NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2020 AND 2019
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Nature of Business
cbdMD, Inc. ("cbdMD", "we", "us", “our”, "Parent
Company” or the “Company”) is a North Carolina
corporation formed on March 17, 2015 as Level Beauty Group, Inc. In
November 2016 we changed the name of the Company to Level Brands,
Inc. and on May 1, 2019 we changed the name of our Company to
“cbdMD, Inc.”. We operate from our offices located in
Charlotte, North Carolina. Our fiscal year end is established as
September 30.
On December 20, 2018 the Company, and its newly organized
wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, 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, cbdMD
LLC survived and operates the prior business of Cure Based
Development. On April 10, 2019, cbdMD LLC was renamed to CBD
Industries LLC (“CBDI”). As consideration for the
Mergers, the Company had a contractual obligation, after approval
by our shareholders, to issue 15,250,000 shares of our common stock
to the members of Cure Based Development, of which 8,750,000 of the
shares will vest over a five year period and are subject to a
voting proxy agreement, as well as to issue another 15,250,000
shares of our common stock in the future upon earnout goals being
within the next 5 years. The Company’s shareholders approved
the issuance of the 15,250,000 shares of common stock and they were
issued to members of Cure Based Development on April 19, 2019. In
addition the first marking period for the earnout was December 31,
2019 and based on measurement criteria, 5,127,792 shares had been
earned and were issued on February 27, 2020. CBDI produces
and
distributes various high-grade,
premium cannabidiol oil (“CBD”) products under the
cbdMD brand. CBD is a natural substance produced from the hemp
plant and the products manufactured by CBDI are non psychoactive as
they do not contain tetrahydrocannabinol (THC).
On October 22, 2019, cbdMD, Inc. filed Articles of Incorporation
with the Secretary of State of North Carolina to form a new
wholly-owned subsidiary, Paw CBD, Inc. (“Paw CBD”), in
conjunction with the organization of its animal health division. In
the third quarter of fiscal 2019 cbdMD, Inc. launched its new CBD
pet brand, Paw CBD. Following the initial positive response to the
brand from retailers and consumers, cbdMD, Inc. organized Paw CBD,
Inc. as a separate wholly-owned subsidiary in an effort to take
advantage of its early mover status in the CBD animal health
industry.
Effective September 30, 2019, the Company abandoned and ceased
operations of four business subsidiaries: Encore Endeavor 1, LLC
(“EE1”), I’M1, LLC (“IM1”), Beauty
and Pin Ups, LLC (“BPU”) and Level H&W, LLC
(“Level H&W”). Therefore, the results of operations
related to these subsidiaries for the Company are reported as
discontinued operations.
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 Company’s Annual Report filed
with the SEC on Form 10-K for the year ended September 30, 2019, as
amended (“2019 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 year 2019 as reported in the 2019 10-K have
been omitted.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries CBDI and Paw CBD.
All material intercompany transactions and balances have been
eliminated in consolidation.
Use of Estimates
The preparation of the Company's consolidated financial statements
have been prepared in accordance with US GAAP, and requires
management to make estimates and assumptions that affect amounts of
assets and liabilities and disclosures of contingent assets and
liabilities as of the date of the financial statements and reported
amounts of revenues and expenses during the periods presented.
Estimates and assumptions are reviewed periodically and the effects
of revisions are reflected in the consolidated financial statements
in the period they are determined to be necessary. Significant
estimates made in the accompanying consolidated financial
statements include, but are not limited to, allowances for doubtful
accounts, inventory valuation reserves, expected sales returns and
allowances, certain assumptions related to the valuation of
investments other securities, acquired intangible and long-lived
assets and the recoverability of intangible and long-lived assets
and income taxes, including deferred tax valuation allowances and
reserves for estimated tax liabilities, contingent liability and,
hence consideration for the Mergers is a material estimate. Actual
results could differ from these estimates.
The Company is continuing to monitor data related to impact of the
COVID-19 pandemic and at this
time, based upon the available data, does not believe there would
be an impact on inputs used for estimates and
assumptions.
Cash and Cash Equivalents
For financial statements purposes, the Company considers all highly
liquid investments with a maturity of less than three months when
purchased to be cash equivalents.
Accounts receivable and Accounts receivable other
Accounts receivable are stated at cost less an allowance for
doubtful accounts, if applicable. Credit is extended to customers
after an evaluation of the customer’s financial condition,
and generally collateral is not required as a condition of credit
extension. Management’s determination of the allowance for
doubtful accounts is based on an evaluation of the receivables,
past experience, current economic conditions, and other risks
inherent in the receivables portfolio. As of June 30, 2020, we have
an allowance for doubtful accounts of $12,288, and had an allowance
of ($7,286) at September 30, 2019.
In addition, the Company has and may, from time to time, enter
into contracts where a portion of the consideration provided by the
customer in exchange for the Company's services is common stock,
options or warrants (an equity position). In these
situations, upon invoicing the customer for the stock or other
instruments, the Company will record the receivable as accounts
receivable other, and use the value of the stock or other
instrument upon invoicing to determine the value. Where an accounts
receivable is settled with the receipt of the common stock or other
instrument, the common stock or other instrument will be classified
as an asset on the balance sheet as either a marketable security
(when the customer is a publicly traded entity) or as an investment
other security (when the customer is a private
entity).
Receivable and Merchant Reserve
The Company primarily sells its products through the internet and
has an arrangement to process customer payments with third-party
payment processors, and will negotiate the fee based on the market.
The arrangement with the payment processors requires that the
Company pay a fee between 4.0% - 5.2% of the transaction amounts
processed. Pursuant to this agreement, there can be a waiting
period between 2 - 5 days prior to reimbursement to the Company,
and as well as a calculated reserve which some payment processors
hold back. Fees and reserves can change periodically with notice
from the processors. At June 30, 2020, the receivable from payment
processors included approximately $258,303 for the waiting period
amount and is recorded as accounts receivable in the accompanying
consolidated balance sheet.
Inventory
Inventory is stated at the lower of cost or net realizable value
with cost being determined on a weighted average basis. The cost of
inventory includes product cost, freight-in, and production fill
and labor (portions of which we outsource to third party
manufacturers). Write-offs of potentially slow moving or damaged
inventory are recorded based on management’s analysis of
inventory levels, forecasted future sales volume and pricing and
through specific identification of obsolete or damaged products. We
assess inventory quarterly for slow moving products and potential
impairments and at a minimum perform a physical inventory count
annually near fiscal year end.
Customer Deposits
Customer deposits consist of payments received in advance of
revenue recognition. Revenue is recognized as revenue recognition
criteria are met.
Property and Equipment
Property and equipment items are stated at cost less accumulated
depreciation. Expenditures for routine maintenance and repairs are
charged to operations as incurred. Depreciation is charged to
expense over the estimated useful lives of the assets using the
straight-line method. Generally, the useful lives are five years
for manufacturing equipment and automobiles, three years for
computer, furniture and equipment, three years for software, and
leasehold improvements are over the term of the lease. 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.
Goodwill
Goodwill represents the excess of cost of an acquired business over
the fair value of the identifiable tangible and intangible assets
acquired and liabilities assumed in a business combination.
Identifiable intangible assets acquired in business combinations
are recorded based on their fair values at the date of acquisition.
Goodwill is not subject to amortization but must be evaluated for
impairment annually. The Company tests for goodwill impairment
annually or whenever events occur or circumstances change that
would more likely than not reduce the fair value of a reporting
unit below its carrying amount.
In performing a goodwill test, the Company performs a qualitative
evaluation and if necessary, a quantitative evaluation. Factors
considered in the qualitative test include specific operating
results as well as new events and circumstances impacting the
operations or cash flows of the business acquired. For the
quantitative test, the Company assesses goodwill for impairment by
comparing the carrying value of the business to the respective fair
value. The Company determines the fair value of its acquired
business using a combination of income-based and market-based
approaches and incorporates assumptions it believes market
participants would utilize. The income-based approach utilizes
discounted cash flows while the market-based approach utilizes
market multiples. These approaches are dependent upon
internally-developed forecasts that are based upon annual budgets
and longer-range strategic plans. The Company uses discount rates
that are commensurate with the risks and uncertainty inherent in
the respective acquired business and in the internally-developed
forecasts. The Company has analyzed a variety of factors in light
of the known impact to date of the COVID-19 pandemic on its
business to determine if a circumstance could trigger an impairment
loss, and, at this time and based on the information presently
known, does not believe it is more likely that an impairment loss
has been incurred.
Intangible Assets
The Company's intangible assets consist of trademarks and other
intellectual property, all of which are accounted for in accordance
with ASC Topic 350, Intangibles – Goodwill
and Other. The Company employs
the non-amortization approach to account for purchased intangible
assets having indefinite lives. Under the non-amortization
approach, intangible assets having indefinite lives are not
amortized into the results of operations, but instead are reviewed
annually or more frequently if events or changes in circumstances
indicate that the assets might be impaired, to assess whether their
fair value exceeds their carrying value. We perform an impairment
analysis at August 1 annually on the indefinite-lived intangible
assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis includes
a qualitative assessment to determine if it is necessary to perform
the quantitative impairment test. In performing a qualitative
assessment, we review events and circumstances that could affect
the significant inputs used to determine if the fair value is less
than the carrying value of the intangible assets.
If a quantitative analysis is
necessary, we would analyze various aspects including revenues from
the business, associated with the intangible assets. In addition,
intangible assets will be tested on an interim basis if an event or
circumstance indicates that it is more likely than not that an
impairment loss has been incurred. The Company has analyzed a
variety of factors in light of the known impact to date of the
COVID-19 pandemic on its business to determine if a circumstance
could trigger an impairment loss, and, at this time and based on
the information presently known, does not believe it is more likely
that an impairment loss has been incurred.
Intangible assets with finite useful lives are amortized using the
straight-line method over their estimated period of benefit. In
accordance with ASC 360-10-35-21, definite lived intangibles are
reviewed annually or more frequently if events or changes in
circumstances indicate that the assets might be impaired, to assess
whether their fair value exceeds their carrying value.
In conjunction with any acquisitions, the Company refers to ASC-805
as amended by Accounting Standards Update (“ASU”)
2017-01 in determining if the Company is acquiring any inputs,
processes or outputs and the impact that such factors would have on
the classification of the acquisition as a business combination or
asset purchase. Additionally, the Company refers to the
aforementioned guidance in reviewing all acquired assets and
assumed liabilities for valuation in a business combination,
including the determination of intangible asset values and
contingent liabilities.
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 8. The Company made a
determination of the fair value of the contingent liabilities as
part of the valuation of the assets acquired and liabilities
assumed in the business combination.
The Company recognized both the fixed number of shares to be
issued, and the variable number of shares to be potentially issued,
as contingent liabilities on its Consolidated Balance Sheets. These
contingent liabilities were recorded at fair value upon the
acquisition date and are remeasured quarterly based on the
reassessed fair value as of the end of that quarterly reporting
period. Additionally, as the fixed shares were issued on April 19,
2019, the value of the shares at that time, in the amount of
$53,215,163, was reclassified from contingent liability to
additional paid in capital on the balance sheet. In addition the
first marking period for the Earnout Shares was December 31, 2019
and based on measurement criteria, 5,127,792 shares were issued on
February 27, 2020. The value of the issued Earnout Shares as of
February 27, 2020 was $4,620,000 and the decrease in value of
$6,924,503 from December 31, 2019 related to those shares was
recorded in the Statement of Operations for the three months ended
March 31, 2020. Additionally, as the 5,127,792 Earnout Shares were
issued on February 27, 2020, the value of the shares in the amount
of $4,620,000 was reclassified from the contingent liability to
additional paid in capital on the balance sheet.
For the three months ended June 30, 2020, the contingent
liabilities associated with the business combination were increased
by $7,580,000 to reflect their reassessed fair values as of June
30, 2020. This increase is reflective of a change in value of the
variable number of shares from March 31, 2020. In May 2020, the
Company updated the forecasts for performance of the
post-acquisition entity based on current trends and performance
that would impact the estimated likelihood that the revenue targets
disclosed in Note 8 would be met. The primary catalyst for the
$7,580,000 increase in contingent liabilities is the change in the
Company’s common share price between June 30, 2020 and March
31, 2020. These increases or decreases to the contingent
liabilities are reflected within Other Income (Expenses) on the
consolidated statements of operations.
