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 North Carolina corporation which we refer to as “Paw CBD”, Proline Global, LLC, a North Carolina limited liability company which we refer to as "Proline", and cbdMD Therapeutics LLC, a North Carolina limited liability company which we refer to as “Therapeutics”. In addition, “fiscal 2023” refers to the year ended September 30, 2023, “fiscal 2024” refers to the fiscal year ending September 30, 2024, “first quarter of 2023” refers to the three months ended December 31, 2022, “first quarter of 2024” refers to the three months ended December 31, 2023, "second quarter of 2023" refers to the three months ended March 31, 2023, "second quarter of 2024" refers to the three months ended March 31, 2024, "third quarter of 2023" refers to the three months ended June 30, 2023, and "third quarter of 2024" refers to the three months ended June 30, 2024.

 

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.

 

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:

 

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material risks associated with our overall business, including:

 

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our history of losses, potential liquidity concerns, and our ability to continue as a going concern;

 

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our reliance to market to key digital channels;

 

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our ability to acquire new customers at a profitable rate;

 

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our reliance on third party raw material suppliers and manufacturers; and

 

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our reliance on third party compliance with our supplier verification program and testing protocols

 

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material risks associated with regulatory environment for CBD, including:

 

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federal laws as well as FDA or DEA interpretation of existing regulation;

 

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state laws pertaining to industrial hemp and their derivatives;

 

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costs to us for compliance with laws and the risks of increased litigation; and

 

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possible changes in the use of CBD.

 

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material risks associated with the ownership of our securities, including;

 

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the risks for failing to comply with the continued listing standards of the NYSE American and reliance on the NYSE American to accept our Plan for continued listing;

 

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availability of sufficient liquidity;

 

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the designations, rights and preferences of our 8% Series A Cumulative Convertible Preferred Stock;

 

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our inability to pay dividends on our Series A Convertible Preferred Stock;

 

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ability to repay the Notes; and

 

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dilution upon the issuance of shares of common stock underlying outstanding Notes, warrants, options and the Series A Convertible Preferred Stock.

 

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 appearing in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 as filed with the Securities and Exchange Commission (the “SEC”) on December 12, 2023 and as amended on January 29, 2024 (the “2023 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.

 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

cbdMD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2024 AND SEPTEMBER 30, 2023

(Unaudited)

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2024 AND SEPTEMBER 30, 2023

(continued)

 

 

See Notes to Condensed Consolidated Financial Statements 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2024 AND 2023

(Unaudited)

 

 

See Notes to Condensed Consolidated Financial Statements 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2024 AND 2023

(Unaudited)

  

 

See Notes to Condensed Consolidated Financial Statements 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED JUNE 30, 2024 AND 2023

(Unaudited)

 

 

Supplemental Disclosures of Cash Flow Information:     

            

 

See Notes to Condensed Consolidated Financial Statements 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED JUNE 30, 2024

(Unaudited)

  

 

See Notes to Condensed Consolidated Financial Statements

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED JUNE 30, 2023

(Unaudited)

 

 

See Notes to Condensed Consolidated Financial Statements  

 

 

cbdMD, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2024 AND 2023 (unaudited)

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

cbdMD, Inc. (“cbdMD”, “we”, “us”, “our”, or the “Company”) is a North Carolina corporation formed on March 17, 2015 as Level Beauty Group, Inc. In November 2016 we changed the name of the Company to Level Brands, Inc. and on May 1, 2019 we changed the name of our Company to cbdMD, Inc. We operate from offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30.

 

There have been no material changes in the Company's significant accounting policies from those previously disclosed in the 2023 10-K.

 

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 2023 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.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries CBDI, Paw CBD, Proline and Therapeutics. All material intercompany transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

The Company’s condensed consolidated financial statements have been prepared in accordance with US GAAP and requires management to make estimates and assumptions that affect the 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 condensed consolidated financial statements include, but are not limited to, allowances for credit losses, inventory valuation reserves, expected sales returns and allowances, certain assumptions related to the valuation of investments other securities, acquired intangibles and long-lived assets and the recoverability of intangible and long-lived assets and income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities, and contingent liability is a material estimate. Actual results could differ from these estimates. The Company continues to monitor macroeconomic conditions to remain flexible and to optimize and evolve its business as appropriate.

 

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.

 

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Accounts Receivable

 

Accounts receivable are stated at cost less an allowance for credit losses, 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 credit losses is based on an evaluation of the receivables, past experience, current economic conditions, and other risks inherent in the receivables portfolio.

 

Merchant Receivable and Reserve

 

The Company primarily sells its products through the internet and has an arrangement to process customer payments with third-party payment processors and negotiate the fee based on the market. The arrangement with the payment processors requires that the Company pay a fee between 2.5% and 5.0% of the transaction amounts processed. Pursuant to this agreement, there can be a waiting period between 2 to 5 days prior to reimbursement to the Company, as well as a calculated reserve which some payment processors hold back. Fees and reserves can change periodically with notice from the processors. At June 30, 2024 and September 30, 2023, the receivable from payment processors included approximately $653,157 and $585,345, respectively, for the waiting period amount and is recorded as accounts receivable in the accompanying condensed consolidated balance sheet.

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. The cost of inventory includes product cost, freight-in, and production fill and labor (portions of which we outsource to third party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management’s analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. We assess inventory quarterly for slow moving products and potential impairments and at a minimum perform a physical inventory count annually near fiscal year end.

 

Property and Equipment

 

Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are five years for manufacturing equipment and automobiles and three years for software, computer, and furniture and equipment. The useful life for leasehold improvements are over the term of the lease, or the remaining economic life of the asset, whichever is shorter. 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.

 

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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.

 

The Company elected the fair value option under ASC 825 Fair Value Measurements for it’s Convertible notes. The convertible notes were initially recognized at fair value on the balance sheet. All subsequent changes in fair value, excluding the impact of the change in fair value related to instrument-specific credit risk are recorded in non-operating income. The changes in fair value related to instrument-specific credit risk is recorded through other comprehensive income (loss). See Note 12 for more information related to the convertible notes.

 

Revenue Recognition

 

Under ASC 606, Revenue from Contracts with Customers, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

 

Performance Obligations

 

Contract liabilities represent unearned revenues and are presented as deferred revenue or customer deposits on the condensed consolidated balance sheets.

 

Other than account receivable, Company has no material contract assets nor contract liabilities at June 30, 2024.

