ycbd_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, 2021

or

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

	For the transition period from __________________ to _______________

Commission file number 001-38299

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.

58,902,970 shares of common stock are issued and outstanding as of February 10, 2022.

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		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.	26

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.	30

ITEM 4.	Controls and Procedures.	30

PART II - OTHER INFORMATION

ITEM 1.	Legal Proceedings.	31

ITEM 1A.	Risk Factors.	31

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	35

ITEM 3.	Defaults Upon Senior Securities.	31

ITEM 4.	Mine Safety Disclosures.	31

ITEM 5.	Other Information.	31

ITEM 6.	Exhibits.	32

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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 2021” refers to the year ended September 30, 2021, “fiscal 2022” refers to the fiscal year ending September 30, 2022, “first quarter of 2021” refers to the three months ended December 31, 2020, and “first quarter of 2022” refers to the three months ended December 31, 2021.

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;

		·	the continuing impact of COVID-19 on our company;

		·	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

		·	risks associated with the implementation of our enterprise resource planning system (ERP) to Accumatica.

material risks associated with regulatory environment for CBD, including:

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

		·	change in state laws pertaining to industrial hemp;

		·	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 impact of changes in the fair value of our contingent liabilities associated with the Earnout Shares;

		·	dilution to our shareholders upon the issuance of the Earnout Shares;

		·	time devoted to our company by one of our co-Chief Executive Officers;

		·	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

		·	voting control held by our directors and their affiliates.

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, 2021 as filed with the Securities and Exchange Commission (the “SEC”) on December 17, 2021 (the “2021 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, 2021 AND SEPTEMBER 30, 2021

	(Unaudited)
	December 31,		September 30,
	2021		2021
Assets

Current assets:
Cash and cash equivalents	$	19,696,919	$	26,411,424
Accounts receivable		1,108,818		1,113,372
Accounts receivable – discontinued operations		2,625		10,967
Marketable securities		-		33,351
Investment other securities		1,000,000		1,000,000
Inventory		4,867,208		5,021,867
Inventory prepaid		559,708		551,519
Prepaid sponsorship		895,070		1,212,682
Prepaid expenses and other current assets		1,548,181		1,147,178
Total current assets		29,678,529		36,502,360

Other assets:
Property and equipment, net		2,504,220		2,561,574
Operating lease assets		5,296,943		5,614,960
Deposits for facilities		407,708		529,583
Intangible assets		18,666,612		23,003,929
Goodwill		42,772,685		56,670,970
Total other assets		69,648,168		88,381,016

Total assets	$	99,326,697	$	124,883,376

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2021 AND SEPTEMBER 30, 2021

(continued)

	(Unaudited)
	December 31,			September 30,
	2021			2021
Liabilities and shareholders' equity

Current liabilities:
Accounts payable	$	3,673,855		$	2,978,914
Accrued expenses		1,909,139			2,727,612
Operating leases – current portion		1,117,236			1,151,150
Note payable		60,468			59,470
Total current liabilities		6,760,698			6,917,146

Long term liabilities:
Long term liabilities		93,489			108,985
Operating leases - long term portion		4,571,510			4,859,058
Contingent liability		3,501,000			9,856,000
Total long term liabilities		8,165,999			14,824,043

Total liabilities		14,926,697			21,741,189

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, 58,277,970 and 57,783,340 shares issued and outstanding, respectively		58,278			57,783
Additional paid in capital		177,835,993			176,417,269
Accumulated deficit		(93,499,271	)		(73,337,865	)
Total shareholders' equity		84,400,000			103,142,187

Total liabilities and shareholders' equity	$	99,326,697		$	124,883,376

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THR THREE MONTHS ENDED DECEMBER 31, 2021 AND 2020

(Unaudited)

	Three months			Three months
	Ended			Ended
	December 31,			December 31,
	2021			2020

Gross Sales	$	9,856,767		$	13,131,946
Allowances		(534,945	)		(803,643	)
Total Net Sales		9,321,822			12,328,303
Cost of sales		4,328,310			3,430,274
Gross Profit		4,993,512			8,898,028

Operating expenses		11,955,284			10,657,973
Impairment of Goodwill and other intangible assets		18,183,285			-
Loss from operations		(25,145,057	)		(1,759,945	)
Realized and Unrealized (loss) gain on marketable and other securities, including impairments		(33,351	)		542,710
Increase (decrease) of contingent liability		5,950,000			(8,500,000	)
Other income		70,738			-
Interest expense		(3,234	)		(10,386	)
Loss before provision for income taxes		(19,160,904	)		(9,727,621	)

