UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| |
| For the quarterly period ended |
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| |
| For the transition period from __________________ to _______________ |
Commission file number
| cbdMD, INC. |
| (Exact Name of Registrant as Specified in its Charter) |
| | | |
| 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 |
| | | |
| | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| | ☒ | Smaller reporting company | |
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Page No |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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| Unregistered Sales of Equity Securities and Use of Proceeds. |
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OTHER PERTINENT INFORMATION
Unless the context otherwise indicates, when used in this report, the terms the “Company,” “cbdMD, “we,” “us, “our” and similar terms refer to cbdMD, Inc., a North Carolina corporation formerly known as Level Brands, Inc., and our subsidiaries CBD Industries LLC, a North Carolina limited liability company formerly known as cbdMD LLC, which we refer to as “CBDI”, Paw CBD, Inc., a North Carolina corporation which we refer to as “Paw CBD” and cbdMD Therapeutics LLC, a North Carolina limited liability company which we refer to as “Therapeutics”. In addition, “fiscal 2022” refers to the year ended September 30, 2022, “fiscal 2023” refers to the fiscal year ending September 30, 2023, “first quarter of 2022” refers to the three months ended December 31, 2021, “first quarter of 2023” refers to the three months ended December 31, 2022, “second quarter of 2022” refers to the three months ended March 31, 2022, “second quarter of 2023” refers to the three months ended March 31, 2023, “third quarter of 2022” refers to the three months ended June 30, 2022, and “third quarter of 2023” refers to the three months ended June 30, 2023.
On February 16, 2023, we held an annual meeting of stockholders. At the annual meeting, our stockholders approved an amendment to our articles of incorporation, as amended, to effect a reverse stock split of our issued and outstanding shares of common stock by a ratio of between one-for-twenty to one-for-fifty, inclusive, with the exact ratio to be set at the discretion of our board of directors, at any time after approval of the amendment and prior to February 16, 2024. On April 12, 2023, the board effected a reverse stock split at a ratio of one-for-forty-five, effective as of April 24, 2023 (the "Reverse Stock Split"). Unless otherwise indicated, all share numbers in this report, including shares of common stock and all securities convertible into, or exercisable for, shares of common stock, give effect to the Reverse Stock Split.
We maintain a corporate website at www.cbdmd.com. The information contained on our corporate website and our various social media platforms are not part of this report.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:
| ● |
material risks associated with our overall business, including: |
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our history of losses, potential liquidity concerns, and our ability to continue as a going concern; |
| ● |
our reliance to market to key digital channels; |
| ● |
our ability to acquire new customers at a profitable rate; |
| ● |
our reliance on third party raw material suppliers and manufacturers and compounders; |
| ● |
our reliance on third party compliance with our supplier verification program and testing protocols; and |
| ● |
material risks associated with regulatory environment for CBD, including: |
| ● |
federal laws as well as FDA or DEA interpretation of existing regulation; |
| ● |
state laws pertaining to industrial hemp and their derivatives; |
| ● |
costs to us for compliance with laws and the risks of increased litigation; and |
| ● |
possible changes in the use of CBD. |
| ● |
material risks associated with the ownership of our securities, including; |
| ● | potential suspension of payment of preferred dividends under North Carolina state business laws; | |
| ● |
the risks for failing to comply with the continued listing standards of the NYSE American; |
| ● |
availability of sufficient liquidity; |
| ● |
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. |
Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward- looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Part II, Item 1A. Risk Factors appearing later in this report, Part I, Item 1A. - Risk Factors appearing in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 as filed with the Securities and Exchange Commission (the “SEC”) on December 15, 2022 and as amended on December 20, 2022 and May 2, 2023 (the “2022 10-K”), as well as our other filings with the SEC. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2023 AND September 30, 2022
| (Unaudited) | ||||||||
| June 30, | September 30, | |||||||
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Accounts receivable – discontinued operations | ||||||||
| Investment other securities | ||||||||
| Inventory | ||||||||
| 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 | ||||||||
| Investment in other securities, noncurrent | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| See Notes to Condensed Consolidated Financial Statements |
cbdMD, INC.
