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 prior to that, since November 17, 2017 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 17, 2021, there were approximately 105 record owners of our common stock and one record 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 on the 15th 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 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. Recent sales of unregistered securities None, except as previously reported. Purchases of equity securities by the issuer and affiliated purchasers None. ITEM 6. SELECTED FINANCIAL DATA. Not applicable to a smaller reporting company. 18 Table of Contents 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 our 2020 10-K, this report, and our other filings with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report. Overview 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 We saw significant growth during fiscal 2020 as we benefited from strong online growth and customer acquisition, while COVID-19 put pressure on our wholesale business. During 2021 we continued to grow cbdMD, our core brand as well as Paw CBD. Additionally during 2021 we began our international expansion efforts, launched our cbdMD Botanicals line, added a line of full spectrum products , and began investing in Therapeutics. Our E-commerce business remained steady despite the volatility of COVID-19 and its variants. During 2021, we rationalized some of our sponsorships but continued to invest heavily in brand building in other channels. Operationally we continued to build out our product portfolio and invested in ongoing quality certification, adding the US Hemp Authority certification as well as the NASC Quality Seal of approval. Results of operations The following tables provide certain selected consolidated financial information for the fiscal years ended September 30, 2021 and 2020: Fiscal Fiscal 2021 2020 Change Total net sales $ 44,480,763 $ 41,883,734 $ 2,597,029 Cost of sales 14,495,063 15,514,727 (1,019,664 ) Gross profit as a percentage of net sales 67.4 % 63.0 % 4.5 % Operating expenses 49,601,690 43,950,862 5,650,828 Operating loss from operations (19,615,990 ) (17,581,855 ) (2,034,135 ) (Increase) decrease on contingent liability (6,687,439 ) 29,780,000 (36,467,439 ) Net (loss) income before taxes (24,289,889 ) 11,305,956 (35,595,845 ) Net (loss) income attributable to cbdMD Inc. common shareholders $ (25,949,498 ) $ 12,235,423 $ (38,184,921 ) The following tables provide certain selected unaudited consolidated financial information for the three months ended September 30, 2021 and 2020: September 30, September 30, 2021 2020 Change Total net sales $ 9,793,327 $ 11,699,917 $ (1,906,590 ) Cost of sales 4,050,710 5,334,090 (1,283,380 ) Gross profit as a percentage of net sales 58.6 % 54.4 % 4.2 % Operating expenses 12,755,319 10,896,899 1,858,420 Operating loss from operations (7,012,702 ) (4,531,072 ) (2,481,630 ) (Increase) decrease on contingent liability 3,740,000 (800,000 ) 4,540,000 Net (loss) income before taxes (3,156,081 ) (5,363,562 ) 2,207,481 Net (loss) income attributable to cbdMD Inc. common shareholders $ (4,360,080 ) $ (6,358,612 ) $ 1,998,532 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, 2021 and 2020. Fiscal 2021 % of total Fiscal 2020 % of total Wholesale sales $ 11,572,807 26.0 % $ 11,377,238 27.2 % E-commerce sales 32,907,956 74.0 % 30,456,496 72.8 % Total Net Sales $ 44,480,763 $ 41,833,734 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, 2021 and 2020 (unaudited): September 30, September 30, 2021 % of total 2020 % of total Wholesale sales $ 2,523,739 25.8 % $ 3,111,161 26.6 % E-commerce sales 7,269,588 74.2 % 8,588,755 73.4 % Total Net Sales $ 9,793,327 $ 11,699,917 Total net sales during the fiscal year ended September 30, 2021 increased by $2,597,029, or 6% as compared to fiscal year ended September 30,2020. Wholesale sales remained nominally the same year over year while E-commerce sales increased by $2,451,461 or 8.0%, partially driven by ongoing brand and market efforts, the addition of multiple products during the year and the acquisition of the assets of Twenty Two during the fourth quarter. Net sales for the fourth quarter declined 16% year over year and were impacted due to changing consumer purchasing habits tied to the dynamic COVID-19 environment as well as supply chain challenges which created some out of stocking and delayed a number of new product launches, impacted marketing plans during the second half of Fiscal 2021. Of our total net sales as indicated above, during the fiscal years ended September 30, 2021 and 2020 our Paw CBD line accounted for net sales of $5,659,796 and $4,492,833, respectively. The year over year growth in our Paw CBD brand is due to the expansion of products and increase 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 as a percentage of net sales was 32.6% and 37.0% for fiscal years ended September 30, 2021 and 2020, respectively. 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 volume pricing, as well as additional product offerings which continue to impact our cost of production. 