10-Q 1 ycbd20240331_10q.htm FORM 10-Q ycbd20240331_10q.htm
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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended March 31, 2024

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from __________________ to _______________

 

Commission file number 001-38299

 

ycbd_10qimg5.jpg
 

cbdMD, INC.

(Exact Name of Registrant as Specified in its Charter)

 

North Carolina

 

47-3414576

State or Other Jurisdiction of Incorporation or Organization

 

I.R.S. Employer Identification No.

   

 

2101 Westinghouse Blvd., Suite A, Charlotte, NC 

28273

Address of Principal Executive Offices

 

Zip Code

 

704-445-3060

Registrant’s Telephone Number, Including Area Code

 

 

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

common

YCBD

NYSE American

8% Series A Cumulative Convertible Preferred Stock

YCBDpA

NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for

the past 90 days. Yes ☒     No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.

 

See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated Filer

Smaller reporting company

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

3,869,082 shares of common stock are issued and outstanding as of May 15, 2024.

 



 

 

 

TABLE OF CONTENTS

 

   

Page No

 
         

PART I-FINANCIAL INFORMATION

 
   

ITEM 1.

Condensed Consolidated Financial Statements.

 

5

 
         

ITEM 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

27

 
         

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

35

 
         

ITEM 4.

Controls and Procedures.

 

35

 
   

PART II - OTHER INFORMATION

 
         

ITEM 1.

Legal Proceedings.

 

36

 
         

ITEM 1A.

Risk Factors.

 

36

 
         

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

36

 
         

ITEM 3.

Defaults Upon Senior Securities.

 

36

 
         

ITEM 4.

Mine Safety Disclosures.

 

36

 
         

ITEM 5.

Other Information.

 

36

 
         

ITEM 6.

Exhibits.

 

37

 
 

 

 

 

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, and "second quarter of 2024" refers to the three months ended March 31, 2024.

 

On April 12, 2023, the Company effected a reverse stock split at a ratio of one-for-forty-five, effective as of April 24, 2023 (the "Reverse Stock Split"). Unless otherwise indicated, all share numbers in this report, including shares of common stock and all securities convertible into, or exercisable for, shares of common stock, give effect to the Reverse Stock Split.

 

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:

 

 

material risks associated with our overall business, including:

 

 

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

 

our reliance to market to key digital channels;

 

our ability to acquire new customers at a profitable rate;

 

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

 

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

 

 

material risks associated with regulatory environment for CBD, including:

 

 

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

 

state laws pertaining to industrial hemp and their derivatives;

 

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

 

possible changes in the use of CBD.

 

 

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

 

  the risks for failing to comply with the continued listing standards of the NYSE American;
 

availability of sufficient liquidity;
 

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

 

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

 

dilution upon the issuance of shares of common stock underlying outstanding convertible 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

March 31, 2024 AND SEPTEMBER 30, 2023

(Unaudited)

 

 

  

(Unaudited)

     
  

March 31,

  

September 30,

 
  

2024

  

2023

 

Assets

        
         

Current assets:

        

Cash and cash equivalents

 $2,105,396  $1,797,860 

Accounts receivable, net of allowance for credit losses of $179,419 and $42,180, respectively

  868,217   1,216,090 

Inventory

  3,174,005   4,052,972 

Inventory prepaid

  277,794   182,675 

Prepaid sponsorship

  52,078   70,061 

Prepaid expenses and other current assets

  932,770   750,383 

Total current assets

  7,410,260   8,070,041 
         

Other assets:

        

Property and equipment, net

  667,979   716,579 

Operating lease assets

  2,766,290   3,350,865 

Deposits for facilities

  132,203   138,708 

Intangible assets

  2,873,406   3,219,090 

Investment in other securities, noncurrent

  700,000   700,000 

Total other assets

  7,139,878   8,125,242 
         

Total assets

 $14,550,138  $16,195,283 

 

See Notes to Condensed Consolidated Financial Statements

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2024 AND SEPTEMBER 30, 2023

 

(continued)

 

  

(Unaudited)

     
  

March 31,

  

September 30,

 
  

2024

  

2023

 

Liabilities and shareholders' equity

        
         

Current liabilities:

        

Accounts payable

 $1,291,306  $1,906,319 

Accrued expenses

  1,282,028   629,648 

Accrued dividends

  2,668,000   667,000 

Deferred revenue

  468,472   187,793 

Operating leases – current portion

  1,226,764   1,277,089 

Note payable

  -   2,492 

Total current liabilities

  6,936,570   4,670,341 
         

Long term liabilities:

        

Convertible notes

  2,702,000   - 

Other long term liabilities

  -   9 

Operating leases - long term portion

  1,824,721   2,403,286 

Contingent liability

  -   90,363 

Total long term liabilities

  4,526,721   2,493,658 
         

Total liabilities

  11,463,291   7,163,999 
         

Commitments and Contingencies (Note 11)