Benefit for income taxes		-			332,000
Net Loss from continuing operations		(19,160,904	)		(9,395,621	)
Net Loss		(19,160,904	)		(9,395,621	)
Preferred dividends		1,000,502			100,050

Net Loss attributable to common shareholders	$	(20,161,406	)	$	(9,495,671	)

Net Loss per share:
Basic earnings per share		(0.35	)		(0.18	)
Diluted earnings per share		(0.35	)		(0.18	)
Weighted average number of shares Basic:		57,825,367			52,130,870
Weighted average number of shares Diluted:		57,825,367			52,130,870

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE MONTHS ENDED DECEMBER 31, 2021 AND 2020

(Unaudited)

	Three months			Three months
	Ended			Ended
	December 31,			December 31,
	2021			2020

Net Loss	$	(19,160,904	)	$	(9,395,621	)
Comprehensive Loss		(19,160,904	)		(9,395,621	)

Preferred dividends		(1,000,502	)		(100,050	)
Comprehensive Income (Loss) attributable to common shareholders	$	(20,161,406	)	$	(9,495,671	)

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2021 AND 2020

(Unaudited)

	Three months			Three months
	Ended			Ended
	December 31,			December 31,
	2021			2020
Cash flows from operating activities:
Net Loss	$	(19,160,904	)	$	(9,395,621	)
Adjustments to reconcile net loss to net cash used by operating activities:
Stock based compensation		505,466			248,894
Restricted stock expense		508,754			15,279
Marketing stock amortization		220,000			-
Issuance of stock / warrants for service		-			35,712
Inventory and materials impairment		878,142			-
Depreciation and amortization		340,701			232,658
Impairment of Goodwill and other Intangible Assets		18,183,285			-
Increase/(Decrease) in contingent liability		(5,950,000	)		8,500,000
Realized and unrealized loss of Marketable and other securities		33,350			(542,709	)
Termination benefit		-			305,326
Amortization of operating lease asset		318,017			304,080
Changes in operating assets and liabilities:
Accounts receivable		4,554			(110,072	)
Deposits		121,875			24,000
Inventory		(723,483	)		219,859
Prepaid inventory		(8,189	)		(48,184	)
Prepaid expenses and other current assets		(303,391	)		(310,268	)
Accounts payable and accrued expenses		(127,254	)		(1,500,755	)
Operating lease liability		(321,462	)		(237,952	)
Deferred revenue / customer deposits		3,723			(22,701	)
Collection on discontinued operations accounts receivable		8,342			422,417
Deferred tax liability		-			(332,000	)
Cash from operating activities		(5,468,475	)		(2,192,038	)
Cash flows from investing activities:
Proceeds from sale of other investment securities		-			540,000
Purchase of property and equipment		(231,030	)		(93,294	)
Cash from investing activities		(231,030	)		446,706
Cash flows from financing activities:
Proceeds from issuance of preferred stock		-			15,798,115
Note payable		(14,498	)		(13,564	)
Preferred dividend distribution		(1,000,502	)		(100,050	)
Cash from financing activities		(1,015,000	)		15,684,500
Net (decrease) increase in cash		(6,714,505	)		13,939,168
Cash and cash equivalents, beginning of period		26,411,424			14,824,644
Cash and cash equivalents, end of period	$	19,696,919		$	28,763,812

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Supplemental Disclosures of Cash Flow Information:


	2021		2020

Cash Payments for:
Interest expense	$	3,234	$	3,672

Non-cash financial/investing activities:
Issuance of Contingent earnout shares:	$	405,000	$	-
Warrants issued to representative	$	-	$	254,950

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY

FOR THE THREE MONTHS ENDED DECEMBER 31, 2021

(Unaudited)

									Additional		Other
	Common Stock				Preferred Stock				Paid in		Comprehensive		Accumulated
	Shares		Amount		Shares		Amount		Capital		Income (loss)		Deficit			Total
Balance, September 30, 2021		57,783,340	$	57,783		5,000,000		5,000	$	176,417,269	$	-	$	(73,337,865	)	$	103,142,187
Issuance of Common stock		494,630		495		-				404,505		-		-			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 Income (loss)		-		-		-		-		-		-		(19,160,904	)		(19,160,904	)
Balance, December 31, 2021		58,277,970	$	58,278		5,000,000		5,000	$	177,835,993	$	-	$	(93,499,271	)	$	84,400,000

See Notes to Condensed Consolidated Financial Statements

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cbdMD, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY

FOR THE THREE MONTHS ENDED DECEMBER 31, 2020

(Unaudited)

