CBDMD, INC. The following discussion of our financial condition and results of operations
for the three and six months ended
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 our 2021 10-K, this report, and our other filings with the
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Our Company
General
We own and operate the nationally recognized CBD (cannabidiol) brands cbdMD, Paw
CBD and cbdMD Botanicals. We believe that we are an industry leader 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 in
Our cbdMD brand of products includes over 130 SKUs of high-grade, premium CBD products, including CBD tinctures, CBD gummies, CBD topicals, CBD capsules, CBD bath bombs, CBD bath salts, and CBD sleep aids.
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Our Paw CBD brand of products includes over 45 SKUs of veterinarian-formulated
products including tinctures, chews, topicals products in varying strengths and
formulas. Paw CBD products have undergone the
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Our cbdMD Botanicals brand of beauty and skincare products features 15 SKUs, including facial oil and serum, toners, moisturizers, clear skin, facial masks, exfoliants and body care. cbdMD Botanicals is dedicated to creating clean CBD skin care products combining the best of Mother Nature with the precision of scientific innovation. All of our products are 100% cruelty-free and have no parabens, sulfates, or gluten - just pure botanical ingredients carefully crafted into gentle beauty products for all skin types.
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cbdMD, Paw CBD and cbdMD Botanicals products are distributed through our e-commerce websites, third party ecommerce sites, select distributors and marketing partners as well as a variety of brick-and-mortar retailers. In addition, we operate directcbdonline.com marketplace through its own ecommerce website.
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Recent Developments
During the first quarter of 2022 we eliminated a number of product lines and SKUs as we work to streamline line our offering to higher velocity products and eliminate slow moving and aging SKUs.
During
During the second quarter of 2022 we have taken steps to right size our cost
structure to our current revenue base and worked to remove over
During
Growth Strategies
We continued to pursue many strategies to grow our revenues and expand the scope of our business in fiscal 2022 and beyond:
· Product Innovation: Our goal is to provide our customers superior
functional based products with greater efficacy, absorption and claims. We
regularly assess and evaluate our product portfolio, and devote resources
to ongoing research and development processes with the goal of expanding
our product offerings to meet these expanding consumer demands. We have a
robust pipeline of products set to launch during fiscal 2022. In December
we launched our new line of Botanical skincare products as well as water
soluble CBD. In February 2022 we launched our line of functional gummies
and curcumin capsules, followed by an initial rollout of several full
spectrum gummies starting in March 2022 and a microdose product in April
2022 , and our mood and focus products in May 2022 .
· Expand our revenue channels: As the market continues to evolve, we are
expanding our sales channels. During fiscal 2020, our wholesale business
was impacted as the broader retail industry faced various headwinds tied
to quarantining and COVID impacts. Despite this, we continued to pursue
relationships with a number of key traditional retail accounts and believe
our top brand awareness, effective marketing and strong balance sheet
position us as the partner for CBD for key traditional retail accounts as
this channel has continued to normalize during the fiscal year 2021 and
the first part of fiscal year 2022. During the recent quarter we added a
number of our top selling ingestible SKUs throughout GNC's retail
footprint.
· International Expansion: We continue to explore sales into markets outside
of the United States . Our products are currently available in 31
countries. We generally partner with local wholesalers and local legal
counsel who can help navigate the laws and regulatory requirements within
their jurisdiction. We continue to pursue key wholesale accounts in a
number of international markets and are gaining market share in Central
America through our sanitary registration approvals. We are also expanding
our E-commerce business to consumers in the United Kingdom (U.K. ). In
March 2021 , we officially filed our Novel Food Application with the United
Kingdom's Food Standards Agency ("FSA") and the European Union's ("E.U.")
Food Safety Agency ("EFSA"). In March 2022 , we received notice that the
products we submitted have been validated in the UK as well as in the EU.
based warehouse. During August 2021 we signed an exclusive agreement to
enter the Israeli Market with IM Cannabis Corp. a multi-country operator
("MCO") in the medical and adult- use recreational cannabis sector with
operations in Israel , Germany and Canada . In March 2022 , the Israeli
Health Ministry announced it has begun the process of exempting CBD from
its banned substances list and will be permitting CBD to be included into
food and cosmetic products.
· Expand our Additional Brands: During fiscal 2021 we took additional steps
to grow the Paw CBD business which included advertising on TV, introducing
our Paw CBD rewards program and introducing a Paw CBD subscription program
which offers additional savings to customers that enroll in the service.
During 2021 we launched cbdMD Botanicals as a separate brand and continue
to build out the product portfolio and distribution channels.
· Expand our sponsorships toward targeted segments: We have had significant
success with attracting high profile sponsors and influencers and expect
to continue to assess the segments we have covered with a focus on
activation of the sponsorships and influencers which are producing the
largest visibility and responsiveness. We recently added 7-time NASCAR
champion Jimmy Johnson to Team cbdMD and believe we will benefit from the
additional exposure he provides to our company.