Paycheck Protection Program Loan
On April 27, 2020, we received a loan in the
principal amount of $1,456,100 (the “SBA Loan”),
under the Paycheck Protection Program (“PPP”), which
was established under the recently enacted Coronavirus Aid,
Relief, and Economic Security Act (the “CARES Act”)
administered by the U.S. Small Business Administration (the
“SBA”). The intent and purpose of the PPP is to support
companies, during the COVID-19 pandemic, by providing funds for
certain specified business expenses, with a focus on payroll. As a
qualifying business as defined by the SBA, we are using the
proceeds from this loan to primarily help maintain our payroll as
we navigate our business with a focus on returning to normal
operations. The term of the Note is two years, though it may be
payable sooner in connection with an event of default under the
Note. The SBA Loan carries a fixed interest rate of one percent per
year, with the first payment due seven months from the date of
initial cash receipt. Under the CARES Act and the PPP, certain
amounts of loans made under the PPP may be forgiven if the
recipients use the loan proceeds for eligible purposes, including
payroll costs and certain rent or utility costs, and meet other
requirements regarding, among other things, the maintenance of
employment and compensation levels. We intend to use the SBA Loan
for qualifying expenses and to apply for forgiveness of the SBA
Loan in accordance with the terms of the CARES
Act.
In
June 2020, the Payroll Protection Program Flexibility Act
(“PPPFA”) was signed into law adjusting certain key
terms of loans issued under the PPP. In accordance with the PPPFA,
the initial deferral period may be extended from six to up to ten
months and the loan maturity may be extended from two to five
years. The PPPFA also provided for certain other changes, including
the extent to which the loan may be forgiven.
As the legal form of the Promissory Note is a debt
obligation, the Company is accounting for it as debt under
Accounting Standards Codification (ASC)
470, Debt and recorded an initial liability of $1,456,100 in
the condensed consolidated balance sheet upon receipt of the loan
proceeds. The Company is accruing interest over the term of the
loan and is not imputing additional interest at a market rate
because the guidance on imputing interest in ASC
835-30, Interest excludes transactions where interest rates
are prescribed by a government agency. If any amount of the loan is
ultimately forgiven, income from the extinguishment of debt would
be recognized as a gain on loan extinguishment in the consolidated
statement of operations and comprehensive
income.
Revenue Recognition
The Company adopted ASC 606, Revenue from Contracts with
Customers using the modified
retrospective method beginning with our quarter ended December 31,
2018. The adoption of the new revenue standards as of October 1,
2018 did not change the Company’s revenue recognition as the
majority of its revenues continue to be recognized when the
customer takes control of its product or the services have been
rendered. As the Company did not identify any accounting changes
that impacted the amount of reported revenues with respect to any
of its revenue streams, no adjustment to retained earnings was
required upon adoption.
Under ASC 606, 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. For our CBD products, the
Company meets that obligation when it has shipped products which
have been ordered to the customer. The Company has reviewed its
various revenue streams for its other contracts under the five-step
approach.
At June 30, 2020, the Company has no future performance
obligations.
Allocation of transaction price
In our current business model we do not have contracts with
customers which have multiple elements as revenue is driven purely
by online product sales or purchase order based product sales.
However, at times in the past, the Company had entered into
contracts with customers wherein there were multiple elements that
may have disparate revenue recognition patterns. In such instances,
the Company must allocate the total transaction price to these
various elements. This is achieved by estimating the standalone
selling price of each element, which is the price at which we sell
a promised good or service separately to a customer.
In circumstances where we have not historically sold relevant
products or services on a standalone basis, the Company utilizes
the most situationally appropriate method of estimating standalone
selling price. These methods include (i) an adjusted market
assessment approach, wherein we refer to prices from our
competitors for similar goods or serves and adjust those prices as
necessary to reflect our typical costs and margins, (ii) an
expected cost plus margin approach, wherein we forecast the costs
that we will incur in satisfying the identified performance
obligation and adding an appropriate margin to such costs, and
(iii) a residual approach, wherein we adjust the total transaction
price to remove all observable standalone selling prices of other
goods or services included in the contract and allocate the
entirety of the remaining contract amount to the remaining
obligation.
Revenue recognition
The Company records revenue from the sale of its products when risk
of loss and title to the product are transferred to the customer,
which is upon shipping (and is typically FOB shipping) which is
when our performance obligation is met. Net sales are comprised of
gross revenues less product returns, trade discounts and customer
allowances, which include costs associated with off-invoice
mark-downs and other price reductions, as well as trade promotions.
These incentive costs are recognized at the later of the date on
which the Company recognizes the related revenue or the date on
which the Company offers the incentive. The Company currently
offers a 60 day, money back guarantee.
In regard to sales for services provided, the Company records
revenue when the customer has accepted services and the Company has
a right to payment. Based on the contracted services, revenue is
recognized when the Company invoices customers for completed
services at agreed upon rates or revenue is recognized over a fixed
period of time during which the service is
performed.
Disaggregated Revenue
Our product revenue is generated primarily through two sales
channels, consumer (E-commerce) and wholesale channels. We also
have generated service related sales, although this type of revenue
is not a primary focus. We believe 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 our principal revenue generating activities are as
follows:
-
Consumer
(E-commerce) sales - consumer products sold through our 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.
-
Wholesale
sales - products sold to our 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.
-
Service
related sales – services provided to organizations typically
consulting services related to branding, marketing, or advisory.
Revenue is recognized when services are delivered to the customer,
in accordance with the terms of the applicable agreement. Payment
terms vary and typically are based on deliverables and agreed upon
timelines.
The following table represents a disaggregation of revenue by sales
channel:
|
|
Three
Months ended
June 30,
2020
|
|
Three
Months ended
June 30,
2019
|
|
|
Wholesale
product sales
|
$2,410,719
|
22.7%
|
$3,366,807
|
42.1%
|
|
Consumer
product sales
|
8,225,826
|
77.3%
|
4,638,342
|
57.9%
|
|
Service
related sales
|
-
|
0%
|
-
|
0%
|
|
Total
net sales
|
$10,636,545
|
|
$8,005,149
|
|
|
|
Nine
Months ended
June 30,
2020
|
|
Nine
Months ended
June 30,
2019
|
|
|
Wholesale
product sales
|
$8,238,832
|
27.3%
|
$4,741,900
|
33.6%
|
|
Consumer
product sales
|
21,944,985
|
72.7%
|
9,365,514
|
66.4%
|
|
Service
related sales
|
-
|
0%
|
-
|
0%
|
|
Total
net sales
|
$30,183,817
|
|
$14,107,414
|
|
Contract Balances
Contract assets represent unbilled receivables and are presented
within accounts receivable, net on the condensed consolidated
balance sheets. Contract liabilities represent unearned revenues
and are presented as deferred revenue or customer deposits on the
condensed consolidated balance sheets.
We have no contract assets and contract liabilities at June 30,
2020.
Cost of Sales
Our cost of sales includes costs associated with distribution, fill
and labor expense, components, manufacturing overhead, third-party
providers, and outbound freight for our products sales, and
includes labor for our service sales. For our product sales, cost
of sales also includes the cost of refurbishing products returned
by customers that will be offered for resale, if any, and the cost
of inventory write-downs associated with adjustments of held
inventories to their net realizable value. These expenses are
reflected in the Company’s consolidated statements of
operations when the product is sold and net sales revenues are
recognized or, in the case of inventory write-downs, when
circumstances indicate that the carrying value of inventories is in
excess of their net realizable value.
Advertising Costs
The Company expenses all costs of advertising and related marketing
and promotional costs as incurred. The Company incurred
approximately $1,699,262 and $2,582,685 in advertising and related
marketing and promotional costs included in operating expenses
during the three months ended June 30, 2020 and 2019, respectively.
The Company incurred approximately $7,534,488 and $4,174,166 in
advertising and related marketing and promotional costs included in
operating expenses during the nine months ended June 30, 2020 and
2019, respectively.
Shipping and Handling Fees and Costs
All fees billed to customers for shipping and handling are
classified as a component of sales. All costs associated with
shipping and handling are classified as a component of cost of
goods sold.
Income Taxes
The Parent Company is a North Carolina corporation that is treated
as a corporation for federal and state income tax purposes. Prior
to April 2017, BPU was a multi-member limited liability company
that was treated as a partnership for federal and state income tax
purposes. Prior to December 2018, IM1 and EE1, were also
multi-member limited liability companies that were treated as a
partnership for federal and state income tax purposes As such, the
Parent Company’s partnership share in the taxable income or
loss of BPU, IM1 and EE1 was included in the tax return of the
Parent Company. Effective September 30, 2019, the Company abandoned
and ceased operations of EE1, IM1, BPU and Level H&W. As of
October 1, 2019, CBDI and Paw CBD are 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 Parent
Company.
The Parent Company accounts for income taxes pursuant to the
provisions of the Accounting for Income Taxes topic of the FASB ASC
740 which requires, among other things, an asset and liability
approach to calculating deferred income taxes. The asset and
liability approach requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax
bases of assets and liabilities. The Parent Company uses the inside
basis approach to determine deferred tax assets and liabilities
associated with its investment in a consolidated pass-through
entity. A valuation allowance is provided to offset any net
deferred tax assets for which management believes it is more likely
than not that the net deferred asset will not be
realized.
US GAAP requires management to evaluate tax positions taken by the
Company and recognize a tax liability (or asset) if the Company has
taken an uncertain tax position that more likely than not would not
be sustained upon examination by the Internal Revenue Service.
Management has analyzed the tax positions taken by the Company, and
has concluded that as of June 30, 2020 and 2019, there were no
uncertain tax positions taken or expected to be taken that would
require recognition of a liability (or asset) or disclosure in the
consolidated financial statements.
Concentrations
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, accounts receivable, and securities.
The Company places its cash and cash equivalents on deposit with
financial institutions in the United States. The Federal Deposit
Insurance Corporation (“FDIC”) covers $250,000 for
substantially all depository accounts. The Company from time to
time may have amounts on deposit in excess of the insured limits.
The Company had a $14,589,707 uninsured balance at June 30, 2020
and a $4,097,190 uninsured balance at September 30,
2019.
Concentration of credit risk with respect to receivables is
principally limited to trade receivables with corporate customers
that meet specific credit policies. Management considers these
customer receivables to represent normal business risk. The Company
did not have any customers that represented a significant amount of
our sales for the three and nine months ended June 30, 2020. We
have three customers whose aggregate accounts receivable balance
was approximately 60% of the combined total accounts receivable and
accounts receivable discontinued operations as of June 30, 2020, of
which one customer is from the discontinued operations and accounts
for approximately 47%. The aggregate accounts receivable balance of
such customers represented approximately 51% of the Company’s
total accounts receivable as of September 30, 2019.
Stock-Based Compensation
We account for our 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.
We use the Black-Scholes model for measuring the fair value of
options and warrants. The stock based fair value compensation is
determined as of the date of the grant or the date at which the
performance of the services is completed (measurement date) and is
recognized over the vesting periods. The Company recognizes
forfeitures when they occur.
Earnings (Loss) Per Share
The Company uses ASC 260-10, Earnings Per Share
for calculating the basic and diluted
income (loss) per share. The Company computes basic income (loss)
per share by dividing net income (loss) and net income (loss)
attributable to common shareholders, after deducting preferred
stock dividends, by the weighted average number of common shares
outstanding. Common equivalent shares are excluded from the
computation of net loss per share if their effect is
anti-dilutive.
New Accounting Standards
On October 1, 2019, the Company adopted ASU No.
2016-02, Leases, and subsequently issued clarifying guidance.
Under the new guidance, lessees are required to recognize assets
and lease liabilities for the rights and obligations created by
leased assets previously classified as operating leases. In July
2018, the FASB issued ASU No. 2018-11, which permitted entities to
record the impact of adoption using a modified retrospective method
with any cumulative-effect as an adjustment to retained earnings
(accumulated deficit) as opposed to restating comparative periods
for the effects of applying the new standard. The Company elected
this transition approach; therefore, the Company’s prior
period reported results are not restated to include the impact of
this adoption. We also elected the practical expedient permitted
under the transition guidance which permits companies not to
reassess prior conclusions on lease identification, historical
lease classification and initial direct costs. In connection with the
adoption of the new guidance, the Company recognized an operating
lease asset for $7,704,109 and operating lease liability of
$7,950,803 and a reduction of retained earnings of $13,528 in its
balance sheet as of December 31, 2019, with no impact to its
results of operations and cash flows. The difference between the
leased assets and lease liabilities represents the net position of
existing prepaid rent and deferred rent liabilities balance,
resulting from historical straight-lining of operating leases,
which were effectively reclassified upon adoption to reduce the
measurement of the leased assets.
In August 2018, the FASB issued ASU No.
2018-13, Fair Value Measurement (Topic
820). The ASU modifies,
removes, and adds several disclosure requirements on fair value
measurements in Topic 820, Fair Value Measurement. The ASU 2018-13
is effective for all entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. The
amendments on changes in unrealized gains and losses, the range and
weighted average of significant unobservable inputs used to develop
Level 3 fair value measurements, and the narrative description of
measurement uncertainty should be applied prospectively for only
the most recent interim or annual period presented in the initial
fiscal year of adoption. All other amendments should be applied
retrospectively to all periods presented upon their effective date.