									Additional		Other
	Common Stock				Preferred Stock				Paid in		Comprehensive		Accumulated
	Shares		Amount		Shares		Amount		Capital		Income (loss)		Deficit			Total
Balance, September 30, 2020		52,130,870	$	52,131		500,000	$	500	$	126,517,784	$	-	$	(47,388,367	)	$	79,182,048
Issuance of Preferred Stock		-		-		2,300,000		2,300		15,795,815		-		-			15,798,115
Issuance of options for share based compensation		-		-		-		-		219,875		-		-			219,875
Issuance of restricted stock for share based compensation		-		-		-		-		15,279		-		-			15,279
Preferred dividend		-		-		-		-		-		-		(100,050	)		(100,050	)
Net Income (loss)		-		-		-		-		-		-		(9,395,621	)		(9,395,621	)
Balance, December 31, 2020		52,130,870	$	52,131		2,800,000	$	2,800	$	142,548,753	$	-	$	(56,884,038	)	$	85,719,646

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, 2021 sand 2020

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 15,250,000 shares of our common stock to the members of Cure Based Development, of which unrestricted voting rights to 8,750,000 of the shares vest over a five-year period and are subject to a voting proxy agreement, as well as to issue another 15,250,000 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 the Company comply with the 2018 Farm Bill - our full spectrum products contain trace amounts of THC under the 0.03% by dry weight limit in the 2018 Farm Bill while our broad spectrum products are non-psychoactive as they do not contain detectable levels of tetrahydrocannabinol (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. In addition to the revenue contribution from the business the Company believes this acquisition will provide additional insight on consumer data and industry trends.

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 2021 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 2021 as reported in the 2021 10-K have been omitted.

Principles of Consolidation

The 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.

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 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 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 intangible 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.

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restriction on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. We are monitoring the trends on infection rates and governmental restrictions and are cautiously optimistic impacts to the business environment will be minimal.

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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.

Accounts Receivable and Accounts Receivable Other

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 December 31, 2021 and September 30, 2021, we had an allowance for doubtful accounts of $12,831 and $3,633, 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 December 31, 2021, the receivable from payment processors included approximately $139,426 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.

Customer Deposits

Customer deposits consist of payments received in advance of revenue recognition. Revenue is recognized as revenue recognition criteria are met.

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.

Goodwill

Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Identifiable intangible assets acquired in business combinations are recorded based on their fair values at the date of acquisition. Goodwill is not subject to amortization but must be evaluated for impairment annually. The Company tests for goodwill impairment annually or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

In performing a goodwill test, the Company performs a qualitative evaluation and if necessary, a quantitative evaluation. Factors considered in the qualitative test include specific operating results as well as new events and circumstances impacting the operations or cash flows of the business acquired. For the quantitative test, the Company assesses goodwill for impairment by comparing the carrying value of the business to the respective fair value. The Company determines the fair value of its acquired business using a combination of income- based and market-based approaches and incorporates assumptions it believes market participants would utilize. The income-based approach utilizes discounted cash flows while the market-based approach utilizes market multiples. These approaches are dependent upon internally developed forecasts that are based upon annual budgets and longer-range strategic plans. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the respective acquired business and in the internally developed forecasts. The Company has analyzed a variety of factors on its business to determine if a circumstance could trigger an impairment loss, and, at this time and based on the information presently known, has determined that is it more likely than not that an impairment loss has occurred. See Note 5 more further information on the impairment testing procedures performed.

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Intangible Assets

The Company’s intangible assets consist of trademarks and other intellectual property, all of which are accounted for in accordance with Accounting Standards Codification (ASC) Topic 350, Intangibles – Goodwill and Other. The Company employs 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. We perform an annual impairment analysis as of August 1 of each fiscal year on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. If a quantitative analysis is necessary, we would analyze various aspects including revenues from the business, associated with the intangible assets. In addition, intangible assets will 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 has analyzed a variety of factors on its business to determine if a circumstance could trigger an impairment loss, and, at this time and based on the information presently known, has determined that is it more likely than not that an impairment loss has occurred. See Note 5 more further information on the impairment testing procedures performed. The Company monitors indefinite lived intangibles periodically to determine that the indefinite life continues to be appropriate. See Note 5 for further information regarding changes to indefinite lived assets at December 31, 2021.

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.