          
         

cbdMD, Inc. shareholders' equity:

        

Preferred stock, authorized 50,000,000 shares, $0.001

        

par value, 5,000,000 and 5,000,000 shares issued and outstanding, respectively

  5,000   5,000 

Common stock, authorized 150,000,000 shares, $0.001

        

par value, 3,045,204 and 2,960,573 shares issued and outstanding, respectively

  3,045   2,961 

Additional paid in capital

  183,456,639   183,387,095 

Comprehensive other expense

  (6,000)  - 

Accumulated deficit

  (180,371,836)  (174,363,772)

Total cbdMD, Inc. shareholders' equity

  3,086,847   9,031,284 
         

Total liabilities and shareholders' equity

 $14,550,138  $16,195,283 

 

See Notes to Condensed Consolidated Financial Statements 

 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE and Six MONTHS ENDED March 31, 2024 and 2023

(Unaudited)

 

   

Three months

   

Three months

   

Six Months

   

Six Months

 
   

Ended

   

Ended

   

Ended

   

Ended

 
   

March 31,

   

March 31,

   

March 31,

   

March 31,

 
   

2024

   

2023

   

2024

   

2023

 
                                 

Gross Sales

  $ 4,816,444     $ 6,584,666     $ 10,192,075     $ 12,825,191  

Allowances

    (439,926 )     (344,646 )     (440,152 )     (499,954 )

Total Net Sales

    4,376,518       6,240,020       9,751,923       12,325,237  

Cost of sales

    1,795,790       2,224,512       3,613,698       4,741,964  

Gross Profit

    2,580,728       4,015,508       6,138,225       7,583,273  
                                 

Operating expenses

    4,131,719       5,416,151       8,755,053       13,030,097  

Loss from operations

    (1,550,991 )     (1,400,643 )     (2,616,828 )     (5,446,824 )

(Increase) decrease of contingent liability

    4,828       48,000       74,580       109,000  

(Increase) decrease in fair value of convertible debt

    (1,446,000 )     -       (1,446,000 )     -  

Other income

    -       17,787       -       49,543  

Interest expense

    (18,399 )     (1,946 )     (18,817 )     (4,583 )

Loss before provision for income taxes

    (3,010,562 )     (1,336,802 )     (4,007,065 )     (5,292,864 )
                                 

Net Loss

    (3,010,562 )     (1,336,802 )     (4,007,065 )     (5,292,864 )

Preferred dividends

    1,000,500       1,000,500       2,001,000       2,001,002  
                                 

Net Loss attributable to cbdMD, Inc. common shareholders

  $ (4,011,062 )   $ (2,337,302 )   $ (6,008,065 )   $ (7,293,866 )
                                 

Net Loss per share:

                               

Basic earnings per share

    (1.35 )     (1.74 )     (2.03 )     (5.43 )

Diluted earnings per share

    (1.35 )     (1.74 )     (2.03 )     (5.43 )

Weighted average number of shares Basic:

    2,961,057       1,345,589       2,961,000       1,343,394  

Weighted average number of shares Diluted:

    2,961,057       1,345,589       2,961,000       1,343,394  

 

See Notes to Condensed Consolidated Financial Statements 

 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE THREE and Six MONTHS ENDED March 31, 2024 and 2023

(Unaudited)

  

   

Three months

   

Three months

   

Six Months

   

Six Months

 
   

Ended

   

Ended

   

Ended

   

Ended

 
   

March 31,

   

March 31,

   

March 31,

   

March 31,

 
   

2024

   

2023

   

2024

   

2023

 
                                 

Net Loss

  $ (3,010,562 )   $ (1,336,802 )   $ (4,007,065 )   $ (5,292,864 )

Comprehensive Loss

    (3,010,562 )     (1,336,802 )     (4,007,065 )     (5,292,864 )
                                 

Other Comprehensive income

  $ (6,000 )   $ -     $ (6,000 )   $ -  

Preferred dividends

    (1,000,500 )     (1,000,500 )     (2,001,000 )     (2,001,002 )

Comprehensive Loss attributable to cbdMD, Inc. common shareholders

  $ (4,017,062 )   $ (2,337,302 )   $ (6,014,065 )   $ (7,293,866 )

 

See Notes to Condensed Consolidated Financial Statements 

 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE Six MONTHS ENDED March 31, 2024 and 2023

(Unaudited)

 

   

Six Months

   

Six Months

 
   

Ended

   

Ended

 
   

March 31,

   

March 31,

 
   

2024

   

2023

 

Cash flows from operating activities:

               

Net Loss

  $ (4,007,065 )   $ (5,292,864 )

Adjustments to reconcile net loss to net cash used by operating activities:

               

