Business context and reporting period
cbdMD, Inc. operates CBD brands cbdMD, Paw CBD and cbdMD Botanicals, selling primarily through e-commerce and wholesale channels. This Form 10-K covers the fiscal year ended September 30, 2022, with fiscal 2021 as the comparison; despite the request metadata referring to “2021 Q4,” the filing is for FY2022 and also reports fourth-quarter results.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $35.4 million | $44.5 million |
| Gross profit / margin | $22.3 million / 63.1% | $30.0 million / 67.4% |
| Operating expenses | $39.6 million | $49.6 million |
| Goodwill and intangible impairment | $61.0 million | — |
| Operating loss | $78.3 million | $19.6 million |
| Net loss | $70.1 million | $23.4 million |
| Net loss attributable to common shareholders | $74.1 million | $25.9 million |
| Cash used in operating activities | $15.0 million | $14.1 million |
Revenue fell 20%. E-commerce contributed $26.4 million (74.7% of sales) and wholesale $9.0 million. Gross margin declined 4.3 percentage points. Cash and cash equivalents were $6.7 million at year-end, versus $26.4 million a year earlier; working capital was $10.7 million, versus $29.6 million. Total liabilities were $9.4 million, including $4.9 million of operating lease liabilities and only nominal note payable balances. Preferred dividends were $4.0 million; 5 million Series A preferred shares were outstanding, carrying an 8% cumulative annual dividend.
Fourth-quarter net sales were $7.9 million, down 20% year over year; gross margin improved to 63.8% from 58.6%. The quarter’s operating loss was $26.9 million, including $12.0 million of impairment charges.
Material changes versus the prior period
- Sales declined in both channels: e-commerce down 19.7% and wholesale down 22.5%. Management attributed the decline to CBD-category softness, inflation, changes affecting digital marketing and customer acquisition, reduced marketing spend, and some product stockouts.
- Operating expenses decreased about 20% as management reduced staffing, marketing, sponsorship and other costs. Marketing spend was approximately $15.4 million, compared with $17.9 million.
- The company recorded $56.7 million of goodwill impairment and $4.3 million of trademark impairment; goodwill was reduced to zero. It also wrote down $878,000 of inventory while rationalizing product lines.
- Cash declined by $19.7 million during the year. The audited cash-flow statement reports $15.0 million of operating cash use; financing cash use included $4.0 million of preferred dividends.
- The company sold substantially all manufacturing assets and moved production to third-party suppliers, shifting toward an outsourced, more variable-cost model.
Outlook, commentary, risks and unusual items
Management said it is pursuing profitability through product-portfolio optimization, cost reduction and marketing focused on returns. It highlighted higher-strength and full-spectrum CBD products, Delta 9 products, NSF-certified offerings and planned FY2023 launches, including cbdMD Max. No quantified revenue, earnings or cash-flow guidance was provided. Management reported six sequential quarters of improvement in non-GAAP adjusted operating income, while that measure remained a loss for FY2022.
The auditor identified substantial doubt about the company’s ability to continue as a going concern. Management said available working capital may not support operations for the 12 months following issuance of the financial statements and that continued operations depend on improved profitability and cash flow or additional funding. The company had an accumulated deficit of $147.4 million.
- Regulatory uncertainty remains material: FDA and state rules for CBD products, permitted claims, labeling and sales may change. UK and EU novel-food applications were in risk assessment; approval was not assured.
- The company relies on third-party suppliers and manufacturers and has no long-term supply contracts. It also faces digital-marketing, customer-acquisition, competitive, inflation and international-expansion risks.
- Up to 3.93 million earnout shares remained potentially issuable at September 30, 2022. The earnout liability was $276,000, and its fair-value changes produced non-cash income of $8.5 million in FY2022, affecting reported earnings.
- Potential dilution includes conversion of preferred stock and outstanding options, warrants and awards. The filing estimates 8.335 million common shares underlying preferred stock and separately describes additional potential issuances.
- A customer-data breach prompted a class-action case; a settlement within insurance policy limits was approved, with dismissal expected after consummation. A separate CBD consumer-protection case was stayed pending regulatory action. The company also reported ongoing trademark litigation.
- A former co-CEO was subject to SEC legal proceedings concerning pre-2019 activity; the company said it was not named as a defendant. The company recorded $602,000 in restructuring expense related to his departure.
Important facts for investors to verify
- Near-term cash needs, operating cash burn and the company’s ability to obtain financing or reach positive cash flow, given the going-concern warning.
- Whether revenue stabilizes and gross margins recover after SKU rationalization, marketing changes and outsourcing manufacturing.
- Status and financial impact of CBD regulatory approvals, product claims, litigation and third-party supply arrangements.
- Actual dilution from earnout shares, preferred conversions and outstanding equity awards, as well as the ongoing cost and payment capacity for cumulative preferred dividends.
- Reconcile selected figures against the audited statements: the filing contains differing operating-expense and operating-loss amounts in parts of its narrative and tables, and its MD&A cash-flow discussion differs from the audited cash-flow statement.