ycbd20231231

ycbd20231231_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 December 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.

3,045,092 shares of common stock are issued and outstanding as of February 13, 2024.

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TABLE OF CONTENTS

		Page No

PART I-FINANCIAL INFORMATION

ITEM 1.	Condensed Consolidated Financial Statements.	5

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	28

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.	36

ITEM 4.	Controls and Procedures.	36

PART II - OTHER INFORMATION

ITEM 1.	Legal Proceedings.	37

ITEM 1A.	Risk Factors.	37

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	37

ITEM 3.	Defaults Upon Senior Securities.	37

ITEM 4.	Mine Safety Disclosures.	37

ITEM 5.	Other Information.	37

ITEM 6.	Exhibits.	38

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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”, 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, and “first quarter of 2024” refers to the three months ended December 31, 2023.

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.

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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

●

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.

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PART 1 – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

cbdMD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, 2023 AND SEPTEMBER 30, 2023

	(Unaudited)
	*December 31,*		*September 30,*
	*2023*		*2023*
Assets

Current assets:
Cash and cash equivalents	$	1,504,844	$	1,797,860
Accounts receivable		1,102,180		1,216,090
Inventory		3,554,395		4,052,972
Inventory prepaid		188,250		182,675
Prepaid sponsorship		29,473		70,061
Prepaid expenses and other current assets		986,821		750,383
Total current assets		7,365,963		8,070,041

Other assets:
Property and equipment, net		790,349		716,579
Operating lease assets		3,060,405		3,350,865
Deposits for facilities		132,203		138,708
Intangible assets		3,046,248		3,219,090
Investment in other securities, noncurrent		700,000		700,000
Total other assets		7,729,205		8,125,242

Total assets	$	15,095,168	$	16,195,283

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, 2023 AND SEPTEMBER 30, 2023

(continued)

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

Current liabilities:
Accounts payable	$	1,566,633		$	1,906,319
Accrued expenses		3,102,468			1,484,441
Operating leases – current portion		1,302,663			1,277,089
Note payable		-			2,492
Total current liabilities		5,971,764			4,670,341

Long term liabilities:
Long term liabilities		-			9
Operating leases - long term portion		2,066,050			2,403,286
Contingent liability		20,611			90,363
Total long term liabilities		2,086,661			2,493,658

Total liabilities		8,058,425			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, 2,961,056 and 2,960,573 shares issued and outstanding, respectively		2,961			2,961
Additional paid in capital		183,389,556			183,387,095
Accumulated deficit		(176,360,774	)		(174,363,772	)
Total cbdMD, Inc. shareholders' equity		7,036,743			9,031,284

Total liabilities and shareholders' equity	$	15,095,168		$	16,195,283

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2023 AND 2022

(Unaudited)

	*Three months*			*Three months*
	*Ended*			*Ended*
	*December 31,*			*December 31,*
	*2023*			*2022*

Gross Sales	$	5,375,630		$	6,240,526
Allowances		(225	)		(155,308	)
Total Net Sales		5,375,405			6,085,218
Cost of sales		1,817,907			2,517,452
Gross Profit		3,557,498			3,567,766

Operating expenses		4,623,333			7,613,947
Loss from operations		(1,065,835	)		(4,046,181	)
Decrease of contingent liability		69,752			61,000
Interest expense (income)		(418	)		29,119
Loss before provision for income taxes		(996,501	)		(3,956,062	)

Benefit for income taxes		-			-
Net Loss		(996,501	)		(3,956,062	)
Preferred dividends		1,000,501			1,000,502

Net Loss attributable to cbdMD, Inc. common shareholders	$	(1,997,002	)	$	(4,956,564	)

Net Loss per share:
Basic and Diluted earnings per share		(0.67	)		(3.70	)
Weighted average number of shares Basic and Diluted:		2,960,945			1,341,277

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2023 AND 2022

(Unaudited)

	*Three months*			*Three months*
	*Ended*			*Ended*
	*December 31,*			*December 31,*
	*2023*			*2022*

Net Loss	$	(996,501	)	$	(3,956,062	)
Comprehensive Loss		(996,501	)		(3,956,062	)

Preferred dividends		(1,000,501	)		(1,000,502	)
Comprehensive Loss Income attributable to cbdMD, Inc. common shareholders	$	(1,997,002	)	$	(4,956,564	)

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2023 AND 2022

(Unaudited)