Stock based compensation

    2,852       96,216  

Restricted stock expense

    992       100,249  

Write off of prepaid assets due to termination of contractual obligation

    -       884,892  

Issuance of stock for services

    -       1,459,193  

Intangibles amortization

    345,684       554,709  

Depreciation

    228,615       100,112  

Increase (decrease) in contingent liability

    (74,580 )     (109,000 )

Increase (decrease) in fair value of convertible debt

    1,446,000       -  

Amortization of operating lease asset

    584,574       556,646  

Changes in operating assets and liabilities:

               

Accounts receivable

    301,132       286,278  

Deposits

    6,505       105,898  

Inventory

    878,967       135,176  

Prepaid inventory

    (95,119 )     100,307  

Prepaid expenses and other current assets

    (164,404 )     (1,544,308 )

Accounts payable and accrued expenses

    449,287       (855,872 )

Operating lease liability

    (628,891 )     (580,325 )

Deferred revenue / customer deposits

    (84,497 )     203,341  

Collection on discontinued operations accounts receivable

    -       1,375  

Cash used by operating activities

   

(809,948

)     (3,797,977 )

Cash flows from investing activities:

               

Purchase of property and equipment

   

(180,015

)     (74,980 )

Other Securities

    -       1,000,000  

Cash flows from investing activities

    (180,015 )     925,020  

Cash flows from financing activities:

               

Proceeds from issuance of common stock

    50,000       -  

Note payable

    1,247,499       (127,725 )

Preferred dividend distribution

    -       (2,001,000 )

Deferred Issuance costs

    -       -  

Cash flows from financing activities

    1,297,499       (2,128,725 )

Net increase (decrease) in cash

    307,536       (5,001,682 )

Cash and cash equivalents, beginning of period

    1,797,860       6,720,234  

Cash and cash equivalents, end of period

  $ 2,105,396     $ 1,718,552  

 

Supplemental Disclosures of Cash Flow Information:     

            

   

2024

   

2023

 
                 

Cash Payments for:

               

Interest expense

  $

18,817

    $

2,638

 
                 
Non-cash financial/investing activities:                
Preferred dividends accrued but not paid   $ 2,001,000     $ -  

 

See Notes to Condensed Consolidated Financial Statements 

 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE six months ended March 31, 2024

(Unaudited)

 

                                         
    Common Stock     Preferred Stock     Other     Additional                  
                            Comprehensive     Paid in     Accumulated          
   

Shares

   

Amount

   

Shares

   

Amount

   

Income

   

Capital

   

Deficit

      Total  

Balance, September 30, 2023

    2,960,573     $ 2,961       5,000,000     $ 5,000     $ -     $ 183,387,095     $ (174,363,772 )   $ 9,031,284  

Issuance of Common stock

    483       -       -       -       -       -       -      

-

 

Issuance of options for share based compensation

    -       -       -       -       -       1,772       -       1,772  

Issuance of restricted stock for share based compensation

    -       -       -       -       -       689       -       689  

Preferred dividend declared, not paid

    -       -       -       -       -       -       (1,000,501 )     (1,000,501 )

Net Loss

    -       -       -       -       -       -       (996,501 )     (996,501 )

Balance, December 31, 2023

    2,961,056     $ 2,961       5,000,000     $ 5,000     $ -     $ 183,389,556     $ (176,360,774 )   $ 7,036,743  

Issuance of Common stock

    19,930       20       -       -       -       15,763       -       15,783  

Issuance of options for share based compensation

    -       -       -       -       -       1,080       -       1,080  

Issuance of restricted stock for share based compensation

    -       -       -       -       -       303       -       303  

Change in fair value of debt related to credit risk

    -       -       -       -       (6,000 )     -       -       (6,000 )

Issuance of Common stock - Keystone

    64,218       64       -       -       -       49,936       -       50,000  

Preferred dividend declared, not paid

    -       -       -       -       -       -       (1,000,500 )     (1,000,500 )

Net Loss

    -       -       -       -       -       -       (3,010,562 )     (3,010,562 )

Balance, March 31, 2024

    3,045,204     $ 3,045       5,000,000     $ 5,000     $ (6,000 )   $ 183,456,639     $ (180,371,836 )   $ 3,086,847  

 

See Notes to Condensed Consolidated Financial Statements

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE six months ended March 31, 2023

(Unaudited)

 

                                   

Additional

                 
   

Common Stock

   

Preferred Stock

   

Paid in

   

Accumulated

         
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Deficit

   

Total

 

Balance, September 30, 2022

    1,348,125     $ 1,348       5,000,000     $ 5,000     $ 178,841,646     $ (147,423,563 )   $ 31,424,431  

Issuance of Common Stock

    1,038       1       -       -       (1 )     -       -  

Issuance of options for share based compensation

    -       -       -       -       79,446       -       79,446  

Issuance of restricted stock for share based compensation

    -       -       -       -       43,449       -       43,449  

Preferred dividend

    -       -       -       -       -       (1,000,502 )     (1,000,502 )

