NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED September 30, 2022 and 2021
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
cbdMD, Inc. ("cbdMD", "we", "us", “our”, or the “Company”) is a North Carolina corporation formed on March 17, 2015 as Level Beauty Group, Inc. In November 2016 we changed the name of the Company to Level Brands, Inc. and on May 1, 2019 we changed the name of our Company to cbdMD, Inc. We operate from our offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30.
On December 20, 2018 (the “Closing Date”), the Company, and its newly organized wholly owned subsidiaries AcqCo, LLC and cbdMD LLC (“CBDI”), 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, CBDI survived and operates the prior business of Cure Based Development. As consideration for the Mergers in April of 2019, the Company issued 15,250,000 shares of our common stock to the members of Cure Based Development, of which unrestricted voting rights to 8,750,000 of the shares vested over a five-year period and 2,187,500 shares remain subject to a voting proxy agreement as of September 30, 2022, as well as to issue another 15,250,000 shares of our common stock (the “Earnout Shares”) in the future upon certain earnout goals (the “Earnout Rights”) being achieved within five years from the closing of the Mergers, and 3,928,792 Earnout Shares remain subject to Earnout Rights at September 30,2022.
The Company owns and operates the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and cbdMD Botanicals. The Company sources cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States. CBD and other hemp-derived cannabinoids are natural substances produced from the hemp plant. The products manufactured by and for the Company comply with the 2018 Farm Bill - our full spectrum products contain trace amounts of THC under the 0.3% by dry weight limit in the 2018 Farm Act while our broad spectrum products are non-psychoactive as they do not contain detectable levels of tetrahydrocannabinol (THC).
In the third quarter of fiscal 2019 cbdMD 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. (“Paw CBD”) as a separate wholly owned subsidiary on October 22, 2019, to take advantage of its early mover status in the CBD animal health industry. On March 15, 2021 cbdMD formed a new wholly owned subsidiary, cbdMD Therapeutics, LLC (“Therapeutics”) for the purposes of isolating and quantifying the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications.
The 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, 2022 (“2022 10-K”) as filed with the SEC on December 15, 2022. 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries CBDI, Paw CBD and Therapeutics. All material intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The Company's consolidated financial statements have been prepared in accordance with US GAAP and requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, certain assumptions related to the valuation of investments other securities, acquired intangible and long-lived assets and the recoverability of intangible and long-lived assets and income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities and contingent liability. Actual results could differ from these estimates.
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restriction on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. We continue to monitor the waning trends on infection rates and are cautiously optimistic future impacts to the business environment will be minimal.
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 receivables 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 September 30, 2022 and September 30, 2021, we had an allowance for doubtful accounts of $36,980 and $3,633, respectively.
Merchant Receivable
The Company primarily sells its products through the internet and has an arrangement to process customer payments with multiple third-party payment processors. The Company pay a fee between 2.5% and 5.0% of the transaction amounts processed. Pursuant to these agreements, there can be a waiting period between 2 to 5 days prior to reimbursement to the Company, as well as a calculated reserve which some payment processors hold back. Fees and reserves can change periodically with notice from the processors. At September 30, 2022, the receivable from payment processors included $273,451 for the waiting period amount and is recorded as accounts receivable in the accompanying consolidated balance sheet.
Inventory
Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. The cost of inventory includes product cost, freight-in, and production fill and labor (portions of which we outsource to third party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management’s analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. We assess inventory quarterly for slow moving products and potential impairments and at a minimum perform a physical inventory count annually near fiscal year end.
Customer Deposits
Customer deposits consist of payments received in advance of revenue recognition. Revenue is recognized as revenue recognition criteria are met.
Property and Equipment
Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are five years for manufacturing equipment and automobiles and three years for software, computer, and furniture and equipment. The useful life for leasehold improvements are over the term of the lease or expected life of the asset, whichever is less. 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 recorded 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 capitalization comparisons. These approaches are dependent upon internally developed forecasts that are based upon annual budgets and longer-range strategic plans. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the respective acquired business and in the internally developed forecasts. The Company has analyzed a variety of factors on its business to determine if a circumstance could trigger an impairment loss. See Note 5 for further information on the impairment testing procedures performed.
Intangible Assets
The Company's intangible assets consist of trademarks and other intellectual property, all of which were previously accounted for in accordance with Accounting Standards Codification (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 annual impairment analysis as of August 1 of each fiscal year on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. If a quantitative analysis is necessary, we would analyze various aspects including revenues from the business, associated with the intangible assets. In addition, intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. The Company analyzed a variety of factors on its business to determine if a circumstance could trigger an impairment loss, and, at this time and based on the information presently known, has determined that is it more likely than not that an impairment loss has occurred. See Note 5 more further information on the impairment testing procedures performed at December 31, 2021 and the Company’s decision to change from indefinite to definite lived status for its trademarks. The Company now accounts for its trademarks in accordance with Accounting Standards Codification (ASC) Topic 360, Property, Plant and Equipment. The Company began amortizing its trademarks over 20 years beginning January 1, 2022 and will perform impairment tests as prescribed by ASC 360, which states that impairment testing should be completed whenever events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. If there are indications that the asset’s carrying value may not be recoverable, there are two further steps involved in long-lived asset impairment testing. Step I of the impairment test, as per ASC 360, involves estimating the Recoverable Amount of the Asset Group and determining the potential for impairment. Step II of the impairment test, as per ASC 360, if necessary, involves quantifying the fair value of the asset group.
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 6. 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.
Paycheck Protection Program Loan
On April 27, 2020, we received a loan in the principal amount of $1,456,100 (the “SBA Loan”) in consideration of a Promissory Note, under the Paycheck Protection Program (“PPP”), which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). The Company used the SBA Loan for qualifying expenses and on May 17, 2021 it received notice from the SBA that the loan had been forgiven. The Company subsequently booked a $1,466,113 gain for unpaid principal and accrued interest.
Revenue Recognition
Under ASC 606, Revenue from Contracts with Customers, 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. The Company meets that obligation when it has shipped products which have been ordered by the customer. The Company has reviewed its various revenue streams for its other contracts under the five-step approach.
Allocation of Transaction Price
In the Company’s current business model, it does not have contracts with customers which have multiple elements as revenue is driven purely by online product sales or purchase order-based product sales.
Revenue Recognition
The Company records revenue from the sale of its products when risk of loss and title to the product are transferred to the customer, which is upon shipping (and is typically FOB shipping) which is when our performance obligation is met. Net sales are comprised of gross revenues less product returns, trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions. These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company currently offers a 60-day, money back guarantee.
Disaggregated Revenue
The Company’s product revenue is generated primarily through two sales channels, E-commerce sales (formerly referred to as consumer sales) and wholesale sales. The Company believes 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 the Company’s principal revenue generating activities are as follows:
| | - | E-commerce sales - consumer products sold through the Company’s 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; and |
| | | |
| | - | Wholesale sales - products sold to the Company’s 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 |
The following table represents a disaggregation of revenue by sales channel:
| | | Fiscal 2022 | | | % of total | | | Fiscal 2021 | | | % of total | |
| | | | | | | | | | | | | | | | | |
| E-commerce sales | | $ | 26,435,203 | | | | 74.7 | % | | $ | 32,907,956 | | | | 74.0 | % |
| Wholesale sales | | | 8,968,021 | | | | 25.3 | % | | | 11,572,807 | | | | 26.0 | % |
| Total Net Sales | | $ | 35,403,224 | | | | | | | $ | 44,480,763 | | | | | |
Contract assets represent unbilled receivables and are presented within accounts receivable, net on the consolidated balance sheets. Contract liabilities represent unearned revenues and are presented as deferred revenue or customer deposits on the consolidated balance sheets. The Company has no material contract assets nor contract liabilities at September 30, 2022.
