cbdMD(YCBD) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements The financial statements reflect significant changes post-merger, with dramatic increases in assets and liabilities, and a substantial net loss driven by contingent liability revaluation Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | March 31, 2019 ($) | September 30, 2018 ($) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $4,639,587 | $4,282,553 | | Total current assets | $14,144,223 | $11,790,147 | | Goodwill | $55,144,269 | $0 | | Intangible assets, net | $24,729,322 | $3,173,985 | | Total assets | $94,835,227 | $15,017,612 | | Liabilities & Equity | | | | Total current liabilities | $1,871,292 | $969,955 | | Contingent liability | $102,267,557 | $0 | | Total liabilities | $108,250,883 | $998,457 | | Total shareholders' equity (deficit) | ($13,415,656) | $14,019,155 | - The significant increase in assets (Goodwill, Intangibles) and liabilities (Contingent Liability) is a direct result of the merger with Cure Based Development completed on December 20, 2018[18][20][39] Condensed Consolidated Statements of Operations Consolidated Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended Mar 31, 2019 ($) | Three Months Ended Mar 31, 2018 ($) | Six Months Ended Mar 31, 2019 ($) | Six Months Ended Mar 31, 2018 ($) | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $5,673,352 | $3,080,910 | $6,922,381 | $3,768,666 | | Gross Profit | $3,538,689 | $2,557,089 | $4,296,711 | $3,016,722 | | Loss from operations | ($2,400,645) | $1,619,966 | ($3,187,564) | $391,954 | | (Increase) decrease on contingent liability | ($30,914,074) | $0 | ($30,914,074) | $0 | | Net Loss attributable to cbdMD, Inc. | ($31,791,738) | $1,404,397 | ($33,901,451) | $271,469 | | Net Loss per share (Basic) | ($3.13) | $0.17 | ($3.35) | $0.04 | - The company reported a significant net loss of $31.8 million for the three months ended March 31, 2019, primarily driven by a $30.9 million non-cash expense related to the increase in the fair value of the contingent liability from the Cure Based Development merger[22][62] Condensed Consolidated Statement of Cash Flows Cash Flow Summary for the Six Months Ended March 31 (Unaudited) | Cash Flow Activity | 2019 ($) | 2018 ($) | | :--- | :--- | :--- | | Net cash used by operating activities | ($4,462,372) | ($3,552,831) | | Net cash used by investing activities | ($1,360,070) | ($662,465) | | Net cash provided by financing activities | $6,179,476 | $10,642,449 | | Net increase in cash | $357,034 | $6,427,153 | - For the six months ended March 31, 2019, financing activities, primarily from a secondary stock offering, provided $6.2 million in cash, which offset cash used in operating and investing activities[25][154] Notes to Condensed Consolidated Financial Statements - On December 20, 2018, the company completed a merger with Cure Based Development, LLC, which now operates as the subsidiary CBD Industries LLC (CBDI) The consideration includes a contractual obligation to issue 15,250,000 shares of common stock, plus up to an additional 15,250,000 shares based on future revenue targets[39][95] - The merger consideration is accounted for as a contingent liability, which was valued at $102.3 million as of March 31, 2019 Its value increased by $30.9 million increase during the quarter, primarily due to the rise in the company's stock price, resulting in a significant non-cash expense[62][140] - The company operates in three segments: Products, Licensing, and Entertainment For the six months ended March 31, 2019, the Products division generated $6.1 million in net sales, representing 88.5% of total net sales, driven by the cbdMD acquisition[176][181] - Subsequent to the quarter's end, on April 19, 2019, shareholders approved changing the company name to "cbdMD, Inc." effective May 1, 2019, and the issuance of 15,250,000 shares related to the merger[186] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 84% sales increase to the cbdMD acquisition, with a significant net loss driven by contingent liability revaluation and increased operating expenses Overview and Recent Developments - The company operates five business units, with the newest, CBD Industries (cbdMD), established in December 2018 following the merger with Cure Based Development LLC[191][196] - On April 19, 2019, shareholders approved changing the company's name from Level Brands, Inc. to cbdMD, Inc., effective May 1, 2019 They also approved the issuance of 15,250,000 shares as initial consideration for the merger[199] - The company's growth strategy is now heavily focused on expanding the visibility and distribution of the