SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2022 |
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________________ to _______________ |
Commission file number 001-38299
cbdMD, INC. | |
(Exact Name of Registrant as Specified in its Charter) |
North Carolina | 47-3414576 | |
State or | I.R.S. Employer Identification No. |
8845 Red Oak Blvd, Charlotte, NC | 28217 | |
Address of | Zip |
704-445-3060
Registrant’s Telephone Number, Including Area Code
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
common | YCBD | NYSE American |
8% Series A Cumulative Convertible Preferred Stock | YCBDpA | NYSE American |
Indicate by check mark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☑ NOYes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☑ NOYes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated | ☒ | Smaller reporting company | ☒ | |
Emerging growth company | ☒ |
If an emerging growth company, indicate by checkmarkcheck mark if the registrant has elected not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the Securities Act:Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESYes ☐ NO ☑
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the latest practicable date. 8,028,928
60,555,595 shares of common stock are issued and outstanding as of February 1, 2018.
Page | ||||
No | ||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations. | ||||
Unregistered Sales of Equity Securities and Use of Proceeds. | ||||
OTHER PERTINENT INFORMATION
Unless the context otherwise indicates, when used in this report, the terms Level Brands,the “Company,” “cbdMD, “we,” “us, “our” and similar terms refer to Level Brands,cbdMD, Inc., a North Carolina corporation formerly known as Level Beauty Group,Brands, Inc., and our subsidiaries BeautyCBD Industries LLC, a North Carolina limited liability company formerly known as cbdMD LLC, which we refer to as “CBDI”, Paw CBD, Inc., a North Carolina corporation which we refer to as “Paw CBD” and Pinups,cbdMD Therapeutics LLC, a North Carolina limited liability company which we refer to as “Beauty & Pin-Ups”, I | M 1, LLC, a California limited liability company, which we refer to as “I’M1”, Encore Endeavor 1 LLC, a California limited liability company which we refer to as “EE1” and Level H&W, LLC, a recently formed North Carolina limited liability company.“Therapeutics”. In addition, “fiscal 2016”2021” refers to the year ended September 30, 2016, "fiscal 2017"2021, “fiscal 2022” refers to the year ended September 30, 2017, "fiscal 2018" refers to thefiscal year ending September 30, 2018, "first2022, “first quarter of 2017"2021” refers to the three months ended December 31, 2016 and "first2020, “first quarter of 2018"2022” refers to the three months ended December 31, 2017.
We maintain a corporate website at www.cbdmd.com. The information contained on our websites at
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”). These forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:
● | material | |
risks associated with our |
● | our | |
● | the | |
● | our | |
● | our | |
● | our | |
● | our | |
● | material risks associated with regulatory environment for CBD, including: |
● | federal laws as well as FDA or DEA interpretation of existing regulation; | |
● | state laws pertaining to industrial hemp and their derivatives; | |
● | costs to us for compliance with laws and the risks of increased litigation; and | |
● | possible changes in the use of CBD. |
● | material risks associated with the ownership of our |
● | the impact of changes in the fair value of our contingent liabilities associated with the Earnout Shares; | |
● | ||
dilution to our shareholders | ||
● | the designations, rights and preferences of our | |
● | dilution upon the issuance of shares of common stock underlying outstanding warrants, options and the Series A Convertible Preferred Stock; and | |
● | voting control held by our directors and their affiliates. |
Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-lookingforward- looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Part II, Item 1A. Risk Factors appearing later in this report, Part I, Item 1A. - Risk Factors appearing in our Annual Report on Form 10-K for the fiscal year ended September 30, 20172021 as filed with the Securities and Exchange Commission (the “SEC”) on December 26, 201717, 2021 (the "2017 10-K"“2021 10-K”)., as well as our other filings with the SEC. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 20172022 AND September 30, 2021
(Unaudited) | ||||||||
June 30, | September 30, | |||||||
2022 | 2021 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 9,553,670 | $ | 26,411,424 | ||||
Accounts receivable | 1,630,233 | 1,113,372 | ||||||
Accounts receivable – discontinued operations | 1,375 | 10,967 | ||||||
Marketable securities | �� | 0 | 33,351 | |||||
Investment other securities | 1,000,000 | 1,000,000 | ||||||
Inventory | 4,318,204 | 5,021,867 | ||||||
Inventory prepaid | 548,580 | 551,519 | ||||||
Prepaid sponsorship | 1,749,083 | 1,212,682 | ||||||
Prepaid expenses and other current assets | 1,057,183 | 1,147,178 | ||||||
Total current assets | 19,858,328 | 36,502,360 | ||||||
Other assets: | ||||||||
Property and equipment, net | 775,477 | 2,561,574 | ||||||
Operating lease assets | 4,751,192 | 5,614,960 | ||||||
Deposits for facilities | 244,606 | 529,583 | ||||||
Intangible assets | 18,111,903 | 23,003,929 | ||||||
Goodwill | 11,996,249 | 56,670,970 | ||||||
Investment other securities, noncurrent | 1,400,000 | 0 | ||||||
Total other assets | 37,279,427 | 88,381,016 | ||||||
Total assets | $ | 57,137,755 | $ | 124,883,376 |
(Unaudited) | ||
December 31, | September 30, | |
2017 | 2017 | |
Assets | ||
Current assets: | ||
Cash and cash equivalents | $8,817,856 | $284,246 |
Accounts receivable | 65,728 | 141,462 |
Accounts receivable -- related party | - | 712,325 |
Accounts receivable other | 50,052 | 12,440 |
Accounts receivable other – related party | 290,909 | 236,364 |
Marketable securities | 299,000 | - |
Investment other securities | 1,159,112 | 859,112 |
Investment other securities – related party | 200,000 | - |
Note receivable – related party | 268,373 | 276,375 |
Inventory | 593,149 | 588,197 |
Deferred initial public offering costs | - | 497,735 |
Prepaid expenses and other current assets | 306,964 | 85,420 |
Total current assets | 12,051,143 | 3,693,676 |
Other assets: | ||
Property and equipment, net | 56,125 | 135,476 |
Intangible assets, net | 3,191,725 | 3,240,287 |
Total other assets | 3,247,850 | 3,375,763 |
Total assets | $15,298,993 | $7,069,439 |
See Notes to Condensed Consolidated Financial Statements |
CONDENSED CONSOLIDATED BALANCE SHEETS |
June 30, 2022 AND September 30, 2021 |
(continued) |
(Unaudited) | ||||||||
June 30, | September 30, | |||||||
2022 | 2021 | |||||||
Liabilities and shareholders' equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 2,310,244 | $ | 2,978,914 | ||||
Accrued expenses | 2,250,549 | 2,727,612 | ||||||
Operating leases – current portion | 1,155,020 | 1,151,150 | ||||||
Note payable | 9,461 | 59,470 | ||||||
Total current liabilities | 5,725,274 | 6,917,146 | ||||||
Long term liabilities: | ||||||||
Long term liabilities | 127,949 | 108,985 | ||||||
Operating leases - long term portion | 3,982,532 | 4,859,058 | ||||||
Contingent liability | 702,000 | 9,856,000 | ||||||
Total long term liabilities | 4,812,481 | 14,824,043 | ||||||
Total liabilities | 10,537,755 | 21,741,189 | ||||||
cbdMD, Inc. shareholders' equity: | ||||||||
Preferred stock, authorized 50,000,000 shares, $0.001 | ||||||||
par value, 5,000,000 and 5,000,000 shares issued and outstanding, respectively | 5,000 | 5,000 | ||||||
Common stock, authorized 150,000,000 shares, $0.001 | ||||||||
par value, 59,946,090 and 57,783,340 shares issued and outstanding, respectively | 59,946 | 57,783 | ||||||
Additional paid in capital | 178,326,685 | 176,417,269 | ||||||
Accumulated deficit | (131,791,631 | ) | (73,337,865 | ) | ||||
Total cbdMD, Inc. shareholders' equity | 46,600,000 | 103,142,187 | ||||||
Total liabilities and shareholders' equity | $ | 57,137,755 | $ | 124,883,376 |
See Notes to Condensed Consolidated Financial Statements
cbdMD, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
FOR THE three and nine months ended June 30, 2022 and 2021 |
(Unaudited) |
Three months | Three months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Gross Sales | $ | 8,868,093 | $ | 11,352,585 | $ | 28,673,718 | $ | 36,941,917 | ||||||||
Allowances | (275,200 | ) | (792,062 | ) | (1,130,117 | ) | (2,254,481 | ) | ||||||||
Total Net Sales | 8,592,893 | 10,560,523 | 27,543,601 | 34,687,436 | ||||||||||||
Cost of sales | 2,660,185 | 3,370,952 | 10,176,085 | 10,444,353 | ||||||||||||
Gross Profit | 5,932,708 | 7,189,571 | 17,367,516 | 24,243,083 | ||||||||||||
Operating expenses | 8,282,931 | 13,865,191 | 31,690,915 | 36,846,371 | ||||||||||||
Impairment of goodwill and other intangible assets | 30,776,436 | 0 | 48,959,721 | 0 | ||||||||||||
Loss from operations | (33,126,659 | ) | (6,675,620 | ) | (63,283,120 | ) | (12,603,288 | ) | ||||||||
Realized and Unrealized (loss) gain on marketable and other securities, including impairments | - | (18,623 | ) | (33,352 | ) | 526,940 | ||||||||||
Gain (loss) on extinguishment of debt | 0 | 1,466,113 | 0 | 1,466,113 | ||||||||||||
Decrease (increase) of contingent liability | 1,943,000 | 6,871,000 | 8,246,000 | (10,500,000 | ) | |||||||||||
Gain (loss) on sale of assets | 88,769 | 0 | 88,769 | 0 | ||||||||||||
Restructuring expense | (602,092 | ) | 0 | (602,092 | ) | 0 | ||||||||||
Other income | 64,390 | 0 | 137,377 | 0 | ||||||||||||
Interest expense | (1,551 | ) | (2,582 | ) | (6,871 | ) | (23,573 | ) | ||||||||
Loss before provision for income taxes | (31,634,143 | ) | 1,640,288 | (55,453,289 | ) | (21,133,808 | ) | |||||||||
Benefit for income taxes | 0 | (103,000 | ) | 0 | 765,000 | |||||||||||
Net (Loss) Income | (31,634,143 | ) | 1,537,288 | (55,453,289 | ) | (20,368,808 | ) | |||||||||
Preferred dividends | 1,000,501 | 560,281 | 3,001,503 | 1,220,610 | ||||||||||||
Net (Loss) Income attributable to cbdMD, Inc. common shareholders | $ | (32,634,644 | ) | $ | 977,007 | $ | (58,454,792 | ) | $ | (21,589,418 | ) | |||||
Net (Loss) Income per share: | ||||||||||||||||
Basic earnings per share | (0.55 | ) | 0.02 | (0.99 | ) | (0.40 | ) | |||||||||
Diluted earnings per share | (0.55 | ) | 0.02 | (0.99 | ) | (0.40 | ) | |||||||||
Weighted average number of shares Basic: | 59,316,762 | 56,676,326 | 59,229,208 | 54,089,263 | ||||||||||||
Weighted average number of shares Diluted: | 59,316,762 | 61,431,643 | 59,229,208 | 54,089,263 |
Liabilities and shareholders' (deficit) equity | ||
Current liabilities: | ||
Accounts payable | $168,645 | $397,601 |
Accounts payable related party | 8,199 | 67,879 |
Deferred revenue | 49,125 | 41,417 |
Accrued payroll | 364,515 | - |
Accrued expenses | 165,148 | 123,823 |
Accrued expenses to related party | 12,800 | 892,805 |
Total current liabilities | 768,432 | 1,523,525 |
Long term liabilities | ||
Long term liabilities, to related party | 360,000 | 360,000 |
Deferred tax liability | 15,000 | 37,000 |
Total long term liabilities | 375,000 | 397,000 |
Total liabilities | 1,143,432 | 1,920,525 |
Level Brands, Inc. shareholders' equity: | ||
Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued and outstanding | - | - |
Common stock, authorized 150,000,000 shares, $0.001 par value, | ||
7,798,928 and 5,792,261 shares issued and outstanding, respectively | 7,799 | 5,792 |
Accumulated other comprehensive income | 33,500 | - |
Additional paid in capital | 20,699,403 | 10,463,480 |
Accumulated deficit | (7,390,350) | (6,257,421) |
Total Level Brands, Inc. shareholders' equity | 13,350,352 | 4,211,851 |
Non-controlling interest | 805,209 | 937,063 |
Total shareholders' equity (deficit) | 14,155,561 | 5,148,914 |
Total liabilities and shareholders' equity (deficit) | $15,298,993 | $7,069,439 |
See Notes to Condensed Consolidated Financial Statements
cbdMD, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
FOR THE three and nine months ended June 30, 2022 and 2021 |
(Unaudited) |
Three months | Three months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Net (Loss) Income | $ | (31,634,143 | ) | $ | 1,537,288 | $ | (55,453,289 | ) | $ | (20,368,808 | ) | |||||
Comprehensive (Loss) Income | (31,634,143 | ) | 1,537,288 | (55,453,289 | ) | (20,368,808 | ) | |||||||||
Preferred dividends | (1,000,501 | ) | (560,281 | ) | (3,001,503 | ) | (1,220,610 | ) | ||||||||
Comprehensive (Loss) Income attributable to cbdMD, Inc. common shareholders | $ | (32,634,644 | ) | $ | 977,007 | $ | (58,454,792 | ) | $ | (21,589,418 | ) |
Three Months Ended | Three Months Ended | |
December 31, | December 31, | |
2017 | 2016 | |
Sales | $448,793 | $422,173 |
Sales related party | 254,545 | - |
Total Gross Sales | 703,338 | 422,173 |
Allowances | (15,582) | (222,336) |
Net Sales | 433,211 | 199,837 |
Net sales related party | 254,545 | - |
Total Net Sales | 687,756 | 199,837 |
Costs of sales | 228,124 | 162,746 |
Gross profit | 459,632 | 37,091 |
Operating expenses | 1,687,644 | 600,266 |
Loss from operations | (1,228,012) | (563,175) |
Loss on disposal of property and equipment | (69,511) | |
Interest expense | 259 | 132,320 |
Loss before provision for income taxes | (1,297,782) | (695,495) |
Benefit (Provision) for income taxes | 33,000 | (2,000) |
Net loss | (1,264,782) | (697,495) |
Net loss attributable to non-controlling interest | (131,854) | (63,016) |
Net loss attributable to Level Brands, Inc. common shareholders | $(1,132,928) | $(634,479) |
Loss per share, basic and diluted | $(0.16) | $(0.18) |
Weighted average number of shares outstanding | 6,911,871 | 3,485,950 |
See Notes to Condensed Consolidated Financial Statements
cbdMD, INC. |
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS |
FOR THE nine months ended June 30, 2022 and 2021 |
(Unaudited) |
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2022 | 2021 | |||||||
Cash flows from operating activities: | ||||||||
Net Loss | $ | (55,453,289 | ) | $ | (20,368,808 | ) | ||
Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||
Stock based compensation | 424,455 | 807,523 | ||||||
Restricted stock expense | 504,650 | 1,137,583 | ||||||
Marketing stock amortization | 717,174 | 660,232 | ||||||
Issuance of stock / warrants for service | 0 | 98,605 | ||||||
Inventory and materials impairment | 878,142 | 0 | ||||||
Intangibles Amortization | 607,025 | 0 | ||||||
Depreciation | 770,335 | 719,856 | ||||||
Impairment of goodwill and other intangible assets | 48,959,721 | 0 | ||||||
Increase/(Decrease) in contingent liability | (8,246,000 | ) | 10,500,000 | |||||
Realized and unrealized loss of marketable and other securities | 33,350 | (526,939 | ) | |||||
Termination benefit | 0 | 495,568 | ||||||
Extinguishment of Paycheck Protection Program Loan | 0 | (1,466,113 | ) | |||||
Amortization of operating lease asset | 863,768 | 922,057 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (116,861 | ) | (556,116 | ) | ||||
Deposits | 284,977 | 261,125 | ||||||
Inventory | (174,479 | ) | (135,058 | ) | ||||
Prepaid inventory | 2,939 | (385,410 | ) | |||||
Prepaid expenses and other current assets | (1,088,579 | ) | (141,393 | ) | ||||
Accounts payable and accrued expenses | (1,149,456 | ) | (603,216 | ) | ||||
Operating lease liability | (872,656 | ) | (846,914 | ) | ||||
Deferred revenue / customer deposits | 3,723 | 4,478 | ||||||
Collection on discontinued operations accounts receivable | 9,592 | 428,667 | ||||||
Deferred tax liability | 0 | (765,000 | ) | |||||
Cash used by operating activities | (13,041,469 | ) | (9,759,273 | ) | ||||
Cash flows from investing activities: | ||||||||
Proceeds from sale of other investment securities | 0 | 540,000 | ||||||
Purchase of other investment securities | 0 | (750,000 | ) | |||||
Proceeds from sale of assets | (322,017 | ) | 0 | |||||
