cbdMD Inc

PART 1**–** FINANCIAL INFORMATION**

ITEM 1. FINANCIAL STATEMENTS.

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2024 AND SEPTEMBER 30, 2023

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2024 AND SEPTEMBER 30, 2023

(continued)

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE and Nine MONTHS ENDED June 30, 2024 and 2023

(Unaudited)

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE and Nine MONTHS ENDED June 30, 2024 and 2023

(Unaudited)

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE Nine MONTHS ENDED June 30, 2024 and 2023

(Unaudited)

Supplemental Disclosures of Cash Flow Information:

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE nine months ended June 30, 2024

(Unaudited)

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE nine months ended June 30, 2023

(Unaudited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THEthree and nine months ended June 30, 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.*

There have beenno material changes in the Company's significant accounting policies from those previously disclosed in the2023 10-K.

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.

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.

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* June 30, 2024* and* September 30,*2023, the receivable from payment processors included approximately $653,157 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.

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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.

The Company elected the fair value option under ASC825 Fair Value Measurements for it’s Convertible notes. The convertible 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 convertible notes.

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.

Performance Obligations

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* June 30, 2024*.

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

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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. CBDI, Therapeutics, and Paw CBD 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 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 $1.6 million uninsured balance at June 30, 2024*.

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 andnine months ended* June 30, 2024*.

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.

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 $3,547,327 for thenine months ended* June 30, 2024*, resulting in a working capital deficit of $567,610 at* June 30, 2024.*

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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 is using 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.

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 impaired 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 plans to hold this investment.

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

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NOTE3 - INVENTORY

Inventory at* June 30, 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 thenine months ended* June 30, 2024*.

NOTE4 – PROPERTY AND EQUIPMENT

Property and equipment at* June 30, 2024* and* September 30,*2023 consisted of the following:

Depreciation expense related to property and equipment was $395,098 and $249,457 for thenine months ended* June 30, 2024and2023*, respectively.

NOTE5 – INTANGIBLE ASSETS

Intangible Assets

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

Amortization expense related to definite lived intangible assets was $1,400,603 and $1,105,630 for thenine months ended* June 30, 2024and2023.*

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NOTE6 – CONTINGENT CONSIDERATION

Pursuant to a merger agreement entered into in2018, 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 were accounted for as a contingent liability and fair value was 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 agreement also provided that an additional 338,889 Earnout Shares would be issued as part of the consideration, upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the closing date of the merger.

An aggregate of 271,405 Earnout shares were issued through* September 30, 2023.There isno* further Earnout obligation.

The Company determined the final Earnout shares to be issued were19,818 and were issued on* January 11, 2024.There isno* further Earnout obligation.

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* June 30, 2024* and* September 30,*2023.

The total amount of preferred dividends declared and accrued were$1,000,500 and $3,001,501 for thethree andnine months ended* June 30, 2024*, respectively, and the total amount of preferred dividends declared and paid were $1,000,501 and $3,001,503 for thethree andnine months ended* June 30, 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 3,759,433 and 2,960,573 shares of common stock issued and outstanding at* June 30, 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 sold to Keystone under the ELOC fluctuated based on the price of the Company's common stock. Keystone purchased an aggregate of 180,955 shares (64,218 of which were purchases during thenine* months ended* June 30, 2024)*under the ELOC, which has expired.

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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.

Preferred stock transactions:

The Company hadno preferred stock transactions in thethree andnine months ended* June 30, 2024* and2023.

Common stock transactions:

In* April 2024,*the Company issued an aggregate of 714,229 shares of common stock pursuant to the partial conversion of certain principal and interest related to the Notes.

In* March 2024,the company issued 16,000 of restricted stock awards to the Company’s board of directors. The shares vest quarter onfourth* on* June 30, 2024,one fourth, on September 30, 2024,one fourth on December 31, 2024,andone* fourth on* March 31, 2025.*The stock awards were valued at the fair market price of $13,760 and will amortize over the individual vesting periods.

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.

Stock option transactions:

On* April 1, 2024,the Company granted its board of directors an aggregate of 8,000 common stock options. The options vested immediately, have a strike price of $0.86 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.

The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in thenine months ended* June 30, 2024and2023*:

Warrant Transactions:

The Company hasno warrant transactions in thethree ornine months ended* June 30, 2024.*

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NOTE9 – STOCK BASED COMPENSATION

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 thenine months ended* June 30, 2024*:

As of* June 30, 2024*, there was approximately $3,925 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 0.75 years.

Restricted Stock Award transactions:

In* March 2024,the company issued 16,000 of restricted stock awards to the Company’s board of directors. The shares vest quarter onfourth* on* June 30, 2024,one fourth, on September 30, 2024,one fourth on December 31, 2024,andone fourth on March 31, 2025.The stock awards were valued at the fair market price of$4,296* upon issuance and will amortize over the individual vesting periods.

In thenine months ended* June 30, 2023*:

In* Februaryof2023,* the Company issued 445 of restricted stock awards to the Company’s board of directors. The shares vested quarterly, one 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 thenine months ended* June 30, 2024and2023* are summarized as follows:

The following table summarizes outstanding common stock purchase warrants as of* June 30, 2024*:

NOTE11 – **** COMMITMENTS AND CONTINGENCIES

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. The Company has made all payments required under the Forbearance Agreement and License Agreement and is working with HSKL to resolve for the back due rent through the termination date.

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NOTE12 – NOTE PAYABLE

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. As of the filing date of this report, the effective Conversion Price is $0.615.

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 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 a fair value of $2,702,000 on the balance sheet as of* March**31,2023.* 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* June 30, 2024* was a decrease of*$859,963.* The overall change in principal value related to the conversion of Notes to commons stock during the quarter ended* June**30,2024* was a decrease of $464,037. As of* June 30, 2024*, total fair value of the Notes is $1,378,000, of which $1,076,963 represents the total 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* June 30, 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* June 30, 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* June 30, 2024*,112,831 potential shares underlying options, unvested RSUs and warrants as well as 185,223 potential shares underlying series A preferred shares were excluded from the shares used to calculate diluted loss per share as their inclusion would be anti-dilutive. At* June 30, 2023,94,948 potential shares underlying options, unvested RSUs and warrants as well as185,223* potential shares underlying series A preferred shares, and 40,404 a360 shares subject to certain vesting requirement as well as total 283,593 of available shares and remaining commitment share under the ELOC 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

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* June 30, 2024*, the Company determined the same circumstances to be true and therefore recorded a net deferred tax asset of zero.

NOTE16 – SUBSEQUENT EVENTS

None.

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