UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| |
| For the quarterly period ended |
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| |
| For the transition period from __________________ to _______________ |
Commission file number
| cbdMD, INC. |
| (Exact Name of Registrant as Specified in its Charter) |
| | | |
| State or Other Jurisdiction of Incorporation or Organization | I.R.S. Employer Identification No. | |
| | ||
| Address of Principal Executive Offices | Zip Code |
Registrant’s Telephone Number, Including Area Code
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
| | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| | ☒ | Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Page No |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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| Unregistered Sales of Equity Securities and Use of Proceeds. |
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OTHER PERTINENT INFORMATION
Unless the context otherwise indicates, when used in this report, the terms the “Company,” “cbdMD, “we,” “us, “our” and similar terms refer to cbdMD, Inc., a North Carolina corporation formerly known as Level Brands, Inc., and our subsidiaries CBD Industries LLC, a North Carolina limited liability company formerly known as cbdMD LLC, which we refer to as “CBDI”, Paw CBD, Inc., a North Carolina corporation which we refer to as “Paw CBD”, Proline Global, LLC, a North Carolina limited liability company which we refer to as "Proline", and cbdMD Therapeutics LLC, a North Carolina limited liability company which we refer to as “Therapeutics”. In addition, “fiscal 2023” refers to the year ended September 30, 2023, “fiscal 2024” refers to the fiscal year ending September 30, 2024, “first quarter of 2023” refers to the three months ended December 31, 2022, “first quarter of 2024” refers to the three months ended December 31, 2023. "second quarter of 2023" refers to the three months ended March 31, 2023, and "second quarter of 2024" refers to the three months ended March 31, 2024.
On April 12, 2023, the Company effected a reverse stock split at a ratio of one-for-forty-five, effective as of April 24, 2023 (the "Reverse Stock Split"). Unless otherwise indicated, all share numbers in this report, including shares of common stock and all securities convertible into, or exercisable for, shares of common stock, give effect to the Reverse Stock Split.
We maintain a corporate website at www.cbdmd.com. The information contained on our corporate website and our various social media platforms are not part of this report.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:
| ● |
material risks associated with our overall business, including: |
| ● |
our history of losses, potential liquidity concerns, and our ability to continue as a going concern; |
| ● |
our reliance to market to key digital channels; |
| ● |
our ability to acquire new customers at a profitable rate; |
| ● |
our reliance on third party raw material suppliers and manufacturers; and |
| ● |
our reliance on third party compliance with our supplier verification program and testing protocols |
| ● |
material risks associated with regulatory environment for CBD, including: |
| ● |
federal laws as well as FDA or DEA interpretation of existing regulation; |
| ● |
state laws pertaining to industrial hemp and their derivatives; |
| ● |
costs to us for compliance with laws and the risks of increased litigation; and |
| ● |
possible changes in the use of CBD. |
| ● |
material risks associated with the ownership of our securities, including; |
| ● | the risks for failing to comply with the continued listing standards of the NYSE American; | |
| ● |
availability of sufficient liquidity; |
| ● |
the designations, rights and preferences of our 8% Series A Cumulative Convertible Preferred Stock; |
| ● |
our inability to pay dividends on our Series A Convertible Preferred Stock; and |
| ● |
dilution upon the issuance of shares of common stock underlying outstanding convertible notes, warrants, options and the Series A Convertible Preferred Stock. |
Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward- looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Part II, Item 1A. Risk Factors appearing later in this report, Part I, Item 1A. - Risk Factors appearing in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 as filed with the Securities and Exchange Commission (the “SEC”) on December 12, 2023 and as amended on January 29, 2024 (the “2023 10-K”), as well as our other filings with the SEC. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2024 AND SEPTEMBER 30, 2023
(Unaudited)
| (Unaudited) | ||||||||
| March 31, | September 30, | |||||||
| 2024 | 2023 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance for credit losses of $ and $, respectively | ||||||||
| Inventory | ||||||||
| Inventory prepaid | ||||||||
| Prepaid sponsorship | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Other assets: | ||||||||
| Property and equipment, net | ||||||||
| Operating lease assets | ||||||||
| Deposits for facilities | ||||||||
| Intangible assets | ||||||||
| Investment in other securities, noncurrent | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| See Notes to Condensed Consolidated Financial Statements |
cbdMD, INC.
| CONDENSED CONSOLIDATED BALANCE SHEETS |
| March 31, 2024 AND SEPTEMBER 30, 2023
|
| (continued) |
| (Unaudited) | ||||||||
| March 31, | September 30, | |||||||
| 2024 | 2023 | |||||||
| Liabilities and shareholders' equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Accrued dividends | ||||||||
| Deferred revenue | ||||||||
| Operating leases – current portion | ||||||||
| Note payable | ||||||||
| Total current liabilities | ||||||||
| Long term liabilities: | ||||||||
| Convertible notes | ||||||||
| Other long term liabilities | ||||||||
| Operating leases - long term portion | ||||||||
| Contingent liability | ||||||||
| Total long term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 11) | ||||||||
| cbdMD, Inc. shareholders' equity: | ||||||||
| Preferred stock, authorized shares, $ | ||||||||
| par value, and shares issued and outstanding, respectively | ||||||||
| Common stock, authorized shares, $ | ||||||||
| par value, and shares issued and outstanding, respectively | ||||||||
| Additional paid in capital | ||||||||
| Comprehensive other expense | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total cbdMD, Inc. shareholders' equity | ||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
| cbdMD, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
| FOR THE THREE and Six MONTHS ENDED March 31, 2024 and 2023 |
| (Unaudited) |
| Three months |
Three months |
Six Months |
Six Months |
|||||||||||||
| Ended |
Ended |
Ended |
Ended |
|||||||||||||
| March 31, |
March 31, |
March 31, |
March 31, |
|||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| Gross Sales |
$ | $ | $ | $ | ||||||||||||
| Allowances |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Total Net Sales |
||||||||||||||||
| Cost of sales |
||||||||||||||||
| Gross Profit |
||||||||||||||||
| Operating expenses |
||||||||||||||||
| Loss from operations |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| (Increase) decrease of contingent liability |
||||||||||||||||
| (Increase) decrease in fair value of convertible debt |
( |
) | ( |
) | ||||||||||||
| Other income |
||||||||||||||||
| Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Loss before provision for income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net Loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Preferred dividends |
||||||||||||||||
| Net Loss attributable to cbdMD, Inc. common shareholders |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net Loss per share: |
||||||||||||||||
| Basic earnings per share |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Diluted earnings per share |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Weighted average number of shares Basic: |
||||||||||||||||
| Weighted average number of shares Diluted: |
||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
| cbdMD, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS |
| FOR THE THREE and Six MONTHS ENDED March 31, 2024 and 2023 |
| (Unaudited) |
| Three months |
Three months |
Six Months |
Six Months |
|||||||||||||
| Ended |
Ended |
Ended |
Ended |
|||||||||||||
| March 31, |
March 31, |
March 31, |
March 31, |
|||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| Net Loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Comprehensive Loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other Comprehensive income |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Preferred dividends |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Comprehensive Loss attributable to cbdMD, Inc. common shareholders |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
See Notes to Condensed Consolidated Financial Statements
| cbdMD, INC. |
| CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS |
| FOR THE Six MONTHS ENDED March 31, 2024 and 2023 |
| (Unaudited) |
| Six Months |
Six Months |
|||||||
| Ended |
Ended |
|||||||
| March 31, |
March 31, |
|||||||
| 2024 |
2023 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net Loss |
$ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used by operating activities: |
||||||||
| Stock based compensation |
||||||||
| Restricted stock expense |
||||||||
| Write off of prepaid assets due to termination of contractual obligation |
||||||||
| Issuance of stock for services |
||||||||
| Intangibles amortization |
||||||||
| Depreciation |
||||||||
| Increase (decrease) in contingent liability |
( |
) | ( |
) | ||||
| Increase (decrease) in fair value of convertible debt |
||||||||
| Amortization of operating lease asset |
||||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
||||||||
| Deposits |
||||||||
| Inventory |
||||||||
| Prepaid inventory |
( |
) | ||||||
| Prepaid expenses and other current assets |
( |
) | ( |
) | ||||
| Accounts payable and accrued expenses |
( |
) | ||||||
| Operating lease liability |
( |
) | ( |
) | ||||
| Deferred revenue / customer deposits |
( |
) | ||||||
| Collection on discontinued operations accounts receivable |
||||||||
| Cash used by operating activities |
( |
) | ( |
) | ||||
| Cash flows from investing activities: |
||||||||
| Purchase of property and equipment |
( |
) | ( |
) | ||||
| Other Securities |
||||||||
| Cash flows from investing activities |
( |
) | ||||||
| Cash flows from financing activities: |
||||||||
| Proceeds from issuance of common stock |
||||||||
| Note payable |
( |
) | ||||||
| Preferred dividend distribution |
( |
) | ||||||
| Deferred Issuance costs |
||||||||
| Cash flows from financing activities |
( |
) | ||||||
| Net increase (decrease) in cash |
( |
) | ||||||
| Cash and cash equivalents, beginning of period |