Purchase of property and equipment | (462,221 | ) | (311,572 | ) | ||||
Cash provided (used) by investing activities | (784,238 | ) | (521,572 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of preferred stock | 0 | 15,798,115 | ||||||
Note payable | (31,044 | ) | (137,292 | ) | ||||
Preferred dividend distribution | (3,001,003 | ) | (1,220,610 | ) | ||||
Cash provided by financing activities | (3,032,047 | ) | 14,440,213 | |||||
Net increase (decrease) in cash | (16,857,754 | ) | 4,159,368 | |||||
Cash and cash equivalents, beginning of period | 26,411,424 | 14,824,644 | ||||||
Cash and cash equivalents, end of period | $ | 9,553,670 | $ | 18,984,012 |
Supplemental Disclosures of Cash Flow Information:
2022 | 2021 | |||||||
Cash Payments for: | ||||||||
Interest expense | $ | 6,817 | $ | 23,573 | ||||
Non-cash financial/investing activities: | ||||||||
Issuance of Contingent earnout shares: | $ | 908,000 | $ | 12,596,089 | ||||
Warrants issued to representative | $ | 0 | $ | 254,950 |
Three Months Ended | Three Months Ended | |
December 31, | December 31, | |
2017 | 2016 | |
Net loss | $(1,264,782) | $(697,495) |
Other Comprehensive Income: | ||
Net Unrealized Gain on Marketable Securities, net of tax | 33,500 | - |
Comprehensive Loss | $(1,231,282) | $(697,495) |
Comprehensive loss attributable to non-controlling interest | $(131,854) | $(63,016) |
Comprehensive loss attributable to Level Brands, Inc. common shareholders | $(1,099,428) | $(634,479) |
See Notes to Condensed Consolidated Financial Statements
cbdMD, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY |
FOR THE nine months ended June 30, 2022 |
(Unaudited) |
Additional | ||||||||||||||||||||||||||||
Common Stock | Preferred Stock | Paid in | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
Balance, September 30, 2021 | 57,783,340 | $ | 57,783 | 5,000,000 | 5,000 | $ | 176,417,269 | $ | (73,337,865 | ) | $ | 103,142,187 | ||||||||||||||||
Issuance of Common stock | 494,630 | 495 | 0 | 0 | 404,505 | 0 | 405,000 | |||||||||||||||||||||
Issuance of options for share based compensation | - | 0 | - | 0 | 505,466 | 0 | 505,466 | |||||||||||||||||||||
Issuance of restricted stock for share based compensation | - | 0 | - | 0 | 508,754 | 0 | 508,754 | |||||||||||||||||||||
Preferred dividend | - | 0 | - | 0 | 0 | (1,000,502 | ) | (1,000,502 | ) | |||||||||||||||||||
Net Loss | - | 0 | - | 0 | 0 | (19,160,904 | ) | (19,160,904 | ) | |||||||||||||||||||
Balance, December 31, 2021 | 58,277,970 | $ | 58,278 | 5,000,000 | 5,000 | $ | 177,835,993 | $ | (93,499,271 | ) | $ | 84,400,000 | ||||||||||||||||
Issuance of Common stock | 1,074,240 | 1,074 | 0 | 0 | 659,926 | 0 | 661,000 | |||||||||||||||||||||
Issuance of options for share based compensation | - | 0 | - | 0 | 291,630 | 0 | 291,630 | |||||||||||||||||||||
Issuance of restricted stock for share based compensation | - | 0 | - | 0 | 328,514 | 0 | 328,514 | |||||||||||||||||||||
Preferred dividend | - | 0 | - | 0 | 0 | (1,000,500 | ) | (1,000,500 | ) | |||||||||||||||||||
Net Loss | - | 0 | - | 0 | 0 | (4,657,215 | ) | (4,657,216 | ) | |||||||||||||||||||
Balance, March 31, 2022 | 59,352,210 | $ | 59,352 | 5,000,000 | 5,000 | $ | 179,116,064 | $ | (99,156,986 | ) | $ | 80,023,429 | ||||||||||||||||
Issuance of Common stock | 593,880 | 594 | 0 | 0 | 177,406 | 0 | 178,000 | |||||||||||||||||||||
Issuance of options for share based compensation | - | 0 | - | 0 | (373,168 | ) | 0 | (373,168 | ) | |||||||||||||||||||
Issuance of restricted stock for share based compensation | - | 0 | - | 0 | (593,617 | ) | 0 | (593,617 | ) | |||||||||||||||||||
Preferred dividend | - | 0 | - | 0 | 0 | (1,000,501 | ) | (1,000,501 | ) | |||||||||||||||||||
Net Loss | - | 0 | - | 0 | 0 | (31,634,143 | ) | (31,634,143 | ) | |||||||||||||||||||
Balance, June 30, 2022 | 59,946,090 | $ | 59,946 | 5,000,000 | 5,000 | $ | 178,326,685 | $ | (131,791,631 | ) | $ | 46,600,000 |
Three Months Ended December 31, | Three Months Ended December 31, | |
2017 | 2016 | |
Cash flows from operating activities: | ||
Net loss | $(1,264,782) | $(697,495) |
Adjustments to reconcile net loss to net | ||
cash used by operating activities: | ||
Stock based compensation | 17,114 | 9,672 |
Restricted stock expense | 39,100 | 39,101 |
Issuance of stock / warrants for service | 37,002 | - |
Amortization of debt issue costs | - | 79,774 |
Depreciation and amortization | 61,067 | 9,189 |
Loss on sale of property and equipment | 69,511 | 4,000 |
Common stock issued as charitable contribution | - | 17,000 |
Non-cash consideration received for services | (454,503) | - |
Changes in operating assets and liabilities: | ||
Accounts receivable | 75,734 | 2,620 |
Accounts receivable – related party | 712,325 | - |
Other accounts receivable | (37,612) | - |
Other accounts receivable – related party | (54,545) | - |
Note receivable – related party | 8,002 | - |
Inventory | (4,952) | (19,572) |
Prepaid expenses and other current assets | (221,545) | 26,832 |
Accounts payable and accrued expenses | 162,142 | (49,739) |
Accounts payable and accrued expenses – related party | (939,685) | - |
Interest Payable | - | 47,981 |
Deferred revenue | 7,708 | - |
Deferred tax liability | (33,000) | 2,000 |
Cash used by operating activities | (1,820,919) | (528,637) |
Cash flows from investing activities: | ||
Purchase of investment other securities | (300,000) | - |
Purchase of property and equipment | (2,665) | (7,034) |
Cash used by investing activities | (302,665) | (7,034) |
Cash flows from financing activities: | ||
Proceeds from issuance of common stock | 10,927,535 | - |
Proceeds from convertible note | - | 2,125,000 |
Debt issuance costs | - | (200,800) |
Repayment of line of credit | - | (300,000) |
Deferred issuance costs | (270,341) | - |
Cash provided by financing activities | 10,657,194 | 1,624,200 |
Net increase (decrease) in cash | 8,533,610 | 1,088,529 |
Cash and cash equivalents, beginning of period | 284,246 | 34,258 |
Cash and cash equivalents, end of period | $8,817,856 | $1,122,787 |
See Notes to Condensed Consolidated Financial Statements
cbdMD, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY |
FOR THE nine months ended June 30, 2021 |
(Unaudited) |
Additional | ||||||||||||||||||||||||||||
Common Stock | Preferred Stock | Paid in | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
Balance, September 30, 2020 | 52,130,870 | $ | 52,131 | 500,000 | $ | 500 | $ | 126,517,784 | $ | (47,388,367 | ) | $ | 79,182,048 | |||||||||||||||
Issuance of Preferred Stock | 0 | 0 | 2,300,000 | 2,300 | 15,795,815 | 0 | 15,795,815 | |||||||||||||||||||||
Issuance of options for share based compensation | - | 0 | - | 0 | 219,875 | 0 | 219,875 | |||||||||||||||||||||
Issuance of restricted stock for share based compensation | - | 0 | - | 0 | 15,279 | 0 | 15,279 | |||||||||||||||||||||
Preferred dividend | - | 0 | - | 0 | 0 | (100,050 | ) | (100,050 | ) | |||||||||||||||||||
Net Loss | - | 0 | - | 0 | 0 | (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 | 0 | 0 | 11,422,488 | 0 | 15,795,815 | |||||||||||||||||||||
Exercise of options for share based compensation | 147,953 | 148 | 0 | 0 | 627,500 | 0 | 627,648 | |||||||||||||||||||||
Issuance of restricted stock for share based compensation | 347,000 | 347 | 0 | 0 | 1,181,481 | 0 | 1,181,828 | |||||||||||||||||||||
Preferred dividend | - | 0 | - | 0 | 0 | (560,279 | ) | (560,279 | ) | |||||||||||||||||||
Net Loss | - | 0 | - | 0 | 0 | (12,510,474 | ) | (12,510,474 | ) | |||||||||||||||||||
Balance, March 31, 2021 | 56,337,787 | $ | 56,338 | 2,800,000 | $ | 2,800 | $ | 155,780,222 | $ | (69,954,791 | ) | $ | 85,884,569 | |||||||||||||||
Issuance of Common stock | 608,528 | 609 | 0 | 0 | 1,471,991 | 0 | 1,472,600 | |||||||||||||||||||||
Exercise of options for share based compensation | - | 0 | - | 0 | 355,565 | 0 | 355,565 | |||||||||||||||||||||
Issuance of restricted stock for share based compensation | 27,500 | 28 | 0 | 0 | 590,264 | 0 | 590,291 | |||||||||||||||||||||
Preferred dividend | - | 0 | - | 0 | 0 | (560,281 | ) | (560,281 | ) | |||||||||||||||||||
Net Income | - | 0 | - | 0 | 0 | 1,537,288 | 1,537,288 | |||||||||||||||||||||
Balance, June 30, 2021 | 56,973,815 | $ | 56,975 | 2,800,000 | 2,800 | $ | 158,198,042 | $ | (68,977,784 | ) | $ | 89,280,032 |
Three Months ended December 31, | Three Months Ended December 31, | |
2017 | 2016 | |
Cash Payments for: | ||
Interest expense | $259 | $4,565 |
Non-cash financial activities: | ||
Warrants issued to IPO selling agent | $171,600 | $- |
IPO costs incurred but unpaid as of quarter end | 14,745 | - |
Common stock issued for services | - | 570,000 |
Warrants issued with convertible notes | - | 5,159 |
Noncontrolling interest transfer | - | 338,556 |
Strike price adjustment on placement agent warrants | - | 31,505 |
Common stock issued for warrant exercise | - | 85,950 |
Equity issued to purchase membership interest in subsidiary | - | 110,000 |
See Notes to Condensed Consolidated Financial Statements
cbdMD, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1– ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
cbdMD, Inc. ("Level Brands"(“cbdMD”, "we"“we”, "us"“us”, “our”, "Parent Company” or the “Company”) is a North Carolina corporation formed on March 17, 2015 as Level Beauty Group, Inc. In November 2016 we changed the name of the Company to Level Brands, Inc. and on May 1, 2019 we changed the name of our Company to cbdMD, Inc. We operate from our offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30.
On December 20, 2018 (the “Closing Date”), the Company, and its newly organized wholly owned subsidiaries AcqCo, LLC and cbdMD LLC (“CBDI”), completed a two-step merger (the “Mergers”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). Upon completion of the Mergers, CBDI survived and operates the prior business of Cure Based Development. As consideration for the Mergers in April of 2019, the Company issued 15,250,000 shares of our common stock to the members of Cure Based Development, of which unrestricted voting rights to 8,750,000 of the shares vest over a five-year period and 4,338,302 shares remain subject to a voting proxy agreement as of June 30,2022, as well as to issue another 15,250,000 shares of our common stock (the “Earnout Shares”) in the future upon certain earnout goals (the “Earnout Rights”) being achieved within five years from the closing of the Mergers.
The Company owns and operates the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and cbdMD Botanicals. The Company sources cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States. CBD is a natural substance produced from the hemp plant. The products manufactured by and for the Company comply with the 2018 Farm Bill - our full spectrum products contain trace amounts of THC under the 0.3% by dry weight limit in the 2018 Farm Act while our broad spectrum products are non-psychoactive as they do not contain detectable levels of tetrahydrocannabinol (THC).
In the third quarter of fiscal 2019 cbdMD launched its new CBD pet brand, Paw CBD. Following the initial positive response to the brand from retailers and consumers, cbdMD, Inc. organized Paw CBD, Inc. (“Paw CBD”) as a separate wholly owned subsidiary on October 22, 2019, to take advantage of its early mover status in the CBD animal health industry. On March 15, 2021 cbdMD formed a new wholly owned subsidiary, cbdMD Therapeutics, LLC (“Therapeutics”) for the purposes of isolating and quantifying the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications.
In July 2021, the Company acquired the assets of Twenty Two Capital, LLC (“Twenty Two”) d/b/a directcbdonline.com (“DCO”). This business operates a CBD marketplace through directcbdonline.com. In addition to the revenue contribution from the business the Company believes this acquisition will provide additional insight on consumer data and industry trends.
The accompanying unaudited interim condensed consolidated financial statements of Level BrandscbdMD 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, 2017.202110-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of consolidated financial position and the consolidated results of operations for the interim periods presented have been reflected herein. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal year 20172021 as reported in the Form 10-K202110-K have been omitted.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiaries I’M1 and EE1 and wholly owned subsidiaries BPUCBDI, Paw CBD and Level H&W.Therapeutics. All material intercompany transactions and balances have been eliminated in consolidation.
The third party ownership of the Company’s subsidiaries is accounted for as non-controlling interest in the consolidated financial statements. Changes in the non-controlling interest are reported in the statement of shareholders’ equity (deficit).
While the Company has been relatively successful in navigating the impact of COVID-19, it had previously been affected by temporary manufacturing closures, changes in product distribution and employment and compensation adjustments. There are also ongoing related risks to the Company’s business depending on any resurgence of the pandemic. The Company continues to monitor macroeconomic conditions to remain flexible and to optimize and evolve its business as appropriate.
Cash and Cash Equivalents
For financial statements purposes, the Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents.
Accounts receivableReceivable and Accounts receivable other
Accounts receivable are stated at cost less an allowance for doubtful accounts, if applicable. Credit is extended to customers after an evaluation of the customer’s financial condition, and generally collateral is not required as a condition of credit extension. Management’s determination of the allowance for doubtful accounts is based on an evaluation of the receivables, past experience, current economic conditions, and other risks inherent in the receivables portfolio. As of June 30, 2022 and September 30, 2017, management determined an accounts receivable allowance of $50,000 was appropriate due to possible uncollectability. We did not have2021, we had an allowance at December 31, 2017.
Merchant Receivable and Reserve
The Company primarily sells its products through the internet and has an arrangement to process customer payments with third-party payment processors and negotiate the fee based on the market. The arrangement with the payment processors requires that the Company may, from time to time, enter into contracts wherepay a portionfee between 2.6% and 5.0% of the consideration provided bytransaction amounts processed. Pursuant to this agreement, there can be a waiting period between 2 to 5 days prior to reimbursement to the customer in exchangeCompany, as well as a calculated reserve which some payment processors hold back. Fees and reserves can change periodically with notice from the processors. At June 30, 2022, the receivable from payment processors included approximately $298,659 for the Company's serviceswaiting period amount and is common stock, options or warrants (an equity position). In these situations, upon invoicing the customer for the stock or other instruments, the Company will record the receivablerecorded as accounts receivable other, and usein the value of the stock or other instrument upon invoicing to determine the value. Where an accounts receivable is settled with the receipt of the common stock or other instrument, the common stock or other instrument will be classified as an asset on the 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 private entity).
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 (which(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. Prepaid Inventory represents deposits made with third party manufacturers in order to begin production of an order for product. We assess inventory quarterly for slow moving products and potential impairments and at a minimum perform a physical inventory count annually near fiscal year end.
