CBDMD, INC. The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements because of several factors, including those set forth under the Part I, Item 1A, Risk Factors and Business sections in this report, and our other filings with theSecurities and Exchange Commission . We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report.
Overview
We own and operate the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and cbdMD Botanicals. We believe that we are an industry leader in producing and distributing broad spectrum CBD products and now full spectrum CBD products. Our mission is to enhance our customer's overall quality of life while bringing CBD education, awareness and accessibility of high quality and effective products to all. We source cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms inthe United States . Our innovative broad spectrum formula utilizes one of the purest hemp extracts, containing CBD, CBG and CBN, while eliminating the presence of tetrahydrocannabinol (THC). Non-THC is defined as below the level of detection using validated scientific analytical methods. Our full spectrum products contain a variety of cannabinoids and terpenes in addition to CBD while maintaining trace amounts of THC that falls within the limits set in the 2018 Farm Bill. In addition to our core brands, we also operate cbdMDTherapeutics, LLC to capture the Company's ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications During 2022 we continued to focus on our core cbdMD brand, expanding our full spectrum products, as well as our Paw CBD and cbdMD Botanicals lines. Fiscal 2022 proved to be more challenging for the Company and industry as a whole as inflation reached 30 year records. Management worked hard to rationalize its SKUs and cost structure during fiscal 2022 and while we have successfully achieved 6 sequential quarters of Non-GAAP Adjusted Operating Income improvement, our revenues were negatively impacted as we tightened our marketing spend and consumers were impacted by inflation trends. Operationally we continued to optimize our product portfolio and invested in ongoing quality certification, adding the NSF certification to certain products and became the first CBD company to commercialize NSF for Sport product in our category. Additionally, we launched a line of hemp-derived delta 9 products as well as new line of high strength CBD products supported by our human clinical at the end of the year and we believe are well positioned to take market share during fiscal 2023. Results of operations
The following tables provide certain selected consolidated financial information
for the fiscal years ended
Fiscal Fiscal
2022 2021 Change
Total net sales$ 35,403,224 $ 44,480,763 $ (9,077,539 ) Cost of sales 13,066,639 14,495,063 (1,428,424 ) Gross profit as a percentage of net sales 63.1 % 67.4 % (4.3 )% Operating expenses 39,647,130 49,601,690 (9,954,560 ) Impairment of goodwill and other intangible assets 60,955,970 - 60,955,970 Operating loss from operations (78,266,515 ) (19,615,990 ) (58,650,525 ) (Increase) decrease on contingent liability 8,473,999 (6,687,439 ) 15,161,438 Net loss before taxes (70,083,693 ) (24,289,889 ) (45,793,804 ) Net loss attributable to cbdMD Inc. common shareholders$ (74,085,698 ) $ (25,949,498 ) $ (48,136,200 ) 2
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The following tables provide certain selected unaudited consolidated financial
information for the three months ended
September September
2022 2021 Change
Total net sales $ 7,859,625 $ 9,793,327 $ (1,933,702 )
Cost of sales 2,844,744 4,050,710 (1,205,966 )
Gross profit as a percentage of net sales 63.8 % 58.6 % 5.2 %
Operating expenses 7,913,256 12,755,319 (4,843,063 )
Impairment of goodwill and other intangible
assets 11,996,249 - 11,996,249
Operating income from operations (14,894,624 ) (7,012,702 ) (7,881.922 )
(Increase) decrease on contingent liability 228,000 3,740,000 (3,512,000 )
Net loss before taxes (14,631,432 ) (3,156,081 ) (11,475,351 )
Net loss attributable to cbdMD Inc. common
shareholders $ (15,631,932 ) $ (4,360,080 ) $ (11,271,852 )
Sales
We record product sales primarily through two main delivery channels, direct to
consumers via our E-commerce sales and direct to wholesalers utilizing our
internal sales team. The following table provides information on the
contribution of net sales by type of sale to our total net sales for the fiscal
years ended September 30, 2022 and 2021.
Fiscal 2022 % of total Fiscal 2021 % of total
E-commerce sales $ 26,435,203 74.7 % $ 32,907,956 74.0 %
Wholesale sales 8,968,021 25.3 % 11,572,807 26.0 %
Total Net Sales $ 35,403,224 $ 44,480,763 In addition, the following table provides information on the contribution of net
sales by type of sale to our total net sales for the three months ended
September 30, September 30,
2022 % of total 2021 % of total
E-commerce sales $ 6,274,482 $ 79.8 % 7,269,588 74.2 %
Wholesale sales 1,585,143 20.2 % 2,523,739 25.8 %
Total Net Sales $ 7,859,625 $ 9,793,327
Total net sales during the fiscal year ended September 30, 2022 decreased by
approximately $9 million , or 20% as compared to fiscal year ended September 30,
2021 . Wholesale sales decreased by approximately $2.6 million , or 22.5% year
over year while E-commerce sales decreased by $6.4 million or 19.7%. The change
in revenue was driven by a combination of broader CBD category softness which we
believe is partially attributed to the macro inflationary environment in
addition to management reducing unprofitable marketing expenses that resulted in
an increase in net contribution, in addition to some stock outages later in the
year. Net sales for the fourth quarter declined 20% year over year. During the
quarter management worked to sell through a number of SKUs prior to the launch
of our high strength products which resulted in lower average price and some out
of stocking of key wholesale products.
