NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2019 AND 2018
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. On April 22, 2019, following approval by our shareholders at
the 2019 annual meeting held on April 19, 2019, we filed Articles
of Amendment to our Articles of Incorporation changing the name of
our Company to “cbdMD, Inc.” effective May 1, 2019. 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. 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
(“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 subsidiary 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, common stock issued prior to the IPO,
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.
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 December 31, 2019, we
have an allowance for doubtful accounts of $33,652, and had an
allowance of $7,286 at September 30, 2019.
In addition, the Company 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).
Accounts receivable and accounts receivable other items that
involve a related party are indicated as such on the face of the
financial statements.
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. The arrangement with the payment processors
requires that the Company pay a fee between 5.20% - 6.95% 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 December 31, 2019,
the receivable from payment processors included approximately
$194,544 for the waiting period amount and is recorded as accounts
receivable in the accompanying consolidated balance sheet and
$412,979 for the reserve amount for a total receivable of
$607,523.
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.
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.
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.
For the three months ended December 31, 2019, the contingent
liabilities associated with the business combination were decreased
by $16,898,006 to reflect their reassessed fair values as of
December 31, 2019. This decrease is reflective of a change in value
of the variable number of shares from September 30, 2019. In
December 2019, 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
$16,898,006 decrease in contingent liabilities is the change in the
Company’s common share price between September 30, 2019 and
December 31, 2019. These increases or decreases to the contingent
liabilities are reflected within Other Expenses on the consolidated
statements of operations.
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, the services have been
rendered, or the usage-based royalty has been earned. 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. The Company has entered into various license agreements
that provide revenues based on guarantee minimum royalty payments
with additional royalty revenues based on a percentage of defined
sales. Guaranteed minimum royalty payments (fixed revenue) are
recognized on a straight-line basis over the term of the contract,
as defined in each license agreement. Earned royalties and earned
royalties in excess of the fixed revenue (variable revenue) are
recognized as income during the period corresponding to the
licensee’s sales. Earned royalties in excess of fixed revenue
are only recognized when the Company is reasonably certain that the
guaranteed minimums payments for the period will be
exceeded.
The below table summarizes amounts related to future performance
obligations under fixed contractual arrangements as of December 31,
2019:
|
|
|
Future
performance obligations
|
$0
|
$0
|
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 30 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, E-commerce and wholesale channels. We also generate
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
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
December 31,
2019
|
|
Three Months ended
December 31,
2018
|
|
Wholesale
product sales
|
$3,284,459
|
32.4%
|
$-
|
0%
|
Consumer
product sales
|
6,863,777
|
67.6%
|
465,687
|
100%
|
Service
related sales
|
-
|
-
|
-
|
0%
|
Total
net sales
|
$10,148,236
|
|
$465,687
|
|
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 December 31,
2019.
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 $2,410,721 and $82,142 in advertising and related
marketing and promotional costs included in operating expenses
during the three months ended December 31, 2019 and 2018,
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. As such, the Parent Company’s partnership share in
the taxable income or loss of BPU was included in the tax return of
the Parent Company. Beginning in April 2017, the Parent Company
acquired the remaining interests in BPU. As a result of the
acquisition, BPU became a disregarded entity for tax purposes and
its entire share of taxable income or loss was included in the tax
return of the Parent Company. CBDI, Paw CBD, and Level H&W 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. IM1 and EE1 are
multi-member limited liability companies that are treated as
partnerships for federal and state income tax purposes. As such,
the Parent Company’s partnership share in the taxable income
or loss of IM1 and EE1 are included in the tax return of the Parent
Company.
The Parent Company accounts for income taxes pursuant to the
provisions of the Accounting for Income Taxes topic of the FASB 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 December 31, 2019 and 2018, 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 $3,182,283 uninsured balance at December 31, 2019
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 months ended December 31, 2019. We have
three customers whose aggregate accounts receivable balance was
approximately 77% of the combined total accounts receivable and
accounts receivable discontinued operations as of December 31,
2019. 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 all 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 $13,527 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, LLC, a Nevada limited liability company
(“Cure Based Development”). The Merger Agreement
provided that AcqCo LLC merge 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 CBD Industries LLC
(“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 has 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. 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.
