cbdMD, Inc. [YCBD] Filings

10-Q 1 ycbd20230331_10q.htm FORM 10-Q ycbd20230331_10q.htm

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, 2023

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

	For the transition period from __________________ to _______________

Commission file number 001-38299

cbdMD, INC.

(Exact Name of Registrant as Specified in its Charter)

North Carolina		47-3414576
State or Other Jurisdiction of Incorporation or Organization		I.R.S. Employer Identification No.

8845 Red Oak Blvd, Charlotte, NC		28217
Address of Principal Executive Offices		Zip Code

704-445-3060

Registrant’s Telephone Number, Including Area Code

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report Securities registered pursuant to Section 12(b) of the Act:

Title of each 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.

2,855,117 shares of common stock are issued and outstanding as of May 2, 2023.

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TABLE OF CONTENTS

		Page No

PART I-FINANCIAL INFORMATION

ITEM 1.	Financial Statements.	5

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	29

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.	37

ITEM 4.	Controls and Procedures.	37

PART II - OTHER INFORMATION

ITEM 1.	Legal Proceedings.	38

ITEM 1A.	Risk Factors.	38

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	38

ITEM 3.	Defaults Upon Senior Securities.	38

ITEM 4.	Mine Safety Disclosures.	38

ITEM 5.	Other Information.	38

ITEM 6.	Exhibits.	39

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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” and cbdMD Therapeutics LLC, a North Carolina limited liability company which we refer to as “Therapeutics”. In addition, “fiscal 2022” refers to the year ended September 30, 2022, “fiscal 2023” refers to the fiscal year ending September 30, 2023, “first quarter of 2022” refers to the three months ended December 31, 2021, “first quarter of 2023” refers to the three months ended December 31, 2022, “second quarter of 2022” refers to the three months ended March 31, 2022, and “second quarter of 2023” refers to the three months ended March 31, 2023.

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.

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.

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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 compounders;

●

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

●

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;

●

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

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, 2022 as filed with the Securities and Exchange Commission (the “SEC”) on December 15, 2022 and as amended on December 20, 2022 and May 2, 2023 (the “2022 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.

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PART 1 – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

cbdMD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2023 AND September 30, 2022

	(Unaudited)
	*March 31,*		*September 30,*
	*2023*		*2022*
Assets

Current assets:
Cash and cash equivalents	$	1,718,552	$	6,720,234
Accounts receivable		1,161,553		1,447,831
Accounts receivable – discontinued operations		-		1,375
Investment other securities		-		1,000,000
Inventory		4,531,890		4,767,373
Prepaid sponsorship		92,755		1,372,845
Prepaid expenses and other current assets		2,641,452		701,945
Total current assets		10,146,202		16,011,603

Other assets:
Property and equipment, net		798,177		823,310
Operating lease assets		3,921,195		4,477,841
Deposits for facilities		138,708		244,606
Intangible assets		17,279,840		17,834,549
Investment in other securities, noncurrent		1,400,000		1,400,000
Total other assets		23,537,920		24,780,306

Total assets	$	33,684,122	$	40,791,909

See Notes to Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2023 AND September 30, 2022

(continued)

	(Unaudited)
	*March 31,*			*September 30,*
	*2023*			*2022*
Liabilities and shareholders' equity

Current liabilities:
Accounts payable	$	1,337,611		$	2,036,558
Accrued expenses		2,107,179			2,060,762
Operating leases – current portion		1,227,249			1,178,683
Note payable		7,375			9,609
Total current liabilities		4,679,414			5,285,612

Long term liabilities:
Long term liabilities		-			125,491
Operating leases - long term portion		3,051,484			3,680,375
Contingent liability		167,000			276,000
Total long term liabilities		3,218,484			4,081,866

Total liabilities		7,897,898			9,367,478

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, 1,456,693 and 1,348,125 shares issued and outstanding, respectively		1,457			1,348
Additional paid in capital		180,497,196			178,841,646
Accumulated deficit		(154,717,429	)		(147,423,563	)
Total cbdMD, Inc. shareholders' equity		25,786,224			31,424,431

Total liabilities and shareholders' equity	$	33,684,122		$	40,791,909

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE three and six months ended March 31, 2023 and 2022

(Unaudited)

	*Three months*			*Three months*			*Six Months*			*Six Months*
	*Ended*			*Ended*			*Ended*			*Ended*
	*March 31,*			*March 31,*			*March 31,*			*March 31,*
	*2023*			*2022*			*2023*			*2022*