Cost of Sales
The Company’s cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third-party providers, and outbound freight for the Company’s products sales. For the Company’s 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 $14,332,235 and $15,835,139 in advertising and marketing and promotional costs included in operating expenses during the years ended September 30, 2022 and 2021 respectively. The Company believes driving its advertising aids in brand awareness and is critical to maintain brand recognition. We are constantly evaluating advertising methods and costs and working to drive down our cost of customer acquisition.
Income Taxes
The Company is a North Carolina corporation that is treated as a corporation for federal and state income tax purposes. As of October 1, 2019, CBDI and Paw CBD were 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 Company and as of March 15, 2021, Therapeutics is also a wholly owned subsidiary and is a disregarded entity for tax purposes and its entire share of taxable income or loss is included in the tax return of the Company.
The Company accounts for income taxes pursuant to the provisions of the Accounting for Income Taxes topic of the Financial Accounting Standards Board ("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 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 September 30, 2022 and 2021, 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 $5,752,550 uninsured balance at September 30, 2022 and a $23,508,953 uninsured balance at September 30, 2021.
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 year ended September 30, 2022.
Stock-Based Compensation
The Company accounts for its 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.
The Company uses 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.
Liquidity and Going Concern Considerations
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company experienced a loss of $74,086,731 for the fiscal year ended September 30, 2022. Excluding one time non-cash goodwill and intangibles impairment charges of $60,955,970, the Company's loss was $13,130,761, resulting in working capital of $10,725,991.
While the Company is taking strong action, believes in the viability of its strategy and path to profitability, 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 of these annual financial statements. The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability 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 the 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.
Restructuring
The Company recorded a one time restructuring charge of $602,092 related to severance and benefits payments to the exit of our former co-CEO. This expenses in reflected in the Company's consolidated statements of operations as of September 30, 2022.
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.
Recently Adopted Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Income Taxes, Simplifying the Accounting for Income Taxes (Topic 740). The ASU eliminates certain exceptions to the guidance in Accounting Standards Codification (ASC or Codification) 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance also clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The adoption of this standard had no material impact on the Company’s consolidated financial statements and disclosures.
NOTE 2 – MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES
The Company has, from time to time, entered into contracts where a portion of the consideration provided by the customer in exchange for the Company's services was common stock, options or warrants (an equity position). In these situations, upon invoicing the customer for the stock or other instruments, the Company recorded the receivable as accounts receivable other, and used the value of the stock or other instrument upon invoicing to determine the value. If there 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. In determining fair value of marketable securities and investment other securities, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in our assessment of fair value. The Company determines the fair value of marketable securities and investment other securities based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
| | ● | Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. |
| | | |
| | ● | Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
| | | |
| | ● | Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. |
Where an accounts receivable other is settled with the receipt of the common stock or other instrument, the common stock or other instrument was classified as an asset on the consolidated 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).
For the year ended September 30, 2022 and September 30, 2021 the Company recorded $(33,350) and $546,878, respectively of realized and unrealized gain (loss) on marketable and other securities, including impairments. The realized gain in 2021 was driven by the sale of our investment in Formula Four Beverages, Inc. that was previously written to zero based on prior information related to the company’s performance and COVID-19 impacts.
In September 2020, the Company purchased a membership interest in Adara Sponsor LLC for $250,000, which along with proceeds from other investors was utilized as an investment in Adara Acquisition Corporation (“Adara”), a newly organized blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination (a “SPAC”). Our former Co-CEO formerly served as CEO of Adara. On January 13, 2021, the Company executed second tranche subscriptions agreements and funded the remaining $750,000 commitment into Adara Sponsor, LLC. On February 9, 2021, the public shares of Adara began trading on the NYSE. Commencing March 24, 2021, holders of the 11,500,000 units sold in the Adara’s initial public offering could elect to separately trade shares of the Adara Class A common stock and warrants included in the units. The shares of Class A common stock and warrants that were separated now trade on NYSE American LLC under the symbols “ADRA” and “ADRA WS”, respectively. On June 22, 2022, the Company executed a transfer agreement with affiliates of Adara Sponsor, LLC whereby the Company's interest would be transferred to the affiliates of Adara Sponsor, LLC upon Adara's acquisition of Alliance Entertainment, Inc. (the "Target") in consideration of the Company's original purchase price. As a result of the SEC litigation against our former CEO, the Target provided a demand to Adara that it required cbdMD and Mr. Sumichrast to dispose of our interests in Adara Sponsor, LLC as a condition of proceeding with any business combination. On June 23, 2022, Adara announced it had entered into business combination agreements with the Target subject to a number of conditions to closing, including shareholder SEC approval. There are no assurances the business combination will be completed. If the business combination is not completed, Adara will continue to pursue other targets for a potential business combination. In the event that the business combination does not close, Adara Sponsor, LLC has until February of 2023 to identify another business combination or the Company is at risk to lose our investment.
Adara’s focus of targets to pursue for the business combination are expected to be in the consumer products industry including business in the health and wellness, ecommerce, discretionary spending, information technology sectors and related channels of distribution.
On April 7, 2022, CBD Industries, LLC entered into an asset sale agreement to sell substantially all its manufacturing assets to a subsidiary of Steady State, LLC ("Steady State"). The equipment sale is initially valued at approximately $1.8 million for accounting purposes, the sale price consisting of a trade credit for products to be provided to the Company under the manufacturing and supply agreement and $1.4 million of which the Company invested into Steady State in the form of an equity investment consistent with the terms of Steady State's recently completed Series C financing.
The table below summarizes the assets valued at fair value as of September 30, 2022:
| | | | | | | | | | |
| | | In Active | | | | | | | |
| | | Markets for | | | Significant Other | | | | |
| | | Identical Assets | | | Observable | | | Total Fair Value | |
| | | and Liabilities | | | Inputs | | | at September 30, | |
| | | (Level 1) | | | (Level 2) | | | 2022 | |
| Balance at September 30, 2020 | | $ | 26,472 | | | $ | - | | | $ | 26,472 | |
| Change in value of equities | | | 6,879 | | | | - | | | | 6,879 | |
| Additional Investment | | | - | | | | - | | | | - | |
| Balance at September 30, 2021 | | | 33,351 | | | | - | | | | 33,351 | |
| Change in value of equities | | | (33,351 | ) | | | | | | | (33,351 | ) |
| Additional Investment | | | - | | | | | | | | - | |
| Balance at September 30, 2022 | | $ | - | | | $ | - | | | $ | - | |
NOTE 3 – INVENTORY
Inventory at September 30, 2022 and 2021 consists of the following:
| | | Septmeber 30 | | | September 30, | |
| | | 2022 | | | 2021 | |
| Finished Goods | | $ | 3,198,488 | | | $ | 3,362,897 | |
| Inventory Components | | | 1,213,724 | | | | 1,729,176 | |
| Inventory Reserve | | | (156,298 | ) | | | (70,206 | ) |
| Inventory prepaid | | | 511,459 | | | | 551,519 | |
| Total Inventory | | $ | 4,767,373 | | | $ | 5,573,386 | |
Abnormal amounts of idle facility expense, freight, handling costs, scrap, and wasted material (spoilage) are expensed in the period they are incurred and no material expenses related to these items occurred in the year ended September 30, 2022. The Company wrote down inventory of $878,142 during the first quarter of fiscal year ended September 30, 2022 primarily related to the rationalization of a number of product lines and stock keeping units (“SKU”s), as we work to streamline our offerings to higher velocity products and eliminate slow-moving and aging SKUs.
NOTE 4 – PROPERTY AND EQUIPMENT
Major classes of property and equipment at September 30, 2022 and 2021 consist of the following:
| | | September 30, | | | September 30, | |
| | | 2022 | | | 2021 | |
| Computers, furniture and equipment | | $ | 1,095,228 | | | $ | 549,910 | |
| Manufacturing equipment | | | 284,275 | | | | 2,968,838 | |
| Leasehold improvements | | | 487,081 | | | | 870,621 | |
| Automobiles | | | 11,087 | | | | 35,979 | |
| | | | 1,877,671 | | | | 4,425,348 | |
| Less accumulated depreciation | | | (1,054,361 | ) | | | (1,863,774 | ) |
| Property and equipment, net | | $ | 823,310 | | | $ | 2,561,574 | |
Depreciation expense related to property and equipment was $948,962 and $1,017,408 for the year ended September 30, 2022 and 2021, respectively. During the third quarter, the Company sold substantially all the assets of its manufacturing facility and as a result the gross investment and accumulated depreciation was removed from the balance sheet, reducing net PP&E.