Early adoption is permitted upon issuance of ASU 2018-13. An entity
is permitted to early adopt any removed or modified disclosures
upon issuance of ASU 2018-13 and delay adoption of the additional
disclosures until their effective date. The Company is evaluating
the effect ASU 2018-13 will have on its consolidated financial
statements and disclosures and has not yet determined the effect of
the standard on its ongoing financial reporting at this
time.
NOTE 2 – ACQUISITIONS
On December 20, 2018 (the “Closing”), the Company, and
its newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD
LLC, both North Carolina limited liability companies, completed a
two-step merger (the “Merger Agreement”) with Cure
Based Development. The Merger Agreement provided that AcqCo LLC
merged with and into Cure Based Development with Cure Based
Development as the surviving entity (the “Merger”), and
immediately thereafter Cure Based Development merged with and into
cbdMD LLC with cbdMD LLC as the surviving entity (the
“Secondary Merger” and collectively with the Merger,
the “Mergers”). cbdMD LLC was renamed on April 10, 2019
to CBDI and has continued as a wholly-owned subsidiary of the
Company and maintains the operations of Cure Based Development
pre-closing. As consideration for the Merger, the Company had a
contractual obligation, after approval by our shareholders, to
issue 15,250,000 shares of our common stock to the members of Cure
Based Development, of which unrestricted voting rights to 8,750,000
of the shares vest over a five year period and are subject to a
voting proxy agreement. The Merger Agreement also provides that an
additional 15,250,000 shares of our common stock can be issued upon
the satisfaction of aggregate net revenue criteria by CBDI, within
60 months following the Closing. The net revenue criteria are:
$20.0, $40.0, $80.0 and $160.0 million, in aggregate $300.0 million
(See Note 8 for more information).
The initial 15,250,000 shares were approved by our shareholders and
issued on April 19, 2019. On February 27, 2020, 5,127,792 shares
were issued upon satisfaction of aggregate net revenue criteria per
the Merger Agreement.
The Company owns 100% of the equity interest of CBDI. The valuation
and purchase price allocation for the Mergers was finalized at
September 30, 2019.
The following table presents the final purchase price
allocation:
|
Consideration
|
$74,353,483
|
|
|
|
|
Assets acquired:
|
|
|
Cash
and cash equivalents
|
$1,822,331
|
|
Accounts
receivable
|
850,921
|
|
Inventory
|
1,054,926
|
|
Other
current assets
|
38,745
|
|
Property
and equipment, net
|
723,223
|
|
Intangible
assets
|
21,585,000
|
|
Goodwill
|
54,669,997
|
|
Total assets acquired
|
80,745,143
|
|
|
|
|
Liabilities assumed:
|
|
|
Accounts
payable
|
257,081
|
|
Notes
payable – related party
|
764,300
|
|
Customer
deposits - related party
|
265,000
|
|
Accrued
expenses
|
460,979
|
|
Deferred
tax liability
|
4,644,300
|
|
Total Liabilities assumed
|
6,391,660
|
|
|
|
|
Net Assets Acquired
|
$74,353,483
|
The goodwill generated from this transaction can be attributed to
the benefits the Company expects to realize from the growth
strategies the acquired Company had developed and the entry into an
emerging market with high growth potential. See Note 8 regarding
contingent liability.
In connection with the purchase price allocation, the Company
recorded a deferred tax liability of approximately $4,644,000, with
a corresponding increase to goodwill, for the tax effect of the
acquired intangible assets from Cure Base Development. This
liability was recorded as there will be no future tax deductions
related to the acquired intangibles, and we have identified these
as indefinite-lived intangible assets.
The Company also acquired estimated net operating loss
carryforwards of approximately $1,996,000. Under Internal Revenue
Code (IRC) Section 382, the use of net operating loss
(“NOL”) carryforwards may be limited to an annual limit
if a change in ownership of a company occurs.
NOTE 3 – MARKETABLE SECURITIES AND INVESTMENT OTHER
SECURITIES
The Company has, from time to time, entered into contracts
where a portion of the consideration provided by the customer in
exchange for the Company's services was common stock, options or
warrants (an equity position). In these situations, upon
invoicing the customer for the stock or other instruments, the
Company recorded the receivable as accounts receivable other, and
used the value of the stock or other instrument upon invoicing to
determine the value. If there was insufficient data to support the
valuation of the security directly, the company would value it, and
the underlying revenue, on the estimated fair value of the services
provided. Where an accounts receivable other was settled with the
receipt of the common stock or other instrument, the common stock
or other instrument was classified as an asset on the balance sheet
as either an investment marketable security (when the customer was
a public entity) or as an investment other security (when the
customer was a privately held entity).
On December 30, 2017 the Company entered into an Agreement with
Isodiol which is a developer of pharmaceutical grade
phytochemical compounds and a manufacturer and developer of
phytoceutical consumer products. As payment for these services, the Company has
received 1,226,435 shares of Isodiol common stock between December
31, 2017 and January 2019. The Company also received 38,095 shares
of Isodiol stock upon Isodiol’s acquisition of Kure Corp,
giving the Company a total of 1,264,530 shares. At June 30, 2020,
the Company has 1,042,193 shares valued at
$52,527.
The table below summarizes the assets valued at fair value as of
June 30, 2020:
|
|
In
Active Markets for Identical Assets and
Liabilities
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
Total
Fair Value at June 30,
2020
|
|
|
|
|
|
|
|
Marketable
securities
|
$52,527
|
-
|
$-
|
$52,527
|
|
Investment
other securities
|
-
|
-
|
$-
|
$-
|
|
|
|
|
|
|
|
Balance
at September 30, 2019
|
$198,538
|
$-
|
$600,000
|
$798,538
|
|
Change
in value of equities
|
$(62,011)
|
$-
|
$-
|
$(62,011)
|
|
Balance
at December 31, 2019
|
$136,527
|
$-
|
$600,000
|
$736,527
|
|
Change
in value of equities
|
$(53,152)
|
$-
|
$(600,000)
|
$(653,152)
|
|
Balance
at March 31, 2020
|
$83,375
|
$-
|
$-
|
$83,375
|
|
Change
in value of equities
|
$(30,848)
|
$-
|
$-
|
$(30,848)
|
|
Balance
at June 30, 2020
|
$52,527
|
$-
|
$-
|
$52,527
|
NOTE 4 – INVENTORY
Inventory at June 30, 2020 and September 30, 2019 consists of the
following:
|
|
|
|
|
Finished
goods
|
$4,019,683
|
$3,050,120
|
|
Inventory
components
|
2,377,643
|
1,251,466
|
|
Inventory
prepaid
|
281,885
|
903,458
|
|
Total
|
$6,679,211
|
$5,205,044
|
Abnormal amounts of idle facility expense, freight, handling
costs, scrap, and wasted material (spoilage) are expensed in the
period they are incurred. During the three months ended June 30,
2020 and 2019, the Company incurred an abnormal charge of $233,372
and $0, respectively due to the scrapping of certain inventory
during the period. This charge was recorded in Other
Expense.
NOTE 5 – PROPERTY AND EQUIPMENT
Major classes of property and equipment at June 30, 2020 and
September 30, 2019 consist of the following:
|
|
|
|
|
Computers,
furniture and equipment
|
$317,369
|
$131,077
|
|
Manufacturing
equipment
|
2,594,675
|
1,375,986
|
|
Leasehold
improvements
|
822,719
|
375,954
|
|
Automobiles
|
24,892
|
24,892
|
|
|
3,759,655
|
1,907,909
|
|
Less
accumulated depreciation
|
(691,746)
|
(192,352)
|
|
Net
property and equipment
|
$3,067,909
|
$1,715,557
|
Depreciation expense for continuing operations related to property
and equipment was $211,937 and $57,874 for the three months ended
June 30, 2020 and 2019, respectively and was $499,394 and $111,913
for the nine months ended June 30, 2020 and 2019, respectively.
Depreciation expense for discontinued operations related to
property and equipment was $0 and $7,654 for the three and nine
months ended June 30, 2019, respectively.
NOTE 6 – INTANGIBLE ASSETS
With the Mergers of Cure Based Development, the Company made a
strategic shift toward the CBD business and all entities and their
associated intangibles were assessed during the year ended
September 30, 2019 with that focus and their ability to support
that business line.
On December 20, 2018, the Company completed the Mergers with Cure
Based Development and acquired certain assets, including the
trademark "cbdMD" and its variants and certain other intellectual
property. The trademark is the cornerstone of this subsidiary and
is key as we create and distribute products and continue to build
this brand. We believe the trademark does not have limits on the
time it will contribute to the generation of cash flows and
therefore we have identified these as indefinite-lived intangible
assets (see Note 2 for more information).
In September 2019, the Company purchased the rights to the
trademark name HempMD for $50,000. This trademark will be used in
the marketing and branding of certain products to be released under
this brand name. We believe the trademark does not have limits on
the time it will contribute to the generation of cash flows and
therefore we have identified these as indefinite-lived intangible
assets.
Intangible assets as of June 30, 2020 and September 30, 2019
consisted of the following:
|
|
|
|
|
Trademark
related to cbdMD
|
$21,585,000
|
$21,585,000
|
|
Trademark
for HempMD
|
50,000
|
50,000
|
|
Total
|
$21,635,000
|
$21,635,000
|
NOTE 7 – PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro-forma data summarizes the results of
operations for the three and nine months ended June 30, 2020 and
2019, as if the Mergers with Cure Based Development had been
completed on October 1, 2017. The pro-forma financial information
is presented for informational purposes only and is not indicative
of the results of operations that would have been achieved if the
Mergers had taken place on October 1, 2017. The pro-forma financial
information represents the continuing operations only.
|
|
Three
Months Ended
June 30,
2020
|
Three
Months Ended
June 30,
2019
|
|
|
|
|
|
Net
revenues
|
$N/A*
|
$N/A*
|
|
Operating
income (loss)
|
$N/A*
|
$N/A*
|
|
Net
income (loss)
|
$N/A*
|
$N/A*
|
|
Net
loss per share – basic and fully diluted
|
$N/A*
|
$N/A*
|
|
|
Nine
Months Ended
June 30,
2020
|
Nine
Months Ended
June 30,
2019
|
|
|
|
|
|
Net
revenues
|
$N/A*
|
$17,190,842
|
|
Operating
income (loss)
|
$N/A*
|
$(10,786,729)
|
|
Net
income (loss)
|
$N/A*
|
$(64,501,471)
|
|
Net
loss per share – basic and fully diluted
|
$N/A*
|
$(2.54)
|
* All entities were consolidated effective December 21, 2018
therefore, the results of operations are included in these
condensed financial statements.
For the per share calculation prior to April 2019, it is being
assumed that the shares to be issued contractually under the Merger
Agreement, upon shareholder approval, were issued at the beginning
of each period. This would account for an additional 6,500,000
shares issued directly to the members of Cure Based Development and
another 8,750,000 shares issued which would have a voting proxy and
leak out on voting rights over a 5 year
period.
NOTE 8 – CONTINGENT LIABILITY
As
consideration for the Mergers, described in Note 2, the Company had
a contractual obligation to issue 15,250,000 shares of our common
stock, after approval by our shareholders, to the members of Cure
Based Development, issued in two tranches 6,500,000 and 8,750,000,
both of which are subject to leak out provisions, and the
unrestricted voting rights to 8,750,000 tranche of shares will also
vest over a five year period and are subject to a voting proxy
agreement. The Merger Agreement also provides that an additional
15,250,000 shares of our common stock can be issued upon the
satisfaction of certain aggregate net revenue criteria by cbdMD
within 60 months following the Closing Date (“Earn
Out”).
The contractual obligations and earn out provision are accounted
for as a contingent liability and fair value is determined using
Level 3 inputs, as estimating the fair value of these contingent
liabilities require the use of significant and subjective inputs
that may and are likely to change over the duration of the
liabilities with related changes in internal and external market
factors.
The initial two tranches totaling 15,250,000 shares have been
valued using a market approach method and included the use of the
following inputs: share price upon contractual obligation, discount
for lack of marketability to address leak out restrictions, and
probability of shareholder disapproval. In addition, the 8,750,000
shares in the second tranche also included an input for a discount
for lack of voting rights during the vest periods.
