EDGAR 10-K Filing

Company CIK: 1644903
Filing Year: 2021
Filename: 1644903_10-K_2021_0001654954-21-013292.json

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ITEM 1. BUSINESS
ITEM 1.
Business.

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ITEM 1A. RISK FACTORS
ITEM 1A.
Risk Factors.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable to a smaller reporting company.

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ITEM 2. PROPERTIES
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.

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ITEM 3. LEGAL PROCEEDINGS
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.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable to our company.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable to a smaller reporting company.
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
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,
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
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
% of
total
Fiscal
% 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,
% of total
% 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
Fiscal
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.
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
Fiscal
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
Fiscal
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.
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.
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 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.
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.
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.
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.
(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
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
EXHIBIT INDEX
Incorporated by Reference
Filed or
Furnished
Herewith
No.
Exhibit Description
Form
Date Filed
Number
1.1
Form of Underwriting Agreement dated May 13, 2019 by and between cbdMD, Inc. and ThinkEquity, a division of Fordman Financial Management, Inc.
8-K
5/14/19
1.1
1.2
Underwriting Agreement dated October 10, 2019 by and between cbdMD, Inc. and ThinkEquity, a division of Fordham Financial Management, Inc.
8-K
10/16/19
1.1
1.3
Underwriting Agreement dated January 9, 2020 by and between cbdMD, Inc. and ThinkEquity, a division of Fordham Financial Management, Inc.
8-K
1/10/20
1.1
1.4
Underwriting Agreement dated December 8, 2020 by and between cbdMD, Inc. and ThinkEquity, a division of Fordham Financial Management, Inc.
8-K
12/9/20
1.1
1.5
Underwriting Agreement dated June 28, 2021 by and between cbdMD, Inc. and ThinkEquity, a division of Fordham Financial Management, Inc.
8-K
6/30/21
1.1
2.1
Merger Agreement dated December 3, 2018 by and among Level Brands, Inc., AcqCo, LLC, cbdMD LLC and Cure Based Development, LLC
8-K
12/4/18
2.1
2.2
Articles of Merger dated December 20, 2018 as filed with the Secretary of State of Nevada merging AcqCo, LLC with and into Cure Based Development, LLC
10-Q
2/14/19
2.2
2.3
Articles of Merger dated December 20, 2018 as filed with the Secretary of State of North Carolina merging AcqCo, LLC with and into Cure Based Development, LLC
10-Q
2/14/19
2.3
2.4
Articles of Merger dated December 20, 2018 as filed with the Secretary of State of Nevada merging Cure Based Development, LLC with an into cbdMD LLC
10-Q
2/14/19
2.4
2.5
Articles of Merger dated December 20, 2018 as filed with the Secretary of State of North Carolina merging Cure Based Development, LLC with an into cbdMD LLC
10-Q
2/14/19
2.5
3.1
Articles of Incorporation
1-A
9/18/17
2.1
3.2
Articles of Amendment to the Articles of Incorporation filed April 22, 2015
1-A
9/18/17
2.2
3.3
Articles of Amendment to the Articles of Incorporation filed June 22, 2015
1-A
9/18/17
2.3
3.4
Articles of Amendment to the Articles of Incorporation filed November 17, 2016
1-A
9/18/17
2.4
3.5
Articles of Amendment to the Articles of Incorporation filed December 5, 2016
1-A
9/18/17
2.5
3.6
Bylaws, as amended
1-A
9/18/17
2.6
3.7
Articles of Amendment to Articles of Incorporation dated April 22, 2019
8-K
4/29/19
3.7
3.8
Articles of Amendment to the Articles of Incorporation including the Certificate of Designations, Rights and Preferences of the 8% Series A Cumulative Convertible Preferred Stock filed October 11, 2019
8-A
10/11/19
3.1(f)
4.1
Form of common stock certificate of the registrant
1-A
9/18/17
3.7
4.2
2015 Equity Compensation Plan+
1-A
9/18/17
3.8
4.3
Form of stock option award under 2015 Equity Compensation Plan+
1-A
9/18/17
3.9
4.4
2021 Equity Compensation Plan+
8-K
1/14/21
10.1
4.5
Form of Representative’s Warrant dated November 16, 2018
S-1
9/26/18
4.10
4.6
Form of Representative’s Warrant dated May 15, 2019
8-K
5/14/19
4.1
4.7
Form of Representative’s Warrant dated October 16, 2019
8-K
10/16/19
4.1
4.8
Form of Representative’s Warrant dated January 9, 2020
8-K
1/10/20
4.1
4.9
Form of Representative’s Warrant dated December 11, 2020
8-K
12/9/20
4.1
4.10
Form of Representative’s Warrant dated June 28, 2021
8-K
6/30/21
4.1
10.1
Form of Indemnification Agreement
1-A
9/18/17
6.21
10.2
Executive Employment Agreement dated September 6, 2018 by and between cbdMD, Inc. and Martin A. Sumichrast+
8-K
9/7/18
10.75
10.3
Amendment No. 1 effective November 13, 2020 to Executive Employment Agreement between cbdMD, Inc. and Martin A. Sumichrast+
8-K
11/17/20
10.1
10.4
Executive Employment Agreement dated December 20, 2018 by and between CBD Industries LLC and R. Scott Coffman+
8-K
12/20/18
10.4
10.5
Amendment No. 1 effective November 13, 2020 to Executive Employment Agreement between CBD Industries LLC and R. Scott Coffman+
8-K
11/17/20
10.2
10.6
Executive Employment Agreement dated September 6, 2018 by and between cbdMD, Inc. and Mark S. Elliott+
8-K
9/7/18
10.76
10.7
Separation Agreement and General Release dated September 16, 2020 by and between cbdMD, Inc. and Mark S. Elliott+
8-K
9/21/20
10.1
10.8
Executive Employment Agreement dated September 15, 2020 by and between cbdMD, Inc. and T. Ronan Kennedy+
8-K
9/21/20
10.2
10.9
Form of voting proxy
8-K
12/20/18
10.2
10.10
Office Lease dated July 11, 2019
10-Q
8/14/19
10.1
10.11
Warehouse Lease dated August 27, 2019
10-Q
2/13/20
10.1
10.12
Form of Distribution Agreement dated February 26, 2020 by and among cbdMD, Inc., CBD Holdings, LLC and the members of CBD Holdings, LLC
8-K
2/28/20
10.1
10.13
Endorsement Agreement effective July 1, 2020
10-Q
8/21/20
10.1
10.14
Form of Lockup Agreement
8-K
12/9/20
10.1
10.15
Amended and Restated Executive Employment Agreement dated April 19, 2021 by and between cbdMD, Inc. and Martin A. Sumichrast+
8-K
4/21/21
10.1
10.16
Amended and Restated Executive Employment Agreement dated April 19, 2021 by and between CBD Industries LLC and R. Scott Coffman+
8-K
4/21/21
10.2
10.17
Asset Purchase Agreement by and among Twenty Two Capital, LLC, cbdMD, Inc., John J. Wiesehan III, Vieo Design, LLC and Bradley D. Trawick dated June 22, 2021
8-K
7/27/21
10.1
10.18
Employment Agreement between cbdMD, Inc. and John Wiesehan III dated July 22, 2021+
8-K
7/27/21
10.2
10.19
John Wiesehan Separation Agreement and General Release dated December 1, 2021+
8-K
12/3/21
10.1
10.20
Executive Employment Agreement dated October 1, 2021 between cbdMD, Inc. and T. Ronan Kennedy+
8-K
10/5/21
10.1
14.1
Code of Business Conduct and Ethics
1-A
9/18/17
15.1
21.1
Subsidiaries of the Registrant
Filed
23.1
Consent of Cherry Bekaert LLP
Filed
24.1
Power of attorney (included on signature page of this report)
Filed
31.1
Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer
Filed
31.2
Rule 13a-14(a)/15d-14(a) Certification of Co-Chief Executive Officer
31.3
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Filed
32.1
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.
