CBDMD, INC. The following discussion of our financial condition and results of operations for the three and six months endedMarch 31, 2021 and the three and six months endedMarch 31, 2020 should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements because of several factors, including those set forth under the Part I, Item 1A, Risk Factors and Business sections in our 2020 10-K, this report, and our other filings with theSecurities and Exchange Commission . We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report. [[Image Removed]] Our Company General We own and operate the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and cbdMD Botanicals. We believe that we are an industry leader in producing and distributing broad spectrum CBD products. Our mission is to enhance our customer's overall quality of life while bringing CBD education, awareness and accessibility of high quality and effective products to all. We source cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms inthe United States . Our innovative broad spectrum formula utilizes one of the purest hemp extracts, containing CBD, CBG and CBN, while eliminating the presence of tetrahydrocannabinol (THC). Non-THC is defined as below the level of detection using validated scientific analytical methods. 31 Our cbdMD brand of products includes over 130 SKUs of high-grade, premium CBD products, including CBD tinctures, CBD gummies, CBD topicals, CBD capsules, CBD bath bombs, CBD bath salts, and CBD sleep aids. OurcbdMD Botanicals brand of beauty and skincare products features 15 SKUs, including facial oil and serum, toners, moisturizers, clear skin, facial masks, exfoliants and body care. [[Image Removed]] Our Paw CBD brand of products includes over 45 SKUs of veterinarian-formulated products including tinctures, chews, topicals products in varying strengths and formulas. [[Image Removed]]
cbdMD, Paw CBD and cbdMD Botanicals products are distributed through our e-commerce websites, third party ecommerce sites, select distributors and marketing partners as well as a variety of brick and mortar retailers.
Recent Developments
During the second quarter our Pet brand, Paw CBD, debuted
its first-ever national TV advertising campaign during the live broadcast of
Puppy Bowl XVII, which aired on
At the end ofDecember 2020 , we announced the expansion of our direct-to-consumer operations into theUnited Kingdom (U.K. ) which allowsU.K. consumers to shop for our products online, with all orders shipping directly from aU.K. -based warehouseInMarch 2021 , we officially filed our Novel Food Application with theUnited Kingdom's Food Standards Agency ("FSA"). The Application included all of the requisite data to allow for a validated submission and thorough scientific assessment. A similar submission was simultaneously made to theEuropean Food Safety Authority (EFSA) to ensure compliance for the European markets. During the remainder of fiscal 2021 we will be accelerating our efforts to increase revenue in theU.K. 32 InJanuary 2021 we announced the launch of cbdMD Botanicals, our new beauty and skincare line featuring 15 luxury products, including facial oil and serum, toners, moisturizers, clear skin, facial masks, exfoliants and body care. We continue to invest in the line of products and have a number of additional SKUs launching during the balance of fiscal 2021. InJanuary 2021 we also announced that we renewed our partnership withKen Block , professional rally and rallycross driver currently with theHoonigan Racing division. Through this renewed sponsorship with cbdMD, the brand is set to become synonymous withMr. Block's rally car races, with the cbdMD logo to appear on his official fire suit and rally car. The extended sponsorship deal will also include a wide range of additional integrated marketing opportunities to promote the cbdMD brand.
In
InFebruary 2021 , two of cbdMD's products were awarded 2021 Product of the Year Awards by a national survey organized byKantar , aglobal leader in research. cbdMD serves as the first CBD company to win Product of the Year in consecutive years, earning 2021 top honors in "CBD Ingestible" for its CBD Gummies, while its Paw CBD brand secures category first "CBD Pet" award with its CBD Hard Chews for Dogs. InMarch 2021 , we announced the formation of Therapeuticsfor the purposes of isolating and quantifying the Company's ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications.
