stock compensation.
Consolidated Operating Expenses
The following tables provide information on our approximate operating expenses for the fiscal years ended September 30, 2021 and 2020:
|
| Fiscal 2021 |
|
| Fiscal 2020 |
|
| Change |
| |||
Staff related expense |
| $ | 16,219,863 |
|
| $ | 14,864,072 |
|
| $ | 1,355,791 |
|
Accounting/Legal expense |
|
| 1,189,703 |
|
|
| 1,266,319 |
|
|
| (76,616 | ) |
Preofessional outside services |
|
| 1,206,929 |
|
|
| 1,300,046 |
|
|
| (93,118 | ) |
Advertising/marketing/social media/events/tradeshows |
|
| 15,835,139 |
|
|
| 9,994,985 |
|
|
| 5,840,154 |
|
Sponsorships |
|
| 2,067,534 |
|
|
| 4,977,067 |
|
|
| (2,909,533 | ) |
Affiliate commissions |
|
| 1,738,103 |
|
|
| 1,897,345 |
|
|
| (159,242 | ) |
Merchant Fees |
|
| 1,965,176 |
|
|
| 2,545,844 |
|
|
| (580,668 | ) |
R&D and regulatory |
|
| 1,422,791 |
|
|
| 424,450 |
|
|
| 998,341 |
|
Non-cash stock compensation |
|
| 3,149,689 |
|
|
| 1,985,804 |
|
|
| 1,163,885 |
|
Depreciation |
|
| 1,017,409 |
|
|
| 720,754 |
|
|
| 296,655 |
|
All other expenses |
|
| 3,789,355 |
|
|
| 3,974,175 |
|
|
| (184,820 | ) |
Totals |
| $ | 49,601,690 |
|
| $ | 43,950,862 |
|
| $ | 5,650,828 |
|
For the twelve months ended September 30, 2021, the overall operating expenses increased by $5,650,829 or 12.9% year over year, primarily driven by an increase in marketing spend of $5,840,154 million to drive increases in brand awareness, an increase in staff related expense of $1,355,791, an increase of non-cash stock compensation expense of $1,163,885 and an increase of R&D and regulatory expense related to Therapeutics of $998,341, partially offset by a decrease of $3,068,775 in sponsorships and affiliate expenses and a reduction in processing costs of $580,668.
| 20 |
| Table of Contents |
Corporate overhead and allocation of management fees to our segments
Included in our consolidated operating expenses are expenses associated with our corporate overhead which are not allocated to the operating business unit, including (i) staff related expenses; (ii) accounting and legal expenses; (iii) professional outside services; (iv) travel and entertainment expenses; (v) rent; (vi) business insurance; and (vii) non-cash stock compensation expense.
The following tables provide information on our approximate corporate overhead for the fiscal years ended September 30, 2021 and 2020:
|
| Fiscal 2021 |
|
| Fiscal 2020 |
|
| Change |
| |||
Staff related expense |
| $ | 1,725,535 |
|
| $ | 1,427,358 |
|
| $ | 298,177 |
|
Accounting/Legal expense |
|
| 866,876 |
|
|
| 769,119 |
|
|
| 97,757 |
|
Professional outside services |
|
| 333,666 |
|
|
| 491,729 |
|
|
| (158,063 | ) |
Travel expense |
|
| 7,381 |
|
|
| 23,188 |
|
|
| (15,807 | ) |
Business insurance |
|
| 607,288 |
|
|
| 388,878 |
|
|
| 218,410 |
|
Non-cash stock compensation |
|
| 3,161,805 |
|
|
| 1,985,804 |
|
|
| 1,176,001 |
|
Totals |
| $ | 6,702,551 |
|
| $ | 5,086,076 |
|
| $ | 1,616,475 |
|
The increase in corporate related expenses for the fiscal year ended September 30, 2021 over prior year is primarily due to the increase in non-cash stock compensation to employees and directors and increases in staffing related expenses as well as insurance costs.
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 which are not allocated to the operating business unit, including (i) staff related expenses and R&D and regulatory expenses.
The following tables provide information on our approximate corporate overhead for the fiscal year ended September 30, 2021. We did not incur expenses related to Therapeutics in 2020 as this subsidiary was not formed until March 15, 2021.
|
| Fiscal 2021 |
|
| Fiscal 2020 |
|
| Change |
| |||
Staff related expense |
| $ | 184,202 |
|
| $ | - |
|
| $ | 184,202 |
|
R&D and Regulatory |
|
| 648,616 |
|
|
| - |
|
|
| 648,616 |
|
Totals |
| $ | 832,818 |
|
| $ | - |
|
| $ | 832,818 |
|
The Therapeutic operating expenses include research and development activities for therapeutic applications.
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.
Increase in contingent liability
As described in Note 6 to the notes to the consolidated financial statements appearing elsewhere in this report, the earn-out provision for the Earnout Shares is accounted for and recorded as a contingent liability with increases in the liability recorded as non-cash other expense and decreases in the liability recorded as non- cash other income. For the three months ended September 30, 2021, the remaining contingent liabilities associated with the business combination, after the issuance of the second quarter fourth marking period Earnout Shares, were decreased by $3,512,558 to reflect their reassessed fair values as of September 30, 2021. This decrease is reflective of a change in value of the variable number of shares from June 30, 2021. In aggregate, we recorded income of $3,740,000 for the three months ended September 30, 2021 between the decrease in the value of the fourth marking period Earnout Shares and the decrease in value of the remaining contingent liabilities. In May 2020, and subsequently in June 2021, we updated the forecasts for performance of the post-acquisition entity based on current trends and performance that would impact the estimated likelihood that the revenue targets disclosed in Note 6 would be met. The primary catalyst for the $4,660,000 decrease in contingent liabilities is the change in our common share price between June 30, 2021 to September 30, 2021 from $2.90 per share to $2.08 per share. We expect to continue to record changes in the non-cash contingent liability through the balance of the earnout period.
In addition, our contingent liability increased by $416,000 at September 30, 2021 for the Twenty Two Earnout Shares that are part of the July 2021 acquisition of www.DirectCBDonline.com.
Liquidity and Capital Resources
We had cash and cash equivalents on hand of $26,411,424 and working capital of $29,595,214 at September 30, 2021 as compared to cash and cash equivalents on hand of $14,824,644 and working capital of $16,023,174 at September 30, 2020. Our current assets increased approximately 53.9% at September 30, 2021 from September 30, 2020, which is primarily attributable to an increase in cash received under the public offering of our shares of our 8.0% Series A Convertible Preferred Stock in December 2020 and in July 2021. Our current liabilities decreased approximately 10% at September 30, 2021 from September 30, 2020. This decrease is primarily attributable to a decrease in accrued expenses as well as the forgiveness of our Paycheck Protect Program Loan.
On July 1, 2021 we closed a follow-on firm commitment underwritten public offering of shares of our 8.0% Series A Convertible Preferred Stock resulting in total net proceeds to us of approximately $15.3 million.
During the fiscal year ended September 30, 2021 we used cash primarily to fund our operations.
| 21 |
| Table of Contents |
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). We have sufficient working capital to fund our operations.
Our goal from a liquidity perspective is to use operating cash flows to fund day to day operations and we have not met this goal as cash flow from operations has been a net use of $12,627,320 (excluding the extinguishment of the PPP loan totaling $1,466,113) and $10,664,336 for the fiscal years ended September 30, 2021 and 2020, respectively.
Earnout Shares
As described in Note 6 in notes to our consolidated financial statements appearing elsewhere in this report, on March 31, 2021 we entered into Addendum No. 1 to the Merger Agreement with the holders of the remaining Earnout Rights which amended the measurement periods within the third marking period to change the determination of the aggregate net revenues within the third marking period to a quarterly basis for each of the six fiscal quarters within the third marking period, beginning with the quarter ended March 31, 2021, instead of the initial 18 month period. While this change in the measurement date has no effect on the number of remaining Earnout Shares issuable under the Earnout Rights, nor the revenue targets, it will result in the issuance of the Earnout Shares associated with the third marketing period (assuming the revenue targets are met under the terms of the Merger Agreement) on a quarterly basis instead of at the end of the 18 month period. Because the Earnout Shares are earned based on the Company’s earned revenue and by issuing these shares quarterly, as compared to at the end of the eight quarters, we expect that this change has the potential to reduce the volatile impact of the contingent liability on our Net Income results and consequentially its non-cash impact to our financial statements with each subsequent quarter.
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.
We believe that the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.
Contingent liability
A significant component of the purchase price consideration for our 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 8. We 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.