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
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
cbdMD, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2021 AND 2020
September 30,
September 30,
Assets
Current assets:
Cash and cash equivalents
$ 26,411,424
$ 14,824,644
Accounts receivable
1,113,372
911,482
Accounts receivable - discontinued operations
10,967
447,134
Marketable securities
33,351
26,472
Investment other securities, at cost
1,000,000
250,000
Inventory
5,021,867
4,603,360
Inventory prepaid
551,519
288,178
Prepaid software
-
174,308
Prepaid sponsorship
1,212,682
1,203,300
Prepaid expenses and other current assets
1,147,178
983,374
Total current assets
36,502,360
23,712,252
Other assets:
Property and equipment, net
2,561,574
3,183,487
Operating lease assets
5,614,960
6,851,357
Deposits for facilities
529,583
790,708
Intangible assets
23,003,929
21,635,000
Goodwill
56,670,970
54,669,997
Total other assets
88,381,016
87,130,549
Total assets
$ 124,883,376
$ 110,842,801
See Notes to Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2021 AND 2020
(continued)
September 30,
September 30,
Liabilities and shareholders' equity
Current liabilities:
Accounts payable
$ 2,978,914
$ 2,850,421
Accrued expenses
2,727,612
2,769,920
Operating leases - current portion
1,151,150
1,159,098
Paycheck Protection Program Loan, current portion
-
854,000
Note payable
59,470
55,639
Total current liabilities
6,917,146
7,689,078
Long term liabilities:
Long term liabilities
108,985
264,367
Paycheck Protection Program Loan
-
602,100
Operating leases - long term portion
4,859,058
6,010,208
Contingent liability
9,856,000
16,200,000
Deferred tax liability
-
895,000
Total long term liabilities
14,824,043
23,971,675
Total liabilities
21,741,189
31,660,753
Commitments and Contingencies (Note 11)
cbdMD, Inc. shareholders' equity:
Preferred stock, authorized 50,000,000 shares, $0.001 par value, 5,000,000 and 500,000 shares issued and outstanding, respectively
5,000
Common stock, authorized 150,000,000 shares, $0.001 par value, 57,783,340 and 52,130,870 shares issued and outstanding, respectively
57,783
52,131
Additional paid in capital
176,417,269
126,517,784
Accumulated deficit
(73,337,865 )
(47,388,367 )
Total cbdMD, Inc. shareholders' equity
103,142,187
79,182,048
Total liabilities and shareholders' equity
$ 124,883,376
$ 110,842,801
See Notes to Consolidated Financial Statements
cbdMD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
SEPTEMBER 30, 2021 AND 2020
Gross Sales
$ 47,332,085
$ 43,172,778
Allowances
(2,851,322 )
(1,289,044 )
Total Net Sales
44,480,763
41,883,734
Cost of sales
14,495,063
15,514,727
Gross Profit
29,985,700
26,369,007
Operating expenses
49,601,690
43,950,862
(Loss) from operations
(19,615,990 )
(17,581,855 )
Realized and Unrealized gain (loss) on marketable and other securities, including impairments
546,878
(932,066 )
Gain on extinguishment of debt
1,466,113
-
(Increase) decrease of contingent liability
(6,687,439 )
29,780,000
Other income
29,479
-
Interest (expense) income
(28,930 )
39,877
(Loss) Income before provision for income taxes
(24,289,889 )
11,305,956
Benefit for income taxes
895,000
1,345,300
Net (Loss) Income from continuing operations
(23,394,889 )
12,651,256
Net (Loss) from discontinued operations, net of tax (Note 14)
-
(48,983 )
Net (Loss) Income
(23,394,889 )
12,602,273
Preferred dividends
2,554,609
366,850
Net (Loss) Income attributable to cbdMD, Inc. common shareholders
$ (25,949,498 )
$ 12,235,423
Net (Loss) Income per share:
Basic earnings per share
(0.47 )
0.28
Diluted earnings per share
(0.47 )
0.28
Weighted average number of shares Basic:
54,938,128
44,140,360
Weighted average number of shares Diluted:
-
45,171,674
See Notes to Consolidated Financial Statements
cbdMD, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 2021 AND 2020
Net (Loss) Income
$ (23,394,889 )
$ 12,602,273
Comprehensive (Loss) Income
(23,394,889 )
12,602,273
Preferred dividends
(2,554,609 )
(366,850 )
Comprehensive (Loss) Income attributable to cbdMD, inc. common shareholders
$ (25,949,498 )
$ 12,235,423
See Notes to Consolidated Financial Statements
cbdMD, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2021 AND 2020
Cash flows from operating activities:
Net (Loss) Income
$ (23,394,889 )
$ 12,602,273
Adjustments to reconcile net (income) loss to net cash used by operating activities:
Stock based compensation
1,298,106
1,900,194
Restricted stock expense
1,626,613
138,000
Marketing stock amortization
871,390
-
Issuance of stock / warrants for service
97,720
338,400
Inventory and materials impairment
670,580
233,372
Impairment on discontinued operations asset
-
45,783
Depreciation and amortization
1,017,408
720,755
Other than temporary impairment other securities and other accounts receivable
-
760,000
Increase/(Decrease) in contingent liability
6,687,439
(29,780,000 )
Realized and unrealized loss of Marketable and other securities
(546,878 )
172,066
Merchant reserve settlement
-
132,657
Termination benefit
196,896
489,381
Extinguishment of Paycheck Protection Program Loan
(1,466,113 )
-
Amortization of operating lease asset
1,236,397
1,180,213
Changes in operating assets and liabilities:
Accounts receivable
(183,735 )
514,352
Deposits
261,125
(938,112 )
Merchant reserve
-
386,912
Inventory
(1,009,192 )
(535,146 )
Prepaid inventory
(263,341 )
615,280
Prepaid expenses and other current assets
525,670
645,796
Accounts payable and accrued expenses
(104,422 )
1,479,189
Operating lease liability
(1,159,097 )
(1,045,285 )
Deferred revenue / customer deposits
3,723
37,802
Collection on discontinued operations accounts receivable
436,167
587,083
Deferred tax liability
(895,000 )
(1,345,300 )
Cash used by operating activities
(14,093,433 )
(10,664,335 )
Cash flows from investing activities:
Proceeds from sale of other investment securities
540,000
-
Purchase of other investment securities
(750,000 )
(250,000 )
Purchase of DirectCBDOnline.com
(2,000,000 )
-
Purchase of property and equipment
(342,013 )
(1,320,095 )
Cash used by investing activities
(2,552,013 )
(1,570,095 )
Cash flows from financing activities:
Proceeds from issuance of common stock
-
16,766,106
Proceeds from issuance of preferred stock
30,938,386
4,421,928
PPP loan
-
1,456,100
Note payable
(151,551 )
29,629
Preferred dividend distribution
(2,554,609 )
(366,850 )
Deferred Issuance costs
-
62,197
Cash provided by financing activities
28,232,226
22,369,110
Net increase (decrease) in cash
11,586,780
10,134,680
Cash and cash equivalents, beginning of period
14,824,644
4,689,966
Cash and cash equivalents, end of period
$ 26,411,424
$ 14,824,646
Supplemental Disclosures of Cash Flow Information:
Cash Payments for:
Interest expense
$ 28,930
$ 33,693
Non-cash financial/investing activities:
Issuance of Contingent earnout shares:
$ 13,520,000
$ 4,620,000
Warrants issued to representative
$ 499,587
$ 524,113
See Notes to Consolidated Financial Statements
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
52,130,870
$ 52,131
500,000
$ 500
$ 126,517,784
$ (47,388,367 )
$ 79,182,048
Issuance of Preferred Stock
-
-
2,300,000
2,300
15,795,815
-
15,798,115
Issuance of options for share based compensation
-
-
-
-
219,875
-
219,875
Issuance of stock costs
-
-
-
-
-
-
-
Issuance of restricted stock for share based compensation
-
-
-
-
15,279
-
15,279
Preferred dividend
-
-
-
-
-
(100,050 )
(100,050 )
Net (Loss) Income
-
-
-
-
-
(9,395,621 )
(9,395,621 )
Balance, December 31, 2020
52,130,870
52,131
2,800,000
2,800
142,548,753
(56,884,038 )
85,719,646
Issuance of Common stock
3,711,964
3,712
-
-
11,422,488
-
11,426,200
Issuance of options for share based compensation
147,953
-
-
627,500
-
627,648
Issuance of restricted stock for share based compensation