In
In
During the second quarter we renewed our NSF certification and underwent the
Earnout Shares
As described in Note 6 to the unaudited condensed consolidated financial statements appearing earlier in this report, onMarch 31, 2021 we entered into Addendum No. 1 to the Merger Agreement with the holders of the remaining Earnout Rights which amended the measurement periods within the third marking period to change the determination of the aggregate net revenues within the third marking period to a quarterly basis for each of the six fiscal quarters within the third marking period, beginning with the quarter endedMarch 31, 2021 , instead of the initial 18 month period. While this change in the measurement date has no effect on the number of remaining Earnout Shares issuable under the Earnout Rights, nor the revenue targets, it will result in the issuance of the Earnout Shares associated with the third marketing period (assuming the revenue targets are met under the terms of the Merger Agreement) on a quarterly basis instead of at the end of the 18 month period. Because Tthe Earnout Shares are earned based on the Company's earned revenue and byissuing these shares quarterly, as compared to at the end of the eight quarters, we expect that this change has the potential to reduce the volatile impact of the contingent liability on our Net Income results and consequentially its non-cash impact to our financial statements with each subsequent quarter. Growth Strategies
We continue to pursue many strategies to grow our revenues and expand the scope of our business in fiscal 2021 and beyond:
? Increase our base product offering: We regularly assess and evaluate our product offering, new products within our existing product categories, additional categories, as well as new and innovative ways to provide CBD in a manner that meets consumer demands. To that end, we are devoting resources to ongoing research and development processes with the goal of expanding our product offerings to meet these expanding consumer demands. In fiscal 2020, we created offerings packaged for convenience stores and lip balm and other topicals as well as several unique products for certain customers. During the first quarter of fiscal 2021, we launched CBD lidocaine products including sprays, a CBD bath salt line, as well as our cbdMD Botanicals line of CBD skin care products. InApril 2021 we announced our forthcoming 2021 product launches of which included an extension of our award-winning and best-selling gummies, as well as the first ever, and highly anticipated, cbdMD Drink Mixes. ? Expand our revenue channels: As the market continues to evolve, we are expanding our sales channels. During fiscal 2020, our wholesale business was impacted as the broader retail industry faced various headwinds tied to quarantining and COVID impacts. Despite this, we continue to pursue relationships with a number of key traditional retail accounts and believe our top brand awareness, effective marketing and strong balance sheet position us as the partner for CBD for key traditional retail accounts as this channel normalizes during the latter half of fiscal 2021. During the second quarter of fiscal 2021 our wholesale sales, including sales to our retail brick and mortar customers, increased by 30.8% from the first quarter of fiscal 2021. ? Expand to markets outsidethe United States : We continue to explore sales into markets outside ofthe United States . Our products are currently available in 31 countries. We generally partner with local wholesalers who can help navigate the laws and regulatory requirements within their jurisdiction. We continue to pursue key wholesale accounts in a number of international markets and are focused on expanding our E-commerce business to consumers in theU.K. ? Expand PAW CBD: During fiscal 2020 we saw the direct-to-consumer strength of cbdMD also translate into significant growth for Paw CBD. We continue to add internal resources to enhance this division. As this brand continues to grow, we are focusing on cross-selling, customer retention and education. During the second quarter of fiscal 2021 we began advertising on TV and introduced our Paw CBD rewards program and expect to introduce a Paw CBD subscription program during the latter part of fiscal 2021. 33 ? Expand our sponsorships toward targeted segments: We have had significant success with attracting high profile sponsors and influencers and expect to continue to assess the segments we have covered with a focus on activation of the sponsorships and influencers which are producing the largest visibility and responsiveness. ? Acquisitions:During fiscal 2021 and beyond we may also choose to further build and maintain our brand portfolio by acquiring additional brands directly or through joint ventures if opportunities arise that we believe are in our best interests. As we are in an emerging market, opportunities could be present as companies establish strong brands and begin to obtain large market share. In assessing potential acquisitions or investments, we expect to primarily utilize our internal resources to evaluate growth potential, the strength of the target brand, offerings of the target, as well as possible efficiencies to gain. We believe that this approach will allow us to effectively screen consumer brand candidates and strategically evaluate acquisition targets and efficiently complete due diligence for potential acquisitions. We are not a party, however at this time, to any agreements or understandings regarding the acquisition of additional brands or companies and there are no assurances we will be successful in expanding our brand portfolio.