NOTE 5 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company had goodwill at September 30, 2021 of $56,670,970. The Company performs a Step 0 goodwill impairment analysis at least annually following the steps laid out in ASC 350-20-35-3C. 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 goodwill. From time to time the Company also evaluates goodwill impairment on a quarterly basis if any triggering events have occurred that would require such analysis. For the three months ended December 31, 2021, the Company performed a Step 0 goodwill impairment analysis on consolidated goodwill and determined that a triggering event had occurred to necessitate performing the quantitative impairment test. After performing the quantitative impairment test in accordance with ASC 350-20-35-3C, the Company determined that goodwill was impaired by $13,898,285. The Company has recorded this impairment to reduce total goodwill on its condensed consolidated balance sheets and has recorded the corresponding impairment expense on its condensed consolidated statement of operations as of December 31, 2021. The Company performed the same analysis as of June 30, 2022 and determined that goodwill was impaired by $30,776,436. The Company has recorded this impairment to reduce total goodwill on its condensed consolidated balance sheets and has recorded the corresponding impairment expense on its condensed consolidated statement of operations as of June 30, 2022. At September 30, 2022 the Company performed a subsequent Step 0 analysis and determined an impairment existed and as a result, it recorded an impairment expense of $11,996,249 on its consolidated statement of operations of September 30, 2022, resulting in a remaining goodwill balance of zero.
Intangible Assets
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 the Company creates and distributes products and continue to build this brand. The Company believed the trademark did not have limits on the time it would contribute to the generation of cash flows and therefore identified these as indefinite lived intangible assets.
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. At the time of acquisition, the Company believed the trademark did not have limits on the time it would contribute to the generation of cash flows and therefore had identified these as indefinite-lived intangible assets.
In July 2021, the Company completed the acquisition of DCO and acquired certain assets, including the trade name, domains and certain other intellectual property. The tradename will be used in marketing and branding of the website. The Company believes the trade name has a 10 year life. In addition to the trade name, DCO has a technology platform used to market to its customer and the Company believes it has a 4 year life.
As of December 31, 2021, the Company has re-assessed the “cbdMD” and “HempMD” trademarks and have determined that the trademarks should be classified as definite lived intangible assets with useful lives of 20 years versus indefinite lived intangible assets. The Company used a variety of factors in determining the reclassifications and have made the reclassifications following guidance prescribed by ASC 350-30-35-17, which states that when a reporting entity subsequently determines that in indefinite-lived intangible asset has a finite useful life, the reporting entity should test the asset for impairment as an indefinite lived asset prior to commencing amortization. As of December 31, 2021, the Company has prepared a tradename impairment analysis in accordance with ASC 350 and has determined that the “cbdMD” trademark was impaired by $4,285,000. The Company has recorded this impairment charge as a reduction in the carrying value of the intangible assets on its condensed consolidated balance sheets with the corresponding impairment expense recorded on its condensed consolidated statements of operations. The Company began amortizing the trademarks over their useful lives of 20 years as of January 2022. Amortization expense for the year ended September 30, 2022 was $932,862 and was recorded on the condensed consolidated statements of operations.
At September 30, 2022, the Company prepared a tradename impairment analysis in accordance with ASC 360 and has determined that there are no indications of impairment.
Intangible assets as of September 30, 2022 and 2021 consisted of the following:
| | | September 30, | | | September 30, | |
| | | 2022 | | | 2021 | |
| Trademark related to cbdMD | | $ | 21,585,000 | | | $ | 21,585,000 | |
| Trademark for HempMD | | | 50,000 | | | | 50,000 | |
| Technology Relief from Royalty related to DirectCBDOnline.com | | | 667,844 | | | | 667,844 | |
| Tradename related to DirectCBDOnline.com | | | 749,567 | | | | 749,567 | |
| Impairment of definite lived intanigble assets: | | | (4,285,000 | ) | | | - | |
| Amortization of definite lived intangible assets: | | | (932,862 | ) | | | (48,482 | ) |
| Total | | $ | 17,834,549 | | | $ | 23,003,929 | |
Future amortization of intangible assets as of September 30, 2022 is as follow:
| | | | | |
| For the year ended September 30, | | | | |
| 2023 | | | 1,109,418 | |
| 2024 | | | 1,109,418 | |
| 2025 | | | 1,074,634 | |
| 2026 | | | 942,457 | |
| 2027 | | | 942,457 | |
| Thereafter | | | 12,656,165 | |
| Total future intangibles amortization | | $ | 17,834,549 | |
Goodwill as of September 30, 2022 and 2021 consisted of the following:
| Goodwill at September 30, 2021 | | $ | 56,670,970 | |
| Impairment of goodwill | | | (56,670,970 | ) |
| Goodwill at September 30, 2022 | | $ | - | |
NOTE 6 – CONTINGENT LIABILITY
As consideration for the Mergers, described in Note 1, the Company had a contractual obligation to issue 15,250,000 shares of its common stock, after approval by its shareholders, to the members of Cure Based Development, issued in two tranches 6,500,000 shares and 8,750,000 shares, both of which are subject to leak out provisions, and the unrestricted voting rights to 8,750,000 tranche of shares vesting over a five year period and are subject to a voting proxy agreement. The Merger Agreement also provided that an additional 15,250,000 Earnout Shares can be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the closing date.
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 provides that an additional 15,250,000 Earnout Shares would be issued as part of the consideration for the Mergers, upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date as follows, as measured at four intervals (each a “marking period”): the completion of 12, 24, 42, and 59 calendar months from the Closing Date, and based upon the ratios set forth below:
| Aggregate Net Revenues | | Shares Issued/ Each $ of Aggregate Net Revenue Ratio | |
| | | | | |
| $1 - $20,000,000 | | | .190625 | |
| $20,000,001 - $60,000,000 | | | .0953125 | |
| $60,000,001 - $140,000,000 | | | .04765625 | |
| $140,000,001 - $300,000,000 | | | .23828125 | |
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 issuance of the initial 15,250,000 shares and the 15,250,000 Earnout Shares were approved by the Company’s shareholders in April 2019. The initial shares were issued upon shareholder approval on April 19, 2019 and had a carrying value of $53,215,163. Additionally, as the 15,250,000 initial shares were issued, the value of the shares in the amount of $53,215,163 was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The third quarter of the third marketing period ended on September 30, 2021 and based on the measurement criteria an additional 466,713 Earnout Shares were earned and issued in December 2021. These shares decreased in value by $366,841 during the quarter through the time of issuance and had a value of $405,000, which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The fourth quarter of the third marketing period ended on December 31, 2021 and based on the measurement criteria an additional 444,243 Earnout Shares were earned and issued in March 2022. These shares increased in value by $41,914 during the quarter through the time of issuance and had a value of $325,000, which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The fifth quarter of the third marketing period ended on March 31, 2022 and based on the measurement criteria an additional 458,877 Earnout Shares were earned and issued in May 2022. These shares decreased in value by $90,792 during the quarter through the time of issuance and had a value of $178,000, which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The sixth quarter of the third marketing period ended on June 30, 2022 and based on the measurement criteria an additional 409,505 Earnout Shares were earned and issued in August 2022. These shares increased in value by $17,718 during the quarter through the time of issuance and had a value of $198,000 at the time of issuance, which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. At September 30, 2022, up to 3,928,797 remaining Earnout Shares are subject to issuance by the Company.
