S-1/A: cbdMD Files for Resale of Up to 5,138,890 Shares Following Convertible Note Issuance

cbdMD, Inc. has filed a registration statement for the potential resale of up to 5,138,890 shares of its common stock by selling shareholders, stemming from a recent private placement involving convertible notes.

Summary

• cbdMD, Inc. has filed a prospectus relating to the potential sale of up to 5,138,890 shares of its common stock by selling shareholders.
• These shares are issuable pursuant to convertible notes issued to the selling shareholders on January 30, 2024.
• The company will not receive any proceeds from the sale of these shares by the selling shareholders.
• The common stock is listed on the NYSE American under the symbol YCBD, with the last reported sale price on March 18, 2024, being $0.77 per share.
• The selling shareholders may be considered underwriters, and any commissions or profits they receive may be deemed underwriting commissions.
• The company issued 8% Senior Secured Convertible Promissory Notes with a 20% Original Issue Discount, resulting in an aggregate principal amount of $1,541,666 from $1,250,000 gross proceeds.
• The notes are convertible into common stock at an initial conversion price of $0.684 per share, subject to adjustments and a $0.30 floor price.
• The company may prepay the notes at 125% of the principal amount, and the selling shareholders have the right to convert up to 100% of the prepayment amount.
• The selling shareholders' conversion rights are limited to prevent beneficial ownership exceeding 4.99% (potentially increasing to 9.99%), and they cannot receive shares exceeding 19.9% of the company's outstanding common stock if it breaches NYSE American rules.
• Shareholder approval is being sought to authorize the issuance of shares exceeding 20% of the outstanding common stock.

Sentiment

Score: 4

Explanation: The document contains a mix of positive and negative elements. The company has secured funding, but the structure of the financing and the potential for dilution raise concerns. The expansion into new product categories is a positive sign, but the regulatory challenges in the CBD industry remain a significant headwind.

Positives

• The company has secured $1,250,000 in gross proceeds through the issuance of convertible notes.
• The funds are intended for working capital and general corporate purposes.
• The company is actively working to simplify its capital structure, which it believes will unlock additional equity value.
• cbdMD's Paw CBD brand won a Pet Innovations award for its Dog Hip and Joint soft chews.
• cbdMD products received bronze awards at the Best in Biz Awards.
• The company launched its hempMD product line and expanded its retail reach into Sprouts Supermarkets.
• cbdMD launched a new functional mushroom line of products under the ATRx brand.

Negatives

• The company will not receive any proceeds from the resale of shares by the selling shareholders.
• The conversion of the notes could lead to dilution for existing shareholders.
• The company was unable to get the required votes needed to approve the amendment to convert the Series A Preferred stock to common stock through a shareholder vote to amend our Series A Preferred Stock designation.
• The company acknowledges the negative impact of the lack of a clear regulatory framework for CBD products.

Risks

• Investing in the company's securities involves a high degree of risk, and investors could lose their entire investment.
• The company is subject to continued listing standards of the NYSE American, and failure to meet these standards may result in delisting.
• Delisting could lead to a lack of trading market, reduced liquidity, decreased analyst coverage, and difficulty obtaining additional financing.
• The issuance of shares upon exercise of options, warrants, or conversion of notes and preferred stock may cause immediate and substantial dilution to existing shareholders.
• The company is seeking shareholder approval to amend its articles of incorporation to provide for the automatic conversion of all outstanding shares of Series A Preferred Stock on a 1 to 6 basis, which in the event such amendment is approved, would result in the issuance of an additional 30,000,000 shares of common stock.

Future Outlook

Management is focused on delivering positive earnings through product portfolio optimization, cost structure right-sizing, and marketing investments with a positive return on customer acquisition. The company is also expanding into categories with fewer regulatory hurdles, such as functional mushrooms.

Management Comments

• Management continues to be very focused on 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.
• 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.
• We continue to believe in the long term benefits of hemp-derived cannabinoids, but see a longer-term horizon for federal regulatory clarity.
• At our core, we believe in natural health and wellness solutions and we believe in the benefits derived from functional mushrooms in addition to hemp.

Industry Context

The company acknowledges the negative impact of the lack of a clear regulatory framework for CBD products, which is a common challenge for businesses in the CBD industry. The company's expansion into functional mushrooms reflects a broader trend of diversification in the health and wellness sector.

Comparison to Industry Standards

• The convertible note structure with a floating conversion price and beneficial ownership limitations is a common financing mechanism used by smaller public companies.
• The 20% original issue discount is relatively high, suggesting that the investors are taking on significant risk.
• The company's focus on cost reduction and marketing optimization is consistent with strategies employed by other companies in the competitive CBD market.
• The expansion into functional mushrooms is a strategic move to diversify revenue streams, similar to other companies in the health and wellness space that are exploring new product categories.

Stakeholder Impact

• Existing shareholders face potential dilution from the conversion of the notes.
• The company's employees and customers may benefit from the company's continued operations and expansion into new product categories.
• The selling shareholders have the opportunity to realize a return on their investment through the sale of the shares.
• The company's creditors may be impacted by the company's financial performance and ability to repay its debts.

Next Steps

• The company will seek shareholder approval to authorize the issuance of shares exceeding 20% of the outstanding common stock.
• The selling shareholders may offer and sell their shares of common stock from time to time.
• The company will continue to focus on optimizing its product portfolio, right-sizing its cost structure, and investing in marketing.
• The company will continue to expand into categories with fewer regulatory hurdles, such as functional mushrooms.

Key Dates

Keywords

cbdMD, convertible notes, common stock, selling shareholders, private placement, YCBD, dilution, NYSE American, registration statement, CBD