The Merger Agreement also provides that an additional 15,250,000
shares (“Earnout Shares”) would be issued as part of
the consideration for the Mergers, upon the satisfaction of certain
aggregate net revenue criteria by cbdMD within 60 months following
the Closing Date as follows, as measured at four intervals (each a
“Marking Period”): the completion of 12, 24, 42, and 59
calendar months from the Closing Date, and based upon the ratios
set forth below:
|
Aggregate
Net Revenues
|
|
Shares Issued / Each $ of Aggregate Net Revenue
Ratio
|
|
|
|
|
|
$1 - $20,000,000
|
|
.190625
|
|
$20,000,001 - $60,000,000
|
|
.0953125
|
|
$60,000,001 - $140,000,000
|
|
.04765625
|
|
$140,000,001 - $300,000,000
|
|
.023828125
|
For clarification purposes, the Aggregate Net Revenues during a
Marking Period shall be multiplied by the applicable Shares
Issued/Each $ of Aggregate Net Revenue Ratio, minus, the number of
shares issued as a result of Aggregate Net Revenues during the
prior Marking Periods.
The initial 15,250,000 shares and the Earnout Shares were approved
by our shareholders and the initial shares were issued on April 19,
2019. The initial shares were issued upon shareholder approval on
April 19, 2019 and had a carrying value of $53,215,163.
Additionally, as the 15,250,000 initial shares were issued, the
value of the shares in the amount of $53,215,163 was reclassified
from the contingent liability to additional paid in capital on the
balance sheet. In addition, the first marking period for the
Earnout Shares was December 31, 2019 and based on measurement
criteria, 5,127,792 shares were issued on February 27, 2020 and had
a value of $4,620,000. Additionally, as the 5,127,792 Earnout
Shares were issued on February 27, 2020, the value of the shares in
the amount of $4,620,000 was reclassified from the contingent
liability to additional paid in capital on the balance
sheet.
The 15,250,000 Earnout Shares which would be issued in the future,
upon the satisfaction of net revenue criteria have been valued
using a Monte Carlo Simulation. Inputs used included: stock price,
volatility, interest rates, revenue projections, and likelihood of
obtaining revenue projections, amongst others.
The value of the contingent liability was $15,400,000 and
$7,820,000 at June 30, 2020 and March 31, 2020, respectively, and
represents the balance of Earnout Shares for potential future
issuance. The increase in value of $7,580,000 is recorded in the
Statement of Operations for the three months ended June 30, 2020.
The Company utilized both a market approach and a Monte Carlo
simulation in valuing the contingent liability and a key input in
both of those methods is the stock price. The main driver of the
change in the value of the Earnout Shares within the contingent
liability was the increase of the Company’s stock price,
which was $1.91 at June 30, 2020 as compared to $0.93 on March 31,
2020.
NOTE 9 – RELATED PARTY TRANSACTIONS
On December 20, 2018, with the closing of the Merger Agreement with
Cure Based Development, we recognized the following related party
transactions which happened prior to the Mergers:
Cure
Based Development received $90,000 from Verdure Holdings LLC for
future orders of the Company’s products. Verdure Holdings
LLC, at that time, was an affiliate of the CEO of Cure Based
Development. This amount has been adjusted based on sales to
Verdure Holdings subsequent to the mergers and is recorded as
customer deposits - related party on the accompanying balance sheet
and was $0 and 7,339 at June 30, 2020 and September 30, 2019,
respectively.
Cure
Based Development entered a lease for office space, which also
provides administrative and IT services, from an affiliate of the
CEO of Cure Based Development. The lease was a month to month lease
for $9,166 per month and ended September 2019.
Cure
Based Development leases its manufacturing facility from an entity
partially owned by an individual who now has a contractual right to
receive shares of the Company as part of the Mergers. The current
lease was entered into on December 15, 2018 and ends December 15,
2021 and has been amended at an annual base rent rate of $199,200
allowing for a 3% annual increase. In addition, common area
maintenance rent is set at $25,200 annually.
NOTE 10 – SHAREHOLDERS’ EQUITY
Preferred Stock – We are authorized to issue 50,000,000
shares of preferred stock, par value $0.001 per share. In October
2019, the Company designated 5,000,000 of these shares as 8.0%
Series A Cumulative Convertible Preferred Stock. Our 8.0% Series A
Cumulative Convertible Preferred Stock ranks senior to our common
stock for liquidation or dividend provisions and holders are
entitled to receive cumulative cash dividends at an annual rate of
8.0% payable monthly in arrears for the prior month. The Company
reviewed ASC 480 – Distinguishing Liabilities
from Equity in order to
determine the appropriate accounting treatment for the preferred
stock and determined that the preferred stock should be treated as
equity. There were 500,000 shares of 8.0% Series A Cumulative
Convertible Preferred Stock issued and outstanding at June 30,
2020.
The total amount of dividends declared and paid were $100,050 and
$100,050, respectively, for the three months ended June 30, 2020.
The total amount of dividends declared and paid were $266,800 and
$266,800, respectively, for the nine months ended June 30,
2020.
Common Stock – We are authorized to issue 150,000,000 shares
of common stock, par value $0.001 per share. There were 51,345,648
and 27,720,356 shares of common stock issued and outstanding at
June 30, 2020 and September 30, 2019, respectively.
Preferred stock transactions:
In the three and nine months ended June 30, 2020:
On October 16, 2019, the Company completed a follow-on firm
commitment underwritten public offering of 500,000 shares of
its 8.0% Series A Cumulative
Convertible Preferred Stock for
aggregate gross proceeds of $5,000,000. The Company received
approximately $4.5 million in gross proceeds after deducting
underwriting discounts and commissions. The Company also issued to
the selling agent warrants to purchase in aggregate 47,923 shares
of common stock with an exercise price of $3.9125. The warrants
were valued at $178,513 and expire on October 10,
2024.
No preferred stock was issued in the three and nine months ended
June 30, 2019.
Common stock transactions:
In the three and nine months ended June 30, 2020:
On January 14, 2020, the Company completed a follow-on firm commitment underwritten public
offering of 18,400,000 shares of its common
stock for aggregate gross proceeds of $18,400,000. The
Company received approximately $16.9 million in net proceeds after
deducting underwriting discounts and commissions. The Company also
issued to the selling agent warrants to purchase in aggregate
480,000 shares of common stock with an exercise price of $1.25. The
warrants were valued at $345,600 and expire on January 14,
2025.
In February 2020, we issued 25,000 shares of our common stock to an
investor relations firm for services. The shares were valued at
$28,250, based on the trading price upon issuance, and is being
amortized and expensed as professional services over the service
period ending January 2021.
In February 2020, we issued 5,000 shares of our common stock to an
employee. The shares were valued at $5,650, based on the trading
price upon issuance, and was expensed as stock based compensation
expense.
In the three and nine months ended June 30, 2019:
On October 2, 2018, the Company completed a follow-on firm
commitment underwritten public offering of 1,971,428 shares of its
common stock for aggregate gross proceeds of approximately $6.9
million. The Company received approximately $6.3 million in net
proceeds after deducting underwriting discounts and commissions and
other estimated offering expenses payable by us. The Company also
issued to representatives of the underwriters warrants to purchase
in aggregate 51,429 shares of common stock with an exercise price
of $4.375. The warrants were valued at $86,092 and expire on
September 28, 2023.
In January 2019, we issued 25,000 shares of our common stock to an
investment banking firm for general financial advisory services.
The shares were valued at $77,250, based on the trading price upon
issuance, and is being amortized and expensed as professional
services over the service period ending December 2019.
In January 2019, we issued 50,000 shares of our common stock to an
investment banking firm for general advisory and investment bank
services. The shares were valued at $212,500, based on the trading
price upon issuance, and is being amortized and expensed as
professional services over the service period ending April
2020.
In April 2019, we issued 15,250,000 shares or our common stock as
consideration for the Mergers with Cure Based Development, of which
8,750,000 of the shares will vest over a five year period and are
subject to a voting proxy agreement.
In May 2019, the Company completed a secondary public offering of
2,300,000 shares of its common stock for aggregate gross proceeds
of $13.8 million. The Company received approximately $12.5 million
in net proceeds after deducting underwriting discounts and
commissions and other estimated offering expenses payable by us.
The Company also issued to the selling agent warrants to purchase
in aggregate 60,000 shares of common stock with an exercise price
of $7.50. The warrants were valued at $223,500 and expire on May
15, 2024.
Stock option transactions:
In the three and nine months ended June 30, 2020:
In December 2019 we granted an aggregate of 280,000 common stock
options to two executives. The options vest 1/3 on January 1, 2020,
1/3 on January 1, 2021 and 1/3 on January 1, 2022, have an exercise
price of $3.15 per share and a term of five years. We have recorded
an expense for the options of $71,540 and $333,856 for the three
and nine months ended June 30, 2020, respectively.
In February 2020, we granted an aggregate of 30,000 common stock
options to an employee. The options vest 1/3 at grant, 1/3 on
February 7, 2021, and 1/3 on February 7, 2022, have an exercise
price of $3.15 per share and a term of five years. We have recorded
an expense for the options of $1,894 and $8,206 for the three and
nine months ended June 30, 2020, respectively.
In May 2020 we granted per the annual board compensation plan, an
aggregate of 80,000 common stock options to four independent
directors and are expensed over the annual board term. The options
vest immediately, have an exercise price of $1.57 per share and a
term of ten years. We have recorded an expense for the options of
$29,020 for the three and nine months ended June 30,
2020.
In the three and nine months ended June 30, 2019:
In May 2019 we granted per the annual board compensation plan, an
aggregate of 120,000 common stock options to six independent
directors. The options vest immediately, have an exercise price of
$5.41 per share and a term of ten years. We have recorded an
expense for the options of $562,440 for the three and nine months
ending June 30, 2019.
In May 2019 we granted an aggregate of 610,000 common stock options
to twelve employees. The options vary in amounts issued and vesting
tiers, which include no vesting with an exercise price of $6.40,
vesting at May 15, 2020 with an exercise price of $7.00, vesting at
May 15, 2021 with an exercise price of $7.50, and vesting at May
15, 2022 with an exercise price of $7.50. The options have a term
of ten years. We have recorded an expense for the options of
$1,290,732 for the three and nine months ended June 30,
2019.
The expected volatility rate was estimated based on comparison to
the volatility of a peer group of companies in similar industries.
The expected term used was the full term of the contract for the
issuances. The risk-free interest rate for periods within the
contractual life of the option is based on U.S. Treasury
securities. The pre-vesting forfeiture rate of zero is based upon
the experience of the Company. As required under ASC 718, we will
adjust the estimated forfeiture rate to our actual experience.
Management will continue to assess the assumptions and
methodologies used to calculate estimated fair value of share-based
compensation. Circumstances may change and additional data may
become available over time, which could result in changes to these
assumptions and methodologies, and thereby materially impact our
fair value determination.
The following table summarizes the inputs used for the
Black-Scholes pricing model on the options issued in the nine
months ended June 30, 2020 and 2019:
|
|
|
|
|
Exercise
price
|
$1.57-$3.15
|
$5.41-$7.50
|
|
Risk
free interest rate
|
0.69%-1.64%
|
2.41%-2.47%
|
|
Volatility
|
95.96%-111.31%
|
89.60%-90.68%
|
|
Expected
term
|
5-10 years
|
10 years
|
|
Dividend
yield
|
None
|
None
|
Warrant transactions:
In the three and nine months ended June 30, 2020:
In October 2019 in relation to the follow-on firm commitment
underwritten public offering of the 8.0% Series A Cumulative
Convertible Preferred Stock, we issued to the representative of the
underwriters warrants to purchase in aggregate 47,923 shares of
common stock with an exercise price of $3.9125. The warrants expire
on October 10, 2024.
In January 2020 in relation to the follow-on firm commitment
underwritten public offering of the Company’s common stock,
we issued to the representative of the underwriters warrants to
purchase in aggregate 480,000 shares of common stock with an
exercise price of $1.25. The warrants expire on January 14,
2025.
In the three and nine months ended June 30, 2019:
On October 2, 2018 in relation to the follow-on firm commitment
underwritten offering, we issued to the representative of the
underwriters warrants to purchase in aggregate 51,429 shares of
common stock with an exercise price of $4.375. The warrants expire
on September 28, 2023.
In May 2019 in relation to the secondary offering, we issued to the
selling agent warrants to purchase in aggregate 60,000 shares of
common stock with an exercise price of $7.50. The warrants expire
on May 15, 2024.