Gross Sales	$	6,584,666		$	9,948,858		$	12,825,191		$	19,805,625
Allowances		(344,646	)		(319,972	)		(499,954	)		(854,917	)
Total Net Sales		6,240,020			9,628,886			12,325,237			18,950,708
Cost of sales		2,224,512			3,186,564			4,741,964			7,514,874
Gross Profit		4,015,508			6,442,322			7,583,273			11,435,834

Operating expenses		5,416,151			11,452,700			13,030,097			23,407,984
Impairment of goodwill and other intangible assets		-			-			-			18,183,285
Loss from operations		(1,400,643	)		(5,010,378	)		(5,446,824	)		(30,155,435	)
Realized and Unrealized loss on marketable and other securities		-			-			-			(33,352	)
Decrease of contingent liability		48,000			353,000			109,000			6,303,000
Other income		17,787			2,249			49,543			72,987
Interest expense		(1,946	)		(2,086	)		(4,583	)		(5,320	)
Loss before provision for income taxes		(1,336,802	)		(4,657,215	)		(5,292,864	)		(23,818,120	)

Benefit for income taxes		-			-			-			-
Net Loss		(1,336,802	)		(4,657,215	)		(5,292,864	)		(23,818,120	)
Preferred dividends		1,000,500			1,000,502			2,001,002			2,001,002

Net Loss attributable to cbdMD, Inc. common shareholders	$	(2,337,302	)	$	(5,657,717	)	$	(7,293,866	)	$	(25,819,122	)

Net Loss per share:
Basic earnings per share		(1.74	)		(4.32	)		(5.43	)		(19.67	)
Diluted earnings per share		(1.74	)		(4.32	)		(5.43	)		(19.67	)
Weighted average number of shares Basic:		1,345,589			1,310,378			1,343,394			1,312,755
Weighted average number of shares Diluted:		1,345,589			1,310,378			1,343,394			1,312,755

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE three and six months ended March 31, 2023 and 2022

(Unaudited)

	*Three months*			*Three months*			*Six Months*			*Six Months*
	*Ended*			*Ended*			*Ended*			*Ended*
	*March 31,*			*March 31,*			*March 31,*			*March 31,*
	*2023*			*2022*			*2023*			*2022*

Net (Loss) Income	$	(1,336,802	)	$	(4,657,215	)	$	(5,292,864	)	$	(23,818,120	)
Comprehensive (Loss) Income		(1,336,802	)		(4,657,215	)		(5,292,864	)		(23,818,120	)

Preferred dividends		(1,000,500	)		(1,000,502	)		(2,001,002	)		(2,001,002	)
Comprehensive (Loss) Income attributable to cbdMD, Inc. common shareholders	$	(2,337,302	)	$	(5,657,717	)	$	(7,293,866	)	$	(25,785,770	)

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE six months ended March 31, 2023 and 2022

(Unaudited)

	*Six Months*			*Six Months*
	*Ended*			*Ended*
	*March 31,*			*March 31,*
	*2023*			*2022*
Cash flows from operating activities:
Net Loss	$	(5,292,864	)	$	(23,818,120	)
Adjustments to reconcile net loss to net cash used by operating activities:
Stock based compensation		96,216			797,096
Restricted stock expense		100,249			837,267
Write off of prepaid assets due to termination of contractual obligation		884,892			-
Issuance of stock for services		1,459,193			-
Marketing stock amortization		-			339,520
Inventory and materials impairment		-			878,142
Intangibles Amortization		554,709			329,671
Depreciation		100,112			600,750
Impairment of goodwill and other intangible assets		-			18,183,285
Increase/(Decrease) in contingent liability		(109,000	)		(6,303,000	)
Realized and unrealized loss (gain) on of Marketable and other securities		-			33,352
Amortization of operating lease asset		556,646			589,291
Changes in operating assets and liabilities:
Accounts receivable		286,278			(932,230	)
Deposits		105,898			390,875
Inventory		135,176			(569,316	)
Prepaid inventory		100,307			32,392
Prepaid expenses and other current assets		(1,544,308	)		354,752
Accounts payable and accrued expenses		(855,872	)		(1,129,614	)
Operating lease liability		(580,325	)		(595,457	)
Deferred revenue / customer deposits		203,341			10,723
Collection on discontinued operations accounts receivable		1,375			9,592
Cash used by operating activities		(3,797,977	)		(10,670,537	)
Cash flows from investing activities:
Purchase of property and equipment		(74,980	)		(373,795	)
Other Securities		1,000,000			-
Cash flows from investing activities		925,020			(373,795	)
Cash flows from financing activities:
Note payable		(127,725	)		(29,240	)
Preferred dividend distribution		(2,001,000	)		(2,001,002	)
Cash flows from financing activities		(2,128,725	)		(2,030,242	)
Net increase (decrease) in cash		(5,001,682	)		(13,074,574	)
Cash and cash equivalents, beginning of period		6,720,234			26,411,424
Cash and cash equivalents, end of period	$	1,718,552		$	13,336,850

