cbdMD, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. cbdMD, INC. CONDENSED CONSOLIDATED BALANCE SHEETS December 31, 2024 AND SEPTEMBER 30, 2024 (Unaudited) (Unaudited) December 31, September 30, 2024 2024 Assets Current assets: Cash and cash equivalents $ 1,970,217 $ 2,452,553 Accounts receivable 1,272,846 983,910 Inventory 2,116,136 2,365,187 Inventory prepaid 356,819 159,006 Prepaid sponsorship 7,126 21,754 Prepaid expenses and other current assets 637,559 406,674 Total current assets 6,360,703 6,389,084 Other assets: Property and equipment, net 511,915 454,268 Operating lease assets 1,209,338 85,817 Deposits for facilities 62,708 62,708 Intangible assets 2,698,313 2,889,580 Investment in other securities, noncurrent 700,000 700,000 Total other assets 5,182,274 4,192,373 Total assets $ 11,542,977 $ 10,581,457 See Notes to Condensed Consolidated Financial Statements 5 Table of Contents cbdMD, INC. CONDENSED CONSOLIDATED BALANCE SHEETS December 31, 2024 AND SEPTEMBER 30, 2024 (continued ) (Unaudited) December 31, September 30, 2024 2024 Liabilities and shareholders' equity Current liabilities: Accounts payable $ 1,161,133 $ 1,541,108 Accrued expenses 775,946 632,674 Accrued dividends 5,671,500 4,671,000 Deferred revenue 527,438 503,254 Operating leases – current portion 671,765 98,696 Convertible notes, at fair value 362,021 1,171,308 Total current liabilities 9,169,803 8,618,040 Long term liabilities: Operating leases - long term portion 591,583 - Total long term liabilities 591,583 - Total liabilities 9,761,386 8,618,040 Commitments and Contingencies (Note 10) cbdMD, Inc. shareholders' equity: Preferred stock, authorized 50,000,000 shares, $ 0.001 par value, 5,000,000 and 5,000,000 shares issued and outstanding, respectively 5,000 5,000 Common stock, authorized 150,000,000 shares, $ 0.001 par value, 5,543,124 and 3,939,057 shares issued and outstanding, respectively 5,543 3,939 Additional paid in capital 184,832,130 184,029,565 Comprehensive other expense ( 7,777 ) ( 7,189 ) Accumulated deficit ( 183,053,305 ) ( 182,067,898 ) Total cbdMD, Inc. shareholders' equity 1,781,591 1,963,417 Total liabilities and shareholders' equity $ 11,542,977 $ 10,581,457 See Notes to Condensed Consolidated Financial Statements 6 Table of Contents cbdMD, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE Three MONTHS ENDED December 31, 2024 and 2023 (Unaudited) Three months Ended December 31, 2024 2023 Gross Sales $ 5,113,476 $ 5,375,630 Allowances - ( 225 ) Total Net Sales 5,113,476 5,375,405 Cost of sales 1,712,867 1,817,907 Gross Profit 3,400,609 3,557,498 Operating expenses 3,486,881 4,623,333 Loss from operations ( 86,272 ) ( 1,065,835 ) Decrease of contingent liability - 69,752 Decrease (increase) in fair value of convertible debt 89,963 - Interest expense 11,404 ( 418 ) Income (loss) before provision for income taxes 15,095 ( 996,501 ) Net Income (loss) 15,095 ( 996,501 ) Preferred dividends 1,000,501 1,000,501 Net Loss attributable to cbdMD, Inc. common shareholders $ ( 985,406 ) $ ( 1,997,002 ) Net Loss per share: Basic and Diluted earnings per share ( 0.22 ) ( 0.67 ) Weighted average number of shares Basic and Diluted: 4,552,067 2,960,945 See Notes to Condensed Consolidated Financial Statements 7 Table of Contents cbdMD, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE Three MONTHS ENDED December 31, 2024 and 2023 (Unaudited) Three months Ended December 31, 2024 2023 Net Income (loss) $ 15,095 $ ( 996,501 ) Comprehensive Income (loss) 15,095 ( 996,501 ) Other Comprehensive income $ - $ - Preferred dividends ( 1,000,501 ) ( 1,000,501 ) Comprehensive Loss attributable to cbdMD, Inc. common shareholders $ ( 985,406 ) $ ( 1,997,002 ) See Notes to Condensed Consolidated Financial Statements 8 Table of Contents cbdMD, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE Three MONTHS ENDED December 31, 2024 and 2023 (Unaudited) Three months Ended December 31, 2024 2023 Cash flows from operating activities: Net Loss $ 15,095 $ ( 996,501 ) Adjustments to reconcile net loss to net cash used by operating activities: Stock based compensation - 1,772 Restricted stock expense 2,007 689 Issuance of stock for services 82,250 - Intangibles amortization 191,267 172,842 Depreciation 106,740 110,864 Increase (decrease) in contingent liability - ( 69,752 ) Increase (decrease) in fair value of convertible debt ( 89,963 ) - Amortization of operating lease asset 41,131 290,459 Changes in operating assets and liabilities: Accounts receivable ( 288,936 ) 67,169 Deposits - 6,505 Inventory 249,051 498,577 Prepaid inventory ( 197,813 ) ( 5,575 ) Prepaid expenses and other current assets ( 216,256 ) ( 195,850 ) Accounts payable and accrued expenses ( 236,770 ) 142,292 Operating lease liability - ( 311,661 ) Deferred revenue / customer deposits 24,248 182,290 Net cash flows from operating activities ( 317,949 ) ( 105,880 ) Cash flows from investing activities: Purchase of property and equipment ( 164,387 ) ( 184,635 ) Net Cash flows from investing activities ( 164,387 ) ( 184,635 ) Cash flows from financing activities: Note payable - ( 2,501 ) Net Cash flows from financing activities - ( 2,501 ) Net increase (decrease) in cash ( 482,336 ) ( 293,016 ) Cash and cash equivalents, beginning of period 2,452,553 1,797,860 Cash and cash equivalents, end of period $ 1,970,217 $ 1,504,844 Supplemental Disclosures of Cash Flow Information: 2024 2023 Cash Payments for: Interest expense $ - $ 11,614 Non-cash financing/investing activities: Issuance of shares for conversion of debt and accrued interest $ 718,490 $ - Issuance of shares for services $ 82,250 $ - Change in lease asset $ 1,164,652 $ - Preferred dividends accrued but not paid $ 1,000,501 $ 1,000,501 See Notes to Condensed Consolidated Financial Statements 9 Table of Contents cbdMD, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE three months ended December 31, 2024 (Unaudited) Other Additional Common Stock Preferred Stock Comprehensive Paid in Accumulated Shares Amount Shares Amount Loss Capital Deficit Total Balance, September 30, 2024 3,939,057 $ 3,939 5,000,000 $ 5,000 $ ( 7,189 ) $ 184,029,566 $ ( 182,067,898 ) $ 1,963,417 Vesting of Restricted stock 8,000 8 - - - ( 8 ) - - Issuance of restricted stock for share based compensation - - - - - 2,007 - 2,007 Change in fair value of debt related to credit risk ( 588 ) ( 588 ) Issuance of Common Stock, Convertible Notes 1,421,067 1,421 - - - 718,490 - 719,911 Issuance of Common Stock, GSS Agreement 175,000 175 - - - 82,075 - 82,250 Preferred dividend declared, not paid - - - - - - ( 1,000,501 ) ( 1,000,501 ) Net Loss - - - - - - 15,095 15,095 Balance, December 31, 2024 5,543,124 $ 5,543 5,000,000 $ 5,000 $ ( 7,777 ) $ 184,832,130 $ ( 183,053,305 ) $ 1,781,591 See Notes to Condensed Consolidated Financial Statements 10 Table of Contents cbdMD, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE three months ended December 31, 2023 (Unaudited) Additional Common Stock Preferred Stock Paid in Accumulated Shares Amount Shares Amount Capital Deficit Total Balance, September 30, 2023 2,960,573 $ 2,961 5,000,000 $ 5,000 $ 183,387,095 $ ( 174,636,772 ) $ 9,031,284 Issuance of Common Stock 483 - - - - - - Issuance of options for share based compensation - - - - 1,772 - 1,772 Issuance of restricted stock for share based compensation - - - - 689 - 689 Preferred dividend - - - - - ( 1,000,501 ) ( 1,000,501 ) Net Loss - - - - - ( 996,501 ) ( 996,501 ) Balance, December 31, 2023 2,961,056 $ 2,961 5,000,000 $ 5,000 $ 183,389,556 $ ( 176,633,774 ) $ 7,036,743 See Notes to Condensed Consolidated Financial Statements 11 Table of Contents cbdMD, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE three months ended December 31, 2024 and 2023 (unaudited) NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cbdMD, Inc. (“cbdMD”, “we”, “us”, “our”, or the “Company”) is a North Carolina corporation formed on March 17, 2015 as Level Beauty Group, Inc. In November 2016 we changed the name of the Company to Level Brands, Inc. and on May 1, 2019 we changed the name of our Company to cbdMD, Inc. We operate from offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30. There have been no material changes in the Company's significant accounting policies from those previously disclosed in the Annual Report as of and for the fiscal year ended September 30, 2024 as filed on Form 10 -K (the "2024 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 the 2024 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 are not 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 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 than three months when purchased to be cash equivalents. 12 Table of Contents 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 is not 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. The balance for allowance for credit losses was $ 310,712 and $ 346,197 December 31, 2024 and September 30, 2024, respectively. Merchant Receivable and Reserve The Company primarily sells its products through the internet and has an arrangement to process customer payments with third -party payment processors and negotiate the fee based on the market. The arrangement with the payment processors requires that the Company pay a fee between 2.5 % and 4.0 % of the transaction amounts processed. Pursuant to this agreement, there can be a waiting period between 2 to 5 days prior to reimbursement to the Company, as well as a calculated reserve which some payment processors hold back. Fees and reserves can change periodically with notice from the processors. At December 31, 2024 and September 30, 2024, the receivable from payment processors included approximately $ 631,033 and $ 621,678 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 to third party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management’s analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. We assess inventory quarterly for slow moving products and potential impairments and at a minimum perform a physical inventory count annually near fiscal year end. Property and Equipment Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are five years for manufacturing equipment and automobiles and three years for software, computer, and furniture and equipment. The useful life for leasehold improvements are over the term of the lease, or the remaining economic life of the asset, whichever is shorter. The cost and accumulated depreciation of property are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the consolidated statements of operations for the applicable period. Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstance indicate the carrying value of an asset may not be recoverable. Fair Value Accounting The Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, observable market activity. In instances where the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. 