We recognize both the fixed number of shares to be issued, and the variable number of shares to be potentially issued, as contingent liabilities on our Consolidated Balance Sheets. These contingent liabilities were recorded at fair value upon the acquisition date and are remeasured quarterly based on the reassessed fair value as of the end of that quarterly reporting period. Additionally, as the fixed shares are issued, the value of the shares at that time are reclassified from contingent liability to additional paid in capital on the balance sheet.
Leases
Effective October 1, 2019, we have adopted ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02") which provides guidance requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases. We determine whether an arrangement is a lease at inception and classify it as finance or operating. All of our leases are classified as operating leases. Our leases do not contain any residual value guarantees. Our current lease activities are recorded in operating lease right-of-use (“ROU”) assets, operating lease short term liabilities and operating lease long term liabilities in the consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Variable lease payments are not included in the calculation of the right-of-use assets and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
As a lessee, we elected a short-term lease exception policy on all classes of underlying assets, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less).
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.
| 22 |
| Table of Contents |
Recent accounting pronouncements
Please see Note 1 – Organization and Summary of Significant Accounting Policies appearing in the consolidated financial statements included in this report for information on accounting pronouncements.
Off balance sheet arrangements
As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please see our Financial Statements beginning on page F-1 of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to our management, including our co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Exchange Act Rule 13a-15(e), we carried out an evaluation, under the supervision and with the participation of our management, including our co-Chief Executive Officers and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our co-Chief Executive Officers and our Chief Financial Officer concluded that our disclosure controls were effective at September 30, 2021.
Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
| · | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
|
|
|
| · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
|
|
|
| · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
As an emerging growth company experiencing rapid growth, we have worked diligently to improve processes within the Company which has created continuous change, specifically including in our IT and manufacturing environments that increase risk related to transaction processing which can impact our financial reporting. We have implemented a significant number of manual compensating controls to address this risk.
| 23 |
| Table of Contents |
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Our management, including our co-CEOs and our CFO, assessed the effectiveness of our internal control over financial reporting as of September 30, 2021. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the 2013 Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as it relates to the classification of common stock issuable under the acquisition of Twenty Two Capital, LLC in the fourth quarter of fiscal 2021. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, our review process on the classification of such certain earnout on the business combination accounting did not account for certain GAAP nuances and resulted in a one-time reclassification on the balance sheet and a quantitatively immaterial adjustment to the consolidated income statement.
The control has been remediated prior to the filing of this report as our review process for future transactions has been adjusted to include third party confirmation/review and/or additional internal accounting scrutiny.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our last fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, but for the additional review procedures renumerated above.
ITEM 9B. OTHER INFORMATION.
None.
| 24 |
| Table of Contents |
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item will be contained in our proxy statement for our 2022 Annual Meeting of shareholders to be filed on or prior to January 28, 2022 (the “Proxy Statement”) and is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be contained in our Proxy Statement and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this item will be contained in our Proxy Statement and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this item will be contained in our Proxy Statement and is incorporated herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item will be contained in our Proxy Statement and is incorporated herein by this reference.
| 25 |
| Table of Contents |
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) | (1) Financial statements. | ||
The consolidated financial statements and Report of Independent Registered Accounting Firm are listed in the “Index to Financial Statements and Schedules” beginning on page F-1.
(2) Financial statement schedules
All schedules for which provision is made in the applicable accounting regulations of the SEC are either not required under the related instructions, are not applicable (and therefore have been omitted), or the required disclosures are contained in the consolidated financial statements herein.
(3) Exhibits.
The exhibits that are required to be filed or incorporated by reference herein are listed in the Exhibit Index.
ITEM 16. FORM 10-K SUMMARY.
None
| 26 |
| Table of Contents |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: December 17, 2021 | cbdMD, Inc. | ||
|
|
|
|
| By: | /s/ Martin A. Sumichrast |
|
|
| Martin A. Sumichrast |
|
|
| Co-Chief Executive Officer, (co-Principal Executive Officer) |
|
|
| ||
Date: December 17, 2021 | cbdMD, Inc. | ||
|
| ||
| By: | /s/ Raymond S. Coffman |
|
| Raymond S. Coffman | ||
| Co-Chief Executive Officer, (co-Principal Executive Officer) | ||
|
| ||
Date: December 17, 2021 | cbdMD, Inc. | ||
|
|
|
|
| By: | /s/ T. Ronan Kennedy |
|
|
| T. Ronan Kennedy |
|
|
| Chief Financial Officer, (Principal Accounting and Financial Officer) |
|
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Ronan Kennedy his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments and supplements to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name |
| Positions |
| Date |
|
|
|
|
|
/s/ Martin A. Sumichrast |
| Chairman of the Board of Directors, co-Chief Executive Officer |
| December 17, 2021 |
Martin A. Sumichrast |
|
|
|
|
|
|
|
|
|
/s/ Raymond S, Coffman |
| Co-Chief Executive Officer, Director |
| December 17, 2021 |
Raymond S. Coffman |
|
|
|
|
|
|
|
|
|
/s/ Bakari Sellers |
| Director |
| December 17, 2021 |
Bakari Sellers |
|
|
|
|
|
|
|
|
|
/s/ Scott Stephen |
| Director |
| December 17, 2021 |
Scott Stephen |
|
|
|
|
|
|
|
|
|
/s/ Peter Ghiloni |
| Director |
| December 17, 2021 |
Peter Ghiloni |
|
|
|
|
|
|
|
|
|
/s/ William Raines III |
| Director |
| December 17, 2021 |
William Raines III |
|
|
|
|
|
|
|
| December 17, 2021 |
/s/ Sim Farrar |
| Director |
|
|
Sim Farrar |
|
|
|
|
| 27 |
| Table of Contents |
EXHIBIT INDEX
|
|
|
| Incorporated by Reference |
| Filed or Furnished Herewith | |||||
No. |
| Exhibit Description |
| Form |
| Date Filed |
| Number |
| ||
|
|
|
|
|
|
|
|
|
|
| |
|
| 8-K |
| 5/14/19 |
| 1.1 |
|
| |||
|
| 8-K |
| 10/16/19 |
| 1.1 |
|
| |||
|
| 8-K |
| 1/10/20 |
| 1.1 |
|
| |||
|
| 8-K |
| 12/9/20 |
| 1.1 |
|
| |||
|
| 8-K |
| 6/30/21 |
| 1.1 |
|
| |||
|
| 8-K |
| 12/4/18 |
| 2.1 |
|
| |||
|
| 10-Q |
| 2/14/19 |
| 2.2 |
|
| |||
|
| 10-Q |
| 2/14/19 |
| 2.3 |
|
| |||
|
| 10-Q |
| 2/14/19 |
| 2.4 |
|
| |||
|
| 10-Q |
| 2/14/19 |
| 2.5 |
|
| |||
|
| 1-A |
| 9/18/17 |
| 2.1 |
|
| |||
| Articles of Amendment to the Articles of Incorporation filed April 22, 2015 |
| 1-A |
| 9/18/17 |
| 2.2 |
|
| ||
| Articles of Amendment to the Articles of Incorporation filed June 22, 2015 |
| 1-A |
| 9/18/17 |
| 2.3 |
|
| ||
| Articles of Amendment to the Articles of Incorporation filed November 17, 2016 |
| 1-A |
| 9/18/17 |
| 2.4 |
|
| ||
| Articles of Amendment to the Articles of Incorporation filed December 5, 2016 |
| 1-A |
| 9/18/17 |
| 2.5 |
|
| ||
|
| 1-A |
| 9/18/17 |
| 2.6 |
|
| |||
| Articles of Amendment to Articles of Incorporation dated April 22, 2019 |
| 8-K |
| 4/29/19 |
| 3.7 |
|
| ||
|
| 8-A |
| 10/11/19 |
| 3.1(f) |
|
| |||
|
| 1-A |
| 9/18/17 |
| 3.7 |
|
| |||
|
| 1-A |
| 9/18/17 |
| 3.8 |
|
| |||
| Form of stock option award under 2015 Equity Compensation Plan+ |
| 1-A |
| 9/18/17 |
| 3.9 |
|
| ||
|
| 8-K |
| 1/14/21 |
| 10.1 |
|
| |||
|
| S-1 |
| 9/26/18 |
| 4.10 |
|
| |||
|
| 8-K |
| 5/14/19 |
| 4.1 |
|
| |||
|
| 8-K |
| 10/16/19 |
| 4.1 |
|
| |||
|
| 8-K |
| 1/10/20 |
| 4.1 |
|
| |||
|
| 8-K |
| 12/9/20 |
| 4.1 |
|
| |||
|
| 8-K |
| 6/30/21 |
| 4.1 |
|
| |||
|
| 1-A |
| 9/18/17 |
| 6.21 |
|
| |||
|
| 8-K |