Of our total net sales as indicated above, during the fiscal years ended
September 30, 2022 and 2021 our Paw CBD line accounted for net sales of
$3,748,779 and $5,659,796 , respectively. The year over year decline in our Paw
CBD brand is due to increasing competition and a rationalization in marketing
efforts specific to the brand.
Cost of sales
Our cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, third-party providers, and freight for our product sales, and includes labor for our service sales. Our cost of sales as a percentage of net sales was 36.1% and 32.6% for fiscal years endedSeptember 30, 2022 and 2021, respectively. While we made significant strides to reduce our overall fixed overhead cost associated with our cost of goods sold during fiscal 2022, gross margins for the year were impacted by (i) a large inventory NRV adjustment during theDecember 2021 quarter as we rationalized SKUs, (ii) lower overhead absorption based on lower revenue and (iii) additional discounting during the fourth fiscal quarter as we worked to sell out of certain SKUs prior to a reset of our products. For the fourth quarter of fiscal 2022 our cost of sales as a percentage of net sales was 36% as compared to 41% in the prior year comparative period. The change reflects the increasing revenue percentage of E-commerce sales, driving purchasing and manufacturing efficiencies, tighter inventory management, changes in the cost of raw materials, evaluating key vendors, negotiating pricing, as well as additional product offerings which continue to impact our cost of production. 3 --------------------------------------------------------------------------------
Operating expenses
Our principal operating expenses include staff related expenses, advertising (which includes expenses related to industry distribution and trade shows), sponsorships, affiliate commissions, merchant fees, technology, travel, rent, professional service fees, and business insurance expenses. Our operating expenses on a consolidated basis decreased approximately$10 million or 20% for the fiscal year endedSeptember 30, 2022 versus the fiscal year endedSeptember 30, 2021 . The decrease can be attributed to management's efforts to rationalize and right size our expenses across all areas of our business. This was partially offset by a$0.8 million non-cash expense as we began amortizing intangibles.
Consolidated Operating Expenses
The following tables provide information on our approximate operating expenses
for the fiscal years ended
Fiscal Fiscal
2022 2021 Change
Staff related expense $ 12,819,447 $ 16,219,863 $ (3,400,416 )
Accounting/Legal expense 1,045,836 1,189,703 (143,867 )
Professional outside services 816,584 1,206,929 (390,345 )
Advertising/marketing/social
media/events/tradeshows 14,332,235 15,835,139 (1,502,904 )
Sponsorships 1,031,516 2,067,534 (1,036,018 )
Affiliate commissions 1,111,795 1,738,103 (626,308 )
Merchant Fees 1,007,025 1,965,176 (958,151 )
R&D and regulatory 633,392 1,422,791 (789,399 )
Non-cash stock compensation 1,124,130 3,149,689 (2,025,559 )
Intangibles amortization 884,380 - 884,380
Depreciation 948,946 1,017,409 (68,463 )
All other expenses 3,803,075 3,789,355 13,720
Totals $ 39,558,361 $ 49,601,690 $ (10,043,329 ) Corporate overhead and allocation of management fees to our segments
Included in our consolidated operating expenses are expenses associated with our corporate overhead which are not allocated to the operating business unit, including (i) staff related expenses; (ii) accounting and legal expenses; (iii) professional outside services; (iv) travel and entertainment expenses; (v) rent; (vi) business insurance; and (vii) non-cash stock compensation expense.
The following tables provide information on our approximate corporate overhead
for the fiscal years ended
Fiscal Fiscal
2022 2021 Change
Staff related expense $ 1,066,428 $ 1,725,535 $ (659,107 )
Accounting/Legal expense 728,250 866,876 (138,626 )
Professional outside services 330,633 333,666 (3,033 )
Travel expense 3,932 7,381 (3,449 )
Business insurance 703,107 607,288 95,819
Non-cash stock compensation 1,124,130 3,161,805 (2,037,675 )
Totals $ 3,956,480 $ 6,702,551 $ (2,746,071 )
The 41% decrease in corporate related expenses for the fiscal year ended
September 30, 2022 over prior year is primarily due to the decreases in non-cash
stock compensation to employees and directors tied to fewer shares issued under
our equity incentive plans and at lower prices per share and, decreases in
staffing related expenses as well as legal and accounting costs.