The following table summarizes the inputs used for the
Black-Scholes pricing model on the warrants issued in the nine
months ended June 30, 2020 and 2019:
|
|
|
|
|
Exercise
price
|
$1.25-$3.9125
|
$4.375-$7.50
|
|
Risk
free interest rate
|
1.48%-1.63%
|
2.15%-2.90%
|
|
Volatility
|
95.36-96.85%
|
70.61%-75.03%
|
|
Expected
term
|
5 years
|
5 years
|
|
Dividend
yield
|
None
|
None
|
NOTE 11 – STOCK-BASED COMPENSATION
Equity Compensation Plan – On June 2, 2015, the Board of
Directors of the Company approved the 2015 Equity Compensation Plan
(“Plan”). The Plan made 1,175,000 common stock shares,
either unissued or reacquired by the Company, available for awards
of options, restricted stocks, other stock grants, or any
combination thereof. The number of shares of common stock available
for issuance under the Plan shall automatically increase on the
first trading day of our fiscal year during the term of the Plan,
beginning with calendar year 2016, by an amount equal to one
percent (1%) of the total number of shares of common stock
outstanding on the last trading day in September of the immediately
preceding fiscal year, but in no event shall any such annual
increase exceed 100,000 shares of common stock. On April 19, 2019,
shareholders approved an amendment to the Plan and increased the
amount of shares available for issuance under the Plan to 2,000,000
and retained the annual evergreen increase provision of the
plan.
We account for stock-based compensation using the provisions of
FASB ASC 718. FASB ASC 718 codification requires
companies to recognize the fair value of stock-based compensation
expense in the financial statements based on the grant date fair
value of the options. We have only awarded stock options since
December 2015. All options are approved by the Compensation.
Corporate Governance and Nominating Committee of the Board of
Directors. Restricted stock awards that vest in accordance with
service conditions are amortized over their applicable vesting
period using the straight-line method. The fair value of our stock
option awards or modifications is estimated at the date of grant
using the Black-Scholes option pricing model.
Eligible recipients include employees, officers, directors and
consultants who are deemed to have rendered or to be able to render
significant services to the Company or its subsidiaries and who are
deemed to have contributed or to have the potential to contribute
to the success of the Company. Options granted generally have a
five to ten year term and have vesting terms that cover one to
three years from the date of grant. Certain of the stock options
granted under the plan have been granted pursuant to various stock
option agreements. Each stock option agreement contains specific
terms.
Stock Options – The Company currently has awards outstanding
with service conditions and graded-vesting features. We recognize
compensation cost on a straight-line basis over the requisite
service period.
The fair value of each time-based award is estimated on the date of
grant using the Black-Scholes option valuation model. Our
weighted-average assumptions used in the Black-Scholes valuation
model for equity awards with time-based vesting provisions granted
during the year.
The following table summarizes stock option activity under the
Plan:
|
|
|
Weighted-average
exercise price
|
Weighted-average
remaining contractual term (in years)
|
Aggregate
intrinsic value (in thousands)
|
|
Outstanding
at September 30, 2019
|
1,219,650
|
6.07
|
|
|
|
Granted
|
390,000
|
2.83
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
44,650
|
6.55
|
|
|
|
Outstanding
at June 30, 2020
|
1,565,000
|
$5.25
|
7.04
|
$—
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2020
|
1,098,334
|
$5.15
|
7.08
|
$—
|
As of June 30, 2020, there was approximately $934,103 of total
unrecognized compensation cost related to non-vested stock options
which vest over a period of approximately 1.8 years.
Restricted Stock Award transactions:
In May 2019, the Company issued 57,500 restricted stock awards in
aggregate to eleven employees. The restricted stock awards vested
January 1, 2020. The stock awards were valued at fair market upon
issuance at $368,000 and amortized over the vesting period. We
recognized $0 and $138,000 of stock based compensation expense for
the three and nine months ended June 30, 2020,
respectively.
NOTE 12 – WARRANTS
Transactions involving our equity-classified warrants are
summarized as follows:
|
|
|
Weighted-average
exercise price
|
Weighted-
average
remaining contractual term
(in
years)
|
Aggregate
intrinsic value (in thousands)
|
|
Outstanding
at September 30, 2019
|
423,605
|
$6.64
|
|
|
|
Issued
|
527,923
|
1.49
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
-
|
-
|
|
|
|
Outstanding
at June 30, 2020
|
951,528
|
$3.78
|
3.52
|
$—
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2020
|
471,528
|
$6.36
|
2.48
|
$—
|
The following table summarizes outstanding common stock purchase
warrants as of June 30, 2020:
|
|
|
Weighted-average exercise price
|
Expiration
|
|
|
|
|
|
|
Exercisable
at $7.80 per share
|
141,676
|
$7.80
|
September
2021
|
|
Exercisable
at $4.00 per share
|
70,500
|
$4.00
|
September
2022
|
|
Exercisable
at $7.50 per share
|
100,000
|
$7.50
|
October
2022
|
|
Exercisable
at $4.375 per share
|
51,429
|
$4.375
|
September
2023
|
|
Exercisable
at $7.50 per share
|
60,000
|
$7.50
|
May
2024
|
|
Exercisable
at $3.9125 per share
|
47,000
|
$3.9125
|
October
2024
|
|
Exercisable
at $1.25 per share
|
480,000
|
$1.25
|
January
2025
|
|
|
951,528
|
3.78
|
|
NOTE 13 – COMMITMENTS AND CONTINGENCIES
In May 2019, the Company entered into an endorsement agreement with
a professional athlete. The term of the agreement is through
December 31, 2022 and is tied to performance of the athlete in so
many professional events annually, and also includes promotion of
the Company via social media, wearing of logo during competition,
provide production days for advertising creation and attend meet
and greets. The potential payments, if all services are provided,
in aggregate is $4,900,000 and is paid based on the services above
for the period ending: December 2019 - $400,000, December 2020 -
$800,000, December 2021 - $1,800,000, and December 2022 -
$1,900,000. In light of the impact of COVID-19 on events, we had
mutually agreed to suspend payments at minimum from March 2020
until June 2020. Effective July 1, 2020, the parties entered into a
new endorsement agreement with the professional athlete amending
certain of the contract terms which superseded the original
agreement. Under the current endorsement agreement potential
payments to the professional athlete are as follows from July 2020
to December 2022 – up to $2,867,000 to be paid in common
stock in three issuances, based on a Volume Weighed Average Price
(“VWAP”) calculation, of which the last two issuances
can be paid in cash at the Company’s option - $1,400,000 paid
in July 2020, $800,000 paid between July 2021 and December 2021,
and $667,000 paid between July 2022 and December 2022. In addition
the Company will make monthly cash payments as follows from: July
2020 to December 2020 - $40,000, from January 2021 to June 2021 -
$50,000, from July 2021 to December 2021 - $75,000, from January
2022 to June 2022 - $85,000, and from July 2022 to December 2022 -
$100,000. We have recorded expense of $0 and $283,334 for the three
and nine months ended June 30, 2020.
In September 2019, the Company entered into a sponsorship agreement
with Life Time, Inc, an operator of fitness clubs, facilities and
events. The term of the agreement is through December 31, 2022 and
is tied to the Company being the exclusive CBD company and
performance of Life Time Inc. regarding advertisement, marketing
and display within facilities and at identified events. The
potential payments, if all commitments are met, in aggregate is
$4,900,000 and is to be paid for the period ending: December 2019 -
$1,125,555, December 2020 - $1,258,148, December 2021 - $1,258,148
and December 2022 - $1,258,149. In light of the impact of COVID-19
on the operation of fitness clubs, facilities and events, we had
mutually agreed to suspend payments at minimum from March 2020
until June 2020 and will determine if a contract amendment is
warranted based on the opening of Life Time Inc. facilities and
decisions on Life Time Inc. hosted events. We have recorded expense
of $0 and $1,173,000 for the three and nine months ended June 30,
2020.
In October 2019, the Company entered into a sponsorship agreement
with Feld Motor Sports to be an official sponsor of the Monster
Energy Cup events through 2021, the United States AMA Supercross
and FIM World Championship events through 2021, and US Supercross
Futures event through 2021. The sponsorship includes various media,
marketing, and promotion activities. The payments in aggregate are
$1,750,000 and is to be paid for the period ending: December 2019 -
$150,000, December 2020 - $800,000 and December 2021 - $800,000. In
light of the impact of COVID-19 on the events, we have provided
notice of termination for the entire agreement and have agreed to
make three monthly payments of $77,430 from April 2020 to June 2020
for services provided in the quarter ending March 31, 2020. We have
recorded expense of $0 and $528,831 for the three and nine months
ended June 30, 2020.
NOTE 14 – NOTE PAYABLE
In July 2019, we entered into a loan arrangement for $249,100 for a
line of equipment, of which $159,404 is a long term note payable at
June 30, 2020. Payments are for 60 months and have a financing rate
of 7.01 %, which requires a monthly payment of $4,905. In January
2020, we entered into a loan arrangement for $35,660 for equipment,
of which $23,310 is a long term note payable at June 30, 2020.
Payments are for 48 months and have a financing rate of 6.2%, which
requires a monthly payment of $841.
NOTE 15 – LONG TERM LIABILITY
In April 2020, we applied for an unsecured loan pursuant to the
Paycheck Protection Prog ram (“PPP”)administered by the
United States Small Business Administration (the “SBA”)
and authorized by the Keeping American Workers Employed and Paid
Act, which is part of the Coronavirus Aid, Relief, and Economic Security Act
(the “CARES Act”). Section 1106 of the Act provides for forgiveness
of up to the full principal amount of qualifying loans guaranteed
under the Paycheck Protection Program. On April 27,
2020, we received the loan from Truist Bank (the
“Lender”) in the principal amount of $1,456,100 (the
“SBA Loan”). The SBA Loan is evidenced by a
promissory note issued by us (the “Note”) to the
Lender.
The term of the Note is two years, though it may be payable sooner
in connection with an event of default under the Note. The SBA Loan
carries a fixed interest rate of one percent per year, with the
first payment due seven months from the date of initial cash
receipt. For the three months ended June 30, 2020 we accrued
interest expense of $2,673 related to the SBA Loan and is recorded
in accrued expenses on the balance sheet at June 30,
2020.
Under the CARES Act and the PPP, certain amounts of loans made
under the PPP may be forgiven if the recipients use the loan
proceeds for eligible purposes, including payroll costs and certain
rent or utility costs, and meet other requirements regarding, among
other things, the maintenance of employment and compensation
levels. We intend to use the SBA Loan for qualifying expenses and
to apply for forgiveness of the SBA Loan in accordance with the
terms of the CARES Act.
The Note provides for customary events of default, including, among
others, those relating to failure to make payment, bankruptcy,
materially false or misleading representations to the Lender or the
SBA, and adverse changes in our financial condition or business
operations that the Lender believes may materially affect our
ability to pay the SBA Loan.
NOTE 16 – DISCONTINUED OPERATIONS
Effective September 30, 2019, the Company ceased operations of four
business subsidiaries: EE1, IM1, BPU and Level H&W. These
subsidiaries accounted for our licensing, entertainment, and
products segments prior to fiscal 2019 and the Company determined
that these business units are not able to provide support or value
to the CBD business, which the Company is now strategically focused
on.
Therefore, the Company classified the operating results of these
subsidiaries as discontinued operations, net of tax in the
Consolidated Statements of Operations.
The following table shows the summary operating results of the
discontinued operations for the three and nine months ended June
30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Gross Sales
|
$-
|
$49,740
|
$-
|
$871,431
|
|
Allowances
|
-
|
(10,553)
|
-
|
(12,129)
|
|
Total Net Sales
|
-
|
39,187
|
-
|
859,302
|
|
Cost of sales
|
-
|
30,038
|
-
|
575,681
|
|
|
|
|
|
|
|
Gross
Profit
|
-
|
9,149
|
-
|
283,621
|
|
|
|
|
|
|
|
Operating
expenses
|
7,781
|
1,802,619
|
48,983
|
2,145,618
|
|
Income
(Loss) from
operations
|
(7,781)
|
(1,793,471)
|
(48,983)
|
(1,861,997)
|
|
Realized
and Unrealized gain (loss) on
marketable
securities
|
-
|
(484,289)
|
-
|
(1,627,266)
|
|
Interest income (expense)
|
-
|
7,982
|
-
|
26,140
|
|
Income (loss) before provision for
income taxes
|
(7,781)
|
(2,269,778)
|
(48,983)
|
(3,463,123)
|
|
|
|
|
|
|
|
Benefit
(Provision) for income
taxes
|
-
|
-
|
-
|
-
|
|
Net Income (Loss)
|
(7,781)
|
(2,269,778)
|
(48,983)
|
(3,463,123)
|
|
Net Gain (Loss) attributable
to
noncontrolling
interest
|
-
|
(1,503,707)
|
-
|
(1,641,391)
|
The following table shows the summary assets and liabilities of the
discontinued operations as of June 30, 2020 and September 30,
2019:
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$-
|
$-
|
|
Accounts
receivable
|
700,884
|
1,080,000
|
|
Total current assets included as part of discontinued
operations
|
700,884
|
1,080,000
|
|
|
|
|
|
Other
assets:
|
|
|
|
Total other assets included as part of discontinued
operations
|
-
|
-
|
|
|
|
|
|
Total assets included as part of discontinued
operations
|
$700,884
|
$1,080,000
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$-
|
$-
|
|
Total current assets included as part of discontinued
operations
|
-
|
-
|
|
|
|
|
|
Long
term liabilities:
|
|
|
|
Total long term liabilities as part of discontinued
operations
|
-
|
-
|
|
|
|
|
|
Total liabilities included as part of discontinued
operations
|
$-
|
$-
|
The following table shows the significant cash flow items from
discontinued operations for the nine months ended June
30:
|
|
|
|
|
Depreciation/
amortization
|
$-
|
$19,992
|
|
Realized/unrealized
(gain) loss on securities expenditures
|
$-
|
$1,627,266
|
|
Impairment
on discontinued operations assets
|
$(48,983)
|
$-
|
Non
cash consideration received for services
|
$-
|
$(470,000)
|
At September 30, 2019, EE1 had an accounts receivable for prior
services delivered to two customers in aggregate of $1,080,000 of
which $1,000,000 was from a related party at the time. At June 30,
2020 the balance on the accounts receivable is $700,884, which
reflects payments made and an impairment of $45,783. At March 31,
2020, one customer has breached their formal agreement on payments
and on April 29, 2020, the Company filed a lawsuit for collection
of this amount and legal fees. The customer is Sandbox Properties
LLC and is an affiliate of Kathy Ireland and kathy ireland
Worldwide. It is not probable that legal fees associated with this
lawsuit will be the responsibility of the Company as they are
contingent based on a successful lawsuit. As of June 30, 2020, the
account receivable balance for this customer is $666,668, we
believe this amount will be collected in full.