Net Loss

    -       -       -       -       -       (3,956,062 )     (3,956,062 )

Balance, December 31, 2022

    1,349,163     $ 1,349       5,000,000     $ 5,000     $ 178,964,539     $ (152,380,127 )   $ 26,590,761  

Issuance of Common Stock

    8,417       8       -       -       (8 )     -       -  

Issuance of options for share based compensation

    -       -       -       -       16,770       -       16,770  

Issuance of restricted stock for share based compensation

    -       -       -       -       56,801       -       56,801  

Issuance of Common stock - A360

    94,277       94       -       -       1,399,906       -       1,400,000  

Issuance of Common stock - DCO

    2,223       2       -       -       29,998       -       30,000  

Issuance of Common stock - Keystone

    2,616       3       -       -       29,190       -       29,193  

True up of fraction shares resulting from reverse split

    -       1       -       -       -       -       -  

Preferred dividend

    -       -       -       -       -       (1,000,500 )     (1,000,500 )

Net Loss

    -       -       -       -       -       (1,336,802 )     (1,336,802 )

Balance, March 31, 2023

    1,456,696     $ 1,457       5,000,000     $ 5,000     $ 180,497,196     $ (154,717,429 )   $ 25,786,223  

 

See Notes to Condensed Consolidated Financial Statements  

 

 

cbdMD, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE three and six months ended March 31, 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.

 

On December 20, 2018 (the “Closing Date”), the Company, and its newly organized wholly owned subsidiaries AcqCo, LLC and cbdMD LLC (“CBDI”), completed a two-step merger (the “Mergers”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). Upon completion of the Mergers, CBDI survived and operates the prior business of Cure Based Development. As consideration for the Mergers in April of 2019, the Company issued 338,889 shares of our common stock to the members of Cure Based Development, of which unrestricted voting rights to 194,445 of the shares vested over a five-year period, as well as to issue another 338,889 shares of our common stock (the “Earnout Shares”) in the future upon certain earnout goals (the “Earnout Rights”) being achieved within five years from the closing of the Mergers.

 

The Company owns and operates the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD as well as the functional mushroom brand ATRx. The Company sources cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States. CBD is a natural substance produced from the hemp plant. The products manufactured by and for the Company comply with the 2018 Farm Bill - our full spectrum products contain trace amounts of tetrahydrocannabinol ("THC") under the 0.3% by dry weight limit in the 2018 Farm Act while our broad spectrum products are non-psychoactive as they do not contain detectable levels of THC.

 

On March 15, 2021 cbdMD formed a new wholly owned subsidiary, cbdMD Therapeutics, LLC (“Therapeutics”) for the purposes of isolating and quantifying the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications.

 

The 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. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2023 as reported in the 2023 10-K have been omitted.

 

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.

 

12

 

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. As of March 31, 2024 and September 30, 2023, we had an allowance for credit losses of $179,419 and $42,180, respectively.

 

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 March 31, 2024 and September 30, 2023, the receivable from payment processors included approximately $498,096 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.

 

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.

 

13

 

Intangible Assets

 

The Company's intangible assets consist of trademarks and other intellectual property, all of which were previously accounted for in accordance with Accounting Standards Codification (ASC) Topic 350, Intangibles – Goodwill and Other. The Company employed the non-amortization approach to account for purchased intangible assets having indefinite lives. Under the non-amortization approach, intangible assets having indefinite lives were not amortized into the results of operations, but instead were reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value. We previously performed an annual impairment analysis each fiscal year on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis included a qualitative assessment to determine if it was necessary to perform the quantitative impairment test. In performing a qualitative assessment, we reviewed events and circumstances that could affect the significant inputs used to determine if the fair value was less than the carrying value of the intangible assets. If a quantitative analysis was necessary, we would analyze various aspects including revenues from the business, associated with the intangible assets. In addition, intangible assets would be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. The Company analyzed a variety of factors on its business to determine if a circumstance could trigger an impairment loss, and, at the time and based on the information then known, had determined that is it was more likely than not that an impairment loss had occurred.

 

The Company now accounts for its trademarks in accordance with Accounting Standards Codification (ASC) Topic 360, Property, Plant and Equipment. The Company began amortizing its trademarks over 20 years beginning  January 1, 2022 and would perform impairment tests as prescribed by ASC 360, which states that impairment testing should be completed whenever events or changes in circumstances indicate that the asset group's carrying value  may not be recoverable. If there are indications that the asset group's carrying value  may not be recoverable, there are two further steps involved in long-lived asset impairment testing. Step I of the impairment test, as per ASC 360, involves estimating the recoverable amount of the asset group and determining the potential for impairment. Step II of the impairment test, as per ASC 360, if necessary, involves quantifying the fair value of the asset group. During July of fiscal 2023, the Company determined that based on regulatory uncertainty and ongoing Company performance it was prudent to change the amortization of the “cbdMD” and “directCBDonline” trademarks to 5 years and “hempMD” trademark to 10 years.  This became a triggering event for an impairment test under ASC360 which resulted in an impairment of the intangibles in  July 2023.  As of the end of the fourth quarter of fiscal 2023, a significant decline in market capitalization of both classes of equity triggered a subsequent impairment test, resulting in additional impairment during the fourth quarter of fiscal 2023.