Supplemental Disclosures of Cash Flow Information:

	*2023*		*2022*

Cash Payments for:
Interest expense	$	2,638	$	4,173

Non-cash financial/investing activities:
Issuance of Contingent earnout shares:	$	-	$	730,000

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) 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			-			43,448
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	)		-			0
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 fractional 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	)	$	25,786,224

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY

FOR THE six months ended March 31, 2022

(Unaudited)

									*Additional*
	*Common Stock*				*Preferred Stock*				*Paid in*		*Accumulated*
	*Shares*		*Amount*		*Shares*		*Amount*		*Capital*		*Deficit*			*Total*
Balance, September 30, 2021		1,284,075	$	1,285		5,000,000	$	500	$	176,478,267	$	(73,337,865	)	$	103,142,187
Issuance of Common Stock		10,992		11		-		-		404,989		-			405,000
Issuance of options for share based compensation		-		-		-		-		505,466		-			505,466
Issuance of restricted stock for share based compensation		-		-		-		-		508,754		-			508,754
Preferred dividend		-		-		-		-		-		(1,000,502	)		(1,000,502	)
Net Loss		-		-		-		-		-		(19,160,904	)		(19,160,904	)
Balance, December 31, 2021		1,295,067	$	1,296		5,000,000	$	500	$	177,897,475	$	(93,499,271	)	$	84,400,000
Issuance of Common Stock		23,873		24		-		-		660,976		-			661,000
Exercise of options for share based compensation		-		-		-		-		291,630		-			291,630
Issuance of restricted stock for share based compensation		-		-		-		-		328,515		-			328,515
Preferred dividend		-		-		-		-		-		(1,000,500	)		(1,000,500	)
Net Loss		-		-		-		-		-		(4,657,215	)		(4,657,215	)
Balance, March 31, 2022		1,318,940	$	1,320		5,000,000	$	500	$	179,178,596	$	(99,156,986	)	$	80,023,429

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE three and six months ended March 31, 2023 and 2022 (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 our offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30.

On December 20, 2018 (the “Closing Date”), the Company, and its newly organized wholly owned subsidiaries AcqCo, LLC and cbdMD LLC (“CBDI”), completed a two-step merger (the “Mergers”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). Upon completion of the Mergers, CBDI survived and operates the prior business of Cure Based Development. As consideration for the Mergers in April of 2019, the Company issued 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 vest over a five-year period of which 48,612 shares remain subject to a voting proxy agreement as of December 31, 2022, 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 and cbdMD Botanicals. 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.

In the third quarter of fiscal 2019 cbdMD launched its new CBD pet brand, Paw CBD. Following the initial positive response to the brand from retailers and consumers, cbdMD, Inc. organized Paw CBD, Inc. (“Paw CBD”) as a separate wholly owned subsidiary on October 22, 2019, to take advantage of its early mover status in the CBD animal health industry. On March 15, 2021 cbdMD formed a new wholly owned subsidiary, cbdMD Therapeutics, LLC (“Therapeutics”) for the purposes of isolating and quantifying the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications. In July 2021, the Company acquired the assets of Twenty Two Capital, LLC (“Twenty Two”) d/b/a directcbdonline.com (“DCO”). This business operates a CBD marketplace through directcbdonline.com.

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 2022 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 2022 as reported in the 2022 10-K have been omitted.

Reverse Stock Split

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. Unless otherwise indicated, all share numbers in this filing, including shares of common stock and all securities convertible into, or exercisable for, shares of common stock, give effect to the reverse stock split. See "Subsequent Events" below.

Principles of Consolidation

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

Use of Estimates

The Company’s 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 doubtful accounts, 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, contingent liability and, hence consideration for the Mergers 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 doubtful accounts, if applicable. Credit is extended to customers after an evaluation of the customer’s financial condition, and generally collateral is not required as a condition of credit extension. Management’s determination of the allowance for doubtful accounts is based on an evaluation of the receivables, past experience, current economic conditions, and other risks inherent in the receivables portfolio. As of March 31, 2023 and September 30, 2022, we had an allowance for doubtful accounts of $19,292 and $36,980, 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 2.6% 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, 2023 and September 30, 2022, the receivable from payment processors included approximately $338,502 and $273,451, 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.

