cbdMD, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2019; filed December 18, 2019. Although the request labels the period “2018 Q4,” this is an annual report for fiscal 2019, not a quarterly filing. Fiscal 2018 comparisons reflect continuing operations excluding businesses later reported as discontinued, unless stated otherwise. cbdMD acquired Cure Based Development in December 2018, shifting the company’s focus to CBD products.
Business context and results
- The continuing business sells CBD products, including oils, capsules, gummies, topical products, and pet products, primarily through e-commerce and wholesale channels. Products were available online and in more than 4,000 stores.
- Fiscal 2019 total net sales were $23.65 million, versus $459,091 in fiscal 2018. The sharp increase primarily reflects the December 2018 acquisition; the periods are not directly comparable. Fiscal 2019 sales comprised $14.77 million consumer sales and $8.88 million wholesale sales.
- Gross profit was $14.51 million, with a 61.4% gross margin, down from 77.3% in fiscal 2018. Operating expenses were $29.31 million, resulting in an operating loss of $14.80 million.
- Net loss from continuing operations was $45.43 million. Net loss attributable to common shareholders was $50.43 million ($2.82 per basic share); consolidated net loss before attribution to non-controlling interests was $51.36 million. Fiscal 2018 net loss attributable to common shareholders was $412,075.
- Losses included a $32.46 million non-cash increase in contingent consideration related to merger shares, as well as discontinued-operation losses and investment-related losses. The contingent consideration is remeasured and can cause material earnings swings.
- Cash used in operating activities was $15.38 million, compared with $5.57 million in fiscal 2018. Investing activities used $2.13 million; financing provided $17.92 million, largely from common-stock offerings. Cash increased by $407,413 to $4.69 million.
- At year-end, working capital was $12.03 million, up from $10.82 million. Current assets were $15.74 million and current liabilities $3.71 million. Total liabilities were $56.91 million, including a $50.60 million contingent liability; reported long-term liabilities also included $363,960 of other long-term liabilities and a $2.24 million deferred tax liability. The filing does not present a conventional debt balance comparable to the contingent share obligation.
- Total assets were $94.52 million, including $54.67 million of goodwill and $21.64 million of intangible assets. Shareholders’ equity was $37.60 million.
Changes, outlook, and risks
- Management’s fiscal 2019 revenue guidance was $24–$26 million. Continuing-business net sales were $23.65 million; management said adding $888,000 of discontinued-business revenue would have brought sales within the guidance range.
- Management’s fiscal 2020-and-beyond priorities included expanding products and sales channels, growing Paw CBD, marketing through sponsorships and influencers, and considering acquisitions. No specific fiscal 2020 revenue or earnings guidance was provided in the supplied filing text.
- The company discontinued four legacy subsidiaries effective September 30, 2019. Their fiscal 2019 net loss was $5.93 million, versus $1.86 million of net income in fiscal 2018. A November 2019 settlement transferred certain receivables and minority interests to the company; undisclosed liabilities could remain a risk.
- The company cited its history of losses, substantial cash use, possible need for additional capital, dilution from merger earnout shares and other securities, and the possibility of further fair-value changes. The merger agreement permits up to 15.25 million additional earnout shares if revenue targets are met.
- Regulatory uncertainty remains significant: the FDA retained authority over CBD products, while state rules and federal guidance were evolving. The company disclosed a December 2019 class-action lawsuit alleging unlawful marketing and mislabeling; it intended to defend the case and could not estimate a probable loss. A separate trademark dispute was pending.
- Subsequent to year-end, the company raised approximately $4.53 million net from an October 2019 offering of 8% Series A cumulative convertible preferred stock. Dividends are cumulative and payable when declared; the company stated it expected monthly payments subject to legal limitations.
- Other commitments include leases with minimum future payments of approximately $10.38 million through 2027 and sponsorship agreements with potential payments of up to $4.9 million each for an athlete endorsement and a fitness-club sponsorship. A further $1.75 million motorsports sponsorship was entered into in October 2019.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective at September 30, 2019; the auditor did not provide an opinion on internal control effectiveness.
Important facts for investors to verify
- Confirm the reporting period and compare revenue on a consistent basis, given the acquisition and discontinued-operation reclassifications.
- Assess underlying cash burn and funding needs against the $4.69 million year-end cash balance, subsequent preferred-stock proceeds, and lease and sponsorship commitments.
- Review the assumptions and sensitivity behind the $50.60 million earnout liability and potential additional share issuance.
- Track gross margins, marketing and customer-acquisition costs, wholesale receivables, inventory growth, and conversion of sales into operating cash flow.
- Monitor FDA and state CBD rules, the class-action lawsuit, and any exposure to liabilities from discontinued subsidiaries.
- Check preferred-stock dividend declarations, conversion and redemption provisions, and potential dilution from options, warrants, preferred-stock conversion, and earnout shares.