Results of operations
The following tables provide certain selected consolidated financial information
for the periods presented:
Three Months Ended March 31,
2021 2020 change
(unaudited) (unaudited)
Total net sales $11,798,611 $9,399,036 2,399,575
Cost of sales 3,643,127 2,732,076 911,051Gross profit as a percentage of net sales 69.1% 70.9%
(1.8)%
Operating expenses 12,323,207 12,267,637 55,570 Operating income from operations (4,167,723) (5,600,677) 1,432,954 (Increase) decrease on contingent liability (8,871,000) 21,261,994 (141.7)% Net income (loss) before taxes (13,046,474) 14,883,772 (187.7)% Net income (loss) attributable to cbdMD, Inc. common shareholders$(13,070,754) $14,783,756 (188.4)% Six Months Ended March 31, 2021 2020 change (unaudited) (unaudited) Total net sales$24,126,914 $19,547,272 4,579,642 Cost of sales 7,073,402 6,432,613 640,789
Gross profit as a percentage of net sales 70.7% 67.1%
3.6%
Operating expenses 22,981,180 24,827,934 (1,846,754) Operating income from operations (5,927,668) (11,713,275) 5,785,607 (Increase) decrease on contingent liability (17,371,000) 38,160,000 (145.5)% Net income (loss) before taxes (22,774,096) 25,614,438 (188.9)% Net income (loss) attributable to cbdMD, Inc. common shareholders$(22,566,426) $27,696,786 (181.5)% Net Sales
We record product sales primarily through two main delivery channels, direct to consumers via our E-commerce sales and direct to wholesalers utilizing our internal sales team. The following table provides information on the contribution of net sales by type of sale to our total net sales.
Three months Three months
ended ended
March 31, March 31,
2021 % of total 2020 % of total
Wholesale sales $3,436,176 29.1% $2,617,860 27.9%
E-commerce sales 8,362,435 70.9% 6,781,176 72.1%
Total net sales $11,798,611 $9,399,036
Six months Six months
ended ended
March 31, March 31,
2021 % of total 2020 % of total
Wholesale sales $6,063,356 25.1% $5,885,981 30.1%
E-commerce sales 18,063,558 74.9% 13,661,291 69.9%
Total net sales $24,126,914 $19,547,272
34
Total net sales for the three months ended March 31, 2021 grew 25.5% year over
year and decreased 4.3% over the first quarter of fiscal 2021. Historically,
sales in our March quarter are impacted by seasonality. e-commerce net sales for
the second quarter of fiscal 2021 grew 23.3% year over year. The growth in this
channel is driven by our continued optimization of our multifaceted marketing
investments and growing brand awareness. We are starting to see some increase in
our Wholesale business and sales 36to our brick and mortar retail customers
experienced a 31.3% increase in net sales year over year for the quarter and a
30.8% sequential quarterly net sales increase. We are starting to see an uptick
in wholesale activity and year over year increase is mainly attributed to
increase confidence and economic outlook when compared to significant
uncertainty brought about by the onset of the COVID-19 pandemic in the prior
year period. We are starting to see For the six months ended March 31, 2021
overall net sales increased 23.4%, while net sales from of our E-commerce and
wholesale grew 32.2% and 3.0% respectively. Overall, we believe the ongoing
brand and market efforts continue to build momentum and traction with consumers
and an increase in activity from our wholesale business has contributed to our
year over year growth.
Of our total net sales as indicated above, during the three months ended
March 31, 2021 and 2020 our Paw CBD line accounted for net sales of $1,415,171
and $768,979 , respectively. In addition, during the six months ended March 31,
2021 and 2020 our Paw CBD line accounted for net sales of $2,882,649 and
$1,589,554 , respectively. The year over year growth in our Paw CBD brand is due
to the expansion of products, increase in marketing efforts specific to the
brand, including TV, as well as further adoptions from our wholesale customers.
Cost of sales
Our cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third-party providers, and outbound freight for our product sales, and includes labor for our service sales. Our cost of sales as a percentage of net sales was 30.9% and 29.1% for three months endedMarch 31, 2021 and 2020, respectively and 29.3% and 32.9% for the six months endedMarch 31, 2021 and 2020, respectively. The change reflects the increasing revenue percentage of E-commerce sales, growth and maturation of the business and its manufacturing process, changes in the cost of raw materials, evaluating key vendors, negotiating volume pricing, as well as additional product offerings which continue to impact our cost of production. We expect product sales will maintain a normal cost of sales as a percentage of net sales, between 30% and 37%, as we continue to manage our overall cost for manufacturing and production during the balance of fiscal 2021.
Operating expenses
Our principal operating expenses include staff related expenses, advertising (which includes expenses related to industry distribution and trade shows), sponsorships, affiliate commissions, merchant fees, technology, travel, rent, professional service fees, and business insurance expenses. Our operating expenses on a consolidated basis increased approximately 0.5% for the second quarter of fiscal 2021 from the same period in fiscal 2020 and decreased approximately 7.4% for the six months endedMarch 31, 2021 as compared to the six months endedMarch 31, 2020 . The decrease can be attributed to the implementation of various cost control measures while supporting continued revenue growth and driving the business to a positive cash flow operation.
