cbdMD Inc

PART 1**–** FINANCIAL INFORMATION**

ITEM 1. FINANCIAL STATEMENTS.

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2024 AND SEPTEMBER 30, 2023

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2024 AND SEPTEMBER 30, 2023

(continued)

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE and Six MONTHS ENDED March 31, 2024 and 2023

(Unaudited)

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE THREE and Six MONTHS ENDED March 31, 2024 and 2023

(Unaudited)

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE Six MONTHS ENDED March 31, 2024 and 2023

(Unaudited)

Supplemental Disclosures of Cash Flow Information:

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE six months ended March 31, 2024

(Unaudited)

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE six months ended March 31, 2023

(Unaudited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THEthree and six months ended March 31, 2024 and 2023 (unaudited)

NOTE1 – 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, 2015as Level Beauty Group, Inc. In November 2016we changed the name of the Company to Level Brands, Inc. and on May 1, 2019we changed the name of our Company to cbdMD, Inc. We operate from offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30.*

On* December 20, 2018 (the “Closing Date”), the Company, and its newly organized wholly owned subsidiaries AcqCo, LLC and cbdMD LLC (“CBDI”), completed atwo*-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* Aprilof2019,* the Company issued 338,889 shares of our common stock to the members of Cure Based Development, of which unrestricted voting rights to 194,445 of the shares vested over afive-year period, as well as to issue another 338,889 shares of our common stock (the “Earnout Shares”) in the future upon certain earnout goals (the “Earnout Rights”) being achieved within five years from the closing of the Mergers.

The Company owns and operates the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD as well as the functional mushroom brand ATRx. The Company sources cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States. CBD is a natural substance produced from the hemp plant. The products manufactured by and for the Company comply with the2018 Farm Bill - our full spectrum products contain trace amounts of tetrahydrocannabinol ("THC") under the0.3% by dry weight limit in the2018 Farm Act while our broad spectrum products are non-psychoactive as they donot contain detectable levels of THC.

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.

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 the2023 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 fiscal2023 as reported in the2023 10-K have been omitted.

Principles of Consolidation

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

Use of Estimates

The Company’s condensed consolidated financial statements have been prepared in accordance with US GAAP and requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying condensed consolidated financial statements include, but arenot limited to, allowances for credit losses, inventory valuation reserves, expected sales returns and allowances, certain assumptions related to the valuation of investments other securities, acquired intangibles and long-lived assets and the recoverability of intangible and long-lived assets and income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities, and contingent liability is a material estimate. Actual results could differ from these estimates.

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

Cash and Cash Equivalents

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

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Accounts Receivable

Accounts receivable are stated at cost less an allowance for credit losses, if applicable. Credit is extended to customers after an evaluation of the customer’s financial condition, and generally collateral isnot required as a condition of credit extension. Management’s determination of the allowance for credit losses is based on an evaluation of the receivables, past experience, current economic conditions, and other risks inherent in the receivables portfolio. As of* March 31, 2024* and* September 30, 2023,*we had an allowance for credit losses of $179,419 and $42,180, respectively.

Merchant Receivable and Reserve

The Company primarily sells its products through the internet and has an arrangement to process customer payments withthird-party payment processors and negotiate the fee based on the market. The arrangement with the payment processors requires that the Company pay a fee between 2.5% and 5.0% of the transaction amounts processed. Pursuant to this agreement, there can be a waiting period between2 to5 days prior to reimbursement to the Company, as well as a calculated reserve which some payment processors hold back. Fees and reserves can change periodically with notice from the processors. At* March 31, 2024* and* September 30, 2023,*the receivable from payment processors included approximately $498,096 and $585,345, respectively, for the waiting period amount and is recorded as accounts receivable in the accompanying condensed consolidated balance sheet.

Inventory

Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. The cost of inventory includes product cost, freight-in, and production fill and labor (portions of which we outsource tothird party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management’s analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. We assess inventory quarterly for slow moving products and potential impairments and at a minimum perform a physical inventory count annually near fiscal year end.

Property and Equipment

Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives arefive years for manufacturing equipment and automobiles andthree 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 Levels1 and2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level3 of the hierarchy).

Level1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level2 inputs are inputs other than quoted prices included in Level1 that are directly or indirectly observable for the asset or liability. Level2 inputs* mayinclude quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability. Level3* inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, observable market activity. In instances where the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

When the Company records an investment in marketable securities the carrying value is assigned at fair value. Any changes in fair value for marketable securities during a given period will be recorded as an unrealized gain or loss in the consolidated statement of operations. For investment other securities without a readily determinable fair value, the Company* may*elect to estimate its fair value at cost less impairment plus or minus changes resulting from observable price changes.