 

Contingent Liability

 

A significant component of the purchase price consideration for the Company’s acquisition of Cure Based Development includes a fixed number of future shares to be issued as well as a variable number of future shares to be issued based upon the post-acquisition entity reaching certain specified future revenue targets, as further described in Note 6. The Company made a determination of the fair value of the contingent liabilities as part of the valuation of the assets acquired and liabilities assumed in the business combination.

 

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.

 

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Performance Obligations

 

A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The Company meets that obligation when it has shipped products which have been ordered to the customer. The Company has reviewed its various revenue streams for its other contracts under the five-step approach. At March 31, 2024, the Company has no unfulfilled performance obligations.

 

Allocation of Transaction Price

 

In the Company’s current business model, it does not have contracts with customers which have multiple elements as revenue is driven purely by online product sales or purchase order-based product sales.

 

Revenue Recognition

 

The Company records revenue from the sale of its products when its customer obtains control, which is upon shipping (and is typically FOB shipping) which is when our performance obligation is met. Net sales are comprised of gross revenues less product returns, trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions. These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company currently offers a 60-day, money back guarantee, a loyalty program as well as a subscription program.

 

Disaggregated Revenue

 

The Company’s product revenue is generated primarily through two sales channels, E-commerce sales (formerly referred to as consumer sales) and wholesale sales. The Company believes that these categories appropriately reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors.

 

A description of the Company’s principal revenue generating activities are as follows:

 

 

-

E-commerce sales - consumer products sold through the Company’s online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due prior to the date of shipment; and

  

 

 

-

Wholesale sales - products sold to the Company’s wholesale customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms vary and can typically be 30 days from the date control over the product is transferred to the customer.

 

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 March 31, 2024.

 

15

 

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

 

  

Three Months

      

Three Months

     
  

Ended

      

Ended

     
  

March 31,

      

March 31,

     
  

2024

  

% of total

  

2023

  

% of total

 
                 

E-commerce sales

 $3,625,719   82.8% $4,889,860   78.4%

Wholesale sales

  750,799   17.2%  1,350,160   21.6%

Total Net Sales

 $4,376,518   100.0% $6,240,020   100.0%

 

  

Six Months

      

Six Months

     
  

Ended

      

Ended

     
  

March 31,

      

March 31,

     
  

2024

  

% of total

  

2023

  

% of total

 
                 

E-commerce sales

 $8,049,724   82.5% $9,796,064   79.5%

Wholesale sales

  1,702,199   17.5%  2,529,173   20.5%

Total Net Sales

 $9,751,923   100.0% $12,325,237   100.0%

 

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. As of October 1, 2019, CBDI and Paw CBD were wholly owned subsidiaries and are disregarded entities for tax purposes and their entire share of taxable income or loss is included in the tax return of the Company and as of March 15, 2021, Therapeutics is also a wholly owned subsidiary and is a disregarded entity for tax purposes and its entire share of taxable income or loss is included in the tax return of the Company.

 

The Company accounts for income taxes pursuant to the provisions of the Accounting for Income Taxes topic of 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 $1.3 million uninsured balance at March 31, 2024 and a $1.2 million uninsured balance at September 30, 2023.

 

Concentration of credit risk with respect to receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management considers these customer receivables to represent normal business risk. The Company did not have any customers that represented a significant amount of our sales for the three and six months ended March 31, 2024.

 

Stock-Based Compensation

 

The Company accounts for its stock compensation under the ASC 718-10-30, Compensation - Stock Compensation using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.

 

The Company uses the Black-Scholes model for measuring the fair value of options and warrants. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods. The Company recognizes forfeitures when they occur.

 

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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.

 

On February 16, 2023, we held an annual meeting of stockholders. At the annual meeting, our stockholders approved an amendment to our articles of incorporation, as amended, to effect a reverse stock split of our issued and outstanding shares of common stock by a ratio of between one-for-twenty to one-for-fifty, inclusive, with the exact ratio to be set at the discretion of our board of directors, at any time after approval of the amendment and prior to February 16, 2024. On April 12, 2023, the board effected a reverse stock split at a ratio of one-for-forty-five, effective as of April 24, 2023 (the "Reverse Stock Split"). Unless otherwise indicated, all share numbers in this report, including shares of common stock and all securities convertible into, or exercisable for, shares of common stock, give effect to the Reverse Stock Split.