||||||||
| Cash and cash equivalents, end of period |
$ | $ | ||||||
Supplemental Disclosures of Cash Flow Information:
| 2024 |
2023 |
|||||||
| Cash Payments for: |
||||||||
| Interest expense |
$ | |
$ | |
||||
| Non-cash financial/investing activities: | ||||||||
| Preferred dividends accrued but not paid | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
| cbdMD, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY |
| FOR THE six months ended March 31, 2024 |
| (Unaudited) |
| Common Stock | Preferred Stock | Other | Additional | |||||||||||||||||||||||||||||
| Comprehensive | Paid in | Accumulated | ||||||||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Income |
Capital |
Deficit |
Total | |||||||||||||||||||||||||
| Balance, September 30, 2023 |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||
| Issuance of Common stock |
- |
|||||||||||||||||||||||||||||||
| Issuance of options for share based compensation |
- | - | ||||||||||||||||||||||||||||||
| Issuance of restricted stock for share based compensation |
- | - | ||||||||||||||||||||||||||||||
| Preferred dividend declared, not paid |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Net Loss |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance, December 31, 2023 |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||
| Issuance of Common stock |
||||||||||||||||||||||||||||||||
| Issuance of options for share based compensation |
- | - | ||||||||||||||||||||||||||||||
| Issuance of restricted stock for share based compensation |
- | - | ||||||||||||||||||||||||||||||
| Change in fair value of debt related to credit risk |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Issuance of Common stock - Keystone |
||||||||||||||||||||||||||||||||
| Preferred dividend declared, not paid |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Net Loss |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance, March 31, 2024 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
| cbdMD, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY |
| FOR THE six months ended March 31, 2023 |
| (Unaudited) |
| Additional |
||||||||||||||||||||||||||||
| Common Stock |
Preferred Stock |
Paid in |
Accumulated |
|||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Capital |
Deficit |
Total |
||||||||||||||||||||||
| Balance, September 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| Issuance of Common Stock |
( |
) | ||||||||||||||||||||||||||
| Issuance of options for share based compensation |
- | - | ||||||||||||||||||||||||||
| Issuance of restricted stock for share based compensation |
- | - | ||||||||||||||||||||||||||
| Preferred dividend |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Net Loss |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance, December 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| Issuance of Common Stock |
( |
) | ||||||||||||||||||||||||||
| Issuance of options for share based compensation |
- | - | ||||||||||||||||||||||||||
| Issuance of restricted stock for share based compensation |
- | - | ||||||||||||||||||||||||||
| Issuance of Common stock - A360 |
||||||||||||||||||||||||||||
| Issuance of Common stock - DCO |
||||||||||||||||||||||||||||
| Issuance of Common stock - Keystone |
||||||||||||||||||||||||||||
| True up of fraction shares resulting from reverse split |
- | - | ||||||||||||||||||||||||||
| Preferred dividend |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Net Loss |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance, March 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
cbdMD, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE three and six months ended March 31, 2024 and 2023 (unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
cbdMD, Inc. (“cbdMD”, “we”, “us”, “our”, or the “Company”) is a North Carolina corporation formed on March 17, 2015 as Level Beauty Group, Inc. In November 2016 we changed the name of the Company to Level Brands, Inc. and on May 1, 2019 we changed the name of our Company to cbdMD, Inc. We operate from offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30.
On December 20, 2018 (the “Closing Date”), the Company, and its newly organized wholly owned subsidiaries AcqCo, LLC and cbdMD LLC (“CBDI”), completed a two-step merger (the “Mergers”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). Upon completion of the Mergers, CBDI survived and operates the prior business of Cure Based Development. As consideration for the Mergers in April of 2019, the Company issued
The Company owns and operates the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD as well as the functional mushroom brand ATRx. The Company sources cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States. CBD is a natural substance produced from the hemp plant. The products manufactured by and for the Company comply with the 2018 Farm Bill - our full spectrum products contain trace amounts of tetrahydrocannabinol ("THC") under the 0.3% by dry weight limit in the 2018 Farm Act while our broad spectrum products are non-psychoactive as they do not contain detectable levels of THC.
On March 15, 2021 cbdMD formed a new wholly owned subsidiary, cbdMD Therapeutics, LLC (“Therapeutics”) for the purposes of isolating and quantifying the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications.
The accompanying unaudited interim condensed consolidated financial statements of cbdMD have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the 2023 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of consolidated financial position and the consolidated results of operations for the interim periods presented have been reflected herein. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2023 as reported in the 2023 10-K have been omitted.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries CBDI, Paw CBD, Proline and Therapeutics. All material intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The Company’s condensed consolidated financial statements have been prepared in accordance with US GAAP and requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying condensed consolidated financial statements include, but are not limited to, allowances for credit losses, inventory valuation reserves, expected sales returns and allowances, certain assumptions related to the valuation of investments other securities, acquired intangibles and long-lived assets and the recoverability of intangible and long-lived assets and income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities, and contingent liability is a material estimate. Actual results could differ from these estimates.
The Company continues to monitor macroeconomic conditions to remain flexible and to optimize and evolve its business as appropriate.
Cash and Cash Equivalents
For financial statements purposes, the Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable are stated at cost less an allowance for credit losses, 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 credit losses is based on an evaluation of the receivables, past experience, current economic conditions, and other risks inherent in the receivables portfolio. As of March 31, 2024 and September 30, 2023, we had an allowance for credit losses of $
Merchant Receivable and Reserve
The Company primarily sells its products through the internet and has an arrangement to process customer payments with third-party payment processors and negotiate the fee based on the market. The arrangement with the payment processors requires that the Company pay a fee between
Inventory
Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. The cost of inventory includes product cost, freight-in, and production fill and labor (portions of which we outsource to third party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management’s analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. We assess inventory quarterly for slow moving products and potential impairments and at a minimum perform a physical inventory count annually near fiscal year end.
Property and Equipment
Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are years for manufacturing equipment and automobiles and years for software, computer, and furniture and equipment. The useful life for leasehold improvements are over the term of the lease, or the remaining economic life of the asset, whichever is shorter. The cost and accumulated depreciation of property are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the consolidated statements of operations for the applicable period. Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstance indicate the carrying value of an asset may not be recoverable.
Fair Value Accounting
The Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, observable market activity. In instances where the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
When the Company records an investment in marketable securities the carrying value is assigned at fair value. Any changes in fair value for marketable securities during a given period will be recorded as an unrealized gain or loss in the consolidated statement of operations. For investment other securities without a readily determinable fair value, the Company may elect to estimate its fair value at cost less impairment plus or minus changes resulting from observable price changes.
Intangible Assets
The Company's intangible assets consist of trademarks and other intellectual property, all of which were previously accounted for in accordance with Accounting Standards Codification (ASC) Topic 350, Intangibles – Goodwill and Other. The Company employed the non-amortization approach to account for purchased intangible assets having indefinite lives. Under the non-amortization approach, intangible assets having indefinite lives were not amortized into the results of operations, but instead were 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 previously performed an annual impairment analysis each fiscal year on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis included a qualitative assessment to determine if it was necessary to perform the quantitative impairment test. In performing a qualitative assessment, we reviewed events and circumstances that could affect the significant inputs used to determine if the fair value was less than the carrying value of the intangible assets. If a quantitative analysis was necessary, we would analyze various aspects including revenues from the business, associated with the intangible assets. In addition, intangible assets would be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. The Company analyzed a variety of factors on its business to determine if a circumstance could trigger an impairment loss, and, at the time and based on the information then known, had determined that is it was more likely than not that an impairment loss had occurred.