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Intangible Assets

The Company's intangible assets consist of trademarks and other intellectual property, all of which were previously accounted for in accordance with Accounting Standards Codification (ASC) Topic350, Intangibles – Goodwill and Other. The Company employed the non-amortization approach to account for purchased intangible assets having indefinite lives. Under the non-amortization approach, intangible assets having indefinite lives werenot amortized into the results of operations, but instead were reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value. We previously performed an annual impairment analysis each fiscal year on the indefinite-lived intangible assets following the steps laid out in ASC350-30-35-18. Our annual impairment analysis included a qualitative assessment to determine if it was necessary to perform the quantitative impairment test. In performing a qualitative assessment, we reviewed events and circumstances that could affect the significant inputs used to determine if the fair value was less than the carrying value of the intangible assets. If a quantitative analysis was necessary, we would analyze various aspects including revenues from the business, associated with the intangible assets. In addition, intangible assets would be tested on an interim basis if an event or circumstance indicates that it is more likely thannot that an impairment loss has been incurred. The Company analyzed a variety of factors on its business to determine if a circumstance could trigger an impairment loss, and, at the time and based on the information then known, had determined that is it was more likely thannot that an impairment loss had occurred.

The Company now accounts for its trademarks in accordance with Accounting Standards Codification (ASC) Topic360, Property, Plant and Equipment. The Company began amortizing its trademarks over20 years beginning* January 1, 2022and would perform impairment tests as prescribed by ASC360,* which states that impairment testing should be completed whenever events or changes in circumstances indicate that the asset group's carrying value* maynot* be recoverable. If there are indications that the asset group's carrying value* maynot* be recoverable, there aretwo further steps involved in long-lived asset impairment testing. Step I of the impairment test, as per ASC360, involves estimating the recoverable amount of the asset group and determining the potential for impairment. Step II of the impairment test, as per ASC360, if necessary, involves quantifying the fair value of the asset group. During* Julyof fiscal2023,* the Company determined that based on regulatory uncertainty and ongoing Company performance it was prudent to change the amortization of the “cbdMD” and “directCBDonline” trademarks to 5 years and “hempMD” trademark to 10 years. This became a triggering event for an impairment test underASC360 which resulted in an impairment of the intangibles in* July 2023.As of the end of thefourth* quarter of fiscal2023, a significant decline in market capitalization of both classes of equity triggered a subsequent impairment test, resulting in additional impairment during thefourth quarter of fiscal2023.

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 Note6. The Company made a determination of the fair value of the contingent liabilities as part of the valuation of the assets acquired and liabilities assumed in the business combination.

Revenue Recognition

Under ASC606, 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 thefive-step model prescribed under ASC606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

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Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The Company meets that obligation when it has shipped products which have been ordered to the customer. The Company has reviewed its various revenue streams for its other contracts under thefive-step approach. At* March 31, 2024*, the Company hasno unfulfilled performance obligations.

Allocation of Transaction Price

In the Company’s current business model, it doesnot have contracts with customers which have multiple elements as revenue is driven purely by online product sales or purchase order-based product sales.

Revenue Recognition

The Company records revenue from the sale of its products when its customer obtains control, which is upon shipping (and is typically FOB shipping) which is when our performance obligation is met. Net sales are comprised of gross revenues less product returns, trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions. These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. The Company currently offers a60-day, money back guarantee, a loyalty program as well as a subscription program.

Disaggregated Revenue

The Company’s product revenue is generated primarily throughtwo 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:

Contract liabilities represent unearned revenues and are presented as deferred revenue or customer deposits on the condensed consolidated balance sheets.

Other than account receivable, Company hasno material contract assets nor contract liabilities at* March 31, 2024*.

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

Cost of Sales

The Company’s cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead,third-party providers, and outbound freight for the Company’s products sales. For the Company’s product sales, cost of sales also includes the cost of refurbishing products returned by customers that will be offered for resale, if any, and the cost of inventory write-downs associated with adjustments of held inventories to their net realizable value. These expenses are reflected in the Company’s consolidated statements of operations when the product is sold and net sales revenues are recognized or, in the case of inventory write-downs, when circumstances indicate that the carrying value of inventories is in excess of their net realizable value.

Income Taxes

The Company is a North Carolina corporation that is treated as a corporation for federal and state income tax purposes. As of* October 1, 2019,CBDI and Paw CBD were wholly owned subsidiaries and are disregarded entities for tax purposes and their entire share of taxable income or loss is included in the tax return of the Company and as of March 15, 2021,*Therapeutics is also a wholly owned subsidiary and is a disregarded entity for tax purposes and its entire share of taxable income or loss is included in the tax return of the Company.

The Company accounts for income taxes pursuant to the provisions of theAccounting for Income Taxes topic of ASC740 which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Company uses the inside basis approach to determine deferred tax assets and liabilities associated with its investment in a consolidated pass-through entity. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely thannot that the net deferred asset willnot be realized.