| CONDENSED CONSOLIDATED BALANCE SHEETS |
| June 30, 2023 AND September 30, 2022 |
| (continued) |
| (Unaudited) | ||||||||
| June 30, | September 30, | |||||||
| 2023 | 2022 | |||||||
| Liabilities and shareholders' equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Operating leases – current portion | ||||||||
| Note payable | ||||||||
| Total current liabilities | ||||||||
| Long term liabilities: | ||||||||
| Long term liabilities | ||||||||
| Operating leases - long term portion | ||||||||
| Contingent liability | ||||||||
| Total long term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 11) | ||||||||
| cbdMD, Inc. shareholders' equity: | ||||||||
| Preferred stock, authorized shares, $ | ||||||||
| par value, and shares issued and outstanding, respectively | ||||||||
| Common stock, authorized shares, $ | ||||||||
| par value, and shares issued and outstanding, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total cbdMD, Inc. shareholders' equity | ||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
| cbdMD, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
| FOR THE three and nine months ended June 30, 2023 and 2022 |
| (Unaudited) |
| Three months |
Three months |
Nine Months |
Nine Months |
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| Ended |
Ended |
Ended |
Ended |
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| June 30, |
June 30, |
June 30, |
June 30, |
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| 2023 |
2022 |
2023 |
2022 |
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| Gross Sales |
$ | $ | $ | $ | ||||||||||||
| Allowances |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Total Net Sales |
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| Cost of sales |
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| Gross Profit |
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| Operating expenses |
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| Impairment of goodwill and other intangible assets |
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| Loss from operations |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Realized and Unrealized loss on marketable and other securities, including impairments |
( |
) | ||||||||||||||
| Decrease of contingent liability |
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| Gain on sale of assets |
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| Restructuring expense |
( |
) | ( |
) | ||||||||||||
| Other income |
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| Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Loss before provision for income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Benefit for income taxes |
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| Net Loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Preferred dividends |
||||||||||||||||
| Net Loss attributable to cbdMD, Inc. common shareholders |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net Loss per share: |
||||||||||||||||
| Basic earnings per share |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Diluted earnings per share |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Weighted average number of shares Basic: |
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| Weighted average number of shares Diluted: |
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See Notes to Condensed Consolidated Financial Statements
| cbdMD, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS |
| FOR THE three and nine months ended June 30, 2023 and 2022 |
| (Unaudited) |
| Three months |
Three months |
Nine Months |
Nine Months |
|||||||||||||
| Ended |
Ended |
Ended |
Ended |
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| June 30, |
June 30, |
June 30, |
June 30, |
|||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Net (Loss) Income |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Comprehensive (Loss) Income |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Preferred dividends |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Comprehensive (Loss) Income attributable to cbdMD, Inc. common shareholders |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
See Notes to Condensed Consolidated Financial Statements
| cbdMD, INC. |
| CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS |
| FOR THE nine months ended June 30, 2023 and 2022 |
| (Unaudited) |
| Nine Months |
Nine Months |
|||||||
| Ended |
Ended |
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| June 30, |
June 30, |
|||||||
| 2023 |
2022 |
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| Cash flows from operating activities: |
||||||||
| Net Loss |
$ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used by operating activities: |
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| Stock based compensation |
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| Restricted stock expense |
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| Write off of prepaid assets due to termination of contractual obligation |
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| Issuance of stock for services |
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| Marketing stock amortization |
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| Inventory and materials impairment |
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| Intangibles amortization |
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| Depreciation |
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| Impairment of goodwill and other intangible assets |
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| Decrease in contingent liability |
( |
) | ( |
) | ||||
| Realized and unrealized loss on of marketable and other securities |
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| Amortization of operating lease asset |
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| Changes in operating assets and liabilities: |
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| Accounts receivable |