13 Table of Contents 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 ASC 825 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 Note 12 for more information related to the convertible notes. Intangible Assets The Company accounts for its trademarks in accordance with Accounting Standards Codification (ASC) Topic 360, Property, Plant and Equipment and are amortized over 5 - 10 years. The Company performs impairment tests as prescribed by ASC 360, which states that impairment testing should be completed whenever events or changes in circumstances indicate that the asset group's carrying value may not be recoverable. Revenue Recognition Under ASC 606, Revenue from Contracts with Customers, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five -step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation. Performance Obligations Contract liabilities represent unearned revenues and are presented as deferred revenue or customer deposits on the condensed consolidated balance sheets. Other than account receivable, the Company has no material contract assets nor contract liabilities at December 31, 2024 . The following tables represent a disaggregation of revenue by sales channel: Three Months Ended December 31, 2024 % of total 2023 % of total E-commerce sales $ 3,952,729 77.3 % $ 4,424,006 82.3 % Wholesale sales 1,160,747 22.7 % 951,399 17.7 % Total Net Sales $ 5,113,476 100.0 % $ 5,375,405 100.0 % 14 Table of Contents 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 the Accounting for Income Taxes topic of ASC 740 which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Company uses the inside basis approach to determine deferred tax assets and liabilities associated with its investment in a consolidated pass-through entity. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized. Concentrations Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and securities. The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. Concentration of credit risk with respect to receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management considers these customer receivables to represent normal business risk. The Company did not have any customers that represented a significant amount of our sales for the three months ended December 31, 2024 . Stock-Based Compensation The Company accounts for its stock compensation under the ASC 718 - 10 - 30, Compensation - Stock Compensation using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. 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. Earnings (Loss) Per Share The Company uses ASC 260 - 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 income of $ 15,095 for the three months ended December 31, 2024 , resulting in a working capital deficit of $ 2,809,100 at December 31, 2024 . 15 Table of Contents 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 be no assurances to that effect. The Company’s working capital position may not be sufficient to support the Company’s daily operations for the twelve 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 within twelve months after the date that the annual financial statements are issued. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result in the Company not being able to continue as a going concern. Convertible Notes Effective February 1, 2024, the Company entered into a Securities Purchase Agreement dated January 30, 2024 ( the “Purchase Agreement”) with five 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 table below represents the change in fair value of the convertible notes as of December 31, 2024. In Active Markets for Significant Other Significant Identical Assets Observable Unobservable and Liabilities Inputs Inputs (Level 1) (Level 2) (Level 3) Balance at September 30, 2024 - - 1,171,308 Change in fair value of convertible notes - - ( 809,287 ) Balance at December 31, 2024 $ - $ - $ 362,021 New Accounting Standards The Company adopted ASU 2023 - 07 , Segment Reporting (Topic 280 ): Improvements to Reportable Segment Disclosures Measurement. This standard went into effect for fiscal years beginning after December 13, 2023 This standard enhances segment reporting under Topic 280 by expanding the breadth and frequency of segment disclosures. The Company is currently evaluating the impacts of this standard on the consolidated financial statements. NOTE 2 – 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. In September of 2023, the Company impaired this investment by $ 700,000 . The Company has classified this investment as Level 3 for fair value measurement purposes as there are no observable inputs and has included it 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 all third -party investors. 16 Table of Contents NOTE 3 - INVENTORY Inventory at December 31, 2024 and September 30, 2024 consists of the following: December 31, September 30, 2024 2024 Finished Goods $ 1,302,911 $ 1,534,718 Inventory Components 851,002 830,469 Inventory Reserve ( 37,777 ) - Inventory prepaid 356,819 159,006 Total Inventory $ 2,472,955 $ 2,524,193 Abnormal amounts of idle facility expense, freight, handling costs, scrap and wasted material (spoilage) are expensed in the period they are in incurred and no material expenses related to these items occurred in the three months ended December 31, 2024 . NOTE 4 – PROPERTY AND EQUIPMENT Property and equipment at December 31, 2024 and September 30, 2024 consisted of the following: December 31, September 30, 2024 2024 Computers, furniture and equipment $ 1,751,798 $ 1,587,411 Manufacturing equipment 284,275 284,275 Leasehold improvements 487,081 487,081 2,523,154 2,358,767 Less accumulated depreciation ( 2,011,239 ) ( 1,904,499 ) Property and equipment, net $ 511,915 $ 454,268 Depreciation expense related to property and equipment was $ 106,740 and $ 110,864 for the three months ended December 31, 2024 and 2023 , respectively. NOTE 5 – INTANGIBLE ASSETS Intangible Assets Intangible assets as of December 31, 2024 and September 30, 2024 consisted of the following: December 31, September 30, 2024 2024 Trademark related to cbdMD $ 21,585,000 $ 21,585,000 Trademark for HempMD 50,000 50,000 Technology Relief from Royalty related to DirectCBDOnline.com 667,844 667,844 Tradename related to CBD MD limited mark 368,000 368,000 Tradename related to DirectCBDOnline.com 749,567 749,567 Impairment of intangible assets ( 17,504,000 ) ( 17,504,000 ) Amortization of definite lived intangible assets ( 3,218,098 ) ( 3,026,831 ) Total $ 2,698,313 $ 2,889,580 Amortization expense related to definite lived intangible assets was $ 191,267 and $ 172,842 for the three months ended December 31, 2024 and 2023 . 