Concentrations

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and securities.

The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers*$250,000* for substantially all depository accounts. The Company from time to time* mayhave amounts on deposit in excess of the insured limits. The Company had a $1.3 million uninsured balance at March 31, 2024* and a $1.2 million uninsured balance at* September 30, 2023.*

Concentration of credit risk with respect to receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management considers these customer receivables to represent normal business risk. The Company didnot have any customers that represented a significant amount of our sales for thethree andsix months ended* March 31, 2024*.

Stock-Based Compensation

The Company accounts for its stock compensation under the ASC718-10-30, Compensation - Stock Compensation using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that* may*be settled by the issuance of those equity instruments.

The Company uses the Black-Scholes model for measuring the fair value of options and warrants. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods. The Company recognizes forfeitures when they occur.

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Earnings (Loss) Per Share

The Company uses ASC260-10, Earnings Per Share for calculating the basic and diluted loss per share. The Company computes basic loss per share by dividing net loss and net loss attributable to common shareholders, after deducting preferred stock dividends, by the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.

On* February 16, 2023,we held an annual meeting of stockholders. At the annual meeting, our stockholders approved an amendment to our articles of incorporation, as amended, to effect a reverse stock split of our issued and outstanding shares of common stock by a ratio of betweenone*-for-twenty toone-for-fifty, inclusive, with the exact ratio to be set at the discretion of our board of directors, at any time after approval of the amendment and prior to* February 16, 2024.On April 12, 2023,the board effected a reverse stock split at a ratio ofone*-for-forty-five, effective as of* April 24, 2023 (*the "Reverse Stock Split"). Unless otherwise indicated, all share numbers in this report, including shares of common stock and all securities convertible into, or exercisable for, shares of common stock, give effect to the Reverse Stock Split.

Liquidity and Going Concern Considerations

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company experienced a loss of $4,007,065 for thesix months ended* March 31, 2024,*resulting in a reduction of net working capital of $203,308.

While the Company is taking strong action, believes in the viability of its strategy and path to profitability, and in its ability to raise additional funds, there can beno assurances to that effect. The Company’s working capital position* may**not* be sufficient to support the Company’s daily operations for thetwelve months subsequent to the issuance of these annual financial statements. The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability and the ability to acquire additional funding. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern withintwelve months after the date that the annual financial statements are issued. These financial statements donot include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that* mayresult in the Companynot* being able to continue as a going concern.

Convertible Notes

Effective* February 1, 2024 (the “Effective Date”), the Company entered into a Securities Purchase Agreement dated January 30, 2024 (the “Purchase Agreement”) withfive* institutional investors (the “Investors”) whereby the Investors advanced the Company an aggregate of $1,250,000 gross proceeds and the Company issued each Investor an 8% Senior Secured Original Issue 20% Discount Convertible Promissory Note, in the aggregate principal amount of $1,541,666 (the “Notes”). The Company intends to use the proceeds from the issuance of the Notes for working capital and general corporate purposes.

The Company elected the fair value option under ASC825 Fair Value Measurements for the Notes. The Notes were initially recognized at fair value on the balance sheet. All subsequent changes in fair value, excluding the impact of the change in fair value related to instrument-specific credit risk are recorded in non-operating income. The changes in fair value related to instrument-specific credit risk is recorded through other comprehensive income (loss). See Note12 for more information related to the Notes.

New Accounting Standards

The Company adopted ASU2016-13 Financial Instruments – Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments (ASC326) effective* October 1, 2023.This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost are presented at the net amount expected to be collected by using an allowance for credit losses. The Company evaluated the impacts of this standard and has determined that is doesnot* have a material impact on the consolidated financial statements.

NOTE2 – MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES

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

In* September 2020,the Company purchased a membership interest in Adara Sponsor LLC for $250,000, which along with proceeds from other investors was utilized as an investment in Adara Acquisition Corporation (“Adara”), a newly organized blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination (a “SPAC”). On January 13, 2021,the Company executedsecond* tranche subscriptions agreements and funded the remaining $750,000. On* June 22, 2022,the Company executed a transfer agreement with affiliates of Adara Sponsor, LLC whereby the Company's interest would be transferred to the affiliates of Adara Sponsor, LLC upon Adara's acquisition of Alliance Entertainment, Inc. (the "Target") in consideration of the Company's original purchase price. As a result of the SEC litigation against our former CEO, the Target provided a demand to Adara that it required cbdMD and our former Chief Executive Officer to dispose of our interests in Adara Sponsor, LLC as a condition of proceeding with any business combination. In December 2022,Adara filed its definitive proxy to approve the acquisition and query shareholders redemption. Effective February 10, 2023,the Company completed the Membership Interest Transfer Agreement with Blystone & Donaldson, LLC, and Mr. Thomas Finke (collectively, the “Transferees”) dated June 22, 2022.*Pursuant to the terms of the agreement, the Company sold its entire ownership interest in Adara Sponsor, LLC, to the Transferees for the total purchase price of $1,000,000 which constitutes the Company’s original purchase price of the interest.

