cbdMD, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2021 Q3, but the filing is for the quarter ended June 30, 2022 (fiscal 2022 third quarter), with comparisons to the quarter and nine months ended June 30, 2021. The filing was signed August 11, 2022.
Business context and reporting period
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 product research through cbdMD Therapeutics. The interim financial statements are unaudited.
Financial performance and position
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Nine months ended June 30, 2022 | Nine months ended June 30, 2021 |
|---|---|---|---|---|
| Net sales | $8.59 million | $10.56 million | $27.54 million | $34.69 million |
| Gross profit | $5.93 million | $7.19 million | $17.37 million | $24.24 million |
| Gross margin | 69.0% | 68.1% | 63.1% | 69.9% |
| Net income (loss) | $(31.63) million | $1.54 million | $(55.45) million | $(20.37) million |
| Net loss attributable to common shareholders | $(32.63) million | $0.98 million | $(58.45) million | $(21.59) million |
| Adjusted loss from operations, non-GAAP | $(2.75) million | $(5.24) million | $(11.09) million | $(8.53) million |
- Revenue and margins: Quarterly net sales fell 18.6% year over year; nine-month sales fell about 20.6%. E-commerce accounted for 75.8% of quarterly sales and wholesale for 24.2%. Quarterly gross margin improved slightly, while the nine-month margin declined.
- Impairment and earnings: The company recorded $48.96 million of goodwill and intangible asset impairment for the nine months, including a $30.78 million goodwill charge in the June quarter. The filing attributes the quarter’s large loss primarily to the impairment; it is non-cash. The company also recorded a $1.94 million quarterly benefit from a decrease in contingent liability.
- Cash flow: Cash used in operating activities was $13.04 million for the nine months, compared with $9.76 million in the prior-year period. Cash and cash equivalents fell to $9.55 million from $26.41 million at September 30, 2021. The cash flow statement reports a $16.86 million net decrease in cash.
- Liquidity and obligations: Working capital was $14.13 million, down from $29.60 million at September 30, 2021. Total liabilities were $10.54 million, including $5.14 million of operating lease liabilities. Note payable was $9,461 current and $5,051 long term. The company had $702,000 of contingent liability related to merger earnout shares.
- Equity and dividends: Accumulated deficit reached $131.79 million. The 5 million outstanding Series A preferred shares carry an 8% cumulative dividend; $3.00 million of preferred dividends were declared for the nine-month period. Common shares outstanding were 59.95 million at June 30, 2022.
Material changes versus the prior comparable period
- Quarterly sales decreased by $1.97 million, with declines in both e-commerce and wholesale. Management cited weaker discretionary spending, competitive industry conditions and wholesale timing, including delayed orders and prior-quarter pipeline fill.
- Quarterly operating expenses fell to $8.28 million from $13.87 million, reflecting lower staffing, marketing, sponsorship, affiliate, merchant processing, research and regulatory costs. Management reported more than $10 million of annualized cost reductions underway and expected further expense savings in the fourth quarter.
- Cost of sales as a percentage of quarterly sales improved to 31.0% from 31.9%, but the nine-month ratio worsened to 36.9% from 30.1%. The company cited lower overhead and freight costs, partly offset by unabsorbed overhead from lower sales; nine-month costs also included an $878,142 inventory and product-line charge.
- The company sold substantially all manufacturing equipment in April 2022 for approximately $1.8 million in stated accounting value, including a $1.4 million investment in the buyer, Steady State, and outsourced certain production. It recorded an $88,769 gain on asset sale.
- Goodwill and intangible assets declined substantially following impairment charges; goodwill was $12.00 million at June 30, 2022, compared with $56.67 million at September 30, 2021. The cbdMD and HempMD trademarks were reclassified as finite-lived and are being amortized over 20 years.
Outlook, commentary, risks and unusual items
- Management stated a goal of achieving profitability and increasing revenue by the end of calendar 2022, and expected continued operating-cost reductions and revenue growth. The filing gives no quantified revenue or earnings guidance and cautions that these plans are not assured.
- Going concern: Management warned that working capital might not support daily operations for the 12 months after issuance. Continuing as a going concern depends on improving profitability and obtaining additional funding; the filing says these conditions raise substantial concern about the company’s ability to continue as a going concern.
- The filing reports a $602,092 one-time restructuring expense related to the former CEO’s separation. The former CEO resigned in June; the CFO/COO was appointed interim principal executive officer in August.
- Risks include the company’s history of losses, dependence on digital marketing and profitable customer acquisition, reliance on third-party suppliers and manufacturers, and uncertainty around CBD regulation and FDA/DEA interpretation. The company also faces potential dilution from preferred shares, options, warrants and earnout shares.
- Management reported no material change in internal control over financial reporting and concluded disclosure controls were effective. No legal proceedings were listed in the filing’s legal proceedings section. The filing nevertheless refers to SEC litigation involving the former CEO in connection with the Adara investment transfer arrangement.
- The company held $8.64 million of cash above FDIC-insured limits at June 30, 2022. Its $1.0 million Adara-related investment and $1.4 million Steady State investment are classified as Level 3, with significant unobservable valuation inputs.
Important facts for investors to verify
- Liquidity runway, cash burn and whether additional funding will be needed, given the explicit going-concern warning.
- Whether sales stabilize and management delivers the stated profitability and revenue objectives, including the expected fourth-quarter cost savings.
- The assumptions supporting the $48.96 million impairment, remaining goodwill and intangible-asset valuations, and Level 3 investments.
- Potential dilution and future contingent-share issuances; the company issued 409,505 earnout shares on August 9, 2022 for the June-quarter revenue result.
- Reconcile cash-flow disclosures: the cash flow statement reports $13.04 million of operating cash use for nine months, while MD&A separately cites $16.8 million for the same period. The filing text does not clearly reconcile these figures. The going-concern discussion also cites a $59.94 million nine-month loss, which differs from the statement-of-operations net loss of $55.45 million; verify the basis for that figure.