17 Table of Contents NOTE 6 – RELATED PARTY TRANSACTIONS None. NOTE 7 – 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. Our 8.0% 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 of 8.0% payable monthly in arrears for the prior month. The Company reviewed ASC 480 – 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 December 31, 2024 and September 30, 2024 . The total amount of preferred dividends declared and accrued were $ 1,006,500 for the three months ended December 31, 2024 , respectively, and the total amount of preferred dividends declared and accrued were $ 1,000,501 for the three months ended December 31, 2023 . Common Stock – The Company is authorized to issue 150,000,000 shares of common stock, par value $ 0.001 per share. There were 5,543,124 and 3,939,057 shares of common stock issued and outstanding at December 31, 2024 and September 30, 2024 , respectively. 18 Table of Contents 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 had no preferred stock transactions in the three months ended December 31, 2024 and 2023 . Common stock transactions: In the three months ended December 31, 2024 : During the quarter the Company issued 1,421,067 shares of common stock for conversion of the Notes. In November 2024, the Company issued 175,000 shares of common stock to a consultant for advisory services. In the three months ended December 31, 2023: None. 19 Table of Contents NOTE 8 – 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 the three months ended December 31, 2024 : Number of shares Weighted-average exercise price Weighted-average remaining contractual term (in years) Aggregate intrinsic value (in thousands) Outstanding at September 30, 2024 44,035 $ 123.58 3.14 $ - Granted - - - - Exercised - - - - Forfeited ( 112 ) 10.35 - - Outstanding at December 31, 2024 43,923 123.83 2.89 - Exercisable at December 31, 2024 43,923 $ 123.87 2.89 $ - As of December 31, 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: The Company had 8,000 shares of previously issued restricted stock vest during the three months ended December 31, 2024. 20 Table of Contents NOTE 9 - WARRANTS Transactions involving the Company equity-classified warrants for the three months ended December 31, 2024 are summarized as follows: Number of shares Weighted-average exercise price Weighted-average remaining contractual term (in years) Aggregate intrinsic value (in thousands) Outstanding at September 30, 2024 48,957 $ 29.48 3.42 $ - Granted - - - - Exercised - - - - Forfeited ( 1,079 ) 176.06 - - Outstanding at December 31, 2024 47,878 26.17 2.98 - Exercisable at December 31, 2024 47,878 $ 26.17 - $ - The following table summarizes outstanding common stock purchase warrants as of December 31, 2024 : Number of shares Weighted-average exercise price Expiration Exercisable at $56.25 per share 822 56.25 January 2025 Exercisable at $168.30 per share 3,357 168.30 December 2025 Exercisable at $168.75 per share 3,199 168.75 June 2026 Exercisable at $2.52 per share 40,500 2.52 April 2028 47,878 $ 37.75 NOTE 10 – COMMITMENTS AND CONTINGENCIES None. 21 Table of Contents NOTE 11 – NOTE PAYABLE Effective February 1, 2024 ( the “Effective Date”), the Company entered into a Securities Purchase Agreement dated January 30, 2024 ( the “Purchase Agreement”) with five 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. If 30 calendar days, 60 calendar days, 90 calendar days, 120 calendar days, or 180 calendar days after the effective date of a registration statement registering the shares of common stock issuable upon conversion of the Notes (the “Registration Statement”) (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 $ 0.5066 . The Company elected the fair value option under ASC 825 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 December 31, 2024 was a decrease of $809,287. The overall change in principal value related to the conversion of Notes to commons stock during the quarter ended December 31, 2024 was a decrease of $719,911. As of December 31, 2024 , total fair value of the Notes is $ 362,021 of which $ 363,798 represents the total principal outstanding. Subsequent to the period covered by this report, the remaining principal and interest of the Notes were fully converted during January 2025. See Note 15 “Subsequent Events”. 22 Table of Contents NOTE 12 – LEASES The Company has lease agreements for its warehouse and executive office with the lease period expiring in September 2026. ASC 842 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 lease do not contain any residual value guarantees. 