The Company now accounts for its trademarks in accordance with Accounting Standards Codification (ASC) Topic 360, Property, Plant and Equipment. The Company began amortizing its trademarks over 20 years beginning January 1, 2022 and would perform impairment tests as prescribed by ASC 360, which states that impairment testing should be completed whenever events or changes in circumstances indicate that the asset group's carrying value may not be recoverable. If there are indications that the asset group's carrying value may not be recoverable, there are two further steps involved in long-lived asset impairment testing. Step I of the impairment test, as per ASC 360, involves estimating the recoverable amount of the asset group and determining the potential for impairment. Step II of the impairment test, as per ASC 360, if necessary, involves quantifying the fair value of the asset group. During July of fiscal 2023, the Company determined that based on regulatory uncertainty and ongoing Company performance it was prudent to change the amortization of the “cbdMD” and “directCBDonline” trademarks to
Contingent Liability
A significant component of the purchase price consideration for the Company’s acquisition of Cure Based Development includes a fixed number of future shares to be issued as well as a variable number of future shares to be issued based upon the post-acquisition entity reaching certain specified future revenue targets, as further described in Note 6. The Company made a determination of the fair value of the contingent liabilities as part of the valuation of the assets acquired and liabilities assumed in the business combination.
Revenue Recognition
Under ASC 606, Revenue from Contracts with Customers, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The Company meets that obligation when it has shipped products which have been ordered to the customer. The Company has reviewed its various revenue streams for its other contracts under the five-step approach. At March 31, 2024, the Company has unfulfilled performance obligations.
Allocation of Transaction Price
In the Company’s current business model, it does not have contracts with customers which have multiple elements as revenue is driven purely by online product sales or purchase order-based product sales.
Revenue Recognition
The Company records revenue from the sale of its products when its customer obtains control, which is upon shipping (and is typically FOB shipping) which is when our performance obligation is met. Net sales are comprised of gross revenues less product returns, trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions. These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company currently offers a 60-day, money back guarantee, a loyalty program as well as a subscription program.
Disaggregated Revenue
The Company’s product revenue is generated primarily through two sales channels, E-commerce sales (formerly referred to as consumer sales) and wholesale sales. The Company believes that these categories appropriately reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors.
A description of the Company’s principal revenue generating activities are as follows:
| - | E-commerce sales - consumer products sold through the Company’s online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due prior to the date of shipment; and | |
|
| ||
| - | Wholesale sales - products sold to the Company’s wholesale customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms vary and can typically be 30 days from the date control over the product is transferred to the customer. |
Contract liabilities represent unearned revenues and are presented as deferred revenue or customer deposits on the condensed consolidated balance sheets.
Other than account receivable, Company has material contract assets nor contract liabilities at March 31, 2024.
The following tables represent a disaggregation of revenue by sales channel:
| Three Months | Three Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2024 | % of total | 2023 | % of total | |||||||||||||
| E-commerce sales | $ | % | $ | % | ||||||||||||
| Wholesale sales | % | % | ||||||||||||||
| Total Net Sales | $ | % | $ | % | ||||||||||||
| Six Months | Six Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2024 | % of total | 2023 | % of total | |||||||||||||
| E-commerce sales | $ | % | $ | % | ||||||||||||
| Wholesale sales | % | % | ||||||||||||||
| Total Net Sales | $ | % | $ | % | ||||||||||||
Cost of Sales
The Company’s cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third-party providers, and outbound freight for the Company’s products sales. For the Company’s product sales, cost of sales also includes the cost of refurbishing products returned by customers that will be offered for resale, if any, and the cost of inventory write-downs associated with adjustments of held inventories to their net realizable value. These expenses are reflected in the Company’s consolidated statements of operations when the product is sold and net sales revenues are recognized or, in the case of inventory write-downs, when circumstances indicate that the carrying value of inventories is in excess of their net realizable value.
Income Taxes
The Company is a North Carolina corporation that is treated as a corporation for federal and state income tax purposes. As of October 1, 2019, CBDI and Paw CBD were wholly owned subsidiaries and are disregarded entities for tax purposes and their entire share of taxable income or loss is included in the tax return of the Company and as of March 15, 2021, Therapeutics is also a wholly owned subsidiary and is a disregarded entity for tax purposes and its entire share of taxable income or loss is included in the tax return of the Company.
The Company accounts for income taxes pursuant to the provisions of the Accounting for Income Taxes topic of ASC 740 which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Company uses the inside basis approach to determine deferred tax assets and liabilities associated with its investment in a consolidated pass-through entity. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
Concentrations
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and securities.
The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $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 $
Concentration of credit risk with respect to receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management considers these customer receivables to represent normal business risk. The Company did have any customers that represented a significant amount of our sales for the three and six months ended March 31, 2024.
Stock-Based Compensation
The Company accounts for its stock compensation under the ASC 718-10-30, Compensation - Stock Compensation using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
The Company uses the Black-Scholes model for measuring the fair value of options and warrants. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods. The Company recognizes forfeitures when they occur.
Earnings (Loss) Per Share
The Company uses ASC 260-10, Earnings Per Share for calculating the basic and diluted loss per share. The Company computes basic loss per share by dividing net loss and net loss attributable to common shareholders, after deducting preferred stock dividends, by the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.
On February 16, 2023, we held an annual meeting of stockholders. At the annual meeting, our stockholders approved an amendment to our articles of incorporation, as amended, to effect a reverse stock split of our issued and outstanding shares of common stock by a ratio of between one-for- to -for-fifty, inclusive, with the exact ratio to be set at the discretion of our board of directors, at any time after approval of the amendment and prior to February 16, 2024. On April 12, 2023, the board effected a reverse stock split at a ratio of one-for--five, effective as of April 24, 2023 (the "Reverse Stock Split"). Unless otherwise indicated, all share numbers in this report, including shares of common stock and all securities convertible into, or exercisable for, shares of common stock, give effect to the Reverse Stock Split.
Liquidity and Going Concern Considerations
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company experienced a loss of $
While the Company is taking strong action, believes in the viability of its strategy and path to profitability, and in its ability to raise additional funds, there can be no assurances to that effect. The Company’s working capital position may not be sufficient to support the Company’s daily operations for the twelve months subsequent to the issuance of these annual financial statements. The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability and the ability to acquire additional funding. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern within twelve months after the date that the annual financial statements are issued. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result in the Company not being able to continue as a going concern.
Effective February 1, 2024 (the “Effective Date”), the Company entered into a Securities Purchase Agreement dated January 30, 2024 (the “Purchase Agreement”) with five institutional investors (the “Investors”) whereby the Investors advanced the Company an aggregate of $
The Company elected the fair value option under ASC 825 Fair Value Measurements for the Notes. The Notes were initially recognized at fair value on the balance sheet. All subsequent changes in fair value, excluding the impact of the change in fair value related to instrument-specific credit risk are recorded in non-operating income. The changes in fair value related to instrument-specific credit risk is recorded through other comprehensive income (loss). See Note 12 for more information related to the Notes.
New Accounting Standards
The Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326) effective October 1, 2023. This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost are presented at the net amount expected to be collected by using an allowance for credit losses. The Company evaluated the impacts of this standard and has determined that is does not have a material impact on the consolidated financial statements.
NOTE 2 – MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES
The Company has, from time to time, entered into contracts where a portion of the consideration provided by the counterparty in exchange for the Company’s services was common stock, options or warrants (an equity position). In these situations, upon invoicing the customer for the stock or other instruments, the Company recorded the receivable as accounts receivable other, and used the value of the stock or other instrument upon invoicing to determine the value. In determining fair value of marketable securities and investment other securities, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in our assessment of fair value. The Company determines the fair value of marketable securities and investment other securities based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the fair value hierarchy distinguishes between observable and unobservable inputs.
In September 2020, the Company purchased a membership interest in Adara Sponsor LLC for $
On April 7, 2022, CBD Industries, LLC entered into an asset sale agreement to sell substantially all its manufacturing assets to a subsidiary of Steady State, LLC ("Steady State"). The equipment sale is initially valued at approximately $
In valuing both investments, the Company used the value paid, which was the price offered to all third-party investors.
NOTE 3 - INVENTORY
Inventory at March 31, 2024 and September 30, 2023 consists of the following:
| March 31, |
September 30, |
|||||||
| 2024 |
2023 |
|||||||
| Finished Goods |
$ | $ | ||||||
| Inventory Components |
||||||||
| Inventory Reserve |
( |
) | ( |
) | ||||
| Inventory prepaid |
||||||||
| Total Inventory |
$ | $ | ||||||
Abnormal amounts of idle facility expense, freight, handling costs, scrap and wasted material (spoilage) are expensed in the period they are in incurred and no material expenses related to these items occurred in the three months ended March 31, 2024.