The corporate operating expenses are primarily related to the ongoing public company related activities.
Therapeutics Overhead
Included in our consolidated operating expenses are expenses associated with
Therapeutics which are not allocated to the operating business unit, including
staff related expenses and R&D and regulatory expenses. The Therapeutic
operating expenses include research and development activities for therapeutic
applications.
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The following tables provide information on our approximate corporate overhead
for the fiscal years ended September 30, 2022 . Therapeutics was formed March 15,
2021 .
Fiscal Fiscal
2022 2021 Change
Staff related expense
$ 907,200 $ 835,937 $ 74,382
Other income and other non-operating expenses
We also record income and expenses associated with non-operating items. The material components of those are set forth below.
Decrease in contingent liability
As described in Note 6 to the notes to the consolidated financial statements appearing elsewhere in this report, the earn-out provision for the Earnout Shares is accounted for and recorded as a contingent liability with increases in the liability recorded as non-cash other expense and decreases in the liability recorded as non-cash other income. For the three months endedSeptember 30, 2022 , the remaining contingent liabilities associated with the business combination, after the issuance of the second quarter fourth marking period Earnout Shares, were decreased by$3,512,558 to reflect their reassessed fair values as ofSeptember 30, 2022 . This decrease is reflective of a change in value of the variable number of shares fromJune 30, 2021 . In aggregate, we recorded income of$3,740,000 for the three months endedSeptember 30, 2022 between the decrease in the value of the fourth marking period Earnout Shares and the decrease in value of the remaining contingent liabilities. InMay 2020 , and subsequently inJune 2021 , we updated the forecasts for performance of the post-acquisition entity based on current trends and performance that would impact the estimated likelihood that the revenue targets disclosed in Note 6 of our financial statements would be met. The primary catalyst for the$4,660,000 decrease in contingent liabilities is the change in our common stock share price betweenJune 30, 2022 toSeptember 30, 2022 from$0.44 per share to$0.223 per share. We expect to continue to record changes in the non-cash contingent liability through the balance of the earnout period. In addition, as ofSeptember 30, 2022 the measuring period for the Twenty Two Earnout Shares is over, the threshold was not met and there is no longer any value ascribed to this on our balance sheet.
Liquidity and Capital Resources
We had cash and cash equivalents on hand of$6.7 million and working capital of$10.7 million atSeptember 30, 2022 as compared to cash and cash equivalents on hand of$26.4 million and working capital of$29.6 million atSeptember 30, 2021 . Our current assets decreased approximately 56% atSeptember 30, 2022 fromSeptember 30, 2021 , which is primarily attributable to an cash used by operations. Our current liabilities decreased approximately 24% atSeptember 30, 2022 fromSeptember 30, 2021 . This decrease is primarily attributable to a decrease in accounts payable and accrued expenses.
During the three and twelve months ended
We do not have any commitments for capital expenditures. We have a commitment for cumulative cash dividends at an annual rate of 8% payable monthly in arrears for the prior month to our preferred shareholders. We have multiple endorsement or sponsorship agreements for varying time periods up throughDecember 2024 and provide for financial commitments from the Company based on performance/participation (see Note 11 Commitments and Contingencies). While the Company is taking strong action and believes that it can execute its strategy and path to profitability within its balance sheet, and in its ability to raise additional funds, there can be no assurances to that effect. The Company's working capital position may not be sufficient to support the Company's daily operations for the twelve months subsequent to the issuance this report. The Company's ability to continue as a going concern is dependent upon its ability to improve profitability and cash flow and the ability to acquire additional funding. These and other factors raise potential concern about the Company's ability to continue as a going concern within twelve months after the date that our annual financial statements are issued. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result in the Company not being able to continue as a going concern. 5 -------------------------------------------------------------------------------- Our goal from a liquidity perspective is to use operating cash flows to fund day to day operations and we have not met this goal as cash flow from operations has been a net use of$2.8 and$3.7 million for the three months endedSeptember 30, 2022 and 2021, respectively$19.6 and$16.8 million for the twelve months endedSeptember 30, 2022 and 2021, respectively.
Non-GAAP Adjusted Operating Income
The non-GAAP Adjusted Income for the three and twelve months ended
Three Months Year Ended
September 30, September 30, September 30, September 30,
2022 2021 2022 2021
(Unaudited)
GAAP (loss) from operations $ (14,894,624 ) $
(7,012,702 )
455,965 297,552 1,833,326 1,017,408
Employee and director stock compensation
(1) 272,613 1,100,362 1,124,130 3,149,688
Other non-cash stock compensation for
services (2) - - - 97,721
Inventory adjustment(3) - 671,669 878,142 671,669
Impairment of Goodwill and other
intangible assets (4) 11,996,249 - 60,955,970 -
Accrual for severance (5) - - 129,761 703,022
Accrual / expenses for discretionary
bonus - 150,000 150,000 300,000
Non-GAAP adjusted (loss) from operations
(1) Represents non-cash expense related to options, warrants, restricted stock expenses that have been amortized during the period. (2) Represents non-cash expense related to options, warrants, restricted stock expenses that have been amortized during the period.