 

The following tables represent a disaggregation of revenue by sales channel:

 

		Three Months								Three Months
		Ended								Ended
		June 30,								June 30,
		2024				% of total				2023				% of total
E-commerce sales		$	3,937,930				76.1	%		$	5,000,261				81.7	%
Wholesale sales			1,235,948				23.9	%			1,119,119				18.3	%
Total Net Sales		$	5,173,878				100.0	%		$	6,119,380				100.0	%

 

		Nine Months								Nine Months
		Ended								Ended
		June 30,								June 30,
		2024				% of total				2023				% of total
E-commerce sales		$	11,987,654				80.3	%		$	14,796,326				80.2	%
Wholesale sales			2,938,147				19.7	%			3,648,291				19.8	%
Total Net Sales		$	14,925,801				100.0	%		$	18,444,617				100.0	%

 

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Cost of Sales 

 

The Company’s cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third-party providers, and outbound freight for the Company’s products sales. For the Company’s product sales, cost of sales also includes the cost of refurbishing products returned by customers that will be offered for resale, if any, and the cost of inventory write-downs associated with adjustments of held inventories to their net realizable value. These expenses are reflected in the Company’s consolidated statements of operations when the product is sold and net sales revenues are recognized or, in the case of inventory write-downs, when circumstances indicate that the carrying value of inventories is in excess of their net realizable value.

 

Income Taxes

 

The Company is a North Carolina corporation that is treated as a corporation for federal and state income tax purposes. CBDI, Therapeutics, and Paw CBD 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 Company and as of March 15, 2021, Therapeutics is also a wholly owned subsidiary and is a disregarded entity for tax purposes and its entire share of taxable income or loss is included in the tax return of the Company.

 

The Company accounts for income taxes pursuant to the provisions of the Accounting for Income Taxes topic of ASC 740 which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Company uses the inside basis approach to determine deferred tax assets and liabilities associated with its investment in a consolidated pass-through entity. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.

 

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 $1.6 million uninsured balance at June 30, 2024.

 

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 nine months ended June 30, 2024.

 

Earnings (Loss) Per Share

 

The Company uses ASC 260-10, Earnings Per Share for calculating the basic and diluted loss per share. The Company computes basic loss per share by dividing net loss and net 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.

 

Liquidity and Going Concern Considerations

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company experienced a loss of $3,547,327 for the nine months ended June 30, 2024, resulting in a working capital deficit of $567,610 at June 30, 2024.

 

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While the Company is taking strong action, believes in the viability of its strategy and path to profitability, and in its ability to raise additional funds, there can be no assurances to that effect.  The Company’s working capital position  may not be sufficient to support the Company’s daily operations for the twelve months subsequent to the issuance of these annual financial statements. The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability and the ability to acquire additional funding. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern within twelve months after the date that the annual financial statements are issued. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that  may result in the Company not being able to continue as a going concern.

 

 

Effective February 1, 2024 (the “Effective Date”), the Company entered into a Securities Purchase Agreement dated January 30, 2024 (the “Purchase Agreement”) with five institutional investors (the “Investors”) whereby the Investors advanced the Company an aggregate of $1,250,000 gross proceeds and the Company issued each Investor an 8% Senior Secured Original Issue 20% Discount Convertible Promissory Note, in the aggregate principal amount of $1,541,666 (the “Notes”). The Company is using the proceeds from the issuance of the Notes for working capital and general corporate purposes.

 

The Company elected the fair value option under ASC 825 Fair Value Measurements for the Notes. The Notes were initially recognized at fair value on the balance sheet. All subsequent changes in fair value, excluding the impact of the change in fair value related to instrument-specific credit risk are recorded in non-operating income. The changes in fair value related to instrument-specific credit risk is recorded through other comprehensive income (loss). See Note 12 for more information related to the Notes.

 

New Accounting Standards

 

The Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326) effective  October 1, 2023. This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost are presented at the net amount expected to be collected by using an allowance for credit losses. The Company evaluated the impacts of this standard and has determined that is does not have a material impact on the consolidated financial statements.

 

NOTE 2 – MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES

 

The Company has, from time to time, entered into contracts where a portion of the consideration provided by the counterparty in exchange for the Company’s services was common stock, options or warrants (an equity position). In these situations, upon invoicing the customer for the stock or other instruments, the Company recorded the receivable as accounts receivable other, and used the value of the stock or other instrument upon invoicing to determine the value. In determining fair value of marketable securities and investment other securities, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in our assessment of fair value. The Company determines the fair value of marketable securities and investment other securities based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the fair value hierarchy distinguishes between observable and unobservable inputs.

 

On April 7, 2022, CBD Industries, LLC entered into an asset sale agreement to sell substantially all its manufacturing assets to a subsidiary of Steady State, LLC ("Steady State"). The equipment sale is initially valued at approximately $1.8 million for accounting purposes, the sale price consisting of products to be provided to the Company under the manufacturing and supply agreement and $1.4 million of which the Company invested into Steady State in the form of an equity investment consistent with the terms of Steady State's completed series C financing. As of September 30, 2023, the Company impaired this investment by $700,000. The Company has classified this investment as Level 3 for fair value measurement purposes as there are no observable inputs and has included in non-current assets on the accompanying condensed consolidated balance sheets as the Company plans to hold this investment.

 

In valuing the investments, the Company used the value paid, which was the price offered to all third-party investors.

 

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NOTE 3 - INVENTORY

 

Inventory at June 30, 2024 and September 30, 2023 consists of the following:

 

		June 30,				September 30,
		2024				2023
Finished Goods		$	2,157,065			$	2,782,680
Inventory Components			1,377,837				1,397,034
Inventory Reserve			(308,987	)			(126,742	)
Total Inventory		$	3,225,915			$	4,052,972
Inventory prepaid			79,866				182,675
Total Inventory and Prepaid inventory		$	3,305,781			$	4,235,647

 

Abnormal amounts of idle facility expense, freight, handling costs, scrap and wasted material (spoilage) are expensed in the period they are in incurred and no material expenses related to these items occurred in the nine months ended June 30, 2024.

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment at June 30, 2024 and September 30, 2023 consisted of the following:

 

		June 30,				September 30,
		2024				2023
Computers, furniture and equipment		$	1,577,411			$	1,392,776
Manufacturing equipment			284,275				284,275
Leasehold improvements			487,081				487,081
Automobiles			-				11,087
			2,348,767				2,175,219
Less accumulated depreciation			(1,795,700	)			(1,458,640	)
Property and equipment, net		$	553,067			$	716,579

 

Depreciation expense related to property and equipment was $395,098 and $249,457 for the nine months ended June 30, 2024 and 2023, respectively.

 

NOTE 5 – INTANGIBLE ASSETS

 

Intangible Assets

 

Intangible assets as of June 30, 2024 and September 30, 2023 consisted of the following:

 

		June 30,				September 30,
		2024				2023
Trademark related to cbdMD		$	21,585,000			$	21,585,000
Trademark for HempMD			50,000				50,000
Technology Relief from Royalty related to DirectCBDOnline.com			667,844				667,844
Tradename related to DirectCBDOnline.com			749,567				749,567
Impairment of intangible assets			(17,405,000	)			(17,504,000	)
Amortization of definite lived intangible assets			(2,946,847	)			(2,329,321	)
Total		$	2,700,564			$	3,219,090

 

Amortization expense related to definite lived intangible assets was $1,400,603 and $1,105,630 for the nine months ended June 30, 2024 and 2023.

 

 

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NOTE 6 – CONTINGENT CONSIDERATION

 

Pursuant to a merger agreement entered into in 2018, the Company had a contractual obligation to issue 338,889 shares of its common stock, after approval by its shareholders, to the members of Cure Based Development, issued in two tranches 144,445 shares and 194,945 shares, both of which were subject to leak out provisions, and the unrestricted voting rights to 194,445 tranche of shares which vested over a five year period and were subject to a voting proxy agreement. 

