cbdMD(YCBD) - 2019 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for the quarterly period ended June 30, 2019, including balance sheets, statements of operations, comprehensive income, cash flows, and shareholders' equity, along with detailed notes explaining accounting policies and significant transactions like the recent merger with Cure Based Development Condensed Consolidated Balance Sheets The balance sheets as of June 30, 2019, and September 30, 2018, show a significant increase in total assets from $15.0 million to $100.9 million, primarily driven by goodwill and intangible assets from the recent merger, with total liabilities also rising dramatically from $1.0 million to $75.8 million due to a new contingent liability of $70.6 million related to the acquisition Condensed Consolidated Balance Sheet Highlights (Unaudited) | Metric | June 30, 2019 (USD) | September 30, 2018 (USD) | | :--- | :--- | :--- | | Total Current Assets | $22.2 million | $11.8 million | | Goodwill | $55.1 million | $0 | | Intangible Assets, net | $22.6 million | $3.2 million | | Total Assets | $100.9 million | $15.0 million | | Total Current Liabilities | $2.3 million | $969,955 | | Contingent Liability | $70.6 million | $0 | | Total Liabilities | $75.8 million | $998,457 | | Total Shareholders' Equity | $25.1 million | $14.0 million | Condensed Consolidated Statements of Operations For the three months ended June 30, 2019, the company reported total net sales of $8.0 million, a significant increase from $3.2 million in the prior-year period, but a substantial increase in operating expenses and a $21.5 million increase in contingent liability led to a net loss of $29.2 million, compared to a net income of $0.57 million in the same quarter of 2018 Statement of Operations Summary (Three Months Ended June 30) | Metric | 2019 (USD) | 2018 (USD) | | :--- | :--- | :--- | | Total Net Sales | $8.0 million | $3.2 million | | Gross Profit | $5.1 million | $2.1 million | | Operating Expenses | $13.3 million | $1.5 million | | (Increase) of contingent liability | ($21.5 million) | $0 | | Net Income (Loss) | ($29.2 million) | $565,253 | | Net Income (Loss) per share (Basic) | ($1.19) | $0.03 | Statement of Operations Summary (Nine Months Ended June 30) | Metric | 2019 (USD) | 2018 (USD) | | :--- | :--- | :--- | | Total Net Sales | $15.0 million | $7.0 million | | Gross Profit | $9.4 million | $5.1 million | | Operating Expenses | $20.8 million | $4.1 million | | (Increase) of contingent liability | ($52.5 million) | $0 | | Net Income (Loss) | ($63.2 million) | $943,390 | | Net Income (Loss) per share (Basic) | ($4.22) | $0.06 | Condensed Consolidated Statement of Cash Flows For the nine months ended June 30, 2019, net cash used by operating activities was $9.1 million, primarily due to a large net loss adjusted for non-cash items like the increase in contingent liability, with investing activities using $1.6 million mainly for the merger, and financing activities providing $18.0 million from common stock issuance, resulting in a net cash increase of $7.4 million Cash Flow Summary (Nine Months Ended June 30, 2019) | Cash Flow Activity | Amount (USD) | | :--- | :--- | | Net cash used by operating activities | ($9.1 million) | | Net cash used by investing activities | ($1.6 million) | | Net cash provided by financing activities | $18.0 million | | Net increase in cash | $7.4 million | | Cash and cash equivalents, end of period | $11.6 million | Notes to Condensed Consolidated Financial Statements The notes provide critical details behind the financial statements, including the December 2018 merger with Cure Based Development, which was accounted for as a business combination, leading to significant goodwill and intangible assets, and also detail the impairment of intangible assets from non-CBD business lines, the nature of the large contingent liability tied to the merger's earnout provisions, and a breakdown of segment performance showing a major shift in revenue towards the CBD products division - On December 20, 2018, the company completed a merger with Cure Based Development, LLC, acquiring the cbdMD brand. The transaction involved issuing 15,250,000 shares and a potential additional 15,250,000 shares based on future revenue targets[39][92] - Due to a strategic shift towards the CBD business, the company recorded impairment charges totaling $2,114,334 in Q3 2019 for intangible assets related to its BPU, I'M1, and EE1 subsidiaries, as these brands were not expected to be used as they have in the past[120][123] - A contingent liability for future share issuances related to the merger was valued at $70.6 million as of June 30, 2019. Its value increased by $21.5 million during the quarter, primarily due to the rise in the company's stock price, which was recorded as an expense[61][133] Segment Net Sales (Three Months Ended June 30) | Segment | 2019 Net Sales (USD) | 2018 Net Sales (USD) | | :--- | :--- | :--- | | Products Division | $8.0 million | $27,205 | | Licensing Division | $3,353 | $1.6 million | | Entertainment Division | $20,113 | $1.5 million | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's performance, emphasizing the strategic shift to the CBD products division following the December 2018 merger, highlighting significant revenue growth driven by the cbdMD brand, alongside a substantial increase in operating expenses for marketing and infrastructure, with the net loss heavily impacted by non-cash charges, including a $2.1 million impairment of non-CBD intangible assets and a $21.5 million increase in the contingent liability related to the merger Overview and Growth Strategies The company operates in three segments: products (CBDI, Beauty & Pin-Ups), licensing (kathy ireland® Health & Wellness, IM1), and entertainment (EE1), with the