Property and Equipment
Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are five years for show boothsmanufacturing equipment and equipment, automobiles and three years for manufacturer’s moldssoftware, computer, and plates, three years for computer, furniture and equipment, and three yearsequipment. The useful life for software.leasehold improvements are over the term of the lease, or the remaining economic life of the asset, whichever is shorter. The cost and accumulated depreciation of property are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the consolidated statementstatements 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 assetcarrying value is valuedassigned at fair value. For investment other securities, it will value the asset using the cost method of accounting. Any changes in fair value for marketable securities during a given period will be recorded as aan unrealized gain or loss in other comprehensive income, unless a decline is determined to be other-than-temporary.the consolidated statement of operations. For investment other securities we usewithout a readily determinable fair value, the Company may elect to estimate its fair value at cost method and compareless 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 costamortization 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 orderthe qualitative test include specific operating results as well as new events and circumstances. For the quantitative test, the Company assesses goodwill for impairment by comparing the carrying value of the business to the respective fair value. The Company determines the fair value of the business using a combination of income- based and market-based approaches and incorporates assumptions it believes market participants would utilize. The income-based approach utilizes discounted cash flows while the market-based approach utilizes market multiples. These approaches are dependent upon internally developed forecasts that are based upon annual budgets and longer-range strategic plans. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the respective acquired business and in the internally developed forecasts. The Company has analyzed a variety of factors on its business to determine if there isa circumstance could trigger an other-than-temporary impairment.
Intangible Assets
The Company'sCompany’s intangible assets consist of trademarks and other intellectual property, all of which are accounted for ASCin accordance with Accounting Standards Codification (ASC) Topic 350,Intangibles – Goodwill and Other. TheOther. Prior to December 31, 2021, the Company employsemployed 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 performThe Company performed an annual impairment analysis at as of August 1 annuallyof each fiscal year on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our350-30-35-18. The annual impairment analysis includesincluded a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we reviewthe Company reviewed events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. If a quantitative analysis is necessary, wethe Company would analyze various aspects including number of contracts acquired and retained as well as revenues from those contracts,the business, associated with the intangible assets. In addition, intangible assets will bewere 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. EventsThe Company analyzed a variety of factors on its business to determine if a circumstance could trigger an impairment loss, and, at this time and based on the information presently known, has determined that are assessed include contracts acquired is it more likely than not that an impairment loss has occurred. See Note 5 more further information on the impairment testing procedures performed at December 31, 2021 and lost that are associated with the intangible assets, as well as the revenues associated with those contracts.
Contingent Liability
A significant component of the purchase price consideration for the Company’s acquisition of Cure Based Development includes a fixed number of future shares to be issued as well as a variable number of future shares to be issued based upon the post-acquisition entity reaching certain specified future revenue targets, as further described in Note 6. The Company made a determination of the fair value of the contingent liabilities as part of the valuation of the assets acquired and liabilities assumed in the business combination.
Paycheck Protection Program Loan
On April 27, 2020, we received a loan in the principal amount of $1,456,100 (the “SBA Loan”) in consideration of a Promissory Note, under the Paycheck Protection Program (“PPP”), which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). The Company used the SBA Loan for qualifying expenses and on May 17, 2021 it received notice from the SBA that the loan had been forgiven. The Company subsequently booked a $1,466,113 gain for unpaid principal and accrued interest.
Revenue Recognition
Under ASC 606,Revenue from Contracts with any acquisitions,Customers, the Company refersrecognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to ASC-805 as amended by Accounting Standards Update (“ASU”) 2017-01in determining ifreceive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The Company meets that obligation when it has shipped products which have been ordered to the customer. The Company has reviewed its various revenue streams for its other contracts under the five-step approach. At June 30, 2022, the Company is acquiring any inputs, processes or outputs and the impact that such factors would have on the classificationhas no unfulfilled performance obligations.
Allocation of the acquisition as a business combination or asset purchase. Additionally, the Company refers to the aforementioned guidance in reviewing all potential assets and liabilities for valuation including the determination of intangible asset values.
In the event, however, there had not been a recent and significant equity financing transaction or the nature of theCompany’s current business has significantly changed subsequent to an equity financing, we used valuation techniques,model, it does not have contracts with customers which included discounted cash flow analysis, comparable company review, and consultation with third party valuation experts to assist in estimating the value of our common stock. On November 17, 2017, the Company completed its IPO, thus our stockhave multiple elements as revenue is valueddriven purely by the market since that date.
Revenue Recognition
The Company records revenue from the sale of its products when risk of loss and title to the product are transferred to theits customer obtains control, which is upon shipping.shipping (and is typically FOB shipping) which is when our performance obligation is met. Net sales are comprised of gross revenues less expected 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 and coupons.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. Although,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 Company does not have a formal return policy, from time to time the Company will allow customers to return certain products. nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors.
A business decision related to customer returns is made by the Company and is performed on a case-by-case basis. We record returns as a reduction in sales and based on whether we disposedescription of the returned product, adjust inventoryCompany’s principal revenue generating activities are as follows:
- | E-commerce sales - consumer products sold through the Company’s online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due prior to the date of shipment; and | |
- | Wholesale sales - products sold to the Company’s wholesale customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms vary and can typically be 30 days from the date control over the product is transferred to the customer. |
Contract liabilities represent unearned revenues and record expenseare presented as appropriate. There were no allowances for sales returns duringdeferred revenue or customer deposits on the three months ended December 31, 2017 and 2016.
The Company also enters into various license agreements that provide revenues based on royalties ashas no material contract assets nor contract liabilities at June 30, 2022.
The following tables represent a percentagedisaggregation of revenue by sales and advertising/marketing fees. The contracts can also have a minimum royalty, with which this and the advertising/marketing revenue is recognized on a straight-line basis over the term of each contract year, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during the period corresponding to the licensee’s sales, as are all royalties that do not have a minimum royalty. Payments received as consideration of the grant of a license are recognized ratably as revenue over the term of the license agreement and are reflected on the Company’s consolidated balance sheets as deferred license revenue at the time payment is received and recognized ratably as revenue over the term of the license agreement. Similarly, advanced royalty payments are recognized ratably over the period indicated by the terms of the license and are reflected in the Company’s consolidated balance sheet in deferred license revenue at the time the payment is received. Revenue is not recognized unless collectability is reasonably assured. If licensing arrangements are terminated prior to the original licensing period, we will recognize revenue for any contractual termination fees, unless such amounts are deemed non-recoverable.
Three Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2022 | % of total | 2021 | % of total | |||||||||||||
Wholesale sales | $ | 2,079,592 | 24.2 | % | $ | 2,740,523 | 26.0 | % | ||||||||
E-commerce sales | 6,513,301 | 75.8 | % | 7,820,000 | 74.0 | % | ||||||||||
Total Net Sales | $ | 8,592,893 | 100.0 | % | $ | 10,560,523 | 100.0 | % |
Nine Months | Nine Months | |||||||||||||||
Ended | Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2022 | % of total | 2021 | % of total | |||||||||||||
Wholesale sales | $ | 7,382,880 | 26.8 | % | $ | 9,049,068 | 26.1 | % | ||||||||
E-commerce sales | 20,160,721 | 73.2 | % | 25,638,368 | 73.9 | % | ||||||||||
Total Net Sales | $ | 27,543,601 | 100.0 | % | $ | 34,687,436 | 100.0 | % |
Cost of Sales
The Company’s cost of sales includes costs associated with distribution, external fill and labor expense, components, manufacturing overhead, third-party providers, and outbound freight for our professionalthe Company’s products divisions,sales, and includes labor and third partyfor its service providers for our licensing and entertainment divisions.
Income Taxes
The Parent Company is a North Carolina corporation that is treated as a corporation for federal and state income tax purposes. Prior to April 2017, BPU was a multi-member limited liability company that was treated as a partnershipAs of October 1, 2019, CBDI and Paw CBD were wholly owned subsidiaries and are disregarded entities for federaltax purposes and state income tax purposes. As such, the Parent Company’s partnershiptheir entire share in theof taxable income or loss of BPU wasis included in the tax return of the Parent Company. Beginning in AprilCompany and as of 2017, the Parent Company acquired the remaining interest in BPU. As a result of the acquisition, BPU became a disregarded entity for tax purposes and its entire share of taxable income or loss was included in the tax return of the Parent Company. Level H&WMarch 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 Parent Company. IM1 and EE1 are multi-member limited liability companies that are treated as partnerships for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of IM1 and EE1 are included in the tax return of the Parent Company.
The Parent Company accounts for income taxes pursuant to the provisions of the Accounting for Income Taxes topic of the FASB Accounting Standards Codification (“ASC”),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 Parent Company uses theinsidethe inside basis approach to determine deferred tax assets and liabilities associated with its investment in a consolidated pass-through entity. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
Concentrations
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and securities.
The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. The Company had a $8,347,313an $8,644,186 uninsured balance at December 31, 2017June 30, 2022 and a $4,728$23,508,953 uninsured balance at September 30, 2017.
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 had sales to threedid not have any customers that individually represented over 10%a significant amount of total netour sales for the three and nine months ended December 31, 2017. Such customers represented 37%, 13%, and 37% of net sales. Net sales to such customers reported in the entertainment divisions were approximately $254,000, $92,000 and $254,000, respectively. The aggregate accounts receivable of such customers represented 79% of the Company’s total accounts receivable at December 31, 2017. June 30, 2022.
Stock-Based Compensation
The Company had two customers whose revenue collectively represented approximately 88% of the Company’s net salesaccounts for the three months ended December 31, 2016.
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. Under ASU 2016-09 which amends ASC 718 and the standard became effective October 1, 2017, we elected to change our accounting principle to recognizeThe Company recognizes forfeitures when they occur. This change had no impact on beginning retained earnings as there had been no forfeitures estimated or incurred in prior periods.
Earnings (Loss) Per Share
The Company uses ASC 260-10, “Earnings260-10, Earnings Per Share”Share for calculating the basic and diluted lossincome (loss) per share. The Company computes basic lossincome (loss) per share by dividing net lossincome (loss) and net lossincome (loss) attributable to common shareholders, after deducting preferred stock dividends, by the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.
Liquidity and 2016, 855,476 and 597,476 potential shares, respectively, were excluded fromGoing Concern Considerations
The accompanying financial statements have been prepared assuming that the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.
While the Company is taking strong action, believes in the viability of its strategy and path to profitability, and in its ability to raise additional funds, there can be no assurances to that effect. The Company’s working capital position may not be sufficient to support the Company’s daily operations for the twelve months subsequent to the registration draftingissuance of these quarterly financial statements. The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability and counsel, independent audit costs directly relatedthe ability to acquire additional funding. These and other factors raise potential concern about the registrationCompany’s ability to continue as a going concern within twelve months after the date that the quarterly financial statements are issued. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and offering, SEC filingclassification of assets or the amounts and print related costs, exchange listing costs, and IPO roadshow related costs.
New Accounting Standards
In May 2014, August 2015 and May 2016, December 2019, the FASB issued ASU 2014-09,
NOTE 2– ACQUISITIONS
The Company may,has, from time to time, enterentered into contracts where a portion of the consideration provided by the customer in exchange for the Company'sCompany’s services iswas common stock, options or warrants (an equity position). In these situations, upon invoicing the customer for the stock or other instruments, the Company will recordrecorded the receivable as accounts receivable other, and useused 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 companyCompany will value it, and the underlying revenue, on the estimated fair value of the services provided. In determining fair value of marketable securities and investment other securities, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in our assessment of fair value. The Company determines the fair value of marketable securities and investment other securities based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
● | Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. | |
● | Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. | |
● | Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. |
Where an accounts receivable other is settled with the receipt of the common stock or other instrument, the common stock or other instrument will bewas 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 privateprivately held entity).
For the three months ended June 30, 2022 and 2021, the Company recorded $0 and $2,852, respectively, and for the nine months ended June 30, 2022 and 2021 the Company recorded $(33,350) and $545,562 respectively, of realized and unrealized gain (loss) on marketable and other securities, including impairments. The realized loss in the first quarter of fiscal 2022 was a result of marking the Company’s holdings of 1,042,193 shares of Isodiol International, Inc. (“Isodiol”) down to zero after Isodiol was delisted from the TSX during December 2021. The gain in the prior year was driven by the sale of our investment in Formula Four Beverages, Inc. that was previously written to zero based on prior information related to the company’s performance and COVID-19 impacts.
In September 2020, the Company purchased a membership interest in Adara Sponsor LLC for $250,000, which along with proceeds from other investors was utilized as an investment in Adara Acquisition Corporation (“Adara”), a newly organized blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination (a “SPAC”). On January 13, 2021, the Company executed second tranche subscriptions agreements and funded the remaining $750,000 commitment into Adara Sponsor, LLC. Certain affiliates of the Company have also invested in Adara Sponsor, LLC. On February 9, 2021, the public shares of Adara began trading on the NYSE. Commencing March 24, 2021, holders of the 11,500,000 units sold in the Adara’s initial public offering could elect to separately trade shares of the Adara Class A common stock and warrants included in the units. The shares of Class A common stock and warrants that were separated now trade on NYSE American LLC under the symbols “ADRA” and “ADRA WS”, respectively. On June 30, 2022, the Company’s implied, indirect ownership in Adara represented 4.4% (633,988 shares) and 10.1% (1 million) of the warrants. As of April 2017, June 30, 2022, ADRA stock closed at $9.89 while ADRA WS closed at $0.18. On June 22, 2022, the Company received 2,500,000 sharesexecuted a transfer agreement with affiliates of common stock, of an OTC-quoted company underAdara Sponsor, LLC whereby the terms of its agreement for servicesCompany's interest would be transferred to the OTC-quoted company, which was valued at $650,000 based onaffiliates of Adara Sponsor, LLC upon Adara's acquisition of Allliance Entertainment, Inc. (the "Target") in consideration of the trading price onCompany's original purchase price. As a result of the OTC MarketsSEC litigation against our former CEO, the dayTarget provided a demand to Adara that it required cbdMD and Mr. Sumichrast to dispose of issuance, which was $0.26 per share. The shares were restrictedour interests in Adara Sponsor, LLC as indicated under Securities Acta condition of 1933 and may not be resold without registration under the Securities Act of 1933 or an exemption therefrom. The Company determined that this common stock was classified as Level 1 for fair value measurement purposes as the stock was actively traded on an exchange.
Adara’s focus of $10,000 per share. The Company classified the preferred stock as Level 3 for fair value measurement purposes as there were no observable inputs. The preferred shares also contained a put optiontargets to pursue for the holder for the stated
On April 7, 2022, CBD Industries, LLC entered into an asset sale agreement to sell substantially all its manufacturing assets to a subsidiary of Steady State, LLC ("Steady State"). The equipment sale is initially valued at approximately $1.8 million for accounting purposes, the stocksale price consisting of products to be provided to the Company usedunder the fair valuemanufacturing and supply agreement and $1.4 million of the services provided, utilizing an analysis of vendor specific objective evidence of its selling price. In August 2017, each of I’M1 and EE1 distributed the shares to its majority owner, Level Brands, and also distributed shares valued at $223,440 to its non-controlling interests (“NCI”). In August 2017,which the Company also provided referral services for kathy Ireland® WorldWide and this customer. As compensationinvested into Steady State in the Company receivedform of an additional 200,000 shares of common stock valued at $114,000 using the pricing described above. The Company assessed the common stock and determined there was not an impairment for the period ended December 31, 2017.
In valuing the stock the Company used factors including financial projections provided by the issuer and conversations with the issuer management regarding the Company’s recent results and future plans and the Company’s financing transactions over the past twelve months.