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 is not 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: Three Months Ended December 31, 2024 Total Operating Lease Costs $ 180,974 Supplemental cash flow information related to operating leases is summarized as follows: Three Months Ended December 31, 2024 Cash paid for amounts included in the measurement of operating lease liabilities $ 100,452 23 Table of Contents As of December 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 December 31, 2024 are summarized as follows: For the year ended December 31, 2025 $ 522,624 2026 798,200 Total future lease payments 1,320,824 Less interest ( 57,476 ) Total lease liabilities $ 1,263,348 NOTE 13 – LOSS PER SHARE At December 31, 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 December 31, 2023 , 93,113 potential shares underlying options, unvested RSUs and warrants as well as 185,223 convertible preferred shares, as well as total of 283,593 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. 24 Table of Contents NOTE 14 – 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, 2023 the Company recorded a net deferred tax asset of zero as the cumulative net deferred tax asset had a full valuation on it and there was not 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 was not any recognition of a deferred tax liability related to indefinite lived deferred tax liabilities. At December 31, 2024 , the Company determined the same circumstances to be true and therefore recorded a net deferred tax asset of zero. NOTE 15 – SUBSEQUENT EVENTS During January 2025, the Company issued an aggregate of 719,709 shares of common stock upon the conversion of the Notes to satisfy the remaining balance of principal and accrued interest on the Notes. 25 Table of Contents ITEM 2. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion of our financial condition and results of operations for the three months ended December 31, 2024 and the three months ended December 31, 2023 should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements because of several factors, including those set forth under the Part I, Item 1A, Risk Factors and Business sections in our 2024 10-K, this report, and our other filings with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report. Our Company Genera l We own and operate the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and functional mushroom brand ATRx Labs. We believe that we are an industry leader producing and distributing hemp derived solutions including broad spectrum CBD products and full spectrum CBD products. Our mission is to enhance our customer’s overall quality of life while bringing cannabinoid and mushroom education, awareness and accessibility of high quality and effective products to all. We source cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States. Our innovative broad spectrum formula utilizes one of the purest hemp extracts, containing CBD, CBG and CBN, while eliminating the presence of tetrahydrocannabinol (THC). Non-THC is defined as below the level of detection using validated scientific analytical methods. Our full spectrum and Delta 9 products contain a variety of cannabinoids and terpenes in addition to CBD while maintaining small amounts of THC that fall below the level of detection and are within the limits set in the 2018 Farm Act. In addition to our core brands, we also operate cbdMD Therapeutics, LLC to capture the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications and Proline Global that houses some of our newer brands. Our cbdMD brand of products includes an array of high-grade, premium every day and functional CBD products, including tinctures; gummies; topicals; capsules; and sleep, focus and calming aids. In addition, we have clinical based claims and industry leading strength and concentrations to drive product efficacy. 26 Table of Contents Our Paw CBD brand of products includes veterinarian-formulated products including tinctures, chews, topicals products in varying strengths and formulas. Paw CBD products have undergone the National Animal Safety Council’s rigorous audit and meet their Quality Seal standard. Our ATRx brand was developed using the power of functional mushrooms to provide consumers a complementary natural ingredient solution for immunity, focus, digestive health, cognitive and mood benefits. cbdMD, Paw CBD and ATRx products are distributed through our e-commerce websites, third party e-commerce sites, select distributors and marketing partners as well as a variety of brick-and-mortar retailers. Recent Developments Management continues to be very focused on our goal of delivering positive earnings through a combination of optimizing our product portfolio, right-sizing our cost structure and investing in marketing that will provide positive return on customer acquisition. During fiscal 2024 we continue to make sweeping changes that have had a very positive impact to the business. The first quarter of fiscal 2025 is the first quarter in Company’s history as a public company that revenues increased from a prior sequential quarter, the Company achieved Net Income (before the preferred dividend accrual) and the Company achieved positive EBITDA on a Non GAAP basis. During the first fiscal quarter cbdMD took a bigger step into the beverage category and launched our line of hemp derived, ready-to-drink beverages under the Herbal Oasis (“Oasis”) line. We see this as currently the fastest growing category in the hemp industry. We remain focused on growing the Company in a smart, profitable manner along with appropriate cost controls. 