On* April 7, 2022,CBD Industries, LLC entered into an asset sale agreement to sell substantially all its manufacturing assets to a subsidiary of Steady State, LLC ("Steady State"). The equipment sale is initially valued at approximately $1.8 million for accounting purposes, the sale price consisting of products to be provided to the Company under the manufacturing and supply agreement and $1.4 million of which the Company invested into Steady State in the form of an equity investment consistent with the terms of Steady State's completed series C financing. As of September 30, 2023,the Company determined it was prudent to impair this investment by $700,000. The Company has classified this investment as Level3* for fair value measurement purposes as there areno observable inputs and has included in non-current assets on the accompanying condensed consolidated balance sheets as the Company holds this investment for longer than a year.

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In valuing both investments, the Company used the value paid, which was the price offered to allthird-party investors.

NOTE3 - INVENTORY

Inventory at* March 31, 2024* and* September 30, 2023*consists of the following:

Abnormal amounts of idle facility expense, freight, handling costs, scrap and wasted material (spoilage) are expensed in the period they are in incurred andno material expenses related to these items occurred in thethree months ended* March 31, 2024*.

NOTE4 – PROPERTY AND EQUIPMENT

Major classes of property and equipment at* March 31, 2024* and* September 30, 2023*consist of the following:

Depreciation expense related to property and equipment was $117,750 and $102,390 for thethree months ended* March 31, 2024and2023*, respectively.

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NOTE5 – INTANGIBLE ASSETS

Intangible Assets

Intangible assets as of* March 31, 2024* and* September 30, 2023*consisted of the following:

Amortization expense related to definite lived intangible assets was $172,842 and $277,354 for thethree months ended* March 31, 2024and2023*

Future amortization of intangible assets as of* March 31, 2024*is as follows:

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NOTE6 – CONTINGENT CONSIDERATION

As consideration for the Mergers, described in Note1, the Company had a contractual obligation to issue 338,889 shares of its common stock, after approval by its shareholders, to the members of Cure Based Development, issued intwo tranches 144,445 shares and 194,945 shares, both of which were subject to leak out provisions, and the unrestricted voting rights to 194,445 tranche of shares which vested over afive year period and were subject to a voting proxy agreement.

The contractual obligations and earn out provision are accounted for as a contingent liability and fair value is determined using Level3 inputs, as estimating the fair value of these contingent liabilities require the use of significant and subjective inputs that* may*and are likely to change over the duration of the liabilities with related changes in internal and external market factors.

The initialtwo tranches totaling 338,889 shares were valued using a market approach method and included the use of the following inputs: share price upon contractual obligation, discount for lack of marketability to address leak out restrictions, and probability of shareholder disapproval. In addition, the 194,445 shares in thesecond tranche also included an input for a discount for lack of voting rights during the vest periods.

The Merger Agreement also provided that an additional 338,889 Earnout Shares would be issued as part of the consideration for the Mergers, upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date as follows, as measured atfour intervals (each a “marking period”): the completion of12, 24, 42, and59 calendar months from the Closing Date, and based upon the ratios set forth below:

An aggregate of 271,405 shares were issued over the initialthree marking periods. Thefourth marketing period began on* July 1, 2022and ended during November 2023.The revenue for thefourth* marking period totaled approximately $35.8 million. Based on the ratios, and subsequent to* December 31, 2023,the Company determined the final Earnout Shares to be issued were 19,818. The shares were issued on January 11, 2024and there isno* further Earnout obligation.

In* December 2022,the Company entered into a contractual obligation to issue up to 556 options and 556 RSUs to an employee. The shares are subject to meeting a minimum direct to consumer revenue of $45 million for anyfour* consecutive quarters before* December 31, 2024.Based on the present revenue run rate, the Company has valued these obligations at $0 for September 30, 2023.*

NOTE7 – RELATED PARTY TRANSACTIONS

None.

NOTE8 – SHAREHOLDERS’** EQUITY**

Preferred Stock – The Company is authorized to issue 50,000,000 shares of preferred stock, par value $0.001 per share. In* October 2019,the Company designated 5,000,000 of these shares as 8.0% Series A Cumulative Convertible Preferred Stock. Our8.0%* Series A Cumulative Convertible Preferred Stock ranks senior to our common stock for liquidation or dividend provisions and holders are entitled to receive cumulative cash dividends at an annual rate of8.0% payable monthly in arrears for the prior month. The Company reviewed ASC480 –Distinguishing Liabilities from Equity in order to determine the appropriate accounting treatment for the preferred stock and determined that the preferred stock should be treated as equity. There were 5,000,000 shares of 8.0% Series A Cumulative Convertible Preferred Stock issued and outstanding at* March 31, 2024* and* September 30, 2023.*

The total amount of preferred dividends declared and accrued were$1,000,500 and 2,001,000 for thethree andsix months ended* March 31, 2024,respectively, and the total amount of preferred dividends declared and paid were $1,000,500 and $2,001,502 for thethree* andsix months ended* March 31, 2023,*respectively.

