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CONTINGENT LIABILITY | 9 Months Ended
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Jun. 30, 2021
CONTINGENT LIABILITY |
Note - 6 CONTINGENT LIABILITY | NOTE 6 – CONTINGENT LIABILITY As consideration for the Mergers, described in Note 1, the Company had a contractual obligation to issue 15,250,000 shares of its common stock, after approval by its shareholders, to the members of Cure Based Development, issued in two tranches 6,500,000 shares and 8,750,000 shares, both of which are subject to leak out provisions, and the unrestricted voting rights to 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 Earnout Shares can 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 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 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 |  | .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 issuance of the initial 15,250,000 shares and the 15,250,000 Earnout Shares were approved by the Company’s shareholders in April 2019. 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 consolidated balance sheet. In addition, the first marking period for the Earnout Shares was December 31, 2019 and based on measurement criteria, 5,127,792 Earnout Shares were issued on February 27, 2020 and had a value of $4,620,000 which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The second marking period for the Earnout Shares was December 31, 2020 and based on measurement criteria, 3,348,520 Earnout Shares were issued on March 8, 2021 and had a value of $11,271,000 which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The first quarter of the third marking period ended on March 31, 2021 and based on the measurement criteria an additional 562,278 Earnout Shares had been earned and issued in May of 2021. These shares deceased in value by $522,104 during the quarter through the time of issuance and had a value of $1,329,000 which was reclassified from the contingent liability to additional paid in capital on the consolidated balance sheet. The third marking period was originally an 18 month period commencing on January 1, 2021 and ending on June 30, 2022 (the “Third Marking Period End Date”), after which time the determination of the issuance of any remaining Earnout Shares would be made pursuant to the terms of the Merger Agreement. On March 31, 2021 the Company entered into Addendum No. 1 to the Merger Agreement (“Addendum No. 1”) with the holders of the remaining Earnout Rights which amended the measurement periods within the third marking period to change the determination of the aggregate net revenues within the third marking period to a quarterly basis for each of the six fiscal quarters within the third marking period, beginning with the quarter ended March 31, 2021, instead of following Third Marking Period End Date. This change in the measurement date, however, has no effect on the number of remaining Earnout Shares issuable under the Earnout Rights and no effect on the earnout targets; Addendum No. 1 simply changes the physical issuance date(s) of the remaining Earnout Shares, if in fact, such shares are earned pursuant to the terms of the Merger Agreement. Addendum No. 1 did not change any of the terms of the fourth marking period (as that term is defined in the Merger Agreement). This change did not impact the fair value of the contingent liability. The value of the contingent liability was $14,100,000 and $16,200,000 at June 30, 2020 and September 30, 2020, respectively, and represents the Earnout Shares. During the first quarter of 2021, the company recorded an increase in value of $8,500,000 which was primarily driven by change in stock price between December 31, 2020 and September 30, 2020. The second marking period shares were valued at $11,271,000 on March 8, 2021 as compared to $8,170,988 on December 31, 2020. This increase in value of $3,100,012 was recorded as an expense in the condensed consolidated statement of operations for the three months ended March 31, 2021 prior to these shares being reclassified to additional paid in capital. After the issuance of the Second Marking Period shares, the remaining Earnout Shares for potential future issuance were valued at $22,300,000 at March 31, 2021 as compared to $16,529,012 at December 31, 2020. The increase in value of the contingent liability of $5,770,988 is recorded in consolidated statement of operations for the three months ended March 31, 2021 and represents the change in value of the remaining Earnout Shares. During the third quarter of fiscal 2021 the company recorded a decrease in value of $6,872,206 to the contingent liability which is recorded as other expense in the consolidated statement of operations for the third quarter of fiscal year 2021. The decrease in value is comprised of $522,104 associated with the decrease of the value of the Third Marking Period shares prior to their issuance in May 2021, while the remaining $6,348,896 is associated with the decrease in the remaining contingent shares as of June 30, 2021. 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 change in the value of the Earnout Shares within the contingent liability was the increase of the Company’s stock price, which was $2.90 at June 30, 2021 as compared to $4.14 at March 31, 2021, $2.95 on December 31, 2020 and $2.00 on September 30, 2020.

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