347,000
-
-
1,181,481
-
1,181,828
Preferred dividend
-
-
-
-
-
(560,279 )
(560,279 )
Net (Loss) Income
-
-
-
-
-
(12,510,474 )
(12,510,474 )
Balance, March 31, 2021
56,337,787
56,338
2,800,000
2,800
155,780,222
(69,954,791 )
85,884,569
Issuance of Common stock
608,528
-
-
1,471,991
-
1,472,600
Issuance of options for share based compensation
-
-
-
-
355,565
-
355,565
Issuance of restricted stock for share based compensation
27,500
-
-
590,264
-
590,291
Preferred dividend
-
-
-
-
-
(560,281 )
(560,281 )
Net Income (loss)
-
-
-
-
-
1,537,288
1,537,288
Balance, June 30, 2021
56,973,815
56,974
2,800,000
2,800
158,198,042
(68,977,784 )
89,280,032
Issuance of Common stock
809,525
-
-
919,491
-
922,500
Issuance of Preferred Stock
-
-
2,200,000
2,200
15,142,571
-
15,142,571
Issuance of options for share based compensation
-
-
-
-
493,000
-
493,000
Issuance of restricted stock for share based compensation
-
-
-
-
479,899
-
479,899
Acquisition of DCO
-
-
-
-
1,184,265
-
1,184,265
Preferred dividend
-
-
-
-
-
(1,333,999 )
(1,333,999 )
Net (Loss) Income
-
-
-
-
-
(2,917,082 )
(2,917,082 )
Balance, September 30, 2021
57,783,340
$ 57,783
5,000,000
$ 5,000
$ 176,417,269
$ (73,228,865 )
$ 103,142,187
See Notes to Condensed Consolidated Financial Statements
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
27,720,356
$ 27,720
-
$ -
$ 97,186,524
$ (59,610,260 )
$ 37,603,984
Issuance of Preferred Stock
-
-
500,000
4,421,428
-
4,421,928
Issuance of options for share based compensation
-
-
-
-
542,574
-
542,574
Issuance of stock costs
-
-
-
-
(31,757 )
-
(31,757 )
Issuance of restricted stock for share based compensation
-
-
-
-
138,000
-
138,000
Preferred dividend
-
-
-
-
-
(66,734 )
(66,734 )
Adoption of ASU 2016-02
-
-
-
-
-
(13,528 )
(13,528 )
Net Income (loss)
-
-
-
-
-
12,929,763
12,929,763
Balance, December 31, 2019
27,720,356
27,720
500,000
102,256,769
(46,760,759 )
55,524,230
Issuance of Common stock
23,590,292
23,591
-
-
21,368,166
-
21,391,757
Exercise of options for share based compensation
-
-
-
-
429,651
-
429,651
Issuance of stock/warrants for services
25,000
-
-
28,225
-
28,250
Preferred dividend
-
-
-
-
-
(100,016 )
(100,016 )
Net Income (loss)
-
-
-
-
-
14,883,772
14,883,772
Balance, March 31, 2020
51,335,648
51,336
500,000
124,082,811
(31,977,003 )
92,157,644
Issuance of options for share based compensation
-
-
-
-
419,045
-
419,045
Issuance of stock/warrants for services
10,000
-
-
56,190
-
56,200
Preferred dividend
-
-
-
-
-
(100,050 )
(100,050 )
Net (Loss) Income
-
-
-
-
-
(8,952,702 )
(8,952,702 )
Balance, June 30, 2020
51,345,648
51,346
500,000
124,558,046
(41,029,755 )
83,580,137
Issuance of Common stock
25,222
-
-
(25 )
-
-
Issuance of options for share based compensation
-
-
-
-
508,923
-
508,923
Issuance of stock/warrants for services
760,000
-
-
1,450,840
-
1,451,600
Preferred dividend
-
-
-
-
-
(100,050 )
(100,050 )
Net (Loss) Income
-
-
-
-
-
(6,258,562 )
(6,258,562 )
Balance, September 30, 2020
52,130,870
$ 52,131
500,000
$ 500
$ 126,517,784
$ (47,388,367 )
$ 79,182,048
See Notes to Condensed Consolidated Financial Statements
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 15,250,000 shares of our common stock to the members of Cure Based Development, of which unrestricted voting rights to 8,750,000 of the shares vest over a five-year period and are subject to a voting proxy agreement, as well as to issue another 15,250,000 shares of our common stock (the “Earnout Shares”) in the future upon certain earnout goals being achieved within five years from the closing of the Mergers. The Company’s shareholders approved the issuance of the 15,250,000 shares of common stock in April 2019 and these shares were issued to members of Cure Based Development on April 19, 2019. In April 2019, our shareholders also approved the possible issuance of the Earnout Shares. The first marking period for the earnout was December 31, 2019 and based on measurement criteria, 5,127,792 Earnout Shares had been earned and were issued on February 27, 2020. The sole member of Cure Based Development at the closing of the Mergers was CBD Holding LLC (“CBDH”). In February 2020, in connection with its liquidation, CBDH distributed the rights to the Earnout Shares (the “Earnout Rights”) to its members based upon the members’ pro pro-rata ownership interest in CBDH. Members of CBDH at the time of its liquidation and this distribution included affiliates of Martin A. Sumichrast and R. Scott Coffman, directors and executive officers of cbdMD. A second marking period for the earnout ended December 31, 2020 and based on measurement criteria an additional 3,348,520 Earnout Shares had been earned and were issued on March 8, 2021. The first quarter of the third marking period ended on March 31, 2021 and based on the measurement criteria an additional 562,278 Earnout Shares had been earned and issued in May of 2021. The second quarter of the third marking period ended on June 30, 2021 and based on the measurement criteria an additional 503,275 Earnout Shares had been earned and issued in August of 2021.
The Company owns and operates the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and cbdMD Botanicals. The Company sources cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States. CBD 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 $3,633 and $20,664, respectively.
Merchant Receivable and Reserve
The Company primarily sells its products through the internet and has an arrangement to process customer payments with multiple third-party payment processors. The Company pay a fee between 2.5% and 5.0% of the transaction amounts processed. Pursuant to this agreement, there can be a waiting period between 2 to 5 days prior to reimbursement to the Company, as well as a calculated reserve which some payment processors hold back. Fees and reserves can change periodically with notice from the processors. At September 30, 2021, the receivable from payment processors included approximately $231,257 for the waiting period amount and is recorded as accounts receivable in the accompanying consolidated balance sheet.
Inventory
Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. The cost of inventory includes product cost, freight-in, and production fill and labor (portions of which we outsource to third party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management’s analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. We assess inventory quarterly for slow moving products and potential impairments and at a minimum perform a physical inventory count annually near fiscal year end.
Customer Deposits
Customer deposits consist of payments received in advance of revenue recognition. Revenue is recognized as revenue recognition criteria are met.
Property and Equipment
Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are five years for manufacturing equipment and automobiles and three years for software, computer, and furniture and equipment. The useful life for leasehold improvements are over the term of the lease or expected life of the asset, whichever is less. 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 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.
Contingent Liability
A significant component of the purchase price consideration for the Company’s acquisition of Cure Based Development includes a fixed number of future shares to be issued as well as a variable number of future shares to be issued based upon the post-acquisition entity reaching certain specified future revenue targets, as further described in Note 6. The Company made a determination of the fair value of the contingent liabilities as part of the valuation of the assets acquired and liabilities assumed in the business combination.