The third marking period was originally an 18 month period commencing on January 1, 2021 and ending on June 30, 2022 (the “Third Marking Period End Date”), after which time the determination of the issuance of any remaining Earnout Shares would be made pursuant to the terms of the Merger Agreement. On March 31, 2021 the Company entered into Addendum No. 1 to the Merger Agreement (“Addendum No. 1”) 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 following Third Marking Period End Date. This change in the measurement date, however, has no effect on the number of remaining Earnout Shares issuable under the Earnout Rights and no effect on the earnout targets; Addendum No. 1 simply changes the physical issuance date(s) of the remaining Earnout Shares, if in fact, such shares are earned pursuant to the terms of the Merger Agreement. Addendum No. 1 did not change any of the terms of the fourth marking period (as that term is defined in the Merger Agreement). This change did not impact the fair value of the contingent liability. The value of the contingent liability was $276,000 and $9,440,000 at September 30, 2022 and September 30, 2021, respectively.
As part of the Twenty Two acquisition in July 2021, the Company has a contractual obligation to issue up to an additional 200,000 shares of its common stock as additional consideration, dependent upon the acquisition entity meeting future revenue targets. Under GAAP the Company is required to record a non-cash contingent liability associated with the Twenty Two Earnout Shares and at the date of the acquisition, recorded a total contingent liability of $488,561. Under GAAP the Company is obligated to reassess the obligations associated with the Twenty Two Earnout Shares on a quarterly basis and, in the event its estimate of the fair value of the contingent consideration changes, the Company will record increases or decreases in the fair value as an adjustment to earnings. In particular, changes in the market price of the Company’s common stock, which is one of the inputs used in determining the amount of the non-cash contingent liability, will result in increases or decreases in this liability and positively or negatively impact the Company’s net loss or profit for the period. At September 30, 2021, the Company recorded a decrease in value of the contingent liability of $73,561 related to a decrease in the market price of our common stock, which adjusted the total contingent liability related to the Twenty Two Earnout Shares to $416,000. At December 31, 2021, the Company recorded a decrease in value of the contingent liability of $255,000 related to a decrease in the market price of our common stock, which adjusted the total contingent liability related to the Twenty Two Earnout Shares to $161,000. At March 30, 2022 the Company recorded a decrease in value of the contingent liability of $148,000 related to a decrease in the market price of our common stock, which adjusted the total contingent liability related to the Twenty Two Earnout Shares to $13,000. At June 30, 2022, the Company recorded a decrease in value of the contingent liability of $13,000 related to a decrease in the market price of our common stock, which adjusted the total contingent liability related to the Twenty Two Earnout Shares to $0. As of September 2022 the measurement period has ended and there is no further obligation with respect to this earnout.
In November of 2021 the Company entered into a contractual obligation to issue up to 120,000 RSUs to an employee. During the twelve month period ending December 31, 2022, the employee shall receive RSUs that are dependent upon a minimum $3 million and up to $8 million of net sales generated by the employee through accounts established and opened by the employee. The shares will be subject to meeting the minimum $3 million of net sales as well as to calculations including volume-weighted average stock price minimum and maximum. As of December 31, 2021 the estimated revenue target to be met by the employee through December 31, 2022 was below the minimum threshold for earning RSUs, and therefore, the Company recorded a zero liability related to this contingent liability at December 31, 2021. During the three months ended March 31, 2022, the employee resigned their position with the Company. As such, this contractual obligation was terminated.
In April 2022, the Company entered into a contractual obligation to issue up to 100,000 options to an employee. The shares are subject to meeting a minimum direct to consumer revenue of $12.0 million for the December 2022 calendar quarter. The Company is not expecting to meet this revenue metric for the December 2022 calendar quarter and has therefore valued this liability at $0 as of September 30, 2022.
NOTE 7 – RELATED PARTY TRANSACTIONS
The Company, as noted in Note 2, and a number of its directors and affiliates have invested into Adara through Adara Sponsor. As mentioned in Note 6, the counterparty in the earnout arrangement is a related party.
NOTE 8 – SHAREHOLDERS’ EQUITY
Preferred Stock – The Company is authorized to issue 50,000,000 shares of preferred stock, par value $0.001 per share. In October 2019, the Company designated 5,000,000 of these shares as 8.0% Series A Cumulative Convertible Preferred Stock. Our 8.0% Series A Cumulative Convertible Preferred Stock ranks senior to our common stock for liquidation or dividend provisions and holders are entitled to receive cumulative cash dividends at an annual rate of 8.0% payable monthly in arrears for the prior month. The Company reviewed ASC 480 – Distinguishing Liabilities from Equity in order to determine the appropriate accounting treatment for the preferred stock and determined that the preferred stock should be treated as equity. There were 5,000,000 and 500,000 shares of 8.0% Series A Cumulative Convertible Preferred Stock issued and outstanding at September 30, 2022 and September 30, 2021, respectively.
The total amount of dividends declared and recorded were $4,002,005 and $2,554,609 for the years ended September 30, 2022 and 2021.
Common Stock – The Company is authorized to issue 150,000,000 shares of common stock, par value $0.001 per share. There were 60,665,595 and 57,783,340 shares of common stock issued and outstanding at September 30, 2022 and 2021, respectively.
Preferred stock transactions:
The Company has no preferred stock transactions in the year ended September 30, 2022.
In the year ended September 30, 2021:
On July 1, 2021, the Company completed a follow-on firm commitment underwritten public offer of 2,200,000 shares of its 8.0% Series A Cumulative Convertible Preferred Stock for aggregate gross proceeds of $16.50 million. The Company received approximately $15.3 million in net proceeds after deducting underwriting discounts and commissions. The Company also issued to the representative of the underwriters warrants to purchase in aggregate 143,382 shares of common stock with an exercise price of $3.75. The warrants were valued at $244,637 and expire on June 30, 2026.
Common stock transactions:
In the year ended September 30, 2022:
In August 2022, the Company issued 5,000 shares of restricted common stock to a newly appointed board member. The stock award was valued at the fair market price of $2,854 and vested at the grant date.
In August 2022, the Company issued 100,000 of restricted common stock to a consultant as part of an advisory agreement under the Company's Equity Compensation Plan. The stock awards were valued at the fair market price of $41,000 and vested at the grant date.
In August 2022, the Company issued 409,505 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.
In May 2022, the Company issued 458,887 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.
In March 2022 the Company issued 444,243 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.
In January 2022, the Company issued 30,000 shares of restricted stock awards to six employees. The stock awards were valued at the fair market price of $29,250 and vested at the grant date.
In January 2022, the Company issued 320,000 shares to a professional athlete in conjunction with an amendment to the athlete’s sponsorship agreement as referenced in Note 11. The stock grant was valuated at the fair market price of $336,000 upon issuance and will be amortized over the remaining term of the agreement.
On December 28, 2021, the Company issued 466,713 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.
In October 2021, the Company issued 25,000 shares of restricted common stock to an executive officer of the Company, subject to vesting on January 1, 2022.
In the year ended September 30, 2021:
On August 16, 2021 the company issued 503,275 shares of restricted common stock in connection with the Earnout shares as referenced Note 6.
In fiscal year ending September 30, 2022, 323,444 warrants issued in January 2020 to purchase shares of common stock at an exercise price of $1.25 were exercised.
On July 22, 2021, the company issued 300,000 shares of restricted common stock in conjunction with the Twenty Two asset acquisition.
On June 8, 2021, the Company issued 25,000 shares of restricted stock awards in connection with a consulting arrangement with an industry professional. The Company recorded a total prepaid expense of $80,500 in conjunction with the issuance of shares and intends to amortize this over the term of the agreement.
On May 14, 2021, the Company issued 562,278 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.
On April 9, 2021, the Company entered into an endorsement agreement with a professional athlete. A part of the endorsement agreement, the Company issued 40,000 shares of restricted common stock. The Company recorded $143,600 prepaid expense and intends to amortize over the term of the agreement.
In March 2021, the Company issued 180,000 shares of restricted common stock to a professional athlete to completely satisfy a $800,000 obligation due between July and December of 2021. The Company recorded a total prepaid expense of $649,800 in conjunction with the issuances of shares and intends to amortize this over the term of the athlete’s agreement.