( |
) | ||||||
| Deposits |
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| Inventory |
( |
) | ||||||
| Prepaid inventory |
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| Prepaid expenses and other current assets |
( |
) | ||||||
| Accounts payable and accrued expenses |
( |
) | ( |
) | ||||
| Operating lease liability |
( |
) | ( |
) | ||||
| Deferred revenue / customer deposits |
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| Collection on discontinued operations accounts receivable |
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| Cash used by operating activities |
( |
) | ( |
) | ||||
| Cash flows from investing activities: |
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| Purchase of property and equipment |
( |
) | ( |
) | ||||
| Proceeds from sale of assets |
( |
) | ||||||
| Other Securities |
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| Cash flows from investing activities |
( |
) | ||||||
| Cash flows from financing activities: |
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| Proceeds from issuance of common stock |
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| Note payable |
( |
) | ( |
) | ||||
| Preferred dividend distribution |
( |
) | ( |
) | ||||
| Cash flows from financing activities |
( |
) | ( |
) | ||||
| Net increase (decrease) in cash |
( |
) | ( |
) | ||||
| Cash and cash equivalents, beginning of period |
||||||||
| Cash and cash equivalents, end of period |
$ | $ | ||||||
Supplemental Disclosures of Cash Flow Information:
| 2023 | 2022 | |||||||
| Cash Payments for: | ||||||||
| Interest expense | $ | $ | ||||||
| Non-cash financial/investing activities: | ||||||||
| Issuance of shares in exchange for a360 credit | ||||||||
| Issuance of Contingent earnout shares: | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
| cbdMD, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY |
| FOR THE nine months ended June 30, 2023 |
| (Unaudited) |
| Additional | ||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Paid in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Issuance of Common stock | ( | ) | ||||||||||||||||||||||||||
| Issuance of options for share based compensation | - | - | ||||||||||||||||||||||||||
| Issuance of restricted stock for share based compensation | - | - | ||||||||||||||||||||||||||
| Preferred dividend | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Issuance of Common stock | ( | ) | ||||||||||||||||||||||||||
| Issuance of options for share based compensation | - | - | ||||||||||||||||||||||||||
| Issuance of restricted stock for share based compensation | - | - | ||||||||||||||||||||||||||
| Issuance of Common stock - A360 | ||||||||||||||||||||||||||||
| Issuance of Common stock - DCO | ||||||||||||||||||||||||||||
| Issuance of Common stock - Keystone | ||||||||||||||||||||||||||||
| True up of fraction shares resuting from reverse split | - | - | ||||||||||||||||||||||||||
| Preferred dividend | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Issuance of Common stock | ||||||||||||||||||||||||||||
| Issuance of Preferred Stock | - | - | - | - | - | - | - | |||||||||||||||||||||
| Issuance of options for share based compensation | - | - | ||||||||||||||||||||||||||
| Issuance of restricted stock for share based compensation | - | - | ||||||||||||||||||||||||||
| Issuance of Common stock - A360 | ||||||||||||||||||||||||||||
| Issuance of Common stock - Maxim | ||||||||||||||||||||||||||||
| Fraction share true-up | ( | ) | ||||||||||||||||||||||||||
| Preferred dividend | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
| cbdMD, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY |
| FOR THE nine months ended June 30, 2022 |
| (Unaudited) |
| Additional |
||||||||||||||||||||||||||||
| Common Stock |
Preferred Stock |
Paid in |
Accumulated |
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| Shares |
Amount |
Shares |
Amount |
Capital |
Deficit |
Total |
||||||||||||||||||||||
| Balance, September 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| Issuance of Common Stock |
||||||||||||||||||||||||||||
| Issuance of options for share based compensation |
- | - | ||||||||||||||||||||||||||
| Issuance of restricted stock for share based compensation |
- | - | ||||||||||||||||||||||||||
| Preferred dividend |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Net Loss |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance, December 31, 2021 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| Issuance of Common Stock |
||||||||||||||||||||||||||||
| Exercise of options for share based compensation |
- | - | ||||||||||||||||||||||||||
| Issuance of restricted stock for share based compensation |
- | - | ||||||||||||||||||||||||||
| Preferred dividend |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Net Loss |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance, March 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| Issuance of Common stock |
||||||||||||||||||||||||||||
| Exercise of options for share based compensation |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Issuance of restricted stock for share based compensation |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Preferred dividend |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Net Income |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance, June 30, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
cbdMD, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE three and nine months ended June 30, 2023 and 2022 (unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
cbdMD, Inc. (“cbdMD”, “we”, “us”, “our”, or the “Company”) is a North Carolina corporation formed on March 17, 2015 as Level Beauty Group, Inc. In November 2016 we changed the name of the Company to Level Brands, Inc. and on May 1, 2019 we changed the name of our Company to cbdMD, Inc. We operate from our offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30.