NOTE 4 – PROPERTY AND EQUIPMENT
Major classes of property and equipment at March 31, 2024 and September 30, 2023 consist of the following:
| March 31, | September 30, | |||||||
| 2024 | 2023 | |||||||
| Computers, furniture and equipment | $ | $ | ||||||
| Manufacturing equipment | ||||||||
| Leasehold improvements | ||||||||
| Automobiles | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation expense related to property and equipment was $
NOTE 5 – INTANGIBLE ASSETS
Intangible Assets
Intangible assets as of March 31, 2024 and September 30, 2023 consisted of the following:
| March 31, | September 30, | |||||||
| 2024 | 2023 | |||||||
| Trademark related to cbdMD | $ | $ | ||||||
| Trademark for HempMD | ||||||||
| Technology Relief from Royalty related to DirectCBDOnline.com | ||||||||
| Tradename related to DirectCBDOnline.com | ||||||||
| Impairment of intangible assets | ( | ) | ( | ) | ||||
| Amortization of definite lived intangible assets | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Amortization expense related to definite lived intangible assets was $
Future amortization of intangible assets as of March 31, 2024 is as follows:
| For the year ended September 30, | |||
| 2024 | $ | | |
| 2025 | |||
| 2026 | |||
| 2027 | |||
| 2028 | |||
| Thereafter | |||
| Total future intangibles amortization | $ |
NOTE 6 – CONTINGENT CONSIDERATION
As consideration for the Mergers, described in Note 1, the Company had a contractual obligation to issue
The contractual obligations and earn out provision are accounted for as a contingent liability and fair value is determined using Level 3 inputs, as estimating the fair value of these contingent liabilities require the use of significant and subjective inputs that may and are likely to change over the duration of the liabilities with related changes in internal and external market factors.
The initial two tranches totaling
The Merger Agreement also provided that an additional
| Aggregate Net Revenues | Shares Issued/ Each $ of Aggregate Net Revenue Ratio | ||
| $ - $ | |||
| $ - $ | |||
| $ - $ | |||
| $ - $ |
An aggregate of
In December 2022, the Company entered into a contractual obligation to issue up to
NOTE 7 – RELATED PARTY TRANSACTIONS
None.
NOTE 8 – SHAREHOLDERS’ EQUITY
Preferred Stock – The Company is authorized to issue
The total amount of preferred dividends declared and accrued were $
Common Stock – The Company is authorized to issue
On March 2, 2023 Company entered into a purchase agreement (the "ELOC") with Keystone Capital Partners, LLC (“Keystone”), pursuant to which Keystone committed to purchase up to
On April 12, 2023, the Company effected the Reverse Stock Split. All fractional shares were rounded up when effectuating the reverse stock split. A total of
Preferred stock transactions:
The Company had no preferred stock transactions in the three and six months ended March 31, 2024 and 2023.
Common stock transactions:
In the six months ended March 31, 2024:
In January 2024, the Company issued
In January 2024, the Company issued
In the six months ended March 31, 2023:
In March of 2023, we entered into the ELOC and we issued
On February 1, 2023, the Company entered into an Agreement for Advertising Placement with a360 Media, LLC ("a360") in which a360 provided professional media support and advertising placement in exchange for up to
In January 2023, the Company issued
In December 2022, the Company issued
Stock option transactions:
In the six months ended March 31, 2024:
The Company has no stock option transactions in the six months ended December 31, 2024.
In the six months ended March 31, 2023:
In February of 2023, the Company granted its board of directors an aggregate of
In January 2023, the Company issued
In December 2022, the Company issued
The expected volatility rate for the Company's stock options was estimated based on a weighted average mix of the volatilities of the Company and a peer group of companies in similar industries. The expected term used was the full term of the contract for the issuances. The risk-free interest rate for periods within the contractual life of the option is based on U.S. Treasury securities. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.
The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the three months ended March 31, 2024 and 2023:
| March 31, | March 31, | |||||||
| 2024 | 2023 | |||||||
| Exercise price | $ | - | $ | |||||
| Risk free interest rate | % | % | ||||||
| Volatility |
| % | % | |||||
| Expected term (in years) | - | |||||||
| Dividend yield | None | None | ||||||
Warrant Transactions:
The Company has no warrant transactions in the three months ended December 31, 2023.
NOTE 9 – STOCK BASED COMPENSATION
Equity Compensation Plan – On June 2, 2015, the Board of Directors of the Company approved the 2015 Equity Compensation Plan (“2015 Plan”). The 2015 Plan initially made
On January 8, 2021, the Company’s Board of Directors approved the 2021 Equity Compensation Plan (the “2021 Plan”) and it was subsequently approved by its shareholders at its annual meeting held on March 12, 2021. The purpose of the 2021 Plan is to advance the interests of the Company by providing an incentive to attract, retain and motivate highly qualified and competent persons who are important to it and upon whose efforts and judgment the success of the Company is largely dependent. The 2021 Plan made
The Company accounts for stock-based compensation using the provisions of ASC 718. ASC 718 codification requires companies to recognize the fair value of stock-based compensation expense in the financial statements based on the grant date fair value of the options. All options are approved by the Compensation, Corporate Governance and Nominating Committee of the Board of Directors. Restricted stock awards that vest in accordance with service conditions are amortized over their applicable vesting period using the straight-line method. The fair value of the Company’s stock option awards or modifications is estimated at the date of grant using the Black-Scholes option pricing model.
Eligible recipients include employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company. Options granted generally have a -to--year term and have vesting terms that cover to years from the date of grant. Certain stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.
Stock Options:
The Company currently has awards outstanding with service conditions and graded-vesting features. We recognize compensation cost on a straight-line basis over the requisite service period.
The fair value of each time-based award is estimated on the date of grant using the Black-Scholes option valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model for equity awards with time-based vesting provisions granted during the year.
The following table summarizes stock option activity under both plans for the six months ended March 31, 2024:
| Weighted-average | ||||||||||||||||
| remaining | Aggregate | |||||||||||||||
| Weighted-average | contractual term | intrinsic value | ||||||||||||||
| Number of shares | exercise price | (in years) | (in thousands) | |||||||||||||
| Outstanding at September 30, 2023 | $ | $ | - | |||||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | - | - | ||||||||||||||
| Outstanding at March 31, 2024 | - | |||||||||||||||
| Exercisable at March 31, 2024 | $ | $ | - | |||||||||||||
As of March 31, 2024, there was approximately $
Restricted Stock Award transactions:
In the six months ended March 31, 2024:
The Company has no restricted stock activity during the six months ended March 31, 2024.
In the six months ended March 31, 2023:
In February of 2023, the Company issued
In January 2023, the Company issued
In December 2022, the Company issued
NOTE 10 - WARRANTS
Transactions involving the Company equity-classified warrants for the six months ended March 31, 2024 and 2023 are summarized as follows:
| Weighted-average | ||||||||||||||||
| remaining | Aggregate | |||||||||||||||
| Weighted-average | contractual term | intrinsic value | ||||||||||||||
| Number of shares | exercise price | (in years) | (in thousands) | |||||||||||||
| Outstanding at September 30, 2023 | $ | $ | - | |||||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | - | - | ||||||||||||||
| Outstanding at March 31, 2024 | - | |||||||||||||||
| Exercisable at March 31, 2024 | $ | - | $ | - | ||||||||||||
The following table summarizes outstanding common stock purchase warrants as of March 31, 2024:
| Weighted-average | |||||||||
| Number of shares | exercise price | Expiration | |||||||
| Exercisable at $337.5 per share | $ | May 2024 | |||||||
| Exercisable at $176.06 per share | October 2024 | ||||||||
| Exercisable at $56.25 per share | | January 2025 | |||||||
| Exercisable at $2.52 per share | April 2028 | ||||||||
| Exercisable at $168.30 per share | December 2025 | ||||||||
| Exercisable at $168.75 per share | June 2026 | ||||||||
| $ | |||||||||
NOTE 11 – COMMITMENTS AND CONTINGENCIES
In May 2019, the Company entered into an endorsement agreement with a professional athlete. On November 4, 2022, the Company entered into a separation agreement with the athlete that required a final payment truing up the Company’s cash obligation through November 2022. No further obligations exist between the parties. The Company recorded a one-time non-cash expense of approximately $
Commencing August 2019 the Company’s executive offices were located at 8845 Red Oak Blvd, Charlotte, NC (the “Red Oak Facilities”) which we sub-leased under a sublease agreement dated July11, 2019 which expires December 2026 (the “Red Oak Sublease”). We received a default notice from HSKL, Inc., the sub landlord, in September 2023. Effective March 20, 2024 we entered into a License Agreement, dated as of March 14, 2024, by and between cbdMD, Inc. and HSKL (the “License Agreement”) and Lease Forbearance Agreement, dated as of March 14, 2024, by and between cbdMD, Inc. and HSKL (the “Forbearance Agreement”). Under the License Agreement we have granted HSKL a license to possess and use a portion of the Red Oak Facilities until the earlier of (i) the termination of the Forbearance Agreement and (ii) July 31, 2024 (the “Termination Date”). The termination of the License Agreement will result in termination of the Red Oak Sublease. Pursuant to the Forbearance Agreement HSKL has agreed to forbear from proceeding to exercise its remedies against us under the Red Oak Sublease, and the declaration of default related to past due rent in consideration of the following payments to HSKL: $
NOTE 12 – NOTE PAYABLE
In January 2020, the Company entered into a loan arrangement for $
Effective February 1, 2024 (the “Effective Date”), the Company entered into a Securities Purchase Agreement dated January 30, 2024 (the “Purchase Agreement”) with five institutional investors (the “Investors”) whereby the Investors advanced the Company an aggregate of $
Each Note bears interest of
Furthermore, at any time after the issuance of the Note, the Company may, after written notice to the Investor, prepay any portion or all outstanding Principal Amount by paying an amount equal to 125% of the Principal Amount then being prepaid (representing a
Upon the occurrence of any Event of Default (as defined in the Note), the Interest rate shall automatically be increased to the lesser of
In addition, upon the occurrence of Event of Default, which has not been cured within any applicable cure period, the Company shall be obligated to pay to the Investor the Mandatory Default Amount, which Mandatory Default Amount shall be payable to the Investor on the date the Event of Default giving rise thereto occurs. In the event the Note shall be converted following the occurrence of an Event of Default, the Investor shall have the option to convert the Mandatory Default Amount, upon the terms provided in the Note.
