cbdMD, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2021; filed August 12, 2021. The request metadata says “2020 Q3,” but the filing itself covers fiscal 2021 Q3 and compares results with the periods ended June 30, 2020.
Business context
cbdMD operates CBD brands cbdMD, Paw CBD and cbdMD Botanicals, selling primarily through e-commerce and wholesale channels. Products include wellness, beauty and pet products. The company also formed cbdMD Therapeutics in March 2021 for research and development activities.
Financial performance and position
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Nine months ended June 30, 2021 | Nine months ended June 30, 2020 |
|---|---|---|---|---|
| Net sales | $10.56 million | $10.64 million | $34.69 million | $30.18 million |
| Gross profit / gross margin | $7.19 million / 68.1% | $6.89 million / 64.8% | $24.24 million / 69.9% | $20.00 million / 66.3% |
| Operating loss | $6.68 million | $1.34 million | $12.60 million | $13.05 million |
| Net income (loss) | $1.54 million | $(8.95) million | $(20.37) million | $18.86 million |
| Net income (loss) attributable to common shareholders | $0.98 million | $(9.05) million | $(21.59) million | $18.59 million |
| Basic EPS | $0.02 | $(0.18) | $(0.40) | $0.45 |
- Revenue mix: Q3 wholesale sales rose to $2.74 million from $2.41 million, while e-commerce sales declined to $7.82 million from $8.23 million. For nine months, wholesale sales increased 9.8% and e-commerce sales increased 16.8% year over year. Paw CBD sales were $1.55 million in Q3 and $4.43 million for nine months, up from $1.23 million and $2.82 million, respectively.
- Cash flow: Operating activities used $9.76 million in the nine months ended June 30, 2021, versus $10.28 million used in the prior-year period. Investing activities used $0.52 million; financing activities provided $14.44 million. Cash increased $4.16 million to $18.98 million. Management separately describes operating cash use as $8.29 million excluding the PPP-loan forgiveness effect.
- Liquidity: Working capital was $23.23 million at June 30, 2021, versus $16.02 million at September 30, 2020. Current assets were $29.98 million and current liabilities $6.75 million. Cash included $18.44 million above FDIC-insured limits.
- Debt and obligations: The $1.46 million PPP loan, plus accrued interest, was forgiven in May 2021, generating a $1.47 million gain. Equipment-financing notes remained; balance-sheet current and long-term obligations indicate approximately $183,000 in note balances. Operating lease liabilities totaled $6.32 million.
- Equity: The company raised approximately $15.8 million net from a December 2020 offering of 8% convertible preferred shares. It had 56.97 million common shares outstanding at June 30, 2021 and 57.27 million as of August 12, 2021. Preferred dividends paid in the nine-month period were $1.22 million.
Material changes and unusual items
- Q3 net sales were nearly flat year over year, while nine-month sales grew 14.9%. Gross margin improved 3.3 percentage points in Q3 and 3.6 points for the nine-month period.
- Q3 operating expenses rose 68.6% to $13.87 million, principally reflecting a $3.10 million increase in advertising and marketing, higher staff costs, Therapeutics research and regulatory costs, and stock compensation. Operating loss therefore widened despite improved gross margin.
- Q3 reported net income included a $6.87 million non-cash gain from remeasurement of earnout-related contingent liabilities and a $1.47 million PPP forgiveness gain. The contingent-liability gain was largely associated with the change in cbdMD’s share price. These items materially affected net income and are not indicators of operating profitability.
- For the nine-month period, the company recorded a $10.50 million contingent-liability expense, compared with a $30.58 million benefit in the prior-year period. This swing was a major reason reported results changed from prior-year net income to a current-year net loss.
- Management says product cost of sales is expected to remain in a 30%–35% range for the balance of fiscal 2021. It reported sufficient working capital but said operating cash flow had not yet funded day-to-day operations. No specific revenue or earnings guidance was provided.
Outlook, risks and other developments
- Management described ongoing investment in marketing, product launches, wholesale relationships, U.K. e-commerce and research. The company filed Novel Food Applications with U.K. and European authorities and reported some supply-chain delays for new products.
- Key stated risks include the company’s history of losses, COVID-19 effects, reliance on third-party suppliers and manufacturers, CBD regulatory uncertainty, ERP implementation, earnout valuation volatility, preferred-stock terms and potential dilution from equity awards, warrants, preferred shares and earnout shares.
- After quarter-end, the company raised approximately $15.3 million net through a July 1 preferred-stock offering. On July 22 it acquired substantially all assets of directcbdonline.com for $2.0 million and up to 600,000 restricted common shares, with part of the share consideration subject to timing, indemnity and earnout provisions.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. The filing reported no legal proceedings and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the reporting-period label: the filing is for the quarter ended June 30, 2021, notwithstanding the request metadata’s “2020 Q3.”
- Assess operating performance separately from non-cash earnout remeasurement and PPP forgiveness; Q3 net income coexisted with a $6.68 million operating loss.
- Track whether revenue growth resumes, particularly in e-commerce, and whether wholesale growth offsets the Q3 e-commerce decline.
- Monitor operating cash use, the effect of the July preferred-stock proceeds, and the ongoing 8% cumulative preferred-dividend burden.
- Review potential dilution and contingent-liability changes from earnout shares, convertible preferred stock, options and warrants; also verify the terms and integration of the directcbdonline.com acquisition.