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Intangible Assets

The Company’s intangible assets consist of definite-lived trademarks and other intellectual property. Prior to December 31, 2021, 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 are not amortized into the results of operations, but instead are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value. The Company now accounts for its trademarks in accordance with Accounting Standards Codification (ASC) Topic 360, Property, Plant and Equipment. The Company began amortizing its trademarks over 20 years beginning January 1, 2022 and will perform impairment tests as prescribed by ASC 360, which states that impairment testing should be completed whenever events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. If there are indications that the asset’s carrying value may not be recoverable, there are two further steps involved in long-lived asset impairment testing. Step I of the impairment test, as per ASC 360, involves estimating the Recoverable Amount of the Asset Group and determining the potential for impairment. Step II of the impairment test, as per ASC 360, if necessary, involves quantifying the fair value of the asset group.

Contingent Liability

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

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, 2023, 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, 2023.

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

	*Three Months*					*Three Months*
	*Ended*					*Ended*
	*March 31,*					*March 31,*
	*2023*		*% of total*			*2022*		*% of total*

E-commerce sales	$	4,889,860		78.4	%	$	6,580,554		68.3	%
Wholesale sales		1,350,160		21.6	%		3,048,332		31.7	%
Total Net Sales	$	6,240,020		100.0	%	$	9,628,886		100.0	%

	*Six Months*					*Six Months*
	*Ended*					*Ended*
	*March 31,*					*March 31,*
	*2023*		*% of total*			*2022*		*% of total*

E-commerce sales	$	9,796,064		79.5	%	$	13,696,641		72.3	%
Wholesale sales		2,529,173		20.5	%		5,254,067		27.7	%
Total Net Sales	$	12,325,237		100.0	%	$	18,950,708		100.0	%

Cost of Sales

The Company’s cost of sales includes costs associated with distribution, fill and labor expense, components, third-party providers, and outbound freight for the Company’s products sales, and includes labor for its service 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 $791,000 uninsured balance at March 31, 2023 and a $5.8 million uninsured balance at September 30, 2022.

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, 2023.

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 income (loss) per share. The Company computes basic income (loss) per share by dividing net income (loss) and net income (loss) attributable to common shareholders, after deducting preferred stock dividends, by the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.

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 $1,336,802 and $5,292,864 for the three and six months ended March 31, 2023, resulting in working capital of $5,466,788.

Management has concluded that substantial doubt exists about our ability to continue as a going concern for the next twelve months from the date hereof. Our current capital resources, including our equity line of credit with Keystone Capital Partners, LLC may not be sufficient to support our planned operations for the next twelve months from the date hereof. We believe that upon receipt of approximately $2.5 million in net proceeds pursuant to the underwritten public offering completed on May 3, 2023 (see "Subsequent Event" below), after deducting the underwriting fees and estimated offering expenses payable by us, that our cash and cash equivalents on hand should be sufficient to fund operations through the end of the fiscal year if not longer. However, depending upon our operating results and cash burn over the next four months, we may be required to raise additional capital to fund operations or scale back our operations or dividends. We expect to continue to incur losses for the foreseeable future as we continue our efforts to increase sales, develop additional products, seek acquisitions and mergers, continue research and development, reduce operating expenses and attempt to achieve profitability. Furthermore, in the event we identify an acquisition candidate, such acquisition may require immediate capital to close such acquisition. These factors, individually and collectively, raise substantial doubt about our ability to continue as a going concern, and therefore, could materially limit our ability to raise additional funds through an issuance of debt or equity securities or otherwise.

New Accounting Standards

None.

NOTE 2 – MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES

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

	●	Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

	●	Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

	●	Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

Where an accounts receivable other is settled with the receipt of the common stock or other instrument, the common stock or other instrument was classified as an asset on the consolidated balance sheet as either an investment marketable security (when the customer is a public entity) or as an investment other security (when the customer is a privately held entity).

For the six months ended March 31, 2023 and 2022 the Company recorded $0 and $(33,350) respectively, of realized and unrealized gain (loss) on marketable and other securities, including impairments.

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 Allliance Entertainment, Inc. (the "Target") in consideration of the Company's original purchase price. As a result of the SEC litigation against our former CEO, the Target provided a demand to Adara that it required cbdMD and Mr. Sumichrast to dispose of our interests in Adara Sponsor, LLC as a condition of proceeding with any business combination. 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 recently completed series C financing. 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.

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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, 2023 and September 30, 2022 consists of the following:

	*March 31,*			*September 30,*
	*2023*			*2022*
Finished Goods	$	2,896,362		$	3,198,488
Inventory Components		1,356,623			1,213,724
Inventory Reserve		(132,247	)		(156,298	)
Inventory prepaid		411,152			511,459
Total Inventory	$	4,531,890		$	4,767,373

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, 2023.

