cbdMD, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2023 (fiscal 2023 Q2); comparisons are to the same periods in 2022. The filing is dated May 15, 2023. The supplied request metadata says “2022 Q2,” but the filing itself reports 2023 Q2.
Business context
cbdMD sells CBD products under the cbdMD, Paw CBD and cbdMD Botanicals brands, primarily through e-commerce and wholesale channels. It also operates a CBD marketplace and conducts cannabinoid research and development. Products are sourced from U.S.-grown hemp. The company reported launches of an NSF Certified for Sport gummy and products on Amazon UK during the quarter.
Key financial results
| Metric | Three months ended March 31, 2023 | Six months ended March 31, 2023 | Comparable 2022 period |
|---|---|---|---|
| Net sales | $6.24 million | $12.33 million | $9.63 million; $18.95 million |
| Gross profit / margin | $4.02 million / 64.4% | $7.58 million / 61.5% | $6.44 million / 66.9%; $11.44 million / 60.3% |
| Operating expenses | $5.42 million | $13.03 million | $11.45 million; $23.41 million |
| Operating loss | $1.40 million | $5.45 million | $5.01 million; $30.16 million |
| Net loss | $1.34 million | $5.29 million | $4.66 million; $23.82 million |
| Net loss attributable to common shareholders | $2.34 million | $7.29 million | $5.66 million; $25.82 million |
Net sales fell 35.2% in Q2 and 35.0% for the six-month period year over year. Q2 e-commerce and wholesale sales each declined by about $1.7 million. Management attributed lower e-commerce sales partly to reduced marketing spend, and lower wholesale sales partly to pricing and larger orders in the prior-year quarter. Gross margin declined in Q2 but improved for the six-month period.
Operating expenses fell substantially, primarily from lower staffing, advertising, sponsorship and affiliate costs. The prior-year six-month comparison also included $18.18 million of goodwill and intangible impairment; goodwill was fully impaired by September 30, 2022. Q2 operating loss improved from $5.01 million to $1.40 million, while the company remained loss-making. Preferred dividends were approximately $1.00 million in Q2 and $2.00 million for six months.
- Cash flow: The cash flow statement reports $3.80 million of cash used in operating activities for the six months, versus $10.67 million in 2022. The MD&A separately describes operating cash use as $1.7 million, an inconsistency to verify.
- Liquidity: March 31 cash was $1.72 million, down from $6.72 million at September 30, 2022. Working capital was $5.47 million; current assets were $10.15 million and current liabilities $4.68 million.
- Debt and obligations: The company described debt as nominal. The balance sheet shows a $7,375 current note payable and $4.28 million of operating lease liabilities. It also has a cumulative 8% Series A preferred stock dividend obligation.
- Non-GAAP measure: Adjusted EBITDA was a loss of $0.80 million for Q2 and $3.31 million for six months, compared with losses of $3.63 million and $8.84 million, respectively, in 2022.
Material changes, outlook and risks
Management reported sequential Q2 revenue growth of approximately 2.5% versus Q1, including approximately 14% growth in wholesale sales, and lower sequential selling, general and administrative costs. It cited encouraging direct-to-consumer trends in March and April, but provided no specific quantitative revenue or earnings guidance. The company said it expects continued losses while pursuing sales growth, product development, cost reductions and potential acquisitions.
Management concluded that substantial doubt exists about the company’s ability to continue as a going concern over the following 12 months. It said available capital, including the Keystone equity line, may not support planned operations; additional financing, reduced operations or reduced dividends may be necessary, depending on cash burn. A May 3, 2023 underwritten offering reportedly generated approximately $2.5 million in net proceeds. Management expected cash on hand after the offering to fund operations through fiscal year-end, potentially longer, while noting there was no assurance.
Other notable items include an approximately $885,000 non-cash expense from terminating an athlete endorsement arrangement; the February 2023 resignation of the company’s president, with the CFO becoming interim CEO; and a 1-for-45 reverse stock split effective April 24, 2023. Management also said it engaged third parties to assess strategic alternatives. Risks include ongoing losses and cash burn, dependence on digital marketing and third-party suppliers, CBD regulatory uncertainty, potential dilution, and NYSE American listing requirements.
Important facts for investors to verify
- Reconcile the cash flow statement’s $3.80 million operating cash use with the MD&A’s $1.7 million figure.
- Confirm the precise post-offering share count and reverse-split-adjusted offering terms: the filing’s subsequent-events note says 1,350,000 shares were offered, while the MD&A refers to 30,000 shares.
- Assess cash runway and financing needs, including actual spending after the May offering, access to the Keystone equity line, and the ongoing preferred dividend burden.
- Track whether cost reductions and new marketing and product initiatives stabilize sales without worsening margins or cash burn.
- Review the terms, potential dilution and accounting for preferred stock, equity-line shares, advertising-placement shares and other share-based obligations.
- Monitor CBD regulatory developments, listing compliance, and any outcomes from the strategic-alternatives review.