| ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | cbdMD, Inc. ("cbdMD", "we",
"us", “our”, "Parent Company” 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. On April
22, 2019, following approval by our shareholders at the 2019 annual meeting held on April 19, 2019, we filed Articles of Amendment
to our Articles of Incorporation changing the name of our Company to “cbdMD, Inc.” effective May 1, 2019. We operate
from our offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30. On December 20, 2018 the Company, and its newly
organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, 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,
cbdMD LLC survived and operates the prior business of Cure Based Development. On April 10, 2019, cbdMD LLC was renamed to CBD Industries
LLC (“CBDI”). As consideration for the Mergers, the Company had a contractual obligation, after approval by our shareholders,
to issue 15,250,000 shares of our common stock to the members of Cure Based Development, of which 8,750,000 of the shares will
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 in the future upon earnout goals being within the next 5 years. The Company’s shareholders approved the issuance
of the 15,250,000 shares of common stock and they were issued to members of Cure Based Development on April 19, 2019. CBDI produces
and distributes Effective September 30, 2019, the Company abandoned
and ceased operations of four business subsidiaries: Encore Endeavor 1, LLC (“EE1”), I’M1, LLC (“IM1”),
Beauty and Pin Ups, LLC (“BPU”) and Level H&W, LLC (“Level H&W”). Therefore, the results of operations
related to these subsidiaries for the Company are reported as discontinued operations. Principles of Consolidation The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary CBDI. All material intercompany transactions and balances have
been eliminated in consolidation. Reclassifications Certain amounts previously presented in the
consolidated financial statements have been reclassified to conform to the current year presentation. Such reclassifications
had no effect on previously reported net loss, shareholders’ equity or cash flows . Use of Estimates The preparation of the Company's consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“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, common stock issued
prior to the IPO, 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. Cash and Cash Equivalents For financial statements purposes, the Company
considers all highly liquid investments with a maturity of less than three months when acquired 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 can be extended to wholesale and retail customers after an evaluation
of 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 September 30, 2019, we have an allowance for doubtful
accounts of $7,286, and had no allowance at September 30, 2018. In addition, the Company has in the past entered
into contracts where a portion of the consideration provided by the customer in exchange for the Company's services is common stock,
options or warrants (an equity position). In these situations, upon invoicing the customer for the stock or other instruments,
the Company will record the receivable as accounts receivable other, and use the value of the stock or other instrument upon invoicing
to determine the value. Where an accounts receivable is settled with the receipt of the common stock or other instrument, the common
stock or other instrument will be classified as an asset on the balance sheet as either an investment marketable security (when
the customer is a publicly traded entity) or as an investment other security (when the customer is a privately held entity). Accounts receivable and accounts receivable
other items that involve a related party are indicated as such on the face of the consolidated financial statements. Receivable and Merchant Reserve The Company primarily sells its products through
the internet and has an arrangement to process customer payments with third-party payment processors. The arrangement with the
payment processors requires that the Company pay a fee between 5.95% - 6.95% of the transaction amounts processed. Pursuant to
this agreement, there is a waiting period between 2 - 14 days prior to reimbursement to the Company, and as well as a calculated
reserve which some payment processors hold back. Fees and reserves can change periodically with notice from the processors. At
September 30, 2019, the receivable from payment processors included approximately $227,050 for the waiting period amount and is
recorded as accounts receivable in the accompanying consolidated balance sheet and $519,569 for the reserve amount for a total
receivable of $746,619. Marketable Securities Marketable securities that are equity securities
are carried at fair value on the consolidated balance sheets with changes in fair value recorded as an unrealized gain or (loss)
in the Statements of Operations in the period of the change. Upon the disposition of a marketable security, the Company records
a realized gain or (loss) on the Company’s consolidated statements of operations. On October 1, 2018, as a result of
the adoption of ASU 2016-01 – Financial Instruments Investment Other Securities For equity investments where the Company neither
controls nor has significant influence over the investee and which are non-marketable, which is 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. 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 show booths and equipment, three years for computer, furniture and equipment, and three years for software.
