XML 55 R15.htm IDEA: XBRL DOCUMENT

8. CONTINGENT LIABILITY

3 Months Ended

Dec. 31, 2019

As consideration for the Mergers, described in Note 2, the Company has a contractual obligation to issue 15,250,000 shares of our common stock, after approval by our shareholders, to the members of Cure Based Development, issued in two tranches 6,500,000 and 8,750,000, both of which are subject to leak out provisions, and the 8,750,000 tranche of shares will also vest over a five year period and are subject to a voting proxy agreement. The Merger Agreement also provides that an additional 15,250,000 shares of our common stock can be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date (“earn out”).

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 15,250,000 shares have been 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 8,750,000 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 provides that an additional 15,250,000 shares (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 (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		.190625
$20,000,001 - $60,000,000		.0953125
$60,000,001 - $140,000,000		.04765625
$140,000,001 - $300,000,000		.023828125

For clarification purposes, the Aggregate Net Revenues during a Marking Period shall be multiplied by the applicable Shares Issued/Each $ of Aggregate Net Revenue Ratio, minus, the number of shares issued as a result of Aggregate Net Revenues during the prior Marking Periods.

The initial 15,250,000 shares and Earnout Shares were approved by our shareholders and the initial shares were issued on April 19, 2019.

The 15,250,000 Earnout Shares which would be issued in the future, upon the satisfaction of net revenue criteria have been valued using a Monte Carlo Simulation. Inputs used included: stock price, volatility, interest rates, revenue projections, and likelihood of obtaining revenue projections, amongst others.

The value of the contingent liability was $50,600,000 at September 30, 2019 and represents the Earnout Shares. The initial shares were issued upon shareholder approval on April 19, 2019 and had a carrying value of $53,215,163. Additionally, as the 15,250,000 initial shares were issued, the value of the shares in the amount of $53,215,163 was reclassified from the contingent liability to additional paid in capital on the balance sheet. The Earnout Shares were valued at $33,701,994 on December 31, 2019 as compared to $50,600,000 at September 30, 2019. The decrease in value of the contingent liability of $16,898,006 is recorded in the Statement of Operations for the three months ended December 31, 2019. The Company utilized both a market approach and a Monte Carlo simulation in valuing the contingent liability and a key input in both of those methods is the stock price. The main driver of the decrease in the value of the Earnout Shares within the contingent liability was the decrease of the Company’s stock price, which was $2.26 at December 31, 2019 as compared to $3.96 on September 30, 2019.