What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-12-22 compared with 2022-12-15 · 57 added, 63 removed, 180 unchanged (40% of the section changed)

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Since May 1, 2019, commensurate with our name change, our common stock has been listed on the NYSE American under the symbol “YCBD”

and prior to that, since November 17, 2017 was listed on the NYSE American under the symbol “LEVB.”

and from November 17, 2017 through May 1, 20219 our common stock was listed on the NYSE American under the symbol “LEVB.”

Our Series A Convertible Preferred Stock has been listed on the NYSE American since October 21, 2019 under the symbol “YCBDpA.”

As of December 9, 2022, there were approximately 104 record owners of our common stock and one record holder of our Series A Convertible Preferred Stock.

As of December 9, 2023, there were approximately 11,419 street owners of our common stock and 1,462 street holder of our Series A Convertible Preferred Stock.

These amounts do not reflect persons or entities that hold our securities in nominee or “street”

name through various brokerage firms.

Dividend policy

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Dividends on the Series A Convertible Preferred Stock will accrue daily and be cumulative from, and including, the first day of the calendar month in which the shares are issued and will be payable monthly in arrears approximately on the 15 th day of each calendar month.

Every month since November 1, 2019 the Audit Committee of our board of directors has declared a cash dividend of $0.0667 per share of Series A Convertible Preferred Stock payable on or around the 15th of each month to holders of record on the first of each month.

We expect that our board of directors will continue to declare and pay monthly cash dividends on our Series A Convertible Preferred Stock, subject to the limitations to do so under North Carolina law.

From November 1, 2019 until August 1, 2023 the Audit Committee of our board of directors declared a cash dividend of $0.0667 per share of Series A Convertible Preferred Stock payable on or around the 15th of each month to holders of record on the first of each month.

On August 22, 2023 the Board of Directors suspended the monthly cash dividend payment on the Company’s 8.0% Series A Cumulative Convertible Preferred Stock beginning with the month ending August 31, 2023 as the Company conserves cash in order to continue its efforts to increase sales, develop additional products, continue research and development, reduce operating expenses and attempt to achieve profitability.

See “Risk Factors”.

Recent sales of unregistered securities

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In addition to our core brands, we also operate cbdMD Therapeutics, LLC to capture the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications.

During 2022 we continued to focus on our core cbdMD brand, expanding our full spectrum products, as well as our Paw CBD and cbdMD Botanicals lines. 

During 2023 we continued to focus on our path to profitability by lowering our costs and focusing on the customer experience.

We transitioned a significant part of our organization during the first half of the year in addition to our ecommerce platform at the end of the third quarter. 

Fiscal 2023 proved to be more challenging for the Company and industry as a whole as inflation reached 30 year records. 

Management worked hard to rationalize its SKUs and cost structure during fiscal 2022 and while we have successfully achieved 6 sequential quarters of Non-GAAP Adjusted Operating Income improvement, our revenues were negatively impacted as we tightened our marketing spend and consumers were impacted by inflation trends. 

Operationally we continued to optimize our product portfolio and invested in ongoing quality certification, adding the NSF certification to certain products and became the first CBD company to commercialize NSF for Sport product in our category. 

Additionally, we launched 

a line of hemp-derived delta 9 products as well as new line of high strength CBD products supported by our human clinical at the end of the year and we believe are well positioned to take market share during fiscal 2023.

While we have not yet achieved positive operating income, management has worked hard to rationalize cost structure during fiscal 2023 and we have successfully achieved 8 sequential quarters of Non-GAAP Adjusted Operating Income improvement, although our revenues were negatively impacted as we tightened our marketing spend and consumers were impacted by inflation trends. 

Operationally we continued to optimize our product portfolio, adding to our NSF for Sport as well as our hemp-derived delta 9 line of products. 

Since year end we added the hempMD and ATRX line of products to open up and expand our distribution channels and customer base and refreshed our website to improve the customer experience. 

We believe we are well positioned to take market share during fiscal 2024.

Results of operations

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The following tables provide certain selected unaudited consolidated financial information for the three months ended September 30, 2023 and 2022:

September 30,

Total net sales

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The change in revenue was driven by a combination of broader CBD category softness which we believe is partially attributed to the macro inflationary environment in addition to management reducing unprofitable marketing expenses that resulted in an increase in net contribution, in addition to some stock outages later in the year. 

Net sales for the fourth quarter declined 20% year over year.

During the quarter management worked to sell through a number of SKUs prior to the launch of our high strength products which resulted in lower average price and some out of stocking of key wholesale products. 

