Introduction
Our goal is to present to you our IPO analysis for every new fixed-income security that enters the market and to find out if there is any trading potential. In this article, we want to shed light on the newest convertible preferred stock issued by cbdMD, Inc. (YCBD). Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.
The New Issue
Before we submerge into our brief analysis, here is a link to the 424B5 Filing By cbdMD Inc – the prospectus (Source: SEC.gov).
For a total of only 500,000 shares issued, the total gross proceeds to the company are $5M. You can find some relevant information about the new preferred stock in the table below:
Source: Author’s spreadsheet
cbdMD, Inc. 8.00% Series A Cumulative Convertible Preferred Stock (AMEX: YCBD-A) has a par value of $10 and pays a fixed dividend at a rate of 8.00%. The new preferred stock has no Standard & Poor’s rating and is callable as of 10/16/2024. Currently, YCBD-A trades quite below its PAR at a 10% discount at a price of $9.00 and has an 8.89% Current Yield and YTC of 10.61%. The dividends paid by this preferred stock are not eligible for the preferential 15-20% tax rate on dividends. They are also not eligible for the dividend received deduction for corporate holders. This means that the “qualified equivalent” Current Yield and YTC would be 7.41% and 8.84%, respectively.
As per the prospectus:
At our option, we may cause the Series A Convertible Preferred Stock, plus accrued and unpaid dividends, to be automatically converted, in whole or in part, on a pro rata basis into shares of our common stock at the Conversion Price if the Trading Price (as defined hereafter) of the common stock equals or exceeds $8.25 (137.5% of the Conversion Price) for at least 20 trading days in any 30 consecutive trading day period ending five days prior to the date of notice of conversion (such event, the “Market Trigger”).
Otherwise, as a convertible security, YCBD-A is convertible at the initial Conversion Price of $6.00 per share, which equals the Conversion Rate of 1.667 shares of YCBD for each $10.00 principal amount of YCBD-A.
Here is what the stock’s YTC curve looks like right now:
Source: Author’s spreadsheet
Ranking of QTS-B
Again, as per the prospectus:
The Series A Convertible Preferred Stock will rank, with respect to rights to the payment of dividends and the distribution of assets upon our liquidation, dissolution or winding up, (1) senior to all classes or series of our common stock and to all other equity securities issued by us other than equity securities referred to in clauses (2) and (3); (2) on a parity with all equity securities issued by us with terms specifically providing that those equity securities rank on a parity with the Series A Convertible Preferred Stock with respect to rights to the payment of dividends and the distribution of assets upon our liquidation, dissolution or winding up; (3) junior to all equity securities issued by us with terms specifically providing that those equity securities rank senior to the Series A Convertible Preferred Stock with respect to rights to the payment of dividends and the distribution of assets upon our liquidation, dissolution or winding up; and (4) junior to all of our existing and future indebtedness.
The Company
cbdMD, Inc., formerly Level Brands, Inc. is an innovative brand management and licensing company that provides bold, unconventional, and socially responsible branding for leading businesses. Level Brands owns and operates the nationally recognized consumer cannabidiol (‘CBD’) brand cbdMD, whose current products include CBD gummies, CBD tinctures, CBD topical, CBD bath bombs, CBD oils, and CBD pet products. The Company’s primary licensing and corporate brand management businesses target consumer products in the health and wellness space and other high-demand verticals, bringing innovative products to market under the kathyireland® Health & Wellness; Ireland Men One (I’M1), and Encore Endeavor One (EE1) brands.
Source: QuantumOnline.com | YCBD
Below, you can see a price chart of the common stock, YCBD.
Source: Tradingview.com
We do not currently intend to pay dividends on our common stock. The declaration, amount and payment of any future dividends on shares of our common stock, if any, will be at the sole discretion of our Board, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our shareholders or by our subsidiaries to us, and any other factors that our Board may deem relevant.
Source: 10-K Filing by cbdMD, Inc | Annual Report
In addition, with a total market capitalization of around $105.30M, YCBD is one of the smallest ‘Market Services’ companies (according to Finviz.com).
Capital Structure
Below you can see a snapshot of cbdMD’s capital structure as of the time of its last quarterly filing in June 2019. You also can see how the capital structure evolved historically.
Source: Morningstar.com | Company’s Balance Sheet
As of Q2, YCBD had no outstanding debt. However, when looking in more detail at the company’s 10-Q filings (quarterly reports), we can find in the balance sheet a $70M liability in the form of Contingent Liability, while on the asset side, it stands against $55M of Goodwill. As for the new IPO, at this point, it is the only issued preferred stock by cbdMD.
Traditional Convertible Preferred Stocks
This section contains all exchange-traded traditional convertible preferred stocks that pay a fixed-rate dividend with no stated maturity:
Source: Author’s database
The full list:
Source: Author’s database
Change of Control
Upon the occurrence of a Change of Control, we are required to redeem all of the then issued and outstanding shares of Series A Convertible Preferred Stock for cash at $11.00 per share, plus accrued but unpaid dividends (whether or not declared) to, but excluding, the redemption date.
Source: 424B5 Filing By cbdMD Inc.
Use of Proceeds
We intend to use the net proceeds from this offering for working capital.
Source: 424B5 Filing By cbdMD Inc.
Addition to the iShares U.S. Preferred Stock ETF
With the current market capitalization of only $5M, YCBD-A cannot be an addition to the iShares U.S. Preferred Stock ETF (PFF), which is important to us due to its influence on the behavior of all fixed-income securities. I’ll just remind you about the last year rally in the fixed-income borne from the redemption of the two “giants” HSEA and HSEB and the released cash of over $600M used from PFF to buy more of the rest of its holdings.
Conclusion
As fixed-income traders, we follow every one preferred stock or baby bond, which is listed on the stock exchange. As such, YCBD-A is no exception, and the homework we always do we share it with the public. It is not necessary for the IPO to be an arbitrage and a bargain, but in many cases, the new security happens to be better than the ones already trading on the market.
With the current discount in YCBD-A’s price, it gives an appetizing Current Yield of 8.90%. Although the market evaluates YCBD at $105M, which translates into a Price-to-Book ratio of 3.42, the company has only 2 years of public trading and its balance sheet looks unusual with the $70M of the contingent liability, which is almost 3x times more than the equity. Also, we can even see a negative equity for the Q1 2019, which cannot be ignored. Furthermore, there aren’t any other securities issued by the company and also there aren’t any other preferred stocks in the sector and a further comparison cannot be made. After all, besides looking at the company, it is always good when considering a specific issue to see it from different angles. Generally, if there was an arbitrage opportunity, I would not hesitate to participate, otherwise, I recommend to be cautious with this one.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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