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 increased approximately 12.4% for the fiscal year ended September 30,2021 versus the fiscal year ended September 30, 2020. The increase can be attributed to an increase in advertising and marketing expenses, and increase in payroll, increase in R&D and regulatory expenses (mostly due to cbdMD Therapeutics, LLC) as well as an increase in non-cash stock compensation. Consolidated Operating Expenses The following tables provide information on our approximate operating expenses for the fiscal years ended September 30, 2021 and 2020: Fiscal 2021 Fiscal 2020 Change Staff related expense $ 16,219,863 $ 14,864,072 $ 1,355,791 Accounting/Legal expense 1,189,703 1,266,319 (76,616 ) Preofessional outside services 1,206,929 1,300,046 (93,118 ) Advertising/marketing/social media/events/tradeshows 15,835,139 9,994,985 5,840,154 Sponsorships 2,067,534 4,977,067 (2,909,533 ) Affiliate commissions 1,738,103 1,897,345 (159,242 ) Merchant Fees 1,965,176 2,545,844 (580,668 ) R&D and regulatory 1,422,791 424,450 998,341 Non-cash stock compensation 3,149,689 1,985,804 1,163,885 Depreciation 1,017,409 720,754 296,655 All other expenses 3,789,355 3,974,175 (184,820 ) Totals $ 49,601,690 $ 43,950,862 $ 5,650,828 For the twelve months ended September 30, 2021, the overall operating expenses increased by $5,650,829 or 12.9% year over year, primarily driven by an increase in marketing spend of $5,840,154 million to drive increases in brand awareness, an increase in staff related expense of $1,355,791, an increase of non-cash stock compensation expense of $1,163,885 and an increase of R&D and regulatory expense related to Therapeutics of $998,341, partially offset by a decrease of $3,068,775 in sponsorships and affiliate expenses and a reduction in processing costs of $580,668. 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 approximate corporate overhead for the fiscal years ended September 30, 2021 and 2020: Fiscal 2021 Fiscal 2020 Change Staff related expense $ 1,725,535 $ 1,427,358 $ 298,177 Accounting/Legal expense 866,876 769,119 97,757 Professional outside services 333,666 491,729 (158,063 ) Travel expense 7,381 23,188 (15,807 ) Business insurance 607,288 388,878 218,410 Non-cash stock compensation 3,161,805 1,985,804 1,176,001 Totals $ 6,702,551 $ 5,086,076 $ 1,616,475 The increase in corporate related expenses for the fiscal year ended September 30, 2021 over prior year is primarily due to the increase in non-cash stock compensation to employees and directors and increases in staffing related expenses as well as insurance costs. 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 (i) staff related expenses and R&D and regulatory expenses. The following tables provide information on our approximate corporate overhead for the fiscal year ended September 30, 2021. We did not incur expenses related to Therapeutics in 2020 as this subsidiary was not formed until March 15, 2021. Fiscal 2021 Fiscal 2020 Change Staff related expense $ 184,202 $ - $ 184,202 R&D and Regulatory 648,616 - 648,616 Totals $ 832,818 $ - $ 832,818 The Therapeutic operating expenses include research and development activities for therapeutic applications. 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. Increase 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, 2021, 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, 2021. 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, 2021 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 would be met. The primary catalyst for the $4,660,000 decrease in contingent liabilities is the change in our common share price between June 30, 2021 to September 30, 2021 from $2.90 per share to $2.08 per share. We expect to continue to record changes in the non-cash contingent liability through the balance of the earnout period. In addition, our contingent liability increased by $416,000 at September 30, 2021 for the Twenty Two Earnout Shares that are part of the July 2021 acquisition of www.DirectCBDonline.com. Liquidity and Capital Resources We had cash and cash equivalents on hand of $26,411,424 and working capital of $29,595,214 at September 30, 2021 as compared to cash and cash equivalents on hand of $14,824,644 and working capital of $16,023,174 at September 30, 2020. Our current assets increased approximately 53.9% at September 30, 2021 from September 30, 2020, which is primarily attributable to an increase in cash received under the public offering of our shares of our 8.0% Series A Convertible Preferred Stock in December 2020 and in July 2021. Our current liabilities decreased approximately 10% at September 30, 2021 from September 30, 2020. This decrease is primarily attributable to a decrease in accrued expenses as well as the forgiveness of our Paycheck Protect Program Loan. On July 1, 2021 we closed a follow-on firm commitment underwritten public offering of shares of our 8.0% Series A Convertible Preferred Stock resulting in total net proceeds to us of approximately $15.3 million. During the fiscal year ended September 30, 2021 we used cash primarily to fund our operations. 21 Table of Contents We do not have any commitments for capital expenditures. We have a commitment for cumulative cash dividends at an annual rate of 8% payable monthly in arrears for the prior month to our preferred shareholders. We have multiple endorsement or sponsorship agreements for varying time periods up through December 2022 and provide for financial commitments from the Company based on performance/participation (see Note 11 Commitments and Contingencies). We have sufficient working capital to fund our operations. Our goal from a liquidity perspective is to use operating cash flows to fund day to day operations and we have not met this goal as cash flow from operations has been a net use of $12,627,320 (excluding the extinguishment of the PPP loan totaling $1,466,113) and $10,664,336 for the fiscal years ended September 30, 2021 and 2020, respectively. 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. 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. 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. 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 8. 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. Leases Effective October 1, 2019, we have adopted 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 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. 22 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 F-1 of this annual report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.