Of our total net sales as indicated above, during the fiscal years ended September 30, 2022 and 2021 our Paw CBD line accounted for net sales of $3,748,779 and $5,659,796, respectively.

Net sales for the fourth quarter declined 27% year over year as a result of industry trends, a reduction of marketing spend and lower wholesale pricing initiatives with our new high-strength products that launched mid-September of 2022.

Of our total net sales as indicated above, during the fiscal years ended September 30, 2023 and 2022 our Paw CBD line accounted for net sales of $2,404,787 and $3,748,779, respectively.

The year over year decline in our Paw CBD brand is due to increasing competition and a rationalization in marketing efforts specific to the brand.

Cost of sales

Our cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third-party providers, and freight for our product sales, and includes labor for our service sales.

Our cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third-party providers, and freight for our product sales.

Our cost of sales as a percentage of net sales was 38.0% and 36.1% for fiscal years ended September 30, 2023 and 2022, respectively.

While we made significant strides to reduce our overall fixed overhead cost associated with our cost of goods sold during fiscal 2022, gross margins for the year were impacted by (i) a large inventory NRV adjustment during the December 2021 quarter as we rationalized SKUs, (ii) lower overhead absorption based on lower revenue and (iii) additional discounting during the fourth fiscal quarter as we worked to sell out of certain SKUs prior to a reset of our products.

For the fourth quarter of fiscal 2022 our cost of sales as a percentage of net sales was 36% as compared to 41% in the prior year comparative period. 

The change reflects the increasing revenue percentage of E-commerce sales, driving purchasing and manufacturing efficiencies, tighter inventory management, changes in the cost of raw materials, evaluating key vendors, negotiating pricing, as well as additional product offerings which continue to impact our cost of production.

While we made significant strides to reduce our overall fixed overhead cost associated with our cost of goods sold during fiscal 2022, gross margins for the year were impacted by lower overhead absorption based on lower revenue and ongoing product mix change from high-margin tinctures to gummies and functional products.

For the fourth quarter of fiscal 2023 our cost of sales as a percentage of net sales was 37.9% as compared to 36.2% in the prior year comparative period. 

The change reflects the product mix change to our higher strength and additional inventory write downs during the fourth quarter.

Operating expenses

Our principal operating expenses include staff related expenses, advertising (which includes expenses related to industry distribution and trade shows), sponsorships, affiliate commissions, merchant fees, technology, travel, rent, professional service fees, and business insurance expenses.

Our operating expenses on a consolidated basis decreased approximately $10 million or 20% for the fiscal year ended September 30, 2022 versus the fiscal year ended September 30, 2021.

The decrease can be attributed to management’s efforts to rationalize and right size our expenses across all areas of our business. 

Our operating expenses on a consolidated basis decreased approximately $15.1 million, excluding impairment charges, or 37.5% for the fiscal year ended September 30, 2023 versus the fiscal year ended September 30, 2022.

The decrease can be attributed to management’s efforts to rationalize and right size our expenses across all areas of our business, especially a $5.3 million reduction in payroll, $8.3 million reduction of marketing expenses and $1.0 million of sponsorships.

This was partially offset by a $0.8 million non-cash expense as we began amortizing intangibles.

Consolidated Operating Expenses

The following tables provide information on our approximate operating expenses for the fiscal years ended September 30, 2022 and 2021:

The following tables provide information on our operating expenses for the fiscal years ended September 30, 2023 and 2022:

Staff related expense

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and (vii) non-cash stock compensation expense.

The following tables provide information on our approximate corporate overhead for the fiscal years ended September 30, 2022 and 2021:

The following tables provide information on our corporate overhead for the fiscal years ended September 30, 2023 and 2022:

Staff related expense

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The 44.6% decrease in corporate related expenses for the fiscal year ended September 30, 2023 over prior year is primarily due to the decreases in non-cash stock compensation to employees and directors tied to fewer shares issued under our equity incentive plans and at lower prices per share and, decreases in staffing related expenses as well as legal and accounting costs.

The decrease was partially offset by $98,000 in professional outside services and increased business insurance rates.

The corporate operating expenses are primarily related to the ongoing public company related activities.

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The Therapeutic operating expenses include research and development activities for therapeutic applications.

Year over year’s decline is primarily driven by the finishing of our clinical studies.

The following tables provide information on our approximate corporate overhead for the fiscal years ended September 30, 2023. 