The Company recognized both the fixed number of shares to be issued, and the variable number of shares to be potentially issued, as contingent liabilities on its consolidated balance sheets. These contingent liabilities were recorded at fair value upon the acquisition date and are remeasured quarterly based on the reassessed fair value as of the end of that quarterly reporting period. Additionally, as the fixed shares were issued on April 19, 2019, the value of the shares at that time, in the amount of $53,215,163, was reclassified from contingent liability to additional paid in capital on the consolidated balance sheet. The first marking period for the Earnout Shares was December 31, 2019 and based on measurement criteria, 5,127,792 shares were issued on February 27, 2020. The value of the issued Earnout Shares as of February 27, 2020 was $4,620,000 and the decrease in value of $6,924,503 from December 31, 2019 related to those shares was recorded in the Statement of Operations for the three months ended March 31, 2020. Additionally, as the 5,127,792 Earnout Shares were issued on February 27, 2020, the value of the shares in the amount of $4,620,000 was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The second marking period for the Earnout Shares ended December 31, 2020 and based on measurement criteria, 3,348,520 Earnout Shares were issued on March 8, 2021. The second marking period shares increased in value by $3,100,012 during the quarter through the time of issuance and had a value of $11,271,000, which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The first quarter of the third marking period ended on March 31, 2021 and based on the measurement criteria an additional 562,278 Earnout Shares had been earned and issued in May of 2021. These shares deceased in value by $522,104 during the quarter through the time of issuance and had a value of $1,329,000 which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The second quarter of the third marking period ended on June 30, 2021 and based on the measurement criteria an additional 503,275 Earnout Shares had been earned and issued in August of 2021. These shares deceased in value by $222,442 during the quarter through the time of issuance and had a value of $920,000 which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The third quarter of the third marketing period ended on September 30, 2021 and based on the measurement criteria an additional 466,713 Earnout Shares had been earned and issued in December 2021. These shares decreased in value by $366,841 during the quarter through the time of issuance and had a value of $405,000 which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet.

For the three months ended December 31, 2021, the remaining contingent liabilities associated with the business combination, after the issuance of the third quarter of the third marking period Earnout Shares, were decreased by $6,101,000 to reflect their reassessed fair values as of December 31, 2021. This decrease is reflective of a change in value of the variable number of shares from September 30, 2021. In aggregate, the Company recorded income of $5,695,000 for the three months ended December 31, 2021 between the decrease in the value of the third marking period Earnout Shares and the decrease in value of the remaining contingent liabilities. In May 2020, and subsequently in June 2021 and December 2021, the Company updated the forecasts for performance of the post-acquisition entity based on current trends and performance that would impact the estimated likelihood that the revenue targets disclosed in Note 6 would be met. The primary catalyst for the $6,101,000 decrease in contingent liabilities is the change in the Company’s common share price between September 30, 2021 to December 31, 2021 from $2.08 per share to $1.08 per share. These increases or decreases to the contingent liabilities are reflected within Other Income (Expenses) on the condensed consolidated statements of operations.

As part of the Twenty Two acquisition in July 2021, the Company has a contractual obligation to issue up to an additional 200,000 shares of it’s common stock as additional consideration, dependent upon the acquisition entity meeting future revenue targets. Under 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 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.

Paycheck Protection Program Loan

On April 27, 2020, we received a loan in the principal amount of $1,456,100 (the “SBA Loan”) in consideration of a Promissory Note, under the Paycheck Protection Program (“PPP”), which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). The intent and purpose of the PPP is to support companies, during the COVID-19 pandemic, by providing funds for certain specified business expenses, with a focus on payroll. As a qualifying business as defined by the SBA, the Company is using the proceeds from this loan to primarily help maintain its payroll as it navigates its business with a focus on returning to normal operations. The term of the Promissory Note is two years, though it may be payable sooner in connection with an event of default under the Promissory Note. The SBA Loan carries a fixed interest rate of one percent per year, with the first payment due seven months from the date of initial cash receipt. Under the CARES Act and the PPP, certain amounts of loans made under the PPP may be forgiven if the recipients use the loan proceeds for eligible purposes, including payroll costs and certain rent or utility costs, and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. The Company used the SBA Loan for qualifying expenses and has applied for forgiveness of the SBA Loan in accordance with the terms of the CARES Act. The Company filed for forgiveness under the terms of the SBA loan and on May 17, 2021 it received notice from the SBA that the loan had been forgiven. The Company subsequently booked $1,466,113 gain for unpaid principal and accrued interest.

Revenue Recognition

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

Performance Obligations

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, 2021, the Company has no future 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. However, at times in the past, the Company has entered into contracts with customers wherein there were multiple elements that may have disparate revenue recognition patterns. In such instances, the Company must allocate the total transaction price to these various elements. This is achieved by estimating the standalone selling price of each element, which is the price at which we sell a promised good or service separately to a customer.

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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.

Regarding sales for services provided, the Company records revenue when the customer has accepted services and the Company has a right to payment. Based on the contracted services, revenue is recognized when the Company invoices customers for completed services at agreed upon rates or revenue is recognized over a fixed period of time during which the service is performed.

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

SEC Form 10-Q filed by cbdMD Inc.