| 9/7/18 |
| 10.75 |
|
| |||
|
| 8-K |
| 11/17/20 |
| 10.1 |
|
| |||
|
| 8-K |
| 12/20/18 |
| 10.4 |
|
| |||
|
| 8-K |
| 11/17/20 |
| 10.2 |
|
| |||
|
| 8-K |
| 9/7/18 |
| 10.76 |
|
| |||
|
| 8-K |
| 9/21/20 |
| 10.1 |
|
| |||
|
| 8-K |
| 9/21/20 |
| 10.2 |
|
| |||
|
| 8-K |
| 12/20/18 |
| 10.2 |
|
| |||
|
| 10-Q |
| 8/14/19 |
| 10.1 |
|
| |||
|
| 10-Q |
| 2/13/20 |
| 10.1 |
|
| |||
|
| 8-K |
| 2/28/20 |
| 10.1 |
|
| |||
|
| 10-Q |
| 8/21/20 |
| 10.1 |
|
| |||
|
| 8-K |
| 12/9/20 |
| 10.1 |
|
| |||
|
| 8-K |
| 4/21/21 |
| 10.1 |
|
| |||
|
| 8-K |
| 4/21/21 |
| 10.2 |
|
| |||
|
| 8-K |
| 7/27/21 |
| 10.1 |
|
| |||
| Employment Agreement between cbdMD, Inc. and John Wiesehan III dated July 22, 2021+ |
| 8-K |
| 7/27/21 |
| 10.2 |
|
| ||
| John Wiesehan Separation Agreement and General Release dated December 1, 2021+ |
| 8-K |
| 12/3/21 |
| 10.1 |
|
| ||
| Executive Employment Agreement dated October 1, 2021 between cbdMD, Inc. and T. Ronan Kennedy+ |
| 8-K |
| 10/5/21 |
| 10.1 |
|
| ||
|
| 1-A |
| 9/18/17 |
| 15.1 |
|
| |||
|
|
|
|
|
|
|
| Filed | |||
|
|
|
|
|
|
|
| Filed | |||
24.1 |
| Power of attorney (included on signature page of this report) |
|
|
|
|
|
|
| Filed | |
| Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer |
|
|
|
|
|
|
| Filed | ||
| Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer |
|
|
|
|
|
|
|
| ||
| Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|
|
|
|
|
|
| Filed | ||
| Section 1350 Certification of Chief Executive Officer and Chief Financial Officer |
|
|
|
|
|
|
| Filed | ||
101 INS |
| XBRL Instance Document |
|
|
|
|
|
|
| Filed | |
101 SCH |
| XBRL Taxonomy Extension Schema |
|
|
|
|
|
|
| Filed | |
101 CAL |
| XBRL Taxonomy Extension Calculation Linkbase |
|
|
|
|
|
|
| Filed | |
101 LAB |
| XBRL Taxonomy Extension Label Linkbase |
|
|
|
|
|
|
| Filed | |
101 PRE |
| XBRL Taxonomy Extension Presentation Linkbase |
|
|
|
|
|
|
| Filed | |
101 DEF |
| XBRL Taxonomy Extension Definition Linkbase |
| ||||||||
|
|
|
| ||||||||
+Indicated management contract or compensatory plan. | |||||||||||
| 28 |
| Table of Contents |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
cbdMD, Inc. and subsidiaries
Charlotte, North Carolina
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of cbdMD, Inc. and subsidiaries (the “Company”) as of September 30, 2021 and 2020, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ (deficit) equity, and cash flows for each of the years in the two-year period ended September 30, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Cherry Bekaert LLP | |
|
|
We have served as the Company’s auditor since 2016. | |
|
|
Charlotte, North Carolina | |
December 17, 2021 |
|
| 29 |
| Table of Contents |
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
cbdMD, INC. |
CONSOLIDATED BALANCE SHEETS |
SEPTEMBER 30, 2021 AND 2020 |
|
| September 30, |
|
| September 30, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Assets |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ |
|
| $ |
| ||
Accounts receivable |
|
|
|
|
|
| ||
Accounts receivable – discontinued operations |
|
|
|
|
|
| ||
Marketable securities |
|
|
|
|
|
| ||
Investment other securities, at cost |
|
|
|
|
|
| ||
Inventory |
|
|
|
|
|
| ||
Inventory prepaid |
|
|
|
|
|
| ||
Prepaid software |
|
|
|
|
|
| ||
Prepaid sponsorship |
|
|
|
|
|
| ||
Prepaid expenses and other current assets |
|
|
|
|
|
| ||
Total current assets |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
| ||
Operating lease assets |
|
|
|
|
|
| ||
Deposits for facilities |
|
|
|
|
|
| ||
Intangible assets |
|
|
|
|
|
| ||
Goodwill |
|
|
|
|
|
| ||
Total other assets |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Total assets |
| $ |
|
| $ |
| ||
See Notes to Consolidated Financial Statements |
| |||||||||||
| 30 |
| Table of Contents |
CONSOLIDATED BALANCE SHEETS |
SEPTEMBER 30, 2021 AND 2020 |
(continued) |
|
| September 30, |
|
| September 30, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Liabilities and shareholders' equity |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
| ||
Accounts payable |
| $ |
|
| $ |
| ||
Accrued expenses |
|
|
|
|
|
| ||
Operating leases – current portion |
|
|
|
|
|
| ||
Paycheck Protection Program Loan, current portion |
|
|
|
|
|
| ||
Note payable |
|
|
|
|
|
| ||
Total current liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Long term liabilities: |
|
|
|
|
|
|
|
|
Long term liabilities |
|
|
|
|
|
| ||
Paycheck Protection Program Loan |
|
|
|
|
|
| ||
Operating leases - long term portion |
|
|
|
|
|
| ||
Contingent liability |
|
|
|
|
|
| ||
Deferred tax liability |
|
|
|
|
|
| ||
Total long term liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
| ||
Commitments and Contingencies (Note 11) |
|
|
|
|
|
|
|
|
cbdMD, Inc. shareholders' equity: |
|
|
|
|
|
|
|
|
Preferred stock, authorized |
|
|
|
|
|
| ||
Common stock, authorized |
|
|
|
|
|
| ||
Additional paid in capital |
|
|
|
|
|
| ||
Accumulated deficit |
|
| ( | ) |
|
| ( | ) |
Total cbdMD, Inc. shareholders' equity |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity |
| $ |
|
| $ |
| ||
See Notes to Consolidated Financial Statements |
| 31 |
| Table of Contents |
cbdMD, INC. |
CONSOLIDATED STATEMENTS OF OPERATIONS |
SEPTEMBER 30, 2021 AND 2020 |
|
| 2021 |
|
| 2020 |
| ||
|
|
|
|
|
|
| ||
Gross Sales |
| $ |
|
| $ |
| ||
Allowances |
|
| ( | ) |
|
| ( | ) |
Total Net Sales |
|
|
|
|
|
| ||
Cost of sales |
|
|
|
|
|
| ||
Gross Profit |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
| ||
(Loss) from operations |
|
| ( | ) |
|
| ( | ) |
Realized and Unrealized gain (loss) on marketable and other securities, including impairments |
|
|
|
|
| ( | ) | |
Gain on extinguishment of debt |
|
|
|
|
|
| ||
(Increase) decrease of contingent liability |
|
| ( | ) |
|
|
| |
Other income |
|
|
|
|
|
| ||
Interest (expense) income |
|
| ( | ) |
|
|
| |
(Loss) Income before provision for income taxes |
|
| ( | ) |
|
|
| |
|
|
|
|
|
|
|
|
|
Benefit for income taxes |
|
|
|
|
|
| ||
Net (Loss) Income from continuing operations |
|
| ( | ) |
|
|
| |
Net (Loss) from discontinued operations, net of tax (Note 14) |
|
|
|
|
| ( | ) | |
Net (Loss) Income |
|
| ( | ) |
|
|
| |
Preferred dividends |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Net (Loss) Income attributable to cbdMD, Inc. common shareholders |
| $ | ( | ) |
| $ |
| |
|
|
|
|
|
|
|
|
|
Net (Loss) Income per share: |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
| ( | ) |
|
|
| |
Diluted earnings per share |
|
| ( | ) |
|
|
| |
Weighted average number of shares Basic: |
|
|
|
|
|
| ||
Weighted average number of shares Diluted: |
|
| - |
|
|
|
| |
See Notes to Consolidated Financial Statements |
| 32 |
| Table of Contents |
cbdMD, INC. |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
FOR THE YEARS ENDED SEPTEMBER 30, 2021 AND 2020 |
|
| 2021 |
|
| 2020 |
| ||
|
|
|
|
|
|
| ||
Net (Loss) Income |
| $ | ( | ) |
| $ |
| |
Comprehensive (Loss) Income |
|
| ( | ) |
|
|
| |
|
|
|
|
|
|
|
|
|
Preferred dividends |
|
| ( | ) |
|
| ( | ) |
Comprehensive (Loss) Income attributable to cbdMD, inc. common shareholders |
| $ | ( | ) |
| $ |
| |
See Notes to Consolidated Financial Statements |
| 33 |
| Table of Contents |
cbdMD, INC. |
|
CONSOLIDATED STATEMENT OF CASH FLOWS |
|
FOR THE YEARS ENDED SEPTEMBER 30, 2021 AND 2020 |
|
|
| 2021 |
|
| 2020 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net (Loss) Income |
| $ | ( | ) |
| $ |
| |
Adjustments to reconcile net (income) loss to net cash used by operating activities: |
|
|
|
|
|
|
|
|
Stock based compensation |
|
|
|
|
|
| ||
Restricted stock expense |
|
|
|
|
|
| ||
Marketing stock amortization |
|
|
|
|
|
| ||
Issuance of stock / warrants for service |
|
|
|
|
|
| ||
Inventory and materials impairment |
|
|
|
|
|
| ||
Impairment on discontinued operations asset |
|
|
|
|
|
| ||
Depreciation and amortization |
|
|
|
|
|
| ||
Other than temporary impairment other securities and other accounts receivable |
|
|
|
|
|
| ||
Increase/(Decrease) in contingent liability |
|
|
|
|
| ( | ) | |
Realized and unrealized loss of Marketable and other securities |
|
| ( | ) |
|
|
| |
Merchant reserve settlement |
|
|
|
|
|
| ||
Termination benefit |
|
|
|
|
|
| ||
Extinguishment of Paycheck Protection Program Loan |
|
| ( | ) |
|
|
| |
Amortization of operating lease asset |
|
|
|
|
|
| ||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| ( | ) |
|
|
| |
Deposits |
|
|
|
|
| ( | ) | |
Merchant reserve |
|
|
|
|
|
| ||
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 |
|
| ( | ) |
|
| ( | ) |
Purchase of DirectCBDOnline.com |
|
| ( | ) |
|
|
| |
Purchase of property and equipment |
|
| ( | ) |
|
| ( | ) |
Cash used by investing activities |
|
| ( | ) |
|
| ( | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
|
|
|
| ||
Proceeds from issuance of preferred stock |
|
|
|
|
|
| ||
PPP loan |
|
|
|
|
|
| ||
Note payable |
|
| ( | ) |
|
|
| |
Preferred dividend distribution |
|
| ( | ) |
|
| ( | ) |
Deferred Issuance costs |
|
|
|
|
|
| ||
Cash provided by financing activities |
|
|
|
|
|
| ||
Net increase (decrease) in cash |
|
|
|
|
|
| ||
Cash and cash equivalents, beginning of period |
|
|
|
|
|
| ||
Cash and cash equivalents, end of period |
| $ |
|
| $ | 14,824,646 |
| |
