cbdMD, Inc. — Form 10-Q Summary
Reporting period: Three months ended December 31, 2021 (the company’s first quarter of fiscal 2022), compared with the three months ended December 31, 2020. The filing was signed February 10, 2022. cbdMD sells CBD products under the cbdMD, Paw CBD and cbdMD Botanicals brands, primarily through e-commerce and wholesale channels.
Key financial results
| Metric | Quarter ended Dec. 31, 2021 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $9.32 million | $12.33 million | Down $3.01 million, or 24% |
| Gross profit / gross margin | $4.99 million / 53.6% | $8.90 million / 72.2% | Margin down 18.6 percentage points |
| Operating expenses | $11.96 million | $10.66 million | Up $1.30 million |
| Operating loss | $25.15 million | $1.76 million | Includes $18.18 million impairment charge |
| Net loss | $19.16 million | $9.40 million | Loss widened |
| Net loss attributable to common shareholders / diluted loss per share | $20.16 million / $0.35 | $9.50 million / $0.18 | Loss per share widened |
| Cash used in operating activities | $5.47 million | $2.19 million | Cash burn increased |
E-commerce sales were $7.12 million, down from $9.70 million; wholesale sales were $2.21 million, down from $2.63 million. The company attributed weaker sales across brands to softness in the CBD market and said some marketing investments were not producing appropriate returns. Cost of sales rose to 46.4% of net sales from 27.8%; excluding an $878,142 inventory write-down, the current-quarter rate was 37.8%.
Balance sheet and liquidity
- Cash and cash equivalents were $19.70 million at December 31, 2021, down from $26.41 million at September 30, 2021. Working capital was $22.92 million, versus $29.60 million.
- Total assets were $99.33 million, down from $124.88 million; total shareholders’ equity was $84.40 million, down from $103.14 million.
- Total liabilities were $14.93 million. Note payable was $60,468 current and $93,489 long-term; operating lease liabilities totaled approximately $5.69 million. The filing reports no significant conventional borrowings beyond these amounts.
- The company paid $1.00 million in preferred dividends in the quarter. Its 5.0 million outstanding Series A preferred shares carry an 8% cumulative dividend.
- Cash used in investing activities was $231,030. Financing cash outflow was $1.02 million, principally preferred dividends and note payments. Cash declined by $6.71 million overall.
Material changes and unusual items
- The company recorded $18.18 million of goodwill and intangible-asset impairment: $13.90 million against goodwill and $4.29 million against the cbdMD trademark. It also reclassified the cbdMD and HempMD trademarks from indefinite-lived to 20-year definite-lived assets and said amortization would begin in January 2022.
- The inventory write-down of $878,142 reflected product-line and SKU rationalization, including slow-moving and aging items.
- A reduction in the fair value of acquisition earnout liabilities generated a reported $5.95 million gain in the statement of operations, substantially affected by the decline in the company’s share price. The MD&A separately describes a $5.695 million decrease; this difference should be reconciled.
- The company’s Isodiol investment was written down to zero after the shares were delisted. The quarter also included higher marketing and non-cash stock-based compensation costs.
- Common shares outstanding were 58.28 million at quarter-end, up from 57.78 million at September 30, 2021. Potential shares from options, warrants, RSUs and convertible preferred stock were excluded from diluted loss per share as antidilutive.
Outlook, commentary and risks
- Management expected cost of sales to be 30%–35% of net sales for the remainder of fiscal 2022, citing an anticipated sales rebound and supply-chain and manufacturing optimization. No specific revenue or earnings forecast was provided.
- In the second quarter of fiscal 2022, management said it had identified approximately $10 million in annualized cost savings to implement during the second and third quarters. It also described plans to reduce marketing and sponsorship spending, improve returns, and right-size costs to the current revenue base.
- Management cited new marketing leadership, a seasoned wholesale executive, product launches, international expansion and retail-channel development as initiatives. It reported renewed NSF cGMP certification and product certifications in January 2022.
- Management stated that working capital was sufficient to fund operations, while acknowledging that operating cash flow remained negative. Cash deposits exceeding FDIC-insured limits totaled $18.73 million at quarter-end.
- Key disclosed risks include continued CBD-market softness, reliance on digital marketing and profitable customer acquisition, third-party suppliers and manufacturers, changing CBD regulation and interpretation, COVID-19 effects, and the possibility of further impairment. The company also identified risks related to earnout-share valuation and potential shareholder dilution.
- Disclosure controls were deemed effective. The filing also describes a prior-period internal-control weakness involving accounting classification of Twenty Two Capital earnout shares; management said it enhanced review procedures. The effectiveness of remediation merits monitoring.
Important facts for investors to verify
- Whether sales stabilize and management achieves its stated 30%–35% cost-of-sales target and approximately $10 million annualized savings.
- Whether the reported earnout-liability gain reconciles to the differing $5.95 million statement figure and $5.695 million MD&A description, and how much future earnings may fluctuate with the share price.
- Whether the impairment assumptions, trademark useful-life change and remaining goodwill and intangible carrying values are supportable as business performance evolves.
- How quickly cash burn declines, given the $5.47 million quarterly operating cash outflow and reduced cash balance.
- Potential dilution from earnout shares, preferred-stock conversion, options, warrants and equity compensation, along with the ongoing preferred dividend obligation.
- Progress in remediating the prior internal-control weakness and any subsequent changes in control effectiveness.