Common Stock – The Company is authorized to issue 150,000,000 shares of common stock, par value $0.001 per share. There were 3,045,204 and 2,960,573 shares of common stock issued and outstanding at* March 31, 2024* and* September 30, 2023,*respectively.

On* March 2, 2023Company entered into a purchase agreement (the "ELOC") with Keystone Capital Partners, LLC (“Keystone”), pursuant to which Keystone committed to purchase up to 281,934 of shares of our common stock. Upon the execution of the ELOC, The Company issued 2,616 shares of common stock as "Commitment Shares" to Keystone as consideration for its commitment to purchase shares of our common stock under the ELOC. An additional 6,104 Commitment Shares were issued180* days after the date of the ELOC*.* The 281,934 shares of the Company's common stock were registered for resale and* maybe issued under the ELOC or sold by us to Keystone at our discretion from time to time over a12* month period commencing* April 1, 2023.The purchase price for the shares that the Company maysell to Keystone under the ELOC will fluctuate based on the price of the Company's common stock. Depending on market liquidity at the time, sales of such shares may*cause the trading price of our common stock to fall. As of the filing of this report, Keystone has purchased an aggregate of 180,955 shares under the ELOC.

On* April 12, 2023,*the Company effected the Reverse Stock Split. All fractional shares were rounded up when effectuating the reverse stock split. A total of 39,455 shares of common stock were issued to account for rounding up of fractional shares.

Preferred stock transactions:

The Company hadno preferred stock transactions in thethree andsix months ended* March 31, 2024* and2023.

Common stock transactions:

In thesix months ended* March 31, 2024*:

In* January 2024,*the Company issued 64,218 shares under our ELOC.

In* January 2024,*the Company issued 19,818 shares as part of the final Earnout.

In* Marchof2023**,* we entered into the ELOC and we issued 2,616 shares of common stock as "Commitment Shares" to Keystone as consideration for its commitment to purchase shares of our common stock under the ELOC.

On* February 1, 2023**,the Company entered into an Agreement for Advertising Placement witha360* Media, LLC ("a360") in whicha360 provided professional media support and advertising placement in exchange for up to 134,681 shares of the Company’s common stock valued at $14.85 per share.a360 will receive the shares by providing the Company with a credit in the amount of $2,000,000 to be used for media support and advertising placement to the Company. The shares are 70% fully vested;15% of the Shares shall vest upon each advertising placement accrue pro-rata as percentage of the total advertising placement; and 15% of the shares shall vest provided there areno restrictions in product categories that the Company is able to market witha360 while the Company utilizes the advertising placement. Any shares vested during the term of the agreement. The Advertising Placement expired as of* December 30, 2023**.*

In* January 2023**,* the Company issued 2,223 shares of common stock to Twenty Two Capital as the final obligation under the2021 acquisition agreement upon the expiration of the indemnification period.

In* December 2022,the Company issued 1,112 shares of restricted common stock to an employee.556 shares vested upon issuance and the Company recorded a total expense of $6,250.556 shares vest based on meeting certain direct to consumer revenue performance hurdles prior to December 2024.*

Stock option transactions:

In thesix months ended* March 31, 2024:*

The Company hasno stock option transactions in thesix months ended* December 31, 2024.*

In* Februaryof2023,* the Company granted its board of directors an aggregate of 2,667 common stock options. The options vested immediately, have a strike price of $12.60 and afive-year term. The Company has recorded a total prepaid expense of $21,120 and intends to amortize the expense over the12-month board term.

In* January 2023**,*the Company issued 2,334 options to a group of employees. The stock options awards vested at issuance, had a strike price of $10.53, five-year term and a fair market value upon issuance of $15,225

In* December 2022,the Company issued 2,222 options to an employee.1,666 options vest equally at each anniversary for the next3* years, have a strike price of $11.25 and afive year term. The total expense of these options is $13,150 and will be amortized over the term of the vesting periods.556 options vest based on meeting certain direct to consumer revenue requirements by the end of* December 2024.*

The expected volatility rate for the Company's stock options was estimated based on a weighted average mix of the volatilities of the Company and a peer group of companies in similar industries. The expected term used was the full term of the contract for the issuances. The risk-free interest rate for periods within the contractual life of the option is based on U.S. Treasury securities. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances* maychange and additional data may*become available over time, which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.