cbdMD brand, capitalizing on the passage of the Farm Bill[200] Results of Operations Financial Performance Summary (Three Months Ended March 31) | Metric | 2019 ($) | 2018 ($) | % Change | | :--- | :--- | :--- | :--- | | Total net sales | $5,673,351 | $3,080,910 | 84.1% | | Gross profit | $3,538,689 | $2,557,089 | 38.4% | | Gross profit % | 62.4% | 83.1% | (20.7)% | | Operating expenses | $5,939,334 | $937,123 | 533.8% | | Net loss attributable to cbdMD, Inc. | ($31,791,738) | $1,404,397 | (2363.7)% | - For the three months ended March 31, 2019, the Products division accounted for 99.5% of total net sales, a dramatic shift from 1.0% in the prior year period, driven by the cbdMD acquisition[203][204] - The significant increase in operating expenses is attributed to the merger and ramp-up of the cbdMD brand, including increased staff, marketing, commissions, and public company support costs[212][216] - A $30.9 million non-cash expense was recorded due to the increase in the fair value of the contingent liability related to the merger, which was the primary driver of the net loss[223] Liquidity and Capital Resources Liquidity Position | Metric | March 31, 2019 ($) | September 30, 2018 ($) | | :--- | :--- | :--- | | Cash and cash equivalents | $4,639,587 | $4,282,553 | | Working capital | $12,272,931 | $10,820,192 | - The company had a net use of cash from operations of $4.5 million for the six months ended March 31, 2019, partly because it has historically accepted equity as compensation for services[230] - In October 2018, the company raised $6.4 million in net proceeds from a follow-on public offering, which is being used for brand development, expansion, and working capital[231] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company qualifies as a smaller reporting company - Not applicable for a smaller reporting company[238] Controls and Procedures Management concluded disclosure controls were effective, and the company formalized a review process for new accounting standards to remediate a material weakness - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2019[239] - The company implemented remediation changes to its internal controls, formalizing a review process to ensure timely adoption of new accounting standards[240] PART II - OTHER INFORMATION Legal Proceedings The company reported no legal proceedings during the period - None[241] Risk Factors The company highlights new and modified risk factors, primarily related to the Cure Based Development merger, including integration challenges, limited operating history, intense competition, evolving CBD regulations, and significant shareholder dilution - There are no assurances the company will successfully integrate the Cure Based Development business, which could disrupt operations and lead to unforeseen expenses[243][245] - The acquired subsidiary, cbdMD LLC, has a limited operating history, making it difficult to evaluate its future performance and strategy[246] - The CBD market is highly competitive and expected to intensify, which could drive down prices and adversely affect operating results[248] - Evolving laws and regulations from the FDA and other authorities following the Farm Bill could increase compliance costs and require changes to the business plan[249][251] - The issuance of 15,250,000 shares (with a potential for 15,250,000 more) to former Cure Based Development members will significantly dilute existing shareholders, giving the new members approximately 60% ownership[253] Unregistered Sales of Equity Securities and Use of Proceeds The company details the use of $6.3 million net proceeds from its October 2018 public offering and the issuance of 75,000 shares to investment banking firms for advisory services - In October 2018, the company raised approximately $6.3 million in net proceeds from a follow-on public offering, used for brand development, acquisitions, and working capital[254] - In January 2019, the company issued 50,000 shares to Maxim Group, LLC and 25,000 shares to Joseph A. Gunnar & Co., LLC for advisory and investment banking services[255][256] Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[257] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable to our company's operations[259] Other Information There is no information provided under this item Exhibits This section lists exhibits filed with the Form 10-Q, including merger agreements, corporate documents, and various service and employment agreements - Lists exhibits filed with the report, including the Merger Agreement with Cure Based Development, employment agreements for key executives, and advisory agreements[261]