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As described in Note 6 to the notes to the consolidated financial statements appearing elsewhere in this report, the earn-out provision for the Earnout Shares is accounted for and recorded as a contingent liability with increases in the liability recorded as non-cash other expense and decreases in the liability recorded as non- cash other income.

For the three months ended September 30, 2022, the remaining contingent liabilities associated with the business combination, after the issuance of the second quarter fourth marking period Earnout Shares, were decreased by $3,512,558 to reflect their reassessed fair values as of September 30, 2022.

This decrease is reflective of a change in value of the variable number of shares from June 30, 2021.

In aggregate, we recorded income of $3,740,000 for the three months ended September 30, 2022 between the decrease in the value of the fourth marking period Earnout Shares and the decrease in value of the remaining contingent liabilities.

In May 2020, and subsequently in June 2021, we updated the forecasts for performance of the post-acquisition entity based on current trends and performance that would impact the estimated likelihood that the revenue targets disclosed in Note 6 of our financial statements would be met.

The primary catalyst for the $4,660,000 decrease in contingent liabilities is the change in our common stock share price between June 30, 2022 to September 30, 2022 from $0.44 per share to $0.223 per share.

We expect to continue to record changes in the non-cash contingent liability through the balance of the earnout period.

For the three months ended September 30, 2023, the remaining contingent liabilities associated with the business combination, after the issuance of the second quarter fourth marking period Earnout Shares, were decreased by $0.03 million to reflect their reassessed fair values as of September 30, 2023.

This decrease in the contingent liability is mostly due to the change in our common stock share price between June 30, 2023 to September 30, 2023 from $1.40 per share to $1.03 per share.

For the twelve months ended September 30, 2023, the contingent liability decreased $0.19 million decrease primarily related to the change in our common stock share price between September 30, 2022 to September 30, 2023 from $10.25 per share to $1.03 per share.

The earnout ended November 2023 and we will record a final change in the non-cash contingent liability in the first quarter of fiscal 2024.

In addition, as of September 30, 2023 the measuring period for the Twenty Two Earnout Shares is over, the threshold was not met and there is no longer any value ascribed to this on our balance sheet.

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We had cash and cash equivalents on hand of $1.8 million and working capital of $3.4 million at September 30, 2023 as compared to cash and cash equivalents on hand of $6.7 million and working capital of $10.7 million at September 30, 2022.

Our current assets decreased approximately 56% at September 30, 2022 from September 30, 2021, which is primarily attributable to an cash used by operations.

Our current assets decreased approximately 49% at September 30, 2023 from September 30, 2022, which is primarily attributable to cash used by operations.

Our current liabilities decreased approximately 13% at September 30, 2023 from September 30, 2022.

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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 2024 and provide for financial commitments from the Company based on performance/participation (see Note 11 Commitments and Contingencies).

We have a commitment for cumulative dividends at an annual rate of 8% payable monthly in arrears for the prior month to our preferred shareholders.

As of September 2023, we have stopped paying this in cash monthly and are accruing this dividend instead. 

While the Company is taking strong action and believes that it can execute its strategy and path to profitability within its balance sheet, and in its ability to raise additional funds, there can be no assurances to that effect.

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The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability and cash flow and the ability to acquire additional funding.

These and other factors raise potential concern about the Company’s ability to continue as a going concern within twelve months after the date that our annual financial statements are issued.

These and other factors raise substantial doubt about the Company’s ability to continue as a going concern within twelve months after the date that our annual financial statements are issued.

These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result in the Company not being able to continue as a going concern.

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 $2.8 

and $3.7 million for the three months ended September 30, 2022 and 2021, respectively $19.6 and $16.8 million for the twelve months ended September 30, 2022 and 2021, respectively.

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 $1.0 and $2.8 million for the three months ended September 30, 2023 and 2022, respectively $4.3 and $15.0 million for the twelve months ended September 30, 2023 and 2022, respectively.

Non-GAAP Adjusted Operating Income

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Employee and director stock compensation (1)

Other non-cash stock compensation for services (2)

Inventory adjustment(2)

Impairment of Goodwill and other intangible assets (3)

Incremental bad debt

Accrual for severance (4)

a360 non-cash trade credit

Accrual / expenses for discretionary bonus

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(1) Represents non-cash expense related to options, warrants, restricted stock expenses that have been amortized during the period.

(2) Represents non-cash expense related to options, warrants, restricted stock expenses that have been amortized during the period.

(2) Represents an operating expense related to inventory loss related to regulatory changes impacting labels and packaging and obsolete/expired inventory.