The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in thethree months ended* March 31, 2024and2023*:

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Warrant Transactions:

The Company hasno warrant transactions in thethree months ended* December 31, 2023.*

NOTE9 – STOCK BASED COMPENSATION

Equity Compensation Plan – On* June 2, 2015,the Board of Directors of the Company approved the2015* Equity Compensation Plan (“2015 Plan”). The2015 Plan initially made 26,112 common stock shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The number of shares of common stock available for issuance under the2015 Plan shall automatically increase on thefirst trading day of* Octobereach calendar year during the term of the2015* Plan, beginning with calendar year2016, by an amount equal toone percent (1%) of the total number of shares of common stock outstanding on the last trading day in* Septemberof the immediately preceding fiscal year, but inno* event shall any such annual increase exceed 2,223 shares of common stock. On* April 19, 2019,shareholders approved an amendment to the2015* Plan and increased the number of shares available for issuance under the2015 Plan to 45,445 and retained the annual evergreen increase provision of the plan.

On* January 8, 2021,the Company’s Board of Directors approved the2021* Equity Compensation Plan (the*“2021* Plan”) and it was subsequently approved by its shareholders at its annual meeting held on* March 12, 2021.The purpose of the2021* Plan is to advance the interests of the Company by providing an incentive to attract, retain and motivate highly qualified and competent persons who are important to it and upon whose efforts and judgment the success of the Company is largely dependent. The2021 Plan made 111,112 common shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The2021 Plan also contains an “evergreen formula” pursuant to which the number of shares of common stock available for issuance under the2021 Plan will automatically increase on* October 1of each calendar year during the term of the2021* Plan, beginning with calendar year2022, by an amount equal to 1.0% of the total number of shares of common stock outstanding on* September 30*of such calendar year, up to a maximum of 5,556 shares.

The Company accounts for stock-based compensation using the provisions of ASC718. ASC718 codification requires companies to recognize the fair value of stock-based compensation expense in the financial statements based on the grant date fair value of the options. All options are approved by the Compensation, Corporate Governance and Nominating Committee of the Board of Directors. Restricted stock awards that vest in accordance with service conditions are amortized over their applicable vesting period using the straight-line method. The fair value of the Company’s stock option awards or modifications is estimated at the date of grant using the Black-Scholes option pricing model.

Eligible recipients include employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company. Options granted generally have afive-to-ten-year term and have vesting terms that coverone tothree years from the date of grant. Certain stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.

Stock Options:

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

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The fair value of each time-based award is estimated on the date of grant using the Black-Scholes option valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model for equity awards with time-based vesting provisions granted during the year.

The following table summarizes stock option activity under both plans for thesix months ended* March 31, 2024*:

As of* March 31, 2024*, there was approximately $5,005 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 1.2 years.

Restricted Stock Award transactions:

In thesix months ended* March 31, 2024*:

The Company hasno restricted stock activity during thesix months ended* March 31, 2024.*

In* Februaryof2023,* the Company issued 445 of restricted stock awards to the Company’s board of directors. The shares vest quarterlyone fourth on* June 30, 2023,one fourth, on September 30, 2023,one fourth on December 31, 2023,andone* fourth on* March 31, 2024.*The stock awards were valued at the fair market price of $5,660 upon issuance and will amortize over the individual vesting periods.

In* January 2023,*the Company issued 3,889 shares to a group of employees. The shares vested upon issuance, having a fair market value upon issuance of $40,950.

In* December 2022,the Company issued 1,112 shares of restricted common stock to an employee.556 shares vested upon issuance and the Company recorded a total expense of $6,250.556 shares vest based on meeting certain direct to consumer revenue performance hurdles prior to December 2024.*

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NOTE10 - WARRANTS

Transactions involving the Company equity-classified warrants for thesix months ended* March 31, 2024and2023* are summarized as follows:

The following table summarizes outstanding common stock purchase warrants as of* March 31, 2024*:

NOTE11 – **** COMMITMENTS AND CONTINGENCIES

In* May 2019,the Company entered into an endorsement agreement with a professional athlete. On November 4, 2022,the Company entered into a separation agreement with the athlete that required a final payment truing up the Company’s cash obligation through November 2022.*No further obligations exist between the parties. The Company recorded aone-time non-cash expense of approximately $885,000 associated with the outstanding un-expensed portion of stock compensation expense from previously issued stock at higher stock prices.