In March 2021, the Company issued 27,000 of restricted stock awards to the Company’s board of directors. Two thousand of the shares vested at the time of the grant, while the balance vest one fourth on June 30, 2021, one fourth, on September 30, 2021, one fourth on December 31, 2021, and one fourth on March 31, 2022. The stock awards were valued at the fair market price of $118,800 upon issuance and will amortize over the individual vesting periods.
In March 2021, the Company issued 3,348,520 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.
In February 2021, as partial compensation pursuant to the terms of a Personal Services Agreement for the endorsement of the Company’s products, the Company issued 40,000 common shares. The Company recorded a total prepaid expense of $155,200 in conjunction with the issuance of shares.
In October 2020 the Company issued 50,000 of restricted stock awards to an executive officer, subject to a multi-year vesting schedule with a minimum one year before the first tranche vests as noted below in Note 9.
Stock option transactions:
In the year ended September 30, 2022:
In August 2022, the Company granted a new board member an aggregate of 30,000 common stock options. The options vested immediately, have a strike price of $0.568 and a five-year term. The Company has recorded a total prepaid expense of $10,290 and were expensed at the issuance date.
In June 2022, an former executive officer of the company forfeited 750,000 common stock options. The forfeited options had an unrecognized value of $555,286. The Company recognized contra-expense of $604,714 for the forfeited options related to the previously amortized expense for these options.
In May 2022, the Company granted a new executive an aggregate of 405,000 common stock options. The options vest equally over 1, 2, and 3 years from the grant date. The options have a strike price $0.84 and a five year term. The total expense of these options totaled $176,985 and will be amortized over the term of the vesting periods.
In April 2022, the Company issued 200,000 options to a consultant as part of an advisory agreement under the Company's Equity Compensation Plan. Fifty thousand of the shares vested upon the grant, 50,000 vest and 6 months from the effective date and 100,000 upon renewal of the consulting agreement in March 2023. The options have a strike price of $1 and five year term. The total expense of these options totaled $131,300 and will be amortized over the term of the vesting periods.
In April 2022, the Company issued 100,000 common stock options to an employee that vest upon the Company achieving certain direct to consumer revenue growth targets for the quarter ended December 2022. The options have a $1 strike price. The Company performs analysis on these options and as of September 30, 2022 no expense was ascribed to these options.
In March 2022, the Company granted its board of directors an aggregate of 120,000 common stock options. The options vested immediately, have a strike price of $0.818 and a five-year term. The Company has recorded a total prepaid expense of $57,000 and intends to amortize the expense over the 12-month board term.
In January 2022, the Company granted an aggregate of 130,000 common stock options to a group of 9 employees. These options vest upon grant and the Company has recorded an expense for these options of $79,500 for the three months ended June 30, 2022
In October 2021, the Company granted an aggregate of 75,000 common stock options to an executive officer. These options vest on October 1, 2022. The Company has recorded an expense for these options of $23,025 and $46,050 for the three and twelve months ended September 30, 2022.
In the year ended September 30, 2021:
In June 2021, the Company entered into a consulting arrangement with an industry professional. As part of the agreement, the Company issued 50,000 options and recorded total prepaid expense of $125,250 and intends to amortize over the 12-month vesting term.
In April 2021, the Company issued 750,000 common stock options to an executive officer in conjunction with an Amended and Restated Executive Employment Agreement. The common stock options vest in three equal tranches, the first of which vests on January 1, 2022, the second on January 1, 2023 and the third on January 1, 2024, under the Corporation’s 2021 Equity Compensation Plan. The Company has recorded an expense of $578,963 for the year ended September 30, 2022 for these options.
In March 2021, the Company granted its board of directors an aggregate of 150,000 common stock options. The options vested immediately, have a strike price of $4.40 and a five-year term. The Company has recorded a total prepaid expense of $395,850 and intends to amortize the expense over the 12-month board term.
In January 2021, the Company granted an aggregate of 80,000 common stock options to three employees. The options vest in three equal tranches, the first on April 15, 2021, the second on April 15, 2022 and the third on April 14, 2023 and have an exercise price of $3.10 per share and a term of 10 years. The Company has recorded an expense of $116,735 for the year ended September 30, 2022 for these options.
In October 2020, the Company granted an aggregate of 350,000 common stock options to an executive officer. The options vest in three equal tranches, the first on October 1, 2021, the second on October 1, 2022 and the third on October 1, 2023, and have an exercise price of $3.50, $5.00, and $6.50 per share and a term of 5 years. The Company has recorded an expense for these options of $124,217 for the year ended September 30, 2022.
The expected volatility rate was estimated based on comparison to the volatility of a blend of the Company's own stock and 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, the Company will adjust the estimated forfeiture rate to its 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 years ended September 30, 2022 and 2021:
Warrant transactions:
The Company has no warrant transactions during the twelve months ended September 30, 2022.
In the year ended September 30, 2021:
In July 2021 in relation to the follow-on firm commitment underwritten public offering of the 8.0% Series A Cumulative Convertible Preferred Stock, the Company issued to the representative of the underwriters warrants to purchase in aggregate 143,482 shares of common stock with an exercise price of $3.75. The warrants expire on December 8, 2025.
| | | 2022 | | | 2021 | |
| Weighted average exercise price | | $ | 0.99 | | | $ | 3.91 | |
| Risk free interest rate | | | 2.56% - 2.97% | | | | 0.16% - 0.85% | |
| Volatility | | | 101.23% - 103.98% | | | | 100.72% - 105.43% | |
| Expected term (in years) | | | 2.5 - 5.5 | | | | 2.5 - 5.5 | |
| Divident yield | | None | | | None | |
In December 2020 in relation to the follow-on firm commitment underwritten public offering of the 8.0% Series A Cumulative Convertible Preferred Stock, the Company issued to the representative of the underwriters warrants to purchase in aggregate 150,502 shares of common stock with an exercise price of $3.74. The warrants expire on December 8, 2025.
The following table summarizes the inputs used for the Black-Scholes pricing model on the warrants issued in the year ended September 30, 2022 and 2021:
| | | 2022 | | | 2021 | |
| Weighted average exercise price | | $ | - | | | $3.74 | |
| Risk free interest rate | | | 0.00 | % | | | 0.39% - 0.89% | |
| Volatility | | | 0.00 | % | | | 103.42 | % |
| Expected term (in years) | | | - | | | | 2.75 | |
| Divident yield | | - | | | None | |
NOTE 9 -STOCK-BASED COMPENSATION
Equity Compensation Plan – On June 2, 2015, the Board of Directors of the Company approved the 2015 Equity Compensation Plan (“2015 Plan”). The 2015 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 2015 Plan shall automatically increase on the first trading day of our fiscal year during the term of the 2015 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 2015 Plan and increased the number of shares available for issuance under the 2015 Plan to 2,000,000 and retained the annual evergreen increase provision of the plan. Subsequent thereto, on August 7, 2019 the Company’s Board of Directors approved an amendment to the 2015 Plan changing the date the automatic evergreen increase is determined to the first trading day of October each calendar year during the term of the 2015 Plan to coincide with the Company’s fiscal year.
On January 8, 2021, the Company’s Board of Directors approved the 2021 Equity Compensation Plan (the “2021 Plan”) and it was subsequently ratified by its shareholders at its annual meeting held on March 12, 2021. The purpose of the 2021 Plan is to advance the interests of the Company by providing an incentive to attract, retain and motivate highly qualified and competent persons who are important to it and upon whose efforts and judgment the success of the Company is largely dependent. The 2021 Plan made 5,000,000 common shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The 2021 Plan also contains an “evergreen formula” pursuant to which the number of shares of common stock available for issuance under the 2021 Plan will automatically increase on October 1 of each calendar year during the term of the 2021 Plan, beginning with calendar year 2022, by an amount equal to 1.0% of the total number of shares of common stock outstanding on September 30 of such calendar year, up to a maximum of 250,000 shares.
The Company accounts for stock-based compensation using the provisions of ASC 718. 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. All options are approved by the Compensation, Corporate Governance and Nominating Committee of the Board of Directors. Restricted stock awards that vest in accordance with service conditions are amortized over their applicable vesting period using the straight-line method. The fair value of the Company’s 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 both plans for the fiscal years ended September 30, 2022 and 2021:
| | | | | | | | | | | Weighted-average | | | | | |
| | | | | | | | | | | remaining | | | Aggregate | |
| | | | | | | Weighted-average | | | contractual term | | | intrinsic value | |
| | | Number of shares | | | exercise price | | | (in years) | | | (in thousands) | |
| Outstanding at September 30, 2020 | | | 1,750,000 | | | $ | 4.68 | | | | | | | $ | - | |
| Granted | | | 1,380,000 | | | | 3.91 | | | | | | | | - | |
| Exercised | | | (147,953 | ) | | | 2.60 | | | | | | | | | |
| Forfeited | | | (279,547 | ) | | | 4.47 | | | | | | | | | |
| Outstanding at September 30, 2021 | | | 2,702,500 | | | | 4.42 | | | | 5.13 | | | | - | |
| Granted | | | 1,060,000 | | | | 0.97 | | | | | | | | - | |
| Exercised | | | - | | | | - | | | | | | | | | |
| Forfeited | | | (1,260,000 | ) | | | 3.63 | | | | | | | | | |
| Outstanding at September 30, 2022 | | | 2,502,500 | | | | 3.36 | | | | 4.55 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Exercisable at September 30, 2022 | | | 1,549,167 | | | $ | 4.13 | | | | 4.69 | | | $ | - | |
As of September 30, 2022, there was approximately $301,126 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 the twelve months ended September 30, 2022:
In August 2022, the Company issued 5,000 shares of restricted common stock to a newly appointed board member. The stock award was valued at the fair market price of $2,854 and vested at the grant date.
In August 2022, the Company issued 100,000 of restricted common stock to a consultant as part of an advisory agreement under the Company's Equity Compensation Plan. The stock awards were valued at the fair market price of $41,000 and vested at the grant date.
In June 2022, the Company issued 400,000 shares of restricted common stock in connection with the Separation Agreement with a former executive officer in which the former employee forfeited 500,000 shares of unvested restricted stock awards and 500,000 unvested options. These shares are subject to vest one-half on July 1, 2022 and the balance January 1, 2023. The fair market value of these shares totaled $172,000 and will be amortized over the vesting periods. The forfeited RSUs and options had an unrecognized value of $799,572 and $555,286, respectively. The Company recognized contra-expense of $880,428 and $604,714 for the forfeited RSUs and options, respectively, related to the previously amortized expense for these RSUs and options.
In May 2022 the Company issued 125,000 shares of restricted common stock to an executive office of the Company as part of a new hire compensation package.
In May 2022 the Company issued 5,000 of restricted common stock to an employee of the Company. The stock award was valued at the fair market price $3,350 of and expensed upon issuance.
In March 2022, the Company issued 20,000 of restricted stock awards to the Company’s board of directors. The shares vest quarterly one fourth on June 30, 2022, one fourth, on September 30, 2022, one fourth on December 31, 2022, and one fourth on March 31, 2023. The stock awards were valued at the fair market price of $16,360 upon issuance and will amortize over the individual vesting periods.
In January 2022, the Company issued 30,000 shares of restricted stock awards to six employees. The stock awards were valued at the fair market price of $29,250 and vested at the grant date.
In January 2022, the Company issued 320,000 shares to a professional athlete in conjunction with an amendment to the athlete’s sponsorship agreement as referenced in Note 11. The stock grant was valuated at the fair market price of $336,000 upon issuance and will be amortized over the remaining term of the agreement.
In November 2021, the Company issued 120,000 shares of restricted stock awards to an employee, subject to certain revenue performances metrics through December 2022, as referenced in Note 6. These shares were forfeited during January 2022.
In October 2021 the Company issued 5,000 shares of restricted stock awards to an employee, which vested immediately upon issuance.
In October 2021 the Company issued 25,000 shares of restricted stock awards to an executive officer, subject to a four-month vesting schedule.
In the twelve months ended September 30, 2021:
In June 2021, the Company entered into a consulting arrangement with an industry professional. As part of the engagement, the Company issued 25,000 shares of restricted common stock, which vested on the issuance date. The Company recorded $80,500 prepaid expense and intends to amortize over the term of the agreement.
In April 2021, the Company entered into an endorsement agreement with a professional athlete. A part of the endorsement agreement, the Company issued 40,000 shares of restricted common stock. The Company recorded $143,600 prepaid expense and intends to amortize over the term of the agreement.
In April 2021, the Company issued 750,000 RSUs to an executive officer. The restricted stock vests in three equal tranches, the first of which vests on January 1, 2022, the second on January 1, 2023 and the third on January 1, 2024. The stock awards were valued at the fair market price of $2,520,000 upon issuance and amortized over the individual vesting periods.
In March 2021, the Company issued 27,000 of restricted stock awards to the members of the Company’s board of directors. Two thousand shares vested at the time of the grant, while the balance vest in four equal tranches, the first of which vests on June 30, 2021, the second on September 30, 2021, on the third on December 31, 2021, and the fourth on March 31, 2022. The stock awards were valued at the fair market price of $118,800 upon issuance and amortized over the individual vesting periods.
In March 2021, the Company issued 180,000 shares of restricted common stock to a professional athlete to completely satisfy an obligation due between July and December of 2021. The Company recorded a total prepaid expense of $649,800 in conjunction with the issuances of shares and intends to amortize this over the term of the athlete’s agreement as a marketing expense.
In January 2021, the Company issued 167,500 of restricted stock awards to an aggregate of 15 employees. A majority vested upon issuance with the balance vesting by April 6, 2021. The stock awards were valued at the fair market price of $494,125 upon issuance at and amortized over the individual vesting periods.
In October 2020, the Company issued 50,000 of restricted stock awards to an executive officer. The restricted stock vests in three equal tranches, the first of which vests on October 1, 2021, on the second on October 1, 2022 and the third on October 1, 2023 and were valued at fair market value upon issuance at $100,000 which will be amortized over the vesting period.
The Company recognized $373,610 and $1,626,613 of restricted stock compensation expense for the years ended September 30, 2022 and 2021, respectively.