As two of the subsidiaries, EE1 and IM1, had minority interests
(non-controlling interests) and all parties agreed to transfer the
non- controlling interest to the Company, we have reclassified the
non-controlling interest balance of $(482,648) to additional paid
in capital as of September 30, 2019.
NOTE 17 – LEASES
We have lease agreements for our corporate, warehouse and
laboratory offices with lease periods expiring between 2021 and
2026. ASC 842 requires the recognition of leasing arrangements on
the balance sheet as right-of-use assets and liabilities pertaining
to the rights and obligations created by the leased assets. We
determine whether an arrangement is a lease at inception and
classify it as finance or operating. All of our leases are
classified as operating leases. Our leases do not contain any
residual value guarantees.
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, we
determine 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. Our 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, which are
variable lease costs.
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:
|
|
|
|
|
|
|
|
|
Operating
lease costs
|
$382,433
|
$1,147,300
|
|
|
25,791
|
74,682
|
|
Total
operating lease costs
|
$408,224
|
$1,221,982
|
Supplemental cash flow information related to operating leases is
summarized as follows:
|
|
|
|
|
|
|
|
|
Cash paid for
amounts included in the measurement of operating lease
liabilities
|
$357,922
|
$1,034,603
|
As of June 30, 2020, our operating leases had a weighted average
remaining lease term of 5.9 years and a weighted average discount
rate of 4.66%. Future minimum aggregate lease payments under
operating leases as of June 30, 2020 are summarized as
follows:
|
For the year ended September 30,
|
|
|
2020
(remaining three months)
|
$360,203
|
|
2021
|
1,452,434
|
|
2022
|
1,392,837
|
|
2023
|
1,380,204
|
|
2024
|
1,421,610
|
|
Thereafter
|
2,532,811
|
|
Total
future lease payments
|
8,540,099
|
|
Less
interest
|
(1,125,091)
|
|
Total
lease liabilities
|
$7,415,008
|
Future minimum lease payments (including interest) under
non-cancelable operating leases as of September 30, 2019 are
summarized as follows:
|
For the year ended September 30,
|
|
|
2020
|
$1,394,806
|
|
2021
|
1,452,434
|
|
2022
|
1,392,837
|
|
2023
|
1,380,204
|
|
2024
|
1,421,610
|
|
Thereafter
|
2,532,811
|
|
Total
obligations and commitments
|
$9,574,702
|
NOTE 18 – EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted
earnings per share for the following periods:
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Net
income (loss) continuing operations
|
$(8,944,921)
|
$(26,933,178)
|
$18,909,818
|
$(59,778,970)
|
|
Preferred
dividends paid
|
100,050
|
-
|
266,800
|
-
|
|
Net
income (loss) continuing operations adjusted for preferred
dividend
|
(9,044,971)
|
|
18,643,018
|
|
|
Net
income (loss) discontinued operations
|
(7,781)
|
(766,071)
|
(48,983)
|
(1,821,732)
|
|
Net
income (loss) attributable to cbdMD, Inc. common
shareholders
|
(9,052,752)
|
(27,699,249)
|
18,594,035
|
(61,600,703)
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Net
income (loss) continuing operations
|
(8,944,921)
|
-
|
18,909,818
|
-
|
|
Net
income (loss) discontinued operations
|
(7,781)
|
-
|
(48,983)
|
-
|
|
Net
income(loss)
|
(8,952,702)
|
-
|
18,860,835
|
-
|
|
|
|
|
|
|
|
Shares used in computing basic earnings per share
|
51,335,648
|
23,193,793
|
41,411,261
|
14,585,619
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
Options
|
-
|
-
|
33,222
|
-
|
|
Warrants
|
-
|
-
|
256,536
|
-
|
|
Convertible
preferred shares
|
833,500
|
-
|
833,500
|
-
|
|
Shares used in computing diluted earnings per share
|
52,169,148
|
23,193,793
|
42,534,519
|
14,585,619
|
|
|
|
|
|
|
|
Earnings per share Basic:
|
|
|
|
|
|
Continued
operations
|
(0.18)
|
(1.16)
|
0.45
|
(4.10)
|
|
Discontinued
operations
|
(0.00)
|
(0.03)
|
(0.00)
|
(0.12)
|
|
Basic
earnings per share
|
(0.18)
|
(1.19)
|
0.45
|
(4.22)
|
|
|
|
|
|
|
|
Earnings per share Diluted:
|
|
|
|
|
|
Continued
operations
|
-
|
-
|
0.44
|
-
|
|
Discontinued
operations
|
-
|
-
|
(0.00)
|
-
|
|
Diluted
earnings per share
|
-
|
-
|
0.44
|
-
|
At the three months ended June 30, 2020, 2,516,528 potential shares
underlying options and warrants were excluded from the shares used
to calculate diluted loss per share as their inclusion would reduce
net loss per share. At the three and nine months ended June 30,
2019, 1,623,255 potential shares underlying options and warrants,
were excluded from the shares used to calculate diluted loss per
share as their inclusion would reduce net loss per
share.
NOTE 19 – INCOME TAXES
On November 17, 2017, the Company completed an IPO of its common
stock. The Company conducted a Section 382 analysis and determined
an ownership change occurred upon the IPO. On October 2, 2018, the
Company completed a follow-on firm commitment underwritten public
offering of its common stock. On May 16, 2019, the Company
completed an additional follow-on firm commitment underwritten
public offering of its common stock. On October 16, 2019, the
Company completed a follow-on firm commitment underwritten public
offering of its 8.0% Series A Cumulative Convertible Preferred
Stock. On January 14, 2020, the Company completed a
follow-on firm commitment underwritten public offering of its
common stock. Management has determined that an ownership change
has occurred under Internal Revenue Code (IRC) Section 382
resulting in limitations on the utilization of Company's
federal and state NOL carryovers. The Company is continuing
to evaluate the extent of limitations of NOLs that the Company will
have the ability to utilize future earnings.
On December 20, 2018, the Company completed a two-step merger with
Cure Based Development (see Note 2). As a result of the Mergers the
Company established as part of the purchase price allocation a net
deferred tax liability related to the book-tax basis of certain
assets and liabilities of approximately $4.6 million.
The Company has had a valuation allowance against the net deferred
tax assets, with the exception of the deferred tax liabilities that
result from indefinite-life intangibles ("naked credits"). The
Company has determined that using the general methodology for
calculating income taxes during an interim period for the quarter
ending December 31, 2019, provided for a wide range of potential
annual effective rates. Therefore, the Company has calculated the
tax provision on a discrete basis under ASC 740-270-30-36(b) for
the quarter ending December 31, 2019, March 31, 2020, and June 30,
2020. Given available information to date and the most probable
scenario given the facts and circumstances, management’s
expectation is that the Company will generate enough indefinite
life deferred tax assets from post-merger NOLs to reduce the naked
credits to zero during the year, and continue to record a valuation
allowance on remaining DTAs. As a result, the Company decreased the
deferred tax liability from $2,240,300 to $0 and a recorded a
deferred tax benefit of $2,240,300 for the quarter ending December
31, 2019. The Company recorded $0 income tax provision for the
quarter ending March 31, 2020 and June 30, 2020.
NOTE 20 – SUBSEQUENT EVENTS
The Company has analyzed its operations subsequent to June 30, 2020
to the date these unaudited condensed consolidated financial
statements were issued, and with the rapid spread of COVID-19
around the world and the continuously evolving responses to the
pandemic, we have witnessed the significant and growing negative
impact of COVID-19 on the global economic and operating
environment. We find that the impact of COVID-19 on the Company is
unknown at this time and the financial consequences of this
situation cause uncertainty as to the future and its effects on the
economy and the Company. However, we are monitoring the rapidly
evolving situation and its potential impacts on our financial
condition, liquidity, operations, suppliers, industry and
workforce.
On July 1, 2020 we entered into an endorsement agreement with a
professional athlete, which replaced an earlier agreement with such
professional athlete, pursuant to which we amended payment terms of
the original agreement from July 1, 2020 to December 31, 2022. As
part of the compensation, we issued 700,000 shares of our common
stock on July 1, 2020 which had a fair market value of
$1,337,000.
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 nine months ended June 30, 2020 and
2019 should be read in conjunction with the 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 2019 10-K, this report, and our other
filings with the Securities and Exchange Commission. We use words
such as “anticipate,” “estimate,”
“plan,” “project,”
“continuing,” “ongoing,”
“expect,” “believe,” “intend,”
“may,” “will,” “should,”
“could,” and similar expressions to identify
forward-looking statements. In addition, any statements that refer
to projections of our future financial performance, our anticipated
growth and trends in our businesses, and other characterizations of
future events or circumstances are forward-looking statements. Such
statements are based on our current expectations and could be
affected by the uncertainties and risk factors described throughout
this report.
Overview
Business
Through our subsidiary, CBDI, we produce
and
distribute various high-grade,
premium CBD products, including tinctures, capsules, gummies, bath
bombs and topical creams. In the third quarter of fiscal 2019, we
launched a line of pet related CBD products under our Paw CBD brand
which includes tinctures, treats, and balms, with additional
products under development. In October 2019, following the initial
positive response to the Paw CBD brand from retailers and
consumers, we organized Paw CBD as a separate wholly-owned
subsidiary in an effort to take advantage of its early mover status
in the CBD animal health industry. With over 40 SKU’s of
premium pet CBD products for dogs, cats and horses, we are seeking
to grow Paw CBD into a leading brand.
We
either manufacture our premium line of products at our Charlotte,
NC facility or work with third party manufacturers. We only
source cannabinoids, including CBD, which are extracted
from non-GMO hemp grown on farms in the United
States. We utilize a manufacturing process which
creates hybrid broad-spectrum concentrations including CBD, other
cannabinoids, and various other compounds, which we believe creates
a superior product, while eliminating tetrahydrocannabinol
(THC) content. In July 2020, we filed a new patent application with
the U.S. Patent and Trademark Office which will allow us to pursue
patented protection in several key areas, including novel
formulations and delivery systems, as well as methods of
manufacturing and use.
Since
December 2018, we have significantly increased the number of
locations cbdMD products are available in, and with the building
momentum of retailer acceptance subsequent to the passage of the
Farm Bill, we continue to pursue multiple opportunities to expand
our product distribution via both online and in brick and mortar
stores as we continue to work to build cbdMD brand recognition. We
also continue to utilize partnerships and sponsorships with
professional athletes as a way to gain brand
recognition.
The Impact of the COVID-19 Pandemic on our Company
On
March 11, 2020, the World Health Organization declared the current
coronavirus (“COVID-19”) outbreak to be a global
pandemic. In response to this declaration and the rapid spread of
COVID-19 within the United States, federal, state and local
governments throughout the country have imposed varying degrees of
restrictions on social and commercial activity to promote social
distancing in an effort to slow the spread of the illness. These
measures have had a significant adverse impact upon many sectors of
the economy, including retail commerce.