Commencing* August 2019the Company’s executive offices were located at8845* Red Oak Blvd, Charlotte, NC (the “Red Oak Facilities”) which we sub-leased under a sublease agreement datedJuly11, 2019 which expires* December 2026 (the “Red Oak Sublease”). We received a default notice from HSKL, Inc., the sub landlord, in September 2023.Effective March 20, 2024we entered into a License Agreement, dated as of March 14, 2024,by and between cbdMD, Inc. and HSKL (the “License Agreement”) and Lease Forbearance Agreement, dated as of March 14, 2024,by and between cbdMD, Inc. and HSKL (the “Forbearance Agreement”). Under the License Agreement we have granted HSKL a license to possess and use a portion of the Red Oak Facilities until the earlier of (i) the termination of the Forbearance Agreement and (ii) July 31, 2024 (the “Termination Date”). The termination of the License Agreement will result in termination of the Red Oak Sublease. Pursuant to the Forbearance Agreement HSKL has agreed to forbear from proceeding to exercise its remedies against us under the Red Oak Sublease, and the declaration of default related to past due rent in consideration of the following payments to HSKL: $80,000 upon the execution of the Forbearance Agreement, followed byfour* monthly payments of $40,000. HSKL’s forbearance shall extend to the Termination Date and HSKL shall dismiss (without prejudice) a Complaint in Summary Ejectment filed in Mecklenburg County, North Carolina on* February 27, 2024.In the event of our breach of any of the conditions of the Forbearance Agreement, HSKL’s obligation to forbear shall cease, and HSKL may*immediately exercise any and all of its rights or remedies at law, in equity or under the Red Oak Sublease.

NOTE12 – NOTE PAYABLE

In* January 2020,the Company entered into a loan arrangement for $35,660 for equipment, and as of December 31, 2023,*this loan was completely paid off.

Effective* February 1, 2024 (the “Effective Date”), the Company entered into a Securities Purchase Agreement dated January 30, 2024 (the “Purchase Agreement”) withfive* institutional investors (the “Investors”) whereby the Investors advanced the Company an aggregate of $1,250,000 gross proceeds and the Company issued each Investor an 8% Senior Secured Original Issue 20% Discount Convertible Promissory Note, in the aggregate principal amount of $1,541,666 (the “Notes”). The Company intends to use the proceeds from the issuance of the Notes for working capital and general corporate purposes.

Each Note bears interest of 8% per annum and matures on* July 30, 2025.The Note is convertible into shares of common stock at any time following the date of issuance at the Investor’s option at an initial conversion price of $0.684 per share (the “Conversion Price”), subject to certain adjustments. If30* calendar days,60 calendar days,90 calendar days,120 calendar days, or180 calendar days after the effective date of the Registration Statement (as defined below) (the “Adjustment Dates”), the Conversion Price then in effect is higher than the Market Conversion Price then in effect on the Adjustment Date, the Conversion Price shall automatically decrease to the Market Conversion Price (as defined under the Note). The Conversion Price is subject to a $0.30 floor price.

Furthermore, at any time after the issuance of the Note, the Company* may,after written notice to the Investor, prepay any portion or all outstanding Principal Amount by paying an amount equal to125%* of the Principal Amount then being prepaid (representing a 25% prepayment premium payable to the Investor which shallnot constitute a principal repayment); provided that a Registration Statement registering all of the Conversion Shares issuable under the Note shall have been declared effective. If the Company elects to prepay the Note, the Investor shall have the right, upon written notice to the Company withinfive Trading Days of the Investor’s receipt of a Prepayment Notice, to convert into common stock, up to100% of the Prepayment Amount at the Conversion Price, upon the terms provided in the Note.

Upon the occurrence of any Event of Default (as defined in the Note), the Interest rate shall automatically be increased to the lesser of 22% per annum or the highest amount permitted by law. In the event that such Event of Default is subsequently cured (andno other Event of Default then exists), the adjustment shall cease to be effective as of the day immediately following the date of such cure; provided that the Interest as calculated and unpaid at such increased rate during the continuance of such Event of Default shall continue to apply to the extent relating to the days after the occurrence of such Event of Default through and including the date of such cure of such Event of Default.

In addition, upon the occurrence of Event of Default, which hasnot been cured within any applicable cure period, the Company shall be obligated to pay to the Investor the Mandatory Default Amount, which Mandatory Default Amount shall be payable to the Investor on the date the Event of Default giving rise thereto occurs. In the event the Note shall be converted following the occurrence of an Event of Default, the Investor shall have the option to convert the Mandatory Default Amount, upon the terms provided in the Note.

The Note provides that the Investor willnot have the right to convert any portion of the Note, if, together with its affiliates, and any other party whose holdings would be aggregated with those of the Investor for purposes of Section13(d) or Section16 of the Securities of1934, as amended, would beneficially own in excess of4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to such conversion (the “Beneficial Ownership Limitation”); provided, however, that the Beneficial Ownership Limitation shall be increased to9.99% on the61st day upon receipt of a written notice by the Investor delivered to the Company, and provided further, inno event shall the Beneficial Ownership Limitation exceed9.99%.

The Notes are secured by afirst priority security interest as evidenced by and to the extent set forth in a Security Agreement, by and between the Company and the Investors.