 

The contractual obligations and earn out provision were accounted for as a contingent liability and fair value was 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 agreement also provided that an additional 338,889 Earnout Shares would be issued as part of the consideration, upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the closing date of the merger.

 

Aggregate Net Revenues		Shares Issued/ Each $ of Aggregate Net Revenue Ratio
$1 - $20,000,000		0.00423615
$20,000,001 - $60,000,000		0.002118075
$60,000,001 - $140,000,000		0.001059038

 

An aggregate of 271,405 Earnout shares were issued through September 30, 2023. There is no further Earnout obligation.

 

The Company determined the final Earnout shares to be issued were 19,818 and were issued on January 11, 2024. There is no further Earnout obligation.

 

NOTE 7 – RELATED PARTY TRANSACTIONS

 

None.  

 

NOTE 8 – SHAREHOLDERS’ EQUITY

 

Preferred Stock – The Company is authorized to issue 50,000,000 shares of preferred stock, par value $0.001 per share. In October 2019, the Company designated 5,000,000 of these shares as 8.0% Series A Cumulative Convertible Preferred Stock. Our 8.0% Series A Cumulative Convertible Preferred Stock ranks senior to our common stock for liquidation or dividend provisions and holders are entitled to receive cumulative cash dividends at an annual rate of 8.0% payable monthly in arrears for the prior month. The Company reviewed ASC 480 – Distinguishing Liabilities from Equity in order to determine the appropriate accounting treatment for the preferred stock and determined that the preferred stock should be treated as equity. There were 5,000,000 shares of 8.0% Series A Cumulative Convertible Preferred Stock issued and outstanding at June 30, 2024 and September 30, 2023.

 

The total amount of preferred dividends declared and accrued were $1,000,500 and $3,001,501 for the three and nine months ended June 30, 2024, respectively, and the total amount of preferred dividends declared and paid were $1,000,501 and $3,001,503 for the three and nine months ended June 30, 2023, respectively.

 

Common Stock – The Company is authorized to issue 150,000,000 shares of common stock, par value $0.001 per share. There were 3,759,433 and 2,960,573 shares of common stock issued and outstanding at June 30, 2024 and September 30, 2023, respectively. 

 

On March 2, 2023 Company entered into a purchase agreement (the "ELOC") with Keystone Capital Partners, LLC (“Keystone”), pursuant to which Keystone committed to purchase up to 281,934 of shares of our common stock. Upon the execution of the ELOC, The Company issued 2,616 shares of common stock as "Commitment Shares" to Keystone as consideration for its commitment to purchase shares of our common stock under the ELOC. An additional 6,104 Commitment Shares were issued 180 days after the date of the ELOC. The 281,934 shares of the Company's common stock were registered for resale and may be issued under the ELOC or sold by us to Keystone at our discretion from time to time over a 12 month period commencing April 1, 2023. The purchase price for the shares that the Company sold to Keystone under the ELOC fluctuated based on the price of the Company's common stock. Keystone purchased an aggregate of 180,955 shares (64,218 of which were purchases during the nine months ended June 30, 2024)  under the ELOC, which has expired.

 

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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.

 

Preferred stock transactions:

 

The Company had no preferred stock transactions in the three and nine months ended June 30, 2024 and 2023.

 

Common stock transactions:

 

In the nine months ended June 30, 2024:

 

In April 2024, the Company issued an aggregate of 714,229 shares of common stock pursuant to the partial conversion of certain principal and interest related to the Notes.

 

In March 2024, the company issued 16,000 of restricted stock awards to the Company’s board of directors.  The shares vest quarter on fourth on June 30, 2024, one fourth, on September 30, 2024, one fourth on December 31, 2024, and one fourth on March 31, 2025. The stock awards were valued at the fair market price of $13,760 and will amortize over the individual vesting periods.

 

In January 2024, the Company issued 64,218 shares under our ELOC.

 

In January 2024, the Company issued 19,818 shares as part of the final Earnout.

 

Stock option transactions:

 

In the nine months ended June 30, 2024:

 

On April 1, 2024, the Company granted its board of directors an aggregate of 8,000 common stock options. The options vested immediately, have a strike price of $0.86 and a five-year term. The Company has recorded a total prepaid expense of approximately $4,300 and intends to amortize the expense over the 12-month board term.  

 

The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the nine months ended June 30, 2024 and 2023:

 

		June 30,				June 30,
		2024				2023
Exercise price			$ 0.537				10.3555 -12.60600
Risk free interest rate			4.34	%			3.93% - 4.71%
Volatility			107.21%				106.48% - 106.51%
Expected term (in years)			2.5				2.5 - 4
Dividend yield		None				None

 

Warrant Transactions:

 

The Company has no warrant transactions in the three or nine months ended June 30, 2024.

 

 

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NOTE 9 – STOCK BASED COMPENSATION

 

The fair value of each time-based award is estimated on the date of grant using the Black-Scholes option valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model for equity awards with time-based vesting provisions granted during the year.

 

The following table summarizes stock option activity under both plans for the nine months ended June 30, 2024:

 

										Weighted-average
										remaining				Aggregate
						Weighted-average				contractual term				intrinsic value
		Number of shares				exercise price				(in years)				(in thousands)
Outstanding at September 30, 2023			41,765			$	144.43				3.65			$	-
Granted			8,000				-				-				-
Exercised			-				-				-				-
Forfeited			(2,447	)			166.06				-				-
Outstanding at June 30, 2024			47,318				119.00				3.36				-
Exercisable at June 30, 2024			45,651			$	122.98				3.39			$	-

 

As of June 30, 2024, there was approximately $3,925 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 0.75 years.

 

Restricted Stock Award transactions:

 

In the nine months ended June 30, 2024:

 

In March 2024, the company issued 16,000 of restricted stock awards to the Company’s board of directors.  The shares vest quarter on fourth on June 30, 2024, one fourth, on September 30, 2024, one fourth on December 31, 2024, and one fourth on March 31, 2025. The stock awards were valued at the fair market price of $4,296 upon issuance and will amortize over the individual vesting periods.

 

In the nine months ended June 30, 2023:

 

In February of 2023, the Company issued 445 of restricted stock awards to the Company’s board of directors. The shares vested quarterly, one fourth on June 30, 2023, one fourth on September 30, 2023, one fourth on December 31, 2023, and one fourth on March 31, 2024. The stock awards were valued at the fair market price of $5,660 upon issuance and will amortize over the individual vesting periods.

 

In January 2023, the Company issued 3,889 shares to a group of employees.  The shares vested upon issuance, having a fair market value upon issuance of $40,950.

 

In December 2022, the Company issued 1,112 shares of restricted common stock to an employee.  556 shares vested upon issuance and the Company recorded a total expense of $6,250.  556 shares vest based on meeting certain direct to consumer revenue performance hurdles prior to December 2024.

