cbdMD, Inc. — Form 10-K Summary
Period: Fiscal year ended September 30, 2021. The request metadata says “2020 Q4,” but the supplied filing is the fiscal 2021 Form 10-K; it also reports fourth-quarter results for the three months ended September 30, 2021.
Business context
cbdMD sells hemp-derived CBD products under cbdMD, Paw CBD and cbdMD Botanicals, primarily through e-commerce and wholesale channels. It launched full-spectrum products and cbdMD Botanicals during fiscal 2021, formed a therapeutic research subsidiary, and acquired the assets of DirectCBDOnline.com.
Financial performance and liquidity
| Metric | Fiscal 2021 | Fiscal 2020 |
|---|---|---|
| Net sales | $44.48 million | $41.88 million |
| Gross profit | $29.99 million | $26.37 million |
| Gross margin | 67.4% | 63.0% |
| Operating expenses | $49.60 million | $43.95 million |
| Operating loss | $(19.62) million | $(17.58) million |
| Net income (loss) attributable to common shareholders | $(25.95) million | $12.24 million |
| Operating cash flow | $(14.09) million | $(10.66) million |
- Annual sales grew 6%, led by e-commerce, which rose 8% to $32.91 million and represented 74% of sales. Wholesale sales were approximately flat at $11.57 million.
- Fiscal 2021 net loss included a $6.69 million non-cash expense from remeasurement of contingent earnout liabilities, versus $29.78 million of non-cash income in fiscal 2020. The filing emphasizes that these valuation changes do not reflect operating cash flows.
- Fourth-quarter sales declined 16% year over year to $9.79 million; gross margin was 58.6%, and operating loss was $7.01 million.
- At September 30, 2021, cash and cash equivalents were $26.41 million and working capital was $29.60 million, compared with $14.82 million and $16.02 million, respectively, a year earlier.
- Cash from financing activities was $28.23 million, primarily reflecting preferred-stock offerings. The company reported $59,470 of current note payable and no remaining PPP loan after forgiveness. It also had $6.01 million of operating lease liabilities and $9.86 million of contingent liabilities.
- Fiscal 2021 cash used in investing activities was $2.55 million, including $2.00 million for the DirectCBDOnline.com acquisition. Capital expenditures were $0.34 million.
Material changes and management commentary
- Gross margin improved year over year, which management attributed to e-commerce mix, manufacturing and purchasing efficiencies, inventory management, and vendor pricing.
- Operating expenses rose about 13%, including higher advertising and marketing expense, payroll, research and development, and stock compensation. Marketing expense was approximately $15.84 million.
- Despite annual sales growth, management said fourth-quarter results were affected by changing consumer purchasing habits, supply-chain challenges, product stock-outs, and delayed product launches that also affected marketing plans.
- The company raised approximately $30.94 million in net cash from preferred-stock issuance during fiscal 2021, including a July follow-on offering that generated about $15.3 million net proceeds. Preferred stock carries cumulative dividends at an 8% annual rate; fiscal 2021 preferred dividends were $2.55 million.
Outlook, risks and unusual items
- No quantitative financial guidance was provided. Management cited a product pipeline for fiscal 2022 and plans to expand channels, brands, and international distribution.
- Management stated it had sufficient working capital, but operating activities continued to consume cash. The company’s history of operating losses and ability to acquire customers profitably remain key risks.
- Important risks include uncertain federal and state CBD rules and FDA/FTC oversight, supply-chain dependence and rising input and freight costs, COVID-19 effects, customer-acquisition costs, international expansion, and implementation of a new ERP system in fiscal 2022.
- The company disclosed a prior customer-data security incident involving personal and payment information. It reported completing remediation and reaching a settlement, subject to court approval at the filing date.
- Legal matters include a purported consumer class action alleging misleading CBD product marketing and a data-privacy class action settlement awaiting final court approval. The company said it intended to defend the consumer action.
- Management identified a material weakness in internal control over financial reporting concerning classification of earnout shares in the DirectCBDOnline.com acquisition. It said the issue was remediated before filing through additional review procedures. Disclosure controls were deemed effective; the auditor did not express an opinion on internal-control effectiveness.
- Potential dilution is significant: up to 5.71 million remaining earnout shares, 4.18 million shares underlying options, restricted awards and warrants, and 8.34 million shares underlying convertible preferred stock were disclosed as potential issuances. The earnout liability’s fair value can also materially affect reported earnings.
Most important facts for investors to verify
- Review the audited financial statements and cash-flow details, including the gap between the reported $14.09 million operating cash outflow and management’s separate discussion of cash use excluding PPP-loan extinguishment.
- Assess whether annual sales growth can resume after the 16% fourth-quarter decline, and whether supply and product-launch issues have improved.
- Track operating expenses, gross margins, customer-acquisition efficiency, and ongoing operating cash burn.
- Confirm the status and terms of earnout share issuances, preferred dividends, and potential dilution from securities outstanding.
- Check progress on the ERP implementation, internal-control remediation, CBD regulatory approvals, and pending litigation and settlement approval.