NOTE 4 – PROPERTY AND EQUIPMENT

Major classes of property and equipment at March 31, 2023 and September 30, 2022 consist of the following:

	*March 31,*			*September 30,*
	*2023*			*2022*
Computers, furniture and equipment	$	1,272,596		$	1,095,228
Manufacturing equipment		284,275			284,275
Leasehold improvements		487,081			487,081
Automobiles		11,087			11,087
		2,055,039			1,877,671
Less accumulated depreciation		(1,256,862	)		(1,054,361	)
Property and equipment, net	$	798,177		$	823,310

Depreciation expense related to property and equipment was $102,390 and $508,299 for the three months ended March 31, 2023 and 2022, respectively.

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NOTE 5 – GOODWILL AND INTANGIBLE ASSETS

Goodwill

The Company had goodwill at March 31, 2022 of $42,772,685. The Company impaired goodwill in subsequent reporting periods of fiscal 2022 and goodwill was fully impaired by September 30, 2022.

Intangible Assets

On December 20, 2018, the Company completed the Mergers with Cure Based Development and acquired certain assets, including the trademark “cbdMD” and its variants and certain other intellectual property. The trademark is the cornerstone of this subsidiary and is key as the Company creates and distributes products and continue to build this brand. The Company believed the trademark did not have limits on the time it would contribute to the generation of cash flows and therefore identified these as indefinite lived intangible assets.

In July 2021, the Company completed the acquisition of DCO and acquired certain assets, including the trade name, domains and certain other intellectual property. The tradename will be used in marketing and branding of the website. The Company believes the trade name has a 10 year life. In addition to the trade name, DCO has a technology platform used to market to its customer and the Company believes it has a 4 year life.

As of December 31, 2021, the Company re-assessed the “cbdMD” and “HempMD” trademarks and determined that the trademarks should be classified as definite lived intangible assets with useful lives of 20 years versus indefinite lived intangible assets. The Company used a variety of factors in determining the reclassifications and have made the reclassifications following guidance prescribed by ASC 350, which states that when a reporting entity subsequently determines that in indefinite-lived intangible asset has a finite useful life, the reporting entity should test the asset for impairment as an indefinite lived asset prior to commencing amortization. As of December 31, 2021, the Company prepared a tradename impairment analysis in accordance with ASC 350 and determined that the “cbdMD” trademark was impaired by $4,285,000. The Company has recorded this impairment charge as a reduction in the carrying value of the intangible assets on its condensed consolidated balance sheets with the corresponding impairment expense recorded on its condensed consolidated statements of operations. The Company began amortizing the trademarks over their useful lives of 20 years as of January 2022.

Intangible assets as of March 31, 2023 and September 30, 2022 consisted of the following:

	*March 31,*			*September 30,*
	*2023*			*2022*
Trademark related to cbdMD	$	17,300,000		$	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		-			(4,285,000	)
Amortization of definite lived intangible assets		(1,487,571	)		(932,862	)
Total	$	17,279,840		$	17,834,549

Amortization expense related to definite lived intangible assets was $277,354 and $277,354 for the three months ended March 31, 2023 and 2022, respectively. No triggering events were identified at March 31, 2023 that suggested a quantitative impairment analysis under ASC 360 was necessary.

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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 are subject to leak out provisions, and the unrestricted voting rights to 194,445 tranche of shares vest over a five year period and are subject to a voting proxy agreement. The Merger Agreement also provides that an additional 338,889 Earnout Shares can be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date.

The contractual obligations and earn out provision are accounted for as a contingent liability and fair value is determined using Level 3 inputs, as estimating the fair value of these contingent liabilities require the use of significant and subjective inputs that may and are likely to change over the duration of the liabilities with related changes in internal and external market factors.

The initial two tranches totaling 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 provides 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

For clarification purposes, the Aggregate Net Revenues during a Marking Period shall be multiplied by the applicable Shares Issued/Each $ of Aggregate Net Revenue Ratio, minus, the number of shares issued as a result of Aggregate Net Revenues during the prior marking periods.

The third marking period was originally an 18 month period commencing on January 1, 2021 and ending on June 30, 2022 (the “Third Marking Period End Date”), after which time the determination of the issuance of any remaining Earnout Shares would be made pursuant to the terms of the Merger Agreement. On March 31, 2021 the Company entered into Addendum No. 1 to the Merger Agreement (“Addendum No. 1”) with the holders of the remaining Earnout Rights which amended the measurement periods within the third marking period to change the determination of the aggregate net revenues within the third marking period to a quarterly basis for each of the six fiscal quarters within the third marking period, beginning with the quarter ended March 31, 2021, instead of following Third Marking Period End Date. This change in the measurement date, however, has no effect on the number of remaining Earnout Shares issuable under the Earnout Rights and no effect on the earnout targets; Addendum No. 1 simply changes the physical issuance date(s) of the remaining Earnout Shares, if in fact, such shares are earned pursuant to the terms of the Merger Agreement. Addendum No. 1 did not change any of the terms of the fourth marking period (as that term is defined in the Merger Agreement). This change did not impact the fair value of the contingent liability. The value of the contingent liability was $167,000 and $276,000 at March 31, 2023 and September 30, 2022 respectively.

