cbdMD, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2023, with comparison to fiscal 2022. The request metadata says “2022 Q4,” but the supplied filing is the FY2023 Form 10-K and also includes unaudited fourth-quarter FY2023 comparisons.
Business context
cbdMD sells hemp-derived wellness products under cbdMD, Paw CBD and hempMD, primarily through e-commerce and wholesale channels. It outsources manufacturing and reports that about 80.5% of FY2023 sales came from e-commerce. The company also operates a research subsidiary and, after year-end, launched hempMD and ATRx products and expanded into Sprouts stores.
Key financial results
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $24.2 million | $35.4 million |
| Gross profit | $15.0 million | $22.3 million |
| Gross margin | 62.0% | 63.1% |
| Operating expenses, before impairment | $24.2 million | $39.6 million |
| Impairment of goodwill and other intangible assets | $13.2 million | $61.0 million |
| Loss from operations | $(22.5) million | $(78.3) million |
| Net loss | $(22.9) million | $(70.1) million |
| Net loss attributable to common shareholders | $(26.9) million | $(74.1) million |
| Cash used in operating activities | $(4.3) million | $(15.0) million |
FY2023 adjusted operating loss, a non-GAAP measure, was $5.5 million versus $13.2 million in FY2022. The company reported eight consecutive quarters of improvement in this measure, but remained loss-making. FY2023 basic and diluted loss per share were both $13.32; the filing gives effect to a 1-for-45 reverse stock split.
Fourth-quarter FY2023 net sales were approximately $5.7 million, down about 27% year over year. The MD&A sales-channel table gives $5,710,597, while its summary table gives $5,710,745; investors should verify the precise figure.
Changes versus prior year; liquidity and capital
- Annual sales fell 32%: e-commerce decreased 26% to $19.4 million and wholesale decreased 47% to $4.7 million. Management cited category softness, inflation, lower marketing spend, channel challenges and some stock outages.
- Gross margin declined 1.1 percentage points. Management attributed pressure to lower overhead absorption, product mix shifting toward gummies and functional products, and fourth-quarter inventory write-downs.
- Operating expenses excluding impairment declined about 37.5%, with payroll down approximately $5.3 million, marketing down $8.3 million and sponsorships down $1.0 million.
- Cash was $1.8 million and working capital $3.4 million at September 30, 2023, versus $6.7 million and $10.7 million a year earlier. Total assets were $16.2 million; total liabilities were $7.2 million.
- Cash declined by $4.9 million during FY2023. The company raised approximately $2.5 million net from a May 2023 common-stock offering and reported $2.5 million of current notes payable, alongside operating lease liabilities totaling $3.96 million.
- The company suspended cash dividends on its 5 million Series A preferred shares in August 2023. The preferred stock carries an 8% cumulative annual dividend; $667,000 was accrued but unpaid at year-end. Dividends declared for FY2023 totaled approximately $4.0 million.
Outlook, risks and unusual items
Management says it is focused on cost control, product and channel diversification, customer experience and profitability. It expects to pursue new products and retail opportunities, but gives no quantified revenue, earnings or cash-flow guidance. Management believes the company may be positioned to gain market share in FY2024; this is forward-looking and not assured.
- Going concern: The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern. Management says working capital may not fund operations for the 12 months after issuance and that continued operations depend on improved profitability, cash flow and additional funding. No assurance of financing is given.
- Capital structure: Management says the preferred stock’s dividend burden, $50 million liquidation preference and change-of-control redemption feature complicate financing and strategic transactions. A proposed conversion amendment failed to obtain the required shareholder votes; the meeting was canceled.
- Lease issue: The company was behind on payments for its Charlotte headquarters, received a landlord default notice in September 2023, and was seeking to renegotiate or sublet/transfer the lease.
- Impairments and investments: FY2023 included $13.2 million of intangible-asset impairment and a $700,000 impairment of the Steady State investment. FY2022 included $56.7 million of goodwill impairment. These charges are material and largely non-cash.
- Regulatory and operating risks: CBD rules remain unsettled, including FDA authority and state-by-state requirements; UK Novel Food review remains in progress and EU review is on hold. Other risks include continued category contraction, costly customer acquisition, reliance on third-party suppliers and manufacturers without long-term commitments, and competition.
- Legal matters: A consumer class/collective action remains stayed pending definitive regulatory action. A trademark dispute is in discovery. The filing also notes a former co-CEO’s SEC proceeding relating to pre-2019 activities; the company is not named as a defendant.
Most important facts to verify
- Near-term liquidity, cash burn and the assumptions supporting management’s going-concern assessment, including financing availability.
- Preferred dividend arrears, cumulative obligations and the practical impact of the preferred stock’s liquidation and change-of-control terms.
- Headquarters lease default status, any renegotiation or sublease, and the company’s ability to meet remaining lease obligations.
- Drivers of revenue declines and whether new brands, retail expansion and reduced marketing costs can stabilize sales without weakening customer acquisition.
- Impairment assumptions and remaining carrying value of intangible assets, plus the recoverability of the Steady State investment.
- The fourth-quarter sales figure discrepancy and other detailed financial-statement values against the complete audited filing.