Note 6 - Contingent Consideration

3 Months Ended

Dec. 31, 2023

Notes to Financial Statements

Business Combination Disclosure [Text Block]

NOTE 6 – CONTINGENT CONSIDERATION

As consideration for the Mergers, described in Note 1, 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 in two tranches 144,445 shares and 194,945 shares, both of which we subject to leak out provisions, and the unrestricted voting rights to 194,445 tranche of shares which vested over a five year period and were subject to a voting proxy agreement. The Merger Agreement also provided that an additional 338,889 Earnout Shares could be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date.

The contractual obligations and earn out provision are accounted for as a contingent liability and fair value is determined using Level 3 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 initial two tranches totaling 338,889 shares were valued using a market approach method and included the use of the following inputs: share price upon contractual obligation, discount for lack of marketability to address leak out restrictions, and probability of shareholder disapproval. In addition, the 194,445 shares in the second tranche also included an input for a discount for lack of voting rights during the vest periods.

The Merger Agreement also provided that an additional 338,889 Earnout Shares would be issued as part of the consideration for the Mergers, upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date as follows, as measured at four intervals (each a “marking period”): the completion of 12, 24, 42, and 59 calendar months from the Closing Date, and based upon the ratios set forth below:

Aggregate Net Revenues	Shares Issued/ Each $ of Aggregate Net Revenue Ratio
$1 - $20,000,000	0.00423615
$20,000,001 - $60,000,000	0.002118075
$60,000,001 - $140,000,000	0.001059038
$140,000,001 - $300,000,000	0.000529519

An aggregate of 271,405 shares were issued over the initial three marking periods. The fourth marketing period began on  July 1, 2022 and ended during  November 2023. As of  November 2023, the preliminary revenue for the fourth marking period totaled approximately $35.8 million.  Based on the ratios, and subsequent to December 31, 2023, the Company determined the final Earnout Shares to be issued were 19,818. The shares were issued on January 11, 2024 and there is no further Earnout obligation.

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