On December 20, 2018 (the “Closing Date”), the Company, and its newly organized wholly owned subsidiaries AcqCo, LLC and cbdMD LLC (“CBDI”), completed a two-step merger (the “Mergers”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). Upon completion of the Mergers, CBDI survived and operates the prior business of Cure Based Development. As consideration for the Mergers in April of 2019, the Company issued
The Company owns and operates the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and cbdMD Botanicals. The Company sources cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States. CBD is a natural substance produced from the hemp plant. The products manufactured by and for the Company comply with the 2018 Farm Bill - our full spectrum products contain trace amounts of tetrahydrocannabinol ("THC") under the 0.3% by dry weight limit in the 2018 Farm Act while our broad spectrum products are non-psychoactive as they do not contain detectable levels of THC.
In the third quarter of fiscal 2019 cbdMD launched its new CBD pet brand, Paw CBD. Following the initial positive response to the brand from retailers and consumers, cbdMD, Inc. organized Paw CBD, Inc. (“Paw CBD”) as a separate wholly owned subsidiary on October 22, 2019, to take advantage of its early mover status in the CBD animal health industry. On March 15, 2021 cbdMD formed a new wholly owned subsidiary, cbdMD Therapeutics, LLC (“Therapeutics”) for the purposes of isolating and quantifying the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications. In July 2021, the Company acquired the assets of Twenty Two Capital, LLC (“Twenty Two”) d/b/a directcbdonline.com (“DCO”). This business operates a CBD marketplace through directcbdonline.com.
The accompanying unaudited interim condensed consolidated financial statements of cbdMD have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the 2022 10-K/A. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of consolidated financial position and the consolidated results of operations for the interim periods presented have been reflected herein. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2022 as reported in the 2022 10-K have been omitted.
Reverse Stock Split
On April 12, 2023, the board effected a reverse stock split at a ratio of one-for--five, effective as of April 24, 2023. Unless otherwise indicated, all share numbers in this filing, including shares of common stock and all securities convertible into, or exercisable for, shares of common stock, give effect to the reverse stock split.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries CBDI, Paw CBD and Therapeutics. All material intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The Company’s condensed consolidated financial statements have been prepared in accordance with US GAAP and requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying condensed consolidated financial statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, certain assumptions related to the valuation of investments other securities, acquired intangibles and long-lived assets and the recoverability of intangible and long-lived assets and income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities, contingent liability and, hence consideration for the Mergers is a material estimate. Actual results could differ from these estimates.
The Company continues to monitor macroeconomic conditions to remain flexible and to optimize and evolve its business as appropriate.