The Note provides that the Investor will not have the right to convert any portion of the Note, if, together with its affiliates, and any other party whose holdings would be aggregated with those of the Investor for purposes of Section 13(d) or Section 16 of the Securities of 1934, as amended, would beneficially own in excess of 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to such conversion (the “Beneficial Ownership Limitation”); provided, however, that the Beneficial Ownership Limitation shall be increased to 9.99% on the 61st day upon receipt of a written notice by the Investor delivered to the Company, and provided further, in no event shall the Beneficial Ownership Limitation exceed 9.99%.
The Notes are secured by a first priority security interest as evidenced by and to the extent set forth in a Security Agreement, by and between the Company and the Investors.
The Company elected the fair value option under ASC 825 Fair Value Measurements for the Notes. The Notes were initially recognized at fair value on the balance sheet. All subsequent changes in fair value, excluding the impact of the change in fair value related to instrument-specific credit risk are recorded in non-operating income. The changes in fair value related to instrument-specific credit risk is recorded through other comprehensive income (loss).
The overall change in fair value of the Notes during the quarter ended March 31, 2024 was a increase of $
NOTE 13 – LEASES
The Company has lease agreements for its corporate offices and warehouse with lease periods expiring between 2024 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. See Note 11 for information regarding commitments and contingencies related to the Company's corporate office operating lease.
Right-of-use lease assets and corresponding lease liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term. Since the interest rate implicit in our lease arrangements is not readily determinable, the Company determined an incremental borrowing rate for each lease based on the approximate interest rate on a collateralized basis with similar remaining terms and payments as of the lease commencement date to determine the present value of future lease payments. The Company’s lease terms may include options to extend or terminate the lease.
In addition to the monthly base amounts in the lease agreements, the Company is required to pay real estate taxes, insurance and common area maintenance expenses during the lease terms.
Lease costs on operating leases are recognized on a straight-line basis over the lease term and included as a selling, general and administrative expense in the condensed consolidated statements of operations.
Components of operating lease costs are summarized as follows:
| Three Months | Six Months | |||||||
| Ended | Ended | |||||||
| March 31, | March 31, | |||||||
| 2024 | 2024 | |||||||
| Total Operating Lease Costs | $ | $ | ||||||
Supplemental cash flow information related to operating leases is summarized as follows:
| Three Months | Six Months | |||||||
| Ended | Ended | |||||||
| March 31, | March 31, | |||||||
| 2024 | 2024 | |||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | $ | ||||||
As of March 31, 2024, our operating leases had a weighted average remaining lease term of
Future minimum aggregate lease payments under operating leases as of March 31, 2024 are summarized as follows:
| For the year ended December 31, | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total future lease payments | ||||
| Less interest | ( | ) | ||
| Total lease liabilities | $ |
NOTE 14 – LOSS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the following periods:
| Three Months Ended | Six Months Ended | |||||||||||||||
| March 31, | March 31, | March 31, | March 31, | |||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Basic and diluted: | ||||||||||||||||
| Net loss continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Preferred dividends paid | ||||||||||||||||
| Net loss attributable to cbdMD Inc. common shareholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Shares used in computing basic and diluted earnings per share | ||||||||||||||||
| Loss per share Basic | ||||||||||||||||
| Basic and diluted earnings per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
At March 31, 2024,
NOTE 15 – INCOME TAXES
On November 17, 2017, the Company completed an IPO of its common stock. The Company conducted a Section 382 analysis and determined an ownership change occurred upon the IPO. On October 2, 2018, the Company completed a follow-on firm commitment underwritten public offering of its common stock. On May 16, 2019, the Company completed an additional follow-on firm commitment underwritten public offering of its common stock. On October 16, 2019, the Company completed a follow-on firm commitment underwritten public offering of its
On December 20, 2018, the Company completed a two-step merger with Cure Based Development (see Note 1). As a result of the Mergers the Company established as part of the purchase price allocation a net deferred tax liability related to the book-tax basis of certain assets and liabilities of approximately $
The Company has a valuation allowance against the net deferred tax assets, with the exception of the deferred tax liabilities that result from indefinite-life intangibles (“naked credits”). The Company has determined that using the general methodology for calculating income taxes during an interim period for the quarters ending December 31, 2019, March 31, 2020, and June 30, 2020, provided for a wide range of potential annual effective rates. At September 30, 2023 the Company recorded a net deferred tax asset of
NOTE 16 – SUBSEQUENT EVENTS
Since March 31, 2024 a total of shares have been issued for principal and interest conversion requests under the Notes. As of the date of this filing, the remaining principal balance on the Notes totals approximately $
On April 1, 2024, the Company granted its board of directors an aggregate of
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations for the three and six months ended March 31, 2024 and the three and six months ended March 31, 2023 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 2022 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 functional mushroom brand ATRx Labs. We believe that we are an industry leader producing and distributing hemp derived solution including broad spectrum CBD products and full spectrum CBD products. Our mission is to enhance our customer’s overall quality of life while bringing cannabinoid and mushroom education, awareness and accessibility of high quality and effective products to all. We source cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States. Our innovative broad spectrum formula utilizes one of the purest hemp extracts, containing CBD, CBG and CBN, while eliminating the presence of tetrahydrocannabinol (THC). Non-THC is defined as below the level of detection using validated scientific analytical methods. Our full spectrum and Delta 9 products contain a variety of cannabinoids and terpenes in addition to CBD while maintaining small amounts of THC that fall below the level of detection and are within the limits set in the 2018 Farm Act. 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 and Proline Global that houses some of our newer brands.
Our cbdMD brand of products includes an array of high-grade, premium every day and functional CBD products, including tinctures; gummies; topicals; capsules; and sleep, focus and calming aids. In addition we have clinical based claims and industry leading strength and concentrations to drive product efficacy.
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 ATRx brand was developed using the power of functional mushrooms to provide consumers a complementary natural ingredient solution for immunity, focus, digestive health, cognitive and mood benefits.
cbdMD, Paw CBD and ATRx products are distributed through our e-commerce websites, third party e-commerce sites, select distributors and marketing partners as well as a variety of brick-and-mortar retailers.
Recent Developments
Management continues to be very focused on delivering positive earnings through a combination of optimizing our product portfolio, right-sizing our cost structure and investing in marketing that will provide positive return on customer acquisition. During fiscal 2023 we made significant changes to our marketing and overall operations including re-platforming our website to significantly reduce our operating costs. Ongoing revenue decreases offset a majority of the infrastructure savings, however we significantly reduce the Company’s cash burn during the year.
While revenue in the second quarter was challenging, we remain focused on top line improvements during 2024. cbdMD expanded its retail reach in December 2023 by launching several products throughout Sprouts Supermarkets and more recently added to Door Dash as a customer.
During December 2023, the Company launched its new functional mushroom line of products with its Super Gummy under the ATRx brand on ATRxlabs.com. At our core, we are committed to natural health and wellness solutions, recognizing the benefits of functional mushrooms alongside hemp. During late April 2024 we launched our 4 SKU ATRx Platinum line into GNC. Management made a strategic decision to work with GNC on an exclusive initial launch of the Platinum line to help offset some legacy inventory issues tied to a $1 million cbdMD order from March of 2022. Working GNC on this launch give the brand a springboard into national distribution and helps accelerate ATRx brand awareness. Additionally, we have a wider store distribution footprint as ATRx products do not have the same geographic limitations as CBD products within the GNC footprint.