(4) Represents non-cash impairment of the cbdMD trademark of $4,285,000 during the first quarter of fiscal 2022 and $56,670,970 of goodwill impairment during the fiscal year ended 2022.

(5) Represents one-time severance costs incurred as Company made rationalized a number of positions.

(3) Represents non-cash impairment of the cbdMD, DCO and Technology Relief from Royalty trademarks of $13.21 million during the fourth quarter of fiscal 2023, non-cash impairment of the cbdMD trademark of $4.28 million during the first quarter of fiscal year 2022 and $56.67 million of goodwill impairment during the fiscal year ended 2022.

(4) Represents one-time severance costs incurred as the Company rationalized a number of positions.

Earnout Shares

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1 to the Merger Agreement with the holders of the remaining Earnout Rights which amended the measurement periods within the third marking period to change the determination of the aggregate net revenues within the third marking period to a quarterly basis for each of the six fiscal quarters within the third marking period, beginning with the quarter ended March 31, 2021, instead of the initial 18 month period.

While this change in the measurement date has no effect on the number of remaining Earnout Shares issuable under the Earnout Rights, nor the revenue targets, it will result in the issuance of the Earnout Shares associated with the third marketing period (assuming the revenue targets are met under the terms of the Merger Agreement) on a quarterly basis instead of at the end of the 18 month period.

Because the Earnout Shares are earned based on the Company’s earned revenue and by issuing these shares quarterly, as compared to at the end of the eight quarters, we expect that this change has the potential to reduce the volatile impact of the contingent liability on our Net Income results and consequentially its non-cash impact to our financial statements with each subsequent quarter.

The Company is currently in the fourth marking period which runs through November 2023.

The fourth and final marking period runs through November 2023.

Critical accounting policies

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Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.

Contingent liability

A significant component of the purchase price consideration for our acquisition of Cure Based Development includes a fixed number of future shares to be issued as well as a variable number of future shares to be issued based upon the post-acquisition entity reaching certain specified future revenue targets, as further described in Note 6.

We made a determination of the fair value of the contingent liabilities as part of the valuation of the assets acquired and liabilities assumed in the business combination.

We recognize both the fixed number of shares to be issued, and the variable number of shares to be potentially issued, as contingent liabilities on our Consolidated Balance Sheets.

These contingent liabilities were recorded at fair value upon the acquisition date and are remeasured quarterly based on the reassessed fair value as of the end of that quarterly reporting period.

Additionally, as the fixed shares are issued, the value of the shares at that time are reclassified from contingent liability to additional paid in capital on the balance sheet.

Effective October 1, 2019, we have adopted Accounting Standards Update ("ASU") No.

2016-02, Leases (Topic 842) ("ASU 2016-02") which provides guidance requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases.

We determine whether an arrangement is a lease at inception and classify it as finance or operating.

All of our leases are classified as operating leases.

Our leases do not contain any residual value guarantees.

Our current lease activities are recorded in operating lease right-of-use (“ROU”) assets, operating lease short term liabilities and operating lease long term liabilities in the consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

Variable lease payments are not included in the calculation of the right-of-use assets and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

We use the implicit rate when readily determinable.

Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

As a lessee, we elected a short-term lease exception policy on all classes of underlying assets, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e.

leases with terms of 12 months or less).

Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis.

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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.

Revenue Recognition

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customer (“ASC 606”).

The Company performs the following five steps:

(i) identify the 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 revenue when (or as) the entity satisfies a performance obligation.

The Company applies the five-step model to arrangements that meet the definition of a contract under the standard, including when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

At contract inception, once the contract is determined to be within the scope of revenue accounting, the Company evaluates the goods or services promised within each contract related performance obligation and assesses whether each promised good or service is distinct.

The Company recognizes as revenue, the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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.

Impairment of Long Lived Assets

The Company reviews all intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable.

Long-lived assets, such as property and equipment and intangible assets subject to depreciation and amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than the Company had originally estimated.

Recoverability of these assets is measured by comparison of the carrying amount of each asset or asset group to the future undiscounted cash flows the asset or asset group is expected to generate over their remaining lives.

If the asset or asset group is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset or asset group.

If the useful life is shorter than originally estimated, the Company amortizes the remaining carrying value over the new shorter useful life.

Impairment losses are recorded in selling, general, and administrative expense in the consolidated statements of operations.

There was $13,219,000 and $4,285,000 of impairment losses recognized related to long-lived assets for the year ended September 30, 2023 and September 30, 2022, respectively.

Recent accounting pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity