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cbdMD (YCBD)

Filed: 15 May 20, 5:17pm
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
☑ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
 
☐ 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
 
Commission file number                                           001-38299
 
cbdMD, INC.
(Exact Name of Registrant as Specified in its Charter)
 
North Carolina 47-3414576
State or Other Jurisdiction of
Incorporation or Organization
 I.R.S. Employer Identification No.
   
8845 Red Oak Blvd, Charlotte, NC 28217
Address of Principal Executive Offices Zip Code
 
704-445-3060
Registrant’s Telephone Number, Including Area Code
 
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each classTrading Symbol(s)Name of each exchange on which registered
commonYCBDNYSE American
8% Series A Cumulative Convertible Preferred StockYCBD PR ANYSE American
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☐Accelerated filer ☐
Non-accelerated filer 
Smaller reporting company 
 
Emerging growth company 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐    No  
 
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
51,335,648 shares of common stock are issued and outstanding as of May 11, 2020.
 

 
 
 
TABLE OF CONTENTS
 
  Page
  No
   
 PART I-FINANCIAL INFORMATION 
   
ITEM 1.Financial Statements.4
   
ITEM 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.35
   
ITEM 3.Quantitative and Qualitative Disclosures About Market Risk.44
   
ITEM 4.Controls and Procedures.44
   
 PART II - OTHER INFORMATION 
   
ITEM 1.Legal Proceedings.45
   
ITEM 1A.Risk Factors.45
   
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds.46
   
ITEM 3.Defaults Upon Senior Securities.46
   
ITEM 4.Mine Safety Disclosures.46
   
ITEM 5.Other Information.46
   
ITEM 6.Exhibits.47
 
 
OTHER PERTINENT INFORMATION
 
Unless the context otherwise indicates, when used in this report, the terms the “Company,” “cbdMD, “we,” “us, “our” and similar terms refer to cbdMD, Inc., a North Carolina corporation formerly known as Level Brands, Inc., and our subsidiaries CBD Industries LLC, a North Carolina limited liability company formerly known as cbdMD LLC, which we refer to as “CBDI”, Paw CBD, Inc., a recently formed North Carolina corporation which we refer to as “Paw CBD”. In addition, "fiscal 2019" refers to the year ended September 30, 2019, “fiscal 2020” refers to the year ended September 30, 2020, and "second quarter of 2019" refers to the three months ended March 31, 2019 and "second quarter of 2020" refers to the three months ended March 31, 2020.
 
We maintain a corporate website at www.cbdmd.com. The information contained on our corporate website and our various social media platforms are not part of this report.
 
 
2
 
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
 
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:
 
our history of losses;
the impact and the unknown related to the COVID-19 pandemic;
the impact of changes in the fair value of our contingent liabilities associated with the Earnout Shares;
the possible need to raise additional capital in the future;
dilution to our shareholders upon the issuance of the Earnout Shares;
changes in state laws, costs associated with compliance with applicable laws and potential uncertain changes to regulations impacting our industry;
risks associated with any future failure to satisfy the NYSE American LLC continued listing standards;
terms of and provisions of our 8.0% Series A Cumulative Convertible Preferred Stock;
risks associated with developing a liquid market for our 8.0% Series A Cumulative Convertible Preferred Stock and possible future volatility in its trading price and the trading price of our common stock;
risks associated with our status as an emerging growth company;
risks associated with control by our executive officers, directors and affiliates;
risks associated with unfavorable research reports;
the accounting treatment of securities we accept as partial compensation for services;
our ability to liquidate securities we accept as partial compensation for services;
the lack of long-term contracts for the purchase of our products;
our ability to protect our intellectual property;
additional operational risks associated with our CBD business;
dilution to our shareholders from the issuance of additional shares of common stock by us, the conversion of shares of our 8.0% Series A Cumulative Convertible Preferred Stock and/or the exercise of outstanding options and warrants; and
risks associated with our articles of incorporation, bylaws and North Carolina law.
 
Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Part II, Item 1A. Risk Factors appearing later in this report, Part I, Item 1A. - Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 as filed with the Securities and Exchange Commission (the “SEC”) on December 18, 2019, as amended on January 24, 2020 (collectively, the "2019 10-K") as well as our other filings with the SEC. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.
 
 
3
 
 
PART 1 - FINANCIAL INFORMATION
 
ITEM 1. 
FINANCIAL STATEMENTS.
 
cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2020 AND SEPTEMBER 30, 2019
 
 
 
(Unaudited)
 
 
 
 
 
 
March 31,
 
 
September 30,
 
 
 
2020
 
 
2019
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
  Cash and cash equivalents
 $14,835,699 
 $4,689,966 
  Accounts receivable
  662,531 
  1,425,697 
  Accounts receivable other
  - 
  160,137 
  Accounts receivable – discontinued operations
  791,998 
  1,080,000 
  Marketable securities
  83,375 
  198,538 
  Investment other securities
  - 
  600,000 
  Deposits
  28,365 
  6,850 
  Merchant reserve
  280,322 
  519,569 
  Inventory
  6,571,696 
  4,301,586 
  Inventory prepaid
  517,309 
  903,458 
  Deferred issuance costs
  - 
  93,954 
  Prepaid software
  167,852 
  206,587 
  Prepaid equipment deposits
  115,555 
  868,589 
  Prepaid expenses and other current assets
  830,565 
  688,104 
Total current assets
  24,885,267 
  15,743,035 
 
    
    
Other assets:
    
    
  Property and equipment, net
  3,224,446 
  1,715,557 
  Operating lease assets
  7,413,256 
  - 
  Deposits for facilities
  755,383 
  754,533 
  Intangible assets, net
  21,635,000 
  21,635,000 
  Goodwill
  54,669,997 
  54,669,997 
Total other assets
  87,698,082 
  78,775,087 
 
    
    
Total assets
 $112,583,349 
 $94,518,122 
 
See Notes to Condensed Consolidated Financial Statements
 
4
 
 
cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2020 AND SEPTEMBER 30, 2019
(continued)
 
 
 
(Unaudited)
 
 
 
 
 
 
March 31,
 
 
September 30,
 
 
 
2020
 
 
2019
 
Liabilities and shareholders' equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
  Accounts payable
 $3,506,663 
 $3,021,271 
  Accrued expenses
  1,044,992 
  681,269 
  Operating leases – short term liabilities
  1,076,907 
  - 
  Note payable
  163,858 
  - 
  Customer deposit – related party
  - 
  7,339 
Total current liabilities
  5,792,420 
  3,709,878 
 
    
    
Long term liabilities:
    
    
  Long term liabilities
  - 
  363,960 
  Note payable
  205,732 
  - 
  Operating leases - long term liabilities
  6,607,553 
  - 
  Contingent liability
  7,820,000 
  50,600,000 
  Deferred tax liability
  - 
  2,240,300 
Total long term liabilities
  14,633,285 
  53,204,260 
 
    
    
Total liabilities
  20,425,705 
  56,914,138 
 
    
    
cbdMD, Inc. shareholders' equity:
    
    
Preferred stock, authorized 50,000,000 shares, $0.001 par value, 500,000 and 0 shares issued and outstanding, respectively
  500 
  - 
Common stock, authorized 150,000,000 shares, $0.001 par value,
    
    
  51,335,648 and 27,720,356 shares issued and outstanding, respectively
  51,336 
  27,720 
Additional paid in capital
  124,082,811 
  97,186,524 
Accumulated deficit
  (31,977,003)
  (59,610,260)
Total cbdMD, Inc. shareholders' equity
  92,157,644 
  37,603,984 
 
    
    
 
    
    
Total liabilities and shareholders' equity
 $112,583,349 
 $94,518,122 
 
See Notes to Condensed Consolidated Financial Statements
 
5
 
 
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2020 AND 2019
(Unaudited)
 
 
 
Three months
 
 
Three months
 
 
Six months
 
 
Six months
 
 
 
Ended
 
 
Ended
 
 
Ended
 
 
Ended
 
 
 
March 31,
2020
 
 
March 31,
2019
 
 
March 31,
2020
 
 
March 31,
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Gross Sales
 $9,703,800 
 $7,752,478 
 $20,116,291 
 $8,436,207 
 Allowances
  (304,764)
  (2,115,900)
  (569,019)
  (2,333,942)
Total Net Sales
  9,399,036 
  5,636,578 
  19,547,272 
  6,102,265 
   Cost of sales
  2,732,076 
  1,914,716 
  6,432,613 
  2,080,027 
 
    
    
    
    
  Gross Profit
  6,666,960 
  3,721,862 
  13,114,659 
  4,022,238 
 
    
    
    
    
  Operating expenses
  12,267,637 
  5,749,463 
  24,827,934 
  7,141,274 
  Income (Loss) from operations
  (5,600,677)
  (2,027,601)
  (11,713,275)
  (3,119,036)
    Realized and Unrealized gain (loss) on marketable securities
  (53,152)
  9,524 
  (115,162)
  (64,640)
     Impairment on investment other securities
  (600,000)
  - 
  (600,000)
  - 
     Impairment accounts receivable other
  (160,000)
  - 
  (160,000)
  - 
     (Increase) decrease on contingent liability
  21,261,994 
  (30,914,074)
  38,160,000 
  (30,914,074)
   Interest income
  35,607 
  6,274 
  42,875 
  43,959 
  Income (loss) before provision for income taxes
  14,883,772 
  (32,925,877)
  25,614,438 
  (34,053,791)
 
    
    
    
    
  Benefit for income taxes
  - 
  1,075,000 
  2,240,300 
  1,208,000 
   Net Income (Loss) from continuing operations
  14,883,772 
  (31,850,877)
  27,854,738 
  (32,845,791)
     Net Income (Loss) from discontinued operations, net of tax (Note 15)
  - 
  603 
  (41,202)
  (1,193,345)
  Net Income (Loss)
  14,883,772 
  (31,850,274)
  27,813,536 
  (34,039,136)
  Net (Loss) attributable to noncontrolling interest
  - 
  (58,536)
  - 
  (137,685)
  Preferred dividends
  100,016 
  - 
  166,750 
  - 
 
    
    
    
    
Net Income (Loss) attributable to cbdMD, Inc. common shareholders
 $14,783,756 
 $(31,791,738)
 $27,646,786 
 $(33,901,451)
 
    
    
    
    
Net Income (Loss) per share:
    
    
    
    
  Basic earnings per share
 $0.41 
 $(3.13)
 $0.76 
 $(3.35)
  Diluted earnings per share
 $0.40 
 $- 
 $0.74 
 $- 
 
    
    
    
    
 Weighted average number of shares Basic:
  36,503,005 
  10,160,947 
  36,503,005 
  10,107,144 
 Weighted average number of shares Diluted:
  37,336,505 
  10,160,947 
  37,336,505 
  10,107,144 
 
 
See Notes to Condensed Consolidated Financial Statements
 
6
 
 
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2020 AND 2019
(Unaudited)
 
 
 
Three months
 
 
Three months
 
 
Six months
 
 
Six months
 
 
 
Ended
 
 
Ended
 
 
Ended
 
 
Ended
 
 
 
March 31,
2020
 
 
March 31,
2019
 
 
March 31,
2020
 
 
March 31,
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss)
 $14,883,772 
 $(31,850,274)
 $27,813,536 
 $(34,039,136)
  Comprehensive Income (Loss)
  14,883,772 
  (31,850,274)
  27,813,536 
  (34,039,136)
 
    
    
    
    
Comprehensive Income (loss) attributable to non-controlling interest
  - 
  (58,536)
  - 
  (137,685)
Preferred dividends
  (100,016)
  - 
  (166,750)
  - 
Comprehensive Income (Loss) attributable to cbdMD, Inc. common shareholders
 $14,783,756 
 $(31,791,738)
 $27,646,786 
 $(33,901,451)
 

See Notes to Condensed Consolidated Financial Statements
 
7
 
 
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2020 AND 2019
(unaudited)
 
 
 
Six Months Ended March 31,
 
 
Six Months Ended March 31,
 
 
 
2020
 
 
2019
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income (loss)
 $27,813,536 
 $(34,039,136)
Adjustments to reconcile net income (loss) to net
    
    
  cash used by operating activities:
    
    
  Stock based compensation
  972,225 
  163,148 
  Restricted stock expense
  138,000 
  - 
  Issuance of stock / warrants for service
  28,250 
  19,313 
  Impairment on discontinued operations asset
  38,002 
  - 
  Depreciation and amortization
  287,457 
  171,356 
  Gain on settlement of Note
  - 
  (20,000)
  Other than temporary impairment other securities and other accounts receivable
  760,000 
  - 
  Increase/(Decrease) in contingent liability
  (38,160,000)
  30,914,074 
  Realized and unrealized loss of marketable securities
  115,162 
  1,207,617 
  Non-cash lease expense
  585,020 
  - 
  Merchant reserve settlement
  132,657 
  - 
  Non-cash consideration received for services
  - 
  (470,000)
Changes in operating assets and liabilities:
    
    
  Accounts receivable
  763,303 
  32,156 
  Accounts receivable – related party
  - 
  204,902 
  Other accounts receivable
  - 
  (137,043)
  Note receivable
  - 
  (18,000)
  Note receivable – related party
  - 
  156,147 
  Deposits
  (22,365)
  - 
  Merchant reserve
  106,590 
  (199,907)
  Inventory
  (2,270,110)
  (1,194,186)
  Prepaid inventory
  386,149 
  - 
  Prepaid expenses and other current assets
  649,308 
  168,041 
  Marketable securities
  - 
  440,211 
  Accounts payable and accrued expenses
  849,113 
  43,076 
  Accounts payable and accrued expenses – related party
  - 
  (393,016)
  Operating lease liability
  (496,834)
  - 
  Note payable
  175,124 
  - 
  Deferred revenue / customer deposits
  (7,339)
  (303,125)
  Cash provided by discontinued operations
  250,000 
  - 
  Deferred tax liability
  (2,240,300)
  (1,208,000)
Cash used by operating activities
  (9,147,052)
  (4,462,372)
 
    
    
Cash flows from investing activities:
    
    
   Net cash used for merger
  - 
  (1,177,867)
   Purchase of intangible assets
  - 
  (79,999)
   Purchase of property and equipment
  (1,796,346)
  (102,204)
Cash used by investing activities
  (1,796,346)
  (1,360,070)
 
    
    
Cash flows from financing activities:
    
    
   Proceeds from issuance of common stock
  16,771,756 
  6,356,997 
   Proceeds from issuance of preferred stock
  4,421,928 
  - 
   Preferred dividend distribution
  (166,750)
  - 
   Deferred issuance costs
  62,197 
  (177,521)
Cash provided by financing activities
  21,089,131 
  6,179,476 
Net increase (decrease) in cash
  10,145,733 
  357,034 
Cash and cash equivalents, beginning of period
  4,689,966 
  4,282,553 
Cash and cash equivalents, end of period
 $14,835,699 
 $4,639,587 
 
See Notes to Condensed Consolidated Financial Statements
 
8
 
 
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2020 AND 2019
(unaudited) (continued)
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
Six Months ended
March 31,
 
 
Six Months Ended
March 31,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
Cash Payments for:
 
 
 
 
 
 
    Interest expense
 $17,097 
 $23,938 
 
    
    
Non-cash financial activities:
    
    
Warrants issued to secondary selling agent
 $524,113 
 $86,092 
Stock received for prior period services, adjusted for other accounts receivable write down prior to receipt
 $- 
 $1,352,000 
Adoption of ASU 2016-01
 $- 
 $2,512,539 
 
 
See Notes to Condensed Consolidated Financial Statements
 
9
 
 
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
Other
 
 
 
 
 
 
 
 
 
Common stock
 
 
Preferred stock
 
 
Paid in
 
 
Comprehensive
 
 
Accumulated
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Income(loss)
 
 
Deficit
 
 
Total
 
Balance, September 30, 2019
  27,720,356 
  27,720 
 ��- 
  - 
  97,186,524 
  - 
  (59,610,260)
  37,603,984 
Issuance of Preferred stock
  - 
  - 
  500,000 
  500 
  4,421,428 
  - 
  - 
  4,421,928 
Issuance of options for share based compensation
  - 
  - 
    
    
  542,574 
  - 
  - 
  542,574 
Issuance of stock costs
  - 
  - 
    
    
  (31,757)
  - 
  - 
  (31,757)
Issuance of restricted stock for share based compensation
  - 
  - 
  - 
  - 
  138,000 
  - 
  - 
  138,000 
Preferred dividend
  - 
  - 
  - 
  - 
  - 
  - 
  (66,734)
  (66,734)
Adoption of ASU 2016-02
  - 
  - 
  - 
  - 
  - 
  - 
  (13,528)
  (13,528)
Net Income (loss)
  - 
  - 
    
    
  - 
  - 
  12,929,763 
  12,929,763 
Balance, December 31, 2019
  27,720,356 
  27,720 
  500,000 
  500 
  102,256,769 
  - 
  (46,760,759)
  55,524,230 
Issuance of common stock
  23,590,292 
  23,591 
  - 
  - 
  21,368,166 
  - 
  - 
  21,391,757 
Issuance of options for share based compensation
  - 
  - 
  - 
  - 
  429,651 
  - 
  - 
  429,651 
Issuance of stock/warrants for services
  25,000 
  25 
  - 
  - 
  28,225 
  - 
  - 
  28,250 
Preferred dividend
  - 
  - 
  - 
  - 
  - 
  - 
  (100,016)
  (100,016)
Net Income (loss)
  - 
  - 
  - 
  - 
  - 
  - 
  14,883,772 
  14,883,772 
Balance, March 31, 2020
  51,335,648 
  51,336 
  500,000 
  500 
  124,082,811 
  - 
  (31,977,003)
  92,157,644 
 
 
 
See Notes to Condensed Consolidated Financial Statements
 
10
 
 
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2019
 
 
 
Common Stock
 
 
Additional Paid in
 
 
Other Comprehensive
 
 
Accumulated
 
 
Non-controlling
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Income(loss)
 
 
Deficit
 
 
Interest
 
 
Total
 
Balance, September 30, 2018
  8,123,928 
  8,124 
  21,781,095 
  (2,512,539)
  (6,669,495)
  1,411,972 
  14,019,155 
Issuance of common stock
  1,971,428 
  1,971 
  6,355,027 
  - 
  - 
  - 
  6,356,998 
Issuance of options for share based compensation
  - 
  - 
  143,673 
  - 
  - 
  - 
  143,673 
Issuance of stock costs
  - 
  - 
  (205,569)
  - 
  - 
  - 
  (205,569)
Adoption of ASU 2016-01
  - 
  - 
  - 
  2,512,539 
  (2,512,539)
  - 
  - 
Net loss
  - 
  - 
  - 
  - 
  (2,109,715)
  (79,149)
  (2,188,864)
Balance, December 31, 2018
  10,095,356 
  10,095 
  28,074,224 
  - 
  (11,291,749)
  1,332,823 
  18,125,391 
Issuance of options for share based compensation
  - 
  - 
  19,475 
  - 
  - 
  - 
  19,475 
Issuance of stock and warrants for services
  75,000 
  75 
  289,675 
  - 
  - 
  - 
  289,750 
Net loss
  - 
  - 
  - 
  - 
  (31,791,738)
  (58,536)
  (31,850,274)
Balance, March 31, 2019
  10,170,356 
  10,170 
  28,383,374 
  - 
  (43,083,487)
  1,274,287 
  (13,415,656)
 
 
 
See Notes to Condensed Consolidated Financial Statements
 
11
 
 
cbdMD, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 2020 AND 2019
 
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Organization and Nature of Business
 
cbdMD, Inc. ("cbdMD", "we", "us", “our”, "Parent Company” or the “Company”) is a North Carolina corporation formed on March 17, 2015 as Level Beauty Group, Inc. In November 2016 we changed the name of the Company to Level Brands, Inc. 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 Company, and its newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, completed a two-step merger (the “Mergers”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). Upon completion of the Mergers, cbdMD LLC survived and operates the prior business of Cure Based Development. On April 10, 2019, cbdMD LLC was renamed to CBD Industries LLC (“CBDI”). As consideration for the Mergers, the Company had a contractual obligation, after approval by our shareholders, to issue 15,250,000 shares of our common stock to the members of Cure Based Development, of which 8,750,000 of the shares will vest over a five year period and are subject to a voting proxy agreement, as well as to issue another 15,250,000 shares of our common stock in the future upon earnout goals being within the next 5 years. The Company’s shareholders approved the issuance of the 15,250,000 shares of common stock and they were issued to members of Cure Based Development on April 19, 2019. CBDI produces and distributes various high-grade, premium cannabidiol oil (“CBD”) products under the cbdMD brand. CBD is a natural substance produced from the hemp plant and the products manufactured by CBDI are non psychoactive as they do not contain tetrahydrocannabinol (THC).
 
On October 22, 2019, cbdMD, Inc. filed Articles of Incorporation with the Secretary of State of North Carolina to form a new wholly-owned subsidiary, Paw CBD, Inc. (“Paw CBD”), in conjunction with the organization of its animal health division. In the third quarter of fiscal 2019 cbdMD, Inc. launched its new CBD pet brand, Paw CBD. Following the initial positive response to the brand from retailers and consumers, cbdMD, Inc. organized Paw CBD, Inc. as a separate wholly-owned subsidiary in an effort to take advantage of its early mover status in the CBD animal health industry.
 
Effective September 30, 2019, the Company abandoned and ceased operations of four business subsidiaries: Encore Endeavor 1, LLC (“EE1”), I’M1, LLC (“IM1”), Beauty and Pin Ups, LLC (“BPU”) and Level H&W, LLC (“Level H&W”). Therefore, the results of operations related to these subsidiaries for the Company are reported as discontinued operations.
 
The accompanying unaudited interim condensed consolidated financial statements of cbdMD have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report filed with the SEC on Form 10-K for the year ended September 30, 2019 (“2019 10-K”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of consolidated financial position and the consolidated results of operations for the interim periods presented have been reflected herein. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal year 2019 as reported in the 2019 10-K have been omitted.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries CBDI and Paw CBD. All material intercompany transactions and balances have been eliminated in consolidation.
 
 
12
 
 
Use of Estimates
 
The preparation of the Company's consolidated financial statements have been prepared in accordance with US GAAP, and requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, certain assumptions related to the valuation of investments other securities, common stock issued prior to the Company’s initial public offering (the “IPO”), acquired intangible and long-lived assets and the recoverability of intangible and long-lived assets and income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities, contingent liability and, hence consideration for the Mergers is a material estimate. Actual results could differ from these estimates.
 
The Company is continuing to monitor data related to impact of the COVID-19 pandemic and at this time, based upon the available data, does not believe there would be an impact on inputs used for estimates and assumptions.
 
Cash and Cash Equivalents
 
For financial statements purposes, the Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents.
 
Accounts receivable and Accounts receivable other
 
Accounts receivable are stated at cost less an allowance for doubtful accounts, if applicable. Credit is extended to customers after an evaluation of the customer’s financial condition, and generally collateral is not required as a condition of credit extension. Management’s determination of the allowance for doubtful accounts is based on an evaluation of the receivables, past experience, current economic conditions, and other risks inherent in the receivables portfolio. As of March 31, 2020, we have an allowance for doubtful accounts of $14,318, and had an allowance of $7,286 at September 30, 2019.
 
In addition, the Company has and may, from time to time, enter into contracts where a portion of the consideration provided by the customer in exchange for the Company's services is common stock, options or warrants (an equity position).  In these situations, upon invoicing the customer for the stock or other instruments, the Company will record the receivable as accounts receivable other, and use the value of the stock or other instrument upon invoicing to determine the value. Where an accounts receivable is settled with the receipt of the common stock or other instrument, the common stock or other instrument will be classified as an asset on the balance sheet as either a marketable security (when the customer is a publicly traded entity) or as an investment other security (when the customer is a private entity). 
 
Receivable and Merchant Reserve
 
The Company primarily sells its products through the internet and has an arrangement to process customer payments with third-party payment processors, and will negotiate the fee based on the market. The arrangement with the payment processors requires that the Company pay a fee between 4.0% - 5.2% of the transaction amounts processed. Pursuant to this agreement, there can be a waiting period between 2 - 5 days prior to reimbursement to the Company, and as well as a calculated reserve which some payment processors hold back. Fees and reserves can change periodically with notice from the processors. At March 31, 2020, the receivable from payment processors included approximately $160,013 for the waiting period amount and is recorded as accounts receivable in the accompanying consolidated balance sheet and $280,322 for the reserve amount for a total receivable of $440,335.
 
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.
 
 
13
 
 
Property and Equipment
 
Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are five years for manufacturing equipment and automobiles, three years for computer, furniture and equipment, three years for software, and leasehold improvements are over the term of the lease. The cost and accumulated depreciation of property are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the consolidated statements of operations for the applicable period. Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstance indicate the carrying value of an asset may not be recoverable.
 
Fair value accounting 
 
The Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
 
Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, observable market activity. In instances where the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
 
When the Company records an investment in marketable securities the carrying value is assigned at fair value.  Any changes in fair value for marketable securities during a given period will be recorded as an unrealized gain or loss in the consolidated statement of operations. For investment other securities without a readily determinable fair value, the Company may elect to estimate its fair value at cost less impairment plus or minus changes resulting from observable price changes.
 
Goodwill
 
Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Identifiable intangible assets acquired in business combinations are recorded based on their fair values at the date of acquisition. Goodwill is not subject to amortization but must be evaluated for impairment annually. The Company tests for goodwill impairment annually or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
 
In performing a goodwill test, the Company performs a qualitative evaluation and if necessary, a quantitative evaluation. Factors considered in the qualitative test include specific operating results as well as new events and circumstances impacting the operations or cash flows of the business acquired. For the quantitative test, the Company assesses goodwill for impairment by comparing the carrying value of the business to the respective fair value. The Company determines the fair value of its acquired business using a combination of income-based and market-based approaches and incorporates assumptions it believes market participants would utilize. The income-based approach utilizes discounted cash flows while the market-based approach utilizes market multiples. These approaches are dependent upon internally-developed forecasts that are based upon annual budgets and longer-range strategic plans. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the respective acquired business and in the internally-developed forecasts.
 
 
14
 
 
Intangible Assets
 
The Company's intangible assets consist of trademarks and other intellectual property, all of which are accounted for in accordance with ASC Topic 350, Intangibles – Goodwill and Other. The Company employs the non-amortization approach to account for purchased intangible assets having indefinite lives. Under the non-amortization approach, intangible assets having indefinite lives are not amortized into the results of operations, but instead are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value. We perform an impairment analysis at August 1 annually on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. If a quantitative analysis is necessary, we would analyze various aspects including revenues from the business, associated with the intangible assets. In addition, intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. The Company has analyzed a variety of factors in light of the known impact to date of the COVID-19 pandemic on its business to determine if a circumstance could trigger an impairment loss, and, at this time and based on the information presently known, does not believe it is more likely that an impairment loss has been incurred.
 
Intangible assets with finite useful lives are amortized using the straight-line method over their estimated period of benefit. In accordance with ASC 360-10-35-21, definite lived intangibles are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value.
 
In conjunction with any acquisitions, the Company refers to ASC-805 as amended by Accounting Standards Update (“ASU”) 2017-01 in determining if the Company is acquiring any inputs, processes or outputs and the impact that such factors would have on the classification of the acquisition as a business combination or asset purchase. Additionally, the Company refers to the aforementioned guidance in reviewing all acquired assets and assumed liabilities for valuation in a business combination, including the determination of intangible asset values and contingent liabilities.
 
Contingent liability
 
A significant component of the purchase price consideration for the Company’s acquisition of Cure Based Development includes a fixed number of future shares to be issued as well as a variable number of future shares to be issued based upon the post-acquisition entity reaching certain specified future revenue targets, as further described in Note 8. The Company made a determination of the fair value of the contingent liabilities as part of the valuation of the assets acquired and liabilities assumed in the business combination.
 
The Company recognized both the fixed number of shares to be issued, and the variable number of shares to be potentially issued, as contingent liabilities on its Consolidated Balance Sheets. These contingent liabilities were recorded at fair value upon the acquisition date and are remeasured quarterly based on the reassessed fair value as of the end of that quarterly reporting period. Additionally, as the fixed shares were issued on April 19, 2019, the value of the shares at that time, in the amount of $53,215,163, was reclassified from contingent liability to additional paid in capital on the balance sheet. In addition the first marking period for the Earnout Shares was December 31, 2019 and based on measurement criteria, 5,127,792 shares were issued on February 27, 2020. The value of the issued Earnout Shares as of February 27, 2020 was $4,620,000 and the decrease in value of $6,924,503 from December 31, 2019 related to those shares is recorded in the Statement of Operations for the three months ended March 31, 2020. Additionally, as the 5,127,792 Earnout Shares were issued on February 27, 2020, the value of the shares in the amount of $4,620,000 was reclassified from the contingent liability to additional paid in capital on the balance sheet.
 
For the three months ended March 31, 2020, the contingent liabilities associated with the business combination were decreased by $21,261,994 to reflect their reassessed fair values as of March 31, 2020. This decrease is reflective of a change in value of the variable number of shares from December 31, 2019, including the change in value of the Earnout Shares from December 31, 2019 until issued February 27, 2020. In December 2019, the Company updated the forecasts for performance of the post-acquisition entity based on current trends and performance that would impact the estimated likelihood that the revenue targets disclosed in Note 8 would be met. The primary catalyst for the $21,261,994 decrease in contingent liabilities is the change in the Company’s common share price between March 31, 2020 and December 31, 2019. These increases or decreases to the contingent liabilities are reflected within Other Income (Expenses) on the consolidated statements of operations.
 
 
15
 
 
Revenue Recognition
 
The Company adopted ASC 606, Revenue from Contracts with Customers using the modified retrospective method beginning with our quarter ended December 31, 2018. The adoption of the new revenue standards as of October 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product or the services have been rendered. As the Company did not identify any accounting changes that impacted the amount of reported revenues with respect to any of its revenue streams, no adjustment to retained earnings was required upon adoption.
 
Under ASC 606, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
 
Performance Obligations
 
A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. For our CBD products, the Company meets that obligation when it has shipped products which have been ordered to the customer. The Company has reviewed its various revenue streams for its other contracts under the five-step approach.
 
The below table summarizes amounts related to future performance obligations under fixed contractual arrangements as of March 31, 2020:
 
 
 
At March 31,
2020
 
 
2020 and
thereafter
 
 
 
 
 
 
 
 
Future performance obligations
 $0 
 $0 
 
Allocation of transaction price
 
In our current business model we do not have contracts with customers which have multiple elements as revenue is driven purely by online product sales or purchase order based product sales. However, at times in the past, the Company had entered into contracts with customers wherein there were multiple elements that may have disparate revenue recognition patterns. In such instances, the Company must allocate the total transaction price to these various elements. This is achieved by estimating the standalone selling price of each element, which is the price at which we sell a promised good or service separately to a customer.
 
In circumstances where we have not historically sold relevant products or services on a standalone basis, the Company utilizes the most situationally appropriate method of estimating standalone selling price. These methods include (i) an adjusted market assessment approach, wherein we refer to prices from our competitors for similar goods or serves and adjust those prices as necessary to reflect our typical costs and margins, (ii) an expected cost plus margin approach, wherein we forecast the costs that we will incur in satisfying the identified performance obligation and adding an appropriate margin to such costs, and (iii) a residual approach, wherein we adjust the total transaction price to remove all observable standalone selling prices of other goods or services included in the contract and allocate the entirety of the remaining contract amount to the remaining obligation.
 
Revenue recognition
 
The Company records revenue from the sale of its products when risk of loss and title to the product are transferred to the customer, which is upon shipping (and is typically FOB shipping) which is when our performance obligation is met. Net sales are comprised of gross revenues less product returns, trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions. These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company currently offers a 30 day, money back guarantee.
 
In regard to sales for services provided, the Company records revenue when the customer has accepted services and the Company has a right to payment. Based on the contracted services, revenue is recognized when the Company invoices customers for completed services at agreed upon rates or revenue is recognized over a fixed period of time during which the service is performed. 
 
 
16
 
 
Disaggregated Revenue
 
Our product revenue is generated primarily through two sales channels, consumer (E-commerce) and wholesale channels. We also generate service related sales, although this type of revenue is not a primary focus. We believe that these categories appropriately reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors.
 
A description of our principal revenue generating activities are as follows:
 
-
Consumer (E-commerce) sales - consumer products sold through our online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due prior to the date of shipment.
-
Wholesale sales - products sold to our wholesale customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms vary and can typically be 30 days from the date control over the product is transferred to the customer.
-
Service related sales – services provided to organizations typically consulting services related to branding, marketing, or advisory. Revenue is recognized when services are delivered to the customer, in accordance with the terms of the applicable agreement. Payment terms vary and typically are based on deliverables and agreed upon timelines.
 
The following table represents a disaggregation of revenue by sales channel:
 
 
 
Three Months ended March 31,
2020
 
 
% of total
 
 
Three Months ended March 31,
2019
 
 
 
% of total
 
Wholesale product sales
 $2,617,860 
  27.9%
 $1,375,045 
  24.4%
Consumer product sales
  6,781,176 
  72.1%
  4,261,533 
  75.6%
Service related sales
  - 
  0%
  - 
  0%
Total net sales
 $9,399,036 
    
 $5,636,578 
    
 
 
 
Six Months ended
March 31,
2020
 
 
% of total
 
 
Six Months ended
March 31,
2019
 
 
% of total
 
Wholesale product sales
 $5,885,981 
  30.1%
 $1,375,045 
  22.5%
Consumer product sales
  13,661,291 
  69.9%
  4,727,220 
  77.5%
Service related sales
  - 
  0%
  - 
  0%
Total net sales
 $19,547,272 
    
 $6,102,265 
    
 
Contract Balances
 
Contract assets represent unbilled receivables and are presented within accounts receivable, net on the condensed consolidated balance sheets. Contract liabilities represent unearned revenues and are presented as deferred revenue or customer deposits on the condensed consolidated balance sheets.
 
We have no contract assets and contract liabilities at March 31, 2020.
 
Cost of Sales
 
Our cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third-party providers, and outbound freight for our products sales, and includes labor for our service sales. For our product sales, cost of sales also includes the cost of refurbishing products returned by customers that will be offered for resale, if any, and the cost of inventory write-downs associated with adjustments of held inventories to their net realizable value. These expenses are reflected in the Company’s consolidated statements of operations when the product is sold and net sales revenues are recognized or, in the case of inventory write-downs, when circumstances indicate that the carrying value of inventories is in excess of their net realizable value.
 
 
17
 
 
Advertising Costs
 
The Company expenses all costs of advertising and related marketing and promotional costs as incurred. The Company incurred approximately $3,398,777 and $1,475,696 in advertising and related marketing and promotional costs included in operating expenses during the three months ended March 31, 2020 and 2019, respectively. The Company incurred approximately $5,809,498 and $1,557,838 in advertising and related marketing and promotional costs included in operating expenses during the six months ended March 31, 2020 and 2019, respectively.
 
Shipping and Handling Fees and Costs
 
All fees billed to customers for shipping and handling are classified as a component of sales. All costs associated with shipping and handling are classified as a component of cost of goods sold.
 
Income Taxes
 
The Parent Company is a North Carolina corporation that is treated as a corporation for federal and state income tax purposes. Prior to April 2017, BPU was a multi-member limited liability company that was treated as a partnership for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of BPU was included in the tax return of the Parent Company. Beginning in April 2017, the Parent Company acquired the remaining interests in BPU. As a result of the acquisition, BPU became a disregarded entity for tax purposes and its entire share of taxable income or loss was included in the tax return of the Parent Company. CBDI, Paw CBD, and Level H&W are wholly owned subsidiaries and are disregarded entities for tax purposes and their entire share of taxable income or loss is included in the tax return of the Parent Company. IM1 and EE1 are multi-member limited liability companies that are treated as partnerships for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of IM1 and EE1 are included in the tax return of the Parent Company.
 
The Parent Company accounts for income taxes pursuant to the provisions of the Accounting for Income Taxes topic of the FASB ASC 740 which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Parent Company uses the inside basis approach to determine deferred tax assets and liabilities associated with its investment in a consolidated pass-through entity. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
 
US GAAP requires management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain tax position that more likely than not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company, and has concluded that as of March 31, 2020 and 2019, 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 $14,344,758 uninsured balance at March 31, 2020 and a $4,097,190 uninsured balance at September 30, 2019.
 
Concentration of credit risk with respect to receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management considers these customer receivables to represent normal business risk. The Company did not have any customers that represented a significant amount of our sales for the three and six months ended March 31, 2020. We have three customers whose aggregate accounts receivable balance was approximately 69% of the combined total accounts receivable and accounts receivable discontinued operations as of March 31, 2020, of which one customer is from the discontinued operations and accounts for approximately 51%. The aggregate accounts receivable balance of such customers represented approximately 51% of the Company’s total accounts receivable as of September 30, 2019.
 
 
18
 
 
Stock-Based Compensation
 
We account for our stock compensation under the ASC 718-10-30, Compensation - Stock Compensation using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments.
 
We use the Black-Scholes model for measuring the fair value of options and warrants. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods. The Company recognizes forfeitures when they occur.
 
Earnings (Loss) Per Share
 
The Company uses ASC 260-10, Earnings Per Share for calculating the basic and diluted income (loss) per share. The Company computes basic income (loss) per share by dividing net income (loss) and net income (loss) attributable to common shareholders, after deducting preferred stock dividends, by the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.
 
New Accounting Standards
 
On October 1, 2019, the Company adopted ASU No. 2016-02, Leases, and all subsequently issued clarifying guidance. Under the new guidance, lessees are required to recognize assets and lease liabilities for the rights and obligations created by leased assets previously classified as operating leases. In July 2018, the FASB issued ASU No. 2018-11, which permitted entities to record the impact of adoption using a modified retrospective method with any cumulative-effect as an adjustment to retained earnings (accumulated deficit) as opposed to restating comparative periods for the effects of applying the new standard. The Company elected this transition approach; therefore, the Company’s prior period reported results are not restated to include the impact of this adoption. We also elected the practical expedient permitted under the transition guidance which permits companies not to reassess prior conclusions on lease identification, historical lease classification and initial direct costs. In connection with the adoption of the new guidance, the Company recognized an operating lease asset for $7,704,109 and operating lease liability of $7,950,803 and a reduction of retained earnings of $13,528 in its balance sheet as of December 31, 2019, with no impact to its results of operations and cash flows. The difference between the leased assets and lease liabilities represents the net position of existing prepaid rent and deferred rent liabilities balance, resulting from historical straight-lining of operating leases, which were effectively reclassified upon adoption to reduce the measurement of the leased assets.
 
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The ASU modifies, removes, and adds several disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is evaluating the effect ASU 2018-13 will have on its consolidated financial statements and disclosures and has not yet determined the effect of the standard on its ongoing financial reporting at this time.
 
 
19
 
 
NOTE 2 – ACQUISITIONS
 
On December 20, 2018 (the “Closing”), the Company, and its newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, both North Carolina limited liability companies, completed a two-step merger (the “Merger Agreement”) with Cure Based Development. The Merger Agreement provided that AcqCo LLC merged with and into Cure Based Development with Cure Based Development as the surviving entity (the “Merger”), and immediately thereafter Cure Based Development merged with and into cbdMD LLC with cbdMD LLC as the surviving entity (the “Secondary Merger” and collectively with the Merger, the “Mergers”). cbdMD LLC was renamed on April 10, 2019 to CBDI and has continued as a wholly-owned subsidiary of the Company and maintains the operations of Cure Based Development pre-closing. As consideration for the Merger, the Company had a contractual obligation, after approval by our shareholders, to issue 15,250,000 shares of our common stock to the members of Cure Based Development, of which unrestricted voting rights to 8,750,000 of the shares vest over a five year period and are subject to a voting proxy agreement. The Merger Agreement also provides that an additional 15,250,000 shares of our common stock can be issued upon the satisfaction of aggregate net revenue criteria by CBDI, within 60 months following the Closing. The net revenue criteria are: $20.0, $40.0, $80.0 and $160.0 million, in aggregate $300.0 million (See Note 8 for more information).
 
The initial 15,250,000 shares were approved by our shareholders and issued on April 19, 2019. On February 27, 2020, 5,127,792 shares were issued upon satisfaction of aggregate net revenue criteria per the Merger Agreement.
 
The Company owns 100% of the equity interest of CBDI. The valuation and purchase price allocation for the Mergers was finalized at September 30, 2019.
 
The following table presents the final purchase price allocation:
 
Consideration
 $74,353,483 
 
    
Assets acquired:
    
   Cash and cash equivalents
 $1,822,331 
   Accounts receivable
  850,921 
   Inventory
  1,054,926 
   Other current assets
  38,745 
   Property and equipment, net
  723,223 
   Intangible assets
  21,585,000 
   Goodwill
  54,669,997 
Total assets acquired
  80,745,143 
 
    
Liabilities assumed:
    
   Accounts payable
  257,081 
   Notes payable – related party
  764,300 
   Customer deposits - related party
  265,000 
   Accrued expenses
  460,979 
   Deferred tax liability
  4,644,300 
Total Liabilities assumed
  6,391,660 
 
    
Net Assets Acquired
 $74,353,483 
 
The goodwill generated from this transaction can be attributed to the benefits the Company expects to realize from the growth strategies the acquired Company had developed and the entry into an emerging market with high growth potential. See Note 8 regarding contingent liability.
 
In connection with the purchase price allocation, the Company recorded a deferred tax liability of approximately $4,644,000, with a corresponding increase to goodwill, for the tax effect of the acquired intangible assets from Cure Base Development. This liability was recorded as there will be no future tax deductions related to the acquired intangibles, and we have identified these as indefinite-lived intangible assets.
 
The Company also acquired estimated net operating loss carryforwards of approximately $1,996,000, Under Internal Revenue Code (IRC) Section 382, the use of net operating loss (“NOL”) carryforwards may be limited to an annual limit if a change in ownership of a company occurs.
 
 
20
 
 
NOTE 3 – MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES
 
The Company may, from time to time, enter into contracts where a portion of the consideration provided by the customer in exchange for the Company's services is common stock, options or warrants (an equity position).  In these situations, upon invoicing the customer for the stock or other instruments, the Company will record the receivable as accounts receivable other, and use the value of the stock or other instrument upon invoicing to determine the value. If there is insufficient data to support the valuation of the security directly, the company will value it, and the underlying revenue, on the estimated fair value of the services provided. Where an accounts receivable other is settled with the receipt of the common stock or other instrument, the common stock or other instrument will be classified as an asset on the balance sheet as either an investment marketable security (when the customer is a public entity) or as an investment other security (when the customer is a privately held entity). 
 
On June 23, 2017, I’M1 and EE1 in aggregate exercised a warrant for 1,600,000 shares of common stock for services delivered to a customer and accounted for this in Investment other securities. The common stock was issued to the Company’s subsidiaries I’M1 and EE1. The customer is a private entity and the stock was valued at $912,000, which was based on its recent financing in June 2017 at $0.57 per share. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used the fair value of the services provided, utilizing an analysis of vendor specific objective evidence of its selling price. In August 2017, each of I’M1 and EE1 distributed the shares to its majority owner, cbdMD, and also distributed shares valued at $223,440 to its non-controlling interests. In August 2017, the Company also provided referral services for kathy Ireland® Worldwide and this customer. As compensation the Company received an additional 200,000 shares of common stock valued at $114,000 using the pricing described above. On December 21, 2017, the Company purchased 300 shares of preferred stock in a private offering from this customer for $300,000. The preferred shares are convertible into common stock at a 20% discount of a defined subsequent financing, or an initial public offering of a minimum $15 million, or at a company valuation of $45 million whichever is the least. The Company has classified this stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used the value paid, which was the price offered to all third party investors. Subsequently, the Company has recently met with other investors of the customer and has indicated desire to sell the equity interest of the Company. As of September 30, 2019, based on conversations with other investors, the market for this equity, and potential selling prices negotiated, the Company determined that the value at September 30, 2019 was $600,000 and an impairment of $502,560 was appropriate for the year ended September 30, 2019. In November 2019, the Company entered into an option to sell the shares by June 30, 2020 to a third party for $600,000. The option required the buyer to provide a non refundable deposit of $30,000. Based upon updates received from the customer during the three months ended March 31, 2020, the Company has determined that it is likely to not realize a return on this asset and has made the determination to take a full impairment of $600,000 at March 31, 2020.
 
In December 2017, the Company completed services per an advisory services agreement with Kure Corp (“Kure”), formerly a related party. As payment for these services, Kure issued 800,000 shares of its stock to the Company. The customer was a private entity and the stock was valued at $400,000, which was based on financing activities by Kure in September 2017 in which shares were valued at $0.50 per share. The Company had classified this common stock, cumulative value of $400,000, as Level 3 for fair value measurement purposes as there were no observable inputs. In valuing the stock the Company used factors including information provided by the issuer regarding their recent results and future plans as well as their most recent financing transactions. On April 30, 2018, Kure. merged with Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company (“Isodiol”). Details can be reviewed in our 2018 Form 10-K previously filed. As a result of this merger we received the first issuance of 380,952 shares from Isodiol and valued them based on the trading price on April 30, 2018 of $0.63 per share which totaled $240,000. We also removed the value of the Kure equity of $400,000 from our Level 3 investments as part of the exchange described above. As the full value of the Kure equity will not be received until the future issuances based on earn out goals, we recorded an accounts receivable other of $160,000 as of December 31, 2018. On March 31, 2019, Isodiol spun off Kure to its original shareholders by issuing back all original Kure stock. As a result of the spin off, the Company received 800,000 shares of Kure stock which we valued at the $160,000, and as Kure is private, when the shares are received they will be treated as a Level 3 stock and will be accounted for as the $160,000 accounts receivable other. In light of the difficulties of the vaping industry, Kure Corp’s ability to continue to raise capital, and uncertainty for future strategy, the Company has assessed the value of the common stock to be received and made the determination to take a full impairment of the $160,000 against the other accounts receivable at March 31, 2020.
 
On December 30, 2017 the Company entered into an Agreement with Isodiol which is a developer of pharmaceutical grade phytochemical compounds and a manufacturer and developer of phytoceutical consumer products. As payment for these services, the Company has received 1,226,435 shares of Isodiol common stock between December 31, 2017 and January 2019. The Company also received 38,095 shares of Isodiol stock upon Isodiol’s acquisition of Kure Corp, giving the Company a total of 1,264,530 shares. At March 31, 2020, the Company has 1,042,193 shares valued at $83,375.
 
 
21
 
 
The table below summarizes the assets valued at fair value as of March 31, 2020:
 
 
 
In Active Markets for Identical Assets and Liabilities
(Level 1)
 
 
Significant Other Observable Inputs
 (Level 2)
 
 
 
Significant Unobservable Inputs
 (Level 3)
 
 
 
 
Total Fair Value at March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities
 $83,375 
  - 
 $- 
 $83,375 
Investment other securities
  - 
  - 
 $- 
 $- 
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Balance at September 30, 2019
 $198,538 
 $- 
 $600,000 
 $798,538 
Change in value of equities
 $(62,011)
 $- 
 $- 
 $(62,011)
Balance at December 31, 2019
 $136,527 
 $- 
 $600,000 
 $736,527 
Change in value of equities
 $(53,152)
 $- 
 $(600,000)
 $(653,152)
Balance at March 31, 2020
 $83,375 
 $- 
 $- 
 $83,375 
 
NOTE 4 – INVENTORY
 
Inventory at March 31, 2020 and September 30, 2019 consists of the following:
 
 
 
March 31,
 
 
September 30,
 
 
 
2020
 
 
2019
 
Finished goods
 $2,518,633 
 $3,050,120 
Inventory components
  4,053,063 
  1,251,466 
Inventory prepaid
  517,309 
  903,458 
Total
 $7,089,005 
 $5,205,044 
 
NOTE 5 – PROPERTY AND EQUIPMENT
 
Major classes of property and equipment at March 31, 2020 and September 30, 2019 consist of the following:
 
 
 
March 31,
 
 
September 30,
 
 
 
2020
 
 
2019
 
Computers, furniture and equipment
 $280,925 
 $131,077 
Manufacturing equipment
  2,591,440 
  1,375,986 
Leasehold improvements
  806,998 
  375,954 
Automobiles
  24,892 
  24,892 
 
  3,704,255 
  1,907,909 
Less accumulated depreciation
  (479,809)
  (192,352)
Net property and equipment
 $3,224,446 
 $1,715,557 
 
Depreciation expense for continuing operations related to property and equipment was $174,206 and $49,936 for the three months ended March 31, 2020 and 2019, respectively and was $287,457 and $54,039 for the six months ended March 31, 2020 and 2019, respectively. Depreciation expense for discontinued operations related to property and equipment was $2,938 and $7,654 for the three and six months ended March 31, 2019, respectively.
 
 
22
 
 
NOTE 6 – INTANGIBLE ASSETS
 
With the Mergers of Cure Based Development, the Company made a strategic shift toward the CBD business and all entities and their associated intangibles were assessed during the year ended September 30, 2019 with that focus and their ability to support that business line.
 
On December 20, 2018, the Company completed the Mergers with Cure Based Development and acquired certain assets, including the trademark "cbdMD" and its variants and certain other intellectual property. The trademark is the cornerstone of this subsidiary and is key as we create and distribute products and continue to build this brand. We believe the trademark does not have limits on the time it will contribute to the generation of cash flows and therefore we have identified these as indefinite-lived intangible assets (see Note 2 for more information).
 
In September 2019, the Company purchased the rights to the trademark name HempMD for $50,000. This trademark will be used in the marketing and branding of certain products to be released under this brand name. We believe the trademark does not have limits on the time it will contribute to the generation of cash flows and therefore we have identified these as indefinite-lived intangible assets.
 
Intangible assets as of March 31, 2020 and September 30, 2019 consisted of the following:
 
 
 
March 31,
 
 
September 30,
 
 
 
2020
 
 
2019
 
Trademark related to cbdMD
 $21,585,000 
 $21.585,000 
Trademark for HempMD
  50,000 
  50,000 
Total
 $21,635,000 
 $21,635,000 
 
NOTE 7 – PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
 
The following unaudited pro-forma data summarizes the results of operations for the three and six months ended March 31, 2020 and 2019, as if the Mergers with Cure Based Development had been completed on October 1, 2017. The pro-forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Mergers had taken place on October 1, 2017. The pro-forma financial information represents the continuing operations only.
 
 
 
Three Months Ended March 31,
2020
 
 
Three Months Ended March 31,
2019
 
 
 
 
 
 
 
 
Net revenues
 $N/A* 
 $N/A* 
Operating income (loss)
 $N/A* 
 $N/A* 
Net income (loss)
 $N/A* 
 $N/A* 
Net loss per share – basic and fully diluted
 $N/A* 
 $N/A* 
 
 
 
Six Months Ended
March 31,
2020
 
 
Six Months Ended
March 31,
2019
 
 
 
 
 
 
 
 
Net revenues
 $N/A* 
 $9,185,693 
Operating income (loss)
 $N/A* 
 $(4,320,089)
Net income (loss)
 $N/A* 
 $(35,298,514)
Net loss per share – basic and fully diluted
 $N/A* 
 $(1.39)
 
* All entities were consolidated effective December 21, 2018 therefore, the results of operations are included in these condensed financial statements.
 
For the per share calculation prior to April 2019, it is being assumed that the shares to be issued contractually under the Merger Agreement, upon shareholder approval, were issued at the beginning of each period. This would account for an additional 6,500,000 shares issued directly to the members of Cure Based Development and another 8,750,000 shares issued which would have a voting proxy and leak out on voting rights over a 5 year period.
 
 
23
 
 
NOTE 8 – CONTINGENT LIABILITY
 
As consideration for the Mergers, described in Note 2, the Company had a contractual obligation to issue 15,250,000 shares of our common stock, after approval by our shareholders, to the members of Cure Based Development, issued in two tranches 6,500,000 and 8,750,000, both of which are subject to leak out provisions, and the unrestricted voting rights to 8,750,000 tranche of shares will also vest over a five year period and are subject to a voting proxy agreement. The Merger Agreement also provides that an additional 15,250,000 shares of our common stock can be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date (“Earn Out”).
 
The contractual obligations and earn out provision are accounted for as a contingent liability and fair value is determined using Level 3 inputs, as estimating the fair value of these contingent liabilities require the use of significant and subjective inputs that may and are likely to change over the duration of the liabilities with related changes in internal and external market factors.
 
The initial two tranches totaling 15,250,000 shares have been valued using a market approach method and included the use of the following inputs: share price upon contractual obligation, discount for lack of marketability to address leak out restrictions, and probability of shareholder disapproval. In addition, the 8,750,000 shares in the second tranche also included an input for a discount for lack of voting rights during the vest periods.
 
The Merger Agreement also provides that an additional 15,250,000 shares (“Earnout Shares”) would be issued as part of the consideration for the Mergers, upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date as follows, as measured at four intervals (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 ..023828125
 
For clarification purposes, the Aggregate Net Revenues during a Marking Period shall be multiplied by the applicable Shares Issued/Each $ of Aggregate Net Revenue Ratio, minus, the number of shares issued as a result of Aggregate Net Revenues during the prior Marking Periods.
 
The initial 15,250,000 shares and the Earnout Shares were approved by our shareholders and the initial shares were issued on April 19, 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 balance sheet.
 
The 15,250,000 Earnout Shares which would be issued in the future, upon the satisfaction of net revenue criteria have been valued using a Monte Carlo Simulation. Inputs used included: stock price, volatility, interest rates, revenue projections, and likelihood of obtaining revenue projections, amongst others.
 
The value of the contingent liability was $33,701,994 and $50,600,000 at December 31, 2019 and September 30, 2019, respectively, and represents the Earnout Shares. The first Marking Period for the Earnout Shares was December 31, 2019 and based on measurement criteria, 5,127,792 shares were issued on February 27, 2020. The value of the issued Earnout Shares as of February 27, 2020 was $4,620,000 and the decrease in value of $6,924,503 from December 31, 2019 related to those shares is recorded in the Statement of Operations for the three months ended March 31, 2020. Additionally, as the 5,127,792 Earnout Shares were issued on February 27, 2020, the value of the shares in the amount of $4,620,000 was reclassified from the contingent liability to additional paid in capital on the balance sheet. The remaining Earnout Shares for future evaluation were valued at $7,820,000 on March 31, 2020 as compared to $22,157,491 at December 31, 2019, a decrease of $14,337,491. The decrease in value of $6,924,503 and $14,337,491 combined represent the decrease of the total contingent liability of $21,261,994 and is recorded in the Statement of Operations for the three months ended March 31, 2020. The Company utilized both a market approach and a Monte Carlo simulation in valuing the contingent liability and a key input in both of those methods is the stock price. The main driver of the decrease in the value of the Earnout Shares within the contingent liability was the decrease of the Company’s stock price, which was $0.93 at March 31, 2020 as compared to $2.26 on December 31, 2019 and the issuance on February 27, 2020 of the Earnout Shares for the first marking period.
 
 
24
 
 
NOTE 9 – RELATED PARTY TRANSACTIONS
 
On December 20, 2018, with the closing of the Merger Agreement with Cure Based Development, we recognized the following related party transactions which happened prior to the Mergers:
 
Cure Based Development received $90,000 from Verdure Holdings LLC for future orders of the Company’s products. Verdure Holdings LLC, at that time, was an affiliate of the CEO of Cure Based Development. This amount has been adjusted based on sales to Verdure Holdings subsequent to the mergers and is recorded as customer deposits - related party on the accompanying balance sheet and was $0 and 7,339 at March 31, 2020 and September 30, 2019, respectively.
 
Cure Based Development entered a lease for office space, which also provides administrative and IT services, from an affiliate of the CEO of Cure Based Development. The lease was a month to month lease for $9,166 per month and ended September 2019.
 
Cure Based Development leases its manufacturing facility from an entity partially owned by an individual who now has a contractual right to receive shares of the Company as part of the Mergers. The current lease was entered into on December 15, 2018 and ends December 15, 2021 and has been amended at an annual base rent rate of $199,200 allowing for a 3% annual increase. In addition, common area maintenance rent is set at $25,200 annually.
 
NOTE 10 – SHAREHOLDERS’ EQUITY
 
Preferred Stock – We are authorized to issue 50,000,000 shares of preferred stock, par value $0.001 per share. In October 2019, the Company designated 5,000,000 of these shares as 8.0% 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 500,000 shares of 8.0% Series A Cumulative Convertible Preferred Stock issued and outstanding at March 31, 2020.
 
The total amount of dividends declared and paid were $100,016 and $100,016, respectively, for the three months ended March 31, 2020. The total amount of dividends declared and paid were $166,750 and $166,750, respectively, for the six months ended March 31, 2020.
 
Common Stock – We are authorized to issue 150,000,000 shares of common stock, par value $0.001 per share. There were 51,335,648 and 27,720,356 shares of common stock issued and outstanding at March 31, 2020 and September 30, 2019, respectively.
 
Preferred stock transactions:
 
In the three and six months ended March 31, 2020:
 
On October 16, 2019, the Company completed a follow-on firm commitment underwritten public offering of 500,000 shares of its 8.0% Series A Cumulative Convertible Preferred Stock for aggregate gross proceeds of $5,000,000. The Company received approximately $4.5 million in gross proceeds after deducting underwriting discounts and commissions. The Company also issued to the selling agent warrants to purchase in aggregate 47,923 shares of common stock with an exercise price of $3.9125. The warrants were valued at $178,513 and expire on October 10, 2024.
 
No preferred stock was issued in the three and six months ended March 31, 2019.
 
Common stock transactions:
 
In the three and six months ended March 31, 2020:
 
On January 14, 2020, the Company completed a follow-on firm commitment underwritten public offering of 18,400,000 shares of its common stock for aggregate gross proceeds of $18,400,000. The Company received approximately $16.9 million in net proceeds after deducting underwriting discounts and commissions. The Company also issued to the selling agent warrants to purchase in aggregate 480,000 shares of common stock with an exercise price of $1.25. The warrants were valued at $345,600 and expire on January 14, 2025.
 
 
25
 
 
In February 2020, we issued 25,000 shares of our common stock to an investor relations firm for services. The shares were valued at $28,250, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending January 2021.
 
In February 2020, we issued 5,000 shares of our common stock to an employee. The shares were valued at $5,650, based on the trading price upon issuance, and was expensed as stock based compensation expense.
 
In the three and six months ended March 31, 2019:
 
On October 2, 2018, the Company completed a follow-on firm commitment underwritten public offering of 1,971,428 shares of its common stock for aggregate gross proceeds of approximately $6.9 million. The Company received approximately $6.3 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by us. The Company also issued to representatives of the underwriters warrants to purchase in aggregate 51,429 shares of common stock with an exercise price of $4.375. The warrants were valued at $86,092 and expire on September 28, 2023.
 
In January 2019, we issued 25,000 shares of our common stock to an investment banking firm for general financial advisory services. The shares were valued at $77,250, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending December 2019.
 
In January 2019, we issued 50,000 shares of our common stock to an investment banking firm for general advisory and investment bank services. The shares were valued at $212,500, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending April 2020.
 
Stock option transactions:
 
In the three and six months ended March 31, 2020:
 
In December 2019 we granted an aggregate of 280,000 common stock options to two executives. The options vest 1/3 on January 1, 2020, 1/3 on January 1, 2021 and 1/3 on January 1, 2022, have an exercise price of $3.15 per share and a term of five years. We have recorded an expense for the options of $71,540 and $262,316 for the three and six months ended March 31, 2020, respectively.
 
In February 2020, we granted an aggregate of 30,000 common stock options to an employee. The options vest 1/3 at grant, 1/3 on February 7, 2021, and 1/3 on February 7, 2022, have an exercise price of $3.15 per share and a term of five years. We have recorded an expense for the options of $6,312 for the three months ended March 31, 2020.
 
No options were issued in the three and six months ended March 31, 2019.
 
The expected volatility rate was estimated based on comparison to the volatility of a peer group of companies in similar industries. The expected term used was the full term of the contract for the issuances. The risk-free interest rate for periods within the contractual life of the option is based on U.S. Treasury securities. The pre-vesting forfeiture rate of zero is based upon the experience of the Company. As required under ASC 718, we will adjust the estimated forfeiture rate to our actual experience. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.
 
 
26
 
 
The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the six months ended March 31, 2020 and 2019:
 
 
2020
2019
Exercise price  $3.15-
Risk free interest rate1.41% - 1.64%-
Volatility95.96% - 99.03%-
Expected term     3 - 5 years-
Dividend yieldNone-
 
Warrant transactions:
 
In the three and six months ended March 31, 2020:
 
In October 2019 in relation to the follow-on firm commitment underwritten public offering of the 8.0% Series A Cumulative Convertible Preferred Stock, we issued to the representative of the underwriters warrants to purchase in aggregate 47,923 shares of common stock with an exercise price of $3.9125. The warrants expire on October 10, 2024.
 
In January 2020 in relation to the follow-on firm commitment underwritten public offering of the Company’s common stock, we issued to the representative of the underwriters warrants to purchase in aggregate 480,000 shares of common stock with an exercise price of $1.25. The warrants expire on January 14, 2025.
 
In the three and six months ended March 31, 2019:
 
On October 2, 2018 in relation to the follow-on firm commitment underwritten offering, we issued to the representative of the underwriters warrants to purchase in aggregate 51,429 shares of common stock with an exercise price of $4.375. The warrants expire on September 28, 2023.
 
The following table summarizes the inputs used for the Black-Scholes pricing model on the warrants issued in the six months ended March 31, 2020 and 2019:
 
 2020
2019
Exercise price  $1.25 - $3.9125$4.375
Risk free interest rate1.48% - 1.63%2.90%
Volatility95.36% - 96.85%70.61%
Expected term5 years  5 years
Dividend yieldNoneNone
 
NOTE 11 – STOCK-BASED COMPENSATION
 
Equity Compensation Plan – On June 2, 2015, the Board of Directors of the Company approved the 2015 Equity Compensation Plan (“Plan”). The Plan made 1,175,000 common stock shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The number of shares of common stock available for issuance under the Plan shall automatically increase on the first trading day of our fiscal year during the term of the Plan, beginning with calendar year 2016, by an amount equal to one percent (1%) of the total number of shares of common stock outstanding on the last trading day in September of the immediately preceding fiscal year, but in no event shall any such annual increase exceed 100,000 shares of common stock. On April 19, 2019, shareholders approved an amendment to the Plan and increased the amount of shares available for issuance under the Plan to 2,000,000 and retained the annual evergreen increase provision of the plan.
 
We account for stock-based compensation using the provisions of FASB ASC 718.  FASB ASC 718 codification requires companies to recognize the fair value of stock-based compensation expense in the financial statements based on the grant date fair value of the options. We have only awarded stock options since December 2015. All options are approved by the Compensation. 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 our stock option awards or modifications is estimated at the date of grant using the Black-Scholes option pricing model.
 
 
27
 
 
Eligible recipients include employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company. Options granted generally have a five to ten year term and have vesting terms that cover one to three years from the date of grant. Certain of the stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.
 
Stock Options – The Company currently has awards outstanding with service conditions and graded-vesting features. We recognize compensation cost on a straight-line basis over the requisite service period.
 
The fair value of each time-based award is estimated on the date of grant using the Black-Scholes option valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model for equity awards with time-based vesting provisions granted during the year.
 
The following table summarizes stock option activity under the Plan:
 
 
 
Number of shares
 
 
Weighted-average exercise price
 
 
Weighted-average remaining contractual term (in years)
 
 
Aggregate intrinsic value (in thousands)
 
Outstanding at September 30, 2019
  1,219,650 
  6.07 
 
 
 
 
 
 
Granted
  310,000 
  3.15 
 
 
 
 
 
 
Exercised
  - 
  - 
 
 
 
 
 
 
Forfeited
  14,650 
  5.70 
 
 
 
 
 
 
Outstanding at March 31, 2020
  1,515,000 
 $5.48 
  7.17 
 $ 
 
    
    
    
    
Exercisable at March 31, 2020
  898,334 
 $5.28 
  6.80 
 $ 
 
As of March 31, 2020, there was approximately $1,171,704 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 2.0 years.
 
Restricted Stock Award transactions:
 
In May 2019 the Company issued 57,500 restricted stock awards in aggregate to eleven employees. The restricted stock awards vested January 1, 2020. The stock awards were valued at fair market upon issuance at $368,000 and amortized over the vesting period. We recognized $0 and $138,000 of stock based compensation expense for the three and six months ended March 31, 2020, respectively.
 
NOTE 12 – WARRANTS
 
Transactions involving our equity-classified warrants are summarized as follows: 
 
 
 
Number of shares
 
 
Weighted-average exercise price
 
 
Weighted-
average remaining contractual term (in years)
 
 
Aggregate intrinsic value (in thousands)
 
Outstanding at September 30, 2019
  423,605 
 $6.64 
 
 
 
 
 
 
Issued
  527,923 
  1.49 
 
 
 
 
 
 
Exercised
  - 
  - 
 
 
 
 
 
 
Forfeited
  - 
  - 
 
 
 
 
 
 
Outstanding at March 31, 2020
  951,528 
 $3.78 
  3.77 
 $ 
 
    
    
    
    
Exercisable at March 31, 2020
  423,605 
 $6.64 
  2.53 
 $ 
 
 
28
 
 
The following table summarizes outstanding common stock purchase warrants as of March 31, 2020:
 
 
 
Number of shares
 
 
Weighted-average exercise price
 
Expiration
 
 
 
 
 
 
 
 
Exercisable at $7.80 per share
  141,676 
 $7.80 
September 2021
Exercisable at $4.00 per share
  70,500 
 $4.00 
September 2022
Exercisable at $7.50 per share
  100,000 
 $7.50 
October 2022
Exercisable at $4.375 per share
  51,429 
 $4.375 
September 2023
Exercisable at $7.50 per share
  60,000 
 $7.50 
May 2024
Exercisable at $3.9125 per share
  47,000 
 $3.9125 
October 2024
Exercisable at $1.25 per share
  480,000 
 $1.25 
January 2025
 
  951,528 
  3.78 
 
 
NOTE 13 – COMMITMENTS AND CONTINGENCIES
 
In May 2019, the Company entered into an endorsement agreement with a professional athlete. The term of the agreement is through December 31, 2022 and is tied to performance of the athlete in so many professional events annually, and also includes promotion of the Company via social media, wearing of logo during competition, provide production days for advertising creation and attend meet and greets. The potential payments, if all services are provided, in aggregate is $4,900,000 and is paid based on the services above for the period ending: December 2019 - $400,000, December 2020 - $800,000, December 2021 - $1,800,000, and December 2022 - $1,900,000. In light of the impact of COVID-19 on events, we have mutually agreed to suspend payments at minimum from April 2020 until June 2020 and will determine if a contract amendment is warranted based on the professional league’s future direction. We have recorded expense of $116,667 and $283,334 for the three and six months ended March 31, 2020.
 
In September 2019, the Company entered into a sponsorship agreement with Life Time, Inc, an operator of fitness clubs, facilities and events. The term of the agreement is through December 31, 2022 and is tied to the Company being the exclusive CBD company and performance of Life Time Inc. regarding advertisement, marketing and display within facilities and at identified events. The potential payments, if all commitments are met, in aggregate is $4,900,000 and is to be paid for the period ending: December 2019 - $1,125,555, December 2020 - $1,258,148, December 2021 - $1,258,148 and December 2022 - $1,258,149. In light of the impact of COVID-19 on the operation of fitness clubs, facilities and events, we have mutually agreed to suspend payments at minimum from April 202 until June 2020 and will determine if a contract amendment is warranted based on the opening of Life Time Inc. facilities and decisions on Life Time Inc. hosted events. We have recorded expense of $208,000 and $1,173,000 for the three and six months ended March 31, 2020.
 
In October 2019, the Company entered into a sponsorship agreement with Feld Motor Sports to be an official sponsor of the Monster Energy Cup events through 2021, the United States AMA Supercross and FIM World Championship events through 2021, and US Supercross Futures event through 2021. The sponsorship includes various media, marketing, and promotion activities. The payments in aggregate are $1,750,000 and is to be paid for the period ending: December 2019 - $150,000, December 2020 - $800,000 and December 2021 - $800,000. In light of the impact of COVID-19 on the events, we have provided notice of termination for the entire agreement and have agreed to make three monthly payments of $77,430 from April 2020 to June 2020 for services provided in the quarter ending March 31, 2020. We have recorded expense of $465,625 and $528,625 for the three and six months ended March 31, 2020.
 
NOTE 14 – NOTE PAYABLE
 
In July 2019, we entered into a loan arrangement for $249,100 for a line of equipment, of which $172,051 is a long term note payable at March 31, 2020. Payments are for 60 months and have a financing rate of 7.01 %, which requires a monthly payment of $4,905. In January 2020, we entered into a loan arrangement for $35,660 for equipment, of which $25,448 is a long term note payable at March 31, 2020. Payments are for 48 months and have a financing rate of 6.2%, which requires a monthly payment of $783.93.
 
 
29
 
 
NOTE 15 – DISCONTINUED OPERATIONS
 
Effective September 30, 2019, the Company ceased operations of four business subsidiaries: EE1, IM1, BPU and Level H&W. These subsidiaries accounted for our licensing, entertainment, and products segments prior to fiscal 2019 and the Company determined that these business units are not able to provide support or value to the CBD business, which the Company is now strategically focused on.
 
Therefore, the Company classified the operating results of these subsidiaries as discontinued operations, net of tax in the Consolidated Statements of Operations.
 
The following table shows the summary operating results of the discontinued operations for the three and six months ended March 31, 2020 and 2019:
 
 
 
Three months
 
 
Three months
 
 
Six months
 
 
Six months
 
 
 
Ended
 
 
Ended
 
 
Ended
 
 
Ended
 
 
 
March 31,
2020
 
 
March 31,
2019
 
 
March 31,
2020
 
 
March 31,
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Gross Sales
 $- 
 $37,958 
 $- 
 $821,691 
 Allowances
  - 
  (1,184)
  - 
  (1,576)
Total Net Sales
  - 
  36,774 
  - 
  820,115 
   Cost of sales
  - 
  219,947 
  - 
  545,643 
 
    
    
    
    
  Gross Profit
  - 
  (183,173)
  - 
  274,473 
 
    
    
    
    
  Operating expenses
  - 
  189,870 
  41,202 
  342,999 
  Income (Loss) from operations
  - 
  (373,043)
  (41,202)
  (68,526)
    Realized and Unrealized gain (loss) on  marketable securities
  - 
  361,835 
  - 
  (1,142,978)
   Interest income (expense)
  - 
  11,811 
  - 
  18,159 
  Income (loss) before provision for income taxes
  - 
  603 
  (41,202)
  (1,193,345)
 
    
    
    
    
  Benefit (Provision) for income taxes
  - 
  - 
  - 
  - 
  Net Income (Loss)
    
  603 
  (41,202)
  (1,193,345)
  Net Gain (Loss) attributable to noncontrolling interest
  - 
  (58,536)
  - 
  (137,685)
 
 
30
 
 
The following table shows the summary assets and liabilities of the discontinued operations as of March 31, 2020 and September 30, 2019.
 
 
 
March 31,
 
 
September 30,
 
 
 
2020
 
 
2019
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
  Cash and cash equivalents
 $- 
 $- 
  Accounts receivable
  791,998 
  1,080,000 
Total current assets included as part of discontinued operations
  791,998 
  1,080,000 
 
    
    
Other assets:
    
    
Total other assets included as part of discontinued operations
  - 
  - 
 
    
    
Total assets included as part of discontinued operations
 $791,998 
 $1,080,000 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
  Accounts payable
 $- 
 $- 
Total current assets included as part of discontinued operations
  - 
  - 
 
    
    
Long term liabilities:
    
    
Total long term liabilities as part of discontinued operations
  - 
  - 
 
    
    
Total liabilities included as part of discontinued operations
 $- 
 $- 
 
The following table shows the significant cash flow items from discontinued operations for the six months ended March 31,:
 
 
 
2020
 
 
2019
 
Depreciation/ amortization
 $- 
 $19,992 
Realized/unrealized (gain) loss on securities expenditures
 $- 
 $1,142,978 
Impairment on discontinued operations assets
 $(38,002)
 $- 
Non cash consideration received for services
 $- 
 $(470,000)
 
At September 30, 2019, EE1 had an accounts receivable for prior services delivered to two customers in aggregate of $1,080,000 of which $1,000,000 was from a related party at the time. At March 31, 2020 the balance on the accounts receivable is $791,998, which reflects payments made and an impairment of $38,002. As of March 31, 2020, one customer has breached their formal agreement on payments, with an accounts receivable balance of $750,000, and on April 29, 2020, the Company filed a lawsuit for collection of this amount and legal fees. The customer is Sandbox Properties LLC and is an affiliate of Kathy Ireland and kathy ireland Worldwide. As of March 31, 2020, we believe this amount will be collected in full.
 
As two of the subsidiaries, EE1 and IM1, had minority interests (non-controlling interests) and all parties agreed to transfer the non- controlling interest to the Company, we have reclassified the non-controlling interest balance of $(482,648) to additional paid in capital as of September 30, 2019.
 
NOTE 16 – LEASES
 
We have lease agreements for our corporate, warehouse and laboratory offices with lease periods expiring between 2021 and 2026. ASC 842 requires the recognition of leasing arrangements on the balance sheet as right-of-use assets and liabilities pertaining to the rights and obligations created by the leased assets. We determine whether an arrangement is a lease at inception and classify it as finance or operating. All of our leases are classified as operating leases. Our leases do not contain any residual value guarantees.
 
 
31
 
 
Right-of-use lease assets and corresponding lease liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term. Since the interest rate implicit in our lease arrangements is not readily determinable, we determine an incremental borrowing rate for each lease based on the approximate interest rate on a collateralized basis with similar remaining terms and payments as of the lease commencement date to determine the present value of future lease payments. Our lease terms may include options to extend or terminate the lease.
 
In addition to the monthly base amounts in the lease agreements, the Company is required to pay real estate taxes, insurance and common area maintenance expenses during the lease terms, which are variable lease costs.
 
Lease costs on operating leases are recognized on a straight-line basis over the lease term and included as a selling, general and administrative expense in the condensed consolidated statements of operations.
 
Components of operating lease costs are summarized as follows:
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
March 31,
2020
 
 
March 31,
2020
 
Operating lease costs
 $382,433 
 $764,866 
Variable lease costs
  25,791 
  48,891 
Total operating lease costs
 $408,224 
 $813,757 
 
Supplemental cash flow information related to operating leases is summarized as follows:
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
March 31,
2020
 
 
March 31,
2020
 
Cash paid for amounts included in the measurement of operating lease liabilities
 $357,922 
 $676,681 
 
As of March 31, 2020, our operating leases had a weighted average remaining lease term of 6.13 years and a weighted average discount rate of 4.66%. Future minimum aggregate lease payments under operating leases as of March 31, 2020 are summarized as follows:
 
For the year ended September 30,
 
 
 
2020 (remaining six months)
 $718,122 
2021
  1,452,434 
2022
  1,392,837 
2023
  1,380,204 
2024
  1,421,610 
Thereafter
  2,532,811 
Total future lease payments
  8,898,018 
Less interest
  (1,213,558)
Total lease liabilities
 $7,684,460 
 
Future minimum lease payments (including interest) under non-cancelable operating leases as of September 30, 2019 are summarized as follows:
 
For the year ended September 30,
 
 
 
2020
 $1,394,806 
2021
  1,452,434 
2022
  1,392,837 
2023
  1,380,204 
2024
  1,421,610 
Thereafter
  2,532,811 
Total obligations and commitments
 $9,574,702 
 
 
32
 
 
NOTE 17 – EARNINGS PER SHARE
 
The following table sets forth the computation of basic and diluted earnings per share for the following periods:
 
 
 
Three Months Ended
 
 
Six Months Ended
 
 
 
March 31,
2020
 
 
March 31,
2019
 
 
March 31,
2020
 
 
March 31,
2019
 
Basic:
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) continuing operations
 $14,883,772 
 $(31,850,877)
 $27,854,738 
 $(32,845,791)
Net income (loss) discontinued operations
  - 
  59,139 
  (41,202)
  (1,055,660)
Net income (loss) attributable to cbdMD, Inc. common shareholders
  14,883,772 
  (31,791,738)
  27,813,536 
  (33,901,451)
 
    
    
    
    
Preferred dividends paid
  100,016 
  - 
  166,750 
  - 
Diluted:
    
    
    
    
Net income (loss) continuing operations adjusted for preferred dividend
  14,783,756 
  - 
  27,687,988 
  - 
Net income(loss) adjusted for preferred dividend
  14,783,756 
  - 
  27,646,786 
  - 
 
    
    
    
    
Shares used in computing basic earnings per share
  36,503,005 
  10,160,947 
  36,503,005 
  10,107,144 
Effect of dilutive securities:
    
    
    
    
   Options
  - 
  - 
  - 
  - 
   Warrants
  - 
  - 
  - 
  - 
    Convertible preferred shares
  833,500 
  - 
  833,500 
  - 
Shares used in computing diluted earnings per share
  37,336,505 
  10,160,947 
  37,336,505 
  10,107,144 
 
    
    
    
    
Earnings per share Basic:
    
    
    
    
   Continued operations
  0.41 
  (3.13)
  0.76 
  (3.24)
   Discontinued operations
  (0.00)
  (0.00)
  (0.00)
  (0.11)
Basic earnings per share
  0.41 
  (3.13)
  0.76 
  (3.35)
 
    
    
    
    
Earnings per share Diluted:
    
    
    
    
   Continued operations
  0.40 
  - 
  0.74 
  - 
   Discontinued operations
  - 
  - 
  (0.00)
  - 
Diluted earnings per share
  0.40 
  - 
  0.74 
  - 
 
At the three and six months ended March 31, 2019, 833,255 potential shares underlying options and warrants, were excluded from the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.
 
NOTE 18 – INCOME TAXES
 
On November 17, 2017, the Company completed an IPO of its common stock. The Company conducted a Section 382 analysis and determined an ownership change occurred upon the IPO. On October 2, 2018 the Company completed a follow-on firm commitment underwritten public offering of its common stock. On May 16, 2019 the Company completed a follow-on firm commitment underwritten public offering of its common stock. On October 16, 2019 the Company completed a follow-on firm commitment underwritten public offering of its 8.0% Series A Cumulative Convertible Preferred Stock. On January 14, 2020, the Company completed a follow-on firm commitment underwritten public offering of its common stock. Management has determined that the Company's federal and state NOL carryovers established up through the date of each of these ownership changes may be subject to an annual limitation; however, this limitation is not material to these condensed consolidated financial statements.
 
 
33
 
 
On December 20, 2018, the Company completed a two-step merger with Cure Based Development (see Note 2). As a result of the Mergers the Company established as part of the purchase price allocation a net deferred tax liability related to the book-tax basis of certain assets and liabilities of approximately $4.6 million.
 
The Company has had a valuation allowance against the net deferred tax assets, with the exception of the deferred tax liabilities that result from indefinite-life intangibles ("naked credits"). The Company has determined that using the general methodology for calculating income taxes during an interim period for the quarter ending December 31, 2019, provided for a wide range of potential annual effective rates. Therefore, the Company has calculated the tax provision on a discrete basis under ASC 740-270-30-36(b) for the quarter ending December 31, 2019. Given available information to date and the most probable scenario given the facts and circumstances, management’s expectation is that the Company will generate enough indefinite life deferred tax assets from post-merger NOLs to reduce the naked credits to zero during the year, and continue to record a valuation allowance on remaining DTAs. As a result, the Company decreased the deferred tax liability from $2,240,300 to $0 and a recorded a deferred tax benefit of $2,240,300 for the quarter ending December 31, 2019. The Company recorded $0 income tax provision for the quarter ending March 31, 2020.
 
NOTE 19 – SUBSEQUENT EVENTS
 
The Company has analyzed its operations subsequent to March 31, 2020 to the date these unaudited condensed consolidated financial statements were issued, and with the rapid spread of COVID-19 around the world and the continuously evolving responses to the pandemic, we have witnessed the significant and growing negative impact of COVID-19 on the global economic and operating environment. We find that the impact of COVID-19 on the Company is unknown at this time and the financial consequences of this situation cause uncertainty as to the future and its effects on the economy and the Company. However, we are monitoring the rapidly evolving situation and its potential impacts on our financial condition, liquidity, operations, suppliers, industry and workforce.
 
On March 27, 2020, Congress passed and the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act, which is commonly known as the CARES Act which provides a stimulus package to certain business and individuals affected by the novel COVID-19 emergency. The Company is currently evaluating how these provisions in the CARES Act will impact its financial position, results of operations and cash flows.
 
In April 2020, the Company applied for an unsecured loan in the amount of approximately $1.5 million pursuant to the Paycheck Protection Program administered by the United States Small Business Administration and authorized by the Keeping American Workers Employed and Paid Act, which is part of 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. The Company received the loan proceeds on April 27, 2020.
 
 
34
 
 
ITEM 2. 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion of our financial condition and results of operations for the second quarters of fiscal 2020 and fiscal 2019 should be read in conjunction with the condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements because of several factors, including those set forth under the Part I, Item 1A, Risk Factors and Business sections in our 2019 10-K, this report, and our other filings with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report.
 
Overview
 
Business
 
Through our subsidiary, CBDI, we produce and distribute various high-grade, premium CBD products, including tinctures, capsules, gummies, bath bombs and topical creams. In the third quarter of fiscal 2019, we launched a line of pet related CBD products under our Paw CBD brand which includes tinctures, treats, and balms, with additional products under development. In October 2019, following the initial positive response to the Paw CBD brand from retailers and consumers, we organized Paw CBD as a separate wholly-owned subsidiary in an effort to take advantage of its early mover status in the CBD animal health industry. With over 40 SKU’s of premium pet CBD products for dogs, cats and horses, we are seeking to grow Paw CBD into a leading brand.
 
We either manufacture our premium line of products at our Charlotte, NC facility or work with third party manufacturers.  We only source cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States.  We utilize a manufacturing process which creates hybrid broad-spectrum concentrations including CBD, other cannabinoids, and various other compounds, which we believe creates a superior product, while eliminating tetrahydrocannabinol (THC) content.
 
Since December 2018, we have significantly increased the number of locations cbdMD products are available in, and with the building momentum of retailer acceptance subsequent to the passage of the Farm Bill, we are pursuing multiple opportunities to expand our product distribution as we continue to work to build cbdMD into a top recognized brand in the industry. We also continue to utilize partnerships and sponsorships with professional athletes as a way to gain brand recognition.
 
The Impact of the COVID-19 Pandemic on our Company
 
On March 11, 2020, the World Health Organization declared the current coronavirus (“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 restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These measures have begun to have a significant adverse impact upon many sectors of the economy, including retail commerce.
 
In response to these measures, the “stay at home” order issued by the Governor of the State of North Carolina where our business is located, and for the protection of our employees and customers, we have temporarily closed our corporate office and altered work schedules at our manufacturing and warehouse facilities. In addition, our senior management and our office personnel are working remotely. To date these adjustments have not adversely impacted our ability to operate our company. In mid March we took steps to increase production to build up our finished goods inventory as well as purchased additional raw material inventory items thereby allowing us to maintain production if supply chain interruptions were to happen. During the second quarter of fiscal 2020 we experienced an impact on our wholesale sales to our brick and mortar customers as many of the stores have been temporarily closed. In response, we have increased our efforts regarding campaigns and marketing reach to support our online sales efforts by upping our initiatives with associated relevant messaging to connect with our consumer base as well increased website content and various offerings and changes to make online ordering more effective (auto reorder capability, giveaways, free shipping, etc.). The impact of COVID-19 on the quarter ended March 31, 2020 has been a small decline in our wholesale sales with relatively no impact to our online sales. We continue to assess the situation on a daily basis, but we are unable to predict when and how quickly we will be able to resume regular operations.
 
 
35
 
 
During this time, we have implemented several measures that we believe will ensure sufficient liquidity and support the business for the next several months. Specific measures, among other things, include the following:
 
Negotiating with our landlords to receive temporary rent deferrals on our facilities;
 
Negotiating with our vendors to defer payments;
 
Suspending sponsorship and affiliate agreements;
 
Shifting sales focus efforts to our online consumer sales while the wholesale sales environment is impacted;
 
Ensuring we had sufficient inventory levels, (both raw and finished goods) allowing us to continue to fulfill orders in the event we must shut down our manufacturing facility or supply chains were impacted; and
 
Furloughing employees in areas impacted (wholesale sales, warehouse, marketing and events)
 
To further bolster our working capital, on April 27, 2020, we received a loan in the principal amount of $1,456,100 (the “SBA Loan”), under the Paycheck Protection Program (“PPP”), which was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). The intent and purpose of the PPP is to support companies, during the COVID-19 pandemic, by providing funds for certain specified business expenses, with a focus on payroll. As a qualifying business as defined by the SBA, we are using the proceeds from this loan to primarily help maintain our payroll as we navigate our business with a focus on returning to normal operations.
 
