cbdMD, Inc. 10-K

ITEM 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.   Since May 1, 2019, commensurate with our name change, our common stock has been listed on the NYSE American under the symbol “YCBD” 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, 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   Common Stock   We do not currently intend to pay dividends on our common stock. The declaration, amount and payment of any future dividends on shares of our common stock, if any, is subject to the designations, rights and preferences of the Series A Convertible Preferred Stock and will be at the sole discretion of our Board, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our shareholders or by our subsidiaries to us, and any other factors that our Board may deem relevant.   Series A Convertible Preferred Stock   As of the date of this filing, there are 5 million shares of our Series A Convertible Preferred Stock outstanding. The designations, rights and preferences of our Series A Convertible Preferred Stock provide that we will pay, when, as and if declared by our board of directors, monthly cumulative cash dividends at an annual rate of 8.0%, which is equivalent to $0.80 per annum per share, based on the $10.00 liquidation preference. 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. 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   None, except as previously reported.   Purchases of equity securities by the issuer and affiliated purchasers   None.   ITEM 6. [Reserved]    18 Table of Contents     ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.   The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements because of several factors, including those set forth under the Part I, Item 1A, Risk Factors and Business sections in this report, and our other filings with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report.   Overview   We own and operate the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and cbdMD Botanicals. We believe that we are an industry leader in producing and distributing broad spectrum CBD products and now full spectrum CBD products. Our mission is to enhance our customer’s overall quality of life while bringing CBD education, awareness and accessibility of high quality and effective products to all. We source cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States. Our innovative broad spectrum formula utilizes one of the purest hemp extracts, containing CBD, CBG and CBN, while eliminating the presence of tetrahydrocannabinol (THC). Non-THC is defined as below the level of detection using validated scientific analytical methods. Our full spectrum products contain a variety of cannabinoids and terpenes in addition to CBD while maintaining trace amounts of THC that falls within the limits set in the 2018 Farm Bill. In addition to our core brands, we also operate cbdMD Therapeutics, LLC to capture the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications.   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.  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   The following tables provide certain selected consolidated financial information for the fiscal years ended September 30, 2023 and 2022:       Fiscal     Fiscal               2023     2022     Change   Total net sales   $ 24,155,362     $ 35,403,224     $ (11,247,862 ) Cost of sales     9,177,703       13,066,639       (3,888,936 ) Gross profit as a percentage of net sales     62.0 %     63.1 %     -1.1 % Operating expenses     24,246,208       39,647,130       (15,400,922 ) Impairment of goodwill and other intangible assets     13,219,000       60,955,970       (47,736,970 ) Operating loss from operations     (22,487,549 )     (78,266,515 )     55,778,966   (Increase) decrease on contingent liability     185,638       8,473,999       (8,288,361 ) Net loss before taxes     (22,938,209 )     (70,083,693 )     47,145,484   Net loss attributable to cbdMD Inc. common shareholders   $ (26,940,209 )   $ (74,085,698 )   $ 47,145,489      The following tables provide certain selected unaudited consolidated financial information for the three months ended September 30, 2023 and 2022:       September     September               2023     2022     Change   Total net sales   $ 5,710,745     $ 7,859,625     $ (2,148,880 ) Cost of sales     2,161,900       2,844,744       (682,844 ) Gross profit as a percentage of net sales     62.1 %     63.8 %     -1.7 % Operating expenses     5,546,915       7,913,256       (2,366,341 ) Impairment of goodwill and other intangible assets     13,219,000       11,996,249       1,222,751   Operating income from operations     (15,217,070 )     (14,894,624 )     (322,446 ) (Increase) decrease on contingent liability     31,867       228,000       (196,133 ) Net loss before taxes     (15,874,941 )     (14,631,432 )     (1,243,509 ) Net loss attributable to cbdMD Inc. common shareholders   $ (16,875,436 )   $ (15,631,932 )   $ (1,243,504 )   19 Table of Contents   Sales   We record product sales primarily through two main delivery channels, direct to consumers via our E-commerce sales and direct to wholesalers utilizing our internal sales team. The following table provides information on the contribution of net sales by type of sale to our total net sales for the fiscal years ended September 30, 2023 and 2022.       Fiscal 2023     % of total     Fiscal 2022     % of total   E-commerce sales   $ 19,436,124       80.5 %   $ 26,435,203       74.7 % Wholesale sales     4,719,238       19.5 %     8,968,021       25.3 % Total Net Sales   $ 24,155,362             $ 35,403,224             In addition, the following table provides information on the contribution of net sales by type of sale to our total net sales for the three months ended September 30, 2023 and 2022 (unaudited):       September 30,             September 30,               2023     % of total     2022     % of total                                     E-commerce sales   $ 4,639,651       81.2 %   $ 6,274,482       79.8 % Wholesale sales     1,070,946       18.8 %     1,585,143       20.2 % Total Net Sales   $ 5,710,597             $ 7,859,625             Total net sales during the fiscal year ended September 30, 2023 decreased by approximately $11.2 million, or 32% as compared to fiscal year ended September 30, 2022. Wholesale sales decreased by approximately $4.2 million, or 47% year over year while E-commerce sales decreased by $7.0 million or 26%.  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 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. 