Cash and Cash Equivalents
For financial statements purposes, the Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable are stated at cost less an allowance for doubtful accounts, if applicable. Credit is extended to customers after an evaluation of the customer’s financial condition, and generally collateral is not required as a condition of credit extension. Management’s determination of the allowance for doubtful accounts is based on an evaluation of the receivables, past experience, current economic conditions, and other risks inherent in the receivables portfolio. As of June 30, 2023 and September 30, 2022, we had an allowance for doubtful accounts of $
Merchant Receivable and Reserve
The Company primarily sells its products through the internet and has an arrangement to process customer payments with third-party payment processors and negotiate the fee based on the market. The arrangement with the payment processors requires that the Company pay a fee between
Inventory
Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. The cost of inventory includes product cost, freight-in, and production fill and labor (portions of which we outsource to third party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management’s analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. We assess inventory quarterly for slow moving products and potential impairments and at a minimum perform a physical inventory count annually near fiscal year end.
Property and Equipment
Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are years for manufacturing equipment and automobiles and years for software, computer, and furniture and equipment. The useful life for leasehold improvements are over the term of the lease, or the remaining economic life of the asset, whichever is shorter. The cost and accumulated depreciation of property are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the consolidated statements of operations for the applicable period. Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstance indicate the carrying value of an asset may not be recoverable.
Fair Value Accounting
The Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, observable market activity. In instances where the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
When the Company records an investment in marketable securities the carrying value is assigned at fair value. Any changes in fair value for marketable securities during a given period will be recorded as an unrealized gain or loss in the consolidated statement of operations. For investment other securities without a readily determinable fair value, the Company may elect to estimate its fair value at cost less impairment plus or minus changes resulting from observable price changes.
Intangible Assets
The Company’s intangible assets consist of definite-lived trademarks and other intellectual property. The Company accounts for its trademarks in accordance with Accounting Standards Codification (ASC) Topic 360, Property, Plant and Equipment. The Company began amortizing its trademarks over 20 years beginning January 1, 2022 and will perform impairment tests as prescribed by ASC 360, which states that impairment testing should be completed whenever events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. If there are indications that the asset’s carrying value may not be recoverable, there are two further steps involved in long-lived asset impairment testing. Step I of the impairment test, as per ASC 360, involves estimating the Recoverable Amount of the Asset Group and determining the potential for impairment. Step II of the impairment test, as per ASC 360, if necessary, involves quantifying the fair value of the asset group.
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.
Revenue Recognition
Under ASC 606, Revenue from Contracts with Customers, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The Company meets that obligation when it has shipped products which have been ordered to the customer. The Company has reviewed its various revenue streams for its other contracts under the five-step approach. At June 30, 2023, the Company has unfulfilled performance obligations.
Allocation of Transaction Price
In the Company’s current business model, it does not have contracts with customers which have multiple elements as revenue is driven purely by online product sales or purchase order-based product sales.
Revenue Recognition
The Company records revenue from the sale of its products when its customer obtains control, which is upon shipping (and is typically FOB shipping) which is when our performance obligation is met. Net sales are comprised of gross revenues less product returns, trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions. These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company currently offers a 60-day, money back guarantee, a loyalty program as well as a subscription program.
Disaggregated Revenue
The Company’s product revenue is generated primarily through two sales channels, E-commerce sales (formerly referred to as consumer sales) and wholesale sales. The Company believes that these categories appropriately reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors.
A description of the Company’s principal revenue generating activities are as follows:
| - | E-commerce sales - consumer products sold through the Company’s online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due prior to the date of shipment; and | |
|
| ||
| - | Wholesale sales - products sold to the Company’s wholesale customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms vary and can typically be 30 days from the date control over the product is transferred to the customer. |
Contract liabilities represent unearned revenues and are presented as deferred revenue or customer deposits on the condensed consolidated balance sheets.
Other than account receivable, Company has material contract assets nor contract liabilities at June 30, 2023.