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 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. If there is insufficient data to support
the valuation of the security directly, the company will value it,
and the underlying revenue, on the estimated fair value of the
services provided. Where an accounts receivable other is settled
with the receipt of the common stock or other instrument, the
common stock or other instrument will be classified as an asset on
the balance sheet as either an investment marketable security (when
the customer is a public entity) or as an investment other security
(when the customer is a privately held entity).
On June 23, 2017, I’M1 and EE1 in aggregate exercised a
warrant for 1,600,000 shares of common stock for services delivered
to a customer and accounted for this in Investment other
securities. The common stock was issued to the Company’s
subsidiaries I’M1 and EE1. The customer is a private entity
and the stock was valued at $912,000, which was based on its recent
financing in June 2017 at $0.57 per share. The Company has
classified this common stock as Level 3 for fair value measurement
purposes as there are no observable inputs. In valuing the stock
the Company used the fair value of the services provided, utilizing
an analysis of vendor specific objective evidence of its selling
price. In August 2017, each of I’M1 and EE1 distributed the
shares to its majority owner, cbdMD, and also distributed shares
valued at $223,440 to its non-controlling interests. In August
2017, the Company also provided referral services for kathy
Ireland® Worldwide and this customer. As compensation the
Company received an additional 200,000 shares of common stock
valued at $114,000 using the pricing described above. On December
21, 2017, the Company purchased 300 shares of preferred stock in a
private offering from this customer for $300,000. The preferred
shares are convertible into common stock at a 20% discount of a
defined subsequent financing, or an IPO offering of a minimum $15
million, or at a company valuation of $45 million whichever is the
least. The Company has classified this stock as Level 3 for fair
value measurement purposes as there are no observable inputs. In
valuing the stock the Company used the value paid, which was the
price offered to all third party investors. Subsequently, the
Company has recently met with other investors of the customer and
has indicated desire to sell the equity interest of the Company. As
of September 30, 2019, based on conversations with other investors,
the market for this equity, and potential selling prices
negotiated, the Company determined that the value at September 30,
2019 was $600,000 and an impairment of $502,560 was appropriate for
the year ended September 30, 2019. In November 2019, the Company
entered into an option to purchase the shares by June 30, 2020 with
a third party for $600,000. The option required the buyer to
provide a non refundable deposit of $30,000. Based on this, the
Company has determined there was not an indication of an impairment
at December 31, 2019.
In December 2017, the Company completed services per an advisory
services agreement with Kure Corp, formerly a related party. As
payment for these services, Kure Corp issued 800,000 shares of its
stock to the Company. The customer was a private entity and the
stock was valued at $400,000, which was based on financing
activities by Kure Corp in September 2017 in which shares were
valued at $0.50 per share. The Company had classified this common
stock, cumulative value of $400,000, as Level 3 for fair value
measurement purposes as there were no observable inputs. In valuing
the stock the Company used factors including information provided
by the issuer regarding their recent results and future plans as
well as their most recent financing transactions. On April 30,
2018, Kure Corp. merged with Isodiol International, Inc. (CSE:
ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company. Details can be
reviewed in our Form 10-K previously filed. As a result of this
merger we received the first issuance of 380,952 shares from
Isodiol and valued them based on the trading price on April 30,
2018 of $0.63 per share which totaled $240,000. We also removed the
value of the Kure equity of $400,000 from our Level 3 investments
as part of the exchange described above. As the full value of the
Kure equity will not be received until the future issuances based
on earn out goals, we recorded an accounts receivable other of
$160,000 as of December 31, 2018. On March 31, 2019, Isodiol spun
off Kure to its original shareholders by issuing back all original
Kure stock. As a result of the spin off, the Company will receive
800,000 shares of Kure stock which we valued at the $160,000 and as
Kure is private, when the shares are received they will be treated
as a Level 3 stock and will be accounted for as the $160,000
accounts receivable other. The Company has determined that the
800,000 shares have a fair market value over $160,000. The Company
has assessed the common stock and determined there was not an
indication of an impairment at December 31, 2019.
On December 30, 2017 the Company entered into an Agreement with
Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F),
a Canadian company 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 December 31,
2019, the Company has 1,042,193 shares valued at
$136,527.
