cbdMD, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three months ended December 31, 2019, which the company calls the first quarter of fiscal 2020—not calendar-year 2019 Q1. The comparable period ended December 31, 2018. Unless otherwise stated, amounts are in U.S. dollars.
Business context and reporting period
cbdMD produces and sells hemp-derived CBD products, including consumer and pet products under its cbdMD and Paw CBD brands. The company is focused on expanding product offerings, wholesale and retail distribution, marketing, and its pet business. The CBD business was acquired in December 2018, so the prior-year quarter included only a short period of its operations; year-over-year comparisons are therefore not fully comparable. The company also reported four discontinued subsidiaries separately after ceasing their operations in September 2019.
Financial performance and position
| Metric | Three months ended Dec. 31, 2019 | Comparable period |
|---|---|---|
| Net sales | $10.15 million | $0.47 million |
| Gross profit / gross margin | $6.45 million / 63.5% | $0.30 million / 64.5% |
| Operating expenses | $12.56 million | $1.39 million |
| Operating loss | $6.11 million | $1.09 million |
| Net income (loss) attributable to common shareholders | $12.86 million | ($2.11 million) |
| Basic / diluted earnings per share | $0.46 / $0.45 | ($0.21) / not meaningful due to loss |
| Cash used by operating activities | $4.87 million | $1.16 million |
- Revenue comprised $6.86 million in consumer product sales and $3.28 million in wholesale sales. The prior-year period had no wholesale sales.
- Reported net income was substantially affected by a $16.90 million noncash reduction in the fair value of merger-related earnout liabilities. A $2.24 million income-tax benefit also contributed. The company reported an operating loss, and cash from operations remained negative.
- Advertising and marketing expense was $2.41 million, while sponsorship expense was $2.13 million. Management attributed higher operating costs to staffing, infrastructure, marketing, and business expansion.
- At December 31, cash was $3.66 million, working capital was $9.39 million, total assets were $101.80 million, and total liabilities were $46.27 million. Cash declined from $4.69 million and working capital from $12.03 million at September 30, 2019.
- Inventory, including prepaid inventory, totaled $6.45 million, up from $5.21 million at September 30. Three customers represented approximately 77% of accounts receivable, including discontinued-operation receivables.
- Note payable totaled approximately $0.46 million. Operating lease liabilities were approximately $7.95 million, including $1.04 million current and $6.91 million long term. The filing reports no other conventional long-term borrowing balance.
Material changes versus the prior comparable period
- Net sales increased by $9.68 million, primarily reflecting the acquired CBD business and its subsequent growth; the prior-year comparison captures only a limited post-acquisition period.
- Gross margin eased by 1.0 percentage point to 63.5%. Management expected product cost of sales to remain between 25% and 40% of sales.
- Operating expenses rose by $11.17 million as the company expanded staffing, advertising, sponsorships, affiliate commissions, and infrastructure.
- The earnout liability declined from $50.60 million at September 30 to $33.70 million at December 31. The company cited a lower share price—$2.26 versus $3.96—as the main driver, alongside updated performance forecasts.
- The company issued 500,000 shares of 8% Series A cumulative convertible preferred stock in October 2019, receiving approximately $4.53 million net. It recorded $66,734 in preferred dividends for the quarter.
- Effective October 1, 2019, the company adopted lease accounting guidance and recognized an operating lease asset of $7.70 million and lease liabilities of approximately $7.95 million.
Outlook, commentary, risks, and unusual items
- Management described growth plans rather than providing numerical revenue or earnings guidance. Priorities include new products, broader sales channels, expansion of Paw CBD, targeted sponsorships, and potential acquisitions. The company said it was not then party to agreements to acquire additional businesses.
- Management stated it had sufficient working capital, while also noting that its goal of funding day-to-day operations from operating cash flow had not been met. It cited cash use from operations of $4.87 million in the quarter.
- After quarter-end, the company completed a common-stock offering of 18.4 million shares for $18.4 million gross proceeds and approximately $16.9 million net proceeds. The filing says proceeds were intended for brand development, expansion, marketing, advertising, and working capital. Common shares outstanding were 46,177,856 as of February 10, 2020, versus 27,720,356 at December 31, 2019.
- Contractual sponsorship and endorsement commitments include up to $4.9 million for an athlete agreement, $4.9 million for a Life Time sponsorship, and $1.75 million for Feld Motor Sports, subject to the agreements’ terms and performance requirements.
- Key risks include the evolving CBD regulatory environment, the company’s history of losses and ongoing operating cash use, possible additional financing and dilution, dependence on marketing and distribution expansion, customer receivable concentration, and the valuation uncertainty of the Level 3 earnout liability. The company also reported $3.18 million of cash above FDIC-insured limits.
- The filing states that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter. It reports no legal proceedings or material off-balance-sheet arrangements.
Important facts for investors to verify
- How much of the reported $12.86 million common-shareholder income is attributable to recurring operations, given the large noncash earnout remeasurement and tax benefit.
- Whether revenue growth can continue across wholesale, e-commerce, and Paw CBD channels, and whether operating expenses and cash burn can be brought under control.
- The performance assumptions and potential share dilution associated with the 15.25 million earnout shares, and any further changes in their fair value.
- Use of proceeds from the January 2020 stock offering, the resulting share count and dilution, and the company’s cash runway.
- Collectability of concentrated receivables and inventory turnover, including the discontinued-operation receivable balance.
- Progress on regulatory compliance, manufacturing capacity, and the sponsorship commitments and other contractual obligations.