NOTE 10 – WARRANTS
Transactions involving the Company equity-classified warrants for the fiscal years ended September 30, 2022 and 2021 are summarized as follows:
| | | | | | | | | | | Weighted-average | | | | | |
| | | | | | | | | | | remaining | | | Aggregate | |
| | | | | | | Weighted-average | | | contractual term | | | intrinsic value | |
| | | Number of shares | | | exercise price | | | (in years) | | | (in thousands) | |
| Outstanding at September 30, 2020 | | | 914,184 | | | $ | 3.88 | | | | 3.23 | | | $ | - | |
| Granted | | | 293,984 | | | | 3.75 | | | | | | | | - | |
| Exercised | | | (323,444 | ) | | | 1.25 | | | | | | | | | |
| Forfeited | | | (224,307 | ) | | | 5.39 | | | | | | | | | |
| Outstanding at September 30, 2021 | | | 660,417 | | | | 4.60 | | | | 3.05 | | | | - | |
| Granted | | | - | | | | - | | | | | | | | - | |
| Exercised | | | - | | | | - | | | | | | | | | |
| Forfeited | | | (70,500 | ) | | | 4.00 | | | | | | | | | |
| Outstanding at September 30, 2022 | | | 589,917 | | | | 4.68 | | | | 2.30 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Exercisable at September 30, 2022 | | | 589,917 | | | $ | 4.68 | | | | - | | | $ | - | |
The following table summarizes outstanding common stock purchase warrants as of September 30, 2022:
| | | | | | | Weighted-average | | |
| | | Number of shares | | | exercise price | | Expiration |
| 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 | | | 47,822 | | | | 3.9125 | | October 2024 |
| Exercisable at $1.25 per share | | | 36,682 | | | | 1.25 | | January 2025 |
| Exercisable at $3.74 per share | | | 150,502 | | | | 3.74 | | December 2025 |
| Exercisable at $3.75 per share | | | 143,482 | | | | 3.75 | | June 2026 |
| | | | 589,917 | | | $ | 4.68 | | |
NOTE 11 – 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, requirements to provide production days for advertising creation and attendance of meet and greets. The potential payments, if all services are provided, in aggregate is $4,900,000 and is paid based on the services above for the period ending: December 2019 - $400,000, December 2020 - $800,000, December 2021 - $1,800,000, and December 2022 - $1,900,000. In light of the impact of COVID-19 on events, the Company and professional athlete mutually agreed to suspend payments from March 2020 through June 2020. Effective July 1, 2020, the parties entered into a new endorsement agreement amending certain of the contract terms which superseded the original agreement. Under the current endorsement agreement potential payments to the professional athlete are as follows from July 2020 to December 2022 – up to $2,867,000 to be paid in common stock in three issuances, based on a Volume Weighed Average Price (“VWAP”) calculation, of which the last two issuances can be paid in cash at the Company’s option - $1,400,000 paid in July 2020, $800,000 paid between July 2021 and December 2021, and $667,000 paid between July 2022 and December 2022. The Company will make monthly cash payments as follows from: July 2020 to December 2020 - $40,000, from January 2021 to June 2021 - $50,000, from July 2021 to December 2021 - $75,000, from January 2022 to June 2022 - $85,000, and from July 2022 to December 2022 - $100,000. In March 2021, the parties entered into an additional amendment to the endorsement agreement whereby the Company issued the professional athlete 180,000 common shares to completely satisfy the $800,000 payment options between July 2021 and December 2021. In January of 2022, the parties entered into an additional amendment to the endorsement agreement, whereby the Company has foregone certain rights to logo wearing during events while retaining other performance of the athlete through December 2024. In exchange for change in obligations and term, the parties re-amortized the balance owed during 2022 through 2024, including issuing 320,000 of the Company’s common stock as part of the total compensation. The Company has recorded expense of $971,554 and $577,034 for years ended September 30, 2022 and 2021, respectively. On November 4, 2022, the Company entered into a separation agreement with the athlete that required a final payment truing up the Company’s cash obligation through November 2022. No further obligations exist between the parties. The Company recorded a one time non-cash expense of approximately $850,000 associated with the outstanding un-expensed portion of stock compensation expense previously issued under a higher stock price.
In April 2022, effective February 2022, the Company entered into an endorsement agreement with a professional athlete. The term of the agreement is through February 2025 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, requirement to provide production days for advertising creation and attendance at meet and greets. The potential base payments, if all services are provided is $1,500,000 over the term of the agreement, in addition to some incentives for sales directly influenced by the athlete.
As previously disclosed, during June of 2022, the Company's CEO resigned from the board of directors and his role as an executive for the Company in June 2022 under the terms of a separation agreement with the Company. This resignation was associated with the SEC action taken against this former executive and the Company was not named in the action.
NOTE 12 – NOTE PAYABLE
In July 2019, the Company entered into a loan arrangement in the amount of $249,100 for a line of equipment as part of the sale of manufacturing equipment during April 2022, the balance of this loan was paid off resulting in a balance of $0 as of September 30, 2022. In January 2020, the Company entered into a loan arrangement for $35,660 for equipment, of which $3,000 is a long term note payable at September 30, 2022. Payments are for 48 months and have a financing rate of 6.2%, which requires a monthly payment of $841.
NOTE 13 – PAYCHECK PROTECTION PROGRAM LOAN
In April 2020, The Company applied for an unsecured loan pursuant to the PPP administered by and authorized by the CARES Act. Section 1106 of the Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the Paycheck Protection Program. On April 27, 2020, the Company received the loan from Truist Bank in the principal amount of $1,456,100. The SBA Loan is evidenced by a promissory note issued by the Company to Truist Bank. During May of 2021, the Company received notice from the SBA the loan principal and any accrued interest was completely forgiven. This gain is reflected within Other Income (Expenses) on the consolidated statements of operations.
NOTE 14 – LEASES
The Company has lease agreements for its corporate, warehouse and laboratory offices with lease periods expiring between 2024 and 2026. ASC 842 requires the recognition of leasing arrangements on the consolidated balance sheet as right-of-use assets and liabilities pertaining to the rights and obligations created by the leased assets. The Company determines whether an arrangement is a lease at inception and classify it as finance or operating. All of the Company’s leases are classified as operating leases. The Company’s 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, the Company determined 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. The Company’s 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.
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 consolidated statements of operations.
Components of operating lease costs are summarized as follows:
| | | Year Ended | |
| | | September 30, | |
| | | 2022 | |
| Total Operating Lease Costs | | $ | 1,391,856 | |
Supplemental cash flow information related to operating leases is summarized as follows:
| | | Year Ended | |
| | | September 30, | |
| | | 2022 | |
| Cash paid for amounts included in the measnurement of operating lease liabilities | | $ | 1,405,887 | |
As of September 30, 2022, our operating leases had a weighted average remaining lease term of 3.91 years and a weighted average discount rate of 4.66%. Future minimum aggregate lease payments under operating leases as of September 30, 2022 are summarized as follows:
| For the year ended September 30, | | | | |
| 2023 | | | 1,380,204 | |
| 2024 | | | 1,421,610 | |
| 2025 | | | 1,159,949 | |
| Thereafter | | | 1,372,862 | |
| Total future lease payments | | | 5,334,625 | |
| Less interest | | | (475,567 | ) |
| Total lease liabilities | | $ | 4,859,058 | |
Future minimum lease payments (including interest) under non-cancelable operating leases as of September 30, 2021 are summarized as follows:
| For the year ended September 30, | | | | |
| 2022 | | $ | 1,405,887 | |
| 2023 | | | 1,380,204 | |
| 2024 | | | 1,421,610 | |
| 2025 | | | 1,159,949 | |
| Thereafter | | | 1,372,862 | |
| Total futrue lease payments | | | 6,740,512 | |
| Less interest | | | (730,304 | ) |
| Total lease liabilities | | $ | 6,010,208 | |
NOTE 15 – LOSS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the following periods:
| | | Year Ended | |
| | | September 30, | | | September 30, | |
| | | 2022 | | | 2021 | |
| Basic: | | | | | | | | |
| Net income (loss) | | $ | (70,083,693 | ) | | $ | (23,394,889 | ) |
| Preferred dividends paid | | | 4,002,005 | | | | 2,554,609 | |
| Net income (loss) continuing operations adjusted for preferred dividend | | | (74,085,698 | ) | | | (25,949,498 | ) |
| Net income (loss) attributable to cbdMD Inc. common shareholders | | | (74,085,698 | ) | | | (25,949,498 | ) |
| | | | | | | | | |
| Diluted: | | | | | | | | |
| Net income (loss) | | | (74,085,698 | ) | | | (25,949,498 | ) |
| Net income (loss) | | | (74,085,698 | ) | | | (25,949,498 | ) |
| | | | | | | | | |
| Shares used in computing basic earnings per share | | | 59,750,301 | | | | 54,938,128 | |
| Effect of dilutive securities: | | | | | | | | |
| Options | | | - | | | | - | |
| Warrants | | | - | | | | - | |
| Convertible preferred shares | | | - | | | | - | |
| Shares used in computing diluted earnings per share | | | 59,750,301 | | | | 54,938,128 | |
| | | | | | | | | |
| Earnings per share Basic: | | | | | | | | |
| Continued operations | | | (1.24 | ) | | | (0.47 | ) |
| Discontinued operations | | | - | | | | - | |
| Basic earnings per share | | | (1.24 | ) | | | (0.47 | ) |
| | | | | | | | | |
| Earnings per share Dliuted: | | | | | | | | |
| Continued operations | | | (1.24 | ) | | | (0.47 | ) |
| Discontinued operations | | | - | | | | - | |
| Diluted earnings per share | | | (1.24 | ) | | | (0.47 | ) |
At the year ended September 30, 2022, 3,335,750 potential shares underlying options, unvested RSUs and warrants as well as 8,335,000 convertible preferred shares were excluded from the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.