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. Intangible Assets The Company's intangible assets consist of trademarks
and other intellectual property, all of which are accounted for in accordance with 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 impairment analysis at August 1 annually 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. Intangible assets with finite useful lives are
amortized using the straight-line method over their estimated period of benefit. In accordance with ASC 360-10-35-21, definite
lived intangibles 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. In conjunction with any acquisitions, the Company
refers to ASC-805 as amended by Accounting Standards Update (“ASU”) 2017-01 in determining if the Company is acquiring
any inputs, processes or outputs and the impact that such factors would have on the classification of the acquisition as a business
combination or asset purchase. Additionally, the Company refers to the aforementioned guidance in reviewing all acquired assets
and assumed liabilities for valuation in a business combination, including the determination of intangible asset values and contingent
liabilities. 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 8. 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. In determining the fair value of the contingent
liability, the Company utilizes level 3 inputs and engages a third party valuation firm for assistance in the fair value determination. 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 balance sheet. For the fiscal year ended September 30, 2019,
the contingent liabilities associated with the business combination were increased by $32,461,680 to reflect their reassessed fair
values as of September 30, 2019. This increase is reflective of a change in value on the variable number of shares from the merger
date of December 20, 2018. In August 2019, 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 8 would
be met. The primary catalyst for the $32,461,680 increase in contingent liabilities is the change in the Company’s share
price between December 20, 2018 and September 30, 2019. These increases or reductions to the contingent liabilities are reflected
within Other Expenses on the consolidated statements of operations. Revenue Recognition The Company adopted ASC 606, Revenue from
Contracts with Customers Under ASC 606, 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 has reviewed its various revenue streams for its existing contracts
under the five-step approach. The Company has entered into various license agreements that provide revenues based on guarantee
minimum royalty payments with additional royalty revenues based on a percentage of defined sales. Guaranteed minimum royalty payments
(fixed revenue) are recognized on a straight-line basis over the term of the contract, as defined in each license agreement. Earned
royalties and earned royalties in excess of the fixed revenue (variable revenue) are recognized as income during the period corresponding
to the licensee’s sales. Earned royalties in excess of fixed revenue are only recognized when the Company is reasonably certain
that the guaranteed minimums payments for the period will be exceeded. The below table summarizes amounts related to
future performance obligations under fixed contractual arrangements as of September 30, 2019:
At September 30, 2019
2020 and thereafter
Future performance obligations $ 0 $ 0 Allocation of transaction price In our current business model we do 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 had 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. In circumstances where we have not historically
sold relevant products or services on a standalone basis, the Company utilizes the most situationally appropriate method of estimating
standalone selling price. These methods include (i) an adjusted market assessment approach, wherein we refer to prices from our
competitors for similar goods or serves and adjust those prices as necessary to reflect our typical costs and margins, (ii) an
expected cost plus margin approach, wherein we forecast the costs that we will incur in satisfying the identified performance obligation
and adding an appropriate margin to such costs, and (iii) a residual approach, wherein we adjust the total transaction price to
remove all observable standalone selling prices of other goods or services included in the contract and allocate the entirety of
the remaining contract amount to the remaining obligation. Revenue recognition The Company records revenue from the sale of
its products when risk of loss and title to the product are transferred to the customer, 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 30 day, money back guarantee. In regard to 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 Our product revenue is generated primarily through
two sales channels, E-commerce and wholesale channels. We also generate service related sales, although this type of revenue is
not a primary focus. We believe 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 our principal revenue generating
activities are as follows:
- Consumer sales - consumer products sold through our 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.
- Wholesale sales - products sold to our 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.
