| ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Organization and Nature of Business 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. 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 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 On October 22, 2019, cbdMD, Inc. filed Articles
of Incorporation with the Secretary of State of North Carolina to form a new wholly-owned subsidiary, Paw CBD, Inc. (“Paw
CBD”), in conjunction with the organization of its animal health division. In the third quarter of fiscal 2019 cbdMD, Inc.
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. as a separate wholly-owned subsidiary in an effort to take advantage of its early mover status in
the CBD animal health industry. 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. 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 Company’s
Annual Report filed with the SEC on Form 10-K for the year ended September 30, 2019 (“2019 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 year 2019 as reported in the 2019 10-K have been omitted. Principles of Consolidation The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries CBDI and Paw CBD. All material intercompany transactions and
balances have been eliminated in consolidation. Use of Estimates The preparation of the Company's 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, common stock issued prior to the Company’s initial public offering (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. The Company
is continuing to monitor data related to impact of the COVID-19 pandemic and a 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 March 31, 2020, we have an allowance for doubtful accounts of $14,318,
and had an allowance of $7,286 at September 30, 2019. In addition, the Company has and may, from
time to time, enter 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
a marketable security (when the customer is a publicly traded entity) or as an investment other security (when the customer is
a private entity). 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, and will negotiate the fee
based on the market. The arrangement with the payment processors requires that the Company pay a fee between 4.0% - 5.2% of the
transaction amounts processed. Pursuant to this agreement, there can be a waiting period between 2 - 5 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 March 31, 2020, the receivable from payment processors included approximately $160,013 for
the waiting period amount and is recorded as accounts receivable in the accompanying consolidated balance sheet and $280,322 for
the reserve amount for a total receivable of $440,335. 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, three years for computer, furniture and equipment, three years for
software, and leasehold improvements are over the term of the lease. 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 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. 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. In addition 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 is
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 balance sheet. For the three months ended March 31, 2020, the
contingent liabilities associated with the business combination were decreased by $21,261,994 to reflect their reassessed fair
values as of March 31, 2020. This decrease is reflective of a change in value of the variable number of shares from December 31,
2019, including the change in value of the Earnout Shares from December 31, 2019 until issued February 27, 2020. In December 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 $21,261,994
decrease in contingent liabilities is the change in the Company’s common share price between March 31, 2020 and December
31, 2019. These increases or decreases to the contingent liabilities are reflected within Other Income (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. For our CBD products, 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. The below table summarizes amounts related to
future performance obligations under fixed contractual arrangements as of March 31, 2020:
At March 31, 2020
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, consumer (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 (E-commerce) 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:
Three Months ended March 31, 2020 % of total
Three Months ended March 31, 2019
% of total
Wholesale product sales $ 2,617,860 27.9 % $ 1,375,045 24.4 %
Consumer product sales 6,781,176 72.1 % 4,261,533 75.6 %
Service related sales - 0 % - 0 %
Total net sales $ 9,399,036 $ 5,636,578
Six Months ended March 31, 2020 % of total
Six Months ended March 31, 2019 % of total
Wholesale product sales $ 5,885,981 30.1 % $ 1,375,045 22.5 %
Consumer product sales 13,661,291 69.9 % 4,727,220 77.5 %
Service related sales - 0 % - 0 %
Total net sales $ 19,547,272 $ 6,102,265 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. We have no contract assets and contract liabilities at March 31,
2020. 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 $3,398,777 and $1,475,696 in advertising
and related marketing and promotional costs included in operating expenses during the three months ended March 31, 2020 and 2019,
respectively. The Company incurred approximately $5,809,498 and $1,557,838 in advertising and related marketing and promotional
costs included in operating expenses during the six months ended March 31, 2020 and 2019, 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, Paw
CBD, 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 March 31, 2020 and 2019, 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 $14,344,758 uninsured balance at March 31, 2020 and a $4,097,190 uninsured balance at September
30, 2019. Concentration of credit risk with respect to
receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management
considers these customer receivables to represent normal business risk. The Company did not have any customers that represented
a significant amount of our sales for the three and six months ended March 31, 2020. We have three customers whose aggregate accounts
receivable balance was approximately 69% of the combined total accounts receivable and accounts receivable discontinued operations
as of March 31, 2020, of which one customer is from the discontinued operations and accounts for approximately 51%. The aggregate
accounts receivable balance of such customers represented approximately 51% of the Company’s total accounts receivable as
of September 30, 2019. Stock-Based Compensation We account for our stock compensation under
the ASC 718-10-30, Compensation - Stock Compensation 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. The Company
recognizes forfeitures when they occur. Earnings (Loss) Per Share The Company uses ASC 260-10, Earnings Per
Share New Accounting Standards On October 1, 2019,
the Company adopted ASU No. 2016-02, Leases In connection
with the adoption of the new guidance, the Company recognized an operating lease asset for $7,704,109 and operating lease liability
of $7,950,803 and a reduction of retained earnings of $13,528 in its balance sheet as of December 31, 2019, with no impact to its
results of operations and cash flows. The difference between the leased assets and lease liabilities represents the net position
of existing prepaid rent and deferred rent liabilities balance, resulting from historical straight-lining of operating leases,
which were effectively reclassified upon adoption to reduce the measurement of the leased assets. In August 2018, the FASB issued ASU No. 2018-13, Fair
Value Measurement (Topic 820). |