During March 2024 we added to our wholesale team, bringing in a VP of Wholesale with significant CBD industry experience. We are seeing wholesale opportunities begin to pick up and bare optimistic a number of international opportunities we have been working on for the last several quarters have revenue goals by the end of the year. At the end of the quarter, we made additional performance marketing hire to help reinvigorate our direct-to-consumer business and deepen our performance driven culture.
During March 2024, we attempted to convert the Series A Preferred stock to common stock through a shareholder vote to amend our Series A Preferred Stock designation. We were unable to get the required votes needed to approve the amendment. We believe the combined market capitalization of both our common and Series A Preferred is being impacted due to our current capital structure. Our goal is to simplify our capital structure and we believe it will help unlock additional equity value and open up more strategic activity for the Company.
During March 2024, we entered into agreements with our sub-landlord for the Red Oak Sublease. As a result of these agreements, we anticipate an estimated $20,000 reduction monthly operating costs in utilities and maintenance related to the Red Oak Sublease that will roll off by the end of the third fiscal quarter. Should we fulfill the obligation of the agreements through the end of July 2024, the legacy lease will terminate, saving approximately a further $85,000 in rent on a monthly basis.
We continue to attack our infrastructure costs in other ways since the end of the quarter and the vote against the Series A Preferred conversion. We continue to sublease additional extra space in our warehouse to consolidate our executive offices and warehouse, we have eliminated addition IT contracts and expenses, renegotiated term and pricing with many vendors and are targeting approximately $50,000 of monthly savings from these efforts to flow through by the end of the current quarter. Additionally, we took steps to reduce our payroll by a targeted $50,000 per month by the end of the third quarter. We continue to evaluate certain marketing vendors and are evaluating bringing some of these resources in house which would result in cost savings to the Company but potentially offset the monthly payroll savings target. Between the ongoing cost initiatives and the Red Oak Sublease our goal is to reduce G&A expense by $200,000 per month or $600,000 per quarter. Based on current revenue run rates, these in-place initiatives should allow the Company to operate close to a positive non-GAAP adjusted EBITDA run rate.
Growth Strategies
We continued to pursue many strategies to grow our revenues and expand the scope of our business in fiscal 2024 and beyond:
| ● |
Product Innovation: Our goal is to provide our customers superior functional based products with greater efficacy claims and absorption. We regularly assess and evaluate our product portfolio, and devote resources to ongoing research and development processes with the goal of improving our product offerings. During fiscal 2023 we focused on expanding some of our core line of products. This included adding to our NSF for Sport product line, as well as our line of Delta 9 gummies and microdose products. In November of 2023 we launched our new CBG tincture and during the first quarter of fiscal 2024 we launched our new nootropic mushroom line under the ATRx brand. We have a robust pipeline of cannabinoid and non-cannabinoid products to launch during fiscal 2024. |
| ● |
Expand our revenue channels: During fiscal year 2023, our wholesale business continued to face macro industry contraction trends that we believe are tied to low-dose, high-priced products. We continued to pursue relationships with traditional retail accounts and believe our top brand awareness and effective marketing position us as a preferred CBD partner for key traditional retail accounts as this channel has continued to normalize. During the first quarter of fiscal 2024 we launched several SKUs into Sprouts retail footprint. In April 2024 we added Door Dash as a customer. We continue to assess our product channel fit and working with retailers and distributors alike to further grow this channel. |
| ● |
International Expansion: We continue to explore sales in markets outside of the United States. We generally partner with local wholesalers and local legal counsel who can help navigate the laws and regulatory requirements within their jurisdiction. We continue to pursue key wholesale accounts in a number of international markets and are gaining market share in Central America through our sanitary registration approvals. We are also expanding our E-commerce business to consumers in the United Kingdom (UK) by expanding onto Amazon’s platform during fiscal year 2023 and are continuing to grow this channel quarterly. In March 2021, we officially filed our Novel Food Application with the United Kingdom’s Food Standards Agency (“FSA”) and the European Union’s (“EU”) Food Safety Agency (“EFSA”) and received validation notices during 2022. The UK government has not provided clarity on the timeline to complete their FSA process. |
| ● |
Cultivate Additional Brands: We continue to operate and attempt to grow the Paw CBD business. During fiscal 2024 we launched our nootropic mushroom line under the ATRx brand. We believe there is ongoing opportunities with these brands to focus on education, cross-selling and customer retention. |
| ● |
Acquisitions: We evaluate acquisitions (M&A) where we believe (i) there is an accretive customer base that can lower our cost of customer acquisitions through either a complementary direct to consumer base or wholesale channels, or (ii) the target has a profitable business or easily attainable cost synergies that can quickly help contribute and accelerate profitability of our Company. While the Company continues to evaluate M&A opportunities, as of the date of this report we currently do not have any pending or potential acquisitions. There have been numerous opportunities, however, our current capital structure, specifically the overhang of our Series A Preferred stock, has to this point stalled prospects. |
Results of operations
The following tables provide certain selected consolidated financial information for the periods presented:
| Three Months Ended March 31, |
||||||||||||
| 2024 |
2023 |
Change |
||||||||||
| Total net sales |
$ | 4,376,518 | $ | 6,240,020 | $ | (1,863,502 | ) | |||||
| Cost of sales |
1,795,790 | 2,224,512 | (428,722 | ) | ||||||||
| Gross profit as a percentage of net sales |
59.0 | % | 64.4 | % | -5.4 | % | ||||||
| Operating expenses |
4,131,719 | 5,416,151 | (1,284,432 | ) | ||||||||
| Operating loss from operations |
(1,550,991 | ) | (1,400,643 | ) | (150,348 | ) | ||||||
| Decrease on contingent liability |
4,828 | 48,000 | (43,172 | ) | ||||||||
| Net loss before taxes |
(3,010,562 | ) | (1,336,802 | ) | (1,673,760 | ) | ||||||
| Net loss attributable to cbdMD Inc. common shareholders |
$ | (4,011,062 | ) | $ | (2,337,302 | ) | $ | (1,673,760 | ) | |||
| Six Months Ended March 31, |
||||||||||||
| 2024 |
2023 |
Change |
||||||||||
| Total net sales |
$ | 9,751,923 | $ | 12,325,237 | $ | (2,573,314 | ) | |||||
| Cost of sales |
3,613,698 | 4,741,964 | (1,128,266 | ) | ||||||||
| Gross profit as a percentage of net sales |
62.9 | % | 61.5 | % | 1.4 | % | ||||||
| Operating expenses |
8,755,053 | 13,030,097 | (4,275,044 | ) | ||||||||
| Operating loss from operations |
(2,616,828 | ) | (5,446,824 | ) | 2,829,996 | |||||||
| Decrease on contingent liability |
74,580 | 109,000 | (34,420 | ) | ||||||||
| Net loss before taxes |
(4,007,065 | ) | (5,292,864 | ) | 1,285,799 | |||||||
| Net loss attributable to cbdMD Inc. common shareholders |
$ | (6,008,065 | ) | $ | (7,293,866 | ) | $ | 1,285,801 | ||||
We record product sales primarily through two main delivery channels, direct to consumers via our E-commerce sales and direct to wholesalers utilizing our internal sales team. The following table provides information on the contribution of net sales by type of sale to our total net sales.
| Three Months |
Three Months |
|||||||||||||||
| Ended |
Ended |
|||||||||||||||
| March 31, |
March 31, |
|||||||||||||||
| 2024 |
% of total |
2023 |
% of total |
|||||||||||||
| E-commerce sales |
$ | 3,625,719 | 82.8 | % | $ | 4,889,860 | 78.4 | % | ||||||||
| Wholesale sales |
750,799 | 17.2 | % | $ | 1,350,160 |
21.6 | % | |||||||||
| Total Net Sales |
$ | 4,376,518 | $ | 6,240,020 | ||||||||||||
| Six Months |
Six Months |
|||||||||||||||
| Ended |
Ended |
|||||||||||||||
| March 31, |
March 31, |
|||||||||||||||
| 2024 |
% of total |
2023 |
% of total |
|||||||||||||
| E-commerce sales |
$ | 8,049,724 | 82.5 | % | $ | 9,796,064 | 79.5 | % | ||||||||
| Wholesale sales |
$ | 1,702,199 | 17.5 | % | 2,529,173 | 20.5 | % | |||||||||
| Total Net Sales |
$ | 9,751,923 | $ | 12,325,237 | ||||||||||||
Net Sales
We had total net sales of $4.4 million and $6.2 million for the three months ended March 31, 2024 and 2023, respectively, resulting in a decrease in net sales of $1.9 million or 29% quarter over quarter. This decrease is partially attributable to a decrease of $1.3 million in e-commerce sales year over year. Wholesale sales decrease of $0.6 million, in part due to the $0.44 million credit issued to GNC related to the $1 million order shipped during the March 2022 quarter. We incurred this credit in part due to expiring product and replacing a significant balance of the expiring product with the ATRx Platinum line of functional mushrooms. During the quarter management embarked on several corrective measures to increase our understanding of wholesale customers operations, including the appointment of a new Vice President of Wholesale, the introduction of new customer acquisition strategies, and the replacement of under performing vendors and agencies and hiring new performance marketer. Despite the overall category facing challenges, we remain optimistic about our product's market positioning in 2024. Revenues appear to be holding and based on the cost reductions in the works, we are designing the Company to be profitable at significantly lower revenue levels than in the past.