The following tables represent a disaggregation of revenue by sales channel:
| Three Months | Three Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | % of total | 2022 | % of total | |||||||||||||
| E-commerce sales | $ | % | $ | % | ||||||||||||
| Wholesale sales | % | % | ||||||||||||||
| Total Net Sales | $ | % | $ | % | ||||||||||||
| Nine Months | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | % of total | 2022 | % of total | |||||||||||||
| E-commerce sales | $ | % | $ | % | ||||||||||||
| Wholesale sales | % | % | ||||||||||||||
| Total Net Sales | $ | % | $ | % | ||||||||||||
Cost of Sales
The Company’s cost of sales includes costs associated with distribution, fill and labor expense, components, third-party providers, and outbound freight for the Company’s products sales, and includes labor for its service sales. For the Company’s product sales, cost of sales also includes the cost of refurbishing products returned by customers that will be offered for resale, if any, and the cost of inventory write-downs associated with adjustments of held inventories to their net realizable value. These expenses are reflected in the Company’s consolidated statements of operations when the product is sold and net sales revenues are recognized or, in the case of inventory write-downs, when circumstances indicate that the carrying value of inventories is in excess of their net realizable value.
Income Taxes
The Company is a North Carolina corporation that is treated as a corporation for federal and state income tax purposes. As of October 1, 2019, CBDI and Paw CBD were wholly owned subsidiaries and are disregarded entities for tax purposes and their entire share of taxable income or loss is included in the tax return of the Company and as of March 15, 2021, Therapeutics is also a wholly owned subsidiary and is a disregarded entity for tax purposes and its entire share of taxable income or loss is included in the tax return of the Company.
The Company accounts for income taxes pursuant to the provisions of the Accounting for Income Taxes topic of ASC 740 which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Company uses the inside basis approach to determine deferred tax assets and liabilities associated with its investment in a consolidated pass-through entity. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
Concentrations
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and securities.
The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $
Concentration of credit risk with respect to receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management considers these customer receivables to represent normal business risk. The Company did have any customers that represented a significant amount of our sales for the three and nine months ended June 30, 2023.
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.
On February 16, 2023, we held an annual meeting of stockholders. At the annual meeting, our stockholders approved an amendment to our articles of incorporation, as amended, to effect a reverse stock split of our issued and outstanding shares of common stock by a ratio of between one-for-
Liquidity and Going Concern Considerations
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company experienced a loss of $ and $
Management has concluded that substantial doubt exists about our ability to continue as a going concern for the next twelve months from the date hereof. We believe that our cash and cash equivalents on hand should be sufficient to fund operations through the end of the fiscal year if not longer. However, depending upon our operating results and cash burn, we may be required to raise additional capital to fund operations or scale back our operations or dividends. We expect to continue to incur losses for the foreseeable future as we continue our efforts to increase sales, develop additional products, seek acquisitions and mergers, continue research and development, reduce operating expenses and attempt to achieve profitability. Furthermore, in the event we identify an acquisition candidate, such acquisition may require immediate capital to close such acquisition. These factors, individually and collectively, raise substantial doubt about our ability to continue as a going concern, and therefore, could materially limit our ability to raise additional funds through an issuance of debt or equity securities or otherwise.
New Accounting Standards
None.
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 counterparty 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. In determining fair value of marketable securities and investment other securities, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in our assessment of fair value. The Company determines the fair value of marketable securities and investment other securities based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the fair value hierarchy distinguishes between observable and unobservable inputs.
For the nine months ended June 30, 2023 and 2022 the Company recorded $
In September 2020, the Company purchased a membership interest in Adara Sponsor LLC for $
On April 7, 2022, CBD Industries, LLC entered into an asset sale agreement to sell substantially all its manufacturing assets to a subsidiary of Steady State, LLC ("Steady State"). The equipment sale is initially valued at approximately $
In valuing both investments, the Company used the value paid, which was the price offered to all third-party investors.
NOTE 3 - INVENTORY
Inventory at June 30, 2023 and September 30, 2022 consists of the following:
| June 30, |
September 30, |
|||||||
| 2023 |
2022 |
|||||||
| Finished Goods |
$ | $ | ||||||
| Inventory Components |
||||||||
| Inventory Reserve |
( |
) | ( |
) | ||||
| Inventory prepaid |
||||||||
| Total Inventory |
$ | $ | ||||||
Abnormal amounts of idle facility expense, freight, handling costs, scrap and wasted material (spoilage) are expensed in the period they are in incurred and no material expenses related to these items occurred in the three or nine months ended June 30, 2023.