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 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 $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 operating expenses for the fiscal years ended September 30, 2023 and 2022:       Fiscal 2023     Fiscal 2022     Change   Staff related expense   $ 7,440,687     $ 12,819,447     $ (5,378,760 ) Accounting/Legal expense     986,295       1,045,836       (59,541 ) Preofessional outside services     846,475       816,584       29,891   Advertising/marketing/social media/events/tradeshows     5,960,458       14,332,235       (8,371,777 ) Sponsorships     18,750       1,031,516       (1,012,766 ) Affiliate commissions     971,132       1,111,795       (140,663 ) Merchant Fees     791,475       1,007,025       (215,550 ) R&D and regulatory     173,038       633,392       (460,354 ) Non-cash stock compensation     349,245       1,124,130       (774,885 ) Intangibles amortization     1,396,459       884,380       512,079   Depreciation     404,280       948,946       (544,666 ) All other expenses     4,907,914       3,891,844       1,016,070   Totals   $ 24,246,208     $ 39,647,130     $ (15,400,922 )   20 Table of Contents   Corporate overhead and allocation of management fees to our segments   Included in our consolidated operating expenses are expenses associated with our corporate overhead which are not allocated to the operating business unit, including (i) staff related expenses; (ii) accounting and legal expenses; (iii) professional outside services; (iv) travel and entertainment expenses; (v) rent; (vi) business insurance; and (vii) non-cash stock compensation expense.   The following tables provide information on our corporate overhead for the fiscal years ended September 30, 2023 and 2022:       Fiscal 2023     Fiscal 2022     Change   Staff related expense   $ 318,762     $ 1,066,428     $ (747,666 ) Accounting/Legal expense     704,933       728,250       (23,317 ) Professional outside services     428,923       330,633       98,290   Travel expense     -       3,932       (3,932 ) Business insurance     783,781       703,107       80,674   Non-cash stock compensation     349,245       1,124,130       (774,885 ) Totals   $ 2,585,644     $ 3,956,480     $ (1,370,836 )   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.   Therapeutics Overhead   Included in our consolidated operating expenses are expenses associated with Therapeutics which are not allocated to the operating business unit, including staff related expenses and R&D and regulatory expenses. The Therapeutic operating expenses include research and development activities for therapeutic applications. Year over year’s decline is primarily driven by the finishing of our clinical studies.   The following tables provide information on our approximate corporate overhead for the fiscal years ended September 30, 2023.  Therapeutics was formed March 15, 2021.       Fiscal 2023     Fiscal 2022     Change   Staff related expense   $ 357,871     $ 338,985     $ 18,886   Accounting and legal     -       3,119       3,119   R&D and Regulatory     158,795       565,096       (406,301 ) Totals   $ 516,666     $ 907,200     $ (384,296 )    Other income and other non-operating expenses   We also record income and expenses associated with non-operating items. The material components of those are set forth below.   Decrease in contingent liability   As described in Note 6 to the notes to the consolidated financial statements appearing elsewhere in this report, the earn-out provision for the Earnout Shares is accounted for and recorded as a contingent liability with increases in the liability recorded as non-cash other expense and decreases in the liability recorded as non- cash other income. 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.   Liquidity and Capital Resources   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 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. This decrease is primarily attributable to a decrease in accounts payable and accrued expenses.   During the three and twelve months ended September 30, 2023 we used cash primarily to fund our operations and pay the preferred dividend.   We do not have any commitments for capital expenditures. We have a commitment for cumulative dividends at an annual rate of 8% payable monthly in arrears for the prior month to our preferred shareholders. As of September 2023, we have stopped paying this in cash monthly and are accruing this dividend instead.    21 Table of Contents   While the Company is taking strong action and believes that it can execute its strategy and path to profitability within its balance sheet, and in its ability to raise additional funds, there can be no assurances to that effect. The Company’s working capital position may not be sufficient to support the Company’s daily operations for the twelve months subsequent to the issuance this report. The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability and cash flow and the ability to acquire additional funding. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern within twelve months after the date that 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 $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   The non-GAAP Adjusted Income for the three and twelve months ended September 30, 2023 and September 30, 2022 is as follows:       Three Months     Year Ended       September 30,     September 30,     September 30,     September 30,       2023     2022     2023     2022   (Unaudited)                                                                   GAAP (loss) from operations   $ (15,217,070 )   $ (14,894,624 )   $ (22,487,549 )   $ (78,266,515 ) Adjustments:                                 Depreciation & Amortization     667,950       455,965       1,800,739       1,833,326   Employee and director stock compensation (1)     33,263       272,613       349,245       1,124,130   Inventory adjustment(2)     70,000       -       70,000       878,142   Impairment of Goodwill and other intangible assets (3)     13,219,000       11,996,249       13,219,000       60,955,970   Incremental bad debt     45,000       -       45,000       -   Accrual for severance (4)     -       -       -       129,761   a360 non-cash trade credit     609,732       -       1,476,967       -   Accrual / expenses for discretionary bonus     -       -       -       150,000   Non-GAAP adjusted (loss) from operations   $ (572,125 )   $ (2,169,797 )   $ (5,526,598 )   $ (13,195,186 )    (1) 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. (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.   22 Table of Contents   Earnout Shares   As described in Note 6 in notes to our consolidated financial statements appearing elsewhere in this report, on March 31, 2021 we entered into Addendum No. 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. The fourth and final marking period runs through November 2023.   Critical accounting policies   The preparation of financial statements and related disclosures in conformity with US GAAP and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to our consolidated financial statements appearing elsewhere in this report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.   We believe that the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.   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.   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.   23 Table of Contents   Recent accounting pronouncements   Please see Note 1 – Organization and Summary of Significant Accounting Policies appearing in the consolidated financial statements included in this report for information on accounting pronouncements.   Off balance sheet arrangements   As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.       ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.   Not applicable for a smaller reporting company.   ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.   Please see our Financial Statements beginning on page 31 of this annual report. The Auditor Firm ID for our external auditors, Cherry Bekaert LLP, is 677 .   ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.   None.