cbdMD, Inc. — Q1 Fiscal 2023 Form 10-Q
Reporting period: Three months ended December 31, 2022; comparisons are to the three months ended December 31, 2021, unless otherwise stated. cbdMD sells CBD products through its cbdMD, Paw CBD and cbdMD Botanicals brands, mainly via e-commerce and wholesale channels.
Financial performance and position
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $6.09 million | $9.32 million |
| Gross profit / gross margin | $3.57 million / 58.6% | $4.99 million / 53.6% |
| Operating expenses | $7.61 million | $11.96 million |
| Operating loss | $4.05 million | $25.15 million |
| Net loss | $3.96 million | $19.16 million |
| Net loss attributable to common shareholders | $4.96 million; $0.08 per share | $20.16 million; $0.35 per share |
| Cash used in operating activities | $2.06 million | $5.47 million |
Cash and cash equivalents were $3.35 million at December 31, down from $6.72 million at September 30, 2022. Working capital was $5.98 million, versus $10.7 million at fiscal year-end. Total assets were $35.73 million and total liabilities were $9.14 million. Current liabilities were $5.55 million. The company reported $9,758 of note payable; operating lease liabilities totaled $4.57 million, including current and long-term portions.
Material changes versus the prior period
- Net sales declined $3.24 million, or 34.7%. E-commerce sales fell $2.21 million and wholesale sales fell $1.03 million.
- Gross margin rose 5.1 percentage points, while operating expenses decreased $4.34 million, or 36.3%. Management attributed expense reductions mainly to lower staffing, marketing and sponsorship costs, and lower stock compensation.
- The smaller reported net loss primarily reflects the absence of the prior-year $18.18 million goodwill and intangible impairment and a substantially smaller contingent-liability decrease. The prior-year comparison also included a $5.95 million contingent-liability decrease.
- Cash used in operations improved year over year but remained negative. Cash declined by $3.37 million during the quarter, including $1.00 million of preferred dividends paid.
Outlook, commentary and risks
- Management said revenue was affected by customer pantry-loading ahead of a shift to higher-strength products, marketing execution difficulties on Meta, reduced marketing spend, wholesale customers selling through existing inventory, and inflation-related pressure on discretionary spending. Revenue was also down 22.6% from the immediately preceding quarter.
- The company launched cbdMD Max for Pain and described plans to improve marketing execution, develop domestic and international sales channels, and pursue growth in its brands. Management expects revenue growth in coming quarters but provided no quantified guidance.
- The filing states that working capital may not support operations for the twelve months after issuance of the financial statements. The company depends on improving profitability and obtaining additional funding; management concluded that substantial doubt exists about its ability to continue as a going concern.
- A November 2022 separation agreement with a professional athlete ended further obligations under that agreement and generated an approximately $885,000 one-time non-cash expense for previously unexpensed stock compensation. A separate endorsement agreement runs through February 2025 and could require up to $1.5 million in base payments if services are provided, plus potential incentives.
- After quarter-end, Adara’s business combination closed and cbdMD sold its Adara Sponsor interest for $1.0 million, its original investment amount. Also after quarter-end, the company agreed to provide up to 6,060,606 common shares for $2.0 million of advertising services, subject to vesting and use terms.
- Up to 3,928,797 earnout shares remain potentially issuable under the Cure Based Development merger agreement, subject to revenue targets. The company cites CBD regulatory uncertainty, customer acquisition and digital-channel dependence, supplier reliance, liquidity, and potential shareholder dilution as risks.
Most important facts for investors to verify
- Whether cash burn and revenue trends improve enough to address the disclosed going-concern uncertainty without additional financing.
- Whether the higher-strength product transition, marketing changes and wholesale pipeline stabilize or grow sales, and whether those sales can be achieved profitably.
- The terms, timing and potential dilution from the advertising-share agreement, earnout shares, preferred-stock conversion and other outstanding equity awards.
- Whether the $1.0 million Adara proceeds were received as described and how the company deploys those funds.
- The continuing cash cost of preferred dividends and lease obligations, and the performance-linked commitments under the remaining endorsement agreement.