In Active | ||||||||||||||||
Markets for | Significant Other | Significant | ||||||||||||||
Identical Assets | Observable | Unobservable | ||||||||||||||
and Liabilities | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Investment other securities | $ | - | $ | - | $ | 1,000,000 | $ | 1,000,000 | ||||||||
Balance at September 30, 2021 | 33,351 | 0 | 1,000,000 | 1,033,351 | ||||||||||||
Change in value of equities | (33,351 | ) | 0 | 0 | (33,351 | ) | ||||||||||
Additional Investment | - | - | - | - | ||||||||||||
Balance at December 31, 2021 | $ | 0 | $ | 0 | $ | 1,000,000 | $ | 1,000,000 | ||||||||
Change in value of equities | - | - | - | - | ||||||||||||
Additional Investment | - | - | - | |||||||||||||
Balance at March 31, 2022 | $ | 0 | $ | 0 | $ | 1,000,000 | $ | 1,000,000 | ||||||||
Change in value of equities | - | - | - | - | ||||||||||||
Additional Investment | 0 | 0 | 1,400,000 | 1,400,000 | ||||||||||||
Balance at June 30, 2022 | $ | 0 | $ | 0 | $ | 2,400,000 | $ | 2,400,000 |
In Active Markets for Identical Assets and Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value at December 31, 2017 | |
Marketable securities | $299,000 | - | $- | $299,000 |
Investment other securities | - | - | $1,359,112 | $1,359,112 |
Level 1 | Level 2 | Level 3 | Total | |
Balance at September 30, 2017 | $- | $- | $859,112 | $859,112 |
Receipt of equity investment upon completion of contract | $254,500 | $- | $- | $254,500 |
Receipt of equity investment upon completion of contract | $- | $- | $200,000 | $200,000 |
Purchase of preferred shares, convertible into common stock | $- | $- | $300,000 | $300,000 |
Change in value of equity, other comprehensive income | $44,500 | $- | $- | $44,500 |
Balance at December 31, 2017 | $299,000 | $- | $1,359,112 | $1,658,112 |
NOTE 4 –3 - INVENTORY
Inventory at December 31, 2017June 30, 2022 and September 30, 20172021 consists of the following:
June 30, | September 30, | |||||||
2022 | 2021 | |||||||
Finished Goods | $ | 3,083,043 | $ | 3,362,897 | ||||
Inventory Components | 1,314,646 | 1,729,176 | ||||||
Inventory Reserve | (79,485 | ) | (70,206 | ) | ||||
Inventory prepaid | 548,580 | 551,519 | ||||||
Total Inventory | $ | 4,866,783 | $ | 5,573,386 |
Abnormal amounts of idle facility expense, freight, handling costs, scrap and wasted material (spoilage) are expensed in the period they are in incurred and no material expenses related to these items occurred in the three months ended June 30, 2022.
December 31, | September 30, | |
2017 | 2017 | |
Finished goods | $383,036 | $375,459 |
Inventory components | 210,113 | 212,738 |
Inventory reserve | - | - |
Total | $593,149 | $588,197 |
NOTE 5 4– PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31, 2017June 30, 2022 and September 30, 20172021 consist of the following:
December 31, | September 30, | |
2017 | 2017 | |
Computers and equipment | $39,926 | $37,261 |
Show booth and equipment | 49,123 | 171,986 |
Manufacturers’ molds and plates | 34,200 | 34,200 |
123,249 | 243,447 | |
Less accumulated depreciation | (67,124) | (107,971) |
Net property and equipment | $56,125 | $135,476 |
June 30, | September 30, | |||||||
2022 | 2021 | |||||||
Computers, furniture and equipment | $ | 861,731 | $ | 549,910 | ||||
Manufacturing equipment | 284,275 | 2,968,838 | ||||||
Leasehold improvements | 487,081 | 870,621 | ||||||
Automobiles | 35,979 | 35,979 | ||||||
1,669,066 | 4,425,348 | |||||||
Less accumulated depreciation | (893,589 | ) | (1,863,774 | ) | ||||
Property and equipment, net | $ | 775,477 | $ | 2,561,574 |
Depreciation expense related to property and equipment was $13,756$158,555 and $9,189$246,532 for the periodsthree months ended June 30, 2022 and 2021, respectively and was $770,335 and $719,856 for the nine months ended June 30, 2022 and 2021, respectively. During the quarter, the Company sold substantially all the assets of its manufacturing facility and as a result the gross investment and accumulated depreciation was removed from the balance sheet, reducing net PP&E.
NOTE 5– GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company had goodwill at December 31, 2017 and 2016, respectively. In the three months ended December 31, 2017 we recorded a one time loss 2021 of $69,511 on the disposal of a show booth that is no longer in use.
December 31, | September 30, | |
2017 | 2017 | |
Trademark and other intellectual property related to BPU | $486,760 | $486,760 |
Trademark and other intellectual property related to I’M1 | 971,667 | 971,667 |
Trademark and other intellectual property related to EE1 | 471,667 | 471,667 |
Trademark, tradename and other intellectual property related to kathy ireland®Health & Wellness™, net | 800,000 | 830,000 |
Cash, warrants and stock issued related to the Wholesale license agreement with Chef Andre Carthen, net | 295,298 | 307,146 |
Cash, warrants and stock issued related to the Wholesale license agreement with Nicholas Walker, net | 166,333 | 173,047 |
Total | $3,191,725 | $3,240,287 |
Intangible | Total unamortized cost | 2018 | 2019 | 2020 | 2021 | 2022 | thereafter |
Trademark, tradename and other intellectual property related to kathy ireland® Health & Wellness™ | $800,000 | $90,000 | $120,000 | $120,000 | $120,000 | $120,000 | $230,000 |
Cash, warrant and stock issued related to the Wholesale license agreement with Chef Andre Carthen | $295,298 | $32,446 | $44,294 | $44,294 | $44,294 | $44,294 | $85,676 |
Cash, warrant and stock issued related to the Wholesale license agreement with Nicholas Walker | $166,333 | $17,402 | $24,950 | $24,950 | $24,950 | $24,950 | $48,297 |
Intangible Assets
On December 20, 2018, the Company completed the Mergers with Cure Based Development and acquired certain assets, including the trademark “cbdMD” and its variants and certain other intellectual property. The trademark is the cornerstone of this subsidiary and is key as the Company creates and distributes products and continue to build this brand. The Company believed the trademark did not have limits on the time it would contribute to the generation of cash flows and therefore identified these as indefinite lived intangible assets.
In September 2019, the Company purchased the rights to the trademark name HempMD for $50,000. This trademark will be used in the marketing and branding of certain products to be released under this brand name. At the time of acquisition, the Company believes the trademark does not have limits on the time it will contribute to the generation of cash flows and therefore has identified these as indefinite-lived intangible assets.
In July 2021, the Company completed the acquisition of DCO and acquired certain assets, including the trade name, domains and certain other intellectual property. The tradename will be used in marketing and branding of the website. The Company believes the trade name has a 10 year life. In addition 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 lossto the trade name, DCO has been incurreda technology platform used to market to its customer and the Company evaluates believes it has a 4 year life.
As of December 31, 2021, the indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support an indefinite useful life. The Company has performed a qualitativere-assessed the “cbdMD” and quantitative analysis“HempMD” trademarks and for the years ended September 30, 2017 and 2016 there has been no impairment. The Company hashave determined that no event or circumstances indicate likeliness of an impairmentthe trademarks should be classified as of December 31, 2017.
Intangible assets as of June 30, 2022 and September 30, 2021 consisted of the following:
June 30, | September 30, | |||||||
2022 | 2021 | |||||||
Trademark related to cbdMD | $ | 17,300,000 | $ | 21,585,000 | ||||
Trademark for HempMD | 50,000 | 50,000 | ||||||
Technology Relief from Royalty related to DirectCBDOnline.com | 667,844 | 667,844 | ||||||
Tradename related to DirectCBDOnline.com | 749,567 | 749,567 | ||||||
Amortization of definite lived intangible assets: | (655,508 | ) | (48,482 | ) | ||||
Total | $ | 18,111,903 | $ | 23,003,929 |
Amortization expense related to definite lived intangible assets was $277,354 and $0 for the three months ended June 30, 2022 and 2021, respectively and was $607,025 and $0for the nine months ended June 30, 2022 and 2021, respectively.
NOTE 6– CONTINGENT CONSIDERATION
As consideration for the Mergers, described in Note 1, the Company had a contractual obligation to issue 15,250,000 shares of its common stock, after approval by its shareholders, to the members of Cure Based Development, issued in two tranches 6,500,000 shares and 8,750,000 shares, both of which are subject to leak out provisions, and the unrestricted voting rights to 8,750,000 tranche of shares will also vest over a five year period and are subject to a voting proxy agreement. The Merger Agreement also provides that an additional 15,250,000 Earnout Shares can be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the steps laidClosing 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 ASC 360-10-35-21. We first assess if there is an indicator of possible impairment such as change ininternal and external market factors.
The initial two tranches totaling 15,250,000 shares were valued using a market approach method and included the use of the asset, marketfollowing inputs: share price changesupon 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 asset, or other eventssecond tranche also included an input for a discount for lack of voting rights during the vest periods.
The Merger Agreement also provides that impactan 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 asset. If an indicator is present we then perform a quantitative analysis to determine ifshares in the carrying amount of $53,215,163 was reclassified from the asset is recoverable. This is done by comparingcontingent liability to additional paid in capital on the total undiscounted future cash flowsconsolidated balance sheet.The third quarter of the long-lived assetthird marketing period ended on September 30, 2021 and based on the measurement criteria an additional 466,713 Earnout Shares were earned and issued in December 2021. These shares decreased in value by $366,841 during the quarter through the time of issuance and had a value of $405,000, which was reclassified from the contingent liability to its carrying amount. Ifadditional paid in capital on the total undiscounted future cash flows exceed the carrying amountconsolidated balance sheet. The fourth quarter of the asset,third marketing period ended on December 31, 2021 and based on the carrying amount is deemed recoverablemeasurement criteria an additional 444,243 Earnout Shares were earned and an impairment is not recorded. Ifissued in March 2022. These shares increased in value by $41,914 during the carrying amountquarter through the time of issuance and had a long-lived asset is deemedvalue of $325,000, which was reclassified from the contingent liability to be unrecoverable, an impairment loss needs to be estimated. In order to calculateadditional paid in capital on the impairment loss, the Fair Valueconsolidated balance sheet. The fifth quarter of the asset must be determined. Fair Value referenced here is determined usingthird marketing period ended on March 31, 2022 and based on the guidance in FASB ASC Topic 820. After assessing indicators for impairment, the Company determined that a quantitative analysis was not needed as of December 31, 2017.
The securities consist of 8% Convertible Notes with warrants to purchase 141,676 shares of the Company’s stock (the “Notes”). The warrants havethird marking period was originally an exercise price of $7.80. The Warrants expire in September18 month period commencing on January 1, 2021 and are exercisable beginning the earlier of: (i) immediately after the IPO Closing; or (ii) July 1, 2017.
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 financing, which was recorded as a debt discountTwenty Two Earnout Shares and is being amortized overat the termdate of the Notes. We haveacquisition, recorded no interest expense relateda total contingent liability of $488,561. Under GAAP the Company is obligated to these amounts forreassess the three months ended December 31, 2017.
In November of its in-house design team to assist us in developing our brands. As compensation under the agreement we agreed to pay kathy ireland® Worldwide a nominal monthly fee. We are also responsible for the payment of expenses incurred by Ms. Ireland or kathy ireland® Worldwide in providing these services to our company.
In April 2022, the Company entered into a one year advisory agreement with Mr. Nic Mendoza pursuantcontractual obligation to which he provides advisory and consulting servicesissue up to us, including serving as co-Managing Director of EE1. We have agreed to pay Mr. Mendoza a fee of $10,000 per month for his services. We are negotiating and expect to execute a new agreement with multi-year terms.
NOTE 7– RELATED PARTY TRANSACTIONS
As noted in June 2017 and the shares issued toNote 2, the Company, in August 2017.
NOTE 10 8– SHAREHOLDERS’ SHAREHOLDERS’ EQUITY
Preferred Stock – We areThe 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 preferred8.0% Series A Cumulative Convertible Preferred Stock ranks senior to our common stock does not have any preference,for liquidation or dividend provisions. Noprovisions 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 shares of 8.0% Series A Cumulative Convertible Preferred Stock issued and outstanding at June 30, 2022 and September 30, 2021.
The total amount of preferred stock have been issued.
Common Stock – We areThe Company is authorized to issue 150,000,000 shares of common stock, par value $0.001 per share. There were 7,798,92859,946,090 and 5,792,26157,783,340 shares of common stock issued and outstanding at December 31, 2017June 30, 2022 and September 30, 2017,2021, respectively.
Preferred stock transactions:
The Company had no preferred stock transactions in the three and nine months ended June 30, 2022.
In the nine months ended June 30, 2021:
On November 17, 2017, December 8, 2020, the Company completed an IPOa follow-on firm commitment underwritten public offering of 2,000,0002,300,000 shares of its common stock8.0% Series A Cumulative Convertible Preferred Stock for aggregate gross proceeds of $12.0$17.25 million. The Company received approximately $10.9$15.8 million in net proceeds after deducting underwriting discounts and commissions and other offering expenses paid by us.
Common stock transactions:
In the threenine months ended December 31, 2017:
In May 2022, the Company completed an IPO of 2,000,000issued 458,887 shares of itsrestricted common stock for aggregate gross proceeds of $12.0 million.
In November 2017, weMarch 2022 the Company issued 6,667444,243 shares of ourrestricted common stock in connection with the Earnout Shares as referenced in Note 6.
In January 2022, the Company issued 30,000 shares of restricted stock awards to six employees. The stock awards were valued at the fair market price of $29,250 and vested at the grant date.
In January 2022, the Company issued 320,000 shares to a professional athlete in conjunction with an amendment to the athlete’s sponsorship agreement as referenced in Note 11. The stock grant was valuated at the fair market price of $336,000 upon issuance and will be amortized over the remaining term of the agreement.
On December 28, 2021, the Company issued 466,713 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.
In October 2021, the Company issued 25,000 shares of restricted common stock to an executive officer of the Company, subject to vesting on January 1, 2022.
In the nine months ended June 30, 2021:
In June 2021, the Company issued 25,000 shares of restricted stock awards in connection with a consulting arrangement with an industry professional. The Company recorded a total prepaid expense of $80,500 in conjunction with the issuance of shares and intends to amortize this over the term of the agreement.
In May 2021, the Company issued 562,278 common shares in connection with the Earnout Shares as referenced in Note 6.
In April 2021, the Company entered into an endorsement agreement with a professional athlete. As part of the endorsement agreement, the Company issued 40,000 common shares of restricted common stock. The Company recorded $143,600 prepaid expense and amortized over the term of the agreement.
In March 2021, the Company issued 180,000 shares of restricted common stock to a professional athlete to completely satisfy a $800,000 obligation due between July and December of 2021. The Company recorded a total prepaid expense of $649,800 in conjunction with the issuances of shares and intends to amortize this over the term of the athlete’s agreement.
In March 2021, the Company issued 27,000 of restricted stock awards to the Company’s board of directors. Two thousand of the shares vested at the time of the grant, while the balance vest onefourth on June 30, 2021, one fourth, on September 30, 2021, onefourth on December 31, 2021, and onefourth on March 31, 2022. The stock awards were valued at the fair market price of $118,800 upon issuance and will amortize over the individual vesting periods.
In March 2021, the Company issued 3,348,520 shares of common stock in connection with the Earnout Shares as referenced in Note 6.
In February 2021 as partial compensation pursuant to the terms of a Personal Services Agreement for the endorsement of the Company’s products, the Company issued 40,000 common shares. The Company recorded a total prepaid expense of $155,200 in conjunction with the issuance of shares.
In January 2021 the Company issued 167,500 of restricted stock awards to an aggregate of 15 employees. A majority vested immediately with the balance vesting by April 6, 2021. The stock awards were valued at the fair market price of $494,125 upon issuance and amortized over the individual vesting periods.
In October 2020 the Company issued 50,000 of restricted stock awards to an executive officer, subject to a multi-year vesting schedule with a minimum one year before the first tranche vests as noted below in Note 9.
Stock option transactions:
In the nine months ended June 30, 2022:
In May 2022, the Company granted a new executive an aggregate of 405,000 common stock options. The options vest equally over 1,2, and 3 years from the grant date. The options have a strike price $0.84 and a five year term. The total expense of these options totaled $176,985 and will be amortized over the term of the vesting periods.
In April 2022, the Company issued 200,000 options to a consultant as part of an advisory agreement under the Company's Equity Compensation Plan. Fifty thousand of the shares vested upon the grant, 50,000 vest and 6 months from the effective date and 100,000 upon renewal of the consulting agreement in March 2023. The options have a consulting agreement.strike price of $1 and five year term. The shares were valued at $37,002, based ontotal expense of these options totaled $131,300 and will be amortized over the trading price upon issuance and expensed as contract compensation.
In the three months ended December 31, 2016:
In March 2022, the Company’s common stock.
In November 2016 we issued 20,000 shares of our common stock valued at $17,000 to Best Buddies International as a charitable contribution.
In October 2021, the Company granted an aggregate of 75,000 common stock options to an executive officer. These options vest on October 1, 2022. The Company has recorded an expense for these options of $23,025 and $46,050 for the three and nine months ended June 30, 2022.