The following tables provide information on our approximate operating expenses
for the three and six months ended
Three months ended Three months ended
March 31, 2021 March 31, 2020 Change ($)
Staff related expense $3,916,730 $3,969,976 $(53,246)
Accounting/legal expense 330,854 382,674 (51,820)
Professional outside services 287,411 329,019 (41,608)
Advertising/marketing/social media/events/tradeshows 4,044,812 3,611,347 433,465
Sponsorships 595,372 1,442,472 (847,100)
Affiliate commissions 417,382 385,341 32,041
Merchant fees 492,093 674,469 (182,376)
R&D and regulatory 82,025 - 82,025
Non-cash stock compensation 825,833 435,301 390,532
Depreciation 240,517 174,205 66,312
All other expenses 1,090,178 862,832 227,346
Totals $12,323,207 $12,267,637 $55,571
35
Six months ended Six months ended
March 31, 2021 March 31, 2020 Change ($)
Staff related expense $7,620,385 $7,919,370 $(298,985)
Accounting/legal expense 535,563 726,093 (190,530)
Professional outside services 594,625 819,448 (224,823)
Advertising/marketing/social media/events/tradeshows 7,032,907 6,244,464 788,443
Sponsorships 1,109,429 3,572,308 (2,462,879)
Affiliate commissions 872,076 929,608 (57,532)
Merchant fees 1,121,137 1,415,462 (294,325)
R&D and regulatory 385,731 - 385,731
Non-cash stock compensation 1,090,007 1,115,875 (25,868)
Depreciation 473,323 287,457 185,866
All other expenses 2,145,997 1,797,849 348,148
Totals $22,981,180 $24,827,934 $(1,846,754)
For the three months ended March 31, 2021 , the overall operating expenses were
relatively constant year over year. We re-negotiated and reduced many of our
sponsorships and worked to reduce many of our operational expenses. While our
merchant fees continue to drop year over year as a percent of net sales, during
the fiscal third quarter we have opened up some additional relationships that
should further reduce our merchant fees going forward. Included in all other
expenses for the quarter is a $299,609 severance expense accrual for a former
non-management employee pursuant to the terms of a separation agreement entered
into with a former employee in January 2021 .
For the six months ended March 31, 2021 , we made progress reducing many of our
operation expenses while increasing our spend on R&D and marketing expenses to
help drive revenue. We believe that we have built a strong business foundation
and infrastructure, and we are now focused on activation of our assets to
continue to build our brand while we focus on overall execution and
profitability.
Corporate overhead and allocation of management fees to our segments
Included in our consolidated operating expenses are expenses associated with our
corporate overhead which are not allocated to the operating business unit,
including (i) staff related expenses; (ii) accounting and legal expenses; (iii)
professional outside services; (iv) travel and entertainment expenses; (v) rent;
(vi) business insurance; and (vii) non-cash stock compensation expense.
36
The following table provides information on our approximate corporate overhead
for the three and six months ended
Three months ended Three months ended
March 31, 2021 March 31, 2020 change ($)
Staff related expense $302,225 $292,833 $9,391
Accounting/legal expense 255,074 163,878 91,196
Professional outside services 104,834 144,522 (39,688)
Travel expense 2 4,160 (4,158)
Business insurance 149,275 108,748 40,527
Non-cash stock compensation 825,833 435,301 390,533
Totals $1,637,243 $1,149,442 $487,801
Six months ended Six months ended
March 31, 2021 March 31, 2020 change ($)
Staff related expense $850,395 $710,240 $140,155
Accounting/legal expense 465,740 435,892 29,848
Professional outside services 171,685 320,030 (148,345)
Travel expense 2 22,684 (22,682)
Business insurance 269,866 182,464 87,402
Non-cash stock compensation 1,090,007 1,115,875 (25,868)
Totals $2,847,695 $2,787,185 $60,510 The increase in corporate related expenses for the three months endedMarch 2021 over prior year is primarily due to the increase in non-cash stock compensation to employees and directors. Corporate expenses were relatively flat for the six months endedMarch 31, 2021 as compared to prior year. While there was an increase in staff related expenses, this was driven by executive incentive accrued during the first quarter of fiscal 2021,which was partially offset by a reduction in professional expenses.
The corporate operating expenses are primarily related to the ongoing public company related activities.
Other income and other non-operating expenses
We also record income and expenses associated with non-operating items. The material components of those are set forth below.