27 Table of Contents Growth Strategies We continued to pursue many strategies to grow our revenues and expand the scope of our business in fiscal 2025 and beyond: ● Product Innovation: Our goal is to provide our customers superior functional based products with greater efficacy claims and absorption. We constantly assess and evaluate our product portfolio, and devote resources to ongoing research and development processes with the goal of improving our product offerings. During the first quarter of fiscal 2025, we launched reformulations on several sleep products to enhance their effectiveness and improve taste. In addition, we launched ready-to-drink beverage product under our new Oasis brand. We have a pipeline of cannabinoid and non-cannabinoid products and formulation upgrades that are in the queue for ongoing innovation and product portfolio improvement. ● Expand our revenue channels: We continued to pursue relationships with traditional retail accounts and distributors and believe our top brand awareness and effective marketing position us as a preferred CBD partner for key traditional retail accounts as this channel has continued to normalize. During the first quarter of fiscal 2024 we launched several SKUs into Sprouts retail footprint. In April 2024 we added Door Dash as a customer. We expanded our ATRx Labs product in GNC during 2024. In 2025 we began developing relationships with beer and alcohol distributors for our Oasis beverage line. ● International Expansion: We continue to explore sales in markets outside of the United States. We generally partner with local wholesalers and local legal counsel who can help navigate the laws and regulatory requirements within their jurisdiction. We continue to pursue key wholesale accounts in a number of international markets and are gaining market share in Central and South America through our sanitary registration approvals. We are also continuing to expand our E-commerce business to consumers in the United Kingdom (UK) which was expanded onto Amazon’s platform during fiscal year 2023 and are continuing to grow this channel quarterly. ● Cultivate Additional Brands: We continue to operate and attempt to grow the Paw CBD business. During fiscal 2024 we have launched our nootropic mushroom line under the ATRx brand. During the first quarter of fiscal 2025 we launched a new line of hemp derived and nootropic beverages under the Oasis brand. We believe there are ongoing opportunities with these brands to focus on education, cross-selling and customer retention. 28 Table of Contents ● Acquisitions: We evaluate acquisitions (M&A) where we believe (i) there is an accretive customer base that can lower our cost of customer acquisitions through either a complementary direct to consumer base or wholesale channels, or (ii) the target has a profitable business or easily attainable cost synergies that can quickly help contribute and accelerate profitability of our Company. While the Company continues to evaluate M&A opportunities, as of the date of this report we currently do not have any pending or potential acquisitions. There have been opportunities, however, our current capital structure, specifically the overhang of our Series A Preferred stock, has to this point stalled prospects. Results of operations The following tables provide certain selected consolidated financial information for the periods presented: Three Months Ended December 31, 2024 2023 Change Total net sales $ 5,113,476 $ 5,375,405 $ (261,929 ) Cost of sales 1,712,867 1,817,907 (105,040 ) Gross profit as a percentage of net sales 66.5 % 66.2 % 0.3 % Operating expenses 3,486,881 4,623,333 (1,136,452 ) Operating loss from operations (86,272 ) (1,065,835 ) 979,563 Decrease on contingent liability - 69,752 (69,752 ) Net Income (loss) before taxes 15,095 (996,501 ) 970,840 Net loss attributable to cbdMD Inc. common shareholders $ (1,011,596 ) $ (1,997,002 ) $ 985,406 We record product sales primarily through two main delivery channels, direct to consumers via our E-commerce sales and direct to wholesalers utilizing our internal sales team. The following table provides information on the contribution of net sales by type of sale to our total net sales. Three Months Three Months Ended Ended December 31, December 31, 2024 % of total 2023 % of total E-commerce sales $ 3,952,729 77.3 % $ 4,424,006 82.3 % Wholesale sales 1,160,747 22.7 % $ 951,399 17.7 % Total Net Sales $ 5,113,476 $ 5,375,405 29 Table of Contents Net Sales We had total net sales of $5.1 million and $5.4 million for the three months ended December 31, 2024 and 2023, respectively, resulting in a decrease in net sales of $0.3 million or 4.9% quarter over quarter. This decrease is partially attributable to a decrease of $0.5 million in e-commerce sales year over year while wholesale sales increased by $0.2 million. The decrease was primarily due to a reduction in marketing spend and ongoing market changes. However, wholesale sales have recently seen a positive impact related to changes in our team and product portfolio year over year. Sequentially, revenue grew by 12%. Our team continues to focus on all areas of driving revenue improvement. Despite the overall category facing challenges, we remain optimistic about our market positioning in fiscal 2025. Cost of sales Our cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third party providers, and freight for our product sales. Our cost of sales as a percentage of net sales was 33.5% and 33.8% for three months ended December 31, 2024 and 2023, respectively. This slight decrease in cost of sales is mostly attributed to ongoing cost saving initiatives. Operating expenses Our principal operating expenses include staff related expenses, advertising (which includes expenses related to industry distribution and trade shows), sponsorships, affiliate commissions, merchant fees, technology, travel, rent, professional service fees, and