In the nine months ended June 30, 2021:
In June 2021, the Company entered into a consulting arrangement with an industry professional. As part of the agreement, the Company issued 50,000 options and recorded total prepaid expenses of $125,250 and intends to amortize over the 12-month vesting term.
In April 2021, the Company issued 750,000 common stock options to an executive officer in conjunction with an Amended and Restated Executive Employment Agreement. The common stock options vest in three equal tranches, the first of which vests on January 1, 2022; the second on January 1, 2023; and the third on January 1, 2024, both under the Corporations 2021 Equity Compensation Plan. The Company has recorded an expense of $195,346 for the three months ended June 30, 2021 for these options.
In March 2021, the Company granted its board of directors an aggregate of 150,000 common stock options. The options vested immediately, have a strike price of $4.40 and a five-year term. The Company has recorded a total prepaid expense of $395,850 and intends to amortize the expense over the 12-month board term.
In January 2021, the Company granted an aggregate of 80,000 common stock options to three employees. The options vest 16% immediately, 42% January 1, 2017 in three equal tranches, the first on April 15, 2021, the second on April 15, 2022 and 42% January 1, 2018. The optionsthe third on April 14, 2023 and have an exercise price of $7.50$3.10 per share and a term of five10 years. We haveThe Company has recorded an expense of $66,967 for the options of $53 and $418 respectively for the three months ended December 31, 2017 and 2016.
In October 1, 2016 we2020, the Company granted an aggregate of 171,500350,000 common stock options to two employees.an executive officer. The options vest ratably through Januaryin three equal tranches, the first on October 1, 2018. The options2021, the second on October 1, 2022 and the third on October 1, 2023, and have an exercise price of $7.50$3,50, $5.00, and $6.50 per share and a term of six5 years. We haveThe Company has recorded an expense for thethese options of $4,802 and $4,802 respectively$31,054 for both the three months ended December 31, 2017 2021 and 2016.
2017 | 2016 | |
Exercise price | - | $7.50 |
Risk free interest rate | - | 1.14% - 1.42% |
Volatility | - | 54.69% - 60.39% |
Expected term | - | 5 - 7 years |
Dividend yield | - | None |
The expected volatility rate was estimated based on comparison toa weighted average mix of the volatilityvolatilities of the Company and a peer group of companies in the similar industry.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. Under ASU 2016-09 which amendsThe pre-vesting forfeiture rate of zero is based upon the experience of the Company. As required under ASC 718, the Company electedwill adjust the estimated forfeiture rate to change our accounting principle to recognize forfeitures when they occur. This change had no impact on beginning retained earnings as there had been no forfeitures estimated or incurred in prior periods.its actual experience. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.
The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the three months ended June 30, 2022 and 2021:
June 30, | June 30, | |||||||
2022 | 2021 | |||||||
Weighted average exercise price | 0.844 -1.0000 | $ | 3.91 | |||||
Risk free interest rate | 2.56% - 2.83% | 0.16% - 0.85% | ||||||
Volatility | 101.23 | % - 102.00 | 100.72% - 105.43% | |||||
Expected term (in years) | 2.5 - 4 | 2.5 - 6.2 | ||||||
Dividend yield | None | None |
Warrant transactions:
The Company has no warrant transactions during the three and nine months ended June 30, 2022.
In the nine months ended June 30, 2021:
In December 2020 in relation to the IPO, wefollow-on firm commitment underwritten public offering of the 8.0% Series A Cumulative Convertible Preferred Stock, the Company issued to the selling agentrepresentative of the underwriters warrants to purchase in aggregate 100,000150,502 shares of common stock with an exercise price of $7.50.$3.74. The warrants expire on September 27, 2022.
The following table summarizes the inputs used for the Black-Scholes pricing model on the warrants issued in the periodsnine months ended December 31, 2017 June 30, 2022 and 2016:
June 30, | ||||
2021 | ||||
Weighted average exercise price | $ | 3.74 | ||
Risk free interest rate | 0.39 | % | ||
Volatility | 103.42 | % | ||
Expected term (in years) | 2.8 | |||
Dividend yield | None |
2017 | 2016 | |
Exercise price | $7.50 | $7.80 |
Risk free interest rate | 2.06% | 1.22% - 1.27% |
Volatility | 43.12% | 52.77% - 54.49% |
Expected term | 5 years | 5 years |
Dividend yield | None | None |
NOTE 11 9– STOCK-BASED STOCK BASED COMPENSATION
Equity Compensation Plan – On June 2, 2015, the Board of Directors of Level Brands, Inc.the Company approved the 2015 Equity Compensation Plan (“(“2015Plan”). The 2015Plan initially made 1,175,000 common stock shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The number of shares of common stock available for issuance under the 2015Plan shall automatically increase on the first trading day of January October each calendar year during the term of the 2015Plan, 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 December September of the immediately preceding calendarfiscal year, but in no event shall any such annual increase exceed 100,000 shares of common stock.
On January 8, 2021, the Company’s Board of Directors approved the 2021 Equity Compensation Plan (the “2021 Plan”) and it was subsequently approved by its shareholders at its annual meeting held on March 12, 2021. The purpose of the 2021 Plan is to advance the interests of the Company by providing an incentive to attract, retain and motivate highly qualified and competent persons who are important to it and upon whose efforts and judgment the success of the Company is largely dependent. The 2021 Plan made 5,000,000 common shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The 2021 Plan also contains an “evergreen formula” pursuant to which the number of shares of common stock available for issuance under the 2021 Plan will automatically increase on October 1 of each calendar year during the term of the 2021 Plan, beginning with calendar year 2022, by an amount equal to 1.0% of the total number of shares of common stock outstanding on September 30 of such calendar year, up to a maximum of 250,000 shares.
The Company accounts for stock-based compensation using the provisions of FASB ASC 718. FASB 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. We have only awarded stock options since December 2015. 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 ourthe 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 ten-yearfive-to-ten-year term and generally vest over 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 which usesfor equity awards with time-based vesting provisions granted during the assumptions described above.
The following table summarizes stock option activity under both plans for the Plan:
Number of shares | Weighted-average exercise price | Weighted-average remaining contractual term (in years) | Aggregate intrinsic value (in thousands) | |
Outstanding at September 30, 2017 | 333,300 | 5.83 | ||
Granted | — | — | ||
Exercised | — | — | ||
Forfeited | 20,000 | 2.00 | ||
Outstanding at December 31, 2017 | 313,300 | $6.07 | 5.4 | $— |
Exercisable at December 31, 2017 | 285,800 | $5.72 | — | $— |
Weighted-average | ||||||||||||||||
remaining | Aggregate | |||||||||||||||
Weighted-average | contractual term | intrinsic value | ||||||||||||||
Number of shares | exercise price | (in years) | (in thousands) | |||||||||||||
Outstanding at September 30, 2021 | 2,702,500 | $ | 4.42 | 5.13 | $ | - | ||||||||||
Granted | 1,030,000 | 0.99 | - | |||||||||||||
Exercised | - | - | ||||||||||||||
Forfeited | (930,000 | ) | 3.59 | |||||||||||||
Outstanding at June 30, 2022 | 2,802,500 | 3.43 | 3.39 | - | ||||||||||||
Exercisable at June 30, 2022 | 1,822,500 | $ | 4.19 | 4.63 | $ | - |
As of December 31, 2017,June 30, 2022, there was approximately $37,207$419,241 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 8 months.
Restricted Stock Award transactions:
In the nine months ended June 30, 2022:
In June 2022, the Company issued 230,000400,000 shares of restricted common stock in connection with the Separation Agreement with a former executive officer in which the former employee forfeited 500,000 shares of unvested restricted stock awards and 500,000 unvested options. These shares are subject to vest one-half on July 1, 2022 and the balance January 1, 2023. The fair market value of these shares totaled $172,000 and will be amortized over the vesting periods. The forfeited RSUs and options had an unrecognized value of $799,572 and $555,286, respectively. The Company recognized contra-expense of $880,428 and $604,714 for the forfeited RSUs and options, respectively, related to the previously amortized expense for these RSUs and options.
In May 2022 the Company issued 125,000 shares of restricted common stock to an executive office of the Company as part of a new hire compensation package.
In May 2022 the Company issued 5,000 of restricted common stock to an employee of the Company. The stock award was valued at the fair market price $3,350 of and expensed upon issuance.
In March 2022, the Company issued 20,000 of restricted stock awards to the Company’s board of directors. The shares vest quarterly onefourth on June 30, 2022, one fourth, on September 30, 2022, onefourth on December 31, 2022, and onefourth on March 31, 2023. The stock awards were valued at the fair market price of $16,360 upon issuance and will amortize over the individual vesting periods.
In January 2022, the Company issued 30,000 shares of restricted stock awards to six employees. The stock awards were valued at the fair market price of $29,250 and vested at the grant date.
In January 2022, the Company issued 320,000 shares to a professional athlete in conjunction with an amendment to the athlete’s sponsorship agreement as referenced in Note 11. The stock grant was valuated at the fair market price of $336,000 upon issuance and will be amortized over the remaining term of the agreement.
In November 2021, the Company issued 120,000 shares of restricted stock awards to an employee, subject to certain revenue performances metrics through December 2022, as referenced in Note 6. These shares were forfeited during January 2022.
In October 2021 the Company issued 5,000 shares of restricted stock awards to an employee, which vested immediately upon issuance.
In October 2021 the Company issued 25,000 shares of restricted stock awards to an executive officer, subject to a four-month vesting schedule.
In the nine months ended June 30, 2021:
In June 2021, the Company issued 25,000 shares of restricted stock awards in connection with a consulting arrangement with an industry professional. The Company recorded a total prepaid expense of $80,500 in conjunction with the issuance of shares and intends to amortize this over the term of the agreement.
In April 2021, the Company issued 750,000 shares of restricted common stock to an executive officer, subject to a multi-year vesting schedule as noted below in Note 9.
In April 2021, the Company entered into an endorsement agreement with a professional athlete. As part of the endorsement agreement, the Company issued 40,000 common shares of restricted common stock. The Company recorded $143,600 prepaid expense and amortized over the term of the agreement.
In March 2021, the Company issued 27,000 of restricted stock awards to the Company’s board of directors. Two thousand of the shares vested at the time of the grant, while the balance vest onefourth on June 30, 2021, one fourth, on September 30, 2021, onefourth on December 31, 2021, and onefourth on March 31, 2022. The stock awards were valued at the fair market price of $118,800 upon issuance and will amortize over the individual vesting periods.
In January 2021 the Company issued 167,500 of restricted stock awards to an aggregate of 15 employees. A majority vested immediately with the balance vesting by April 6, 2021. The stock awards were valued at the fair market price of $494,125 upon issuance and amortized over the individual vesting periods.
In October 2020, the Company issued 50,000 of restricted stock awards to board members.an executive officer. The restricted stock awards vest Januaryvests in three equal tranches, the first of which vests on October 1, 2018. The stock awards are2021, on the second on October 1, 2022 and the third on October 1, 2023 and were valued at fair market value upon issuance at $195,500 and$100,000 which will be amortized over the vesting period. We
The Company recognized $39,101$(593,617) and $641,267 of restricted stock based compensation expense for the three months ended December 31, 2017 June 30, 2022 and 2016,2021, respectively. The Company recognized $242,382 and $1,218,110 of restricted stock compensation expense for the nine months ended June 30, 2022 and 2021, respectively.
NOTE 12 –10 - WARRANTS
Transactions involving ourthe Company equity-classified warrants for the nine months ended June 30, 2022 and 2021 are summarized as follows:
Number of shares | Weighted-average exercise price | Weighted- average remaining contractual term (in years) | Aggregate intrinsic value (in thousands) | |
Outstanding at September 30, 2017 | 212,176 | $6.53 | ||
Issued | 100,000 | 7.50 | ||
Exercised | — | — | ||
Forfeited | — | — | ||
Outstanding at December 31, 2017 | 312,176 | $6.84 | 4.3 | $— |
Exercisable at December 31, 2017 | 312,176 | $6.84 | 4.3 | $— |
Weighted-average | ||||||||||||||||
remaining | Aggregate | |||||||||||||||
Weighted-average | contractual term | intrinsic value | ||||||||||||||
Number of shares | exercise price | (in years) | (in thousands) | |||||||||||||
Outstanding at September 30, 2021 | 660,417 | $ | 4.60 | 3.05 | $ | - | ||||||||||
Granted | - | - | - | |||||||||||||
Exercised | - | - | ||||||||||||||
Forfeited | - | - | ||||||||||||||
Outstanding at June 30, 2022 | 660,417 | 4.60 | 2.79 | - | ||||||||||||
Exercisable at June 30, 2022 | 660,417 | $ | 4.60 | - | $ | - |
The following table summarizes outstanding common stock purchase warrants as of December 31, 2017:
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 |
Number of shares | Weighted-average exercise price | Expiration | |
Exercisable at $7.80 per share | 141,676 | $7.80 | September 2021 |
Exercisable at $4.00 per share | 70,500 | $4.00 | September 2022 |
Exercisable at $7.50 per share | 100,000 | $7.50 | October 2022 |
312,176 | 6.84 |
NOTE 13 11–COMMITMENTS AND CONTINGENCIES
In September 2017 weMay 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 wholesale licensenew endorsement agreement amending certain of the contract terms which superseded the original agreement. Under the current endorsement agreement potential payments to the professional athlete are as follows from July 2020 to December 2022 – up to $2,867,000 to be paid in common stock in three issuances, based on a Volume Weighed Average Price (“VWAP”) calculation, of which the last two issuances can be paid in cash at the Company’s option - $1,400,000 paid in July 2020, $800,000 paid between July 2021 and December 2021, and $667,000 paid between July 2022 and December 2022. The Company will make monthly cash payments as follows from: July 2020 to December 2020 - $40,000, from January 2021 to June 2021 - $50,000, from July 2021 to December 2021 - $75,000, from January 2022 to June 2022 - $85,000, and from July 2022 to December 2022 - $100,000. In March 2021, the parties entered into an additional amendment to the endorsement agreement whereby the Company issued the professional athlete 180,000 common shares to completely satisfy the $800,000 payment options between July 2021 and December 2021. The Company has recorded expense of $422,309 and $253,700 for the three months ended December 31, 2021 and 2020, respectively. In January of 2022, the parties entered into an additional amendment to the endorsement agreement, whereby the Company has foregone certain rights to logo wearing during events while retaining other performance of the athlete through December 2024. In exchange for change in obligations and term, the parties re-amortized the balance owed during 2022 through 2024, including issuing 320,000 of the Company’s common stock as part of the total compensation.
In April 2022, effective February 2022, the Company entered into an endorsement agreement with kathy ireland® Worldwidea professional athlete. The term of the agreement is through February 2025 and is tied to performance of the athlete in so many professional events annually, and also includes promotion of the Company via social media, wearing of logo during competition, requirement to provide production days for advertising creation and attendance at meet and greets. The potential base payments, if all services are provided is $1,500,000 over the term of the agreement, in addition to some incentives for sales directly influenced by the athlete.
As previously disclosed, during June of 2022, the Company's CEO resigned from the board of directors and his role as an executive for the Company in June of 2022 under the terms of a separation agreement with the Company.
NOTE 12– NOTE PAYABLE
In July 2019, the Company entered into a loan arrangement in the amount of $249,100 for a line of equipment, as part of the sale of manufacturing equipment during April 2022, the balance of this loan was paid off resulting in a balance of $0 as of June 30, 2022. In January 2020, the Company entered into a loan arrangement for $35,660 for equipment, of which $5,051 is a long term note payable at June 30, 2022. Payments are for 48 months and have a financing rate of 6.2%, which requires a monthly payment of $841.
NOTE 13– PAYCHECK PROTECTION PROGRAM LOAN
In April 2020, the Company applied for an unsecured loan pursuant to the PPP administered by and authorized by the CARES Act. Section 1106 of the Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the Paycheck Protection Program. On April 27, 2020, the Company received the loan from Truist Bank (the “Lender”) in the principal amount of $1,456,100. The SBA Loan is evidenced by a promissory note issued by the Company to the Lender. During May of 2021, the Company received notice from the SBA the loan principal and any accrued interest was completely forgiven.
NOTE 14– LEASES
The Company has lease agreements for its corporate offices and warehouse with lease periods expiring between 2021 and 2026. ASC 842 requires the recognition of leasing arrangements on the consolidated balance sheet as right-of-use assets and liabilities pertaining to the rights and obligations created by the leased assets. The Company determines whether an arrangement is a lease at inception and classify it as finance or operating. All of the Company’s leases are classified as operating leases. The Company’s leases do not contain any residual value guarantees. During the June 2022 quarter, the Company exited its laboratory facility as all R&D is conducted in its corporate offices. This lease expired in December 2022, and as a result we were grantedincurred an exclusive, royalty freeexit fee of $80,000 tied to the landlord's right to license, assignholdover rent which was booked as an offset to gain on the sold assets for the quarter ending June 30, 2022.
