cbdMD(YCBD) - 2020 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Q4 2019 financials show net sales of $10.1 million and net income of $12.9 million, primarily due to the CBD merger Condensed Consolidated Balance Sheets Total assets grew to $101.8 million, liabilities decreased to $46.3 million, and shareholders' equity increased to $55.5 million Condensed Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | Dec 31, 2019 | Sep 30, 2019 | | :--- | :--- | :--- | | Total Current Assets | $14,874,171 | $15,743,035 | | Total Assets | $101,796,640 | $94,518,122 | | Total Current Liabilities | $5,481,248 | $3,709,878 | | Contingent Liability | $33,701,994 | $50,600,000 | | Total Liabilities | $46,272,410 | $56,914,138 | | Total Shareholders' Equity | $55,524,230 | $37,603,984 | Condensed Consolidated Statements of Operations Net sales surged to $10.1 million, resulting in a net income of $12.9 million, primarily due to a $16.9 million non-cash gain from contingent liability decrease Statement of Operations Summary (Unaudited) | Metric | Three Months Ended Dec 31, 2019 | Three Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Total Net Sales | $10,148,236 | $465,687 | | Gross Profit | $6,447,699 | $300,196 | | Loss from Operations | ($6,112,598) | ($1,091,617) | | Decrease of contingent liability | $16,898,006 | - | | Net Income (Loss) | $12,929,763 | ($2,189,042) | | Basic EPS | $0.46 | ($0.21) | Condensed Consolidated Statement of Cash Flows Operating activities used $4.9 million cash, financing provided $4.4 million, resulting in a $1.0 million decrease in cash and equivalents Cash Flow Summary (Unaudited) | Cash Flow Activity | Three Months Ended Dec 31, 2019 | Three Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net Cash Used by Operating Activities | ($4,873,544) | ($1,162,902) | | Net Cash Used by Investing Activities | ($555,674) | ($1,267,593) | | Net Cash Provided by Financing Activities | $4,400,562 | $6,179,476 | | Net (Decrease) in Cash | ($1,028,656) | $3,748,981 | | Cash at End of Period | $3,661,310 | $8,031,534 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, the CBD merger, contingent liability revaluation, discontinued operations, stock offerings, and new commitments - On December 20, 2018, the company completed a merger with Cure Based Development, acquiring its CBD business, which is the primary driver of strategic shift and financial performance[39] - Effective September 30, 2019, the company discontinued operations of four legacy subsidiaries (EE1, IM1, BPU, Level H&W) to focus strategically on the CBD business[41][144] - The company adopted the new lease accounting standard (ASU No. 2016-02) on October 1, 2019, recognizing a $7.7 million operating lease asset and a $8.0 million operating lease liability on the balance sheet[90] - A significant subsequent event occurred on January 14, 2020, when the company completed a follow-on public offering of common stock, raising approximately $16.9 million in net proceeds[161] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes revenue growth to CBD business expansion, with increased operating expenses and net income from a non-cash contingent liability gain Overview and Growth Strategies The company focuses on premium CBD product distribution for humans and pets, with strategies including product expansion, channel growth, sponsorships, and acquisitions - The company's core business is producing and distributing high-grade CBD products, including a dedicated pet line under the Paw CBD brand, organized as a separate subsidiary in October 2019[164] - Growth strategies include: Increasing product offerings and expanding sales channels from online to wholesale and retail; Expanding the Paw CBD animal health division; Continuing high-profile sponsorships to build brand recognition; Evaluating potential acquisitions in the emerging CBD market[169] Results of Operations Net sales surged to $10.1 million, driven by the CBD business, with operating expenses increasing over 800% to $12.6 million due to scaling investments Net Sales by Channel (Q1 FY2020 vs Q1 FY2019) | Sales Channel | Q1 2020 | % of Total | Q1 2019 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Wholesale sales | $3,284,459 | 32.4% | $ - | 0% | | Consumer sales | $6,863,777 | 67.6% | $465,687 | 100% | | Total net sales | $10,148,236 | | $465,687 | | Operating Expense Breakdown (Q1 FY2020 vs Q1 FY2019) | Expense Category | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Staff related expense | $3,933,002 | $294,540 | | Advertising/marketing | $2,410,721 | $82,142 | | Sponsorships | $2,129,835 | $ - | | Non-cash stock compensation | $680,574 | $143,673 | | Total Operating Expenses | $12,560,297 | $1,391,812 | - The significant increase in operating expenses is directly related to the merger and the subsequent ramp-up of the CBDI business, including increased staff, marketing, and infrastructure expansion[174][178] Contingent Liability A $16.9 million non-cash gain resulted from a decrease in contingent liability fair value, driven by the company's stock price decline - The value of the contingent liability for earnout shares decreased by $16,898,006, recorded as other income[184] - The primary driver for the decrease in the liability's value was the decline in the company's stock price to $2.26 at December 31, 2019, from $3.96 at September 30, 2019[184] Liquidity and Capital Resources The company held $3.7 million cash and $9.4 million working capital, with $4.9 million net cash used in operations, raising capital through stock offerings Liquidity Position | Metric | Dec 31, 2019 | Sep 30, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $3,661,310 | $4,689,966 | | Working capital | $9,392,923 | $12,033,157 | - Cash flow from operations was a net use of $4,873,544 for the three months ended December 31, 2019[189] - The company raised capital through two offerings: $4.5 million net from preferred stock in October 2019 and $16.9 million net from common stock in January 2020[190] Item 3. 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[196] Item 4. Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal control over financial reporting - The company's co-Chief Executive Officers and Chief Financial Officer concluded that disclosure controls and procedures were effective as of December 31, 2019[197] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[198] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company reported no legal proceedings during the period - None[201] Item 1A. Risk Factors Risk factors are incorporated by reference from the company's 2019 Form 10-K - Risk factors are incorporated by reference from the 2019 Form 10-K[202] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[203] Item 6. Exhibits This section lists all exhibits filed, including merger agreements, articles of incorporation, a warehouse lease, and officer certifications - A list of exhibits filed with the Form 10-Q is provided, including certifications required by the Sarbanes-Oxley Act (Sections 302 and 906) and XBRL data files[206]