   

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NOTE 10 - WARRANTS

 

Transactions involving the Company equity-classified warrants for the nine months ended June 30, 2024 and 2023 are summarized as follows:

 

										Weighted-average
										remaining				Aggregate
						Weighted-average				contractual term				intrinsic value
		Number of shares				exercise price				(in years)				(in thousands)
Outstanding at September 30, 2023			50,309			$	37.75				4.07			$	-
Forfeited			(1,352	)			337.50				-				-
Outstanding at June 30, 2024			48,957				29.48				3.42				-
Exercisable at June 30, 2024			48,957			$	29.48				-			$	-

 

The following table summarizes outstanding common stock purchase warrants as of June 30, 2024:

 

						Weighted-average
		Number of shares				exercise price			Expiration
Exercisable at $176.06 per share			1,079				176.06		October 2024
Exercisable at $56.25 per share			822				56.25		January 2025
Exercisable at $168.75 per share			3,199				168.75		June 2026
Exercisable at $168.30 per share			3,357				168.30		December 2025
Exercisable at $2.52 per share			40,500				2.52		April 2028
			48,957			$	37.75

 

NOTE 11 – COMMITMENTS AND CONTINGENCIES

 

Commencing August 2019 the Company’s executive offices were located at 8845 Red Oak Blvd, Charlotte, NC (the “Red Oak Facilities”) which we sub-leased under a sublease agreement dated July11, 2019 which expires December 2026 (the “Red Oak Sublease”).  We received a default notice from HSKL, Inc., the sub landlord, in September 2023. Effective March 20, 2024 we entered into a License Agreement, dated as of March 14, 2024, by and between cbdMD, Inc. and HSKL (the “License Agreement”) and Lease Forbearance Agreement, dated as of March 14, 2024, by and between cbdMD, Inc. and HSKL (the “Forbearance Agreement”). Under the License Agreement we have granted HSKL a license to possess and use a portion of the Red Oak Facilities until the earlier of (i) the termination of the Forbearance Agreement and (ii) July 31, 2024 (the “Termination Date”). The termination of the License Agreement will result in termination of the Red Oak Sublease. Pursuant to the Forbearance Agreement HSKL has agreed to forbear from proceeding to exercise its remedies against us under the Red Oak Sublease, and the declaration of default related to past due rent in consideration of the following payments to HSKL: $80,000 upon the execution of the Forbearance Agreement, followed by four monthly payments of $40,000. HSKL’s forbearance shall extend to the Termination Date and HSKL shall dismiss (without prejudice) a Complaint in Summary Ejectment filed in Mecklenburg County, North Carolina on February 27, 2024. In the event of our breach of any of the conditions of the Forbearance Agreement, HSKL’s obligation to forbear shall cease, and HSKL may immediately exercise any and all of its rights or remedies at law, in equity or under the Red Oak Sublease.  The Company has made all payments required under the Forbearance Agreement and License Agreement and is working with HSKL to resolve for the back due rent through the termination date.

       

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NOTE 12 – NOTE PAYABLE

 

Effective February 1, 2024 (the “Effective Date”), the Company entered into a Securities Purchase Agreement dated January 30, 2024 (the “Purchase Agreement”) with five institutional investors (the “Investors”) whereby the Investors advanced the Company an aggregate of $1,250,000 gross proceeds and the Company issued each Investor an 8% Senior Secured Original Issue 20% Discount Convertible Promissory Note, in the aggregate principal amount of $1,541,666 (the “Notes”). The Company intends to use the proceeds from the issuance of the Notes for working capital and general corporate purposes.

 

Each Note bears interest of 8% per annum and matures on July 30, 2025. The Note is convertible into shares of common stock at any time following the date of issuance at the Investor’s option at an initial conversion price of $0.684 per share (the “Conversion Price”), subject to certain adjustments. If 30 calendar days, 60 calendar days, 90 calendar days, 120 calendar days, or 180 calendar days after the effective date of the Registration Statement (as defined below) (the “Adjustment Dates”), the Conversion Price then in effect is higher than the Market Conversion Price then in effect on the Adjustment Date, the Conversion Price shall automatically decrease to the Market Conversion Price (as defined under the Note). The Conversion Price is subject to a $0.30 floor price. As of the filing date of this report, the effective Conversion Price is $0.615.

 

Furthermore, at any time after the issuance of the Note, the Company may, after written notice to the Investor, prepay any portion or all outstanding Principal Amount by paying an amount equal to 125% of the Principal Amount then being prepaid (representing a 25% prepayment premium payable to the Investor which shall not constitute a principal repayment); provided that a Registration Statement registering all of the Conversion Shares issuable under the Note shall have been declared effective. If the Company elects to prepay the Note, the Investor shall have the right, upon written notice to the Company within five trading days of the Investor’s receipt of a Prepayment Notice, to convert into common stock, up to 100% of the Prepayment Amount at the Conversion Price, upon the terms provided in the Note.

 

Upon the occurrence of any Event of Default (as defined in the Note), the Interest rate shall automatically be increased to the lesser of 22% per annum or the highest amount permitted by law. In the event that such Event of Default is subsequently cured (and no other Event of Default then exists), the adjustment shall cease to be effective as of the day immediately following the date of such cure; provided that the Interest as calculated and unpaid at such increased rate during the continuance of such Event of Default shall continue to apply to the extent relating to the days after the occurrence of such Event of Default through and including the date of such cure of such Event of Default.

 

In addition, upon the occurrence of Event of Default, which has not been cured within any applicable cure period, the Company shall be obligated to pay to the Investor the Mandatory Default Amount, which Mandatory Default Amount shall be payable to the Investor on the date the Event of Default giving rise thereto occurs. In the event the Note shall be converted following the occurrence of an Event of Default, the Investor shall have the option to convert the Mandatory Default Amount, upon the terms provided in the Note.

 

The Notes are secured by a first priority security interest as evidenced by and to the extent set forth in a Security Agreement, by and between the Company and the Investors.

 

The Company elected the fair value option under ASC 825 Fair Value Measurements for the Notes. The Notes were initially recognized at a fair value of $2,702,000 on the balance sheet as of March 31,2023. All subsequent changes in fair value, excluding the impact of the change in fair value related to instrument-specific credit risk are recorded in non-operating income. The changes in fair value related to instrument-specific credit risk is recorded through other comprehensive income (loss).

 

The overall change in fair value of the Notes during the quarter ended June 30, 2024 was a decrease of $859,963. The overall change in principal value related to the conversion of Notes to commons stock during the quarter ended June 30,2024 was a decrease of  $464,037. As of  June 30, 2024, total fair value of the Notes is $1,378,000, of which $1,076,963 represents the total principal outstanding.

 

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NOTE 13 – LEASES

 

The Company has lease agreements for its corporate offices and warehouse with lease periods expiring between 2024 and 2026. ASC 842 requires the recognition of leasing arrangements on the consolidated balance sheet as right-of-use assets and liabilities pertaining to the rights and obligations created by the leased assets. The Company determines whether an arrangement is a lease at inception and classify it as finance or operating. All of the Company’s leases are classified as operating leases. The Company’s leases do not contain any residual value guarantees. See Note 11 for information regarding commitments and contingencies related to the Company's corporate office operating lease.