Right-of-use lease assets and usecorresponding lease liabilities are recognized at commencement date based on the kathy ireland® Health & Wellness™ trademark,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 all trade names, trademarkspayments 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 service markscommon area maintenance expenses during the lease terms.
Lease costs on operating leases are recognized on a straight-line basis over the lease term and included as a selling, general and administrative expense in the condensed consolidated statements of operations.
Components of operating lease costs are summarized as follows:
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2022 | 2022 | |||||||
Total Operating Lease Costs | $ | 336,474 | $ | 1,059,732 |
Supplemental cash flow information related to operating leases is summarized as follows:
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
June 30, | June 30, | |||||||
2022 | 2022 | |||||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 339,194 | $ | 1,068,620 |
As of June 30, 2022, our operating leases had a weighted average remaining lease term of 4.38 years and a weighted average discount rate of 4.66%.
For the year ended September 30, | ||||
2022 | $ | 337,267 | ||
2023 | 1,380,204 | |||
2024 | 1,421,610 | |||
2025 | 1,159,949 | |||
Thereafter | 1,372,862 | |||
Total future lease payments | 5,671,892 | |||
Less interest | (534,340 | ) | ||
Total lease liabilities | $ | 5,137,552 |
Future minimum aggregate lease payments under operating leases as of June 30, 2022 are summarized as follows:
NOTE 15– EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the following periods:
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Basic: | ||||||||||||||||
Net loss continuing operations | $ | (31,634,143 | ) | $ | 1,537,288 | $ | (55,453,289 | ) | $ | (20,368,808 | ) | |||||
Preferred dividends paid | 1,000,501 | 560,281 | 3,001,503 | 1,220,610 | ||||||||||||
Net (loss) income continuing operations adjusted for preferred dividend | (32,634,644 | ) | 977,007 | (58,454,792 | ) | (21,589,418 | ) | |||||||||
Net (loss) income attributable to cbdMD Inc. common shareholders | (32,634,644 | ) | 977,007 | (58,454,792 | ) | (21,589,418 | ) | |||||||||
Diluted: | ||||||||||||||||
Net (loss) income continuing operations | (32,634,644 | ) | 977,007 | (58,454,792 | ) | (21,589,418 | ) | |||||||||
Net (loss) income continuing operations | (32,634,644 | ) | 977,007 | (58,454,792 | ) | (21,589,418 | ) | |||||||||
Shares used in computing basic earnings per share | 59,316,762 | 56,676,326 | 59,229,208 | 54,089,263 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Options | 0 | 64,833 | 0 | 0 | ||||||||||||
Warrants | 0 | 22,884 | 0 | 0 | ||||||||||||
Convertible preferred shares | 0 | 4,667,600 | 0 | 0 | ||||||||||||
Shares used in computing diluted earnings per share | 59,316,762 | 61,431,643 | 59,229,208 | 54,089,263 | ||||||||||||
Earnings per share Basic: | ||||||||||||||||
Continued operations | (0.55 | ) | 0.02 | (0.99 | ) | (0.40 | ) | |||||||||
Basic earnings per share | (0.55 | ) | 0.02 | (0.99 | ) | (0.40 | ) | |||||||||
Earnings per share Diluted: | - | - | ||||||||||||||
Continued operations | (0.55 | ) | 0.02 | (0.99 | ) | (0.40 | ) | |||||||||
Diluted earnings per share | (0.55 | ) | 0.02 | (0.99 | ) | (0.40 | ) |
At June 30, 2022, 4,888,667potential shares underlying options, unvested RSUs and warrants as well as 8,335,000 convertible preferred shares were excluded from the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.
NOTE 16– INCOME TAXES
On November 17, 2017, the Company completed an IPO of its common stock. The Company conducted a Section 382 analysis and determined an ownership change occurred upon the IPO. On October 2, 2018, the Company completed a follow-on firm commitment underwritten public offering of its common stock. On May 16, 2019, the Company completed an additional follow-on firm commitment underwritten public offering of its common stock. On October 16, 2019, the Company completed a follow-on firm commitment underwritten public offering of its 8.0% Series A Cumulative Convertible Preferred Stock. On January 14, 2020, the Company completed a follow-on firm commitment underwritten public offering of its common stock. Management has determined that an ownership change has occurred under Internal Revenue Code (IRC) Section 382 resulting in limitations on the utilization of Company’s federal and state NOL carryovers.
On December 20, 2018, the Company completed a two-step merger with Cure Based Development (see Note 1). As a result of the Mergers the Company established as part of the purchase price allocation a net deferred tax liability related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with healthbook-tax basis of certain assets and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™.
Three Months Ended September 30, 2016 | ||||
Professional Product Division | Licensing Division | Entertainment Division | Total | |
Net Sales | $29,070 | $37,162 | $366,979 | $433,211 |
Net Sales related party | $- | $- | $254,545 | $254,545 |
Income (loss) from Operations before Overhead | $(360,753) | $(360,109) | $242,553 | $(478,309) |
Allocated Corporate Overhead (a) | 49,930 | 41,554 | 694,989 | 786,474 |
Net Loss | $(410,683) | $(401,663) | $(452,436) | $(1,264,782) |
Assets | $4,587,741 | $5,792,671 | $4,918,581 | $15,298,993 |
Three Months Ended September 30, 2016 | ||||
Professional Product Division | Licensing Division | Entertainment Division | Total | |
Net Sales | $199,837 | $- | $- | $199,837 |
Income (loss) from Operations before Overhead | $(458,347) | $- | $- | $(458,347) |
Allocated Corporate Overhead (a) | 239,156 | 239,156 | ||
Net Loss | $(697,495) | $- | $- | $(697,495) |
Assets | $2,688,852 | - | - | $2,688,852 |
The Company has a valuation allowance against the net deferred tax assets, with the exception of the deferred tax liabilities that result from indefinite-life intangibles which cannot be offset by deferred tax assets.
NOTE 17– SUBSEQUENT EVENTS
On August 1, 2022, the Company would be deemedsuccessfully made the transition from Oracle Netsuite to Acumatica for its ERP system. During the past year, Oracle terminated our license agreement and requested we find an investment company, and that is not the Company’s focus or intention. The Company has begun working on a plan to liquidate, in an orderly fashion, assets as well as review business strategy to mitigate this issue, if it is determined these thresholds are exceeded.
On January 19, 2018 the base compensation of theAugust 9, 2022, T. Ronan Kennedy, our Chief ExecutiveFinancial Officer and Chief FinancialOperating Officer, of Level Brands, Inc., was increased. The Compensation Committeeappointed interim principal executive officer.
Effective August 9, 2022, Dr. Sybil Swift, a key employee of the BoardCompany, was appointed to serve on the board of Directors approveddirectors, filling a vacancy on the increasesboard, in each of their base compensation to $270,000 annually for Mr. Sumichrast and $180,000 annually for Mr. Elliott, retroactively effective foraccordance with the pay period beginning January 1, 2018. In addition, the Compensation Committee awarded Mr. Sumichrast and Mr. Elliott cash bonuses of $240,000 and $100,000, respectively. The Compensation Committeebylaws of the BoardCompany. Dr. Swift has served as the Company’s Vice President for Scientific & Regulatory Affairs and the co-chair of DirectorscbdMD Therapeutics, LLC, since March of 2021. She initially joined the Company as a Regulatory Consultant in Jan 2021. Prior to joining the Company, from Jan 2020 to Dec 2020, Dr. Swift was the Senior Vice President for Scientific & Regulatory Affairs at the Natural Products Association. Dr. Swift served in multiple roles during her 5 years within the U.S. Food and Drug Administration's Office of Dietary Supplement Programs; the last role was the Associate Director for Research and Strategy. As Associate Director, Dr. Swift directed the office’s research portfolio and was responsible for ensuring alignment between its science, research, compliance, enforcement, and policy initiatives. Dr. Swift was also the co-chair of the Botanical Safety Consortium, a collaboration between scientists from government agencies, academia and industry. Dr. Swift earned her Ph.D. in Nutrition has and M.S. in Kinesiology at Texas A&M University. She is presently negotiatingcurrently a member of the American Society for Nutrition, the Global Retailer & Manufacturer Alliance (GRMA), the Natural Products Association (NPA) ComPLI Committee, the Council for Federal Cannabis Regulation's (CFCR) SRAC. Dr. Swift is not considered an “independent director” within the meaning of Section 803 of the NYSE American Company Guide. As an employee director, she will not be appointed to any committee of our board of directors. She shall receive a restricted stock grant of 5,000 shares of our common stock and five options to purchase 30,000 shares of our common stock, exercisable at $0.568 per share. The restricted stock grant and options vest on the date of issuance. In keeping with the Company’s stated commitment to increase diversity on the board which it believes supports the Company’s core values and is an essential measure of sound governance and critical to a well-functioning board, the board of directors recognizes that Dr. Swift is a minority.
As previously reported, on December 20, 2018 we closed that certain Merger Agreement, as amended, by and among our company, our subsidiaries and Cure Based Development, LLC (“Cure Based Development”). Pursuant to the terms of new employment agreementsthe Merger Agreement, as partial merger consideration CBD Holding, LLC (“CBDH”), the then sole member of Cure Based Development, was entitled to receive (the “Earnout Rights”) up to 15,250,000 additional shares of our common stock (the “Earnout Shares”) upon the satisfaction of certain aggregate net revenue criteria within 60 months (marking periods) following the Closing Date. The possible issuance of the Earnout Shares was approved by our shareholders in April 2019. In February 2020 CBDH distributed the Earnout Rights to its members which included affiliates of Martin A. Sumichrast (our former officer and director) and R. Scott Coffman (a current member of our board of directors and former officer). Following the completion of the June 30, 2022 quarter within the third marking period, and in accordance with each executive.
The following discussion of our financial condition and results of operations for the first quarter of fiscal 2018three and nine months ended June 30, 2022 and the first quarter of fiscal 2017three and nine months ended June 30, 2021 should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements because of several factors, including those set forth under the Part I, Item 1A, Risk Factors and Business sections in our 20172021 10-K, this report, and our other filings with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report.
Our Company
General
We own and operate the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and cbdMD Botanicals. We believe that we are an industry leader producing and distributing broad spectrum CBD products and now full spectrum CBD products. Our mission is to be anenhance 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 licensing,broad spectrum formula utilizes one of the purest hemp extracts, containing CBD, CBG and CBN, while eliminating the presence of tetrahydrocannabinol (THC). Non-THC is defined as below the level of detection using validated scientific analytical methods. Our full spectrum products contain a variety of cannabinoids and terpenes in addition to CBD while maintaining trace amounts of THC that falls within the limits set in the 2018 Farm Bill. In addition to our core brands, we also operate cbdMD Therapeutics, LLC to capture the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications
Our cbdMD brand of products includes high-grade, premium CBD products, including CBD tinctures, CBD gummies, CBD topicals, CBD capsules, CBD bath bombs, and CBD sleep aids.
Our Paw CBD brand of products includes veterinarian-formulated products including tinctures, chews, topicals products in varying strengths and formulas. Paw CBD products have undergone the National Animal Safety Council’s rigorous audit and meet their Quality Seal standard.
Our cbdMD Botanicals brand of beauty and skincare products features facial oil and serum, toners, moisturizers, clear skin, facial masks, exfoliants and body care. cbdMD Botanicals is dedicated to creating clean CBD skin care products combining the best of Mother Nature with the precision of scientific innovation. All of our products are 100% cruelty-free and have no parabens, sulfates, or gluten – just pure botanical ingredients carefully crafted into gentle beauty products for all skin types.
cbdMD, Paw CBD and cbdMD Botanicals products are distributed through our e-commerce websites, third party e-commerce sites, select distributors and marketing and brand management company with a focus on lifestyle-based products. We champion a bold, unconventional image, and social consciousness for our company and our brands. Working closely with our Chairman Emeritus and Chief Brand Strategist, Kathy Ireland, the Chairman, CEO and Chief Designer of
Recent Developments
During the first quarter of 2022 we eliminated a number of product lines and SKUs as we work to streamline line our offering to higher velocity products and eliminate slow moving and aging SKUs.
During January 2022 we completed a renewal of our NSF cGMP quality certification and are now NSF 455 cGMP certified. Additionally, we earned the prestigious NSF product certification for our soft gel products and received the NSF certified for Sport for our 500mg and 1000mg sleep softgels and 1500mg and 3000mg soft gels.
During the second quarter of 2022 we took steps to right size our cost structure to our current revenue base and worked to remove over $10 million of annualized costs. We achieved this through a combination of reductions in payroll, renegotiating freight rates, rationalizing marketing expenses, reducing regulatory spend, exited our lab and overall tightening of all expenditures. We started enacting these steps during the second quarter resulting in sequential reductions in operating costs in both the second and third quarters of 2022. We expect continued roll off of expenses during the fourth quarter from the full quarter benefit of adjustments made during the third quarter coupled with additional rationalization we are working on.
During April 2022, in an effort to reduce costs, we sold our manufacturing equipment and outsourced certain products previously produced in-house. This change had a significant reduction in our fixed labor and overhead, positively impacting cost of goods sold, and increased flexibility in our supply chain and was part of our overall cost structure rationalization plan.
During May 2022 our Co-CEO and cbdMD brand Founder retired and we hired a new President.
The Company's management mandate is to achieve profitability and increase revenue by the end of the calendar year. Significant headway was made on cost controls over the last two quarter and we believe additional opportunities to improve our cost structure exist: we are working to lower our facility costs, we are taking further opportunities to improve freight rates, and we continue to reassess our marketing costs and make improvements to our product portfolio. In addition to these efforts, the Company continues to invest in a strong pipeline of accretive revenue opportunities.
Growth Strategies
We continued to pursue many strategies to grow our revenues and expand the portfolioscope of brands through strategic acquisitions.