The Company recognized both the fixed number of shares to be issued, and the variable number of shares to be potentially issued, as contingent liabilities on its consolidated balance sheets. These contingent liabilities were recorded at fair value upon the acquisition date and are remeasured quarterly based on the reassessed fair value as of the end of that quarterly reporting period. Additionally, as the fixed shares were issued on April 19, 2019, the value of the shares at that time, in the amount of $53,215,163, was reclassified from contingent liability to additional paid in capital on the consolidated balance sheet. The first marking period for the Earnout Shares was December 31, 2019 and based on measurement criteria, 5,127,792 shares were issued on February 27, 2020. The value of the issued Earnout Shares as of February 27, 2020 was $4,620,000 and the decrease in value of $6,924,503 from December 31, 2019 related to those shares was recorded in the Statement of Operations for the three months ended March 31, 2020. Additionally, as the 5,127,792 Earnout Shares were issued on February 27, 2020, the value of the shares in the amount of $4,620,000 was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The second marking period for the Earnout Shares ended December 31, 2020 and based on measurement criteria, 3,348,520 Earnout Shares were issued on March 8, 2021. The second marking period shares increased in value by $3,100,012 during the quarter through the time of issuance and had a value of $11,271,000, which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The first quarter of the third marking period ended on March 31, 2021 and based on the measurement criteria an additional 562,278 Earnout Shares had been earned and issued in May of 2021. These shares deceased in value by $522,104 during the quarter through the time of issuance and had a value of $1,329,000 which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The second quarter of the third marking period ended on June 30, 2021 and based on the measurement criteria an additional 503,275 Earnout Shares had been earned and issued in August of 2021. These shares deceased in value by $222,442 during the quarter through the time of issuance and had a value of $920,000 which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet.
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 $488,561. Under GAAP, the Company is obligated to reassess the obligations associated with the Twenty Two Earnout Shares on a quarterly basis and, in the event the Company’s estimate of the fair value of the contingent consideration changes, will record increases or decreases in the fair value as an adjustment to earnings. In particular, changes in the market price of the Company’s common stock, which is one of the inputs used in determining the amount of the non-cash contingent liability, will result in increases or decreases in this liability and positively or negatively impact the Company’s net loss or profit for the period. At September 30, 2021, the Company recorded a decrease in value of the contingent liability of $73,561 related to a decrease in the market price of its common stock, which adjusted the total contingent liability related to the DCO Earnout Shares to $416,000.
Paycheck Protection Program Loan
On April 27, 2020, we received a loan in the principal amount of $1,456,100 (the “SBA Loan”) in consideration of a Promissory Note, under the Paycheck Protection Program (“PPP”), which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). The intent and purpose of the PPP is to support companies, during the COVID-19 pandemic, by providing funds for certain specified business expenses, with a focus on payroll. As a qualifying business as defined by the SBA, the Company is using the proceeds from this loan to primarily help maintain its payroll as it navigates its business with a focus on returning to normal operations. The term of the Promissory Note is two years, though it may be payable sooner in connection with an event of default under the Promissory Note. The SBA Loan carries a fixed interest rate of one percent per year, with the first payment due seven months from the date of initial cash receipt. Under the CARES Act and the PPP, certain amounts of loans made under the PPP may be forgiven if the recipients use the loan proceeds for eligible purposes, including payroll costs and certain rent or utility costs, and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. The Company used the SBA Loan for qualifying expenses in accordance with the terms of the CARES Act. The Company filed for forgiveness under the terms of the SBA loan and on May 17, 2021 it received notice from the SBA that the loan had been forgiven. The Company subsequently booked $1,466,113 of gain for unpaid principal and accrued interest. This gain is reflected within Other Income (Expenses) on the consolidated statements of operations.
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.
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
$ 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
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 $15,835,139 and $9,946,755 in advertising and marketing and promotional costs included in operating expenses during the years ended September 30, 2021 and 2020 respectively. The Company believes driving its advertising aids in brand awareness and is critical to maintain brand recognition. We are constantly evaluating advertising methods and costs and working to drive down our cost of customer acquisition.
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.
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 $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. The Company had a $23,508,953 uninsured balance at September 30, 2021 and a $14,287,810 uninsured balance at September 30, 2020.
Concentration of credit risk with respect to receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management considers these customer receivables to represent normal business risk. The Company did not have any customers that represented a significant amount of our sales for the 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.
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 $546,878 and $(932,066), respectively of realized and unrealized gain (loss) on marketable and other securities, including impairments. The realized gain was driven by the sale of our investment in Formula Four Beverages, Inc. that was previously written to zero based on prior information related to the company’s performance and COVID-19 impacts, while the loss in the prior year was driven by the impairment from its investment in Formula Four Beverages, Inc. and Kure Corp.
On December 30, 2017, the Company entered into an agreement with Isodiol International, Inc., whereby the Company provided pharmaceutical grade phytochemical compound development services. As payment for these services, the Company has received 1,226,435 shares of Isodiol's common stock between December 31, 2017 and January 2019. The Company also received 38,095 shares of Isodiol's common stock upon Isodiol’s acquisition of Kure Corp., giving the Company a total of 1,264,530 shares. At September 30, 2021, the Company had 1,042,193 shares valued at $33,351.
In September 2020, the Company purchased a membership interest in Adara Sponsor LLC for $250,000, which along with proceeds from other investors was utilized as an investment in Adara Acquisition Corporation (“Adara”), a newly organized blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination (a “SPAC”). On January 13, 2021, the Company executed second tranche subscriptions agreements and funded the remaining $750,000 commitment into Adara Sponsor, LLC. On February 9, 2021, the public shares of Adara began trading on the NYSE. Commencing March 24, 2021, holders of the 11,500,000 units sold in the Adara’s initial public offering could elect to separately trade shares of the Adara Class A common stock and warrants included in the units. The shares of Class A common stock and warrants that were separated now trade on NYSE American LLC under the symbols “ADRA” and “ADRA WS”, respectively. On September 30, 2021, the Company’s implied, indirect ownership in Adara represented 4.4% (633,988 shares) and 10.1% (1 million) of the warrants. As of September 30, 2021, ADRA stock closed at $9.80 while ADRA WS closed at $0.54.
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)
Marketable Securities
$ 33,351
$ -
$ -
$ 33,351
Investment other securities
-
-
1,000,000
1,000,000
(Level 1)
(Level 2)
(Level 3)
Balance at September 30, 2019
$ 198,538
$ -
$ 600,000
$ 798,538
Change in value of equities
(172,066 )
-
(600,000 )
(772,066 )
Additional Investment
-
-
250,000
250,000
Balance at September 30, 2020
26,472
-
250,000
276,472
Change in value of equities
6,879
-
-
6,879
Additional Investment
-
-
750,000
750,000
Balance at September 30, 2021
$ 33,351
$ -
$ 1,000,000
$ 1,033,351
NOTE 3 - INVENTORY
Inventory at September 30, 2021 and 2020 consists of the following:
Septmeber 30
September 30,
Finished Goods
$ 3,362,897
$ 2,706,518
Inventory Components
1,729,176
1,982,021
Inventory Reserve
(70,206)
(85,179 )
Inventory prepaid
551,519
288,178
Total Inventory
$ 5,573,386
$ 4,891,538
Abnormal amounts of idle facility expense, freight, handling costs, scrap, and wasted material (spoilage) are expensed in the period they are incurred and no material expenses related to these items occurred in the year ended September 30, 2021. The Company wrote down inventory of $670,580 during the fiscal year ended September 30, 20021 primarily related to regulatory changes affecting packaging, as well as expired product.
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,
Computers, furniture and equipment
$ 549,910
$ 365,638
Manufacturing equipment
2,968,838
2,873,598
Leasehold improvements
870,621
832,465
Automobiles
35,979
24,892
4,425,348
4,096,593
Less accumulated depreciation
(1,863,774)
(913,106 )
Property and equipment, net
$ 2,561,574
$ 3,183,487
Depreciation expense related to property and equipment was $968,926 and $111,913 for the year ended September 30, 2021 and 2020, respectively.
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 $50,000. This trademark will be used in the marketing and branding of certain products to be released under this brand name. The Company believes the trademark does not have limits on the time it will contribute to the generation of cash flows and therefore has identified these as indefinite-lived intangible assets.
