cbdMD, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended March 31, 2022 (cbdMD fiscal 2022 Q2 and first half), compared with the periods ended March 31, 2021. This differs from the request metadata’s “2021 Q2.” cbdMD sells CBD products through its cbdMD, Paw CBD and cbdMD Botanicals brands, primarily via e-commerce and wholesale.
Key financial results
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Net sales | $9.63 million in 2022; $11.80 million in 2021, down 18.4% | $18.95 million in 2022; $24.13 million in 2021, down about 21.5% |
| Gross profit / margin | $6.44 million / 66.9%; prior year $8.16 million / 69.1% | $11.44 million / 60.3%; prior year $17.05 million / 70.7% |
| Operating expenses | $11.45 million, down 7.1% year over year | $23.41 million, up 1.9% year over year |
| Operating loss | $5.01 million, versus $4.17 million | $30.16 million, versus $5.93 million |
| Net loss | $4.66 million, versus $12.51 million | $23.82 million, versus $21.91 million |
| Net loss attributable to common shareholders | $5.66 million, or $0.10 per share, versus $13.07 million, or $0.24 per share | $25.82 million, or $0.44 per share, versus $22.57 million, or $0.43 per share |
- First-half operating loss included an $18.18 million noncash impairment charge: $13.90 million of goodwill and $4.29 million for the cbdMD trademark. The company also changed the cbdMD and HempMD trademarks from indefinite-lived to 20-year useful lives and began amortizing them in January 2022.
- Cash used in operating activities was $10.67 million in the first half, compared with $5.15 million in the prior-year period. Investing activities used $0.37 million and financing activities used $2.03 million, including $2.00 million of preferred dividends. Cash declined from $26.41 million at September 30, 2021 to $13.34 million at March 31, 2022.
- At March 31, 2022, working capital was $18.54 million; current assets were $24.33 million and current liabilities $5.79 million. Total liabilities were $12.96 million. Debt was limited: the balance sheet reports a $61,000 current note payable and $77,732 of long-term liabilities; operating lease liabilities totaled $5.41 million.
- Five million 8% Series A preferred shares were outstanding. The company paid $2.00 million in preferred dividends in the first half. Common shares outstanding increased to 59.35 million from 57.78 million at September 30, 2021.
Material changes and management commentary
- Quarterly sales fell in both channels: e-commerce was $6.58 million versus $8.36 million, and wholesale was $3.05 million versus $3.44 million. Management cited competitive CBD-industry conditions and inflation’s effect on discretionary spending. It reported 3% sequential revenue growth, led by wholesale.
- First-half gross margin contracted to 60.3% from 70.7%. Management attributed the decline to lower operating leverage, product mix and a $878,142 inventory charge related to eliminating slow-moving and aging SKUs.
- Management said it removed over $10 million of annualized costs through marketing reductions, payroll cuts and other expense controls, but only part of the savings was reflected in Q2. Marketing spend had reached an approximately $3.5 million quarterly run rate by March, which management expected to continue in Q3. The company reduced headcount by 26 positions during Q2 and expected further savings from a full quarter of reductions.
- In April 2022, the company sold substantially all manufacturing equipment and entered into a supply agreement with Steady State, an existing qualified supplier. The transaction was initially valued at approximately $1.8 million, including products to be supplied and a $1.4 million equity investment. Management anticipated improved gross margins from this and other cost actions; the filing provides no quantified margin or earnings forecast.
- The company reported NSF 455 cGMP certification and product certifications, added selected products to GNC stores, and said its UK and EU Novel Food submissions had been validated. These developments are not quantified as revenue guidance.
Outlook, risks and unusual items
- No formal revenue, profit or cash-flow guidance is provided. Management said it expects cost savings to appear more fully in Q3 and anticipates gross-margin improvement from SKU rationalization, logistics changes and outsourcing manufacturing.
- The company has a history of losses and operating cash outflows. Management said it had sufficient working capital, but had not achieved its goal of funding operations from operating cash flow. Continued cash burn and further deterioration in sales or margins are key liquidity considerations.
- Key stated risks include CBD regulation and interpretation by the FDA, DEA and state authorities; reliance on digital marketing channels and third-party suppliers/manufacturers; customer acquisition costs; COVID-19 effects; and implementation of its ERP system. Management also cited inflation and competitive conditions.
- Changes in the fair value of contingent earnout liabilities materially affect reported results without corresponding operating cash flow. The liability declined by $6.30 million in the first half, compared with a $17.37 million increase in the prior-year period. It stood at $2.82 million at March 31, 2022; changes are driven in part by the company’s stock price and remain subject to remeasurement.
- The company disclosed $12.62 million of cash balances above FDIC-insured limits. It reported no legal proceedings, no defaults upon senior securities and no material changes in internal control over financial reporting; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether sales declines stabilize, particularly in e-commerce, and whether sequential growth continues.
- Whether promised cost reductions and manufacturing outsourcing produce sustained gross-margin improvement and reduce operating cash burn.
- The assumptions and valuation impact behind the $18.18 million impairment, and whether further impairment is possible.
- Cash runway, working-capital sufficiency and the effect of preferred dividends, leases and future operating losses.
- Regulatory progress for CBD products in the United States, UK, EU and international markets, and any resulting commercial impact.
- The economics, accounting treatment and execution of the Steady State equipment sale, supply arrangement and equity investment.