 

Right-of-use lease assets and corresponding lease liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term. Since the interest rate implicit in our lease arrangements is not readily determinable, the Company determined an incremental borrowing rate for each lease based on the approximate interest rate on a collateralized basis with similar remaining terms and payments as of the lease commencement date to determine the present value of future lease payments. The Company’s lease terms may include options to extend or terminate the lease.

 

In addition to the monthly base amounts in the lease agreements, the Company is required to pay real estate taxes, insurance and common area maintenance expenses during the lease terms.

 

Lease costs on operating leases are recognized on a straight-line basis over the lease term and included as a selling, general and administrative expense in the condensed consolidated statements of operations.

 

Components of operating lease costs are summarized as follows:

 

		Three Months				Nine Months
		Ended				Ended
		June 30,				June 30,
		2024				2024
Total Operating Lease Costs		$	332,124			$	996,373

 

Supplemental cash flow information related to operating leases is summarized as follows:

 

		Three Months				Nine Months
		Ended				Ended
		June 30,				June 30,
		2024				2024
Cash paid for amounts included in the measurement of operating lease liabilities		$	355,239			$	1,063,804

  

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As of June 30, 2024, our operating leases had a weighted average remaining lease term of 2.56 years and a weighted average discount rate of 4.66%.

 

Future minimum aggregate lease payments under operating leases as of June 30, 2024 are summarized as follows:

 

For the year ended September 30,
2024		$	357,806
2025			1,159,949
2026			1,092,297
Thereafter			280,565
Total future lease payments			2,890,617
Less interest			(194,372	)
Total lease liabilities		$	2,696,245

 

NOTE 14 – LOSS PER SHARE

 

The following table sets forth the computation of basic and diluted earnings per share for the following periods:

 

		Three Months Ended								Nine Months Ended
		June 30,				June 30,				June 30,				June 30,
		2024				2023				2024				2023
Basic and diluted:
Net Income (loss) continuing operations		$	459,737			$	(1,770,404	)		$	(3,547,327	)		$	(7,063,270	)
Preferred dividends accrued			1,000,500								3,001,501
Preferred dividends paid			-				1,000,501				-				3,001,503
Net loss attributable to cbdMD Inc. common shareholders			(540,763	)			(2,770,904	)			(6,548,828	)			(10,064,773	)
Shares used in computing basic and diluted earnings per share			3,592,969				2,379,633				3,561,884				2,360,908
Loss per share Basic
Basic and diluted earnings per share			(0.15	)			(1.16	)			(1.84	)			(4.26	)

 

At June 30, 2024, 112,831 potential shares underlying options, unvested RSUs and warrants as well as 185,223 potential shares underlying series A preferred shares were excluded from the shares used to calculate diluted loss per share as their inclusion would be anti-dilutive. At  June 30, 2023, 94,948 potential shares underlying options, unvested RSUs and warrants as well as 185,223 potential shares underlying series A preferred shares, and 40,404 a360 shares subject to certain vesting requirement as well as total 283,593 of available shares and remaining commitment share under the ELOC were excluded from the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.

 

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NOTE 15 – INCOME TAXES

 

The Company has 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 quarters ending December 31, 2019, March 31, 2020, and June 30, 2020, provided for a wide range of potential annual effective rates. At September 30, 2023 the Company recorded a net deferred tax asset of zero as the cumulative net deferred tax asset had a full valuation on it and there was not enough positive evidence that would warrant recognizing the benefit of the net deferred tax asset. In addition, the net indefinite lived deferred tax items were a deferred tax asset so there was not any recognition of a deferred tax liability related to indefinite lived deferred tax liabilities. At June 30, 2024, the Company determined the same circumstances to be true and therefore recorded a net deferred tax asset of zero.

 

NOTE 16 – SUBSEQUENT EVENTS

 

None.

 

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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 three and nine months ended June 30, 2024 and the three and nine months ended June 30, 2023 should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties such as our plans, objectives, expectations and intentions.

 

Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements because of several factors, including those set forth under the Part I, Item 1A, Risk Factors and Business sections in our 2023 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.

 

Our Company

 

General

 

We own and operate the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and functional mushroom brand ATRx Labs. We believe that we are an industry leader producing and distributing hemp derived solutions including broad spectrum CBD products and full spectrum CBD products. Our mission is to enhance our customer’s overall quality of life while bringing cannabinoid and mushroom education, awareness and accessibility of high quality and effective products to all. We source cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States. Our innovative broad spectrum formula utilizes one of the purest hemp extracts, containing CBD, CBG and CBN, while eliminating the presence of tetrahydrocannabinol (THC). Non-THC is defined as below the level of detection using validated scientific analytical methods. Our full spectrum and Delta 9 products contain a variety of cannabinoids and terpenes in addition to CBD while maintaining small amounts of THC that fall below the level of detection and are within the limits set in the 2018 Farm Act. In addition to our core brands, we also operate cbdMD Therapeutics, LLC to capture the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications and Proline Global that houses some of our newer brands.

 

Our cbdMD brand of products includes an array of high-grade, premium every day and functional CBD products, including tinctures; gummies; topicals; capsules; and sleep, focus and calming aids.  In addition we have clinical based claims and industry leading strength and concentrations to drive product efficacy.

 

 

 

 

Our Paw CBD brand of products includes veterinarian-formulated products including tinctures, chews, topicals products in varying strengths and formulas. Paw CBD products have undergone the National Animal Safety Council’s rigorous audit and meet their Quality Seal standard.

 

 

Our ATRx brand was developed using the power of functional mushrooms to provide consumers a complementary natural ingredient solution for immunity, focus, digestive health, cognitive and mood benefits.

 

 

cbdMD, Paw CBD and ATRx products are distributed through our e-commerce websites, third party e-commerce sites, select distributors and marketing partners as well as a variety of brick-and-mortar retailers. 

 

Recent Developments

 

Management continues to be very focused on our goal of delivering positive earnings through a combination of optimizing our product portfolio, right-sizing our cost structure and investing in marketing that will provide positive return on customer acquisition.  During fiscal 2023 we made significant changes to our marketing and overall operations including re-platforming our website to significantly reduce our operating costs.  Ongoing revenue decreases offset a majority of the infrastructure savings, however we significantly reduce the Company’s cash burn during the year.

 

The Company remained very focused on revenue improvements during the third quarter. While year over year its revenue was down, we gained 18 % sequentially and grew both direct to consumer and wholesale revenue.  Management continues to focus on growing revenue and operating with lean infrastructure costs.

 

cbdMD expanded its retail reach in December 2023 by launching several products throughout Sprouts Supermarkets and more recently added to Door Dash as a customer.