NOTE 16 – INCOME TAXES
The Company generated operating losses for the years ended September 30, 2022 and 2021 on which it has recognized a full valuation allowance. The Company accounts for is state franchise and minimum taxes as a component of its general and administrative expenses.
The following table presents the components of the provision for income taxes from continuing operations for the fiscal years ended September 30, 2022 and 2021:
| | | Year Ended September 30, | |
| | | 2022 | | | 2021 | |
| Current | | | | | | | | |
| Federal | | $ | - | | | $ | - | |
| State | | | - | | | | - | |
| Total current | | | - | | | | - | |
| Deferred | | | | | | | | |
| Federal | | | - | | | | (895,000 | ) |
| State | | | - | | | | - | |
| Total deferred | | | - | | | | (895,000 | ) |
| Total provision | | $ | - | | | $ | (895,000 | ) |
A reconciliation for the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
| | | Year Ended September 30, | |
| | | 2022 | | | 2021 | |
| Federal statutory income tax rate | | | 21.0 | % | | | 21.0 | % |
| State income taxes, net of federal benefit | | | 0.4 | | | | 0.8 | |
| Permanent differences | | | (17.1 | ) | | | 1.5 | |
| Contingent derivative expense | | | 2.5 | | | | (5.8 | ) |
| Limitation on net operating losses | | | - | | | | - | |
| Change in valuation allowance | | | (6.8 | ) | | | (13.8 | ) |
| Benefit from (provision for) income taxes | | | 0.0 | % | | | 3.7 | % |
Significant components of the Company’s deferred income taxes are shown below:
| | | Year Ended September 30, | |
| | | 2022 | | | 2021 | |
| Deferred tax assets: | | | | | | | | |
| Net operating loss carryforwards | | $ | 12,909,000 | | | $ | 9,160,000 | |
| ROU - Liability | | | 1,087,000 | | | | 1,342,000 | |
| Capital loss carryforward | | | 702,000 | | | | 716,000 | |
| Allowance for doubtful accounts | | | 8,000 | | | | 1,000 | |
| Stock compensation | | | 833,000 | | | | 1,107,000 | |
| Investments | | | 452,000 | | | | 444,000 | |
| Accrued expenses | | | 214,000 | | | | 165,000 | |
| Fixed Assets | | | 40,000 | | | | - | |
| Inventory reserve | | | 35,000 | | | | 16,000 | |
| Capitalized expenses | | | 48,000 | | | | 52,000 | |
| Charitable contributions | | | 45,000 | | | | 43,000 | |
| Total deferred tax assets | | | 16,373,000 | | | | 13,046,000 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Prepaid Expenses | | | (257,000 | ) | | | (219,000 | ) |
| ROU - Assets | | | (1,002,000 | ) | | | (1,254,000 | ) |
| Intangibles | | | (3,426,000 | ) | | | (4,481,000 | ) |
| Fixed assets | | | - | | | | (162,000 | ) |
| Total deferred tax liabilities | | | (4,685,000 | ) | | | (6,116,000 | ) |
| Net deferred tax assets | | | 11,688,000 | | | | 6,930,000 | |
| Valuation allowance | | | (11,688,000 | ) | | | (6,930,000 | ) |
| | | | | | | | | |
| Net deferred tax liability | | $ | - | | | $ | - | |
Net deferred tax liability
The Company has established a valuation allowance against net deferred tax assets due to the uncertainty that such assets will be realized. The deferred tax liabilities that result from indefinite life intangibles cannot be offset by deferred tax assets. The Company periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred tax assets will be realizable, the valuation allowance will be reduced. Under Internal Revenue Code (IRC) Section 382, the use of net operating loss (“NOL”) carryforwards may be limited if a change in ownership of a company occurs. During the year ending September 30, 2018, the company determined that a change of ownership under IRC Section 382 had occurred during the years ending September 30, 2017 and 2015. As a result of these ownership changes, the pre-ownership change NOL carryforwards would be limited and approximately $2.1 million of such NOLs will expire before being utilized. Therefore, at September 30, 2018 the Company reduced the deferred tax asset and related valuation allowance associated with these NOLs by approximately $0.5 million due to IRC Section 382.
During the year ended September 30, 2021, the Company determined that a change in ownership under IRC had occurred during the year ending September 30, 2019. As a result of these ownership changes, the pre-ownership change NOL carryforwards would be limited and approximately $11.4 million of such NOLs will expire before being utilized. Therefore, at September 30, 2021 the Company reduced the deferred tax asset and related valuation allowance associated with these NOLs by approximately $2.7 million due to IRC Section 382.
The total valuation allowance increased by $4,758,000 and decreased by $3,351,000 as of September 30, 2022 and 2021, respectively.
At September 30, 2022, the Company has utilizable NOL carryforwards of approximately $57.7 million which for federal purposes will carryforward indefinitely.
The Company accounts for its state franchise and minimum taxes as a component of its general and administrative expenses.
The Company files income tax returns in the United States, and various state jurisdictions. The Company’s policy is to recognize interest expense and penalties related to income tax matters as tax expense. At September 30, 2021 and 2020, there are no unrecognized tax benefits, and there are no significant accruals for interest related to unrecognized tax benefits or tax penalties.
The CARES Act, which was enacted on March 27, 2020, includes several significant provisions for corporations, including the usage of net operating losses and payroll benefits. The Company analyzed the provisions of the CARES Act and determined there was no effect on its provision for the year ended September 30, 2021 and will continue to evaluate the impact, if any, the CARES Act may have on the Company’s consolidated financial statements and disclosures.
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"). During the year ended September 30, 2021, the Company generated 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 deferred tax assets.
NOTE 17 – ACQUISITIONS
On July 22, 2021, the Company entered into an asset purchase agreement with Twenty Two Capital, LLC (“Twenty Two”) to acquire substantially all the assets of the business operating as directcbdonline.com. The Company acquired the assets for the consideration of $2,000,000 and up to 600,000 shares of the Company’s restricted common stock. At the closing, $200,000 of the cash purchase price was deposited into escrow pending possible post-closing adjustments and indemnity provisions. In addition, at closing, the Company issued Twenty Two 300,000 shares of the Company’s common stock, 100,000 shares of the Company’s common stock to be issued to Twenty Two on or before January 31, 2023, less any amounts setoff against such shares for indemnification claims pending against or paid by the Company under the asset purchase agreement and a remaining 200,000 shares shall be issued to Twenty Two on or before 60th day following the first year anniversary of the Closing subject to certain earn out provisions provided under the asset purchase agreement. The shares are subject to a 180 day lock up agreement subject to certain limited transfers which will also be subject to the lock up.
The initial 300,000 shares issued and 100,000 indemnification holdback shares had a carrying value of $1,064,000 and are included in additional paid in capital in the consolidated balance sheet.
As of September 30, 2022 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.
The following table presents the final purchase price allocation:
| Consideration | | $ | 3,552,529 | |
| | | | | |
| Assets Acquired: | | | | |
| | | | | |
| Undeposited Funds | | $ | 18,155 | |
| Inventory | | | 79,895 | |
| Inventory - Prepaid Shipping | | | 31,094 | |
| Proerpty and equipment, net | | | 5,000 | |
| Intangible Assets | | | 3,418,383 | |
| Total assets aquired | | $ | 3,552,529 | |
NOTE 18 – SUBSEQUENT EVENTS
The Company has analyzed its operations subsequent to September 30, 2022 to the date the consolidated financial statements were issued and there are no material subsequent events other than previously disclosed in these footnotes.
