cbdMD(YCBD) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements for Q3 2020 and 2019, including balance sheets, income statements, cash flows, and equity statements with detailed notes Condensed Consolidated Balance Sheets Total assets increased to $111.3 million from $94.5 million, while total liabilities decreased to $27.7 million from $56.9 million, significantly boosting shareholders' equity to $83.6 million Balance Sheet Highlights | Balance Sheet Highlights | June 30, 2020 (Unaudited) | September 30, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $15,006,319 | $4,689,966 | | Inventory | $6,397,326 | $4,301,586 | | Total current assets | $24,111,750 | $15,743,035 | | Goodwill | $54,669,997 | $54,669,997 | | Total assets | $111,310,797 | $94,518,122 | | Liabilities & Equity | | | | Total current liabilities | $4,386,423 | $3,709,878 | | Contingent liability | $15,400,000 | $50,600,000 | | Total liabilities | $27,730,659 | $56,914,138 | | Total shareholders' equity | $83,580,138 | $37,603,984 | Condensed Consolidated Statements of Operations Q3 2020 net sales rose to $10.6 million, with net loss improving to $9.1 million from $27.7 million; nine-month net income reached $18.6 million due to a $30.6 million decrease in contingent liability Income Statement Highlights (in thousands) | Income Statement Highlights (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Nine Months Ended June 30, 2020 | Nine Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $10,637 | $8,005 | $30,184 | $14,107 | | Gross Profit | $6,889 | $5,076 | $20,003 | $9,098 | | Income (Loss) from operations | $(1,338) | $(6,467) | $(13,051) | $(9,586) | | (Increase) Decrease of contingent liability | $(7,580) | $(21,548) | $30,580 | $(52,462) | | Net Income (Loss) attributable to common shareholders | $(9,053) | $(27,699) | $18,594 | $(61,601) | | Basic EPS | $(0.18) | $(1.19) | $0.45 | $(4.22) | Condensed Consolidated Statement of Cash Flows Net cash used in operations was $10.3 million, offset by $22.4 million from financing activities, leading to a $10.3 million net cash increase and a $15.0 million cash balance Cash Flow Summary (Nine Months Ended June 30) | Cash Flow Summary (Nine Months Ended June 30) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used by operating activities | $(10,277,081) | $(9,055,308) | | Net cash used by investing activities | $(1,851,746) | $(1,606,715) | | Net cash provided by financing activities | $22,445,180 | $18,012,683 | | Net increase in cash | $10,316,353 | $7,350,660 | | Cash and cash equivalents, end of period | $15,006,319 | $11,633,213 | - Financing activities were the primary source of cash, with $16.8 million from the issuance of common stock, $4.4 million from preferred stock, and a $1.46 million PPP loan[26] Notes to Condensed Consolidated Financial Statements Detailed notes explain accounting policies, the 2018 merger, revenue recognition, contingent liability, stock issuances, business segment discontinuation, and the PPP loan - The company's business is focused on producing and distributing CBD products under the cbdMD and Paw CBD brands; operations of four former subsidiaries (EE1, IM1, BPU, Level H&W) were discontinued effective September 30, 2019[35][36][37] Disaggregated Revenue by Channel (Nine Months Ended June 30) | Disaggregated Revenue by Channel (Nine Months Ended June 30) | 2020 | % of Total | 2019 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Wholesale product sales | $8,238,832 | 27.3% | $4,741,900 | 33.6% | | Consumer product sales | $21,944,985 | 72.7% | $9,365,514 | 66.4% | | Total net sales | $30,183,817 | 100.0% | $14,107,414 | 100.0% | - On April 27, 2020, the company received a Paycheck Protection Program (PPP) loan of $1,456,100 under the CARES Act to support payroll and other specified expenses during the COVID-19 pandemic[60][152] - The contingent liability related to the Cure Based Development merger was valued at $15.4 million as of June 30, 2020; its fair value is remeasured quarterly, with changes impacting the statement of operations, and the increase of $7.6 million in Q3 2020 was primarily driven by the rise in the company's stock price[57][59][116] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses business operations, financial performance, and strategic outlook, covering COVID-19 impacts, growth strategies, detailed financial results, and liquidity management The Impact of the COVID-19 Pandemic The pandemic led to operational changes, a shift to online sales offsetting wholesale declines, and liquidity measures including a $1.46 million PPP loan and cost controls - The pandemic caused a decline in wholesale sales to brick-and-mortar customers, but this was offset by a substantial increase in online sales to consumers[178] - Liquidity measures taken in response to