Cost of sales
Our cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third party providers, and freight for our product sales. Our cost of sales as a percentage of net sales was 41.0% and 35.6% for three months ended March 31, 2024 and 2023, respectively. This increase in cost of sales is mostly attributed to the $440,000 credit issued to GNC during the quarter. We anticipate cost of sales to be in line with our historical averages prior to the March 2024 quarter.
Operating expenses
Our principal operating expenses include staff related expenses, advertising (which includes expenses related to industry distribution and trade shows), sponsorships, affiliate commissions, merchant fees, technology, travel, rent, professional service fees, and business insurance expenses.
Consolidated Operating Expenses
The following tables provide information on our operating expenses for the three and six months ended March 31, 2024 and 2023:
| Three Months |
Three Months |
|||||||||||
| Ended |
Ended |
|||||||||||
| March 31, |
March 31, |
|||||||||||
| 2024 |
2023 |
Change |
||||||||||
| Staff related expense |
$ | 1,384,558 | $ | 1,958,806 | $ | (574,248 | ) | |||||
| Accounting/legal expense |
295,233 | 301,724 | (6,491 | ) | ||||||||
| Professional outside services |
132,397 | 213,211 | (80,814 | ) | ||||||||
| Advertising/marketing/social media/events/tradeshows/sponsorships/affiliate commissions |
979,625 | 1,323,551 | (343,926 |
) | ||||||||
| Merchant fees |
167,228 | 196,785 | (29,557 | ) | ||||||||
| R&D and regulatory |
2,097 | 56,161 | (54,064 | ) | ||||||||
| Rent and utilities |
407,895 | 399,032 | 8,863 | |||||||||
| Non-cash stock compensation |
11,944 | 117,821 | (105,877 | ) | ||||||||
| Intangibles Amortization |
172,842 | 277,354 | (104,512 | ) | ||||||||
| Depreciation |
117,750 | 102,390 | 15,360 | |||||||||
| All other expenses |
460,150 | 469,316 | (9,166 | ) | ||||||||
| Totals |
$ | 4,131,719 | $ | 5,416,151 | $ | (1,284,432 | ) | |||||
| Six Months |
Six Months |
|||||||||||
| Ended |
Ended |
|||||||||||
| March 31, |
March 31, |
|||||||||||
| 2024 |
2023 |
Change |
||||||||||
| Staff related expense |
$ | 2,771,424 | $ | 4,289,836 | $ | (1,518,412 | ) | |||||
| Accounting/legal expense |
567,279 | 568,779 | (1,500 | ) | ||||||||
| Professional outside services |
313,575 | 430,187 | (116,612 | ) | ||||||||
| Advertising/marketing/social media/events/tradeshows/sponsorships/affiliate commissions |
2,372,620 | 3,249,579 | (876,959 | ) | ||||||||
| Merchant fees |
343,103 | 407,050 | (63,947 | ) | ||||||||
| R&D and regulatory |
6,726 | 132,433 | (125,707 | ) | ||||||||
| Rent and utilities |
803,206 | 821,706 | (18,500 | ) | ||||||||
| Non-cash stock compensation |
28,486 | 254,965 | (226,479 | ) | ||||||||
| Intangibles Amortization |
345,684 | 554,709 | (209,025 | ) | ||||||||
| Depreciation |
228,615 | 202,502 | 26,113 | |||||||||
| Non-cash stock compensation related to terminated contractual obligation |
- | 884,892 | (884,892 | ) | ||||||||
| All other expenses |
974,335 | 1,233,458 | (259,123 | ) | ||||||||
| Totals |
$ | 8,755,053 | $ | 13,030,097 | $ | (4,275,043 | ) | |||||
Our overall operating expenses decreased by $1.3 million or 25% for the three months ended March 31, 2024 over the three months ended March 31, 2023. The year over year decrease was primarily driven by management's continued ongoing efforts to reduce our cost structure including decreases in staff related expenses, advertising, marketing, sponsorships and affiliate commission expenses, professional, accounting and legal expenses, and a reduction of intangibles amortization. As previously discussed, we have a number of initiatives in place with a target to further reduce G&A costs by an estimated $0.2 million a month by August, including the elimination of the Red Oak Lease.
For the six months ending March 2024, year to date operating expenses decreased by $4.3 million as management continues to focus on operational efficiencies across the board.
Corporate overhead and allocation of management fees to our segments
Included in our consolidated operating expenses are expenses associated with our corporate overhead which are not allocated to the operating business unit, including (i) staff related expenses; (ii) accounting and legal expenses; (iii) professional outside services; (iv) travel and entertainment expenses; (v) rent; (vi) business insurance; and (vii) non-cash stock compensation expense.
The following tables provide information on our corporate overhead for the three and six months ended March 31, 2024 and 2023:
| Three Months |
Three Months |
|||||||||||
| Ended |
Ended |
|||||||||||
| March 31, |
March 31, |
|||||||||||
| 2024 |
2023 |
Change |
||||||||||
| Staff related expense |
$ | 109,583 | $ | 54,264 | $ | 55,319 | ||||||
| Accounting/Legal expense |
169,264 | 220,243 | (50,979 | ) | ||||||||
| Professional outside services |
65,932 | 121,092 | (55,160 | ) | ||||||||
| Business insurance |
154,878 | 198,456 | (43,578 | ) | ||||||||
| Non-cash stock compensation |
11,944 | 117,821 | (105,877 | ) | ||||||||
| Totals |
$ | 511,601 | $ | 711,876 | $ | (200,275 | ) | |||||
| Six Months |
Six Months |
|||||||||||
| Ended |
Ended |
|||||||||||
| March 31, |
March 31, |
|||||||||||
| 2024 |
2023 |
Change |
||||||||||
| Staff related expense |
$ | 212,191 | $ | 206,790 | $ | 5,401 | ||||||
| Accounting/legal expense |
386,270 | 418,105 | (31,835 | ) | ||||||||
| Professional outside services |
184,144 | 180,033 | 4,111 | |||||||||
| Business insurance |
337,071 | 378,630 | (41,559 | ) | ||||||||
| Non-cash stock compensation |
28,486 | 254,965 | (226,479 | ) | ||||||||
| Totals |
$ | 1,148,162 | $ | 1,438,523 | $ | (290,361 | ) | |||||
Our corporate operating expenses are down quarter over quarter by $290,000 or 28%. This decrease in primarily related decreased non-cash stock compensation, accounting/legal expenses and business insurance expenses.
The corporate operating expenses are primarily related to the ongoing public company-related activities.
Therapeutics Overhead
Included in our consolidated operating expenses are expenses associated with Therapeutics which are not allocated to the operating business unit, including staff related expenses and R&D and regulatory expenses. The Therapeutic operating expenses include research and development activities for therapeutic applications. Year over year’s decline is primarily driven by the finishing of our clinical studies.
The following tables provide information on our approximate corporate overhead for the three and six months ended March 31, 2024 and 2023:
| Three Months |
Three Months |
|||||||||||
| Ended |
Ended |
|||||||||||
| March 31, |
March 31, |
|||||||||||
| 2024 |
2023 |
Change |
||||||||||
| Staff related expense |
$ | 91,250 | $ | 87,170 | $ | 4,080 | ||||||
| R&D and Regulatory |
- | 50,142 | (50,142 | ) | ||||||||
| Totals |
$ | 91,250 | $ | 137,312 | $ | (46,062 | ) | |||||
| Six Months |
Six Months |
|||||||||||
| Ended |
Ended |
|||||||||||
| March 31, |
March 31, |
|||||||||||
| 2024 |
2023 |
Change |
||||||||||
| Staff related expense |
$ | 183,503 | $ | 174,368 | $ | 9,135 | ||||||
| R&D and Regulatory |
- | 125,355 | (125,355 | ) | ||||||||
| Totals |
$ | 183,503 | $ | 299,723 | $ | (116,220 | ) | |||||
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.