The table below summarizes the assets valued at fair value as of
December 31, 2019:
|
In Active Markets for Identical Assets and Liabilities
(Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
Total Fair Value at
December 31,
2019
|
|
|
|
|
|
Marketable
securities
|
$136,527
|
-
|
$-
|
$136,527
|
Investment
other securities
|
-
|
-
|
$600,000
|
$600,000
|
|
|
|
|
|
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
|
NOTE 4 – INVENTORY
Inventory at December 31, 2019 and September 30, 2019 consists of
the following:
|
|
|
|
|
|
Finished
goods
|
$2,050,712
|
$3,050,120
|
Inventory
components
|
3,256,505
|
1,251,466
|
Inventory
prepaid
|
1,141,211
|
903,458
|
Total
|
$6,448,428
|
$5,205,044
|
NOTE 5 – PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31, 2019 and
September 30, 2019 consist of the following:
|
|
|
|
|
|
Computers,
furniture and equipment
|
$169,122
|
$131,077
|
Manufacturing
equipment
|
1,802,745
|
1,375,986
|
Leasehold
improvements
|
466,824
|
375,954
|
Automobiles
|
24,892
|
24,892
|
|
2,463,583
|
1,907,909
|
Less
accumulated depreciation
|
(305,603)
|
(192,352)
|
Net
property and equipment
|
$2,157,980
|
$1,715,557
|
Depreciation expense for continuing operations related to property
and equipment was $113,251 and $4,103 for the three months ended
December 31, 2019 and 2018, respectively. Depreciation expense for
discontinued operations related to property and equipment was
$4,715 for the three months ended December 31, 2018.
NOTE 6 – INTANGIBLE ASSETS
With the Mergers of Cure Based Development, the Company has 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 December 31, 2019 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 months ended December 31, 2019 and 2018,
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
December 31,
2019
|
Three Months Ended
December 31,
2018
|
|
|
|
Net
sales
|
$N/A*
|
$3,549,115
|
Operating
income (loss)
|
$N/A*
|
$(828,744)
|
Net
income (loss)
|
$N/A*
|
$(2,180,308)
|
Net
income per share – average weighted shares
|
$N/A*
|
$(0.09)
|
Net
income per share – fully diluted
|
$N/A*
|
$-
|
* 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 has
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 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 (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 Earnout Shares were approved by
our shareholders and the initial shares were issued on April 19,
2019.
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 $50,600,000 at September
30, 2019 and represents the Earnout Shares. 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. The Earnout Shares
were valued at $33,701,994 on December 31, 2019 as compared to
$50,600,000 at September 30, 2019. The decrease in value of the
contingent liability of $16,898,006 is recorded in the Statement of
Operations for the three months ended December 31, 2019. 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
decrease in the value of the Earnout Shares within the contingent
liability was the decrease of the Company’s stock price,
which was $2.26 at December 31, 2019 as compared to $3.96 on
September 30, 2019.
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 December 31, 2019 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% Series
A Cumulative Convertible Preferred Stock. Our 8% Series A
Cumulative Convertible Preferred Stock ranks senior to our common
stock for liquidation or dividend provisions and are entitled to
receive cumulative cash dividends at an annual rate of 8% 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% Series A Cumulative
Convertible Preferred Stock issued and outstanding at December 31,
2019.
The total amount of dividends declared and paid were $67,000 and
$67,000, respectively, for the three months ended December 31,
2019.
Common Stock – We are authorized to issue 150,000,000 shares
of common stock, par value $0.001 per share. There were 27,720,356
shares of common stock issued and outstanding at December 31, 2019
and September 30, 2019, respectively.
Preferred stock transactions:
In the three months ended December 31, 2019:
On October 16, 2019, the Company completed a follow-on 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.
No preferred stock was issued in the three months ended December
31, 2018.
Common stock transactions:
No common stock was issued in the three months ended December 31,
2019.
In the three months ended December 31, 2018:
On October 2, 2018, the Company completed a follow-on 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 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 were valued at $86,092 and expire on September
28, 2023.
Stock option transactions:
In the three months ended December 31, 2019:
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 $190,776 for the three months ended
December 31, 2019.
No options were issued in the three months ended December 31,
2018.
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 three
months ended December 31, 2019 and 2018:
|
|
|
Exercise
price
|
$3.15
|
-
|
Risk
free interest rate
|
1.64%
|
-
|
Volatility
|
95.96%
|
-
|
Expected
term
|
5 years
|
-
|
Dividend
yield
|
None
|
-
|
Warrant transactions:
In the three months ended December 31, 2019:
In October 2019 in relation to the follow-on public offering of the
8.0% Series A Cumulative Convertible Preferred Stock, we issued to
the representatives 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 the three months ended December 31, 2018:
On October 2, 2018 in relation to the secondary offering, we issued
to the representatives 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.
The following table summarizes the inputs used for the
Black-Scholes pricing model on the warrants issued in the three
months ended December 31, 2019 and 2018:
|
|
|
Exercise
price
|
$3.9125
|
$4.375
|
Risk
free interest rate
|
1.48%
|
2.90%
|
Volatility
|
95.36%
|
70.61%
|
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
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
|
280,000
|
3.15
|
|
|
Exercised
|
-
|
-
|
|
|
Forfeited
|
-
|
-
|
|
|
Outstanding
at December 31, 2019
|
1,499,650
|
$5.52
|
7.42
|
$—
|
|
|
|
|
|
Exercisable
at December 31, 2019
|
809,650
|
$5.49
|
7.27
|
$—
|
As of December 31, 2019, there was approximately $1,586,205 of
total unrecognized compensation cost related to non-vested stock
options which vest over a period of approximately 2.3
years.
Restricted Stock Award transactions:
In May 2019 the Company issued 57,500 restricted stock awards in
aggregate to eleven employees. The restricted stock awards vest
January 1, 2020. The stock awards were valued at fair market upon
issuance at $368,000 and amortized over the vesting period. We
recognized $138,000 of stock based compensation expense for the
three months ended December 31, 2019.
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
|
47,923
|
3.91
|
|
|
Exercised
|
-
|
-
|
|
|
Forfeited
|
-
|
-
|
|
|
Outstanding
at December 31, 2019
|
471,528
|
$6.36
|
2.83
|
$—
|
|
|
|
|
|
Exercisable
at December 31, 2019
|
423,605
|
$6.64
|
2.770
|
$—
|
The following table summarizes outstanding common stock purchase
warrants as of December 31, 2019:
|
|
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
|
47,923
|
$3.9125
|
October
2024
|
|
471,528
|
6.36
|
|
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. We have recorded expense of $166,666 for the three
months ended December 31, 2019.
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. We have recorded expense of
$965,000 for the three months ended December 31, 2019.
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. We
have recorded expense of $63,206 for the three months ended
December 31, 2019.
NOTE 14 – NOTE PAYABLE
In July 2019, we entered into a loan arrangement for $249,100 for a
line of equipment, of which $182,975 is a long term note payable at
December 31, 2019. Payments are for 60 months and have a financing
rate of 7.01 %, which requires a monthly payment of
$4,905.
NOTE 15 – 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 has
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 has 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 months ended December 31,
2018:
|
Three months ended December 31,
|
Three months ended December 31,
|
|
|
|
|
|
|
Gross
Sales
|
$-
|
$783,734
|
Allowances
|
-
|
(392)
|
Total Net Sales
|
-
|
783,342
|
Costs
of sales
|
-
|
325,697
|
Gross profit
|
-
|
457,645
|
Operating
expenses
|
41,202
|
153,128
|
Income (loss) from
operations
|
(41,202)
|
304,517
|
|
|
|
Other
income
|
|
|
Realized
and Unrealized gain (loss) on marketable securities
|
-
|
(1,578,976)
|
Interest
income (expense)
|
-
|
6,348
|
Income (loss) before provision
for income taxes
|
(41,202)
|
(1,268,111)
|
Provision
for income taxes
|
-
|
-
|
Net Income (loss)
|
(41,202)
|
(1,268,111)
|
Net
Income (loss) attributable to non-controlling interest
|
$-
|
$(79,149)
|
The following table shows the summary assets and liabilities of the
discontinued operations as of December 31, 2019 and September 30,
2019.
