Business Context and Reporting Period
Company: cbdMD, Inc. (formerly Level Brands, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended June 30, 2024
Business Overview: cbdMD operates nationally recognized CBD brands (cbdMD, Paw CBD) and the functional mushroom brand ATRx Labs. The company distributes hemp-derived solutions and functional products via e-commerce and wholesale channels. The company is a smaller reporting company and non-accelerated filer.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2024 | Nine Months Ended June 30, 2024 |
|---|---|---|
| Net Sales | $5,173,878 | $14,925,801 |
| Gross Profit | $3,403,514 (65.8% margin) | $9,541,740 (63.9% margin) |
| Operating Loss | $(382,028) | $(2,998,855) |
| Net Income (Loss) | $459,737 | $(3,547,327) |
| Net Loss Attributable to Common Shareholders | $(540,763) | $(6,548,828) |
| Cash and Cash Equivalents | $2,395,175 | $2,395,175 (as of June 30, 2024) |
| Working Capital | $(567,610) Deficit | $(567,610) Deficit |
| Convertible Notes (Fair Value) | $1,378,000 | $1,378,000 |
| Accrued Preferred Dividends | $3,667,667 | $3,667,667 |
Material Changes vs. Prior Period
- Revenue: Net sales decreased 15.4% year-over-year (YoY) for the three months ended June 30, 2024, compared to $6.12 million in the prior year. However, revenue grew 15.4% sequentially from the previous quarter. E-commerce sales declined YoY, while wholesale sales increased slightly.
- Profitability: The company reported a Net Income of $459,737 for the quarter, a significant improvement from a Net Loss of $(1.77) million in the same period last year. This was driven by a $854,506 gain from the decrease in the fair value of convertible debt and reduced operating expenses.
- Operating Expenses: Operating expenses decreased by approximately $1.88 million (33%) YoY to $3.79 million. Reductions were driven by lower staff-related expenses, advertising/marketing spend, and professional services.
- Liquidity: Cash and cash equivalents increased to $2.4 million from $1.8 million at the end of the prior fiscal year. However, the company reported a working capital deficit of $567,610, largely due to accrued preferred dividends of $3.67 million.
Outlook, Risks, and Management Commentary
- Going Concern: Management has raised substantial doubt about the company's ability to continue as a going concern within the next twelve months. The working capital position may not be sufficient to support daily operations without additional funding or improved profitability.
- Listing Compliance: The company received notice from NYSE American regarding non-compliance with continued listing standards due to stockholders' equity below $4 million and recent net losses. A compliance plan was submitted on July 5, 2024, with a target compliance date of December 5, 2025. Failure to comply could result in delisting.
- Capital Structure: The company has 5,000,000 shares of 8% Series A Cumulative Convertible Preferred Stock outstanding. Dividends are accrued but not paid in cash, totaling $3.67 million as of June 30, 2024. Management attempted to convert this stock to common stock in March 2024 but failed to secure the required shareholder votes.
- Debt: In February 2024, the company issued $1.54 million in aggregate principal amount of 8% Senior Secured Convertible Promissory Notes. These notes are convertible into common stock and carry a 25% prepayment premium.
- Operational Strategy: Management is focused on cost reduction, having achieved over $200,000 in monthly savings by August 2024 through lease terminations (Red Oak facility) and headcount reductions. The company plans to increase marketing spend in the fourth fiscal quarter.
Investor Verification Checklist
- Going Concern Status: Verify the company's ability to secure additional funding or achieve profitability to avoid insolvency within 12 months.
- NYSE American Compliance: Monitor the status of the compliance plan submitted to the NYSE American to avoid potential delisting.
- Preferred Dividend Obligation: Assess the impact of the $3.67 million accrued preferred dividend liability on future cash flows and equity dilution upon potential conversion.
- Convertible Note Terms: Review the terms of the $1.54 million convertible notes, specifically the conversion price ($0.615 effective) and the risk of dilution or default penalties.
- Revenue Trends: Confirm if the sequential revenue growth observed in Q3 2024 is sustainable given the year-over-year decline in e-commerce sales.