The Company elected the fair value option under ASC825 Fair Value Measurements for the Notes. The Notes were initially recognized at fair value on the balance sheet. All subsequent changes in fair value, excluding the impact of the change in fair value related to instrument-specific credit risk are recorded in non-operating income. The changes in fair value related to instrument-specific credit risk is recorded through other comprehensive income (loss).

The overall change in fair value of the Notes during the quarter ended* March 31, 2024was a increase of $1.7 million. As at March**31,* 2024, there was $1,541,666 principal outstanding.

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NOTE13 – LEASES

The Company has lease agreements for its corporate offices and warehouse with lease periods expiring between2024 and2026. ASC842 requires the recognition of leasing arrangements on the consolidated balance sheet as right-of-use assets and liabilities pertaining to the rights and obligations created by the leased assets. The Company determines whether an arrangement is a lease at inception and classify it as finance or operating. All of the Company’s leases are classified as operating leases. The Company’s leases donot contain any residual value guarantees. See Note11 for information regarding commitments and contingencies related to the Company's corporate office operating lease.

Right-of-use lease assets and corresponding lease liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term. Since the interest rate implicit in our lease arrangements isnot readily determinable, the Company determined an incremental borrowing rate for each lease based on the approximate interest rate on a collateralized basis with similar remaining terms and payments as of the lease commencement date to determine the present value of future lease payments. The Company’s lease terms* may*include options to extend or terminate the lease.

In addition to the monthly base amounts in the lease agreements, the Company is required to pay real estate taxes, insurance and common area maintenance expenses during the lease terms.

Lease costs on operating leases are recognized on a straight-line basis over the lease term and included as a selling, general and administrative expense in the condensed consolidated statements of operations.

Components of operating lease costs are summarized as follows:

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

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As of* March 31, 2024*, our operating leases had a weighted average remaining lease term of 2.56 years and a weighted average discount rate of 4.66%.

Future minimum aggregate lease payments under operating leases as of* March 31, 2024* are summarized as follows:

NOTE14 – LOSS PER SHARE

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

At* March 31, 2024*,92,408 potential shares underlying options, unvested RSUs and warrants as well as 185,223 convertible preferred shares, as well as total 283,593 of available shares and remaining commitment share under the Keystone agreement were excluded from the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.

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NOTE15 – INCOME TAXES

On* November 17, 2017,the Company completed an IPO of its common stock. The Company conducted a Section382* analysis and determined an ownership change occurred upon the IPO. On* October 2, 2018,the Company completed a follow-on firm commitment underwritten public offering of its common stock. On May 16, 2019,the Company completed an additional follow-on firm commitment underwritten public offering of its common stock. On October 16, 2019,the Company completed a follow-on firm commitment underwritten public offering of its 8.0% Series A Cumulative Convertible Preferred Stock. On January 14, 2020,the Company completed a follow-on firm commitment underwritten public offering of its common stock. Management has determined that an ownership change has occurred under Internal Revenue Code (IRC) Section382* resulting in limitations on the utilization of Company’s federal and state NOL carryovers.

On* December 20, 2018,the Company completed atwo*-step merger with Cure Based Development (see Note1). As a result of the Mergers the Company established as part of the purchase price allocation a net deferred tax liability related to the book-tax basis of certain assets and liabilities of approximately $4.6 million.

The Company has a valuation allowance against the net deferred tax assets, with the exception of the deferred tax liabilities that result from indefinite-life intangibles (“naked credits”). The Company has determined that using the general methodology for calculating income taxes during an interim period for the quarters ending* December 31, 2019,** March 31, 2020,and June 30, 2020,provided for a wide range of potential annual effective rates. At September 30, 2023the Company recorded a net deferred tax asset ofzero as the cumulative net deferred tax asset had a full valuation on it and there wasnot* enough positive evidence that would warrant recognizing the benefit of the net deferred tax asset. In addition, the net indefinite lived deferred tax items were a deferred tax asset so there wasnot any recognition of a deferred tax liability related to indefinite lived deferred tax liabilities. At* March 31, 2024*, the Company determined the same circumstances to be true and therefore recorded a net deferred tax asset of zero.

NOTE16 – SUBSEQUENT EVENTS

Since* March 31, 2024*a total of[823,878] shares have been issued for principal and interest conversion requests under the Notes. As of the date of this filing, the remaining principal balance on the Notes totals approximately $1.0 million.

On* April 1, 2024,the Company granted its board of directors an aggregate of 2,667 common stock options. The options vested immediately, have a strike price of $12.60 and afive-year term. The Company has recorded a total prepaid expense of approximately $4,300 and intends to amortize the expense over the12*-month board term. In addition, the Company granted its board of Directors 16,000 shares of restricted common stock at $0.86 and recorded total expense of $13,760. The stock will vest equally overfour quarters starting* June 30, 2024.*

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