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
Cash
and cash equivalents
|
$-
|
$-
|
Accounts
receivable
|
875,331
|
1,080,000
|
Total current assets included as part of discontinued
operations
|
875,331
|
1,080,000
|
|
|
|
Other
assets:
|
|
|
Total other assets included as part of discontinued
operations
|
-
|
-
|
|
|
|
Total assets included as part of discontinued
operations
|
$875,331
|
$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 three months ended December
31,:
|
|
|
Depreciation/
amortization
|
$-
|
$64,414
|
Realized/unrealized
(gain) loss on securities expenditures
|
$-
|
$80,173
|
Impairment
on discontinued operations assets
|
$(38,002)
|
$-
|
Non
cash consideration received for services
|
$-
|
$(407,500)
|
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 December
31, 2019 the balance on the accounts receivable is $875,331, which
reflects payments made and an impairment of $38,002.
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 16 – 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
|
Variable
lease costs
|
23,100
|
Total
operating lease costs
|
$405,533
|
Supplemental cash flow information related to operating leases is
summarized as follows:
|
|
|
|
Cash
paid for amounts included in the measurement of operating lease
liabilities
|
$318,759
|
As of December 31, 2019, our operating leases had a weighted
average remaining lease term of 6.36 years and a weighted average
discount rate of 4.66%. Future minimum aggregate lease payments
under operating leases as of December 31, 2019 are summarized as
follows:
For the year ended September 30,
|
|
2020
(remaining nine months)
|
$1,076,047
|
2021
|
1,452,434
|
2022
|
1,392,837
|
2023
|
1,380,204
|
2024
|
1,421,610
|
Thereafter
|
2,532,811
|
Total
future lease payments
|
9,255,943
|
Less
interest
|
(1,305,139)
|
Total
lease liabilities
|
$7,950,804
|
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 17 – 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
|
$12,970,965
|
$(920,931)
|
Net
income (loss) discontinued operations
|
(41,202)
|
(1,188,962)
|
Net
income (loss) attributable to cbdMD, Inc. common
shareholders
|
12,929,763
|
(2,109,893)
|
|
|
|
Preferred
dividends paid
|
66,734
|
-
|
Diluted:
|
|
|
Net
income (loss) continuing operations adjusted for preferred
dividend
|
12,904,231
|
-
|
Net
income(loss) adjusted for preferred dividend
|
12,863,029
|
-
|
|
|
|
Shares
used in computing basic earnings per share
|
27,720,356
|
10,052,960
|
Effect
of dilutive securities:
|
|
|
Options
|
-
|
-
|
Warrants
|
-
|
-
|
Convertible
preferred shares
|
833,500
|
-
|
Shares
used in computing diluted earnings per share
|
28,553,856
|
10,052,960
|
|
|
|
Earnings
per share Basic:
|
|
|
Continued
operations
|
0.46
|
(0.09)
|
Discontinued
operations
|
(.00)
|
(0.12)
|
Basic
earnings per share
|
0.46
|
(0.21)
|
|
|
|
Earnings
per share Diluted:
|
|
|
Continued
operations
|
0.45
|
-
|
Discontinued
operations
|
-
|
-
|
Diluted
earnings per share
|
0.45
|
-
|
At December 31, 2018, 833,255 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 18 – INCOME TAXES
On November 17, 2017, the Company completed an IPO. 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 offering. On December 16, 2019 the Company completed
afollow-on offering of its 8.0% Series A Cumulative Convertible
Preferred Stock. Management has determined that the Company's
federal and state NOL carryovers established up through the date of
each of these ownership changes may be subject to an annual
limitation; however, this limitation is not material to these
condensed consolidated financial statements.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted. As a
result of the enactment, the U.S. corporate tax rate was changed
from a progressive bracketed tax rate with the highest marginal
rate of 35% to a flat corporate tax rate of 21%. The Company has
revalued its deferred tax assets and liabilities at the date of
enactment and the result was a reduction of the net deferred tax
liability and a tax provision benefit of $12,000 which is reflected
in the nine months ending June 30, 2018 financial
statements.
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, provides 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. 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 $2,240,000 to $0 and a recorded a deferred tax benefit of
$2,240,000 for the quarter ending December 31, 2019.
NOTE 19 – SUBSEQUENT EVENTS
On January 14, 2020, the Company completed a follow-on firm
committment 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.