NOTE 4 – PROPERTY AND EQUIPMENT
Major classes of property and equipment at June 30, 2023 and September 30, 2022 consist of the following:
| June 30, | September 30, | |||||||
| 2023 | 2022 | |||||||
| Computers, furniture and equipment | $ | $ | ||||||
| Manufacturing equipment | ||||||||
| Leasehold improvements | ||||||||
| Automobiles | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation expense related to property and equipment was $
NOTE 5 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company had goodwill at March 31, 2022 of $
Intangible Assets
On December 20, 2018, the Company completed the Mergers with Cure Based Development and acquired certain assets, including the trademark “cbdMD” and its variants and certain other intellectual property. The trademark is the cornerstone of this subsidiary and is key as the Company creates and distributes products and continue to build this brand. The Company believed the trademark did not have limits on the time it would contribute to the generation of cash flows and therefore identified these as indefinite lived intangible assets.
In July 2021, the Company completed the acquisition of DCO and acquired certain assets, including the trade name, domains and certain other intellectual property. The tradename will be used in marketing and branding of the website. The Company believes the trade name has a
As of December 31, 2021, the Company re-assessed the “cbdMD” and “HempMD” trademarks and determined that the trademarks should be classified as definite lived intangible assets with useful lives of
Intangible assets as of June 30, 2023 and September 30, 2022 consisted of the following:
| June 30, | September 30, | |||||||
| 2023 | 2022 | |||||||
| Trademark related to cbdMD | $ | $ | ||||||
| Trademark for HempMD | ||||||||
| Technology Relief from Royalty related to DirectCBDOnline.com | ||||||||
| Tradename related to DirectCBDOnline.com | ||||||||
| Impairment of cbdMD trademark | ( | ) | ||||||
| Amortization of definite lived intangible assets | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Amortization expense related to definite lived intangible assets was $
NOTE 6 – CONTINGENT CONSIDERATION
As consideration for the Mergers, described in Note 1, the Company had a contractual obligation to issue
The contractual obligations and earn out provision are accounted for as a contingent liability and fair value is determined using Level 3 inputs, as estimating the fair value of these contingent liabilities require the use of significant and subjective inputs that may and are likely to change over the duration of the liabilities with related changes in internal and external market factors.
The initial two tranches totaling
The Merger Agreement also provides that an additional
| Aggregate Net Revenues | Shares Issued/ Each $ of Aggregate Net Revenue Ratio | ||
| $ - $ | |||
| $ - $ | |||
| $ - $ | |||
| $ - $ |
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 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 $
The fourth marketing period began on July 1, 2022 and ends in November 2023. At June 30, 2023, up to
As part of the Twenty Two acquisition in July 2021, the Company had a contractual obligation to issue up to an additional
In December 2022, the Company entered into a contractual obligation to issue up to
NOTE 7 – RELATED PARTY TRANSACTIONS
As mentioned in Note 6, a counterparty in the earnout arrangement is a related party.
NOTE 8 – SHAREHOLDERS’ EQUITY
Preferred Stock – The Company is authorized to issue
The total amount of preferred dividends declared and paid were $
Common Stock – The Company is authorized to issue
On February 16, 2023, we held an annual meeting of stockholders. At the annual meeting, our stockholders approved an amendment to our articles of incorporation, as amended, to effect a reverse stock split of our issued and outstanding shares of common stock by a ratio of between one-for-
Preferred stock transactions:
The Company had no preferred stock transactions in the three and nine months ended June 30, 2023 and 2022.