 

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 $4,007,065 for the six months ended March 31, 2024, resulting in a reduction of net working capital of $203,308.

 

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.

 

 

Convertible Notes

 

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.

 

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.

 

In September 2020, the Company purchased a membership interest in Adara Sponsor LLC for $250,000, which along with proceeds from other investors was utilized as an investment in Adara Acquisition Corporation (“Adara”), a newly organized blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination (a “SPAC”). On  January 13, 2021, the Company executed second tranche subscriptions agreements and funded the remaining $750,000. On June 22, 2022, the Company executed a transfer agreement with affiliates of Adara Sponsor, LLC whereby the Company's interest would be transferred to the affiliates of Adara Sponsor, LLC upon Adara's acquisition of Alliance Entertainment, Inc. (the "Target") in consideration of the Company's original purchase price. As a result of the SEC litigation against our former CEO, the Target provided a demand to Adara that it required cbdMD and our former Chief Executive Officer to dispose of our interests in Adara Sponsor, LLC as a condition of proceeding with any business combination. In December 2022, Adara filed its definitive proxy to approve the acquisition and query shareholders redemption. Effective February 10, 2023, the Company completed the Membership Interest Transfer Agreement with Blystone & Donaldson, LLC, and Mr. Thomas Finke (collectively, the “Transferees”) dated June 22, 2022. Pursuant to the terms of the agreement, the Company sold its entire ownership interest in Adara Sponsor, LLC, to the Transferees for the total purchase price of $1,000,000 which constitutes the Company’s original purchase price of the interest.

 

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 determined it was prudent to impair 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 holds this investment for longer than a year.

 

17

 

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

 

 

NOTE 3 - INVENTORY

 

Inventory at March 31, 2024 and September 30, 2023 consists of the following:

 

   

March 31,

   

September 30,

 
   

2024

   

2023

 

Finished Goods

  $ 2,037,743     $ 2,782,680  

Inventory Components

    1,385,625       1,397,034  

Inventory Reserve

    (249,363 )     (126,742 )

Inventory prepaid

    277,794       182,675  

Total Inventory

  $ 3,451,799     $ 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 three months ended March 31, 2024.

 

 

NOTE 4 PROPERTY AND EQUIPMENT

 

Major classes of property and equipment at March 31, 2024 and September 30, 2023 consist of the following:

 

  

March 31,

  

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

  (1,680,788)  (1,458,640)

Property and equipment, net

 $667,979  $716,579 

 

Depreciation expense related to property and equipment was $117,750 and $102,390 for the three months ended March 31, 2024 and 2023, respectively.

 

18

 
 

NOTE 5  INTANGIBLE ASSETS

 

Intangible Assets

 

Intangible assets as of March 31, 2024 and September 30, 2023 consisted of the following:

 

  

March 31,

  

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

  (2,774,005)  (2,329,321)

Total

 $2,873,406  $3,219,090 

 

Amortization expense related to definite lived intangible assets was $172,842 and $277,354 for the three months ended March 31, 2024 and 2023 

 

Future amortization of intangible assets as of March 31, 2024 is as follows:

 

For the year ended September 30,   

2024

$

345,684

 
2025 688,757 
2026 660,040 
2027 660,040 
2028 496,223 
Thereafter 22,662 
Total future intangibles amortization$2,873,406 

 

19

 
 

NOTE 6 CONTINGENT CONSIDERATION

 

As consideration for the Mergers, described in Note 1, 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 are accounted for as a contingent liability and fair value is determined using Level 3 inputs, as estimating the fair value of these contingent liabilities require the use of significant and subjective inputs that may and are likely to change over the duration of the liabilities with related changes in internal and external market factors.

 

The initial two tranches totaling 338,889 shares were valued using a market approach method and included the use of the following inputs: share price upon contractual obligation, discount for lack of marketability to address leak out restrictions, and probability of shareholder disapproval. In addition, the 194,445 shares in the second tranche also included an input for a discount for lack of voting rights during the vest periods.

 

The Merger Agreement also provided that an additional 338,889 Earnout Shares would be issued as part of the consideration for the Mergers, upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date as follows, as measured at four intervals (each a “marking period”): the completion of 12, 24, 42, and 59 calendar months from the Closing Date, and based upon the ratios set forth below:

 

Aggregate Net Revenues

 

Shares Issued/ Each $ of Aggregate Net Revenue Ratio

 
    

$1 - $20,000,000

 0.00423615 

$20,000,001 - $60,000,000

 0.002118075 

$60,000,001 - $140,000,000

 0.001059038 

$140,000,001 - $300,000,000

 0.000529519 

 

An aggregate of 271,405 shares were issued over the initial three marking periods. The fourth marketing period began on  July 1, 2022 and ended during  November 2023. The revenue for the fourth marking period totaled approximately $35.8 million.  Based on the ratios, and subsequent to December 31, 2023, the Company determined the final Earnout Shares to be issued were 19,818. The shares were issued on January 11, 2024 and there is no further Earnout obligation.