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 $0 at March 31, 2024, as compared to $90,363 at September 30, 2023, respectively. The fourth and final marking period ended and the final issuance of shares occurred in January 2024.
Liquidity and Capital Resources
We had cash and cash equivalents on hand of $2.1 million and working capital of $3.2 million (excluding $2.7 million of accrued dividends) at March 31, 2024 as compared to cash and cash equivalents on hand of $1.8 million and working capital of $4.1 million at September 30, 2023 (excluding $0.7 million in accrued dividends). Our current assets decreased approximately 8.1% at March 31, 2024 from September 30, 2023, which is primarily attributable to a decrease in inventory and accounts receivables. Our current liabilities increased by 49% at March 31, 2024 from September 30, 2023, and is primarily attributable to dividends on the preferred stock that have been accrued but not paid and unpaid rent for the Red Oak Lease.
The Company entered into a Purchase Agreement dated January 30, 2024 with five Investors whereby the Investors advanced the Company an aggregate of $1,250,000 gross proceeds and the Company issued each Investor an 8% Senior Secured Original Issue 20% Discount Convertible Promissory Note, in the aggregate principal amount of $1,541,666. The Company intends to use the proceeds from the issuance of the Notes for working capital and general corporate purposes, including, but not limited to inventory investment to assist with orders and funding proxy expenses. Under GAAP the convertible feature of the Notes creates a non-cash contingent liability. Due to the common stock price increase from the issuance date to the end of the second quarter the FMV of the Notes increased, resulting in a FMV for the Notes of $2.7 million as of March 31, 2024. As of this filing, the actual Notes principal balance has been reduced to approximately $1 million through a series of partial conversions of the Notes.
During the three and six months ended March 31, 2024 we used cash primarily to fund our operations.
We do not have any commitments for capital expenditures. We have a commitment for cumulative dividends at an annual rate of 8% payable monthly in arrears for the prior month to our preferred shareholders. As of September 2023, we have suspended paying the dividend in cash and are accruing this dividend on a monthly basis.
While the Company is taking strong action and believes that it can execute its strategy and path to profitability within its balance sheet, and in its ability to raise additional funds, there can be no assurances to that effect. The Company’s working capital position may not be sufficient to support the Company’s daily operations for the twelve months subsequent to the issuance this report. The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability and cash flow and the ability to acquire additional funding. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern within twelve months after the date that these financial statements are issued. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result in the Company not being able to continue as a going concern.
Our goal from a liquidity perspective is to use operating cash flows to fund day to day operations and we have not met this goal as cash flow from operations has been a net use of $0.7 million and $1.7 million for the three months ended March 31, 2024 and 2023, respectively. Management believes the quarterly cash consumption should continue to improve in subsequent quarters.
Adjusted EBITDA
To supplement the Company's unaudited interim consolidated financial statements presented in accordance with US GAAP, the Company uses certain non-GAAP measures of financial performance. Non-GAAP financial measures are not prepared in accordance with, or as an alternative to US GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company's performance that either excludes or includes amounts, or is subject to adjustment that have such an effect, that are not normally excluded or included in the most directly comparable financial measure that is calculated and presented in accordance with US GAAP. Adjusted EBITDA as presented below is a non-GAAP measure.
cbdMD defines Adjusted EBITDA as Earnings Before Interest, Taxes, Depreciation and Amortization excluding (1) stock based compensation; (2) one time inventory adjustments; (3) impairment of goodwill and other intangible items; (4) one-time severance accruals; (5) non-cash trade credits; and (6) accruals/expenses for discretionary bonuses, and (7) other one-time expenses related to M&A or other corporate actions.
Our management uses and relies on Adjusted EBITDA, which is a non-GAAP financial measure. We believe that management, analysts and shareholders benefit from referring to the following non-GAAP financial measure to evaluate and assess our core operating results from period-to-period after removing the impact of items that affect comparability. Our management recognizes that the non-GAAP financial measures have inherent limitations because of the excluded items described below.
We have included a reconciliation of our non-GAAP financial measure to the most comparable financial measures calculated in accordance with GAAP. We believe that providing the non-GAAP financial measures, together with the reconciliation to GAAP, helps investors make comparisons between cbdMD and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measure and the corresponding GAAP measure provided by each company under applicable rules of the Securities and Exchange Commission.
The following table presents a reconciliation of GAAP loss from operations to Adjusted EBITDA.
Adjusted EBITDA for the three and six months ended March 31, 2024 and March 31, 2023 is as follows:
| Three months |
Three months |
Six Months |
Six Months |
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| Ended |
Ended |
Ended |
Ended |
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| March 31, |
March 31, |
March 31, |
March 31, |
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| 2024 |
2023 |
2024 |
2023 |
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| (Unaudited) |
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| GAAP (loss) from operations |
$ | (1,550,991 | ) | $ | (1,400,643 | ) | $ | (2,616,828 | ) | $ | (5,446,824 | ) | ||||
| Adjustments: |
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| Depreciation & Amortization |
290,592 | 379,744 | 574,299 | 757,210 | ||||||||||||
| Employee and director stock compensation (1) |
11,944 | 117,821 | 28,486 | 254,965 | ||||||||||||
| Other non-cash stock compensation for services (2) |
- | - | - | 884,892 | ||||||||||||
| Mergers and Acquisitions and financing transaction expense (3) |
58,239 | - | 125,838 | - | ||||||||||||
| Accrual for severance |
- | - | - | 129,761 | ||||||||||||
| Non-cash expense incurred as a credit (4) |
439,926 | - | 439,926 | - | ||||||||||||
| Non-cash accelerated amortization of expense related to terminated IT contracts |
72,101 | - | 72,101 | - | ||||||||||||
| a360 non-cash trade credit |
- | 107,608 | - | 107,608 | ||||||||||||
| Non-GAAP adjusted EBITDA |
$ | (678,189 | ) | $ | (795,470 | ) | $ | (1,376,178 | ) | $ | (3,312,387 | ) | ||||
| (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 expenses incurred in relation to M&A and financing activities during the six months ended March 31, 2024. |
| (4) Represents non-cash expense incurred as a credit provided to GNC to replace expired product. |
Critical accounting policies
The preparation of financial statements and related disclosures in conformity with US GAAP and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to our consolidated financial statements appearing elsewhere in this report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.
Please see Part II, Item 7 – Critical Accounting Policies appearing in our 2023 10-K for the critical accounting policies we believe involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.
Recent accounting pronouncements
Please see Note 1 – Organization and Summary of Significant Accounting Policies appearing in the consolidated financial statements included in this report for information on accounting pronouncements.
Off balance sheet arrangements
As of the date of this report, we have no undisclosed off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this report, our principal executive officer and Chief Accounting Officer has concluded that our disclosure controls and procedures were effective to ensure that the information relating to our company, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
As disclosed above, the Company’s sub landlord HSKL for its Red Oak Facility, filed a Complaint in Summary Ejectment filed in Mecklenburg County, North Carolina on February 27, 2024. Subject to compliance with the License Agreement and Lease Forbearance Agreement, HSKL has agreement to dismiss the complaint. See footnote 11 to our financial statements above.
We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Accordingly, in addition to the disclosure below, we incorporate by reference the risk factors disclosed in Part I, Item 1A of our 2023 10-K and the risk factor disclosed in our Form 10-Q for the period ended December 31, 2023. See also "Liquidity and Capital Resources" above.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Except for those unregistered securities previously disclosed in reports filed with the SEC, we have not sold any securities without registration under the Securities Act during the period covered by this report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable to our Company’s operations.
The Auditor Firm ID for our external auditors, Cherry Bekaert LLP, is 677.
+ 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.
* This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our stockholders who make a written request to our Corporate Secretary at cbdMD, Inc. 2101 Westinghouse Blvd, Suite A, Charlotte, NC 28273.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| cbdMD, INC. |
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| May 15, 2024 | By: |
/s/ T. Ronan Kennedy | |
| T. Ronan Kennedy, Chief Executive Officer and | |||
| principal executive officer | |||
| May 15, 2024 | By: |
/s/ T. Ronan Kennedy |
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| T. Ronan Kennedy, Chief Financial Officer and |
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| principal financial officer |
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