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2021 |
|
| 2020 |
| ||
|
|
|
|
|
|
|
|
|
Cash Payments for: |
|
|
|
|
|
|
|
|
Interest expense |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Non-cash financial/investing activities: |
|
|
|
|
|
|
|
|
Issuance of Contingent earnout shares: |
| $ |
|
| $ |
| ||
Warrants issued to representative |
| $ |
|
| $ |
| ||
See Notes to Consolidated Financial Statements |
| |||||||
| 34 |
| Table of Contents |
cbdMD, INC. |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY |
FOR THE YEARS ENDED SEPTEMBER 30, 2021 AND 2020 |
|
|
| Common Stock |
|
| Preferred Stock |
|
| Additional Paid in |
|
| Accumulated |
|
|
|
|
| |||||||||||
|
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| ||||||
Balance, September 30, 2020 |
|
|
|
| $ |
|
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| ||||||
Issuance of Preferred Stock |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of options for share based compensation |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of stock costs |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of restricted stock for share based compensation |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Preferred dividend |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Net (Loss) Income |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Balance, December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
| ||||||
Issuance of Common stock |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of options for share based compensation |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of restricted stock for share based compensation |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Preferred dividend |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Net (Loss) Income |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Balance, March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
| ||||||
Issuance of Common stock |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of options for share based compensation |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of restricted stock for share based compensation |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Preferred dividend |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Net Income (loss) |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance, June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
| ||||||
Issuance of Common stock |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of Preferred Stock |
|
| - |
|
|
| - |
|
|
| |
|
|
| |
|
|
|
|
|
| - |
|
|
|
| ||
Issuance of options for share based compensation |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of restricted stock for share based compensation |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Acquisition of DCO |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
| - |
|
|
|
| ||
Preferred dividend |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Net (Loss) Income |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Balance, September 30, 2021 |
|
|
|
| $ |
|
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| ||||||
See Notes to Condensed Consolidated Financial Statements |
| 35 |
| Table of Contents |
cbdMD, INC. |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY |
FOR THE YEARS ENDED SEPTEMBER 30, 2021 AND 2020 |
|
|
| Common Stock |
|
| Preferred Stock |
|
| Additional Paid in |
|
| Accumulated |
|
|
|
|
| |||||||||||
|
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| ||||||
Balance, September 30, 2019 |
|
|
|
| $ |
|
|
| - |
|
| $ | - |
|
| $ |
|
| $ | ( | ) |
| $ |
| ||||
Issuance of Preferred Stock |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
| ||||
Issuance of options for share based compensation |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of stock costs |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | |||
Issuance of restricted stock for share based compensation |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Preferred dividend |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Adoption of ASU 2016-02 |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Net Income (loss) |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance, December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
| ||||||
Issuance of Common stock |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Exercise of options for share based compensation |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of stock/warrants for services |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Preferred dividend |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Net Income (loss) |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance, March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
| ||||||
Issuance of options for share based compensation |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of stock/warrants for services |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Preferred dividend |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Net (Loss) Income |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Balance, June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
| ||||||
Issuance of Common stock |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
| |||||
Issuance of options for share based compensation |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of stock/warrants for services |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Preferred dividend |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Net (Loss) Income |
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Balance, September 30, 2020 |
|
|
|
| $ |
|
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| ||||||
See Notes to Condensed Consolidated Financial Statements |
| 36 |
| Table of Contents |
cbdMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED SEPTEMBER 30, 2021 AND 2020
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
cbdMD, Inc. ("cbdMD", "we", "us", “our”, or the “Company”) is a North Carolina corporation formed on March 17, 2015 as Level Beauty Group, Inc. In November 2016 we changed the name of the Company to Level Brands, Inc. and on May 1, 2019 we changed the name of our Company to cbdMD, Inc. We operate from our offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30.
On December 20, 2018 (the “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, the Company had a contractual obligation, after approval by our shareholders, to issue
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 and other hemp-derived cannabinoids are natural substances produced from the hemp plant and the products manufactured by the Company.
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.
The consolidated financial statements of cbdMD have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report filed with the SEC on Form 10-K for the year ended September 30, 2020 (“2020 10-K”) as filed with the SEC on December 22, 2020. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of consolidated financial position and the consolidated results of operations for the interim periods presented have been reflected herein.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries CBDI, Paw CBD and Therapeutics. All material intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The Company's consolidated financial statements have been prepared in accordance with US GAAP and requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, certain assumptions related to the valuation of investments other securities, acquired intangible and long-lived assets and the recoverability of intangible and long-lived assets and income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities, contingent liability and, hence consideration for the Mergers is a material estimate. Actual results could differ from these estimates.
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restriction on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. We continue to monitor the waning trends on infection rates and are cautiously optimistic future impacts to the business environment will be minimal.
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 receivables 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 September 30, 2021 and September 30, 2020, we had an allowance for doubtful accounts of $
| 37 |
| Table of Contents |
Merchant Receivable and Reserve
The Company primarily sells its products through the internet and has an arrangement to process customer payments with multiple third-party payment processors. 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.
Customer Deposits
Customer deposits consist of payments received in advance of revenue recognition. Revenue is recognized as revenue recognition criteria are met.
Property and Equipment
Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are
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 recorded at fair value. Any changes in fair value for marketable securities during a given period will be recorded as an unrealized gain or loss in the consolidated statement of operations. For investment other securities without a readily determinable fair value, the Company may elect to estimate its fair value at cost less impairment plus or minus changes resulting from observable price changes.
Goodwill
Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Identifiable intangible assets acquired in business combinations are recorded based on their fair values at the date of acquisition. Goodwill is not subject to amortization but must be evaluated for impairment annually. The Company tests for goodwill impairment annually or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
In performing a goodwill test, the Company performs a qualitative evaluation and if necessary, a quantitative evaluation. Factors considered in the qualitative test include specific operating results as well as new events and circumstances impacting the operations or cash flows of the business acquired. For the quantitative test, the Company assesses goodwill for impairment by comparing the carrying value of the business to the respective fair value. The Company determines the fair value of its acquired business using a combination of income-based and market-based approaches and incorporates assumptions it believes market participants would utilize. The income-based approach utilizes discounted cash flows while the market-based approach utilizes market multiples. These approaches are dependent upon internally developed forecasts that are based upon annual budgets and longer-range strategic plans. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the respective acquired business and in the internally developed forecasts. The Company has analyzed a variety of factors in light of the known impact to date of the COVID-19 pandemic on its business to determine if a circumstance could trigger an impairment loss, and, at this time and based on the information presently known, does not believe that it is more likely than not that an impairment loss has been incurred.
Intangible Assets
The Company's intangible assets consist of trademarks and other intellectual property, all of which are accounted for in accordance with Accounting Standards Codification (ASC) Topic 350, Intangibles – Goodwill and Other. The Company employs the non-amortization approach to account for purchased intangible assets having indefinite lives. Under the non-amortization approach, intangible assets having indefinite lives are not amortized into the results of operations, but instead are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value. We perform an annual impairment analysis as of August 1 of each fiscal year on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. If a quantitative analysis is necessary, we would analyze various aspects including revenues from the business, associated with the intangible assets. In addition, intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. In addition, the Company has analyzed a variety of factors in light of the known impact to date of the COVID-19 pandemic on its business to determine if a circumstance could trigger an impairment loss, and, at this time there have been no events identified that would trigger an impairment.
| 38 |
| Table of Contents |
Contingent Liability
A significant component of the purchase price consideration for the Company’s acquisition of Cure Based Development includes a fixed number of future shares to be issued as well as a variable number of future shares to be issued based upon the post-acquisition entity reaching certain specified future revenue targets, as further described in Note 6. The Company made a determination of the fair value of the contingent liabilities as part of the valuation of the assets acquired and liabilities assumed in the business combination.
The Company recognized both the fixed number of shares to be issued, and the variable number of shares to be potentially issued, as contingent liabilities on its consolidated balance sheets. These contingent liabilities were recorded at fair value upon the acquisition date and are remeasured quarterly based on the reassessed fair value as of the end of that quarterly reporting period. Additionally, as the fixed shares were issued on April 19, 2019, the value of the shares at that time, in the amount of $
A component of the purchase price consideration for the Company’s acquisition of Twenty Two Capital, LLC (“Twenty Two”) includes 200,000 of future shares (“Twenty Two Earnout Shares”) to be issued upon the post-acquisition entity reaching certain specified revenue targets, as further described in Note 6. Under GAAP, the Company is required to record a non-cash contingent liability associated with the Twenty Two Earnout Shares and at the date of the acquisition, recorded a total contingent liability of $
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 by the customer. The Company has reviewed its various revenue streams for its other contracts under the five-step approach.
| 39 |
| Table of Contents |
Allocation of Transaction Price
In the Company’s current business model, it does not have contracts with customers which have multiple elements as revenue is driven purely by online product sales or purchase order-based product sales. However, at times in the past, the Company has entered into contracts with customers wherein there were multiple elements that may have disparate revenue recognition patterns. In such instances, the Company must allocate the total transaction price to these various elements. This is achieved by estimating the standalone selling price of each element, which is the price at which we sell a promised good or service separately to a customer.
Revenue Recognition
The Company records revenue from the sale of its products when risk of loss and title to the product are transferred to the customer, which is upon shipping (and is typically FOB shipping) which is when our performance obligation is met. Net sales are comprised of gross revenues less product returns, trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions. These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company currently offers a 60-day, money back guarantee.
Disaggregated Revenue
The Company’s product revenue is generated primarily through two sales channels, E-commerce sales (formerly referred to as consumer sales) and wholesale sales. The Company believes that these categories appropriately reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors.
A description of the Company’s principal revenue generating activities are as follows:
| - | E-commerce sales - consumer products sold through the Company’s online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due prior to the date of shipment; and |
|
|
|
| - | Wholesale sales - products sold to the Company’s wholesale customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms vary and can typically be 30 days from the date control over the product is transferred to the customer |
The following table represents a disaggregation of revenue by sales channel:
|
| Fiscal 2021 |
|
| % of total |
|
| Fiscal 2020 |
|
| % of total |
| ||||
Wholesale sales |
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
E-commerce sales |
|
|
|
|
| % |
|
|
|
|
| % | ||||
Total Net Sales |
| $ |
|
|
|
|
|
| $ | 41,833,734 |
|
|
|
|
| |
Contract assets represent unbilled receivables and are presented within accounts receivable, net on the consolidated balance sheets. Contract liabilities represent unearned revenues and are presented as deferred revenue or customer deposits on the consolidated balance sheets. The Company has no material contract assets nor contract liabilities at September 30, 2021.
Cost of Sales
The Company’s cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third-party providers, and outbound freight for the Company’s products sales. 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.
Advertising Costs
The Company expenses all costs of advertising and related marketing and promotional costs as incurred. The Company incurred approximately $
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.
| 40 |
| Table of Contents |
US GAAP requires management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain tax position that more likely than not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company, and has concluded that as of September 30, 2021 and 2020, there were no uncertain tax positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the consolidated financial statements.
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 not have any customers that represented a significant amount of our sales for the year ended September 30, 2021.
Stock-Based Compensation
The Company accounts for its stock compensation under the ASC 718-10-30, Compensation - Stock Compensation using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments.
The Company uses the Black-Scholes model for measuring the fair value of options and warrants. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods. The Company recognizes forfeitures when they occur.
Earnings (Loss) Per Share
The Company uses ASC 260-10, Earnings Per Share for calculating the basic and diluted income (loss) per share. The Company computes basic income (loss) per share by dividing net income (loss) and net income (loss) attributable to common shareholders, after deducting preferred stock dividends, by the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.
New Accounting Standards
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The ASU modifies, removes, and adds several disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 on October 1, 2020. The adoption of this standard had no material impact on the Company's consolidated financial statements and disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes, Simplifying the Accounting for Income Taxes (Topic 740). The ASU eliminates certain exceptions to the guidance in Accounting Standards Codification (ASC or Codification) 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance also clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently in the process of evaluating the impact of this standard update.
NOTE 2 – MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES
The Company has, from time to time, entered into contracts where a portion of the consideration provided by the customer in exchange for the Company's services was common stock, options or warrants (an equity position). In these situations, upon invoicing the customer for the stock or other instruments, the Company recorded the receivable as accounts receivable other, and used the value of the stock or other instrument upon invoicing to determine the value. If there is insufficient data to support the valuation of the security directly, the Company will value it, and the underlying revenue, on the estimated fair value of the services provided. In determining fair value of marketable securities and investment other securities, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in our assessment of fair value. The Company determines the fair value fair value of marketable securities and investment other securities based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
| · | Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. |
|
|
|
| · | Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
|
|
|
| · | Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. |
| 41 |
| Table of Contents |
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 year ended September 30, 2021 and September 30, 2020 the Company recorded $
On December 30, 2017, the Company entered into an agreement with Isodiol International, Inc., whereby the Company provided pharmaceutical grade phytochemical compound development services. As payment for these services, the Company has received
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. In valuing the investment, the Company used the value paid, which was the price offered to all third-party investors. The Company assessed the common stock and determined there was not an impairment for the period ended September 30, 2021.
The table below summarizes the assets valued at fair value as of September 30, 2021:
|
| In Active |
|
|
|
|
|
|
|
|
|
| ||||
|
| Markets for |
|
| Significant Other |
|
| Significant |
|
|
| |||||
|
| Identical Assets |
|
| Observable |
|
| Unobservable |
|
| Total Fair Value |
| ||||
|
| and Liabilities |
|
| Inputs |
|
| Inputs |
|
| at September 30, |
| ||||
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| 2021 |
| ||||
Marketable Securities |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Investment other securities |
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| 2021 |
| ||||
Balance at September 30, 2019 |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Change in value of equities |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | |
Additional Investment |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Change in value of equities |
|
|
|
| - |
|
|
| - |
|
|
|
| |||
Additional Investment |
|
|
|
|
| - |
|
|
| |
|
|
| |
| |
Balance at September 30, 2021 |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| 42 |
| Table of Contents |
NOTE 3 – INVENTORY
Inventory at September 30, 2021 and 2020 consists of the following:
|
| Septmeber 30 |
|
| September 30, |
| ||
|
| 2021 |
|
| 2020 |
| ||
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 incurred and no material expenses related to these items occurred in the year ended September 30, 2021. The Company wrote down inventory of $
NOTE 4 – PROPERTY AND EQUIPMENT
Major classes of property and equipment at September 30, 2021 and 2020 consist of the following:
|
| September 30, |
|
| September 30, |
| ||
|
| 2021 |
|
| 2020 |
| ||
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 – INTANGIBLE ASSETS
In July 2021, the Company completed the acquisition of DCO and acquired certain assets, including the trade name, domains, and certain other intellectual property. The tradename will be used in marketing and branding of the website. The Company believes the trade name has a 10 year life. In addition to the trade name, DCO has a technology platform used to market to its customer and the Company believe it has a 4 year life.
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 continues to build this brand. The Company believes the trademark does not have limits on the time it will contribute to the generation of cash flows and therefore has identified these as indefinite-lived intangible assets (see Note 1 for more information).
In September 2019, the Company purchased the rights to the trademark name HempMD for $
Intangible assets as of September 30, 2021 and 2020 consisted of the following:
|
| September 30, |
|
| September 30, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Indefinite lived: |
|
|
|
|
|
| ||
Trademark related to cbdMD |
| $ |
|
| $ |
| ||
Trademark for HempMD |
|
|
|
|
|
| ||
Definite lived intangible assets: |
|
| - |
|
|
| - |
|
Technology Relief from Royalty related to DirectCBDOnline.com |
|
|
|
|
| - |
| |
Tradename related to DirectCBDOnline.com |
|
|
|
|
| - |
| |
Amortization of definite lived intangible assets: |
|
| ( | ) |
|
|
| |
Total |
| $ |
|
| $ | 43,220,000 |
| |
| 43 |
| Table of Contents |
Goodwill as of September 30, 2021 ands 2020 consisted of the following:
Goodwill at September 30, 2020 |
| $ |
| |
Goodwill related to acquisition of DirectCBDOnline.com |
|
|
| |
Goodwill at September 30,2021 |
| $ |
|
NOTE 6 – CONTINGENT LIABILITY
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 |
|
| .190625 |
|
$20,000,001 - $60,000,000 |
|
| .0953125 |
|
$60,000,001 - $140,000,000 |
|
| .04765625 |
|
$140,000,001 - $300,000,000 |
|
| .23828125 |
|
For clarification purposes, the Aggregate Net Revenues during a Marking Period shall be multiplied by the applicable Shares Issued/Each $ of Aggregate Net Revenue Ratio, minus, the number of shares issued as a result of Aggregate Net Revenues during the prior marking periods.
The issuance of the initial
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 $9,440,000 and $16,200,000 at September 30, 2021 and September 30, 2020, respectively.
| 44 |
| Table of Contents |
As part of the Twenty Two acquisition in July 2021, the Company has a contractual obligation to issue up to an additional 200,000 shares of its common stock as additional consideration, dependent upon the acquisition entity meeting future revenue targets.. Under GAAP the Company is required to record a non-cash contingent liability associated with the Twenty Two Earnout Shares and at the date of the acquisition, recorded a total contingent liability of $
NOTE 7 – RELATED PARTY TRANSACTIONS
The Company, as noted in Note 2, and a number of its affiliates have invested into Adara through Adara Sponsor. Martin Sumichrast, the Company’s co-CEO, is also CEO of Adara.
NOTE 8 – SHAREHOLDERS’ EQUITY
Preferred Stock – The Company is authorized to issue
The total amount of dividends declared and recorded were $
Common Stock – The Company is authorized to issue
Preferred stock transactions:
In the year ended September 30, 2021:
On July 1, 2021, the Company completed a follow-on firm commitment underwritten public offer of
On December 8, 2020, the Company completed a follow-on firm commitment underwritten public offering of
In the year ended September 30, 2020:
On October 16, 2019, the Company completed a firm commitment underwritten public offering of
Common stock transactions:
In the year ended September 30, 2021:
On August 16, 2021 the company issued
In fiscal year ending September 30, 2021,
On July 22, 2021, the company issued 300,000 shares of restricted common stock in conjunction with the Twenty Two asset acquisition.
On June 8, 2021, the Company issued
On May 14, 2021, the Company issued
On April 9, 2021, the Company entered into an endorsement agreement with a professional athlete. A part of the endorsement agreement, the Company issued
In March 2021, the Company issued
| 45 |
| Table of Contents |
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 October 2020 the Company issued
In the year ended September 30, 2020:
On January 14, 2020, the Company completed a follow-on firm commitment underwritten public offering of
In February 2020, the Company issued
In February 2020, the Company issued
In February 2020, the company issued
Stock option transactions:
In the year ended September 30, 2021:
In June 2021, the Company entered into a consulting arrangement with an industry professional. As part of the agreement, the Company issued 50,000 options and recorded total prepaid expense of $
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 comparison to the volatility of a peer group of companies in similar industries. The expected term used was the full term of the contract for the issuances. The risk-free interest rate for periods within the contractual life of the option is based on U.S. Treasury securities. The pre-vesting forfeiture rate of zero is based upon the experience of the Company. As required under ASC 718, the Company will adjust the estimated forfeiture rate to its actual experience. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.
In the year ended September 30, 2020:
In December 2019, we granted an aggregate of
In February 2020, we granted an aggregate of
In May 2020, we granted per the annual board compensation plan, an aggregate of
In September 2020, we granted an aggregate of 30,000 common stock options to an employee as part of a severance agreement.
The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the years ended September 30, 2021 and 2020:
Warrant transactions:
In the year ended September 30, 2021:
In July 2021 in relation to the follow-on firm commitment underwritten public offering of the 8.0% Series A Cumulative Convertible Preferred Stock, the Company issued to the representative of the underwriters warrants to purchase in aggregate
|
| 2021 |
|
| 2020 |
| ||
Weighted average exercise price |
| $ |
|
| $ |
| ||
Risk free interest rate |
| % |
| | % | |||
Volatility |
| | % |
| | % | ||
Expected term |
| |
|
| |
| ||
Divident yield |
| None |
|
| None |
| ||
| 46 |
| Table of Contents |
In December 2020 in relation to the follow-on firm commitment underwritten public offering of the 8.0% Series A Cumulative Convertible Preferred Stock, the Company issued to the representative of the underwriters warrants to purchase in aggregate 150,502 shares of common stock with an exercise price of $
In the year ended September 30, 2020:
In October 2019 in relation to the firm commitment underwritten public offering of the 8.0% Series A Cumulative Convertible Preferred Stock, the Company issued to the representative of the underwriters warrants to purchase in aggregate
In January of 2020 in relation to the follow-on firm commitment underwritten public offering of the Company’s common stock, the Company issued to the representative of the underwriters warrants to purchase in aggregate
The following table summarizes the inputs used for the Black-Scholes pricing model on the warrants issued in the year ended September 30, 2021 and 2020:
|
| 2021 |
|
| 2020 | ||
Weighted average exercise price |
| $ |
|
| $ | ||
Risk free interest rate |
|
| % |
| % | ||
Volatility |
|
| % |
| % | ||
Expected term |
| |
|
| | ||
Divident yield |
| None |
|
| None | ||
NOTE 9 -STOCK-BASED COMPENSATION
Equity Compensation Plan – On June 2, 2015, the Board of Directors of the Company approved the 2015 Equity Compensation Plan (“2015 Plan”). The 2015 Plan made
On January 8, 2021, the Company’s Board of Directors approved the 2021 Equity Compensation Plan (the “2021 Plan”) and it was subsequently ratified 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 five-to-ten-year term and have vesting terms that cover one to three years from the date of grant. Certain of the stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.
Stock Options:
The Company currently has awards outstanding with service conditions and graded-vesting features. We recognize compensation cost on a straight-line basis over the requisite service period.
The fair value of each time-based award is estimated on the date of grant using the Black-Scholes option valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model for equity awards with time-based vesting provisions granted during the year.
| 47 |
| Table of Contents |
The following table summarizes stock option activity under both plans for the fiscal years ended September 30, 2021 and 2020:
|
|
|
|
|
|
|
| Weighted-average |
|
|
|
| ||||
|
|
|
|
|
|
|
| remaining |
|
| Aggregate |
| ||||
|
|
|
|
| Weighted-average |
|
| contractual |
|
| intrinsic |
| ||||
|
| Number of shares |
|
| exercise price |
|
| term (in years) |
|
| value (in thousands) |
| ||||
Outstanding at September 30, 2019 |
|
|
|
| $ |
|
|
|
|
| $ | - |
| |||
Granted |
|
|
|
|
|
|
|
|
|
|
| - |
| |||
Exercised |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
| |
Forfeited |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
| ||
Outstanding at September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Exercised |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |
Forfeited |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |
Outstanding at September 30, 2021 |
|
|
|
| $ |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
As of September 30, 2021, there was approximately $
Restricted Stock Award transactions:
In June 2021, the Company entered into a consulting arrangement with an industry professional. As part of the engagement, the Company issued
In April 2021, the Company entered into an endorsement agreement with a professional athlete. A part of the endorsement agreement, the Company issued
In April 2021, the Company issued
In March 2021, the Company issued
In March 2021, the Company issued
In January 2021, the Company issued
In October 2020, the Company issued
In June 2020, the Company issued
The Company recognized $
| 48 |
| Table of Contents |
NOTE 10 – WARRANTS
Transactions involving the Company equity-classified warrants for the fiscal years ended September 30, 2021 and 2020 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, 2019 |
|
|
|
| $ |
|
|
|
|
| $ | - |
| |||
Granted |
|
|
|
|
|
|
|
|
|
|
| - |
| |||
Exercised |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
| ||
Forfeited |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
| |
Outstanding at September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Exercised |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |
Forfeited |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |
Outstanding at September 30, 2021 |
|
|
|
| $ |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021 |
|
|
|
| $ |
|
|
| - |
|
| $ |
| |||
The following table summarizes outstanding common stock purchase warrants as of September 30, 2021:
|
|
|
|
| Weighted-average |
|
|
| |||
|
| Number of shares |
|
| exercise price |
|
| Expiration | |||
Exercisable at $4.00 per share |
|
|
|
|
|
|
| ||||
Exercisable at $7.50 per share |
|
|
|
|
|
|
| ||||
Exercisable at $4.375 per share |
|
|
|
|
|
|
| ||||
Exercisable at $7.50 per share |
|
|
|
|
|
|
| ||||
Exercisable at $3.9125 per share |
|
|
|
|
|
|
| ||||
Exercisable at $1.25 per share |
|
|
|
|
|
|
| ||||
Exercisable at $3.74 per share |
|
|
|
|
|
|
| ||||
Exercisable at $3.75 per share |
|
|
|
|
|
|
| ||||
|
|
|
|
| $ |
|
|
| |||
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 October 2019, the Company entered into a sponsorship agreement with Feld Motor Sports to be an official sponsor of the Monster Energy Cup events, the United States AMA Supercross, the FIM World Championship events and US Supercross Futures event through 2021.
In May 2021, cbdMD signed an exclusive sponsorship agreement to be the Official CBD Partner of the NOBULL CrossFit Games in 2021.
NOTE 12 – NOTE PAYABLE
In July 2019, the Company entered into a loan arrangement in the amount of $
| 49 |
| Table of Contents |
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 – DISCONTINUED OPERATIONS
Effective September 30, 2019, the Company ceased operations of four business subsidiaries: EE1, IM1, BPU and Level H&W. These subsidiaries accounted for our licensing, entertainment, and products segments prior to fiscal 2019 and the Company determined that these business units are not able to provide support or value to the CBD business, which the Company is now strategically focused on. Therefore, the Company classified the operating results of these subsidiaries as discontinued operations, net of tax in the Consolidated Statements of Operations.
At September 30, 2020 the balance in accounts receivable related to discontinued operations was $
NOTE 15 – LEASES
The Company has lease agreements for its corporate, warehouse and laboratory offices with lease periods expiring between 2021 and 2026. ASC 842 requires the recognition of leasing arrangements on the consolidated balance sheet as right-of-use assets and liabilities pertaining to the rights and obligations created by the leased assets. The Company determines whether an arrangement is a lease at inception and classify it as finance or operating. All of the Company’s leases are classified as operating leases. The Company’s leases do not contain any residual value guarantees.
Right-of-use lease assets and corresponding lease liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term. Since the interest rate implicit in our lease arrangements is not readily determinable, the Company determined an incremental borrowing rate for each lease based on the approximate interest rate on a collateralized basis with similar remaining terms and payments as of the lease commencement date to determine the present value of future lease payments. The Company’s lease terms may include options to extend or terminate the lease.
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 consolidated statements of operations.
Components of operating lease costs are summarized as follows:
|
| Year Ended |
| |
|
| September 30, |
| |
|
| 2021 |
| |
| Total Operating Lease Costs |
| $ |
| |
Supplemental cash flow information related to operating leases is summarized as follows:
|
| Year Ended |
| |
|
| September 30, |
| |
|
| 2021 |
| |
Cash paid for amounts included in the measnurement of operating lease liabilities |
| $ |
| |
As of September 30, 2021, 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 |
| $ |
| |
| 50 |
| Table of Contents |
Future minimum lease payments (including interest) under non-cancelable operating leases as of September 30, 2020 are summarized as follows:
| For the year ended September 30, |
|
|
| |
2021 |
|
|
| |
2022 |
|
|
| |
2023 |
|
|
| |
2024 |
|
|
| |
2025 |
|
|
| |
| Thereafter |
|
|
| |
Total future lease payments |
| $ |
| |
| Less interest |
|
| ( | ) |
Total lease liabilities |
| $ |
| |
NOTE 16 – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the following periods:
|
| Year Ended |
| |||||
|
| September 30, |
|
| September 30, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Basic: |
|
|
|
|
|
| ||
Net income (loss) continuing operations |
| $ | ( | ) |
| $ |
| |
Preferred dividends paid |
|
|
|
|
|
| ||
Net income (loss) continuing operations adjusted for preferred dividend |
|
| ( | ) |
|
|
| |
Net income (loss) discontinued operations |
|
|
|
|
| ( | ) | |
Net income (loss) attributable to cbdMD Inc. common shareholders |
|
| ( | ) |
|
| 12,235,423 |
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
Net income (loss) continuing operations |
|
| ( | ) |
|
|
| |
Net income (loss) discontinued operations |
|
|
|
|
| ( | ) | |
Net income (loss) |
|
| (25,949,498 | ) |
|
|
| |
|
|
|
|
|
|
|
|
|
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 |
|
| ( | ) |
|
|
| |
Discontinued operations |
|
|
|
|
|
| ||
Basic earnings per share |
|
| ( | ) |
|
|
| |
|
|
|
|
|
|
|
|
|
Earnings per share Dliuted: |
|
|
|
|
|
|
|
|
Continued operations |
|
| ( | ) |
|
|
| |
Discontinued operations |
|
|
|
|
|
| ||
Diluted earnings per share |
|
| (0.47 | ) |
|
|
| |
At the year ended September 30, 2021,
| 51 |
| Table of Contents |
NOTE 17 – INCOME TAXES
The Company generated operating losses for the years ended September 30, 2021 and 2020 on which it has recognized a full valuation allowance. The Company accounts for is state franchise and minimum taxes as a component of its general and administrative expenses.