Intangible assets as of September 30, 2021 and 2020 consisted of the following:
September 30,
September 30,
Indefinite lived:
Trademark related to cbdMD
$ 21,585,000
$ 21,585,000
Trademark for HempMD
50,000
50,000
Definite lived intangible assets:
-
-
Technology Relief from Royalty related to DirectCBDOnline.com
863,745
-
Tradename related to DirectCBDOnline.com
667,844
-
Amortization of definite lived intangible assets:
(48,482 )
21,585,000
Total
$ 23,003,929
$ 43,220,000
Goodwill as of September 30, 2021 ands 2020 consisted of the following:
Goodwill at September 30, 2020
$ 54,669,997
Goodwill related to acquisition of DirectCBDOnline.com
2,000,973
Goodwill at September 30,2021
$ 56,670,970
NOTE 6 - CONTINGENT LIABILITY
As consideration for the Mergers, described in Note 1, the Company had a contractual obligation to issue 15,250,000 shares of its common stock, after approval by its shareholders, to the members of Cure Based Development, issued in two tranches 6,500,000 shares and 8,750,000 shares, both of which are subject to leak out provisions, and the unrestricted voting rights to 8,750,000 tranche of shares will also vest over a five year period and are subject to a voting proxy agreement. The Merger Agreement also provides that an additional 15,250,000 Earnout Shares can be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date.
The contractual obligations and earn out provision are accounted for as a contingent liability and fair value is determined using Level 3 inputs, as estimating the fair value of these contingent liabilities require the use of significant and subjective inputs that may and are likely to change over the duration of the liabilities with related changes in internal and external market factors.
The initial two tranches totaling 15,250,000 shares have been valued using a market approach method and included the use of the following inputs: share price upon contractual obligation, discount for lack of marketability to address leak out restrictions, and probability of shareholder disapproval. In addition, the 8,750,000 shares in the second tranche also included an input for a discount for lack of voting rights during the vest periods.
The Merger Agreement also provides that an additional 15,250,000 Earnout Shares would be issued as part of the consideration for the Mergers, upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date as follows, as measured at four intervals (each a “marking period”): the completion of 12, 24, 42, and 59 calendar months from the Closing Date, and based upon the ratios set forth below:
Aggregate Net Revenues
Shares Issued/ Each $ of Aggregate Net Revenue Ratio
$1 - $20,000,000
.190625
$20,000,001 - $60,000,000
.0953125
$60,000,001 - $140,000,000
.04765625
$140,000,001 - $300,000,000
.23828125
For clarification purposes, the Aggregate Net Revenues during a Marking Period shall be multiplied by the applicable Shares Issued/Each $ of Aggregate Net Revenue Ratio, minus, the number of shares issued as a result of Aggregate Net Revenues during the prior marking periods.
The issuance of the initial 15,250,000 shares and the 15,250,000 Earnout Shares were approved by the Company’s shareholders in April 2019. The initial shares were issued upon shareholder approval on April 19, 2019 and had a carrying value of $53,215,163. Additionally, as the 15,250,000 initial shares were issued, the value of the shares in the amount of $53,215,163 was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. In addition, the first marking period for the Earnout Shares was December 31, 2019 and based on measurement criteria, 5,127,792 Earnout Shares were issued on February 27, 2020 and had a value of $4,620,000 which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The second marking period for the Earnout Shares was December 31, 2020 and based on measurement criteria, 3,348,520 Earnout Shares were issued on March 8, 2021 and had a value of $11,271,000 which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The first quarter of the third marking period ended on March 31, 2021 and based on the measurement criteria an additional 562,278 Earnout Shares had been earned and issued in May of 2021. These shares deceased in value by $522,104 during the quarter through the time of issuance and had a value of $1,329,000 which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The second quarter of the third marking period ended on June 30, 2021 and based on the measurement criteria an additional 503,275 Earnout Shares had been earned and issued in August of 2021. These shares deceased in value by $222,442 during the quarter through the time of issuance and had a value of $920,000 which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet.
The third marking period was originally an 18 month period commencing on January 1, 2021 and ending on June 30, 2022 (the “Third Marking Period End Date”), after which time the determination of the issuance of any remaining Earnout Shares would be made pursuant to the terms of the Merger Agreement. On March 31, 2021 the Company entered into Addendum No. 1 to the Merger Agreement (“Addendum No. 1”) with the holders of the remaining Earnout Rights which amended the measurement periods within the third marking period to change the determination of the aggregate net revenues within the third marking period to a quarterly basis for each of the six fiscal quarters within the third marking period, beginning with the quarter ended March 31, 2021, instead of following Third Marking Period End Date. This change in the measurement date, however, has no effect on the number of remaining Earnout Shares issuable under the Earnout Rights and no effect on the earnout targets; Addendum No. 1 simply changes the physical issuance date(s) of the remaining Earnout Shares, if in fact, such shares are earned pursuant to the terms of the Merger Agreement. Addendum No. 1 did not change any of the terms of the fourth marking period (as that term is defined in the Merger Agreement). This change did not impact the fair value of the contingent liability. The value of the contingent liability was $9,440,000 and $16,200,000 at September 30, 2021 and September 30, 2020, respectively.
As part of the Twenty Two acquisition in July 2021, the Company has a contractual obligation to issue up to an additional 200,000 shares of its common stock as additional consideration, dependent upon the acquisition entity meeting future revenue targets.. Under GAAP the Company is required to record a non-cash contingent liability associated with the Twenty Two Earnout Shares and at the date of the acquisition, recorded a total contingent liability of $488,561. Under GAAP the Company is obligated to reassess the obligations associated with the Twenty Two Earnout Shares on a quarterly basis and, in the event its estimate of the fair value of the contingent consideration changes, the Company will record increases or decreases in the fair value as an adjustment to earnings. In particular, changes in the market price of the Company’s common stock, which is one of the inputs used in determining the amount of the non-cash contingent liability, will result in increases or decreases in this liability and positively or negatively impact the Company’s net loss or profit for the period. At September 30, 2021, the Company recorded a decrease in value of the contingent liability of $73,561 related to a decrease in the market price of our common stock, which adjusted the total contingent liability related to the DCO Earnout Shares to $416,000.
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 50,000,000 shares of preferred stock, par value $0.001 per share. In October 2019, the Company designated 5,000,000 of these shares as 8.0% Series A Cumulative Convertible Preferred Stock. Our 8.0% Series A Cumulative Convertible Preferred Stock ranks senior to our common stock for liquidation or dividend provisions and holders are entitled to receive cumulative cash dividends at an annual rate of 8.0% payable monthly in arrears for the prior month. The Company reviewed ASC 480 - Distinguishing Liabilities from Equity in order to determine the appropriate accounting treatment for the preferred stock and determined that the preferred stock should be treated as equity. There were 5,000,000 and 500,000 shares of 8.0% Series A Cumulative Convertible Preferred Stock issued and outstanding at September 30, 2021 and September 30, 2020, respectively.
The total amount of dividends declared and recorded were $2,554,609 and $366,850 for the years ended September 30, 2021 and 2020.
Common Stock - The Company is authorized to issue 150,000,000 shares of common stock, par value $0.001 per share. There were 57,783,340 and 52,130,870 shares of common stock issued and outstanding at September 30, 2021 and 2020, respectively.
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 2,200,000 shares of its 8.0% Series A Cumulative Convertible Preferred Stock for aggregate gross proceeds of $16.50 million. The Company received approximately $15.3 million in net proceeds after deducting underwriting discounts and commissions. The Company also issued to the representative of the underwriters warrants to purchase in aggregate 143,382 shares of common stock with an exercise price of $3.75. The warrants were valued at $244,637 and expire on June 30, 2026.
On December 8, 2020, the Company completed a follow-on firm commitment underwritten public offering of 2,300,000 shares of its 8.0% Series A Cumulative Convertible Preferred Stock for aggregate gross proceeds of $17.25 million. The Company received approximately $15.8 million in net proceeds after deducting underwriting discounts and commissions. The Company also issued to the representative of the underwriters warrants to purchase in aggregate 150,502 shares of common stock with an exercise price of $3.74. The warrants were valued at $254,950 and expire on December 8, 2025.