	*Three Months*			*Three Months*
	*Ended*			*Ended*
	*December 31,*			*December 31,*
	*2023*			*2022*
Cash flows from operating activities:
Net Loss	$	(996,501	)	$	(3,956,062	)
Adjustments to reconcile net loss to net cash used by operating activities:
Stock based compensation		1,772			79,446
Restricted stock expense		689			43,449
Write off of prepaid assets due to termination of contractual obligation		-			884,892
Intangibles amortization		172,842			277,354
Depreciation		110,864			100,112
Impairment of goodwill and other intangible assets		-			-
Decrease in contingent liability		(69,752	)		(61,000	)
Amortization of operating lease asset		290,459			276,636
Changes in operating assets and liabilities:
Accounts receivable		67,169			549,111
Deposits		6,505			105,898
Inventory		498,577			(434,695	)
Prepaid inventory		(5,575	)		340,799
Prepaid expenses and other current assets		(195,850	)		(226,670	)
Accounts payable and accrued expenses		142,292			39,204
Operating lease liability		(311,661	)		(287,547	)
Deferred revenue / customer deposits		182,290			203,341
Collection on discontinued operations accounts receivable		-			1,375
Cash used by operating activities		(105,880	)		(2,064,357	)
Cash flows from investing activities:
Purchase of property and equipment		(184,635	)		(177,370	)
Cash flows from investing activities		(184,635	)		(177,370	)
Cash flows from financing activities:
Note payable		(2,501	)		(125,341	)
Preferred dividend distribution		-			(1,000,502	)
Cash flows from financing activities		(2,501	)		(1,125,843	)
Net increase (decrease) in cash		(293,016	)		(3,367,570	)
Cash and cash equivalents, beginning of period		1,797,860			6,720,234
Cash and cash equivalents, end of period	$	1,504,844		$	3,352,664

Supplemental Disclosures of Cash Flow Information:

	*2023*		*2022*

Cash Payments for:
Interest expense	$	11,614	$	2,638

Non-cash financial activities:
Preferred dividends accrued but not paid	$	1,000,501	$	0

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE three months ended December 31, 2023

(Unaudited)

									*Additional*
	*Common Stock*				*Preferred Stock*				*Paid in*		*Accumulated*
	*Shares*		*Amount*		*Shares*		*Amount*		*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

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE three months ended December 31, 2022

(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

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE three months ended December 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 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 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 2023 10-K/A. 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 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 Generally Accepted Accounting Principles ("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, and contingent liability is a material estimate. Actual results could differ from these estimates.

The Company continues to monitor macroeconomic conditions to remain flexible and to optimize and evolve its business as appropriate.

Cash and Cash Equivalents

For financial statements purposes, the Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents.

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Accounts Receivable

Accounts receivable are stated at cost less an allowance for 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 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 December 31, 2023 and September 30, 2023, we had an allowance for credit losses of $114,882 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 December 31, 2023 and September 30, 2023, the receivable from payment processors included approximately $576,901 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.

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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. As further outlined in Note 5, during the 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 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 December 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 December 31, 2023.

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

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

E-commerce sales	$	4,424,006		82.3	%	$	4,906,205		80.6	%
Wholesale sales		951,399		17.7	%		1,179,013		19.4	%
Total Net Sales	$	5,375,405		100.0	%	$	6,085,218		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 $0.9 million uninsured balance at December 31, 2023 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 months ended December 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 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 $996,501 for the three months ended December 31, 2023, resulting in a reduction of net working capital of $1,394,198.

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.

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 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 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.

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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 December 31, 2023 and September 30, 2023 consists of the following:

	*December 31,*			*September 30,*
	*2023*			*2023*
Finished Goods	$	2,384,087		$	2,782,680
Inventory Components		1,358,009			1,397,034
Inventory Reserve		(187,701	)		(126,742	)
Inventory prepaid		188,250			182,675
Total Inventory	$	3,742,645		$	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 December 31, 2023.

NOTE 4 – PROPERTY AND EQUIPMENT

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

	*December 31,*			*September 30,*
	*2023*			*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			11,087
		2,359,854			2,175,219
Less accumulated depreciation		(1,569,505	)		(1,458,640	)
Property and equipment, net	$	790,349		$	716,579

Depreciation expense related to property and equipment was $110,864 and $100,112 for the three months ended December 31, 2023 and 2022, respectively.

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NOTE 5 – INTANGIBLE ASSETS

Intangible Assets

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

	*December 31,*			*September 30,*
	*2023*			*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		(2,601,163	)		(2,329,321	)
Total	$	3,046,248		$	3,219,090

Amortization expense related to definite lived intangible assets was $172,842 and $277,354 for the three months ended December 31, 2023 and 2022

Future amortization of intangible assets as of December 31, 2023 is as follows:

For the year ended September 30,
2024	$	518,526
2025		688,757
2026		660,040
2027		660,040
2028		496,223
Thereafter		22,662
Total future intangibles amortization	$	3,046,248

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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 we 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 Merger Agreement also provided that an additional 338,889 Earnout Shares could 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 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. As of November 2023, the preliminary 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 $

SEC Form 10-Q filed by cbdMD Inc.