· Acquisitions: We seek to acquire brands that we believe we can optimize
through our internal digital marketing agency and supply chain platform
while we broaden our product assortment and increase our total addressable
market. Our scalable supply chain and fulfillment operation allows our
brands to deliver an exceptional end-to-end experience to our customers in
a cost-effective manner. We may acquire brands directly or through joint
ventures if opportunities arise that we believe are in our best interest.
In assessing potential acquisitions or investments, we expect to primarily
utilize our internal resources to evaluate growth potential, the strength
of the target brand, offerings of the target, as well as possible
efficiencies to gain. We believe that this approach will allow us to
effectively screen consumer brand candidates and strategically evaluate
acquisition targets and efficiently complete due diligence for potential
acquisitions. In July 2021 , we acquired directcbdonline.com and related
intellectual property. We are currently not a party to any additional
agreements or understandings regarding the acquisition of additional
brands or companies and there are no assurances we will be successful in
expanding our brand portfolio.
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Results of operations
The following tables provide certain selected consolidated financial information
for the periods presented:
Three Months Ended March 31,
2022 2021 Change
Total net sales $ 9,628,886 $ 11,798,611 $ (2,169,725 )
Cost of sales 3,186,564 3,643,127 (456,563 )
Gross profit as a percentage of net
sales 66.9 % 69.1 % -2.2 %
Operating expenses 11,452,700 12,323,207 (870,507 )
Impairment of goodwill and other
intangible assets - - -
Operating income from operations (5,010,378 ) (4,167,723 ) (842,655 )
(Increase) decrease on contingent
liability 353,000 (8,871,000 ) 9,224,000
Net income (loss) before taxes (4,657,215 ) (13,046,474 ) 8,389,259
Net income (loss) attributable to cbdMD
Inc. common shareholders $ (5,657,715 ) $ (13,070,754 ) $ 7,413,039
Six Months Ended March 31,
2022 2021 Change
Total net sales $ 18,950,708 $ 24,126,914 $ (5,176,206 )
Cost of sales 7,514,874 7,073,402 441,472
Gross profit as a percentage of net
sales 60.3 % 70.7 % -10.3 %
Operating expenses 23,407,984 22,981,180 426,804
Impairment of goodwill and other
intangible assets 18,183,285 - 18,183,285
Operating income from operations (30,155,435 ) (5,927,668 ) (24,227,767 )
(Increase) decrease on contingent
liability 6,303,000 (17,371,000 ) 23,674,000
Net income (loss) before taxes (23,818,120 ) (22,774,096 ) (1,044,024 )
Net income (loss) attributable to
cbdMD Inc. common shareholders $ (25,819,122 ) $ (22,566,426 ) $ (3,252,696 ) 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.
Three Months Three Months
Ended March Ended March
31,2022 % of total 31,2021 % of total
Wholesale sales $ 3,048,332 31.7 % $ 3,436,176 29.1 %
E-commerce sales 6,580,554 68.3 % 8,362,435 70.9 %
Total Net Sales $ 9,628,886 $ 11,798,611
Six Months Six Months
Ended March Ended March
31,2022 % of total 31,2021 % of total
Wholesale sales $ 5,254,067 27.7 % $ 6,063,356 25.1 %
E-commerce sales 13,696,641 72.3 % 18,063,558 74.9 %
Total Net Sales $ 18,950,708 $ 24,126,914
Net Sales
We had total net sales of
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We had total net sales of
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. Our cost of sales as a percentage of net sales was 33.1%
and 30.9% for three months ended
At the end of the first quarter of fiscal 2022, we eliminated a number of product lines including a number of slow moving and aging SKUs in an effort to streamline our business and simplify our product offerings, build scale in our SKUs, and reduce our obsolescence and expiration risk which resulted in inventory adjustments in past quarters. We made additional changes to our logistics program during the quarter and began seeing marked savings at the end of the quarter. In addition, as noted in the subsequent events, at the beginning of the third quart of fiscal 2022 we executed a transaction to sell our manufacturing equipment and enter into a supply agreement for certain products. This transaction was designed to free up assets, and also eliminate marked unabsorbed overhead that burdened our gross profit. We anticipate a gross margin gain in subsequent quarters as a result of all of these actions taken.
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.