- Service related sales – services provided to organizations typically consulting services related to branding, marketing, or advisory. Revenue is recognized when services are delivered to the customer, in accordance with the terms of the applicable agreement. Payment terms vary and typically are based on deliverables and agreed upon timelines. The following table represents a disaggregation
of revenue by sales channel:
Fiscal 2019 % of total Fiscal 2018 % of total
Wholesale product sales $ 8,878,901 37.5 % $ - 0 %
Consumer product sales 14,772,650 62.5 % - 0 %
Service related sales - - 459,091 100 %
Total net sales $ 23,651,551 $ 459,091 Contract Balances Contract assets represent unbilled receivables
and are presented within accounts receivable, net on the condensed consolidated balance sheets. Contract liabilities represent
unearned revenues and are presented as deferred revenue or customer deposits on the condensed consolidated balance sheets. The below table summarize the net change in
contract assets and contract liabilities from October 1, 2018 to September 30, 2019, of which all of these contract liabilities
are associated with the discontinued operations more fully described in Note 15:
Entertainment Products Licensing Total
Balance at September 30, 2018 $ 37,500 - $ 115,625 $ 153,125
Billed during three months ended December 31, 2018 75,000 265,000 - 340,000
Earned during three months ended December 31, 2018 (68,750 ) - (115,625 ) (184,375 )
Balance at December 31, 2018 $ 43,750 $ 265,000 - $ 308,750
Amount returned during three months ended March 31, 2019 (175,000 ) (175,000 )
Billed during three months ended March 31, 2019 - - 10,000 10,000
Earned during three months ended March 31, 2019 (18,750 ) - (1,667 ) (20,417 )
Balance at March 31, 2019 $ 25,000 $ 90,000 $ 8,333 $ 123,333
Billed during three months ended June 30, 2019 - - - -
Earned during three months ended June 30, 2019 (18,750 ) (55,596 ) (1,667 ) (76,013 )
Balance at June 30, 2019 $ 6,250 $ 34,404 $ 6,666 $ 47,320
Billed during three months ended September 30, 2019 - - - -
Earned or written off during three months ended September 30, 2019 (6,250 ) (34,404 ) (6,666 ) (47,320 )
Balance at September 30, 2019 $ - $ - $ - $ - Cost of Sales Our cost of sales includes costs associated
with distribution, fill and labor expense, components, manufacturing overhead, third-party providers, and outbound freight for
our products sales, and includes labor for our service sales. For our 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. Advertising Costs The Company expenses all costs of advertising
and related marketing and promotional costs as incurred. The Company incurred approximately $5,151,795 and $143,701 in advertising
and related marketing and promotional costs included in operating expenses during the years ended September 30, 2019 and 2018,
respectively. Shipping and Handling Fees and Costs All fees billed to customers for shipping and
handling are classified as a component of sales. All costs associated with shipping and handling are classified as a component
of cost of goods sold. Income Taxes The Parent Company is a North Carolina corporation
that is treated as a corporation for federal and state income tax purposes. Prior to April 2017, BPU was a multi-member limited
liability company that was treated as a partnership for federal and state income tax purposes. As such, the Parent Company’s
partnership share in the taxable income or loss of BPU was included in the tax return of the Parent Company. Beginning in April
2017, the Parent Company acquired the remaining interests in BPU. As a result of the acquisition, BPU became a disregarded entity
for tax purposes and its entire share of taxable income or loss was included in the tax return of the Parent Company. CBDI and
Level H&W are 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 Parent Company. IM1 and EE1 are multi-member limited liability companies that are
treated as partnerships for federal and state income tax purposes. As such, the Parent Company’s partnership share in the
taxable income or loss of IM1 and EE1 are included in the tax return of the Parent Company. The Parent Company accounts for income taxes
pursuant to the provisions of the Accounting for Income Taxes topic of the FASB 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 Parent 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. US GAAP requires management to evaluate tax
positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain tax position that
more likely than not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions
taken by the Company, and has concluded that as of September 30, 2019 and 2018, there were no uncertain tax positions taken or
expected to be taken that would require recognition of a liability (or asset) or disclosure in the consolidated financial statements. 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 $4,097,190 uninsured balance at September 30, 2019 and a $0 uninsured balance at September 30,
2018. Funds which are not subject to coverage or loss under FDIC were $0 and $4,003,003 at September 30, 2019 and 2018, respectively. 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 year ended September 30, 2019. We have four customers whose aggregate accounts receivable
balance was approximately 84% of the combined total accounts receivable and accounts receivable discontinued operations as of September
30, 2019. The Company had three customers whose revenue in total represented 75% of the Company’s net sales for the year
ended September 30, 2018, such customers represented 51%, 10% and 14% of net sales. The aggregate accounts receivable balance of
such customers represented 92% of the Company’s total accounts receivable as of September 30, 2018. Stock-Based Compensation We account for our stock compensation under
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. We use 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. Under
ASU 2016-09 which amends ASC 718, which became effective October 1, 2017, we elected to change our accounting principle to recognize
forfeitures when they occur. This change had no impact on beginning retained earnings as there had been no forfeitures estimated
or incurred in prior perio |