In
response to these measures, the “stay at home” order
issued by the Governor of the State of North Carolina where our
business is located, and for the protection of our employees and
customers, we had temporarily closed our corporate office and
altered work schedules at our manufacturing and warehouse
facilities. Beginning in June 2020 we implemented return to work
policies following CDC guidelines and we have re-opened our
corporate office with staggered work schedules for all departments.
To date these actions have not adversely impacted our ability to
operate our company. In mid March 2020 we took steps to increase
production to build up our finished goods inventory as well as
purchased additional raw material inventory items thereby allowing
us to maintain production if supply chain interruptions were to
happen. At this time we have not had any impact on our supply
chain. Since the pandemic we have experienced an impact and decline
on our wholesale sales to our brick and mortar customers as many of
the stores have been temporarily closed. In response, we have
increased our efforts regarding campaigns and marketing reach to
support our online sales efforts by upping our initiatives with
associated relevant messaging to connect with our consumer base as
well as increased website content and various offerings and changes
to make online ordering more effective (auto reorder capability,
giveaways, free shipping, etc.). This effort has allowed us to
continue to increase sales by offsetting the decline in wholesales
sales with substantial increase in our online sales to consumers.
We continue to assess the situation on a daily basis and adjust our
business, priorities, and processes to enable us to continue to
operate effectively until we are able to resume regular
operations.
During
this time, we have implemented several measures that we believe
will continue to ensure sufficient liquidity and support the
business for the next several months. Specific measures, among
other things, include the following:
●
Negotiating
with our landlords to receive temporary rent deferrals on our
facilities while utilizing security deposits for
April;
●
Negotiating
with our vendors to defer payments as needed;
●
Suspending
sponsorship and affiliate agreements as well as renegotiating
various agreements based on current events, activities, and
trends;
Shifting
sales focus efforts to our online consumer sales while the
wholesale sales environment is impacted, this focus continues and
has been successful in allowing for continued sales growth to this
point;
Implementation
of various cost control measures across the company with a focus on
supporting the business growth while reaching a positive cash flow
operation and adjusted our budget for the balance of 2020 to
reflect the changes;
●
Ensuring
we had sufficient inventory levels, (both raw and finished goods)
allowing us to continue to fulfill orders in the event we must shut
down our manufacturing facility or supply chains were impacted;
and
●
Prioritizing
our technology initiatives to align with an online sales
focus.
To further bolster our
working capital, on April 27,
2020, we received a loan in the principal amount of $1,456,100 (the
“SBA Loan”), under the Paycheck Protection Program
(“PPP”), which was established under the recently
enacted Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”) administered by the U.S. Small Business
Administration (the “SBA”). The intent and purpose of
the PPP is to support companies, during the COVID-19 pandemic, by
providing funds for certain specified business expenses, with a
focus on payroll. As a qualifying business as defined by the SBA,
we are using the proceeds from this loan to primarily help maintain
our payroll as we navigate our business with a focus on returning
to normal operations. The term of the Note is two years, though it
may be payable sooner in connection with an event of default under
the Note. The SBA Loan carries a fixed interest rate of one percent
per year, with the first payment due seven months from the date of
initial cash receipt. Under the CARES Act and the PPP, certain
amounts of loans made under the PPP may be forgiven if the
recipients use the loan proceeds for eligible purposes, including
payroll costs and certain rent or utility costs, and meet other
requirements regarding, among other things, the maintenance of
employment and compensation levels. We intend to use the SBA Loan
for qualifying expenses and to apply for forgiveness of the SBA
Loan in accordance with the terms of the CARES
Act.
As the adverse impact of COVID-19 on our company, industry, and
country continues, our ability to meet customer demands for
products may be impaired or, similarly, our customers may
experience adverse business consequences due to the COVID-19
pandemic. Reduced demand for products or impaired ability to meet
customer demand (including as a result of disruptions at our
transportation service providers, third-party manufacturing
partners or vendors) could have a material adverse effect on our
business, operations and financial performance.
While we are not able to estimate the ultimate
impact of the COVID-19 pandemic on our financial condition and
future results of operations, depending on the prolonged impact of
the COVID-19 outbreak, this situation could have a significant
adverse effect on our future reported results of operations. As
indicated, we have implemented several initiatives allowing us to
increase our online direct to consumer sales to date, which we will
continue to use as we evaluate changes in the wholesale
channel. The extent to which the
coronavirus impacts our results and financial condition, however,
will depend on future developments, which are highly uncertain and
cannot be predicted, including new information that may emerge and
the actions to contain and treat its impacts, among
others.
Growth Strategies and Outlook
While
we continue to assess the COVID-19 pandemic and adjust our day to
day business, we continue to pursue the following strategies to
grow our revenues and expand our business and operations in the
balance of fiscal 2020 and beyond:
●
Increase our base of product
offerings : We currently have a
broad offering of CBD products, including topicals, tinctures,
gummies, bath bombs, vape oils, capsules, and pet products and
continue to evaluate additional offerings within these categories
as well as new ways to provide CBD in a manner that meets
consumer demands. To that end we are devoting resources
to ongoing research and development processes with the goal of
expanding our product offerings to meet these expanding consumer
demands. In May 2020 we rolled out lip and body balms and new
bundled packages. We have several products in the research and
development phase with targeted roll-outs during the balance of
2020;
●
Expand our sales
channels : As the market
continues to evolve, we are expanding our sales channels. During
fiscal 2019, we moved from a 100% online sales channel to working
with wholesalers and retail channels. Big box retailers are
beginning to explore CBD products and we believe this will provide
another significant opportunity at some point in the future. In
addition, sales channels for the pet line include expanding online
to not only retail stores but veterinary and pet care
professionals. In addition, we have expanded into international
sales and continue to position for increasing international
territories and sales;
●
Expand our recently formed CBD
animal health division : With
the formation in October 2019 of Paw CBD as a separate wholly-owned
subsidiary, we have committed resources to branding and marketing
the Paw CBD product line, which we believe will enable us to more
effectively expand sales channels as well as utilize our marketing
efforts in a more targeted manner;
●
Expand our sponsorships toward
targeted segments: We have had
significant success with attracting high profile sponsors and
influencers and expect to continue to assess the segments we have
covered with a focus on activation of the sponsorships and
influencers which are producing the largest visibility and
responsiveness; and
●
Acquisitions.
We may also choose to further build
and maintain our brand portfolio by acquiring additional brands
directly or through joint ventures if opportunities arise that we
believe are in our best interests. As we are in an emerging market,
opportunities could be present as companies establish strong brands
and begin to obtain large market share. In assessing potential
acquisitions or investments, we expect to utilize our internal
resources to primarily evaluate growth potential, the strength of
the target brand, offerings of the target, as well as possible
efficiencies to gain. We believe that this approach will allow us
to effectively screen consumer brand candidates and strategically
evaluate acquisition targets and efficiently complete due diligence
for potential acquisitions. We are not a party, however at this
time, to any agreements or understandings regarding the acquisition
of additional brands or companies and there are no assurances we
will be successful in expanding our brand
portfolio.
As
a consumer goods manufacturer, we strive to meet or exceed the FDAs
Good Manufacturing Practice (GMP) guidelines. Good Manufacturing
Practices (GMPs) are guidelines that provide a system of processes,
procedures and documentation to assure a product has the identity,
strength, composition, quality and purity that appear on its label.
These GMP requirements are listed in Section 8 of NSF/ANSI 173
which is the only American National Standard in the dietary
supplement industry developed in accordance with the FDA’s 21
CFR part 111.
With our growth and evolution, challenges could
exist and we must continue to review processes and controls and
adapt our day to day GMP policies and practices as our
manufacturing volume increases. We are dedicated to providing
the highest quality CBD consumer goods on the market and therefore
will continue to focus substantial efforts on GMP
compliance. Our manufacturing facility and warehouse
operations are fully GMP compliant and NSF GMP
registered. NSF GMP registration verifies that the
facility is audited twice annually for quality and safety in
compliance with Federal Regulations for
dietary supplements good
manufacturing practices. We have applied for an
additional third-party certification from the U.S. Hemp Authority
and are awaiting scheduling of the audit. Additionally, we have secured third party contract
manufacturing from FDA registered facilities which are
independently GMP certified and subject to continuing
independent audit and certification, to handle our increased
manufacturing needs.
Results of operations
The
following tables provide certain selected consolidated financial
information for the periods presented:
|
|
Three
Months Ended June 30,
|
Nine
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
$10,636,545
|
$8,005,149
|
2,631,396
|
$30,183,817
|
$14,107,414
|
16,076,403
|
|
Cost
of sales
|
3,748,024
|
2,929,160
|
818,864
|
10,180,637
|
5,009,187
|
5,171,450
|
|
Gross
profit as a percentage of net sales
|
64.7%
|
63.4%
|
1.3%
|
66.3%
|
64.5%
|
1.8%
|
|
Operating
expenses
|
8,226,029
|
11,542,628
|
(3,316,599)
|
33,053,962
|
18,683,905
|
14,370,057
|
|
(Increase)
decrease on contingent liability
|
(7,580,000)
|
(21,547,606)
|
64.8%
|
30,580,000
|
(52,461,680)
|
158.3%
|
|
Net
income (loss) before taxes
|
(8,944,921)
|
(28,021,178)
|
68.1%
|
16,669,518
|
(62,074,970)
|
126.9%
|
|
Net
income (loss) attributable to cbdMD, Inc. common
shareholders
|
$(9,052,752)
|
$(27,699,249)
|
67.3%
|
$18,594,035
|
$(61,600,703)
|
130.2%
|
Sales
We
record product sales primarily through two main delivery channels,
direct to consumers via online capabilities (E-commerce) and direct
to wholesalers utilizing our internal sales team. In addition, we
record revenue upon delivery of services (consulting, marketing and
brand strategy). The following table provides information on the
contribution of net sales by type of sale to our total net
sales.
|
|
Three
months ended
June 30,
2020
|
|
Three
months ended
June 30,
2019
|
|
|
|
|
|
|
|
|
Wholesale
sales
|
$2,410,719
|
22.7%
|
$3,366,807
|
42.1%
|
|
Consumer
sales
|
8,225,826
|
77.3%
|
4,638,342
|
57.9%
|
|
Service
oriented sales
|
-
|
0%
|
-
|
0%
|
|
Total
net sales
|
$10,636,545
|
|
$8,005,149
|
|
|
|
Nine
months ended
June 30,
2020
|
|
Nine
months ended
June 30,
2019
|
|
|
|
|
|
|
|
|
Wholesale
sales
|
$8,238,832
|
27.3%
|
$4,741,900
|
33.6%
|
|
Consumer
sales
|
21,944,985
|
72.7%
|
9,365,514
|
66.4%
|
|
Service
oriented sales
|
-
|
0%
|
-
|
0%
|
|
Total
net sales
|
$30,183,817
|
|
$14,107,414
|
|
Of
our total net sales as indicated above, during the three months
ended June 30, 2020 and 2019 our Paw CBD line accounted for net
sales of $1,228,860 and $593,718, respectively and for the nine
months ended June 30, 2020 and 2019 accounted for net sales of
$2,818,414 and $1,211,999, respectively.
Cost of sales
Our cost of sales includes costs associated with
distribution, fill and labor expense, components, manufacturing
overhead, third-party providers, and outbound freight for our
product sales (consumer and wholesale sales), and includes labor
for our service sales.
The following table provides
information on the cost of sales to our net sales for the three and
nine months ended June 30, 2020 and 2019:
|
|
Three
months ended
June 30,
2020
|
Three
months ended
June 30,
2019
|
|
|
|
|
|
|
|
Product
sales
|
$3,748,024
|
$2,915,300
|
$832,724
|
|
Service
related sales
|
-
|
13,860
|
(13,860)
|
|
Total
cost of sales
|
$3,748,024
|
$2,929,160
|
$818,864
|
|
|
|
|
|
|
|
Nine
months ended
June 30,
2020
|
Nine
months ended
June 30,
2019
|
|
|
|
|
|
|
|
Product
sales
|
$10,180,637
|
$4,956,067
|
$5,224,570
|
|
Service
related sales
|
-
|
53,120
|
(53,120)
|
|
Total
cost of sales
|
$10,180,637
|
$5,009,187
|
$5,171,450
|
|
|
|
|
|
Our
cost of sales as a percentage of sales was 35.2% and 36.6% for the
three months ended June 30, 2020 and 2019, respectively, and was
33.7% and 35.5% for the nine months ended June 30, 2020 ad 2019,
respectively. The change reflects the growth and maturation of the
business and its manufacturing process, and changes in the cost of
raw materials as we continue to evaluate key vendors to work with
and leverage volume purchasing as we grow as well as additional
product offerings which continue to impact our cost of production.
We expect product sales will maintain cost of sales as a percentage
of net sales, between 30% and 37%, as we continue to manage our
overall cost for manufacturing and production.