 

During December 2023, the Company launched its new functional mushroom line of products with its Super Gummy under the ATRx brand on ATRxlabs.com.  At our core, we are committed to natural health and wellness solutions, recognizing the benefits of functional mushrooms alongside hemp. During late April 2024 we launched our 4 SKU ATRx Platinum line into GNC.   Management made a strategic decision to work with GNC on an exclusive initial launch of the Platinum line to help offset some legacy inventory issues tied to a $1 million cbdMD product order from March of 2022.  Working with GNC on this launch provides the brand a springboard into national distribution and we believe helped accelerate ATRx brand awareness.  Additionally, we have a wider store distribution footprint as ATRx products do not have the same geographic limitations as CBD products within the GNC footprint.

 

 

During March 2024 we added personnel to our wholesale team, bringing in a VP of Wholesale with significant CBD industry experience.  We are seeing wholesale opportunities begin to pick up and we are optimistic a number of international opportunities we have been working on for the last several quarters will generate revenues by the end of the calendar year.  At the end of the quarter, we made additional performance marketing hire to help reinvigorate our direct-to-consumer business and deepen our performance driven culture.

 

During March 2024, we attempted to automatically convert the Series A Preferred stock to common stock through a shareholder vote to amend our Series A Preferred Stock designation. We were unable to get the required votes needed to approve the amendment.  We believe the combined market capitalization of both our common and Series A Preferred is being impacted due to our current capital structure.  Our goal is to simplify our capital structure and we believe it will help unlock additional equity value and open up more strategic activity for the Company.

 

During March 2024, we entered into agreements with our sub-landlord for the Red Oak Sublease. As a result of these agreements, we anticipate an estimated $20,000 reduction monthly operating costs in utilities and maintenance related to the Red Oak Sublease that will roll off by the end of the third fiscal quarter and we fulfilled the obligation of the agreements in July 2024, terminating future obligations under the lease, saving approximately a further $85,000 in rent on a monthly basis. While we satisfied this agreement and no longer have a future lease obligation, we continue to negotiate with the landlord on back rent due.

 

We continue to make headway on our infrastructure costs and efficiencies, critical to the endeavor of an EBITDA profitable business. Early during the third fiscal quarter we enacted certain cost savings initiatives and as of August 2024, believe we have achieved over $200,000 in monthly savings over our March 2024. This includes shedding our legacy Red Oak executive office lease effective August 1, 2024, headcount reductions, vendor consolidation and replacement, and other initiatives to lower product and overhead costs. We do anticipate increasing marketing spend during the fourth fiscal quarter to offset some of these savings.

 

Growth Strategies

 

We continued to pursue many strategies to grow our revenues and expand the scope of our business in fiscal 2024 and beyond:

 

●

Product Innovation: Our goal is to provide our customers superior functional based products with greater efficacy claims and absorption. We regularly assess and evaluate our product portfolio, and devote resources to ongoing research and development processes with the goal of improving our product offerings. During fiscal 2023 we focused on expanding some of our core line of products.  This included adding to our NSF for Sport product line, as well as our line of Delta 9 gummies and microdose products. In November of 2023 we launched our new CBG tincture and during the first quarter of fiscal 2024 we launched our new nootropic mushroom line under the ATRx brand.   We have a pipeline of cannabinoid and non-cannabinoid products and formulation upgrades to launch during the next few quarters.

 

●

Expand our revenue channels: During fiscal year 2023, our wholesale business continued to face macro industry contraction trends that we believe are tied to low-dose, high-priced products. We continued to pursue relationships with traditional retail accounts and believe our top brand awareness and effective marketing position us as a preferred CBD partner for key traditional retail accounts as this channel has continued to normalize. During the first quarter of fiscal 2024 we launched several SKUs into Sprouts retail footprint. In April 2024 we added Door Dash as a customer. We continue to assess our product channel fit and working with retailers and distributors alike to further grow this channel.

 

●

International Expansion: We continue to explore sales in markets outside of the United States. We generally partner with local wholesalers and local legal counsel who can help navigate the laws and regulatory requirements within their jurisdiction. We continue to pursue key wholesale accounts in a number of international markets and are gaining market share in Central and South America through our sanitary registration approvals. We are also continuing to expand our E-commerce business to consumers in the United Kingdom (UK) which was expanded onto Amazon’s platform during fiscal year 2023 and are continuing to grow this channel quarterly.

 

●

Cultivate Additional Brands: We continue to operate and attempt to grow the Paw CBD business. During fiscal 2024 we have launched our nootropic mushroom line under the ATRx brand. We believe there is ongoing opportunities with these brands to focus on education, cross-selling and customer retention.

 

 

●

Acquisitions: We evaluate acquisitions (M&A) where we believe (i) there is an accretive customer base that can lower our cost of customer acquisitions through either a complementary direct to consumer base or wholesale channels, or (ii) the target has a profitable business or easily attainable cost synergies that can quickly help contribute and accelerate profitability of our Company. While the Company continues to evaluate M&A opportunities, as of the date of this report we currently do not have any pending or potential acquisitions. There have been numerous opportunities, however, our current capital structure, specifically the overhang of our Series A Preferred stock, has to this point stalled prospects.

 

Results of operations

 

The following tables provide certain selected consolidated financial information for the periods presented:

 

		Three Months Ended June 30,
		2024				2023				Change
Total net sales		$	5,173,878			$	6,119,380			$	(945,502	)
Cost of sales			1,770,364				2,273,839				(503,475	)
Gross profit as a percentage of net sales			65.8	%			62.8	%			2.9	%
Operating expenses			3,785,542				5,669,193				(1,883,651	)
Operating loss from operations			(382,028	)			(1,823,652	)			1,441,624
Decrease on contingent liability			-				44,771				(44,771	)
Net loss before taxes			459,737				(1,770,404	)			2,230,141
Net loss attributable to cbdMD Inc. common shareholders		$	(540,763	)		$	(2,770,904	)		$	2,230,141

 

		Nine Months Ended June 30,
		2024				2023				Change
Total net sales		$	14,925,801			$	18,444,617			$	(3,518,816	)
Cost of sales			5,384,061				7,015,803				(1,631,742	)
Gross profit as a percentage of net sales			63.9	%			62.0	%			2.0	%
Operating expenses			12,540,595				18,699,293				(6,158,698	)
Operating loss from operations			(2,998,855	)			(7,270,479	)			4,271,624
Decrease on contingent liability			-				153,771				(153,771	)
Net loss before taxes			(3,547,327	)			(7,063,270	)			3,515,943
Net loss attributable to cbdMD Inc. common shareholders		$	(6,548,828	)		$	(10,064,773	)		$	3,515,945

 

We record product sales primarily through two main delivery channels, direct to consumers via our E-commerce sales and direct to wholesalers utilizing our internal sales team. The following table provides information on the contribution of net sales by type of sale to our total net sales.

