cbdMD, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2019 Q2, but this filing is for the quarter and six months ended March 31, 2020 (fiscal 2020 Q2), compared with the same periods in 2019. Filed May 15, 2020.
Business context and reporting period
cbdMD sells hemp-derived CBD products through consumer e-commerce and wholesale channels, including products under the Paw CBD pet brand. The company is focused on its CBD business and had ceased operations of four other subsidiaries, which are reported as discontinued operations.
Financial performance and position
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Six months ended March 31, 2020 | Six months ended March 31, 2019 |
|---|---|---|---|---|
| Net sales | $9.40 million | $5.64 million | $19.55 million | $6.10 million |
| Gross profit | $6.67 million | $3.72 million | $13.11 million | $4.02 million |
| Gross margin | 70.9% | 66.0% | 67.0% | 65.9% |
| Operating loss | $(5.60) million | $(2.03) million | $(11.71) million | $(3.12) million |
| Net income (loss) attributable to common shareholders | $14.78 million | $(31.79) million | $27.65 million | $(33.90) million |
| Operating cash flow | Not separately presented by quarter | $(9.15) million | $(4.46) million |
- Q2 net sales rose about 67% year over year; six-month net sales rose about 220%. Consumer sales were 72.1% of Q2 revenue and wholesale sales 27.9%.
- Net income included substantial noncash gains from remeasurement of merger earnout liabilities: $21.26 million in Q2 and $38.16 million for the six months. The company remained loss-making from operations.
- Q2 operating expenses were $12.27 million, more than twice the prior-year quarter. Advertising and marketing costs were $3.40 million, versus $1.48 million. Six-month operating expenses were $24.83 million, versus $7.14 million.
- Cash and cash equivalents were $14.84 million at March 31, 2020, versus $4.69 million at September 30, 2019. Working capital was $19.09 million, versus $12.03 million.
- Cash used in investing was $1.80 million for the six months, mainly property and equipment purchases. Cash provided by financing was $21.09 million, primarily from common- and preferred-stock offerings.
- Total liabilities were $20.43 million. Note payable balances totaled about $0.37 million; operating lease liabilities totaled $7.68 million. The $7.82 million contingent liability relates to remaining merger earnout shares.
- At March 31, 2020, inventory was $7.09 million, including $4.05 million of components. The company reported $54.67 million goodwill and $21.64 million intangible assets.
Material changes versus the prior comparable period
- Revenue growth reflected expansion of the CBD business following the December 2018 merger and increased consumer and wholesale sales. The filing says COVID-19 caused a small decline in wholesale sales in Q2, with relatively no impact on online sales during that quarter.
- Gross margin improved year over year. Management said a Q2 inventory adjustment lowered reported cost of sales; without that adjustment, cost of sales would have been 33.1% of sales for the quarter and 34.8% for the six-month period.
- Operating expenses increased substantially as the company expanded staffing, advertising, sponsorships, sales, and infrastructure. Management said it was shifting attention toward execution and profitability.
- Common shares outstanding increased from 27.72 million at September 30, 2019 to 51.34 million at March 31, 2020. A January 2020 common-stock offering raised approximately $16.93 million net. A 500,000-share preferred offering in October 2019 raised approximately $4.53 million net.
- The first merger earnout marking period resulted in issuance of 5,127,792 shares on February 27, 2020. The earnout liability fell substantially, principally due to the common-share price decline from $2.26 at December 31, 2019 to $0.93 at March 31, 2020, as well as shares issued.
Outlook, management commentary, risks, and unusual items
- COVID-19: The company reported remote office work, adjusted manufacturing and warehouse schedules, higher inventory preparation, and furloughs in affected areas. It warned the pandemic could significantly adversely affect Q3 fiscal 2020 results and possibly later periods. Supply-chain, vendor, customer-demand, and logistics disruption remain risks.
- Liquidity measures: Management described efforts to defer rent and vendor payments, suspend sponsorship and affiliate arrangements, and prioritize online sales. The company received a $1.456 million PPP loan on April 27, 2020, bearing 1% interest with a two-year term; it intended to use eligible proceeds and seek forgiveness, which was not assured.
- Plans: Management described new products, expanded sales channels, development of Paw CBD, and potential acquisitions. It gave no specific revenue or earnings forecast. Management expects product cost of sales to remain between 25% and 40% of net sales.
- Commitments: Athlete and Life Time sponsorship payments were suspended at least temporarily during COVID-19 disruptions. The company gave notice of termination of its Feld Motor Sports sponsorship and agreed to three monthly payments of $77,430 for services provided through Q2.
- Contingencies and unusual items: The company impaired a $600,000 private-company investment and a $160,000 other receivable in Q2. It filed suit on April 29, 2020 to collect a $750,000 discontinued-operations receivable from Sandbox Properties and affiliates; the filing said management believed the amount would be collected in full as of March 31.
- The company reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter. It disclosed no material off-balance-sheet arrangements.
Most important facts for investors to verify
- How much of reported net income depends on noncash earnout-liability remeasurement, and what operating cash burn implies for funding needs.
- Whether COVID-19 affected Q3 and later sales, production, inventory, staffing, and sponsorship obligations beyond the Q2 impacts described.
- The status and likely collectability of the $750,000 Sandbox receivable and the outcome of the related lawsuit.
- PPP loan forgiveness eligibility and any remaining repayment obligation.
- Potential dilution from issued earnout shares, remaining earnout provisions, preferred-stock conversion, options, and warrants; common shares had increased materially during the period.
- Whether reported gross-margin improvement is sustainable without inventory adjustments, and whether operating expenses can be aligned with revenue growth.