primary growth strategy focused on expanding the cbdMD brand by increasing distribution to wholesalers and retailers, developing new CBD products, and executing a robust advertising and media plan, aiming to surpass $5 million in monthly net sales by March 2020 and $10 million by December 2020 - The company's primary strategic focus is to build the cbdMD brand into the top recognized brand in the CBD sector following the passage of the Farm Bill[201] - Key growth strategies include expanding distribution from approximately 600 to 3,000 retail doors since January 2019, developing new CBD products, and continuing development of all advertising, media, and sales channels[201] - The company has set future goals to surpass $5 million in monthly net sales by March 31, 2020, and achieve operational positive cash flow in the second quarter of fiscal 2021[201] Results of Operations For the third quarter of 2019, total net sales grew 151.5% year-over-year to $8.0 million, driven almost entirely by the Products division (cbdMD), which now accounts for 99.7% of sales, reflecting a major shift from the prior year when licensing and entertainment were primary revenue sources, while operating expenses surged over 800% to $13.3 million due to the ramp-up of the cbdMD business and a $2.1 million non-cash impairment charge, with the cost of sales for the Products division improving significantly as a percentage of sales Financial Performance Comparison (Three Months Ended June 30) | Metric | 2019 (USD) | 2018 (USD) | % Change | | :--- | :--- | :--- | :--- | | Total Net Sales | $8.0 million | $3.2 million | 151.5% | | Gross Profit % | 63.2% | 65.4% | (2.2)% | | Operating Expenses | $13.3 million | $1.5 million | 811.4% | | Net Loss Attributable to cbdMD, Inc. | ($27.7 million) | $206,074 | (13541.4)% | - The Products division's net sales increased to $8.0 million in Q3 2019 from just $27,205 in Q3 2018, due to the acquisition of the cbdMD brand[201][202] - The significant increase in operating expenses is attributed to the merger and ramp-up of the cbdMD brand, including higher staff, marketing, legal, and travel costs, plus a one-time impairment charge of approximately $2,114,000[210] Liquidity and Capital Resources As of June 30, 2019, the company had $11.6 million in cash and cash equivalents and $19.9 million in working capital, a significant improvement from September 30, 2018, largely due to raising net proceeds of $12.7 million from a public offering in May 2019 and $6.4 million in October 2018, but despite revenue growth, cash flow from operations was a net use of $9.8 million for the nine months ended June 30, 2019, as the company funded its operational expansion Liquidity Position | Metric | June 30, 2019 (USD) | September 30, 2018 (USD) | | :--- | :--- | :--- | | Cash and cash equivalents | $11.6 million | $4.3 million | | Working capital | $19.9 million | $10.8 million | - The company raised total net proceeds of $12.7 million in May 2019 and $6.4 million in October 2018 from public stock offerings to fund brand development, marketing, and working capital[229] - Net cash used in operations for the nine months ended June 30, 2019, was $9.8 million, an increase from $4.8 million in the prior-year period, reflecting the costs of funding operational growth[228] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company is a smaller reporting company - Disclosure is not applicable for a smaller reporting company[236] Controls and Procedures Management, including the co-CEOs and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of the end of the reporting period, with the only material change to internal control over financial reporting being the implementation of an automated perpetual inventory system during the quarter - The company's co-Chief Executive Officers and Chief Financial Officer concluded that disclosure controls and procedures were effective[237] - In the quarter ending June 30, 2019, the company implemented an automated perpetual inventory system as a change to its internal control over financial reporting[238] PART II - OTHER INFORMATION Legal Proceedings There are no new legal proceedings to report beyond what has been previously disclosed - None, except as previously reported[241] Risk Factors The company incorporates by reference the risk factors previously disclosed in its 2018 Form 10-K and its Q1 2019 Form 10-Q - The company incorporates by reference the risk factors disclosed in its Annual Report on Form 10-K for the fiscal year ended September 30, 2018, and its Quarterly Report on Form 10-Q for the period ended March 31, 2019[242] Unregistered Sales of Equity Securities and Use of Proceeds There are no new unregistered sales of equity securities to report beyond what has been previously disclosed - None, except as previously reported[243] Other Information The company disclosed two items: first, it is pursuing collection of a $1,000,000 payment from an affiliate of a former board member that was due May 1, 2019, and second, on August 7, 2019, the board approved an amendment to its 2015 Equity Compensation Plan to reflect the new company name and align the annual share increase date with the fiscal year - The company is pursuing collection of a $1,000,000 payment from an affiliate of a former board member after a missed payment on June 30, 2019[246] - On August 7, 2019, the board amended the 2015 Equity Compensation Plan to change its name and modify the timing of the annual 'evergreen' share increase[247] Exhibits This section lists the exhibits filed with the Form 10-Q, including a new office lease agreement, certifications from principal officers, and XBRL data files - Filed exhibits include a new office lease dated July 11, 2019, CEO and CFO certifications (Section 302 and 906), and XBRL documents[249]