● | Product Innovation:Our goal is to provide our customers superior functional based products with greater efficacy, absorption and claims. Weregularly assess and evaluate our product portfolio, and devote resources to ongoing research and development processes with the goal of expanding our product offerings to meet these expanding consumer demands. We have a robust pipeline of products set to launch during fiscal 2022. In February 2022 we launched our line of functional gummies and curcumin capsules, followed by an initial rollout of several full spectrum gummies starting in March 2022 and a 2018 Farm Act compliant hemp extracted Delta 9 product assortment in April 2022, and our mood and focus products in May 2022. | ||
● | Expand our revenue channels:We continued to pursue relationships with a number of key traditional retail accounts and believe our top brand awareness, and effective marketing position us as the CBD partner for key traditional retail accounts as this channel has continued to normalize. During the second quarter we added a number of our top selling ingestible SKUs throughout GNC’s retail footprint. We continue to have discussions with key retailers and have expanded our sales organization to include deep channel-specific experience, and expect to have additional announcement in | calendar 2022. | |
● | International Expansion:We continue to explore sales into markets outside of the United States. Our | the EU. based warehouse. During August 2021 we signed an exclusive agreement to enter the Israeli Market with IM Cannabis Corp. a multi-country operator in the medical and adult- use recreational cannabis sector with operations in Israel, Germany and Canada. In March 2022, the Israeli Health Ministry announced it has begun the process of exempting CBD from its banned substances list and will be permitting CBD to be included into food and cosmetic products. We anticipate additional international announcements before the end of the calendar year. | |
● | Expand our Additional Brands:During fiscal 2021 we took additional steps to | ||
● | Maintain our | ||
● | Acquisitions:We seek to acquire (i) brands that we believe we can optimize through our internal digital marketing agency and fulfillment platform to increase our total addressable market or (ii) technology or intellectual property that will further enhance our product portfolio and create product differentiation. We may acquire brands directly or through joint ventures if opportunities arise that we believe are in our best interest. In assessing potential acquisitions or investments, we expect to primarily utilize our internal resources to evaluate growth potential, the strength of the target brand, offerings of the target, as well as possible efficiencies to gain. We believe that this approach will allow us to effectively screen consumer brand candidates and strategically evaluate acquisition targets and efficiently complete due diligence for potential acquisitions. We are currently not a party to any agreements or understandings regarding the acquisition of additional brands or companies and there are no assurances we will be successful in expanding our brand portfolio. |
Results of operations
The following tables provide certain selected consolidated financial information for the periods presented:
First Quarter 2018 | First Quarter 2017 | Change | |
(unaudited) | (unaudited) | ||
Sales | $448,793 | $422,173 | |
Sales related party | 254,545 | - | |
Total gross sales | $703,338 | $422,173 | |
Allowances | (15,582) | (222,336) | |
Net sales | $433,211 | $199,837 | |
Net sales related party | 254,545 | - | |
Total net sales | $687,756 | $199,837 | |
Costs of sales | 228,124 | 162,746 | |
Gross profit as a percentage of net sales | 66.8% | 18.6% | |
Operating expenses | 1,687,644 | 600,266 | |
Other expenses | 69,770 | 132,320 | |
Net loss | $(1,264,782) | $(697,495) | |
Net loss attributable to Level Brands, Inc. common shareholders | $(1,132,928) | $(634,479) |
Three Months Ended June 30, | ||||||||||||
2022 | 2021 | Change | ||||||||||
Total net sales | $ | 8,592,893 | $ | 10,560,523 | $ | (1,967,630 | ) | |||||
Cost of sales | 2,660,185 | 3,370,952 | (710,767 | ) | ||||||||
Gross profit as a percentage of net sales | 69.0 | % | 68.1 | % | 1.0 | % | ||||||
Operating expenses | 8,282,931 | 13,865,191 | (5,582,260 | ) | ||||||||
Impairment of goodwill and other intangible assets | 30,776,436 | - | 30,776,436 | |||||||||
Operating income from operations | (33,126,659 | ) | (6,675,620 | ) | (26,451,039 | ) | ||||||
(Increase) decrease on contingent liability | 1,943,000 | 6,871,000 | (4,928,000 | ) | ||||||||
Net (loss) income before taxes | (31,634,143 | ) | 1,640,288 | (33,274,431 | ) | |||||||
Net (loss) income attributable to cbdMD Inc. common shareholders | $ | (32,634,644 | ) | $ | 977,007 | $ | (33,611,651 | ) |
Nine Months Ended June 30, | ||||||||||||
2022 | 2021 | Change | ||||||||||
Total net sales | $ | 27,543,601 | $ | 34,687,436 | $ | (7,143,835 | ) | |||||
Cost of sales | 10,176,085 | 10,444,353 | (268,268 | ) | ||||||||
Gross profit as a percentage of net sales | 63.1 | % | 69.9 | % | -6.8 | % | ||||||
Operating expenses | 31,690,915 | 36,846,371 | (5,155,456 | ) | ||||||||
Impairment of goodwill and other intangible assets | 48,959,721 | - | 48,959,721 | |||||||||
Operating income from operations | (63,283,120 | ) | (12,603,288 | ) | (50,679,832 | ) | ||||||
(Increase) decrease on contingent liability | 8,246,000 | (10,500,000 | ) | 18,746,000 | ||||||||
Net loss before taxes | (55,453,289 | ) | (21,133,808 | ) | (34,319,481 | ) | ||||||
Net loss attributable to cbdMD Inc. common shareholders | $ | (58,454,792 | ) | $ | (21,589,418 | ) | $ | (36,865,374 | ) |
We record product sales primarily through two main delivery channels, direct to consumers via our E-commerce sales and direct to wholesalers utilizing our internal sales team. The following table provides information on the contribution of net sales by segmenttype of sale to our total net sales.
First Quarter 2018 | % of total | First Quarter 2017 | % of total | |
(unaudited) | (unaudited) | |||
Professional products division | $29,070 | 4.2% | $199,837 | 100% |
Licensing division | 37,162 | 5.4% | 0 | % |
Entertainment division | 621,524 | 90.4% | 0 | % |
Total net sales | $687,756 | 100% | $199,837 | 100% |
Three Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2022 | % of total | 2021 | % of total | |||||||||||||
Wholesale sales | $ | 2,079,592 | 24.2 | % | $ | 2,740,523 | 26.0 | % | ||||||||
E-commerce sales | 6,513,301 | 75.8 | % | 7,820,000 | 74.0 | % | ||||||||||
Total Net Sales | $ | 8,592,893 | $ | 10,560,523 |
Nine Months | Nine Months | |||||||||||||||
Ended | Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2022 | % of total | 2021 | % of total | |||||||||||||
Wholesale sales | $ | 7,382,880 | 26.8 | % | $ | 9,049,068 | 26.1 | % | ||||||||
E-commerce sales | 20,160,721 | 73.2 | % | 25,638,368 | 73.9 | % | ||||||||||
Total Net Sales | $ | 27,543,601 | $ | 34,687,436 |
Net Sales
We have entered into agreements where we have accepted common stock, options or warrants (an equity position). This practice has an impact on immediate cash flow and these equities could be subject to adjustment which could result in future period losses. In the first quarter of fiscal 2018, of ourhad total net sales of $687,756 we have received compensation in the form of equity positions totaling $454,500,$8,592,893 and we did not receive any equity positions in the first quarter of fiscal 2017.
We had total net sales of $27,543,599 and $34,687,436 for the nine months ended June 30, 2022 and 2021 respectively, resulting in a year over year decrease in net sales of $7.1 million, primarily attributable to primary reliance upon one distribution channel combined with an ineffective post launch support effort.a $1.7 million, or 20.4% reduction in wholesale sales and reduction in e-commerce sales of $5.5 million. We have made a strategic decisioncontinue to increase our distributors and have added twoinvest in new distributors in the first quarter of fiscal 2018, and are targeting to add additional distributors while also assessing other sales channels including large retail and online channels as well as licensing opportunities. In addition, we have added independent sales representatives and revamped our education team and process. We believe these changes will support the product line and sales process better, although no assurance can be given asrelationships and work to when and if our product line will receive more acceptance inexpand the marketplace.
Cost of sales
Our cost of sales includes costs associated with distribution, external fill and labor expense, components, manufacturing overhead, third party providers, and freight for our professional products divisions, and includes labor and third party service providers for our licensing and entertainment divisions.product sales. Our cost of sales as a percentage of net sales was 33.2%31.0% and 31.9% for three months ended June 30, 2022 and 2021, respectively and 36.9% and 30.1% for the nine months ended June 30, 2022 and 2021, respectively. Year over year, the reduction in our cost of sales for the June 30, 2022 quarter is a result of operational gains from the elimination of overhead and lower freight costs that were partially offset by increase in unabsorbed overhead resulting from the $1.9 million drop in revenues. The decrease in our cost of sales for the nine months ended June 30, 2022 over prior year is also the result of operational gains from the elimination of overhead and lower freight costs, partially offset by an increase in unabsorbed overhead resulting from the $7.4 million drop in revenues, as well as a one-time charge of $878,142 related to the rationalization of a number of SKUs and product lines during the first quarter of fiscal 2018 as compared to 81.4% in2022.
The changes made during the first quarter of fiscal 2017. In order to explain the change in cost of sales we must account for the two new divisionslast quarters have eliminated significant fixed overhead and lookwere aimed at each division separately to see the cumulative impact.
Operating expenses
Our principal operating expenses include wages,staff related expenses, advertising travel, rent, professional service fees, and(which includes expenses related to industry distribution and trade shows. Ourshows), sponsorships, affiliate commissions, merchant fees, technology, travel, rent, professional service fees, and business insurance expenses.
Consolidated Operating Expenses
The following tables provide information on our operating expenses for the three and nine months ended June 30, 2022 and 2021:
Three Months | Three Months | |||||||||||
Ended | Ended | |||||||||||
June 30, | June 30, | |||||||||||
2022 | 2021 | Change | ||||||||||
Staff related expense | $ | 2,874,938 | $ | 4,455,640 | $ | (1,580,702 | ) | |||||
Accounting/legal expense | 262,307 | 237,357 | 24,950 | |||||||||
Professional outside services | 237,877 | 304,570 | (66,693 | ) | ||||||||
Advertising/marketing/social media/events/tradeshows | 3,415,575 | 4,796,929 | (1,381,354 | ) | ||||||||
Sponsorships | 227,084 | 520,208 | (293,124 | ) | ||||||||
Affiliate commissions | 287,026 | 482,026 | (195,000 | ) | ||||||||
Merchant fees | 255,956 | 496,963 | (241,007 | ) | ||||||||
R&D and regulatory | 113,751 | 674,874 | (561,123 | ) | ||||||||
Non-cash stock compensation | (938,285 | ) | 959,319 | (1,897,604 | ) | |||||||
Intangibles Amortization | 277,354 | - | 277,354 | |||||||||
Depreciation | 158,556 | 246,533 | (87,977 | ) | ||||||||
All other expenses | 1,110,792 | 690,772 | 420,020 | |||||||||
Totals | $ | 8,282,931 | $ | 13,865,191 | $ | (5,582,260 | ) |
Nine Months | Nine Months | |||||||||||
Ended | Ended | |||||||||||
June 30, | June 30, | |||||||||||
2022 | 2021 | Change | ||||||||||
Staff related expense | $ | 10,119,111 | $ | 12,076,025 | $ | (1,956,914 | ) | |||||
Accounting/legal expense | 828,016 | 772,921 | 55,095 | |||||||||
Professional outside services | 648,764 | 899,195 | (250,431 | ) | ||||||||
Advertising/marketing/social media/events/tradeshows | 11,839,584 | 11,856,233 | (16,649 | ) | ||||||||
Sponsorships | 1,012,767 | 1,629,637 | (616,870 | ) | ||||||||
Affiliate commissions | 853,559 | 1,354,102 | (500,543 | ) | ||||||||
Merchant fees | 751,328 | 1,618,100 | (866,772 | ) | ||||||||
R&D and regulatory | 550,268 | 1,060,605 | (510,337 | ) | ||||||||
Non-cash stock compensation | 851,517 | 2,049,326 | (1,197,809 | ) | ||||||||
Intangibles Amortization | 607,025 | - | 607,025 | |||||||||
Depreciation | 770,336 | 719,856 | 50,480 | |||||||||
All other expenses | 2,858,641 | 2,810,371 | 48,270 | |||||||||
Totals | $ | 31,690,915 | $ | 36,846,371 | $ | (5,155,456 | ) |
Our overall operating expenses decreased by $5,582,260 or 40% three months ended June 30, 2022 over the three months ended June 30, 2021 and decreased $5,155,456 or 14% for the nine months ended June 30, 2022 versus the nine months ended June 30, 2021. The quarter over quarter decrease was primarily driven by management's ongoing efforts to reduce our cost structure including decreases in staff related expenses ($1.58 million), advertising, marketing, sponsorships and affiliate commission expenses ($1.89 million) well as a merchant processing fees ($241,000) attributable to (i) on boarding new processors during the third quarter of 2021 at much lower rates as well as (ii) lower volume, reduction in stock expense ($1,897,142) which includes $1,485,142 of contra-expense for stock compensation related to forfeited RSUs and options, and R&D and regulatory spend ($561,000). These decreases were offset by an increase in other expenses ($420,000) and an increase in the amortization of intangibles ($277,000) that increased this quarter as we began amortizing our trade names as referenced in Note 5. The reduction of $3.67 million for the nine months ended June 30, 2022 versus June 30, 2021 is due to $1,687,644an reduction in compensation ($1.9 million), advertising, marketing, sponsorships and affiliate commission expenses ($1.13 million), merchant fees ($867,000), and R&D and Regulatory ($510,000), partially offset by increase in stock compensation ($287,000) as well as depreciation and amortization ($862,000).
Excluding non-cash depreciation, intangible amortization, and non-cash stock expenses, we reduced our adjusted operating expenses from $12.7 million to $8.8 million for the three months ended June 30, 2021 and June 30, 2022 respectively and from $34.1 million to $29.2 million the nine months ended June 30, 2021 and June 30, 2022 respectively.
While our goal is to continue to improve year-over-year performance, management is also very much focused on improving the sequential performance and cash flow of the business. Excluding the stock compensation expense reversal of $1,485,142 related to forfeited RSUs and stock options, sequentially we reduced our expenses by $1.68 million. We reduced marketing expense by over $1.0 million while increasing traffic to our websites. Marketing costs will continue to come down during the fourth quarter as we rationalize expiring influencer contracts and focus on the most profitable customer acquisition and retention activities. In the third quarter of 2022, we took further steps to reduce our overall headcount, including the outsourcing of our production facility, resulting in a reduction of of 16 positions (105 employees by June 30, 2022). These steps coupled with the full quarter benefit of reductions during the second quarter of fiscal 2022 resulted in over $608,000 in sequential payroll cost savings. Since the reductions occurred over the course of the quarter, we expect to realize additional savings during the fourth quarter of fiscal 2022 as we benefit from a full quarter of savings. We are active in working to rightsize our corporate office and warehouse and believe significant additional savings exist should we be successful in our efforts. We continue to pursue all avenues that will help lower our costs while maintaining our quality, efficacy and service for our customers; position us for revenue growth; and promote a culture of performance and success.
Corporate overhead
Included in our consolidated operating expenses are expenses associated with our corporate overhead which are not allocated to the operating business unit, including (i) staff related expenses; (ii) accounting and legal expenses; (iii) professional outside services; (iv) travel and entertainment expenses; (v) rent; (vi) business insurance; and (vii) non-cash stock compensation expense.
The following tables provide information on our approximate corporate overhead for the three and nine months ended June 30, 2022 and 2021:
Three Months | Three Months | |||||||||||
Ended | Ended | |||||||||||
June 30, | June 30, | |||||||||||
2022 | 2021 | Change | ||||||||||
Staff related expense | $ | 288,570 | $ | 432,844 | $ | (144,274 | ) | |||||
Accounting/Legal expense | 195,056 | 190,199 | 4,857 | |||||||||
Professional outside services | 119,330 | 100,370 | 18,960 | |||||||||
Travel expense | 2,526 | 6,972 | (4,446 | ) | ||||||||
Business insurance | 167,387 | 155,838 | 11,549 | |||||||||
Non-cash stock compensation | (938,285 | ) | 959,319 | (1,897,604 | ) | |||||||
Totals | $ | (165,417 | ) | $ | 1,845,542 | $ | (2,010,959 | ) |
Nine Months | Nine Months | |||||||||||
Ended | Ended | |||||||||||
June 30, | June 30, | |||||||||||
2022 | 2021 | Change | ||||||||||
Staff related expense | $ | 917,144 | $ | 1,283,240 | $ | (366,096 | ) | |||||
Accounting/legal expense | 578,356 | 655,939 | (77,584 | ) | ||||||||
Professional outside services | 282,030 | 272,055 | 9,975 | |||||||||
Travel expense | 3,933 | 6,974 | (3,041 | ) | ||||||||
Business insurance | 530,742 | 425,704 | 105,038 | |||||||||
Non-cash stock compensation | 851,517 | 2,049,326 | (1,197,809 | ) | ||||||||
Totals | $ | 3,163,721 | $ | 4,693,238 | $ | (1,529,517 | ) |
Excluding the $1,485,142 contra-expense for stock compensation related to forfeited RSUs and stock options, our corporate operating expenses are down quarter over quarter and year over year as a result of our ongoing efforts to reduce our cost structure across the board.
The corporate operating expenses are primarily related to the ongoing public company related activities.
Therapeutics Overhead
Included in our consolidated operating expenses are expenses associated with Therapeutics including staff related expenses and R&D and regulatory expenses. The Therapeutic operating expenses include research and development activities for therapeutic applications.
The following tables provide information on our approximate corporate overhead for the three and nine months ended June 30, 2022 and 2021:
Three Months | Three Months | |||||||||||
Ended | Ended | |||||||||||
June 30, | June 30, | |||||||||||
2022 | 2021 | Change | ||||||||||
Staff related expense | $ | 80,346 | $ | 90,041 | $ | (9,695 | ) | |||||
Accounting/legal expense | 3,119 | $ | - | 3,119 | ||||||||
R&D and Regulatory | 112,364 | 615,497 | (503,133 | ) | ||||||||
Totals | $ | 195,829 | $ | 705,538 | $ | (509,709 | ) |
Nine Months | Nine Months | |||||||||||
Ended | Ended | |||||||||||
June 30, | June 30, | |||||||||||
2022 | 2021 | Change | ||||||||||
Staff related expense | $ | 251,787 | $ | 90,041 | $ | 161,746 | ||||||
Accounting/legal expense | 3,119 | $ | - | 3,119 | ||||||||
R&D and Regulatory | 482,579 | 615,497 | (132,918 | ) | ||||||||
Totals | $ | 737,485 | $ | 705,538 | $ | 31,947 |
The Therapeutic operating expenses include research and development activities for therapeutic applications. This division was formed during the third quarter of fiscal 2021. Our human and pet clinical studies remain underway and we anticipate initial results during the fourth quarter of 2022 and the first quarter of fiscal 2018 from $600,2662023.