 

In  December 2022, the Company entered into a contractual obligation to issue up to 556 options and 556 RSUs to an employee. The shares are subject to meeting a minimum direct to consumer revenue of $45 million for any four consecutive quarters before  December 31, 2024. Based on the present revenue run rate, the Company has valued these obligations at $0 for  September 30, 2023. 

 

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 480Distinguishing 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 March 31, 2024 and September 30, 2023.

 

The total amount of preferred dividends declared and accrued were $1,000,500 and 2,001,000 for the three and six months ended March 31, 2024, respectively, and the total amount of preferred dividends declared and paid were $1,000,500 and $2,001,502 for the three and six months ended March 31, 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 3,045,204 and 2,960,573 shares of common stock issued and outstanding at March 31, 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 may sell to Keystone under the ELOC will fluctuate based on the price of the Company's common stock. Depending on market liquidity at the time, sales of such shares may cause the trading price of our common stock to fall. As of the filing of this report, Keystone has purchased an aggregate of 180,955 shares under the ELOC.

 

On April 12, 2023, the Company effected the Reverse Stock Split. All fractional shares were rounded up when effectuating the reverse stock split. A total of 39,455 shares of common stock were issued to account for rounding up of fractional shares.

 

Preferred stock transactions:

 

The Company had no preferred stock transactions in the three and six months ended March 31, 2024 and 2023.

 

Common stock transactions:

 

In the six months ended March 31, 2024:

 

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.

 

In the six months ended March 31, 2023:

 

In March of 2023, we entered into the ELOC and we 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.

 

On February 1, 2023, the Company entered into an Agreement for Advertising Placement with a360 Media, LLC ("a360") in which a360 provided professional media support and advertising placement in exchange for up to 134,681 shares of the Company’s common stock valued at $14.85 per share. a360 will receive the shares by providing the Company with a credit in the amount of $2,000,000 to be used for media support and advertising placement to the Company. The shares are 70% fully vested; 15% of the Shares shall vest upon each advertising placement accrue pro-rata as percentage of the total advertising placement; and 15% of the shares shall vest provided there are no restrictions in product categories that the Company is able to market with a360 while the Company utilizes the advertising placement. Any shares vested during the term of the agreement. The Advertising Placement expired as of December 30, 2023.

 

In January 2023, the Company issued 2,223 shares of common stock to Twenty Two Capital as the final obligation under the 2021 acquisition agreement upon the expiration of the indemnification period.

 

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.

 

 


 

Stock option transactions:

 

In the six months ended March 31, 2024:

 

The Company has no stock option transactions in the six months ended December 31, 2024.

 

In the six months ended March 31, 2023:

 

In February of 2023, the Company granted its board of directors an aggregate of 2,667 common stock options. The options vested immediately, have a strike price of $12.60 and a five-year term. The Company has recorded a total prepaid expense of $21,120 and intends to amortize the expense over the 12-month board term.

 

In January 2023, the Company issued 2,334 options to a group of employees. The stock options awards vested at issuance, had a strike price of $10.53, five-year term and a fair market value upon issuance of $15,225

 

In  December 2022, the Company issued 2,222 options to an employee. 1,666 options vest equally at each anniversary for the next 3 years, have a strike price of $11.25 and a five year term. The total expense of these options is $13,150 and will be amortized over the term of the vesting periods. 556 options vest based on meeting certain direct to consumer revenue requirements by the end of  December 2024.

 

The expected volatility rate for the Company's stock options was estimated based on a weighted average mix of the volatilities of the Company and a peer group of companies in similar industries. The expected term used was the full term of the contract for the issuances. The risk-free interest rate for periods within the contractual life of the option is based on U.S. Treasury securities. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.

 

The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the three months ended March 31, 2024 and 2023:

 

  

March 31,

  

March 31,

 
  

2024

  

2023

 
Exercise price $-  $10.355 - 12.6060 

Risk free interest rate

  0.00%  3.93% - 4.71%

Volatility

  

0.00

%  106.48% - 106.51%

Expected term (in years)

  

-

   2.5 - 4 

Dividend yield

 

None

  

None

 

 

20

 

Warrant Transactions:

 

The Company has no warrant transactions in the three months ended December 31, 2023.

 

 

NOTE 9 STOCK BASED COMPENSATION

 

Equity Compensation Plan – On June 2, 2015, the Board of Directors of the Company approved the 2015 Equity Compensation Plan (“2015 Plan”). The 2015 Plan initially made 26,112 common stock shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The number of shares of common stock available for issuance under the 2015 Plan shall automatically increase on the first trading day of October each calendar year during the term of the 2015 Plan, beginning with calendar year 2016, by an amount equal to one percent (1%) of the total number of shares of common stock outstanding on the last trading day in September of the immediately preceding fiscal year, but in no event shall any such annual increase exceed 2,223 shares of common stock. On April 19, 2019, shareholders approved an amendment to the 2015 Plan and increased the number of shares available for issuance under the 2015 Plan to 45,445 and retained the annual evergreen increase provision of the plan.