Consolidated Operating Expenses
The following tables provide information on our operating expenses for the three
and six months ended
Three Months Three Months
Ended March Ended March
31,2022 31,2021 Change
Staff related expense $ 3,483,884 $ 3,916,730 $ (432,846 )
Accounting/Legal expense 241,533 330,854 (89,321 )
Professional outside services 146,177 287,411 (141,234 )
Advertising/marketing/social
media/events/tradeshows 4,236,246 4,044,812 191,434 Sponsorships 393,750 595,372 (201,622 ) Affiliate commissions 321,187 417,382 (96,195 ) Merchant Fees 242,130 492,093 (249,963 ) R&D and regulatory 151,095 82,025 69,070 Non-cash stock compensation 655,245 825,833 (170,588 ) Intangibles Amortization 277,354 - 277,354 Depreciation 508,299 240,517 267,782 All other expenses 795,800 1,090,178 (294,378 ) Totals$ 11,452,700 $ 12,323,207 $ (870,507 ) 32 Table of Contents Six Months Six Months Ended March Ended March 31,2022 31,2021 Change Staff related expense$ 7,244,173 $ 7,620,385 $ (376,212 ) Accounting/Legal expense 565,709 535,563 30,146 Professional outside services 410,888 594,625 (183,737 )
Advertising/marketing/social
media/events/tradeshows 8,424,010 7,032,907 1,391,103 Sponsorships 785,683 1,109,429 (323,746 ) Affiliate commissions 566,533 872,076 (305,543 ) Merchant Fees 495,371 1,121,137 (625,766 ) R&D and regulatory 436,518 385,731 50,787 Non-cash stock compensation 1,789,802 1,090,007 699,795 Intangibles Amortization 329,671 - 329,671 Depreciation 816,842 473,323 343,519 All other expenses 1,542,785 2,145,997 (603,212 ) Totals$ 23,407,984 $ 22,981,180 $ 426,804
Our overall operating expenses decreased by
Excluding non-cash depreciation, intangible amortization, and non-cash stock
expenses, we reduced our adjusted operating expenses from
While our goal is to continue to improve year over year performance, we are also
very much focused on improving the sequential performance and cash flow of the
business. With our new marketing leadership, we have made changes to reduce
marketing and sponsorship spend, drive better return on investment, and increase
traffic to our site. Although significant changes have occurred, we were unable
to realize the benefits as quickly as desired during the second quarter;
however, by
Corporate overhead
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.
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The following tables provide information on our approximate corporate overhead
for the three and six months ended
Three Months Three Months
Ended March Ended March
31,2022 31,2021 Change
Staff related expense $ 332,688 $ 302,225 $ 30,463
Accounting/Legal expense 176,706 255,074 (78,368 )
Professional outside services 84,549 104,834 (20,285 )
Travel expense 1,407 2 1,405
Business insurance 190,584 149,275 41,309
Non-cash stock compensation 655,245 825,833 (170,588 )
Totals $ 1,441,179 $ 1,637,243 $ (196,064 )
Six Months Six Months
Ended March Ended March
31,2022 31,2021 Change
Staff related expense $ 628,573 $ 850,395 $ (221,822 )
Accounting/Legal expense 383,300 465,740 (82,440 )
Professional outside services 162,700 171,685 (8,985 )
Travel expense 1,407 2 1,405
Business insurance 363,356 269,866 93,490
Non-cash stock compensation 1,789,802 1,090,007 699,795
Totals $ 3,329,139 $ 2,847,695 $ 481,444 Excluding non-cash stock compensation we were able to reduce our corporate
related expenses for the three and six months ended
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 including staff related expenses and R&D and regulatory expenses. The Therapeutic operating expenses include research and development activities for therapeutic applications.
The following tables provide information on our approximate corporate overhead
for the three and six months ended
Three Months Three Months
Ended March Ended March
31,2022 31,2021 Change
Staff related expense $ 91,207 $ - $ 91,207
R&D and Regulatory 102,685 - 102,685
Totals $ 193,892 $ - $ 193,892
Six Months Six Months
Ended March Ended March
31,2022 31,2021 Change
Staff related expense $ 171,441 $ - $ 171,441
R&D and Regulatory 370,215 - 370,215
Totals $ 541,656 $ - $ 541,656 The Therapeutic operating expenses include research and development activities for therapeutic applications. This division was formed during the third quarter of fiscal 2021 and therefore no prior year comparative results exist.
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.
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Realized and unrealized gain (loss) on marketable and other securities
We value investments in marketable securities at fair value and record a gain or
loss upon sale at each period in realized and unrealized gain (loss) on
marketable securities. For the three months ended
Increase 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. The value of the non-cash contingent
liability was
As described in Note 6 to the notes to the consolidated financial statements
appearing elsewhere in the report, the earn-out provision for the Twenty Two
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. The value of the non-cash
contingent liability was
Liquidity and Capital Resources
We had cash and cash equivalents on hand of
During the three and six 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 through
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
Earnout Shares
As described in Note 6 to the unaudited condensed consolidated financial
statements appearing earlier in this report, on
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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.
Please see Part II, Item 7 - Critical Accounting Policies appearing in our 2021 10-K for the critical accounting policies we believe 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.
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 have no undisclosed 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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