Operating expenses
Our
principal operating expenses include staff related expense,
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 expense. Our operating expenses on a
consolidated basis decreased approximately 28.7% for the three
months ended June 30, 2020 from the same period ended June 30,
2019. The decrease can be attributed to the implementation of cost
controls as we have set our eyes on continued growth and positive
cash flow as well as additional cost reductions as a result of the
COVID pandemic. Our operating expense on a consolidated basis
increased approximately 76.9% for the nine months ended June 30,
2020 from the same periods ended June 30, 2019, respectively, and
is directly related to the Mergers on December 20, 2018 and the
significant growth and ramp up of our CBD business to build the
brand.
The
following table provides information on our approximate operating
expenses for the three and nine months ended June 30, 2020 and
2019:
|
|
Three
months ended
June 30,
2020
|
Three
months ended
June 30,
2019
|
|
|
|
|
|
|
|
Staff
related expense
|
$3,290,812
|
$2,952,018
|
$338,794
|
|
Accounting/legal
expense
|
212,766
|
132,507
|
80,259
|
|
Professional
outside services
|
120,303
|
684,389
|
(564,086)
|
|
Advertising/marketing/social
media/events/tradeshows
|
1,699,262
|
2,582,685
|
(883,423)
|
|
Sponsorships
|
588,059
|
780,939
|
(192,880)
|
|
Affiliate
commissions
|
504,440
|
574,361
|
(69,921)
|
|
Merchant
fees
|
522,374
|
626,330
|
(103,956)
|
|
Technology
|
363,936
|
174,077
|
189,859
|
|
Travel
expense
|
10,916
|
283,786
|
(272,870)
|
|
Rent
expense
|
401,231
|
100,289
|
300,942
|
|
Business
insurance
|
125,450
|
87,869
|
37,581
|
|
Non-cash
stock compensation
|
331,985
|
1,389,224
|
(1,057.239)
|
|
All
other expenses
|
54,495
|
1,174,155
|
(1,119,660)
|
|
Totals
|
$8,226,029
|
$11,542,629
|
$(3,316,600)
|
During
the three months ended June 30, 2020, the Company implemented
various cost control measures with a focus on supporting the
business growth while reaching a positive cash flow operation and
in addition adjusted other expenses in relation to the COVID-19
pandemic. As a result, we have reduced our merchant fee expense,
sponsorships, outside services, and other general expenses. As many
events and tradeshows have been canceled during COVID-19 we have
had a reduction in overall advertising/marketing expense and in
addition have adjusted and focused key marketing/advertising
expenses in our ongoing budget for this significant
category.
|
|
Nine
months ended
June 30,
2020
|
Nine
months ended
June 30,
2019
|
|
|
|
|
|
|
|
Staff
related expense
|
$11,193,791
|
$5,467,349
|
$5,726,442
|
|
Accounting/legal
expense
|
938,859
|
670,329
|
268,530
|
|
Professional
outside services
|
962,407
|
1,366,025
|
(403,618)
|
|
Advertising/marketing/social
media/events/tradeshows
|
7,534,488
|
4,174,166
|
3,360,322
|
|
Sponsorships
|
4,160,366
|
780,939
|
3,379,427
|
|
Affiliate
commissions
|
1,434,048
|
1,052,200
|
381,848
|
|
Merchant
fees
|
1,937,836
|
1,030,138
|
907,698
|
|
Technology
|
904,994
|
225,936
|
679,058
|
|
Travel
expense
|
379,959
|
420,137
|
(40,178)
|
|
Rent
expense
|
1,145,422
|
274,504
|
870,918
|
|
Business
insurance
|
391,113
|
245,231
|
145,882
|
|
Non-cash
stock compensation
|
1,447,860
|
1,552,372
|
(104,512)
|
|
All
other expenses
|
622,819
|
1,424,579
|
(801,760)
|
|
Totals
|
$33,053,962
|
$18,683,905
|
$14,370,057
|
During
the nine months ended June 30, 2020 and 2019, the increase in staff
related expense is a direct result of the build out of the CBDI
team. The decrease in professional outside services is related to
the use of outside agencies and firms to support the growth while
we built our infrastructure and added staff to handle certain
functions. The increase in advertising/marketing, sponsorships,
affiliate commissions, and technology are a result of execution on
the business strategy and building of the CBD brand while
increasing market share. The increase in merchant fees is a direct
result of increased business through our E-commerce site. The
non-cash stock compensation expense reflects the value of
restricted stock awards and options as they vest.
The
significant increase in operating expenses is related to the
continued ramping up of the CBDI business, which included increased
staff hiring, a full blown sales, advertising and marketing process
and expenses related to infrastructure expansion. With an
established business foundation and infrastructure, we are now
focused on activation of our assets to continue to build our brand
while we transition with a focus on overall execution and
profitability.
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 table provides information on our approximate corporate
overhead for three and nine months ended June 30, 2020 and
2019:
|
|
Three
months ended
June 30,
2020
|
Three
months ended
June 30,
2019
|
|
|
|
|
|
|
|
Staff
related expense
|
$276,490
|
$186,532
|
$89,958
|
|
Accounting/legal
expense
|
81,198
|
130,152
|
(48,954)
|
|
Professional
outside services
|
45,566
|
307,181
|
(261,615)
|
|
Travel
expense
|
-
|
36,323
|
(36,323)
|
|
Business
insurance
|
99,875
|
58,131
|
41,744
|
|
Non-cash
stock compensation
|
331,985
|
1,389,224
|
(1,057,239)
|
|
Totals
|
$835,114
|
$2,107,543
|
$(1,272,429)
|
|
|
Nine
months ended
June 30,
2020
|
Nine
months ended
June 30,
2019
|
|
|
|
|
|
|
|
Staff
related expense
|
$986,731
|
$952,333
|
$34,398
|
|
Accounting/legal
expense
|
517,090
|
665,680
|
(148,590)
|
|
Professional
outside services
|
365,596
|
793,323
|
(427,727)
|
|
Travel
expense
|
22,342
|
80,279
|
(57,937)
|
|
Business
insurance
|
282,339
|
198,945
|
83,394
|
|
Non-cash
stock compensation
|
1,447,860
|
1,552,372
|
(104,512)
|
|
Totals
|
$3,621,958
|
$4,242,932
|
$(620,974)
|
The
corporate operating expenses are primarily related to the ongoing
public company related activities.
Other income and other non-operating expenses
Interest income (expense)
Our
interest income (expense) was $3,436 and $6,229 for the three
months ended June 30, 2020 and 2019, respectively. For the nine
months ended June 30, 2020 and 2019, our interest income (expense)
was $46,311 and $50,189, respectively.
Contingent liability
As
consideration for the Mergers, under the terms of the Merger
Agreement, we had a contractual obligation to issue 15,250,000
initial shares of our common stock (the “Initial
Shares”), after approval by our shareholders, to the members
of Cure Based Development, to be issued in two tranches 6,500,000
shares and 8,750,000 shares, both of which are subject to leak out
provisions. The unrestricted voting rights to 8,750,000 tranche of
shares vest over a five year period and until those voting rights
vest are subject to voting proxy agreements. As of June 30, 2020,
unrestricted voting rights to 2,187,500 shares have vested and
those shares are no longer subject to voting proxy agreements. The
Merger Agreement also provided that an additional 15,250,000
Earnout Shares of our common stock can be issued upon the
satisfaction of certain aggregate net revenue criteria by cbdMD
within 60 months following the closing date of the
Mergers.
The
Initial Shares and Earnout Shares were approved by our shareholders
and the Initial Shares were issued on April 19, 2019. The Initial
Shares value at April 19, 2019 was $53,215,163, and with the
issuance of the Initial Shares, the contingent liability related to
the Initial Shares was reclassified to shareholders’ equity
by $53,215,163. In addition, the first marking period for the
Earnout Shares was December 31, 2019 and based on measurement
criteria, 5,127,792 shares were issued on February 27, 2020 and had
a value of $4,620,000. Additionally, as the 5,127,792 Earnout
Shares were issued on February 27, 2020, the value of the shares in
the amount of $4,620,000 was reclassified from the contingent
liability to additional paid in capital on the balance
sheet.
The
earn out provision is accounted for and recorded as a contingent
liability with increases in the liability recorded as a non cash
other expense and decreases in the liability recorded as a non cash
other income. The value of the contingent liability was $15,400,000
and $7,820,000 at June 30, 2020 and March 31, 2020, respectively,
and represents the balance of Earnout Shares not issued in the
first marking period. The increase in value of $7,580,000 is
recorded in the Statement of Operations for the three months ended
June 30, 2020. The Company utilized both a market approach and a
Monte Carlo simulation in valuing the contingent liability and a
key input in both of those methods is the stock price. The main
driver of the change in the value of the Earnout Shares within the
contingent liability was the increase of the Company’s stock
price, which was $1.91 at June 30, 2020 as compared to $0.93 on
March 31, 2020.
Realized and unrealized gain (loss) on marketable and other
securities
We
value investments in marketable securities at fair value and record
a gain or loss upon sale at each period in realized and unrealized
gain (loss) on marketable securities. For the three months ended
June 30, 2020 and 2019 we recorded $(30,849) and $(13,162) of
realized and unrealized gain (loss) on marketable and other
securities. For the nine months ended June 30, 2020 and 2019 we
recorded $(146,011) and $(77,802) of realized and unrealized gain
(loss) on marketable and other securities. The discontinued
operations recorded a realized and unrealized gain (loss) of
$(484,289) and $(1,627,266), for the three and nine months ended
June 30, 2019, which is included in the net income (loss) from
discontinued operations on the statement of
operations.
For
the three and nine months ended June 30, 2020 we had an impairment
on other securities of $0 and $600,000, respectively as well as an
impairment of $0 and $160,000, respectively, against other account
receivable representing an investment other security that was to be
received.
Liquidity and Capital Resources
We
had cash and cash equivalents on hand of $15,006,319 and working
capital of $19,725,327 at June 30, 2020 as compared to cash on hand
of $4,689,966 and working capital of $12,033,157 at September 30,
2019. Our current assets increased approximately 53.1% at June 30,
2020 from September 30, 2019, and is primarily attributable to an
increase in cash and inventory, offset by a decrease in accounts
receivable, marketable and other securities, merchant reserve,
prepaid expenses, and assets from discontinued operations. Our
current liabilities increased approximately 18.2% at June 30, 2020
from September 30, 2019. This increase is primarily attributable to
increases in accrued expenses, note payable and operating lease
short term liability offset by decreases in accounts
payable.
During
the three and nine months ended June 30, 2020 we used cash
primarily to fund our operations.
We
do not have any commitments for capital expenditures. We have a
commitment for cumulative cash dividends at an annual rate of 8%
payable monthly in arrears for the prior month to our preferred
shareholders. We have multiple endorsement or sponsorship
agreements for varying time periods up through December 2022 and
provide for financial commitments from the Company based on
performance/participation (see Note 13 Commitments and
Contingencies). We have sufficient working capital to fund our
operations.
Our
goal from a liquidity perspective is to use operating cash flows to
fund day to day operations and we have not met this goal as cash
flow from operations has been a net use of $10,277,081 and
$9,055,308 for the nine months ended June 30, 2020 and 2019,
respectively.
On
October 16, 2019 we closed a follow-on firm commitment underwritten
public offering of shares of our 8.0% Series A Convertible
Preferred Stock resulting in total net proceeds to us of
$4,525,100. On January 15, 2020, we closed a follow-on firm
underwritten public offering of shares of our common stock
resulting in total net proceeds to us of $16,928,100. We are using
the net proceeds from the offerings for brand development and
expansion, advertising, marketing, and general working capital. In
addition, as described earlier in this report, in April 2020 we
received a PPP Loan of $1,456,100.
Related Parties
As
described in Note 9 in notes to our consolidated financial
statements appearing elsewhere in this report, we have engaged in
related party transactions. We have reported transactions with
related parties within the consolidated financial statements as
well as within the notes to the consolidated financial
statements.
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 2019 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 do not have any off-balance sheet
arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to
investors. The term "off-balance sheet arrangement" generally means
any transaction, agreement or other contractual arrangement to
which an entity unconsolidated with us is a party, under which we
have any obligation arising under a guarantee contract, derivative
instrument or variable interest or a retained or contingent
interest in assets transferred to such entity or similar
arrangement that serves as credit, liquidity or market risk support
for such assets.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not
applicable for a smaller reporting company.
Evaluation of Disclosure
Controls and Procedures. We
maintain “disclosure controls and procedures” as such
term is defined in Rule 13a-15(e) under 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 co-Chief Executive Officers and
our Chief Financial Officer have 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
co-Chief Executive Officers and our 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.