In the year ended September 30, 2020:
On October 16, 2019, the Company completed a firm commitment underwritten public offering of 500,000 shares of its 8.0% Series A Cumulative Convertible Preferred Stock for aggregate gross proceeds of $5,000,000. The Company received approximately $4.5 million in net proceeds after deducting underwriting discounts and commissions. The Company also issued to the representative of the underwriters warrants to purchase in aggregate 47,923 shares of common stock with an exercise price of $3.9125. The warrants were valued at $178,513 and expire on October 10, 2024.
Common stock transactions:
In the year ended September 30, 2021:
On August 16, 2021 the company issued 503,275 shares of restricted common stock in connection with the Earnout shares as referenced Note 6.
In fiscal year ending September 30, 2021, 323,444 warrants issued in January 2020 to purchase shares of common stock at an exercise price of $1.25 were exercised.
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 25,000 shares of restricted stock awards in connection with a consulting arrangement with an industry professional. The Company recorded a total prepaid expense of $80,500 in conjunction with the issuance of shares and intends to amortize this over the term of the agreement.
On May 14, 2021, the Company issued 562,278 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.
On April 9, 2021, the Company entered into an endorsement agreement with a professional athlete. A part of the endorsement agreement, the Company issued 40,000 shares of restricted common stock. The Company recorded $143,600 prepaid expense and intends to amortize over the term of the agreement.
In March 2021, the Company issued 180,000 shares of restricted common stock to a professional athlete to completely satisfy a $800,000 obligation due between July and December of 2021. The Company recorded a total prepaid expense of $649,800 in conjunction with the issuances of shares and intends to amortize this over the term of the athlete’s agreement.
In March 2021, the Company issued 27,000 of restricted stock awards to the Company’s board of directors. Two thousand of the shares vested at the time of the grant, while the balance vest one fourth on June 30, 2021, one fourth, on September 30, 2021, one fourth on December 31, 2021, and one fourth on March 31, 2022. The stock awards were valued at the fair market price of $118,800 upon issuance and will amortize over the individual vesting periods.
In March 2021, the Company issued 3,348,520 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.
In February 2021, as partial compensation pursuant to the terms of a Personal Services Agreement for the endorsement of the Company’s products, the Company issued 40,000 common shares. The Company recorded a total prepaid expense of $155,200 in conjunction with the issuance of shares.
In October 2020 the Company issued 50,000 of restricted stock awards to an executive officer, subject to a multi-year vesting schedule with a minimum one year before the first tranche vests as noted below in Note 9.
In the year ended September 30, 2020:
On January 14, 2020, the Company completed a follow-on firm commitment underwritten public offering of 18,400,000 shares of its common stock for aggregate gross proceeds of $18,400,000. The Company received approximately $16.9 million in net proceeds after deducting underwriting discounts and commissions. The Company also issued to the selling agent warrants to purchase in aggregate 480,000 shares of common stock with an exercise price of $1.25. The warrants were valued at $345,600 and expire on January 14, 2025.
In February 2020, the Company issued 25,000 shares of our common stock to an investor relations firm for services. The shares were valued at $28,250, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending January 2021.
In February 2020, the Company issued 5,000 shares of our common stock to an employee. The shares were valued at $5,650, based on the trading price upon issuance, and was expensed as stock based compensation expense.
In February 2020, the company issued 5,127,792 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.
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 $125,250 and intends to amortize over the 12-month vesting term.
In April 2021, the Company issued 750,000 common stock options to an executive officer in conjunction with an Amended and Restated Executive Employment Agreement. The common stock options vest in three equal tranches, the first of which vests on January 1, 2022, the second on January 1, 2023 and the third on January 1, 2024, both under the Corporation’s 2021 Equity Compensation Plan. The Company has recorded an expense of $578,963 for the year ended September 30, 2021 for these options.
In March 2021, the Company granted its board of directors an aggregate of 150,000 common stock options. The options vested immediately, have a strike price of $4.40 and a five-year term. The Company has recorded a total prepaid expense of $395,850 and intends to amortize the expense over the 12-month board term.
In January 2021, the Company granted an aggregate of 80,000 common stock options to three employees. The options vest in three equal tranches, the first on April 15, 2021, the second on April 15, 2022 and the third on April 14, 2023 and have an exercise price of $3.10 per share and a term of 10 years. The Company has recorded an expense of $116,735 for the year ended September 30, 2021 for these options.
In October 2020, the Company granted an aggregate of 350,000 common stock options to an executive officer. The options vest in three equal tranches, the first on October 1, 2021, the second on October 1, 2022 and the third on October 1, 2023, and have an exercise price of $3,50, $5.00, and $6.50 per share and a term of 5 years. The Company has recorded an expense for these options of $124,217 for the year ended September 30, 2021.
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 280,000 common stock options to two executives. The options vest 1/3 on January 1, 2020, 1/3 on January 1, 2021, and 1/3 January 1, 2022, have an exercise price of $3.15 per share and a term of five years. We have recorded an expense for the options of $405,396 for the fiscal year ended September 30, 2020.
In February 2020, we granted an aggregate of 30,000 stock options to an employee. The options vest 1/3 at grant, 1/3 on February 7, 2021, and 1/3 on February 7, 2022, have an exercise price of $3.15 per share and a term of five years. We have recorded an expense for the options of $10,100 for the fiscal year ended September 30, 2020.
In May 2020, we granted per the annual board compensation plan, an aggregate of 80,000 common stock options four independent directors and are expensed over the annual board term. The options vest immediately, have an exercise price of $1.57 per share and a term of 10 years. We have recorded an expense for the options of $58,040 for the fiscal year ended September 30, 2020.
In September 2020, we granted an aggregate of 30,000 common stock options to an employee as part of a severance agreement. The options vest immediately have an exercise price of $2.60 per share and a term of three years. We have recorded an expense for the options of $273,000 for the fiscal year ended September 30, 2020.
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 143,482 shares of common stock with an exercise price of $3.75. The warrants expire on December 8, 2025.
Weighted average exercise price
$ 3.91
$ 3.15
Risk free interest rate
0.16% - 0.85
%
1.41% - 1.64
%
Volatility
100.72% - 105.43
%
95.96% - 99.03
%
Expected term
2.5 - 5.5 years
3 - 5 years
Divident yield
None
None
In December 2020 in relation to the follow-on firm commitment underwritten public offering of the 8.0% Series A Cumulative Convertible Preferred Stock, the Company issued to the representative of the underwriters warrants to purchase in aggregate 150,502 shares of common stock with an exercise price of $3.74. The warrants expire on December 8, 2025.
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 47,923 shares of common stock with an exercise price of $3.9125. The warrants expire on October 10, 2024.
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 480,000 shares of common stock with an exercise price of $1.25. The warrants expire on January 14, 2025.
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:
Weighted average exercise price
$ 3.74
$1.25-$3.9125
Risk free interest rate
0.39%-0.89 %
1.48%-1.63
%
Volatility
103.42 %
95.36%-96.85
%
Expected term
2.75 years
5 years
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 1,175,000 common stock shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The number of shares of common stock available for issuance under the 2015 Plan shall automatically increase on the first trading day of our fiscal year during the term of the 2015 Plan, beginning with calendar year 2016, by an amount equal to one percent (1%) of the total number of shares of common stock outstanding on the last trading day in September of the immediately preceding fiscal year, but in no event shall any such annual increase exceed 100,000 shares of common stock. On April 19, 2019, shareholders approved an amendment to the 2015 Plan and increased the number of shares available for issuance under the 2015 Plan to 2,000,000 and retained the annual evergreen increase provision of the plan. Subsequent thereto, on August 7, 2019 the Company’s Board of Directors approved an amendment to the 2015 Plan changing the date the automatic evergreen increase is determined to the first trading day of October each calendar year during the term of the 2015 Plan to coincide with the Company’s fiscal year.
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 5,000,000 common shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The 2021 Plan also contains an “evergreen formula” pursuant to which the number of shares of common stock available for issuance under the 2021 Plan will automatically increase on October 1 of each calendar year during the term of the 2021 Plan, beginning with calendar year 2022, by an amount equal to 1.0% of the total number of shares of common stock outstanding on September 30 of such calendar year, up to a maximum of 250,000 shares.