 

		Three Months								Three Months
		Ended								Ended
		June 30,								June 30,
		2024				% of total				2023				% of total
E-commerce sales		$	3,937,930				76.1	%		$	5,000,261				81.7	%
Wholesale sales			1,235,948				23.9	%		$	1,119,119				18.3	%
Total Net Sales		$	5,173,878							$	6,119,380

 

		Nine Months								Nine Months
		Ended								Ended
		June 30,								June 30,
		2024				% of total				2023				% of total
E-commerce sales		$	11,987,654				80.3	%		$	14,796,326				80.2	%
Wholesale sales		$	2,938,147				19.7	%			3,648,291				19.8	%
Total Net Sales		$	14,925,801							$	18,444,617

 

 

Net Sales

 

We had total net sales of $5.2 million and $6.1 million for the three months ended June 30, 2024 and 2023, respectively, resulting in a decrease in net sales of $0.9 million or 16% quarter over quarter. This decrease is partially attributable to a decrease of $1.0 million in e-commerce sales year over year while wholesale sales increased by $0.1 million. Sequentially, revenue grew by 15.4%. Our team continues to focus on all areas of driving revenue improvement. Despite the overall category facing challenges, we remain optimistic about our product's market positioning in fiscal 2024 and into 2025. Revenues appear to be holding and with continued cost reductions, we are designing the Company to be profitable at significantly lower revenue levels than in the past.

 

Cost of sales

 

Our cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third party providers, and freight for our product sales. Our cost of sales as a percentage of net sales was 35% and 35% for three months ended June 30, 2024 and 2023, respectively. This decrease in cost of sales is mostly attributed to ongoing cost saving initiatives. We anticipate future cost of sales to be in line with our historical averages prior to the March 2024 quarter.

 

Operating expenses

 

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

 

Consolidated Operating Expenses

 

The following tables provide information on our operating expenses for the three and nine months ended June 30, 2024 and 2023:

 

		Three Months				Three Months
		Ended				Ended
		June 30,				June 30,
		2024				2023				Change
Staff related expense		$	1,443,800			$	1,714,416			$	(270,616	)
Accounting/legal expense			176,148				221,777				(45,629	)
Professional outside services			130,214				253,960				(123,746	)
Advertising/marketing/social media/events/tradeshows/sponsorships/affiliate commissions			903,490				1,879,134				(975,644	)
Merchant fees			171,993				196,354				(24,361	)
R&D and regulatory			10,108				24,566				(14,458	)
Rent and utilities			362,083				381,630				(19,547	)
Non-cash stock compensation			9,321				61,017				(51,696	)
Intangibles Amortization			172,842				277,354				(104,512	)
Depreciation			114,912				98,225				16,687
All other expenses			290,631				560,760				(270,129	)
Totals		$	3,785,542			$	5,669,193			$	(1,883,651	)

 

 

		Nine Months				Nine Months
		Ended				Ended
		June 30,				June 30,
		2024				2023				Change
Staff related expense		$	4,215,224			$	6,004,252			$	(1,789,028	)
Accounting/legal expense			743,427				790,556				(47,129	)
Professional outside services			443,790				684,148				(240,358	)
Advertising/marketing/social media/events/tradeshows/sponsorships/affiliate commissions			3,276,111				5,128,803				(1,852,692	)
Merchant fees			515,096				603,405				(88,309	)
R&D and regulatory			16,835				156,999				(140,164	)
Rent and utilities			1,165,289				1,203,338				(38,048	)
Non-cash stock compensation			16,835				315,982				(299,147	)
Intangibles Amortization			518,526				832,063				(313,537	)
Depreciation			343,527				300,726				42,801
Non-cash stock compensation related to terminated contractual obligation			-				884,892				(884,892	)
All other expenses			1,285,935				1,794,129				(508,194	)
Totals		$	12,540,595			$	18,699,293			$	(6,158,697	)

 

Our overall operating expenses decreased by approximately $1.9 million or 24% for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. The year over year decrease was primarily driven by management's continued ongoing efforts to reduce our cost structure including decreases in staff related expenses, advertising, marketing, sponsorships and affiliate commission expenses, professional, accounting and legal expenses, and a reduction of intangibles amortization. As previously discussed, we have a number of initiatives in place with a target to further reduce G&A costs, including the elimination of the Red Oak Lease. While we are working to reduced fixed overhead costs, we do anticipate an increase in our advertising and marketing expenses for the fourth fiscal quarter.

 

For the nine months ending June 2024, year to date operating expenses decreased by $6.1 million as management continues to focus on operational efficiencies across the board.

 

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.

 

Other income and other non-operating expenses

 

We also record income and expenses associated with non-operating items. The material components of those are set forth below.

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

To supplement the Company's unaudited interim consolidated financial statements presented in accordance with US GAAP, the Company uses certain non-GAAP measures of financial performance. Non-GAAP financial measures are not prepared in accordance with, or as an alternative to US GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company's performance that either excludes or includes amounts, or is subject to adjustment that have such an effect, that are not normally excluded or included in the most directly comparable financial measure that is calculated and presented in accordance with US GAAP. Adjusted EBITDA as presented below is a non-GAAP measure.

 

cbdMD defines Adjusted EBITDA as Earnings Before Interest, Taxes, Depreciation and Amortization excluding (1) stock based compensation; (2) one time inventory adjustments; (3) mergers and acquisitions and financing transaction expenses; (4) one-time severance accruals; (5) non-cash trade credits; and (6) non-cash accelerated amortization of expense related to terminated IT contracts.

 

Our management uses and relies on Adjusted EBITDA, which is a non-GAAP financial measure. We believe that management, analysts and shareholders benefit from referring to the following non-GAAP financial measure to evaluate and assess our core operating results from period-to-period after removing the impact of items that affect comparability. Our management recognizes that the non-GAAP financial measures have inherent limitations because of the excluded items described below.

 

We have included a reconciliation of our non-GAAP financial measure to the most comparable financial measures calculated in accordance with GAAP. We believe that providing the non-GAAP financial measures, together with the reconciliation to GAAP, helps investors make comparisons between cbdMD and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measure and the corresponding GAAP measure provided by each company under applicable rules of the Securities and Exchange Commission.

 

 

 

 

Adjusted EBITDA for the three and nine months ended June 30, 2024 and June 30, 2023 is as follows:

 

		Three months				Three months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		Three Months Ended June 30,				Three Months Ended June 30,				Nine Months Ended June 30,				Nine Months Ended June 30,
		2024				2023				2024				2023
(Unaudited)
GAAP (loss) from operations		$	(382,028	)		$	(1,823,652	)		$	(2,998,855	)		$	(7,270,479	)
Adjustments:
Depreciation & Amortization			287,754				375,579				862,053				1,132,789
Employee and director stock compensation (1)			9,321				61,016				16,835				315,982
Mergers and Acquisitions and financing transaction expense (2)			-				-				58,239				-
Accrual for severance			-				-				-				129,761
Non-cash expense incurred as a credit (3)			-				-				439,926				-
Non-cash accelerated amortization of expense related to terminated IT contracts			-				-				72,101				-
a360 non-cash trade credit			-				778,703				-				887,039
Non-GAAP adjusted EBITDA		$	(84,953	)		$	(608,354	)		$	(1,549,701	)		$	(4,804,908	)

  

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

(2) Represents expenses incurred in relation to M&A and financing activities during the nine months ended June 30, 2024.

(3) Represents non-cash expense incurred as a credit provided to GNC to replace expired product.

 

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 2023 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.

