Business context and reporting period
cbdMD, Inc. sells cannabidiol products under the cbdMD and Paw CBD brands through e-commerce and wholesale channels. This Form 10-Q covers the quarter ended December 31, 2020, which the company calls fiscal Q1 2021; this differs from the request metadata’s “2020 Q1.” The comparison period is the three months ended December 31, 2019.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2020 | Prior-year quarter |
|---|---|---|
| Net sales | $12.33 million | $10.15 million |
| Gross profit / gross margin | $8.90 million / 72.2% | $6.45 million / 63.5% |
| Operating expenses | $10.66 million | $12.56 million |
| Operating loss | $1.76 million | $6.11 million |
| Net income (loss) attributable to common shareholders | $(9.50) million | $12.86 million |
| Basic and diluted EPS | $(0.18) | $0.46 basic; $0.45 diluted |
| Cash used by operating activities | $2.19 million | $4.87 million |
Management also describes operating cash use as $712,211 after excluding the $939,826 reclassification of the PPP loan to current liabilities. Cash and cash equivalents were $28.76 million at December 31, 2020, versus $14.82 million at September 30, 2020; working capital was $30.64 million, versus $16.02 million. Current assets were $37.38 million and current liabilities $6.74 million.
Total liabilities were $38.36 million. Borrowings included a $1.46 million PPP loan and approximately $210,530 of equipment notes; operating lease liabilities were $6.93 million. The company raised approximately $15.8 million net from a preferred-stock offering during the quarter. The 8% Series A preferred stock carries cumulative cash dividends, and 2.8 million preferred shares were outstanding at quarter end.
Material changes versus the prior comparable period
- Net sales increased 21.5%. E-commerce sales grew 41.3% to $9.70 million, while wholesale sales fell approximately 20% to $2.63 million. E-commerce represented 78.7% of sales, compared with 67.6% a year earlier.
- Paw CBD sales rose to $1.47 million from $820,575.
- Gross margin improved to 72.2% from 63.5%; management attributed the change partly to the higher e-commerce mix and production and sourcing efficiencies.
- Operating expenses declined approximately 15.1%, primarily reflecting cost controls and lower sponsorship, professional-services, and stock-compensation costs. Advertising and marketing expense increased.
- Net results swung from income to loss chiefly because a non-cash $8.50 million increase in the fair value of the merger earnout liability was recorded as expense. The prior-year quarter included a $16.90 million non-cash decrease in that liability recorded as income. The liability reached $24.70 million at quarter end, with the share-price increase a principal valuation driver.
- Cash increased largely due to the preferred-stock offering; operations still used cash.
Outlook, commentary and risks
- Management expects product cost of sales to generally range from 30% to 37% of net sales as wholesale sales recover; it said it expects wholesale normalization in the latter half of fiscal 2021. This is not a revenue or earnings forecast.
- The company said it saw encouraging initial returns from television advertising and anticipated increasing spending during fiscal 2021. It also planned to accelerate U.K. e-commerce efforts and pursue new products and sales channels.
- COVID-19 continued to weigh on wholesale and brick-and-mortar retail, while e-commerce increased. The company cited uncertainty around the pandemic’s effects on operations, suppliers, industry and workforce.
- Other disclosed risks include CBD regulation and compliance, dependence on third-party suppliers and manufacturers, and disruption or reporting problems from the Oracle NetSuite ERP implementation, which began February 1, 2021.
- The $24.70 million earnout liability is a Level 3 fair-value estimate and may fluctuate; additional earnout shares were anticipated following the December 2020 measurement period. Potential share issuance, preferred-stock conversion, options and warrants could dilute common shareholders.
- The company intended to seek forgiveness of its PPP loan; forgiveness was not reported as received. It also had sponsorship and endorsement commitments, including a revised athlete agreement and multi-year contracts. Management stated it had sufficient working capital, but had not achieved its goal of funding operations from operating cash flows.
- Cash balances included $28.24 million above FDIC-insured limits. Management reported no legal proceedings and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the intended period: the filing is for fiscal Q1 2021, ended December 31, 2020, despite the metadata’s “2020 Q1.”
- Review the earnout terms, valuation assumptions, potential share issuance and resulting non-cash earnings volatility.
- Reconcile reported operating cash use of $2.19 million with management’s adjusted $712,211 figure and assess cash generation excluding financing proceeds.
- Track whether wholesale sales recover, e-commerce growth persists, and gross margin returns toward management’s stated 30%–37% cost-of-sales range.
- Check the status of PPP loan forgiveness, preferred dividends, sponsorship obligations, and potential dilution from preferred stock, warrants, options and earnout shares.
- Assess NetSuite implementation progress and the impact of COVID-19 and CBD regulatory developments on sales, operations and compliance.