the pandemic include securing a $1.456 million PPP loan, negotiating rent and vendor payment deferrals, and suspending or renegotiating sponsorship agreements[179][180] Growth Strategies and Outlook Growth strategies include product expansion, broader sales channels, Paw CBD growth, targeted sponsorships, potential acquisitions, and maintaining GMP-compliant manufacturing standards - Key growth strategies include: - Increasing the base of product offerings - Expanding sales channels, including big-box retailers and international markets - Growing the Paw CBD animal health division - Leveraging targeted sponsorships and influencers - Evaluating potential acquisitions[185] - The company emphasizes its commitment to quality, with its manufacturing facility being fully GMP compliant and NSF GMP registered, and is also seeking certification from the U.S. Hemp Authority[185] Results of Operations Q3 2020 net sales grew 33% to $10.6 million, driven by 77% consumer sales growth, with gross profit margin improving to 64.7% and operating expenses decreasing 28.7% to $8.2 million Financial Performance (Three Months Ended June 30) | Financial Performance (Three Months Ended June 30) | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Total net sales | $10,636,545 | $8,005,149 | +32.9% | | Gross profit | $6,888,521 | $5,075,989 | +35.7% | | Gross profit as a % of net sales | 64.7% | 63.4% | +1.3 ppt | | Operating expenses | $8,226,029 | $11,542,628 | -28.7% | - The shift in sales mix was significant in Q3 2020, with consumer sales accounting for 77.3% of total net sales, up from 57.9% in Q3 2019[188] - The Paw CBD product line demonstrated strong growth, with net sales increasing to $1.23 million in Q3 2020 from $0.59 million in Q3 2019[188] Liquidity and Capital Resources As of June 30, 2020, cash and equivalents were $15.0 million and working capital $19.7 million; $10.3 million cash used in operations was offset by $4.5 million preferred stock, $16.9 million common stock, and $1.46 million PPP loan funding Liquidity Metrics | Liquidity Metrics | June 30, 2020 | September 30, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $15,006,319 | $4,689,966 | | Working capital | $19,725,327 | $12,033,157 | - Cash flow from operations was a net use of $10.3 million for the nine months ended June 30, 2020[208] - The company secured significant funding through public offerings, receiving net proceeds of $4.5 million from a preferred stock offering in October 2019 and $16.9 million from a common stock offering in January 2020[209] Item 3. Quantitative and Qualitative Disclosures About Market Risk This disclosure is not required as the company qualifies as a smaller reporting company - This disclosure is not applicable as the company qualifies as a smaller reporting company[215] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[216] - There were no material changes in internal control over financial reporting during the most recent fiscal quarter[217] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company reported no legal proceedings during the reporting period - The company reports no legal proceedings[220] Item 1A. Risk Factors This section highlights material risks, incorporating 2019 Form 10-K factors and adding new risks related to the COVID-19 pandemic's potential impact on commerce, logistics, and economic conditions - The company explicitly adds new risk factors related to the COVID-19 pandemic, including: - Significant disruption in retail commerce - Potential disruptions to logistics and key vendors/customers - The risk of a recession or long-term market correction impacting business and access to capital[222][223][224] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued 700,000 common shares on July 1, 2020, to a professional athlete for an endorsement, exempt from registration under Section 4(a)(2) - On July 1, 2020, the company issued 700,000 shares of common stock to a professional athlete for an endorsement agreement; the transaction was exempt from registration[225] Item 5. Other Information Details of a new Endorsement Agreement effective July 1, 2020, with a professional athlete, outlining compensation up to $2.87 million in stock and cash through December 2022 - An endorsement agreement with a professional athlete was superseded and amended effective July 1, 2020; the new payment structure includes a mix of common stock (starting with 700,000 shares) and escalating monthly cash payments through December 2022[229][230] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including merger agreements, corporate documents, officer certifications, and the new Endorsement Agreement - A list of exhibits filed with the report is provided, including the new Endorsement Agreement effective July 1, 2020, and required CEO/CFO certifications[232]