Common stock transactions:
In the nine months ended June 30, 2023:
On May 3, 2023, the Company completed an underwritten public offering of
On April 24, 2023 the Company issued a total of
In March 2, 2023, the Company entered into a Purchase Agreement (the "Purchase Agreement") with Keystone Capital Partners, LLC (“Keystone”), pursuant to which Keystone has committed to purchase up to
In April 2023, the Company issued
On February 1, 2023, the Company entered into an Agreement for Advertising Placement with a360 Media, LLC (“a360”) in which a360 will provide professional media support and advertising placement in exchange for up to
In January of 2023, the Company issued
In the nine months ended June 30, 2022:
In May 2022, the Company issued
In March 2022 the Company issued
On December 28, 2021 the Company issued
In October 2021, the Company issued
Stock option transactions:
In the nine months ended June 30, 2023:
In February of 2023, the Company granted its board of directors an aggregate of
In January 2023, the Company issued
In December 2022, the Company issued
In the nine months ended June 30, 2022:
In May 2022, the Company granted a new executive an aggregate of
In April 2022, the Company issued
In April 2022, the Company issued
In March of 2022, the Company granted its board of directors an aggregate of
In January of 2022, the Company granted an aggregate of
In October 2021, the Company granted an aggregate of
The expected volatility rate for the Company's stock options was estimated based on a weighted average mix of the volatilities of the Company and a peer group of companies in similar industries. The expected term used was the full term of the contract for the issuances. The risk-free interest rate for periods within the contractual life of the option is based on U.S. Treasury securities. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.
The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the nine months ended June 30, 2023 and 2022:
| June 30, | June 30, | |||||||
| 2023 | 2022 | |||||||
| Exercise price | | |||||||
| Risk free interest rate | ||||||||
| Volatility | | - | ||||||
| Expected term (in years) | | - | ||||||
| Dividend yield | None | None | ||||||
Warrant Transactions:
As part of the public underwritten offer discussed in Note 8, the Company issued the Underwriter a warrant to purchase up to 40,500 shares of its common stock exercisable at $2.52 per share.
NOTE 9 – STOCK BASED COMPENSATION
Equity Compensation Plan – On June 2, 2015, the Board of Directors of the Company approved the 2015 Equity Compensation Plan (“2015 Plan”). The 2015 Plan initially made
On January 8, 2021, the Company’s Board of Directors approved the 2021 Equity Compensation Plan (the “2021 Plan”) and it was subsequently approved by its shareholders at its annual meeting held on March 12, 2021. The purpose of the 2021 Plan is to advance the interests of the Company by providing an incentive to attract, retain and motivate highly qualified and competent persons who are important to it and upon whose efforts and judgment the success of the Company is largely dependent. The 2021 Plan made
The Company accounts for stock-based compensation using the provisions of ASC 718. ASC 718 codification requires companies to recognize the fair value of stock-based compensation expense in the financial statements based on the grant date fair value of the options. All options are approved by the Compensation, Corporate Governance and Nominating Committee of the Board of Directors. Restricted stock awards that vest in accordance with service conditions are amortized over their applicable vesting period using the straight-line method. The fair value of the Company’s stock option awards or modifications is estimated at the date of grant using the Black-Scholes option pricing model.
Eligible recipients include employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company. Options granted generally have a -to--year term and have vesting terms that cover to years from the date of grant. Certain stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.
Stock Options:
The Company currently has awards outstanding with service conditions and graded-vesting features. We recognize compensation cost on a straight-line basis over the requisite service period.
The fair value of each time-based award is estimated on the date of grant using the Black-Scholes option valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model for equity awards with time-based vesting provisions granted during the year.
The following table summarizes stock option activity under both plans for the nine months ended June 30, 2023:
| Weighted-average | ||||||||||||||||
| remaining | Aggregate | |||||||||||||||
| Weighted-average | contractual term | intrinsic value | ||||||||||||||
| Number of shares | exercise price | (in years) | (in thousands) | |||||||||||||
| Outstanding at September 30, 2022 | $ | $ | - | |||||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | - | |||||||||||||||