The term of the Note is two years, though it may be payable sooner in connection with an event of default under the Note. The SBA Loan carries a fixed interest rate of one percent per year, with the first payment due seven months from the date of initial cash receipt. Under the CARES Act and the PPP, certain amounts of loans made under the PPP may be forgiven if the recipients use the loan proceeds for eligible purposes, including payroll costs and certain rent or utility costs, and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. We intend to use the SBA Loan for qualifying expenses and to apply for forgiveness of the SBA Loan in accordance with the terms of the CARES Act.
 
As the adverse impact of COVID-19 on our company, industry, and country continues, our ability to meet customer demands for products may be impaired or, similarly, our customers may experience adverse business consequences due to the COVID-19 pandemic. Reduced demand for products or impaired ability to meet customer demand (including as a result of disruptions at our transportation service providers, third-party manufacturing partners or vendors) could have a material adverse effect on our business, operations and financial performance.
 
While we are not able to estimate the ultimate impact of the COVID-19 pandemic on our financial condition and future results of operations, depending on the prolonged impact of the COVID-19 outbreak, this situation may have a significant adverse effect on our reported results of operations for our third fiscal quarter of 2020 and possibly beyond. The extent to which the coronavirus impacts our results and financial condition, however, will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge and the actions to contain and treat its impacts, among others.
 
 
36
 
 
Growth Strategies and Outlook
 
We continue to pursue the following strategies to grow our revenues and expand our business and operations in the balance of fiscal 2020 and beyond:
 
Increase our base of product offerings : We currently have a broad offering of CBD products, including topicals, tinctures, gummies, bath bombs, vape oils, capsules, and pet products and continue to evaluate additional offerings within these categories as well as new ways to provide CBD in a manner that meets consumer demands. To that end we are devoting resources to ongoing research and development processes with the goal of expanding our product offerings to meet these expanding consumer demands. In addition, on April 8, 2020 we announced that in the coming weeks, we would offer third party manufactured single use alcohol-based hand sanitizers (which will not contain CBD) free with the purchase of cbdMD products, while supplies last. This has been accomplished. In addition, we also announced that in the coming 60 days from date of the announcement that we intend to begin manufacturing of our own branded alcohol-based hand sanitizer products (which will not contain CBD) pursuant to the authorization provided in the FDA’s Temporary Policy for Preparation of Certain Alcohol-Based Hand Sanitizer Products During the Public Health Emergency (COVID-19) Guidance for Industry, which was issued on March 27, 2020. We have begun the manufacturing and marketing process and expect the product to be available in May 2020. We also have other new products and bundled packages which will be available starting in May 2020 as well as several products in the research and development phase with targeted roll-out during 2020;
 
Expand our sales channels : As the market continues to evolve, we are expanding our sales channels. During fiscal 2019, we moved from a 100% online sales channel to working with wholesalers and retail channels. Big box retailers are beginning to explore CBD products and we believe this will provide another significant opportunity. In addition, sales channels for the pet line include expanding to not only retail stores but veterinary and pet care professionals;
 
Expand our recently formed CBD animal health division : With the formation in October 2019 of Paw CBD as a separate wholly-owned subsidiary, we have committed resources to branding and marketing the Paw CBD product line, which we believe will enable us to more effectively target new sales channels as well as utilize our marketing efforts in a more defined manner that we believe will generate other sales opportunities;
 
Expand our sponsorships toward targeted segments: We have had significant success with attracting high profile sponsors and influencers and expect to continue to assess the segments we have covered with a focus on activation of the sponsorships and influencers which are producing the largest visibility and responsiveness; and
 
Acquisitions. We may also choose to further build and maintain our brand portfolio by acquiring additional brands directly or through joint ventures if opportunities arise that we believe are in our best interests. As we are in an emerging market, opportunities could be present as companies establish strong brands and begin to obtain large market share. In assessing potential acquisitions or investments, we expect to utilize our internal resources to primarily evaluate growth potential, the strength of the target brand, offerings of the target, as well as possible efficiencies to gain. We believe that this approach will allow us to effectively screen consumer brand candidates and strategically evaluate acquisition targets and efficiently complete due diligence for potential acquisitions. We are not a party, however at this time, to any agreements or understandings regarding the acquisition of additional brands or companies and there are no assurances we will be successful in expanding our brand portfolio.
 
As a consumer goods manufacturer, we strive to meet or exceed the FDAs Good Manufacturing Practice (GMP) guidelines. Good Manufacturing Practices (GMPs) are guidelines that provide a system of processes, procedures and documentation to assure a product has the identity, strength, composition, quality and purity that appear on its label. These GMP requirements are listed in Section 8 of NSF/ANSI 173 which is the only American National Standard in the dietary supplement industry developed in accordance with the FDA’s 21 CFR part 111.
 
 
37
 
 
With our growth and evolution, challenges could exist and we must continue to review processes and controls and adapt our day to day GMP policies and practices as our manufacturing volume increases.  We are dedicated to providing the highest quality CBD consumer goods on the market and therefore will continue to focus substantial efforts on GMP compliance. Our manufacturing facility and warehouse operations are fully GMP compliant and NSF GMP registered.  NSF GMP registration verifies that the facility is audited twice annually for quality and safety in compliance with Federal Regulations for dietary supplements good manufacturing practices.   We have applied for an additional third-party certification from the U.S. Hemp Authority and are awaiting scheduling of the audit. Additionally, we have secured third party contract manufacturing from FDA registered facilities which are independently GMP certified and subject to continuing independent audit and certification, to handle our increased manufacturing needs.  
 
Results of operations
 
The following tables provide certain selected consolidated financial information for the periods presented:
 
 
 
Three Months Ended March 31,
 
 
Six Months Ended March 31,
 
 
 
2020
 
 
2019
 
 
change
 
 
2020
 
 
2019
 
 
change
 
 
 
(unaudited)
 
 
(unaudited)
 
 
 
 
 
(unaudited)
 
 
(unaudited)
 
 
 
 
Total net sales
 $9,399,036 
 $5,636,578 
  3,762,458 
 $19,547,272 
 $6,102,265 
  13,445,007 
Cost of sales
  2,732,076 
  1,914,716 
  817,360 
  6,432,613 
  2,080,027 
  4,352,586 
Gross profit as a percentage of net sales
  70.9%
  66.0%
  4.1%
  67.0%
  65.9%
  1.1%
Operating expenses
  12,267,637 
  5,749,464 
  6,518,173 
  24,827,934 
  7,141,276 
  17,686,658 
(Increase) decrease on contingent liability
  21,261,994 
  (30,914,074)
  168.8%
  38,160,000 
  (30,914,074)
  223.4%
Net income (loss) before taxes
  14,883,772 
  (32,925,877)
  145.2%
  25,614,438 
  (33,978,793)
  175.4%
Net income (loss) attributable to cbdMD, Inc. common shareholders
 $14,783,756 
 $(31,791,738)
  146.5%
 $27,646,786 
 $(33,901,451)
  181.5%
 
Sales
 
We record product sales primarily through two main delivery channels, direct to consumers via online capabilities (E-commerce) and direct to wholesalers utilizing our internal sales team. In addition, we record revenue upon delivery of services (consulting, marketing and brand strategy). The following table provides information on the contribution of net sales by type of sale to our total net sales.
 
 
 
 
Three months ended
March 31,
2020
 
 
% of total
 
 
Three months ended
March 31,
2019
 
 
% of total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale sales
 $2,617,860 
  27.9%
 $1,375,045 
  24.4%
Consumer sales
  6,781,176 
  72.1%
  4,261,533 
  75.6%
Service oriented sales
  - 
  0%
  - 
  0%
Total net sales
 $9,399,036 
    
 $5,636,578 
    
 
 
 
Six months ended
March 31,
2020
 
 
% of total
 
 
Six months ended
March 31,
2019
 
 
% of total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale sales
 $5,885,981 
  30.1%
 $1,375,045 
  22.5%
Consumer sales
  13,661,291 
  69.9%
  4,727,220 
  77.5%
Service oriented sales
  - 
  0%
  - 
  0%
Total net sales
 $19,547,272 
    
 $6,102,265 
    
 
 
 
38
 
 
Cost of sales
 
Our cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third-party providers, and outbound freight for our product sales (consumer and wholesale sales), and includes labor for our service sales. The following table provides information on the cost of sales to our net sales for the three and six months ended March 31, 2020 and 2019:
 
 
 
Three months ended
March 31,
2020
 
 
Three months ended
March 31,
2019
 
 
 
change
 
 
 
 
 
 
 
 
 
 
 
Product sales
 $2,732,076 
 $1,893,927 
 $838,149 
Service related sales
  - 
  20,789 
  (20,789)
Total cost of sales
 $2,732,076 
 $1,914,716 
 $817,360 
 
    
    
    
 
 
 
Six months ended
March 31,
2020
 
 
Six months ended
March 31,
2019
 
 
 
change
 
 
 
 
 
 
 
 
 
 
 
Product sales
 $6,432,613 
 $2,040,767 
 $4,391,846 
Service related sales
  - 
  39,260 
  (39,260)
Total cost of sales
 $6,432,613 
 $2,080,027 
 $4,352,586 
 
In our product sales, our cost of sales as a percentage of sales was 29.0% and 33.9% for the three months ended March 31, 2020 and 2019, respectively, and was 32.9% and 34.0% for the six months ended March 31, 2020 ad 2019, respectively. The change reflects the growth and maturation of the business and its manufacturing process, and changes in the cost of raw materials as we continue to evaluate key vendors to work with and leverage volume purchasing as we grow as well as additional product offerings which continue to impact our cost of production. During the three months ended March 31, 2020 we had a inventory adjustment which decreased our cost of sales for the same period, without this adjustment our cost of sales as a percentage of sales would have been 33.1% and 34.8% for the three and six months ended March 31, 2020. We expect product sales will maintain cost of sales as a percentage of net sales, between 25% and 40%, as we continue to manage our overall cost for manufacturing and production.
 
Operating expenses
 
Our principal operating expenses include staff related expense, advertising (which includes expenses related to industry distribution and trade shows), sponsorships, affiliate commissions, merchant fees, travel, rent, professional service fees, and business insurance expense. Our operating expenses on a consolidated basis increased approximately 110% and 245% in the three and six months ended March 31, 2020 from the same periods ended March 31, 2019, respectively, and is directly related to the Mergers on December 20, 2018 and the significant growth and ramp up of that business.
 
The following table provides information on our approximate operating expenses for the three and six months ended March 31, 2020 and 2019:
 
 
 
Three months ended
 
 
Three months ended
 
 
 
 
 
 
March 31,
2020
 
 
March 31,
2019
 
 
change
 
 
 
 
 
 
 
 
 
 
 
Staff related expense
 $3,969,976 
 $2,220,790 
 $1,749,186 
Accounting/legal expense
  382,673 
  226,628 
  156,045 
Professional outside services
  329,019 
  427,271 
  (98,252)
Advertising/marketing/social media/events/tradeshows
  3,398,776 
  1,475,695 
  1,923,081 
Sponsorships
  1,442,472 
  - 
  1,442,472 
Affiliate commissions
  385,341 
  477,838 
  (92,497)
Merchant fees
  674,469 
  372,363 
  302,106 
Technology
  280,899 
  34,648 
  246,251 
Travel expense
  164,325 
  129,281 
  35,044 
Rent
  394,598 
  112,510 
  282,088 
Business insurance
  121,202 
  94,498 
  26,704 
Non-cash stock compensation
  435,301 
  19,475 
  415,826 
All other expenses
  288,586 
  158,467 
  130,119 
Totals
 $12,267,637 
 $5,749,464 
 $6,518,173 
 
 
 
39
 
 
 
 
 
Six months ended
 
 
Six months ended
 
 
 
 
 
 
March 31,
2020
 
 
March 31,
2019
 
 
change
 
 
 
 
 
 
 
 
 
 
 
Staff related expense
 $7,902,979 
 $2,515,330 
 $5,387,649 
Accounting/legal expense
  726,093 
  537,821 
  188,272 
Professional outside services
  842,104 
  681,636 
  160,468 
Advertising/marketing/social media/events/tradeshows
  5,809,498 
  1,557,837 
  4,251,661 
Sponsorships
  3,572,308 
  - 
  3,572,308 
Affiliate commissions
  929,608 
  477,838 
  451,770 
Merchant fees
  1,415,462 
  403,808 
  1,011,654 
Technology
  540,895 
  46,788 
  494,107 
Travel expense
  369,043 
  136,351 
  232,692 
Rent
  744,191 
  174,215 
  569,976 
Business insurance
  265,663 
  157,362 
  108,301 
Non-cash stock compensation
  1,115,875 
  163,148 
  952,727 
All other expenses
  594,215 
  289,142 
  305,073 
Totals
 $24,827,934 
 $7,141,276 
 $17,686,658 
 
The increase in staff related expense is a direct result of the build out of the CBDI team. The increase in professional outside services is related to the use of outside agencies and firms to support the growth while we built our infrastructure. The increase in advertising/marketing, sponsorships, affiliate commissions, technology, and travel are a result of execution on the business strategy and building of the CBD brand while increasing market share. The increase in merchant fees is a direct result of increased business through our E-commerce site. The non-cash stock compensation expense reflects the value of restricted stock awards and options as they vest.
 
The significant increase in operating expenses is related to the Mergers as well as the ramping up of the CBDI business, which included increased staff hiring, a full blown sales, advertising and marketing process and expenses related to infrastructure expansion. With an established business foundation and infrastructure, we are now focused on activation of our assets to continue to build our brand while we transition with a focus on overall execution and profitability.
 
Corporate overhead and allocation of management fees to our segments
 
Included in our consolidated operating expenses are expenses associated with our corporate overhead which are not allocated to the operating business unit, including (i) staff related expenses; (ii) accounting and legal expenses; (iii) professional outside services; (iv) travel and entertainment expenses; (v) rent; (vi) business insurance; and (vii) non-cash stock compensation expense.
 