The Company accounts for stock-based compensation using the provisions of ASC 718. ASC 718 codification requires companies to recognize the fair value of stock-based compensation expense in the financial statements based on the grant date fair value of the options. All options are approved by the Compensation, Corporate Governance and Nominating Committee of the Board of Directors. Restricted stock awards that vest in accordance with service conditions are amortized over their applicable vesting period using the straight-line method. The fair value of the Company’s stock option awards or modifications is estimated at the date of grant using the Black-Scholes option pricing model.
Eligible recipients include employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company. Options granted generally have a five-to-ten-year term and have vesting terms that cover one to three years from the date of grant. Certain of the stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.
Stock Options:
The Company currently has awards outstanding with service conditions and graded-vesting features. We recognize compensation cost on a straight-line basis over the requisite service period.
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 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
1,219,650
$ 6.07
$ -
Granted
690,000
2.73
-
Exercised
-
-
Forfeited
(159,650 )
6.90
Outstanding at September 30, 2020
1,750,000
4.68
6.01
-
Granted
1,380,000
3.91
-
Exercised
(147,953 )
2.60
Forfeited
(279,547 )
4.47
Outstanding at September 30, 2021
2,702,500
$
4.42
5.18
-
Exercisable at September 30, 2021
1,395,835
$ 4.99
5.58
$ -
As of September 30, 2021, there was approximately $1,786,716 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 2.3 years.
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 25,000 shares of restricted common stock, which vested on the issuance date. The Company recorded $80,500 prepaid expense and intends to amortize over the term of the agreement.
In April 2021, the Company entered into an endorsement agreement with a professional athlete. A part of the endorsement agreement, the Company issued 40,000 shares of restricted common stock. The Company recorded $143,600 prepaid expense and intends to amortize over the term of the agreement.
In April 2021, the Company issued 750,000 RSUs to an executive officer. The restricted stock vests in three equal tranches, the first of which vests on January 1, 2022, the second on January 1, 2023 and the third on January 1, 2024. The stock awards were valued at the fair market price of $2,520,000 upon issuance and amortized over the individual vesting periods.
In March 2021, the Company issued 27,000 of restricted stock awards to the members of the Company’s board of directors. Two thousand shares vested at the time of the grant, while the balance vest in four equal tranches, the first of which vests on June 30, 2021, the second on September 30, 2021, on the third on December 31, 2021, and the fourth on March 31, 2022. The stock awards were valued at the fair market price of $118,800 upon issuance and amortized over the individual vesting periods.
In March 2021, the Company issued 180,000 shares of restricted common stock to a professional athlete to completely satisfy an obligation due between July and December of 2021. The Company recorded a total prepaid expense of $649,800 in conjunction with the issuances of shares and intends to amortize this over the term of the athlete’s agreement as a marketing expense.
In January 2021, the Company issued 167,500 of restricted stock awards to an aggregate of 15 employees. A majority vested upon issuance with the balance vesting by April 6, 2021. The stock awards were valued at the fair market price of $494,125 upon issuance at and amortized over the individual vesting periods.
In October 2020, the Company issued 50,000 of restricted stock awards to an executive officer. The restricted stock vests in three equal tranches, the first of which vests on October 1, 2021, on the second on October 1, 2022 and the third on October 1, 2023 and were valued at fair market value upon issuance at $100,000 which will be amortized over the vesting period.
In June 2020, the Company issued 10,000 restricted stock awards to a Company sponsor. The restricted stock awards vested June 30, 2020. The stock awards were valued at fair market upon issuance at $56,200 and amortized over the vesting period and were expensed to sponsorship expense.
The Company recognized $2,264,893 and $138,000 of restricted stock compensation expense for the years ended September 30, 2021 and 2020, respectively.
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
423,605
$ 6.84
$ -
Granted
527,923
1.49
-
Exercised
(37,344 )
1.25
Forfeited
-
-
Outstanding at September 30, 2020
914,184
3.88
3.23
-
Granted
293,984
3.75
-
Exercised
(323,444 )
1.25
Forfeited
(224,307 )
5.39
Outstanding at September 30, 2021
660,417
$
4.60
3.05
-
Exercisable at September 30, 2021
660,417
$ 4.60
-
$ -
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
70,500
4.00
September 2022
Exercisable at $7.50 per share
100,000
7.50
October 2022
Exercisable at $4.375 per share
51,429
4.375
September 2023
Exercisable at $7.50 per share
60,000
7.50
May 2024
Exercisable at $3.9125 per share
47,822
3.9125
October 2024
Exercisable at $1.25 per share
36,682
1.25
January 2025
Exercisable at $3.74 per share
150,502
3.74
December 2025
Exercisable at $3.75 per share
143,482
3.75
June 2026
660,417
$ 4.60
NOTE 11 - COMMITMENTS AND CONTINGENCIES
In May 2019, the Company entered into an endorsement agreement with a professional athlete. The term of the agreement is through December 31, 2022 and is tied to performance of the athlete in so many professional events annually, and also includes promotion of the Company via social media, wearing of logo during competition, requirements to provide production days for advertising creation and attendance of meet and greets. The potential payments, if all services are provided, in aggregate is $4,900,000 and is paid based on the services above for the period ending: December 2019 - $400,000, December 2020 - $800,000, December 2021 - $1,800,000, and December 2022 - $1,900,000. In light of the impact of COVID-19 on events, the Company and professional athlete mutually agreed to suspend payments from March 2020 through June 2020. Effective July 1, 2020, the parties entered into a new endorsement agreement amending certain of the contract terms which superseded the original agreement. Under the current endorsement agreement potential payments to the professional athlete are as follows from July 2020 to December 2022 - up to $2,867,000 to be paid in common stock in three issuances, based on a Volume Weighed Average Price (“VWAP”) calculation, of which the last two issuances can be paid in cash at the Company’s option - $1,400,000 paid in July 2020, $800,000 paid between July 2021 and December 2021, and $667,000 paid between July 2022 and December 2022. The Company will make monthly cash payments as follows from: July 2020 to December 2020 - $40,000, from January 2021 to June 2021 - $50,000, from July 2021 to December 2021 - $75,000, from January 2022 to June 2022 - $85,000, and from July 2022 to December 2022 - $100,000. In March 2021, the parties entered into an additional amendment to the endorsement agreement whereby the Company issued the professional athlete 180,000 common shares to completely satisfy the $800,000 payment options between July 2021 and December 2021. The Company has recorded expense of $971,554 and $577,034 for years ended September 30, 2021 and 2020, respectively
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. The sponsorship includes various media, marketing, and promotion activities. The payments in aggregate are $1,750,000 and are to be paid for the periods ending: December 2019 - $150,000, December 2020 -$800,000 and December 2021 - $800,000. In light of the impact of COVID-19 on these events, both parties entered into an amendment to the sponsorship agreement during October 2020. The revised total aggregate payments are $1,013,625 during the term of the contract, ending May 2021, and are to be paid for periods ending: 2019 Season - $150,000, 2020 Season - $503,625 and December 2021 - $360,000. The Company has recorded expenses related to this agreement of $360,003 and $666,831 for the years ended September 30, 2021 and 2020, respectively.
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 $249,100 for a line of equipment, of which $96,880 a long term note payable at September 30, 2021. Payments are for 60 months and have a financing rate of 7.01 %, which requires a monthly payment of $4,905. In January 2020, the Company entered into a loan arrangement for $35,660 for equipment, of which $12,105 is a long term note payable at September 30, 2021. Payments are for 48 months and have a financing rate of 6.2%, which requires a monthly payment of $841.
NOTE 13 - PAYCHECK PROTECTION PROGRAM LOAN
In April 2020, The Company applied for an unsecured loan pursuant to the PPP administered by and authorized by the CARES Act. Section 1106 of the Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the Paycheck Protection Program. On April 27, 2020, the Company received the loan from Truist Bank (the “Lender”) in the principal amount of $1,456,100. The SBA Loan is evidenced by a promissory note issued by the Company (the “Promissory Note”) to the Lender. During May of 2021, the Company received notice from the SBA the loan principal and any accrued interest was completely forgiven. This gain is reflected within Other Income (Expenses) on the consolidated statements of operations.
