cbdMD, Inc. — Form 10-Q Summary
Reporting-period note: The request metadata says “2018 Q3,” but the filing is for the quarter ended June 30, 2019, and compares results with the quarter ended June 30, 2018. Financial amounts below are in U.S. dollars.
Business context and reporting period
cbdMD shifted its focus toward CBD products after acquiring Cure Based Development in December 2018. The acquired business operates as CBD Industries, LLC (CBDI); cbdMD products accounted for 99.7% of quarterly net sales. The company also has licensing and entertainment businesses and changed its corporate name from Level Brands, Inc. to cbdMD, Inc., effective May 1, 2019.
Financial results and liquidity
- Revenue: Third-quarter total net sales were $8.04 million, up 151.5% from $3.20 million. Nine-month sales were $14.97 million, up 114.8% from $6.97 million. Growth primarily reflects CBDI, consolidated from December 20, 2018. The prior-year periods included related-party sales of $1.35 million in the quarter and $1.55 million over nine months.
- Gross profit and margins: Quarterly gross profit was $5.09 million, with a 63.2% margin versus 65.4%. Nine-month gross profit was $9.38 million, with a 62.7% margin versus 73.3%.
- Operating results: The company reported a quarterly net loss of $29.20 million, including a $27.70 million loss attributable to common shareholders, versus net income of $565,000 and $206,000, respectively, a year earlier. Nine-month net loss was $63.24 million, including $61.60 million attributable to common shareholders, versus prior-year net income of $943,000 and $478,000. Basic loss per share was $1.19 for the quarter and $4.22 for nine months.
- Major loss drivers: Nine-month operating expenses were $20.80 million, including $2.11 million of intangible-asset impairments. The company also recorded a $52.46 million increase in the fair value of merger-related contingent liabilities. Quarterly operating expenses were $13.35 million, versus $1.46 million a year earlier.
- Cash flow: The cash-flow statement reports $9.06 million of operating cash used and $1.61 million of investing cash used over nine months; financing provided $18.01 million, largely from stock offerings. Cash increased to $11.63 million from $4.28 million at September 30, 2018. Management’s discussion separately cites operating cash use of $9.82 million; the filing does not reconcile this difference.
- Liquidity and debt: Working capital was $19.86 million, compared with $10.82 million at September 30, 2018. Current liabilities were $2.33 million. Total liabilities were $75.76 million, including a $70.60 million merger-related contingent liability and $2.83 million deferred tax liability. No conventional long-term borrowing balance is listed at June 30.
- Equity and dilution: The company issued 15.25 million shares as merger consideration and 2.30 million shares in a May 2019 offering, which generated approximately $12.65 million in net proceeds. There were 27.72 million shares outstanding at June 30 and August 14, 2019.
Material changes versus the prior comparable period
- CBD product sales drove the shift in revenue mix: products were 99.7% of quarterly sales, compared with less than 1% in the prior-year quarter. Licensing and entertainment sales declined as the company reassessed those businesses’ roles in its CBD-focused strategy.
- Advertising and marketing costs rose to approximately $2.60 million for the quarter and $4.41 million for nine months, from $443,000 and $1.04 million, respectively.
- The company impaired $2.11 million of non-CBD intangible assets, reflecting its changed business focus. Goodwill was $55.13 million and intangible assets were $22.57 million at June 30, largely reflecting the acquisition.
- Cash increased following stock offerings, while inventory rose to $3.76 million from $123,000 at September 30, 2018.
Outlook, risks, contingencies and unusual items
- Management targets: Surpass $5 million in monthly net sales by March 31, 2020, $10 million by December 31, 2020, and achieve positive operating cash flow in the second quarter of fiscal 2021. These are goals, not assurances.
- Expansion plans: Management reported retail placement growth from about 600 to 3,000 stores since January 2019 and plans to expand wholesale distribution, retail placement, products, and marketing.
- Merger consideration: The initial 15.25 million merger shares were issued in April 2019. A further 15.25 million shares may be issued if CBDI meets revenue targets over five years. The related earnout liability was valued at $70.60 million at quarter-end; its increase was primarily driven by the company’s share price. The purchase-price allocation remained preliminary.
- Contractual commitments: A May 2019 athlete endorsement agreement could require payments totaling up to $4.9 million through 2022, subject to services and performance terms. A new office lease signed in July 2019 runs through December 2026, with first-year monthly base rent of $76,041.
- Collection risk: A former director affiliate had not made a scheduled June 30 payment toward a $1 million balance owed for completed services. The company said it was pursuing collection with counsel; another payment was scheduled for August 15, 2019.
- Other risks: The filing highlights the evolving CBD regulatory environment, competition, the company’s history of losses, reliance on growth and consumer acceptance, potential need for additional capital, share-price volatility, dilution, and related-party relationships. Cash deposits included $10.01 million above FDIC-insured limits.
- Controls: Management concluded disclosure controls were effective. The company implemented an automated perpetual inventory system during the quarter and continued reviewing related processes.
Important facts for investors to verify
- Confirm the reporting-period mismatch in the request metadata: this filing covers the quarter ended June 30, 2019, not 2018 Q3.
- Reconcile operating cash used: $9.06 million in the cash-flow statement versus $9.82 million in management’s discussion.
- Review the valuation assumptions and potential dilution associated with the $70.60 million earnout liability and up to 15.25 million additional shares.
- Assess whether CBD sales growth, gross margins, and cash use support management’s monthly-sales and positive-cash-flow targets.
- Monitor collection of the overdue $1 million services receivable and the obligations under the athlete endorsement and new office lease.