cbdMD, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2021 (fiscal Q2 2021), with six-month results also presented. The request metadata says “2020 Q2,” but the filing itself is for 2021 Q2 and compares against the periods ended March 31, 2020.
Business context
cbdMD sells CBD products under the cbdMD, Paw CBD and cbdMD Botanicals brands, primarily through e-commerce and wholesale channels. It sources U.S.-grown hemp and describes its products as non-THC. The company reported expansion of U.K. direct-to-consumer sales, a U.K. Novel Food application and a submission to the European Food Safety Authority, and formed cbdMD Therapeutics for research and development activities.
Financial results and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Net sales, 2021 | $11.80 million | $24.13 million |
| Net sales, 2020 | $9.40 million | $19.55 million |
| Gross profit, 2021 | $8.16 million; 69.1% margin | $17.05 million; 70.7% margin |
| Gross profit, 2020 | $6.67 million; 70.9% margin | $13.11 million; 67.1% margin |
| Operating expenses, 2021 | $12.32 million | $22.98 million |
| Operating loss, 2021 | $4.17 million | $5.93 million |
| Net income (loss), 2021 | $(12.51) million | $(21.91) million |
| Net income (loss), 2020 | $14.88 million | $27.81 million |
| Operating cash flow, 2021 | Not separately presented here | $(5.15) million |
- Quarterly net sales grew 25.5% year over year; six-month sales rose 23.4%. Quarterly e-commerce sales increased 23.3%; wholesale sales rose 31.3% year over year and 30.8% sequentially. Paw CBD sales were $1.42 million for the quarter, versus $0.77 million a year earlier.
- Quarterly gross margin fell 1.8 percentage points year over year, while the six-month margin improved 3.6 points. Management cited product mix, production, raw-material costs and vendor pricing as factors.
- The operating loss narrowed compared with the prior-year periods. Net results reversed from profit to loss largely because of contingent-liability valuation movements: the 2021 quarter included $8.87 million of non-cash expense, while the prior-year quarter included $21.26 million of non-cash income from a decrease in the liability.
- Cash and cash equivalents were $23.71 million at March 31, up from $14.82 million at September 30, 2020. Working capital was $27.88 million, versus $16.02 million. The company said it had sufficient working capital, but had not yet achieved its goal of funding day-to-day operations with operating cash flow.
- Total liabilities were $35.17 million. Debt included approximately $1.46 million of PPP borrowing and $0.20 million of equipment notes; operating-lease liabilities totaled $6.63 million. The PPP forgiveness application was under review, and management said the company qualified for full forgiveness.
- Financing provided $15.01 million of cash in the six-month period, including approximately $15.8 million net proceeds from a preferred-stock offering. The company reported $15.80 million of preferred-stock proceeds in its cash-flow statement.
Material changes and unusual items
- On March 8, 2021, the company issued 3,348,520 merger earnout shares. Remaining earnout contingent liability was $22.3 million at March 31, up from $16.2 million at September 30, 2020. The filing attributes remeasurement principally to the common share price rising to $4.14 from $2.95 at December 31.
- An amendment changed measurement of the third earnout period to quarterly assessments, without changing earnout targets or the total potential shares. Management expects this may reduce quarter-to-quarter volatility in the liability and reported net income.
- The December 2020 preferred-stock offering issued 2.3 million 8% Series A cumulative convertible preferred shares for $17.25 million gross proceeds. Preferred dividends were $0.56 million for the quarter and $0.66 million for the six months.
- The company terminated its Life Time sponsorship during fiscal Q2. Operating expenses for the quarter were broadly flat year over year; the six-month total declined 7.4%, including lower sponsorship costs and other cost controls. Quarterly expenses included a $0.30 million severance accrual.
- Common shares outstanding were 56.34 million at March 31, versus 52.13 million at September 30, 2020; the filing reports 56.42 million issued and outstanding as of May 12, 2021. Potential dilution also includes options, warrants and convertible preferred shares.
Outlook, commentary and risks
- Management expects product cost of sales to remain approximately 30%–37% of net sales for the balance of fiscal 2021. It expects to pursue U.K. growth, product launches, expanded Paw CBD marketing and wholesale account development as retail conditions normalize. No formal revenue or earnings guidance is provided.
- Management cited COVID-19 and its effects on operations and retail activity, dependence on third-party suppliers and manufacturers, CBD regulation and compliance, and implementation of the Oracle NetSuite ERP system as risks. The filing also highlights the company’s history of losses and possible dilution and volatility related to earnout shares and securities.
- Other forward-looking risks include the uncertain outcome of the PPP forgiveness review and U.K./European regulatory applications. The company reported no legal proceedings and no material off-balance-sheet arrangements.
- Subsequent events included amended executive agreements and new equity awards for co-CEOs, including 750,000 RSUs and 750,000 options for one executive; management estimates related non-cash compensation of $4.21 million over the vesting period. The company also announced a 2021 CrossFit Games sponsorship.
Important facts for investors to verify
- Confirm the period: this filing covers fiscal Q2 2021, not Q2 2020.
- Track operating cash burn and whether revenue growth and cost controls translate into sustainable positive operating cash flow.
- Review the assumptions and sensitivity behind the $22.3 million earnout liability, including share-price effects and quarterly earnout measurement.
- Monitor the PPP loan forgiveness decision, preferred dividend obligations, lease commitments and remaining sponsorship or endorsement commitments.
- Assess the pace and profitability of e-commerce, wholesale, Paw CBD and international growth, alongside gross-margin trends and potential equity dilution.