The following table provides information on our approximate corporate overhead for three and six months ended March 31, 2020 and 2019:
 
 
 
Three months ended
 
 
Three months ended
 
 
 
 
 
 
March 31,
2020
 
 
March 31,
2019
 
 
change
 
 
 
 
 
 
 
 
 
 
 
Staff related expense
 $292,833 
 $553,595 
 $(260,762)
Accounting/legal expense
  163,878 
  224,335 
  (60,457)
Professional outside services
  144,522 
  240,722 
  (96,200)
Travel expense
  4,160 
  37,031 
  (32,871)
Business insurance
  108,748 
  80,628 
  28,120 
Non-cash stock compensation
  435,301 
  19,475 
  415,826 
Totals
 $1,149,442 
 $1,155,786 
 $(6,344)
 
 
 
Six months ended
 
 
Six months ended
 
 
 
 
 
 
March 31,
2020
 
 
March 31,
2019
 
 
change
 
 
 
 
 
 
 
 
 
 
 
Staff related expense
 $710,240 
 $765,802 
 $(55,562)
Accounting/legal expense
  435,892 
  535,528 
  (99,636)
Professional outside services
  320,030 
  486,141 
  (166,111)
Travel expense
  22,684 
  43,956 
  (21,272)
Business insurance
  182,465 
  140,814 
  41,651 
Non-cash stock compensation
  1,115,875 
  163,148 
  952,727 
Totals
 $2,787,186 
 $2,135,389 
 $651,797 
 
 
40
 
 
The overall increase in corporate operating expenses is related to the maturation of the entire organization and ongoing public company related expenses.

Other income and other non-operating expenses
 
Interest income (expense)
 
Our interest income (expense) was $35,607 and $6,274 for the three months ended March 31, 2020 and 2019, respectively. For the six months ended March 31, 2020 and 2019, our interest income (expense) was $42,875 and $43,959, respectively.
 
Contingent liability
 
As consideration for the Mergers, under the terms of the Merger Agreement, we had a contractual obligation to issue 15,250,000 initial shares of our common stock (the “Initial Shares”), after approval by our shareholders, to the members of Cure Based Development, to be issued in two tranches 6,500,000 shares and 8,750,000 shares, both of which are subject to leak out provisions. The unrestricted voting rights to 8,750,000 tranche of shares vest over a five year period and until those voting rights vest are subject to voting proxy agreements. As of March 31, 2020, unrestricted voting rights to 2,187,500 shares have vested and those shares are no longer subject to voting proxy agreements. The Merger Agreement also provided that an additional 15,250,000 Earnout Shares of our common stock can be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the closing date of the Mergers.
 
The Initial Shares and Earnout Shares were approved by our shareholders and the Initial Shares were issued on April 19, 2019. The Initial Shares value at April 19, 2019 was $53,215,163, and with the issuance of the Initial Shares, the contingent liability related to the Initial Shares was reclassified to shareholders’ equity by $53,215,163.
 
The earn out provision is accounted for and recorded as a contingent liability with increases in the liability recorded as a non cash other expense and decreases in the liability recorded as a non cash other income. The first marking period for the Earnout Shares was December 31, 2019 and based on measurement criteria, 5,127,792 shares were earned and issued on February 27, 2020. The value of the issued Earnout Shares as of February 27, 2020 was $4,620,000 and the decrease in value of $6,924,503 related to those shares is recorded in the Statement of Operations for the three months ended March 31, 2020. Additionally, as the 5,127,792 Earnout Shares were issued on February 27, 2020, the value of the shares in the amount of $4,620,000 was reclassified from the contingent liability to additional paid in capital on the balance sheet. The remaining Earnout Shares for future evaluations represent the contingent liability and were valued at $7,820,000 at March 31, 2020, as compared to $22,157,491 at December 31, 2019, a decrease of $14,337,491. The decrease in value of $6,924,503 and $14,337,491 combined represent the decrease of the total contingent liability of $21,261,994 and is recorded as other income in the Statement of Operations for the three months ended March 31, 2020. The Company utilizes both a market approach and a Monte Carlo simulation in valuing the contingent liability and a key input in both of those methods is the stock price. The main driver of the decrease in the value of the contingent liability was the decrease of the Company’s stock price, which was $0.93 at March 31, 2020 as compared to $2.26 on December 31, 2019 and the issuance on February 27, 202 of the Earnout Shares for the first marking period.
 
Realized and unrealized gain (loss) on marketable and other securities
 
We value investments in marketable securities at fair value and record a gain or loss upon sale at each period in realized and unrealized gain (loss) on marketable securities. For the three months ended March 31, 2020 and 2019 we recorded $(53,152) and $9,524 of realized and unrealized gain (loss) on marketable and other securities. For the six months ended March 31, 2020 and 2019 we recorded $(115,162) and $(64,640) of realized and unrealized gain (loss) on marketable and other securities. The discontinued operations recorded a realized and unrealized gain (loss) of $361,835 and $(1,142,978), for the three and six months ended March 31, 2019, which is included in the net income (loss) from discontinued operations on the statement of operations.
 
For the three and six months ended March 31, 2020 we had an impairment on other securities of $600,000 as well as an impairment of $160,000 against other account receivable representing an investment other security that was to be received. (see Note 3 Marketable Securities and Investment Other Securities in the consolidated financial statements for more information).
 
 
41
 
 
Liquidity and Capital Resources
 
 We had cash and cash equivalents on hand of $14,835,699 and working capital of $19,092,846 at March 31, 2020 as compared to cash on hand of $4,689,966 and working capital of $12,033,157 at September 30, 2019. Our current assets increased approximately 58.1% at March 31, 2020 from September 30, 2019, and is primarily attributable to an increase in cash and inventory, offset by a decrease in accounts receivable, marketable and other securities, merchant reserve, prepaid expenses, and assets from discontinued operations. Our current liabilities increased approximately 56.1% at March 31, 2020 from September 30, 2019. This increase is primarily attributable to increases in accounts payable, accrued expenses, note payable and operating lease short term liability.
 
During the three and six months ended March 31, 2020 we used cash primarily to fund our operations.
 
We do not have any commitments for capital expenditures. We have a commitment for cumulative cash dividends at an annual rate of 8% payable monthly in arrears for the prior month to our preferred shareholders. We have multiple endorsement or sponsorship agreements for varying time periods up through December 2022 and provide for financial commitments from the Company based on performance/participation (see Note 13 Commitments and Contingencies). We have sufficient working capital to fund our operations.
 
Our goal from a liquidity perspective is to use operating cash flows to fund day to day operations and we have not met this goal as cash flow from operations has been a net use of $9,147,052 and $4,462,372 for six months ended March 31, 2020 and 2019, respectively.
 
On October 16, 2019 we closed a follow-on firm commitment underwritten public offering of shares of our 8.0% Series A Convertible Preferred Stock resulting in total net proceeds to us of $4,525,100. On January 15, 2020, we closed a follow-on firm underwritten public offering of shares of our common stock resulting in total net proceeds to us of $16,928,100. We are using the net proceeds from the offerings for brand development and expansion, advertising, marketing, and general working capital. In addition, as described earlier in this section, in April 2020 we received a PPP Loan of $1,456,100
 
Related Parties
 
As described in Note 9 in notes to our consolidated financial statements appearing elsewhere in this report, we have engaged in related party transactions. We have reported transactions with related parties within the consolidated financial statements as well as within the notes to the consolidated financial statements (see Note 9 Related Party Transactions in the consolidated financial statements for more information).
 
Critical accounting policies
 
The preparation of financial statements and related disclosures in conformity with US GAAP and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to our consolidated financial statements appearing elsewhere in this report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.
 
Please see Part II, Item 7 – Critical Accounting Policies appearing in our 2019 10-K for the critical accounting policies we believe involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.
 
Recent accounting pronouncements
 
Please see Note 1 –Organization and Summary of Significant Accounting Policies appearing in the consolidated financial statements included in this report for information on accounting pronouncements.
 
 
42
 
 
Off balance sheet arrangements
 
As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
 
 
 
 
 
 
 
 
 
 
 
43
 
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not applicable for a smaller reporting company.
 
ITEM 4.  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this report, our co-Chief Executive Officers and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information relating to our company, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our co-Chief Executive Officers and our Chief Financial Officer, to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
44
 
 
PART II - OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS.
 
As previously disclosed, effective November 8, 2019 we and certain of our subsidiaries (collectively, the “Level Parties”) entered into a Settlement Agreement and Mutual General Release Agreement with EEI Holdings, LLC, IM1 Holdings, LLC, Sandbox Properties, LLC (“Sandbox), kathy ireland Worldwide, Inc., B&B Bandwidth LLC, Erik Sterling and Jason Winters (collectively, the “kiWW Parties”), the terms of which provided, in part, that the parties agreed to transfer the accounts receivable of EE1 and the minority interest of both EE1 and IM1 to us and we agreed to have all rights to certain past contracts or customers for those entities assigned to the minority holders. Sandbox is affiliated with and managed by executives of kathy ireland Worldwide, Inc. As consideration, Sandbox was obligated to cause a total payment of $1,000,000 to be made to us, with $83,333.34 due on or before November 14, 2019 and the remaining amount due in equal installments of $83,334.34 by the 15th day of each month. On February 26, 2020, after notice of Sandbox’s non-payment of $83,333.34 due on February 15, 2020 and Sandbox’ continued failure to make such payment, we notified the kiWW Parties of a default. Upon this default, under the terms of the agreement the kiWW Parties are obligated to pay us 10% interest on the amount due and an administrative fee of $5,000.
 
The Settlement Agreement and Mutual General Release Agreement also contains a confidentiality clause limiting our ability to disclose certain terms of the agreement, including Sandbox’s obligation to pay us $1,000,000. On February 26, 2020 we also notified the kiWW Parties that the default triggered a reportable event by us. We reached this conclusion given the material amount owed to us by the kiWW Parties.
 
On April 29, 2020, we filed a lawsuit in the Superior Court of the State of California in and for Los Angeles Central District (Case No. 20STCV16290) against the kiWW Parties and certain of their affiliates asserting fraud, breach of written contract, fraudulent inducement, breach of agreement, negligent misrepresentation, breach of fiduciary duty, theft, violation of California Penal Code § 496(c), fraudulent conveyance, unjust enrichment and constructive trust. We are seeking actual, compensatory and consequential damages, together with an order violating defendants’ fraudulent transfers.
 
ITEM 1A.  RISK FACTORS.
 
We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Accordingly, we incorporate by reference the risk factors disclosed in Part I, Item 1A of our 2019 Form 10-K.
 
The coronavirus global pandemic has caused a significant disruption in retail commerce and may have a material adverse impact upon our financial condition and results of operations.
 
On March 11, 2020, the World Health Organization declared the current 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. These measures have had a significant adverse impact upon many sectors of the economy, including retail commerce. As a result of these circumstances, we have temporarily closed our corporate office and have altered work schedules at our warehouse and manufacturing facilities. In addition, many of our office personnel are working remotely. We are unable to predict when and how quickly we will be able to resume regular operations. While we are not able to estimate the full impact of the COVID-19 outbreak on our financial condition and results of operations, we expect that this situation will have a significant adverse impact on the Company’s results of operations for the third fiscal quarter of 2020 and possibly beyond. Should these conditions persist for a prolonged period beyond the third quarter, this may have a material adverse impact on our ultimate financial condition and liquidity.
 
Major disruptions to our logistics capability or to the operations of our key vendors or customers could have a material adverse impact on our operations.
 
Conditions caused by the COVID-19 pandemic could adversely affect our customers’ ability or willingness to purchase our products or services, delay prospective customers’ purchasing decisions, adversely impact our ability to provide or deliver products and on-site services to our customers, delay the provisioning of our offerings, or lengthen payment terms, all of which could adversely affect our future sales, operating results and overall financial performance.
 
 
45
 

A recession or long-term market correction as a result of COVID-19 could have a material impact on our business
 
While the potential economic impact brought by COVID-19 may be difficult to assess or predict, the pandemic has resulted in significant disruption of global financial markets, and a recession or long-term market correction resulting from the spread of COVID-19 could materially impact the value of our common stock, impact our access to capital and affect our business in the near and long-term.
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
None
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.
 
None.
 
ITEM 4.  MINE SAFETY DISCLOSURES.
 
Not applicable to our Company’s operations.
 
ITEM 5.  OTHER INFORMATION.
 
In April 2020 following our 2020 annual meeting of shareholders, our board of directors approved the consolidation of two previously constituted Board committees, the Compensation Committee and the Nominating and Corporate Governance Committee, into one consolidated committee titled the Compensation, Nominating and Corporate Governance Committee. In connection therewith, the Board adopted a new committee charter, a copy of which is posted on our corporate website at www.cbdmd.com. Following this action, the following independent directors were appointed to the committees of the Board, to serve at the pleasure of the board of directors:
 
DirectorAudit Committee MemberCompensation, Corporate Governance and Nominating Committee Member
   
Bakari Sellers
*
Peter J. Ghiloni
Scott G. Stephen
William F. Raines, III
*
 
*           
denotes Committee chairperson.
 
 
46
 
 
ITEM 6.                        EXHIBITS.
 

 
 Incorporated by Reference 
Filed or
Furnished
No. Exhibit Description Form Date Filed Number Herewith
  8-K 12/3/2018 2.1  
  10-Q 02/14/2019 2.2  
  10-Q 02/14/2019 2.3  
  10-Q 02/14/2019 2.4  
  10-Q 02/14/2019 2.5  
  1-A 9/18/17 2.1  
  1-A 9/18/17 2.2  
  1-A 9/18/17 2.3  
  1-A 9/18/17 2.4  
  1-A 9/18/17 2.5  
  1-A 9/18/17 2.6  
  8-K 2/28/20 10.1  
        Filed
        Filed
        Filed
        Filed
101 INS XBRL Instance Document       Filed
101 SCH XBRL Taxonomy Extension Schema       Filed
101 CAL XBRL Taxonomy Extension Calculation Linkbase       Filed
101 LAB XBRL Taxonomy Extension Label Linkbase       Filed
101 PRE XBRL Taxonomy Extension Presentation Linkbase       Filed
101 DEF XBRL Taxonomy Extension Definition Linkbase       Filed
 
 
 
47
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 cbdMD, INC.
   
May 15, 2020By:/s/ Martin A. Sumichrast
  Martin A. Sumichrast, Co-Chief Executive Officer, co-principal executive officer
 
   
May 15, 2020By:/s/ Raymond S. Coffman
  Raymond S. Coffman, Co-Chief Executive Officer, co-principal executive officer
 
 
May 15, 2020By:/s/ Mark S. Elliott
  Mark S. Elliott, Chief Operating Officer, Chief Financial Officer, principal financial and accounting officer
 
 
 
 
 
 
 
 
48