Realized and unrealized gain (loss) on marketable and other securities
We value investments in marketable securities at fair value and record a gain or loss upon sale at each period in realized and unrealized gain (loss) on marketable securities. For the three months endedMarch 31, 2021 and 2020, we recorded$2,852 and$(813,152) , respectively and for the six months endedMarch 31, 2021 and 2020 we recorded$545,562 and$(875,162) , respectively, of realized and unrealized gain (loss) on marketable and other securities, including impairments. The realized gain was driven by the sale of our investment inFormula Four Beverages, Inc. that was previously written to zero in the prior year based on prior information related to the company's performance and COVID-19 impacts. The loss in the prior year was driven by the impairment from its investment inFormula Four Beverages, Inc. 37
Increase in contingent liability
As described in Note 6 to the notes to the consolidated financial statements appearing elsewhere in this report, the earn-out provision for the Earnout Shares is accounted for and recorded as a contingent liability with increases in the liability recorded as non-cash other expense and decreases in the liability recorded as non-cash other income. The value of the non-cash contingent liability was$22,300,000 atMarch 31, 2021 , as compared to$16,200,000 atSeptember 30, 2020 , respectively. During the second quarter of fiscal 2021 we had an increase in value of$8,871,000 to the contingent liability which is recorded as other expense in our consolidated statement of operations for the second quarter of fiscal year 2021. The increase in value is comprised of$3,100,012 associated with the increase of the value of the Second Marking Period shares prior to their issuance onMarch 8, 2021 , while the remaining$5,770,988 is associated with the increase in the remaining contingent shares as ofMarch 31, 2021 . We utilize both a market approach and a Monte Carlo simulation in valuing the contingent liability and a key input in both of those methods is the stock price. The main driver of the change in the value of the contingent liability was the increase of our common stock price, which was$4.14 atMarch 31, 2021 as compared to$2.95 onDecember 31, 2020 . We expect to continue to record changes in the non-cash contingent liability through the balance of the earnout period.
Liquidity and Capital Resources
We had cash and cash equivalents on hand of$23,711,600 and working capital of$27,882,688 atMarch 31, 2021 as compared to cash and cash equivalents on hand of$14,824,644 and working capital of$16,023,174 atSeptember 30, 2020 . Our current assets increased approximately 46.5% atMarch 31, 2021 fromSeptember 30, 2020 , which is primarily attributable to an increase in cash received under the public offering of our shares of our 8.0% Series A Convertible Preferred Stock inDecember 2020 and an increase in accounts receivables as wholesale net sales picked up at the end of the quarter. Our current liabilities decreased approximately 10.7% atMarch 31, 2021 fromSeptember 30, 2020 . This decrease is primarily attributable to decrease in accounts payables and accrued expenses, note payable and operating lease short term liability offset by increases in accrued expenses, note payables and operating lease short term liability. OnDecember 8, 2020 we closed a follow-on firm commitment underwritten public offering of shares of our 8.0% Series A Convertible Preferred Stock resulting in total net proceeds to us of approximately$15.7 million .
During the three and six months ended
We do not have any commitments for capital expenditures. We have a commitment for cumulative cash dividends at an annual rate of 8% payable monthly in arrears for the prior month to our preferred shareholders. We have multiple endorsement or sponsorship agreements for varying time periods up throughDecember 2022 and provide for financial commitments from the Company based on performance/participation (see Note 11 Commitments and Contingencies). In addition, inJanuary 2021 we entered into a separation agreement with a former consultant which provides for a severance payment of$300,000 , of which$150,000 was paid inJanuary 2021 and the balance is due inJune 2021 . We have sufficient working capital to fund our operations. Our goal from a liquidity perspective is to use operating cash flows to fund day to day operations and we have not met this goal as cash flow from operations has been a net use of$3,654,674 and$4,273,508 for the three months endedMarch 31, 2021 and 2020, respectively and$4,279,309 (excluding the reclassification of$1,027,403 of the PPP loan to short term liabilities) and$9,147,052 for the six months endedMarch 31, 2021 and 2020, respectively. 38 Critical accounting policies The preparation of financial statements and related disclosures in conformity with US GAAP and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1, "Organization and Summary of Significant Accounting Policies," of the Notes to our consolidated financial statements appearing elsewhere in this report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material. Please see Part II, Item 7 - Critical Accounting Policies appearing in our 2020 10-K for the critical accounting policies we believe involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.
Recent accounting pronouncements
Please see Note 1 - Organization and Summary of Significant Accounting Policies appearing in the consolidated financial statements included in this report for information on accounting pronouncements.
Off balance sheet arrangements
As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
ITEM 3.
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