(3) Represents an operating expense related to inventory loss related to regulatory changes impacting labels and packaging and obsolete/expired inventory.
(4) Represents non-cash impairment of the cbdMD trademark of$4,285,000 during the first quarter of fiscal 2022 and$56,670,970 of goodwill impairment during the fiscal year ended 2022.
(5) Represents one-time severance costs incurred as Company made rationalized a number of positions.
Earnout Shares As described in Note 6 in notes to our consolidated financial statements appearing elsewhere in this report, onMarch 31, 2021 we entered into Addendum No. 1 to the Merger Agreement with the holders of the remaining Earnout Rights which amended the measurement periods within the third marking period to change the determination of the aggregate net revenues within the third marking period to a quarterly basis for each of the six fiscal quarters within the third marking period, beginning with the quarter endedMarch 31, 2021 , instead of the initial 18 month period. While this change in the measurement date has no effect on the number of remaining Earnout Shares issuable under the Earnout Rights, nor the revenue targets, it will result in the issuance of the Earnout Shares associated with the third marketing period (assuming the revenue targets are met under the terms of the Merger Agreement) on a quarterly basis instead of at the end of the 18 month period. Because the Earnout Shares are earned based on the Company's earned revenue and by issuing these shares quarterly, as compared to at the end of the eight quarters, we expect that this change has the potential to reduce the volatile impact of the contingent liability on our Net Income results and consequentially its non-cash impact to our financial statements with each subsequent quarter. The Company is currently in the fourth marking period which runs throughNovember 2023 .
Critical accounting policies
The preparation of financial statements and related disclosures in conformity
with US GAAP and our discussion and analysis of our financial condition and
operating results require our management to make judgments, assumptions and
estimates that affect the amounts reported in our consolidated financial
statements and accompanying notes. Note 1, "Organization and Summary of
Significant Accounting Policies," of the Notes to our consolidated financial
statements appearing elsewhere in this report describes the significant
accounting policies and methods used in the preparation of our consolidated
financial statements. Management bases its estimates on historical experience
and on various other assumptions it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities. Actual results may differ from
these estimates, and such differences may be material.
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We believe that the following critical accounting policies involve the more
significant judgments and estimates used in the preparation of our consolidated
financial statements and are the most critical to aid you in fully understanding
and evaluating our reported financial results. Management considers these
policies critical because they are both important to the portrayal of our
financial condition and operating results, and they require management to make
judgments and estimates about inherently uncertain matters.
Contingent liability
A significant component of the purchase price consideration for our acquisition ofCure Based Development includes a fixed number of future shares to be issued as well as a variable number of future shares to be issued based upon the post-acquisition entity reaching certain specified future revenue targets, as further described in Note 6. We made a determination of the fair value of the contingent liabilities as part of the valuation of the assets acquired and liabilities assumed in the business combination. We recognize both the fixed number of shares to be issued, and the variable number of shares to be potentially issued, as contingent liabilities on our Consolidated Balance Sheets. These contingent liabilities were recorded at fair value upon the acquisition date and are remeasured quarterly based on the reassessed fair value as of the end of that quarterly reporting period. Additionally, as the fixed shares are issued, the value of the shares at that time are reclassified from contingent liability to additional paid in capital on the balance sheet. Leases EffectiveOctober 1, 2019 , we have adopted Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASU 2016-02") which provides guidance requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases. We determine whether an arrangement is a lease at inception and classify it as finance or operating. All of our leases are classified as operating leases. Our leases do not contain any residual value guarantees. Our current lease activities are recorded in operating lease right-of-use ("ROU") assets, operating lease short term liabilities and operating lease long term liabilities in the consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Variable lease payments are not included in the calculation of the right-of-use assets and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. As a lessee, we elected a short-term lease exception policy on all classes of underlying assets, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less).
Inventory
Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. The cost of inventory includes product cost, freight-in, and production fill and labor (portions of which we outsource to third party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management's analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. We assess inventory quarterly for slow moving products and potential impairments and at a minimum perform a physical inventory count annually near fiscal year end.
Recent accounting pronouncements
Please see Note 1 - Organization and Summary of Significant Accounting Policies appearing in the consolidated financial statements included in this report for information on accounting pronouncements.
Off balance sheet arrangements
As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
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