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 $447,134, which reflects payments made and an impairment of $45,783. At September 30, 2021 the balance in accounts receivable related to discontinued operations totaled $10,967.
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,
Total Operating Lease Costs
$ 1,547,133
Supplemental cash flow information related to operating leases is summarized as follows:
Year Ended
September 30,
Cash paid for amounts included in the measnurement of operating lease liabilities
$ 1,469,834
As of September 30, 2021, our operating leases had a weighted average remaining lease term of 4.82 years and a weighted average discount rate of 4.66%. Future minimum aggregate lease payments under operating leases as of September 30, 2021 are summarized as follows:
For the year ended September 30,
$ 1,405,887
1,380,204
1,421,610
1,159,949
Thereafter
1,372,862
Total future lease payments
6,740,512
Less interest
(730,304 )
Total lease liabilities
$ 6,010,208
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,
1,469,834
1,405,887
1,380,204
1,421,610
1,159,949
Thereafter
1,372,862
Total future lease payments
$ 8,210,346
Less interest
(1,041,040 )
Total lease liabilities
$ 7,169,306
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,
Basic:
Net income (loss) continuing operations
$ (23,394,889 )
$ 12,651,256
Preferred dividends paid
2,554,609
366,850
Net income (loss) continuing operations adjusted for preferred dividend
(25,949,498 )
12,284,406
Net income (loss) discontinued operations
-
(48,983 )
Net income (loss) attributable to cbdMD Inc. common shareholders
(25,949,498 )
12,235,423
Diluted:
Net income (loss) continuing operations
(25,949,498 )
12,651,256
Net income (loss) discontinued operations
-
(48,983 )
Net income (loss)
(25,949,498 )
12,602,273
Shares used in computing basic earnings per share
54,938,128
44,140,360
Effect of dilutive securities:
Options
-
19,904
Warrants
-
177,910
Convertible preferred shares
-
833,500
Shares used in computing diluted earnings per share
54,938,128
45,171,674
Earnings per share Basic:
Continued operations
(0.47 )
0.28
Discontinued operations
-
-
Basic earnings per share
(0.47 )
0.28
Earnings per share Dliuted:
Continued operations
(0.47 )
0.28
Discontinued operations
-
-
Diluted earnings per share
(0.47 )
0.28
At the year ended September 30, 2021, 4,175,417 potential shares underlying options, unvested RSUs and warrants as well as 8,335,000 convertible preferred shares were excluded from the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.
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,
Current
Federal
$ -
$ -
State
-
-
Total current
-
-
Deferred
Federal
(895,000 )
(1,345,300 )
State
-
-
Total deferred
(895,000 )
(1,345,300 )
Total provision
$ (895,000 )
$ (1,345,300 )
A reconciliation for the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Years Ended September 30,
Federal statutory income tax rate
21.0 %
21.0 %
State income taxes, net of federal benefit
0.8
(1.1 )
Permanent differences
1.5
3.1
Contingent derivative expense
(5.8 )
55.3
Limitation on net operating losses
-
21.3
Change in valuation allowance
(13.8 )
(0.9 )
Benefit from (provision for) income taxes
3.7 %
(11.9 )%
Significant components of the Company’s deferred income taxes are shown below:
Years Ended September 30,
Deferred tax assets:
Net operating loss carryforwards
$ 9,160,000
$ 5,914,000
ROU - Liability
1,342,000
1,594,000
Capital loss carryforward
716,000
616,000
Allowance for doubtful accounts
1,000
5,000
Stock compensation
1,107,000
691,000
Investments
444,000
685,000
Accrued expenses
165,000
370,000
Inventory reserve
16,000
20,000
Capitalized expenses
52,000
60,000
Charitable contributions
43,000
42,000
Total deferred tax assets
13,046,000
9,997,000
Deferred tax liabilities:
Prepaid Expenses
(219,000 )
(434,000 )
Management fees
-
-
ROU - Assets
(1,254,000 )
(1,520,000 )
Intangibles
(4,481,000 )
(4,650,000 )
Fixed assets
(162,000 )
(709,000 )
Total deferred tax liabilities
(6,116,000 )
(7,313,000 )
Net deferred tax assets
6,930,000
2,684,000
Valuation allowance
(6,930,000 )
(3,579,000 )
Net deferred tax liability
$ -
$ (895,000 )
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 $2.1 million of such NOLs will expire before being utilized. Therefore, at September 30, 2018 the Company reduced the deferred tax asset and related valuation allowance associated with these NOLs by approximately $0.5 million due to IRC Section 382.
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 $11.4 million of such NOLs will expire before being utilized. Therefore, at September 30, 2020 the Company reduced the deferred tax asset and related valuation allowance associated with these NOLs by approximately $2.7 million due to IRC Section 382.
The total valuation allowance increased by $3,351,000 and decreased by $97,000 as of September 30, 2021 and 2020, respectively.
At September 30, 2021, the Company has utilizable NOL carryforwards of approximately $40.7 million which for federal purposes will carryforward indefinitely.
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 $895,000 of deferred liabilities related to the naked credits. During the year ended September 30, 2021, the Company generated enough indefinite life deferred tax assets from post-merger NOLs to reduce the naked credits to zero during the year and continue to record a valuation allowance on remaining DTAs. As a result, the Company decreased the deferred tax liability from $895,000 to $0 and a recorded a deferred tax benefit of $130,000 for the quarter and $895,000 for the year ended September 30, 2021 related to the reduction of the naked credits.
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 600,000 shares of the Company’s restricted common stock. At the closing, $200,000 of the cash purchase price was deposited into escrow pending possible post-closing adjustments and indemnity provisions. In addition, at closing, the Company issued Twenty Two 300,000 shares of the Company’s common stock, 100,000 shares of the Company’s common stock to be issued to Twenty Two on or before January 31, 2023, less any amounts setoff against such shares for indemnification claims pending against or paid by the Company under the asset purchase agreement and a remaining 200,000 shares shall be issued to Twenty Two on or before 60th day following the first year anniversary of the Closing subject to certain earn out provisions provided under the asset purchase agreement. The shares are subject to a 180 day lock up agreement subject to certain limited transfers which will also be subject to the lock up.
The initial 300,000 shares issued and 100,000 indemnification holdback shares had a carrying value of $1,064,000 and are included in additional paid in capital in the consolidated balance sheet.
The fair value of the 200,000 earnout shares was determined using a two-factor Monte Carlo simulation using Risk Neutral Geometric Brownian Motion, along with volatility and discounts rates to be applied to revenue projections, share price and earnout settlement value. The earnout shares were valued at $488,529 and are included in contingent liability in the consolidated balance sheet.
The following table presents the final purchase price allocation:
Consideration
$ 3,552,529
Assets Acquired:
Undeposited Funds
$ 18,155
Inventory
79,895
Inventory - Prepaid Shipping
31,094
Property and equipment, net
5,000
Intangible Assets
3,418,383
Total assets aquired
$ 3,552,529
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 25,000 RSUs to an executive officer that vests January 1, 2022. In addition, the Company issued 75,000 options that vest on October 1, 2022. The stock awards were valued at the fair market price of $141,100 upon issuance and amortized over the individual vesting periods.
In October 2021, the Company issued 5,000 RSUs to an employee. The stock awards was valued at the fair market price of $9,800.
In November 2021, the Company issued up to 120,000 RSUs to an employee. During the twelve month period ending December 31, 2022, the employee shall receive RSUs that are dependant upon a minimum $3 million of net sales and up to $8 million generated by the employee through accounts established and opened by the employee. The shares will be subject to meeting the minimum $3 million of net sales as well as to calculations including volume-weighted average stock price minimum and maximum.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for a smaller reporting company.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please see our Financial Statements beginning on page of this annual report.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
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.
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.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION.
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be contained in our Proxy Statement and is incorporated herein by this reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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.
(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.