The fourth marketing period began on July 1, 2022 and ends in November 2023. At March 31, 2023, up to 87,307 remaining Earnout Shares are subject to issuance by the Company. Based on the remaining share ratios, the Company would have to generate over $162 million in revenue during the fourth marking period to issue the full balance of the shares.

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As part of the Twenty Two acquisition in July 2021, the Company has a contractual obligation to issue up to an additional 4,445 shares of its common stock as additional consideration, dependent upon the acquisition entity meeting future revenue targets. Under US GAAP the Company is required to record a non-cash contingent liability associated with the Twenty Two Earnout Shares and at the date of the acquisition, recorded a total contingent liability of $488,561. Under US GAAP the Company is obligated to reassess the obligations associated with the Twenty Two Earnout Shares on a quarterly basis and, in the event its estimate of the fair value of the contingent consideration changes, the Company will record increases or decreases in the fair value as an adjustment to earnings. In particular, changes in the market price of the Company’s common stock, which is one of the inputs used in determining the amount of the non-cash contingent liability, will result in increases or decreases in this liability and positively or negatively impact the Company’s net loss or profit for the period. At September 30, 2021, the Company recorded a decrease in value of the contingent liability of $73,561 related to a decrease in the market price of our common stock, which adjusted the total contingent liability related to the Twenty Two Earnout Shares to $416,000. At December 31, 2021, the Company recorded a decrease in value of the contingent liability of $255,000 related to a decrease in the market price of our common stock, which adjusted the total contingent liability related to the Twenty Two Earnout Shares to $161,000. At June 30, 2022, the Company recorded a decrease in value of the contingent liability of $13,000 related to a decrease in the market price of our common stock, which adjusted the total contingent liability related to the Twenty Two Earnout Shares to $0. As of September 2022 the measurement period ended and there is no further obligation with respect to this earnout.

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 March 31, 2023.

NOTE 7 – RELATED PARTY TRANSACTIONS

As mentioned in Note 6, a counterparty in the earnout arrangement is a related party.

NOTE 8 – SHAREHOLDERS’ EQUITY

Preferred Stock – The Company is authorized to issue 50,000,000 shares of preferred stock, par value $0.001 per share. In October 2019, the Company designated 5,000,000 of these shares as 8.0% Series A Cumulative Convertible Preferred Stock. Our 8.0% Series A Cumulative Convertible Preferred Stock ranks senior to our common stock for liquidation or dividend provisions and holders are entitled to receive cumulative cash dividends at an annual rate of 8.0% payable monthly in arrears for the prior month. The Company reviewed ASC 480 – Distinguishing Liabilities from Equity in order to determine the appropriate accounting treatment for the preferred stock and determined that the preferred stock should be treated as equity. There were 5,000,000 shares of 8.0% Series A Cumulative Convertible Preferred Stock issued and outstanding at March 31, 2023 and September 30, 2022.

The total amount of preferred dividends declared and paid were $1,000,500 and $1,000,502, respectively, for the three months ended March 31, 2023 and 2022.

Common Stock – The Company is authorized to issue 150,000,000 shares of common stock, par value $0.001 per share. There were 1,456,693 and 1,348,125 shares of common stock issued and outstanding at March 31, 2023 and September 30, 2022, respectively.

Preferred stock transactions:

The Company had no preferred stock transactions in the three and six months ended March 31, 2023 and 2022.

Common stock transactions:

In the six months ended March 31, 2023:

In March 2, 2023, we entered into a Purchase Agreement (the "Purchase Agreement") with Keystone Capital Partners, LLC (“Keystone”), pursuant to which Keystone has committed to purchase up to 281,934 of shares of our common stock. Upon the execution of the Purchase Agreement, 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 Purchase Agreement. Additional Commitment Shares (6,104) will be issued over 180 days from March 2, 2023. The 281,934 shares of our common stock were registered for resale and may be issued under the Purchase Agreement or sold by us to Keystone at our discretion from time to time over a 12-month period commencing April 1, 2023, subject tp a 75 day blackout period commencing April 30,2023. The purchase price for the shares that we may sell to Keystone under the Purchase Agreement will fluctuate based on the price of our common stock. Depending on market liquidity at the time, sales of such shares may cause the trading price of our common stock to fall. See "Subsequent Events" below.