 

On January 8, 2021, the Company’s Board of Directors approved the 2021 Equity Compensation Plan (the “2021 Plan”) and it was subsequently approved by its shareholders at its annual meeting held on March 12, 2021. The purpose of the 2021 Plan is to advance the interests of the Company by providing an incentive to attract, retain and motivate highly qualified and competent persons who are important to it and upon whose efforts and judgment the success of the Company is largely dependent. The 2021 Plan made 111,112 common shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The 2021 Plan also contains an “evergreen formula” pursuant to which the number of shares of common stock available for issuance under the 2021 Plan will automatically increase on October 1 of each calendar year during the term of the 2021 Plan, beginning with calendar year 2022, by an amount equal to 1.0% of the total number of shares of common stock outstanding on September 30 of such calendar year, up to a maximum of 5,556 shares.

 

The Company accounts for stock-based compensation using the provisions of ASC 718. ASC 718 codification requires companies to recognize the fair value of stock-based compensation expense in the financial statements based on the grant date fair value of the options. All options are approved by the Compensation, Corporate Governance and Nominating Committee of the Board of Directors. Restricted stock awards that vest in accordance with service conditions are amortized over their applicable vesting period using the straight-line method. The fair value of the Company’s stock option awards or modifications is estimated at the date of grant using the Black-Scholes option pricing model.

 

Eligible recipients include employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company. Options granted generally have a five-to-ten-year term and have vesting terms that cover one to three years from the date of grant. Certain stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.

 

Stock Options:

 

The Company currently has awards outstanding with service conditions and graded-vesting features. We recognize compensation cost on a straight-line basis over the requisite service period.

 

21

 

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 six months ended March 31, 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

  -   -   -   - 

Exercised

  -   -   -   - 

Forfeited

  -   -   -   - 

Outstanding at March 31, 2024

  41,765   144.43   3.15   - 
                 

Exercisable at March 31, 2024

  40,098  $149.97   3.16  $- 

 

As of March 31, 2024, there was approximately $5,005 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 1.2 years.

 

Restricted Stock Award transactions:

 

In the six months ended March 31, 2024:

 

The Company has no restricted stock activity during the six months ended March 31, 2024.

 

In the six months ended March 31, 2023:

 

In February of 2023, the Company issued 445 of restricted stock awards to the Company’s board of directors. The shares vest 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 $6,250556 shares vest based on meeting certain direct to consumer revenue performance hurdles prior to December 2024.

 

 

22

 
 

NOTE 10 - WARRANTS

 

Transactions involving the Company equity-classified warrants for the six months ended March 31, 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  $- 

Granted

  -   -   -   - 

Exercised

  -   -   -   - 

Forfeited

  -   -   -   - 

Outstanding at March 31, 2024

  50,309   37.75   3.57   - 
                 

Exercisable at March 31, 2024

  50,309  $37.75   -  $- 

 

The following table summarizes outstanding common stock purchase warrants as of March 31, 2024:

 

      

Weighted-average

  
  

Number of shares

  

exercise price

 

Expiration

Exercisable at $337.5 per share

  1,352  $337.50 

May 2024

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 $2.52 per share

  40,500   2.52 

April 2028

Exercisable at $168.30 per share

  3,357   168.30 

December 2025

Exercisable at $168.75 per share

  3,199   168.75 

June 2026

   50,309  $37.75  

 

 

NOTE 11 COMMITMENTS AND CONTINGENCIES

 

In May 2019, the Company entered into an endorsement agreement with a professional athlete. On November 4, 2022, the Company entered into a separation agreement with the athlete that required a final payment truing up the Company’s cash obligation through November 2022. No further obligations exist between the parties. The Company recorded a one-time non-cash expense of approximately $885,000 associated with the outstanding un-expensed portion of stock compensation expense from previously issued stock at higher stock prices.

 

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.

 

 

NOTE 12 NOTE PAYABLE

 

In January 2020, the Company entered into a loan arrangement for $35,660 for equipment, and as of December 31, 2023, this loan was completely paid off.

 

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.

 

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 Note provides that the Investor will not have the right to convert any portion of the Note, if, together with its affiliates, and any other party whose holdings would be aggregated with those of the Investor for purposes of Section 13(d) or Section 16 of the Securities of 1934, as amended, would beneficially own in excess of 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to such conversion (the “Beneficial Ownership Limitation”); provided, however, that the Beneficial Ownership Limitation shall be increased to 9.99% on the 61st day upon receipt of a written notice by the Investor delivered to the Company, and provide