 

Off balance sheet arrangements

 

As of the date of this report, we have no undisclosed off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

 

ITEM 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 principal executive officer and principal accounting officer has 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 principal executive officer and principal accounting 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.

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

None.

 

ITEM 1A. RISK FACTORS.

 

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Accordingly, in addition to the disclosure below, we incorporate by reference the risk factors disclosed in Part I, Item 1A of our 2023 10-K and the risk factor disclosed in our Form 10-Q for the period ended December 31, 2023. See also "Liquidity and Capital Resources" above.

 

The Company has received notification from the NYSE American LLC that the Company is no longer in compliance with NYSE American’s continued listing standards and has submitted a Plan to the NYSE American to regain compliance; in the event the NYSE American does not accept the Plan or we do not ultimately regain compliance, our securities could ultimately be delisted from the NYSE American.

 

On June 5, 2024, we received notification (the “Notice”) from the NYSE American that the Company is no longer in compliance with NYSE American’s continued listing standards. Specifically, the letter states that the Company is not in compliance with the continued listing standard set forth in Section 1003(a)(ii) of the NYSE American Company Guide. Section 1003(a)(ii) requires a listed company to have stockholders’ equity of $4 million or more if the listed company has reported losses from continuing operations and/or net losses in three of its four most recent fiscal years. The Company reported stockholders equity of $3.1 million as of March 31, 2024, and losses from continuing operations and/or net losses in three of its four most recent fiscal years ended September 30, 2023.  The Company submitted a plan of compliance (the “Plan”) on July 5, 2024 addressing how it intends to regain compliance with the continued listing standards by December 5, 2025 and we expect a response from the NYSE American in mid August 2024. If the NYSE American accepts the Company’s Plan, the Company will be able to continue its listing during the Plan period and will be subject to continued periodic review by the NYSE American staff. If the Plan is not accepted, or is accepted but the Company is not in compliance with the continued listing standards by December 5, 2025 or if the Company does not make progress consistent with the Plan during the Plan period, the Company will be subject to delisting procedures as set forth in the NYSE American Company Guide.  The Company is committed to undertaking a transaction or transactions in the future to achieve compliance with the NYSE American’s requirements. However, there can be no assurance that the Company will be able to achieve compliance with the NYSE American’s continued listing standards within the required timeframe.

 

While the Notice has no immediate impact on the listing of the Company’s shares of common stock or Series A Preferred Stock, which will continue to be listed and traded on the NYSE American during this period, subject to the Company’s compliance with the other listing requirements of the NYSE American, if the Common Stock and Preferred Stock ultimately were to be delisted for any reason, it could negatively impact the Company by (i) reducing the liquidity and market price of the Company’s Common Stock and Preferred Stock; (ii) reducing the number of investors willing to hold or acquire the Common Stock and Preferred Stock, which could negatively impact the Company’s ability to raise equity financing; (iii) limiting the Company’s ability to use a registration statement to offer and sell freely tradable securities, thereby preventing the Company from accessing the public capital markets; and (iv) triggering an event of default under the Company’s outstanding Senior Secured Convertible Promissory Notes.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

Except for those unregistered securities previously disclosed in reports filed with the SEC, we have not sold any securities without registration under the Securities Act during the period covered by this report. 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable to our Company’s operations.

 

 

ITEM 5. OTHER INFORMATION.

 

The Auditor Firm ID for our external auditors, Cherry Bekaert LLP, is 677.

 

 

ITEM 6. EXHIBITS.

				Incorporated by Reference						Filed or Furnished
No.		Exhibit Description		Form		Date Filed		Number		Herewith
2.1		Merger Agreement dated December 3, 2018 by and among Level Brands, Inc., AcqCo, LLC, cbdMD LLC and Cure Based Development, LLC		8-K		12/3/18		2.1
2.2		Articles of Merger dated December 20, 2018 as filed with the Secretary of State of Nevada merging AcqCo, LLC with and into Cure Based Development, LLC		10-Q		2/14/19		2.2
2.3		Articles of Merger dated December 20, 2018 as filed with the Secretary of State of North Carolina merging AcqCo, LLC with and into Cure Based Development, LLC		10-Q		2/14/19		2.3
2.4		Articles of Merger dated December 20, 2018 as filed with the Secretary of State of Nevada merging Cure Based Development, LLC with an into cbdMD LLC		10-Q		2/14/19		2.4
2.5		Articles of Merger dated December 20, 2018 as filed with the Secretary of State of North Carolina merging Cure Based Development, LLC with an into cbdMD LLC		10-Q		2/14/19		2.5
2.6		Addendum No. 1 to Agreement and Plan of Merger dated March 31, 2021		8-K		4/1/21		10.1
3.1		Articles of Incorporation		1-A		9/18/17		2.1
3.2		Articles of Amendment to the Articles of Incorporation – filed April 22, 2015		1-A		9/18/17		2.2
3.3		Articles of Amendment to the Articles of Incorporation – filed June 22, 2015		1-A		9/18/17		2.3
3.4		Articles of Amendment to the Articles of Incorporation – filed November 17, 2016		1-A		9/18/17		2.4
3.5		Articles of Amendment to the Articles of Incorporation – filed December 5, 2016		1-A		9/18/17		2.5
3.6		Articles of Amendment to Articles of Incorporation		8-K		4/29/19		3.7
3.7		Articles of Amendment to the Articles of Incorporation including the Certificate of Designations, Rights and Preferences of the 8.0% Series A Cumulative Convertible Preferred Stock		8-A		10/11/19		3.1(f)
3.8		Articles of Amendment of Articles of Incorporation, as amended, of cbdMD, Inc. effective April 24, 2023 - reverse stock split		8-K		4/27/23		3.1
3.9		Bylaws, As amended		1-A		9/18/17		2.6

 

 

31.1		Certification of Principal Executive Officer and Principal Financial Officer (Section 302)								Filed
32.1		Certification of Principal Executive Officer and Principal Financial Officer (Section 906)								Furnished*
101.INS		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document								Filed
101.SCH		Inline XBRL Taxonomy Extension Schema Document								Filed
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document								Filed
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document								Filed
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document								Filed
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document								Filed
104		Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101)								Filed

 

+ Exhibits and/or schedules have been omitted.  The Company hereby agrees to furnish to the staff of the Securities and Exchange Commission upon request any omitted information.

* This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

 

Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our stockholders who make a written request to our Corporate Secretary at cbdMD, Inc. 2101 Westinghouse Blvd, Suite A, Charlotte, NC 28273.

  

 

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 signed on the registrant’s behalf by a duly authorized officer of the registrant and by the principal financial or chief accounting officer of the registrant.

 

 

	cbdMD, INC.
August 14, 2024	By:	/s/ T. Ronan Kennedy
		T. Ronan Kennedy, Chief Executive Officer and
		principal executive officer
August 14, 2024	By:	/s/ T. Ronan Kennedy
		T. Ronan Kennedy, Chief Financial Officer and
		principal financial officer
August 14, 2024		/s/ Brad Whitford
		Brad Whitford, Chief Accounting Officer