On February 1, 2023, the Company entered into an Agreement for Advertising Placement with a360 Media, LLC (“a360”) in which a360 will provide 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 which do not vest within the term of the agreement shall be forfeited. The Advertising Placement must be used by the Company prior to December 30, 2023, unless otherwise agreed in writing by both parties.

In January of 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 the six months ended March 31, 2022:

In March 2022 the Company issued 9,873 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.

On December 28, 2021 the Company issued 10,372 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.

In October 2021, the Company issued 556 shares of restricted common stock to an executive officer of the Company, subject to a January 1, 2022 vest.

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Stock option transactions:

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 2,223 options to an employee. 1,667 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.

In the six months ended March 31, 2022:

In March of 2022, the Company granted its board of directors an aggregate of 2,667 common stock options. The options vested immediately, have a strike price of $36.81 and a five-year term. The Company has recorded a total prepaid expense of $57,000 and intends to amortize the expense over the 12-month board term.

In January of 2022, the Company granted an aggregate of 2,889 common stock options to a group of 9 employees. These options vest upon grant and the Company has recorded an expense for these options of $79,500 for the three months ended March 31, 2022

In October 2021, the Company granted an aggregate of 1,667 common stock options to an executive officer. These options vest on October 1, 2022. The Company has recorded an expense for these options of $23,025 and $46,050 for the three and six months ended March 31, 2022.

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 six months ended March 31, 2023 and 2022:

	*March 31,*		*March 31,*
	*2023*		*2022*
Exercise price	10.355 -12.6060			36.900 -43.87575
Risk free interest rate		3.93% - 4.71%		1.56% - 1.66%
Volatility		106.48% - 106.51%		100.23% - 100.30%
Expected term (in years)		2.5 - 4		2.5 - 5 years
Dividend yield	None		None

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Warrant Transactions:

The Company has no warrant transactions during the three and six months ended March 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 of the stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.

Stock Options:

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

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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, 2023:

						*Weighted-average*
						*remaining*		*Aggregate*
				*Weighted-average*		*contractual term*		*intrinsic value*
	*Number of shares*			*exercise price*		*(in years)*		*(in thousands)*
Outstanding at September 30, 2022		55,612		$	151.20		4.55	$	-
Granted		7,223			11.70		-		-
Exercised		-			-		-		-
Forfeited		(22,889	)		85.50		-		-
Outstanding at March 31, 2023		39,946			148.50		4.15		-

Exercisable at March 31, 2023		34,389		$	151.20		4.23	$	-

As of March 31, 2023, there was approximately $155,742 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 2.7 years.

Restricted Stock Award transactions:

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 $6,250. 556 shares vest based on meeting certain direct to consumer revenue performance hurdles prior to December 2024.

In the six months ended March 31, 2022:

In March of 2022, the Company issued 445 of restricted stock awards to the Company’s board of directors. The shares vest quarterly one fourth on June 30, 2022, one fourth, on September 30, 2022, one fourth on December 31, 2022, and one fourth on March 31, 2023. The stock awards were valued at the fair market price of $16,360 upon issuance and will amortize over the individual vesting periods.

In January 2022, the Company issued 667 shares of restricted stock awards to six employees. The stock awards were valued at the fair market price of $29,250 and vested at the grant date.

In January of 2022, the Company issued 7,112 shares to a professional athlete in conjunction with an amendment to the athlete’s sponsorship agreement as referenced in Note 11. The stock grant was valuated at the fair market price of $336,000 upon issuance and will be amortized over the remaining term of the agreement.

In November 2021, the Company issued 2,667 shares of restricted stock awards to an employee, subject to certain revenue performances metrics through December 2022, as referenced in Note 6. These shares were forfeited during January 2022.

In October 2021 the Company issued 112 shares of restricted stock awards to an employee, which vested immediately upon issuance.

In October 2021 the Company issued 556 shares of restricted stock awards to an executive officer, subject to a four-month vesting schedule.

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NOTE 10 - WARRANTS

Transactions involving the Company equity-classified warrants for the six months ended March 31, 2023 and 2022 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, 2022		13,110		$	210.60		2.30	$	-
Granted		-			-		-		-
Exercised		-			-		-		-
Forfeited		(2,223	)		337.50
Outstanding at March 31, 2023		10,887			184.50		2.79		-

Exercisable at March 31, 2023		10,887		$	184.50		-	$	-

During the three month period ended December 31, 2022, 2,223 warrants expired and as a result were forfeited.