Goodwill Impairment
We had goodwill at December 31, 2021 of $56,670,970. We perform a Step 0 goodwill impairment analysis annually following the steps laid out in ASC 350-20-35-3C. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of goodwill. From time to time we also evaluate goodwill impairment on a quarterly basis if any triggering events have occurred that would require such analysis. For the three months ended December 31, 2021, we performed a Step 0 goodwill impairment analysis on consolidated goodwill and determined that a triggering event had occurred to necessitate performing the quantitative impairment test. After performing the quantitative impairment test in accordance with ASC 350-20-35-3C, we determined that goodwill was impaired by $13,898,285. We recorded this impairment to reduce total goodwill on its condensed consolidated balance sheets and has recorded the corresponding impairment expense on its condensed consolidated statement of operations as of December 31, 2021. We performed the same analysis as of June 30, 2022 and determined that goodwill was impaired by $30,776,436. We has recorded this impairment to reduce total goodwill on its condensed consolidated balance sheets and has recorded the corresponding impairment expense on its condensed consolidated statement of operations as of June 30, 2022.
Other income and other non-operating expenses
We also record income and expenses associated with non-operating items. The material components of those are set forth below.
Realized and unrealized gain (loss) on marketable and other securities
We value investments in marketable securities at fair value and record a gain or loss upon sale at each period in realized and unrealized gain (loss) on marketable securities. For the three months ended June 30, 2022 and 2021, we recorded $0 and $2,852, respectively, and for the firstnine months ended June 30, 2022 and 2021 we recorded $(33,350) and $545,562, respectively, including impairments. The realized loss in 2022 was a result of our shares in Isodiol being delisted while the realized gain in 2021 was driven by the sale of our investment in Formula Four Beverages, Inc. that was previously written to zero in the prior year based on prior information related to the company’s performance and COVID-19 impacts.
Restructuring expenses
During the quarter the Company entered into a separating agreement with its former CEO. The Company booked a onetime restructuring charge of $602,000 related to the cash payments required by separation agreement. This expense was booked as outside of operating expenses and included in a one of our other expenses outside of operating income.
Gain on the sale of assets
As mentioned in Note 2, the Company sold it manufacturing assets during the quarter for a total value of $1.8 million. The Company realized a net book gain of $88,000 after the net depreciated value and expenses associated with the sale.
Decrease in contingent liability
As described in Note 6 to the notes to the consolidated financial statements appearing elsewhere in this report, the earn-out provision for the Earnout Shares is accounted for and recorded as a contingent liability with increases in the liability recorded as non-cash other expense and decreases in the liability recorded as non- cash other income. The value of the non-cash contingent liability was $702,000 at June 30, 2022, as compared to $16,200,000 at September 30, 2021, respectively. First quarter adjustment to the the contingent liability comprised of $366,841 associated with the decrease of the value of the Third Marking Period shares prior to their issuance in December 2021, while the remaining $5,329,159 is associated with the decrease in the remaining contingent shares as of December 31, 2021. Second quarter adjustment to the contingent liability comprised of $41,916 associated with the decrease of the value of the Third Marking Period shares prior to their issuance in March 2022, while the remaining $246,915 is associated with the decrease in the remaining contingent shares as of March 31, 2022.During the third quarter of fiscal 2017,2022 we had a decrease in value of $1,943,000 to the contingent liability which is recorded as other income in our consolidated statement of operations for the third quarter of fiscal year 2022. The decrease in value is comprised of $90,792 associated with an increase of $1,087,378 or 181.15%. This increasethe value of the Fourth Marking Period shares prior to their issuance in May 2022, while the remaining $1,839,2072 is directly related toassociated with the changesdecrease in the companyremaining contingent shares as it increased from one operating business subsidiary to fourof June 30, 2022. We utilize both a market approach and builta Monte Carlo simulation in valuing the infrastructure to supportcontingent liability and a key input in both of those methods is the overall company from a growth perspective as well as to operate as a public entity. Specifically, duringstock price. The main driver of the first quarterchange in the value of fiscal 2018the contingent liability was the decrease of our common stock price, which was $0.44 at June 30, 2022 as compared to the first quarter of fiscal 2017 our staff related expenses increased approximately $458,000 as we added executive management, and other staff over our new licensing and entertainment divisions, and other staff support. In addition, our accounting and legal expenses increased by approximately $189,000 as we have ongoing needs and costs associated with being a public company as well as additional professional fees related to various contracts we undertake. In addition, during the first quarter of fiscal 2018 as compared to the first quarter of fiscal 2017, expenses related to social media, public relations, advertising and marketing process, tradeshows, and promotions increased approximately $259,000, our travel and entertainment expenses increased approximately $23,000, and our rent expense increased $10,000. The increase during first quarter of fiscal 2018 was partially offset by certain decreases in operating expenses during such period as our professional outside services related to product formulation, design, marketing and tradeshow expenses decreased approximately by $48,000 and commissions paid to an outside sales consultant decreased approximately $15,000. During the first quarter of fiscal 2018 we had an increase in non-cash expense of $7,441 related to the issuance of restricted stock awards to our board members as well as for options issued to employees.
As described in Note 6 to the notes to the consolidated financial statements appearing elsewhere in the report, the earn-out provision for the first quarterTwenty Two Earnout Shares is accounted for and recorded as a contingent liability with increases in the liability recorded as non-cash other expense and decreases in the liability recorded as non-cash other income. The value of fiscal 2018. Operating expenses include staff related expenses of $36,000, accounting and legal expenses of approximately $84,000, and expenses related to social media, public relations, advertising, marketing and tradeshows of approximately $108,000. In addition, we allocated internal management fees from corporate of $50,000 to this division. As with our licensing division, we expect to continue to allocate corporate management fees to this division in future periods, however, the amount of such fees will vary depending upon the amount of time devoted by our senior management to this division. The corporate charges eliminate upon consolidation of our financial statements.
Liquidity and capital resources
We had cash and cash equivalents on hand of $8,817,856$9,553,670 and working capital of $11,282,711$14,133,054 at December 31, 2017June 30, 2022 as compared to cash and cash equivalents on hand of $284,246$26,411,424 and working capital of $2,170,154$29,595,214 at September 30, 2017.2021. Our current assets increased 226%decreased approximately 45.6% at December 31, 2017June 30, 2022 from September 30, 2017, and2021, which is primarily attributable to an increase of cash, marketable and other securities, prepaid expenses, and offset by a decrease in all accounts receivables, note receivable related party, and deferred IPO costs.cash used to fund operations. Our current liabilities decreased 49.5%by 17.2% at December 31, 2017June 30, 2022 from September 30, 2017. This decrease2021, and is primarily attributable to decreases in accounts payable and accrued expenses which was offset by an increase in deferred revenue. Both the changes in our current assets and current liabilities are also reflective of the further development of our business during the first quarter of fiscal 2018 and the impact of completion of an initial public offering. In November 2017 we completed an IPO and as of December 31, 2017 we have recorded $954,421 of deferred IPO costs which were directly attributable to the offering and have been charged against the gross proceeds of the offering as a reduction of additional paid-in capital. In July 2017 we sold, to a related party, an equity position in a customer that we had received as compensation for services and we received a portion in cash and the balance as a short term note receivable for $275,000.
During the first quarter of fiscal 2018three and nine months ended June 30, 2022 we used cash primarily to fund our operating loss in addition to increases in our marketable and other securities. We offer net 30 day terms and our receivables generally turn every 41 days.
We do not have any commitments for capital expenditures. We have sufficienta commitment for cumulative cash dividends at an annual rate of 8% payable monthly in arrears for the prior month to our preferred shareholders. We have multiple endorsement or sponsorship agreements for varying time periods up through December 2022 and provide for financial commitments from the Company based on performance/participation (see Note 11 Commitments and Contingencies).
While the Company is taking strong action and believes that it can execute it's strategy and path to profitability within it's balance sheet, and in its ability to raise additional funds, there can be no assurances to that effect. The Company’s working capital position may not be sufficient to fund oursupport the Company’s daily operations for the twelve months subsequent to the issuance of these quarterly financial statements. The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability and the ability to fund our expected growth.
Our goal from a liquidity perspective however, is to use operating cash flows to fund day to day operations. To date,operations and we have not met this goal as cash flow from operations has been a net use of $1,820,919$3.7 million and $528,637$4.6 million (excluding the reclassification of $939,826 of the SBA loan to short term liabilities) for the firstthree months ended June 30, 2022 and 2021, respectively and $16.8 million and $8.3 million for the nine months ended June 30, 2022 and 2021, respectively. Management believes the quarterly cash consumption will continue to improve in subsequent quarters and we have sufficient capital to execute our plan to profitability.
Adjusted EBITDA
Adjusted EBITDA for the three and nine months ended June 30, 2022 and June 30, 2021 is as follows:
Three months | Three months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
(Unaudited) | ||||||||||||||||
GAAP (loss) from operations | $ | (33,126,659 | ) | $ | (6,675,620 | ) | $ | (63,283,120 | ) | $ | (12,603,288 | ) | ||||
Adjustments: | ||||||||||||||||
Depreciation & Amortization | 435,910 | 246,533 | 1,377,361 | 719,856 | ||||||||||||
Employee and director stock compensation (1) | (938,285) | 959,319 | 851,517 | 2,049,326 | ||||||||||||
Other non-cash stock compensation for services (2) | - | 28,650 | - | 97,721 | ||||||||||||
Inventory adjustment(3) | - | 50,000 | 878,142 | 50,000 | ||||||||||||
Write down of legacy accounts receivable (4) | - | - | - | - | ||||||||||||
Impairment of Goodwill and other intangible assets (5) | 30,776,436 | 48,805,436 | - | |||||||||||||
Accrual for severance | 107,261 | - | 129,761 | 703,022 | ||||||||||||
Accrual / expenses for discretionary bonus | - | 150,000 | 150,000 | 450,000 | ||||||||||||
Non-GAAP adjusted (loss) from operations | $ | (2,745,337 | ) | $ | (5,241,118 | ) | $ | (11,090,9031 | ) | $ | (8,533,363 | ) | ||||
(1) Represents non-cash expense related to options, warrants, restricted stock expenses that have been amortized during the period. |
(2) Represents non-cash expense related to options, warrants, restricted stock expenses that have been amortized during the period. |
(3) Represents an operating expense related to inventory loss related to regulatory changes impacting labels and packaging and obsolete/expired inventory. |
(4) Write down of legacy accounts receivable. |
(5) Represents non-cash goodwill impairment of $13,744,000 and impairment of the cbdMD trademark of $4,285,000. |
Adjusted EBITDA for the quarter ending June 2022 improved by over $2.5 million over prior year as a result of over $4.0 million in improvement operating costs that were partially offset by a reduction in revenue and corresponding gross profit. Year to date Adjusted EBITDA declined by $2.5 million mostly related to a reduction in gross profit that was partially offset by reduction in operating costs. This is the fourth consecutive quarter of fiscal 2018Adjusted EBITDA improvement and a $1 million improvement over the first quarterprior sequential quarter. Management expects continuous improvement in future quarters as a result of fiscal 2017, respectively. We continue to assess all areas of operations for costongoing improvements in operating costs and efficiencies as we continue to mature.
Critical accounting policies
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“US GAAP”)GAAP and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to our consolidated financial statements appearing elsewhere in this report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.
Please see Part II, Item 7 – Critical Accounting Policies appearing in our 20172021 10-K for the critical accounting policies we believe involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.
Recent accounting pronouncements
Please see Note 1 – Organization and May 2016,Summary of Significant Accounting Policies appearing in the Financial Accounting Standards Board (FASB) issued ASU 2014-09,
Off balance sheet arrangements
As of the date of this report, we do not have anyno undisclosed off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance“off-balance sheet arrangement"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.
Not applicable for a smaller reporting company.
Evaluation of Disclosure Controls and Procedures
. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this report, ourChanges in Internal Control overOver Financial Reporting.
None.
We are materially dependent upon our relationships with kathy ireland® Worldwide and certaindesire to take advantage of its affiliates. Our advisory agreements with certainthe “safe harbor” provisions of these affiliates have expiredthe Private Securities Litigation Reform Act of 1995. Accordingly, we incorporate by their terms. If we are unable to enter into new advisory agreements with these individuals, we would be deprived of their services. In that event, our business could be materially adversely impacted.
Except for those unregistered securities previously disclosed in reports filed with the SEC during the period covered by this report, we issued 6,667have not sold any securities without registration under the Securities Act during the period covered by this report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable to our Company’s operations.
On August 9, 2022, T. Ronan Kennedy, our Chief Financial Officer and Chief Operating Officer, was appointed interim principal executive officer.
Effective August 9, 2022, Dr. Sybil Swift, a key employee of the Company, was appointed to serve on the board of directors, filling a vacancy on the board, in accordance with the bylaws of the Company. Dr. Swift has served as the Company’s Vice President for Scientific & Regulatory Affairs and the co-chair of cbdMD Therapeutics, LLC, since March of 2021. She initially joined the Company as a Regulatory Consultant in Jan 2021. Prior to joining the Company, from Jan 2020 to Dec 2020, Dr. Swift was the Senior Vice President for Scientific & Regulatory Affairs at the Natural Products Association. Dr. Swift served in multiple roles during her 5 years within the U.S. Food and Drug Administration's Office of Dietary Supplement Programs; the last role was the Associate Director for Research and Strategy. As Associate Director, Dr. Swift directed the office’s research portfolio and was responsible for ensuring alignment between its science, research, compliance, enforcement, and policy initiatives. Dr. Swift was also the co-chair of the Botanical Safety Consortium, a collaboration between scientists from government agencies, academia and industry. Dr. Swift earned her Ph.D. in Nutrition has and M.S. in Kinesiology at Texas A&M University. She is currently a member of the American Society for Nutrition, the Global Retailer & Manufacturer Alliance (GRMA), the Natural Products Association (NPA) ComPLI Committee, the Council for Federal Cannabis Regulation's (CFCR) SRAC. Dr. Swift is not considered an “independent director” within the meaning of Section 803 of the NYSE American Company Guide. As an employee director, she will not be appointed to any committee of our board of directors. She shall receive a restricted stock grant of 5,000 shares of our common stock valuedand five options to purchase 30,000 shares of our common stock, exercisable at $37,002$0.568 per share. The restricted stock grant and options vest on the date of issuance. In keeping with the Company’s stated commitment to increase diversity on the board which it believes supports the Company’s core values and is an essential measure of sound governance and critical to a well-functioning board, the board of directors recognizes that Dr. Swift is a minority.
As previously reported, on December 20, 2018 we closed that certain Merger Agreement, as compensationamended, by and among our company, our subsidiaries and Cure Based Development, LLC (“Cure Based Development”). Pursuant to the terms of the Merger Agreement, as partial merger consideration CBD Holding, LLC (“CBDH”), the then sole member of Cure Based Development, was entitled to receive (the “Earnout Rights”) up to 15,250,000 additional shares of our common stock (the “Earnout Shares”) upon the satisfaction of certain aggregate net revenue criteria within 60 months (marking periods) following the Closing Date. The possible issuance of the Earnout Shares was approved by our shareholders in April 2019. In February 2020 CBDH distributed the Earnout Rights to its members which included affiliates of Martin A. Sumichrast (our former officer and director) and R. Scott Coffman (a current member of our board of directors and former officer). Following the completion of the June 30, 2022 quarter within the third marking period, and in accordance with the terms of the Merger Agreement, as amended, we determined that the net revenues for services to us.the June 30, 2022 quarter within the third marking period were $8,592,892 and on August 9, 2022 we issued the members an aggregate of 409,505 shares of our common stock. The recipient was a sophisticated or otherwiserecipients were accredited investor with access to businessinvestors and financial information on our company. The issuance wasthe issuances were exempt from registration under the Securities Act of 1933, as amended, in reliance on an exemption provided by Section 4(a)(2) of that act.
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Document and include in Exhibit 101) | Filed |
+ Exhibits and/or schedules have been omitted. The Company hereby agrees to furnish to the staff of the Securities and Exchange Commission upon request any omitted information.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
cbdMD, INC. | |||
By: | /s/ | ||
T. Ronan Kennedy, interim Principal Executive Officer | |||
August 11, 2022 | By: | /s/ T. Ronan Kennedy | |
T. Ronan Kennedy, Chief Financial Officer, | |||
principal financial and accounting officer |