business insurance expenses. Consolidated Operating Expenses The following tables provide information on our operating expenses for the three months ended December 31, 2024 and 2023: Three Months Ended December 31, 2024 2023 Change Staff related expense $ 1,241,879 $ 1,386,866 $ (144,987 ) Accounting/legal expense 207,925 272,045 (64,120 ) Professional outside services 137,485 181,178 (43,693 ) Advertising/marketing/social media/events/tradeshows/sponsorships/affiliate commissions 1,001,242 1,392,996 (391,754 ) Merchant fees 148,639 175,875 (27,236 ) R&D and regulatory 2,947 4,629 (1,682 ) Rent and utilities 139,245 395,310 (256,065 ) Non-cash stock compensation 3,082 16,542 (13,460 ) Intangibles Amortization 191,267 172,842 18,425 Depreciation 106,740 110,864 (4,124 ) All other expenses 306,430 514,187 (207,757 ) Totals $ 3,486,881 $ 4,623,334 $ (1,136,453 ) 30 Table of Contents Our overall operating expenses decreased by approximately $1.2 million or 26% for the three months ended December 31, 2024 as compared to the three months ended December 31, 2023. The year over year decrease was primarily driven by management's continued ongoing efforts to reduce our cost structure including decreases in staff related expenses, marketing expenses, and professional, accounting and legal expenses. Our team continues to pursue cost saving initiatives, however after significant progress in 2023 and 2024, larger saving opportunities are harder to identify and implement. We are closely watching marketing expenses and anticipate seeing some increases in future quarters with the goal of positively impacting (increasing) revenues. Corporate overhead and allocation of management fees to our segments Included in our consolidated operating expenses are expenses associated with our corporate overhead which are not allocated to the operating business unit, including (i) staff related expenses; (ii) accounting and legal expenses; (iii) professional outside services; (iv) travel and entertainment expenses; (v) rent; (vi) business insurance; and (vii) non-cash stock compensation expense. Liquidity and Capital Resources We had cash and cash equivalents on hand of approximately $2.0 million and a working capital deficit of $2.8 million. Our working capital is reduced by approximately $5.7 million of accrued dividend payments as of December 31, 2024. At September 30, 2024 we had cash and cash equivalents of $2.4 million and working capital of negative $1.1 million. Our working capital was reduced by approximately $4.7 million for accrued dividends payments as of September 30, 2024. Excluding the accrued dividend payments, we had adjusted working capital of $2.8 million as of December 31, 2024 and $2.4 million as of September 30, 2024. See non GAAP Adjusted EBITDA disclosure below. 31 Table of Contents We do not have any commitments for material capital expenditures. We have a commitment for cumulative dividends at an annual rate of 8% payable monthly in arrears for the prior month to our preferred shareholders. As of August 2023, we suspended paying the dividend in cash and are accruing this dividend on a monthly basis. While the Company is taking strong action and believes that it can execute its strategy and path to profitability, and in its ability to raise additional funds, there can be no assurances to that effect. The Company’s working capital position may not be sufficient to support the Company’s daily operations for the twelve months subsequent to the filing of this quarterly report. The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability and cash flow 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 within twelve months after the date that these financial statements are issued. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result in the Company not being able to continue as a going concern. On December 31, 2024, we received notification (the “Notice”) from the NYSE American NYSE American that the Company is no longer in compliance with an additional NYSE American continued listing standard. Specifically, the letter states that the Company is not in compliance with the continued listing standard set forth in Section 1003(a)(i) of the NYSE American Company Guide (the “Company Guide”). Section 1003(a)(i) requires a listed company to have stockholders’ equity of $2 million or more if the listed company has reported losses from continuing operations and/or net losses in two of its three most recent fiscal years then ended. The Company reported stockholders equity of $1,963,417 as of September 30, 2024, and losses from continuing operations and/or net losses in four of its five most recent fiscal years then ended. The Notice further provided that the Company remains subject to the conditions set forth in the NYSE American’s initial non compliance notification dated June 5, 2024 and its compliance plan that was accepted by the NYSE American on August 20, 2024 for noncompliance under Section 1003(a)(ii) of the Company Guide due to stockholders’ equity under $4 million which addressed how the Company intends to regain compliance with the continued listing standards by December 5, 2025 (the “Plan”). If the Company is not in compliance with the continued listing standards by December 5, 2025 or if the Company does not make progress consistent with the Plan during the Plan period, the Company will be subject to delisting procedures as set forth in the Company Guide. As previously disclosed, the Company is committed to undertaking a transaction or transactions in the future to achieve compliance with the NYSE American’s