The following table presents the components of the provision for income taxes from continuing operations for the fiscal years ended September 30, 2021 and 2020:
|
| Years Ended September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Current |
|
|
|
|
|
| ||
Federal |
| $ |
|
| $ |
| ||
State |
|
|
|
|
|
| ||
Total current |
|
|
|
|
|
| ||
Deferred |
|
|
|
|
|
|
|
|
Federal |
|
| ( | ) |
|
| ( | ) |
State |
|
|
|
|
|
| ||
Total deferred |
|
| ( | ) |
|
| ( | ) |
Total provision |
| $ | ( | ) |
| $ | ( | ) |
A reconciliation for the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
|
| Years Ended September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Federal statutory income tax rate |
|
| % |
|
| % | ||
State income taxes, net of federal benefit |
|
|
|
|
| ( | ) | |
Permanent differences |
|
|
|
|
|
| ||
Contingent derivative expense |
|
| ( | ) |
|
|
| |
Limitation on net operating losses |
|
| - |
|
|
|
| |
Change in valuation allowance |
|
| ( | ) |
|
| ( | ) |
Benefit from (provision for) income taxes |
|
| % |
|
| ( | )% | |
Significant components of the Company’s deferred income taxes are shown below:
|
| Years Ended September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Deferred tax assets: |
|
|
|
|
|
| ||
Net operating loss carryforwards |
| $ |
|
| $ |
| ||
ROU - Liability |
|
|
|
| ||||
Capital loss carryforward |
|
|
|
|
|
| ||
Allowance for doubtful accounts |
|
|
|
|
|
| ||
Stock compensation |
|
|
|
|
|
| ||
Investments |
|
|
|
|
|
| ||
Accrued expenses |
|
|
|
|
|
| ||
Inventory reserve |
|
|
|
|
|
| ||
Capitalized expenses |
|
|
|
|
|
| ||
Charitable contributions |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Prepaid Expenses |
|
| ( | ) |
|
| ( | ) |
Management fees |
|
|
|
|
|
| ||
ROU - Assets |
|
| (1,254,000 | ) |
|
| (1,520,000 | ) |
Intangibles |
|
| ( | ) |
|
| ( | ) |
Fixed assets |
|
| ( | ) |
|
| ( | ) |
Total deferred tax liabilities |
|
| ( | ) |
|
| ( | ) |
Net deferred tax assets |
|
|
|
|
|
| ||
Valuation allowance |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
Net deferred tax liability |
| $ |
|
| $ | ( | ) | |
| 52 |
| Table of Contents |
Net deferred tax liability
The Company has established a valuation allowance against net deferred tax assets due to the uncertainty that such assets will be realized. The deferred tax liabilities that result from indefinite life intangibles cannot be offset by deferred tax assets. The Company periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred tax assets will be realizable, the valuation allowance will be reduced. Under Internal Revenue Code (IRC) Section 382, the use of net operating loss (“NOL”) carryforwards may be limited if a change in ownership of a company occurs. During the year ending September 30, 2018, the company determined that a change of ownership under IRC Section 382 had occurred during the years ending September 30, 2017 and 2015. As a result of these ownership changes, the pre-ownership change NOL carryforwards would be limited and approximately $
During the year ended September 30, 2020, the Company determined that a change in ownership under IRC had occurred during the year ending September 30, 2019. As a result of these ownership changes, the pre-ownership change NOL carryforwards would be limited and approximately $
The total valuation allowance increased by $
At September 30, 2021, the Company has utilizable NOL carryforwards of approximately $
The Company accounts for its state franchise and minimum taxes as a component of its general and administrative expenses.
The Company files income tax returns in the United States, and various state jurisdictions. The Company’s policy is to recognize interest expense and penalties related to income tax matters as tax expense. At September 30, 2020 and 2019, there are no unrecognized tax benefits, and there are no significant accruals for interest related to unrecognized tax benefits or tax penalties.
The CARES Act, which was enacted on March 27, 2020, includes several significant provisions for corporations, including the usage of net operating losses and payroll benefits. The Company analyzed the provisions of the CARES Act and determined there was no effect on its provision for the year ended September 30, 2020 and will continue to evaluate the impact, if any, the CARES Act may have on the Company’s consolidated financial statements and disclosures.
On December 20, 2018, the Company completed a two-step merger with Cure Based Development (see Note 2). As a result of the Mergers the Company established as part of the purchase price allocation a net deferred tax liability related to the book-tax basis of certain assets and liabilities of approximately $4.6 million.
The Company has had a valuation allowance against the net deferred tax assets, with the exception of the deferred tax liabilities that result from indefinite-life intangibles ("naked credits"). At September 30, 2020, the company had recorded $
NOTE 18 – ACQUISITIONS
On July 22, 2021, the Company entered into an asset purchase agreement with Twenty Two Capital, LLC (“Twenty Two”) to acquire substantially all the assets of the business operating as directcbdonline.com. The Company acquired the assets for the consideration of $2,000,000 and up to
The initial
The fair value of the
| 53 |
| Table of Contents |
The following table presents the final purchase price allocation:
Consideration |
| $ |
| |
|
|
|
|
|
Assets Acquired: |
|
|
|
|
|
|
|
|
|
Undeposited Funds |
| $ |
| |
Inventory |
|
|
| |
Inventory - Prepaid Shipping |
|
|
| |
Property and equipment, net |
|
|
| |
Intangible Assets |
|
|
| |
Total assets aquired |
| $ |
|
NOTE 19 – SUBSEQUENT EVENTS
The Company has analyzed its operations subsequent to September 30, 2021 to the date the consolidated financial statements were issued.
In October 2021, the Company issued
In October 2021, the Company issued
In November 2021, the Company issued up to
| 54 |
EXHIBIT 21.1
Subsidiaries of the Registrant
| Name of Subsidiary |
| Jurisdiction of Organization |
|
|
|
|
| CBD Industries, LLC |
| North Carolina |
|
|
|
|
| Paw CBD, Inc. |
| North Carolina |
|
|
|
|
| cbdMD Therapeutics, LLC |
| North Carolina |
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference of our report dated December 17, 2021, relating to the audits of the consolidated balance sheets of cbdMD, Inc. and subsidiaries (the “Company”) as of September 30, 2021 and 2020 and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for the years then ended, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2021, which is filed with the United States Securities and Exchange Commission (the “SEC”) in the Company’s (i) Registration Statement on Form S‑1, as amended (SEC File No. 333-227529), as declared effective by the SEC on September 28, 2018; (ii) Registration Statement on Form S-8 (SEC File No. 333-227746) as filed with the SEC on October 9, 2018; (iii) Registration Statement on Form S-3, as amended (SEC File No. 333-228773), as declared effective by the SEC on April 9, 2019; (iv) Registration Statement on Form S-8 (SEC File No. 333-223291) as filed with the SEC on August 15, 2019; (v) Registration Statement on Form S-8 (SEC File No. 333-252481) as filed with the SEC on January 27, 2021; and (vi) Registration Statement on Form S-8 (SEC File No. 333-254974) as filed with the SEC on April 1, 2021.
/s/ Cherry Bekaert LLP
Charlotte, North Carolina
December 17, 2021
EXHIBIT 31.1
Rule 13a-14(a)/15d-14(a) Certification
I, Martin A. Sumichrast, certify that:
| 1. | I have reviewed this report on Form 10-K for the year ended September 30, 2021 of cbdMD, Inc.; |
|
|
|
| 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; |
|
|
|
| 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; |
|
|
|
| 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: |
|
| (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; |
|
|
|
|
|
| (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; |
|
|
|
|
|
| (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 |
|
|
|
|
|
| (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 |
| 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): |
|
| (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 |
|
|
|
|
|
| (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. |
| Dated: December 17, 2021 | /s/ Martin A. Sumichrast | ||
|
|
| Martin A. Sumichrast, Co-Chief Executive Officer, co-principal executive officer |
EXHIBIT 31.2
Rule 13a-14(a)/15d-14(a) Certification
I, Raymond S. Coffman, certify that:
| 1. | I have reviewed this report on Form 10-K for the year ended September 30, 2021 of cbdMD, Inc.; |
|
|
|
| 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; |
|
|
|
| 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; |
|
|
|
| 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: |
|
| (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; |
|
|
|
|
|
| (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; |
|
|
|
|
|
| (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 |
|
|
|
|
|
| (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 |
| 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): |
|
| (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 |
|
|
|
|
|
| (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. |
| Dated: December 17, 2021 | /s/ Raymond S. Coffman |
|
|
| Raymond S. Coffman, Co-Chief Executive Officer, co-principal executive officer |
|
EXHIBIT 31.3
Rule 13a-14(a)/15d-14(a) Certification
I, T. Ronan Kennedy, certify that:
| 1. | I have reviewed this report on Form 10-K for the year ended September 30, 2021 of cbdMD, Inc.; |
|
|
|
| 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; |
|
|
|
| 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; |
|
|
|
| 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: |
|
| (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; |
|
|
|
|
|
| (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; |
|
|
|
|
|
| (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 |
|
|
|
|
|
| (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 |
| 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): |
|
| (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 |
|
|
|
|
|
| (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. |
| Dated: December 17, 2021 | /s/ T. Ronan Kennedy |
|
|
| T. Ronan Kennedy, Chief Financial Officer, principal financial and accounting officer |
|
EXHIBIT 32.1
Section 1350 Certification
In connection with the Annual Report of cbdMD, Inc. (the “Company”) on Form 10-K for the year ended September 30, 2021 as filed with the Securities and Exchange Commission (the “Report”), I, Martin A. Sumichrast, Co-Chief Executive Officer, I, Raymond S. Coffman, Co-Chief Executive Officer, and I, T. Ronan Kennedy, 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:
|
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and |
|
|
|
|
|
| 2. | The information contained in the Report fairly presents, in all material respects, the financial conditions and results of operations of the Company. |
| December 17, 2021 | /s/ Martin A. Sumichrast | |
|
| Martin A. Sumichrast, Co-Chief Executive Officer, co-principal executive officer |
|
|
|
|
|
| December 17, 2021 | /s/ Raymond S. Coffman | |
|
| Raymond S. Coffman, Co-Chief Executive Officer, co-principal executive officer |
|
|
|
|
|
| December 17, 2021 | /s/ T. Ronan Kennedy |
|
| T. Ronan Kennedy, Chief Financial Officer, 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.