The following table summarizes outstanding common stock purchase warrants as of March 31, 2023:

			*Weighted-average*
	*Number of shares*		*exercise price*		*Expiration*
Exercisable at $196.88 per share		1,143		196.88	September 2023
Exercisable at $337.5 per share		1,334		337.50	May 2024
Exercisable at $176.06 per share		1,063		176.06	October 2024
Exercisable at $56.25 per share		815		56.25	January 2025
Exercisable at $168.30 per share		3,344		168.30	December 2025
Exercisable at $168.75 per share		3,188		168.75	June 2026
		10,887	$	184.50

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.

In April 2022, effective February 2022, the Company entered into an endorsement agreement with a professional athlete. The term of the agreement is through February 2025 and is tied to performance of the athlete in so many professional events annually, and also includes promotion of the Company via social media, wearing of logo during competition, requirement to provide production days for advertising creation and attendance at meet and greets. The potential base payments, if all services are provided is $1,500,000 over the term of the agreement, in addition to some incentives for sales directly influenced by the athlete.

As previously disclosed, during June of 2022, the Company's CEO resigned from the board of directors and his role as an executive for the Company in June of 2022 under the terms of a separation agreement with the Company.

NOTE 12 – NOTE PAYABLE

In July 2019, the Company entered into a loan arrangement in the amount of $249,100 for a line of equipment, as part of the sale of manufacturing equipment during April 2022, the balance of this loan was paid off resulting in a balance of $0 as of December 31, 2022. In January 2020, the Company entered into a loan arrangement for $35,660 for equipment, of which $7,375 is a short term note payable at March 31, 2023. Payments are for 48 months and have a financing rate of 6.2%, which requires a monthly payment of $841.

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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. During the June 2022 quarter, the Company exited its laboratory facility as all R&D is conducted in its corporate offices. This lease expired in December 2022, and as a result we incurred an exit fee of $80,000 tied to the landlord's right to holdover rent which was booked as an offset to gain on the sold assets for the quarter ending June 30, 2022.

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*		*Six Months*
	*Ended*		*Ended*
	*March 31,*		*March 31,*
	*2023*		*2023*
Total Operating Lease Costs	$	332,124	$	664,249

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

	*Three Months*		*Six Months*
	*Ended*		*Ended*
	*March 31,*		*March 31,*
	*2023*		*2023*
Cash paid for amounts included in the measurement of operating lease liabilities	$	344,892	$	687,927

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As of March 31, 2023, our operating leases had a weighted average remaining lease term of 3.44 years and a weighted average discount rate of 4.66%.

Future minimum aggregate lease payments under operating leases as of March 31, 2023 are summarized as follows:

For the year ended September 30,
2023	$	692,277
2024		1,421,610
2025		1,159,949
Thereafter		1,372,862
Total future lease payments		4,646,698
Less interest		(367,965	)
Total lease liabilities	$	4,278,733

NOTE 14 – EARNINGS PER SHARE

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

	*Three Months Ended*						*Six Months Ended*
	*March 31,*			*March 31,*			*March 31,*			*March 31,*
	*2023*			*2022*			*2023*			*2022*
Basic and diluted:
Net loss continuing operations	$	(1,336,802	)	$	(4,657,215	)	$	(5,292,864	)	$	(23,818,120	)
Preferred dividends paid		1,000,500			1,000,502			2,001,002			2,001,002
Net loss adjusted for preferred dividend		(2,337,302	)		(5,657,717	)		(7,293,866	)		(25,819,122	)
Net loss attributable to cbdMD Inc. common shareholders		(2,337,302	)		(5,657,717	)		(7,293,866	)		(25,819,122	)

Shares used in computing basic earnings per share		1,345,589			1,310,378

cbdMD, Inc. [YCBD] Filings
10-Q	[2023-05-15]
S-1	[2023-03-13]
10-Q	[2023-02-13]
10-K	[2022-12-15]
10-Q	[2022-08-11]
10-Q	[2022-05-13]
10-Q	[2022-02-10]
10-K	[2021-12-17]
10-Q	[2021-08-12]
10-Q	[2021-05-12]
10-Q	[2021-02-09]
10-K	[2020-12-22]
10-Q	[2020-08-12]
10-Q	[2020-05-15]
10-Q	[2020-02-13]
10-K	[2019-12-18]
10-Q	[2019-08-14]
10-Q	[2019-05-15]
10-Q	[2019-02-14]
10-K	[2018-12-12]
S-1	[2018-09-26]
10-Q	[2018-08-14]
10-Q	[2018-05-15]
10-Q	[2018-02-14]
10-K	[2017-12-26]