requirements, including but not limited to seeking shareholder approval to convert its outstanding Series A Preferred Stock and accrued dividends, a liability totaling $5.7 million on December 31, 2024, into shares of Common Stock. Under certain Series A Preferred Stock conversion proposals, the accrued dividend would move to equity and increase the Company’s stockholder equity. However, there can be no assurance that the Company will be able to achieve compliance with the NYSE American’s continued listing standards within the required timeframe. While the Notice has no immediate impact on the listing of the Company’s shares of common stock or Series A Preferred Stock, which will continue to be listed and traded on the NYSE American during this period, subject to the Company’s compliance with the other listing requirements of the NYSE American, if the Common Stock and Series A Preferred Stock ultimately were to be delisted for any reason, it could negatively impact the Company by (i) reducing the liquidity and market price of the Company’s Common Stock and Series A Preferred Stock; (ii) reducing the number of investors willing to hold or acquire the Common Stock and Series A Preferred Stock, which could negatively impact the Company’s ability to raise equity financing; and (iii) limiting the Company’s ability to use a registration statement to offer and sell freely tradable securities, thereby preventing the Company from accessing the public capital markets. Our goal from a liquidity perspective is to use operating cash flows to fund day to day operations. We continue to improve the Company’s operating performance, we have been able to stabilize our cash position over the last few quarters, and we believe we are getting closer to long-term sustainable cash flow production. The conversion of the Notes provides the Company additional cash for working purposes during fiscal 2025. Management continues to focus on profitability growing the Company in order to strengthen its balance sheet. Adjusted EBITDA To supplement the Company's unaudited interim consolidated financial statements presented in accordance with US GAAP, the Company uses certain non-GAAP measures of financial performance. Non-GAAP financial measures are not prepared in accordance with, or as an alternative to US GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company's performance that either excludes or includes amounts, or is subject to adjustment that have such an effect, that are not normally excluded or included in the most directly comparable financial measure that is calculated and presented in accordance with US GAAP. Adjusted EBITDA as presented below is a non-GAAP measure. cbdMD defines Adjusted EBITDA as Earnings Before Interest, Taxes, Depreciation and Amortization excluding stock based compensation and mergers and acquisitions and financing transaction expenses. Our management uses and relies on Adjusted EBITDA, which is a non-GAAP financial measure. We believe that management, analysts and shareholders benefit from referring to the following non-GAAP financial measure to evaluate and assess our core operating results from period-to-period after removing the impact of items that affect comparability. Our management recognizes that the non-GAAP financial measures have inherent limitations because of the excluded items described below. We have included a reconciliation of our non-GAAP financial measure to the most comparable financial measures calculated in accordance with GAAP. We believe that providing the non-GAAP financial measures, together with the reconciliation to GAAP, helps investors make comparisons between cbdMD and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measure and the corresponding GAAP measure provided by each company under applicable rules of the Securities and Exchange Commission. 32 Table of Contents Adjusted EBITDA for the three months ended December 31, 2024 and December 31, 2023 is as follows: Three months Ended December 31, 2024 2023 (Unaudited) GAAP (loss) from operations $ (86,272 ) $ (1,065,835 ) Adjustments: Depreciation & Amortization (1) 298,007 283,706 Employee and director stock compensation (2) 3,082 16,542 Mergers and Acquisitions and financing transaction expense (3) - 67,599 Non-GAAP adjusted EBITDA $ 214,817 $ (697,988 ) (1) Represents depreciation of property, plant and equipment and amortization of the Company's intangible assets. (2) Represents non-cash expense related to options, warrants, restricted stock expenses that have been amortized during the period. (3) Represents expenses incurred in relation to M&A and financing activities during the quarter ended December 31, 2023. Critical accounting policies The preparation of financial statements and related disclosures in conformity with US GAAP and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to our consolidated financial statements appearing elsewhere in this report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material. Please see Part II, Item 7 – Critical Accounting Policies appearing in our 2024 10-K for the critical accounting policies we believe involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. 33 Table of Contents Recent accounting pronouncements Please see Note 1 – Organization and Summary of Significant Accounting Policies appearing in the consolidated financial statements included in this report for information on accounting pronouncements. Off balance sheet arrangements As of the date of this report, we have no undisclosed off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable for a smaller reporting company.