CBDMD, INC. The following discussion of our financial condition and results of operations for the three and nine months endedJune 30, 2022 and the three and nine months endedJune 30, 2021 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 our 2021 10-K, 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. [[Image Removed: ycbd_10qimg1.jpg]] 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 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 Our cbdMD brand of products includes high-grade, premium CBD products, including CBD tinctures, CBD gummies, CBD topicals, CBD capsules, CBD bath bombs, and CBD sleep aids. [[Image Removed: productlineup062022copy425.jpg]] Our Paw CBD brand of products includes veterinarian-formulated products including tinctures, chews, topicals products in varying strengths and formulas. Paw CBD products have undergone theNational Animal Safety Council's rigorous audit and meet their Quality Seal standard. [[Image Removed: ycbd_10qimg3.jpg]] 29
--------------------------------------------------------------------------------
Table of Contents
Our cbdMD Botanicals brand of beauty and skincare products features 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.
[[Image Removed: ycbd_10qimg4.jpg]]
cbdMD, Paw CBD and cbdMD Botanicals products are distributed through our e-commerce websites, third party e-commerce sites, select distributors and marketing partners as well as a variety of brick-and-mortar retailers. In addition, we operate a CBD marketplace through directcbdonline.com, our own e-commerce website.
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. DuringJanuary 2022 we completed a renewal of our NSF cGMP quality certification and are now NSF 455 cGMP certified. Additionally, we earned the prestigious NSF product certification for our soft gel products and received the NSF certified for Sport for our 500mg and 1000mg sleep softgels and 1500mg and 3000mg soft gels. During the second quarter of 2022 we took steps to right size our cost structure to our current revenue base and worked to remove over$10 million of annualized costs. We achieved this through a combination of reductions in payroll, renegotiating freight rates, rationalizing marketing expenses, reducing regulatory spend, exited our lab and overall tightening of all expenditures. We started enacting these steps during the second quarter resulting in sequential reductions in operating costs in both the second and third quarters of 2022. W e expect continued roll off of expenses during the fourth quarter from the full quarter benefit of adjustments made during the third quarter coupled with additional rationalization we are working on.
During
During
The Company's management mandate is to achieve profitability and increase revenue by the end of the calendar year. Significant headway was made on cost controls over the last two quarter and we believe additional opportunities to improve our cost structure exist: we are working to lower our facility costs, we are taking further opportunities to improve freight rates, and we continue to reassess our marketing costs and make improvements to our product portfolio. In addition to these efforts, the Company continues to invest in a strong pipeline of accretive revenue opportunities. 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
line of functional gummies and curcumin capsules, followed by an initial
rollout of several full spectrum gummies starting in
Farm Act compliant hemp extracted Delta 9 product assortment in
and our mood and focus products in
? Expand our revenue channels: We continued to pursue relationships with a
number of key traditional retail accounts and believe our top brand awareness,
and effective marketing position us as the CBD partner for key traditional
retail accounts as this channel has continued to normalize. During the second
quarter we added a number of our top selling ingestible SKUs throughout GNC's
retail footprint. We continue to have discussions with key retailers and have
expanded our sales organization to include deep channel-specific experience,
and expect to have additional announcement in calendar 2022.
? International Expansion: We continue to explore sales into markets outside of
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
registration approvals. We are also expanding our E-commerce business to
consumers in the
Novel Food Application with the
and the
we received notice that the products we submitted have been validated in the
exclusive agreement to enter the Israeli Market with IM Cannabis Corp. a
multi-country operator in the medical and adult- use recreational cannabis
sector with operations in
from its banned substances list and will be permitting CBD to be included into
food and cosmetic products. We anticipate additional international
announcements before the end of the calendar year.
? 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.
? Maintain 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 maintaining
key sponsorships and influencers which are producing the largest visibility
and responsiveness.
? Acquisitions: We seek to acquire (i) brands that we believe we can optimize
through our internal digital marketing agency and fulfillment platform to
increase our total addressable market or (ii) technology or intellectual
property that will further enhance our product portfolio and create product
differentiation. 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. We are currently not a
party to any 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.
30--------------------------------------------------------------------------------
Table of Contents
Results of operations
The following tables provide certain selected consolidated financial information
for the periods presented:
Three Months Ended June 30,
2022 2021 Change
Total net sales $ 8,592,893 $ 10,560,523 $ (1,967,630 )
Cost of sales 2,660,185 3,370,952 (710,767 )
Gross profit as a percentage of net sales 69.0 % 68.1 % 1.0 %
Operating expenses 8,282,931 13,865,191 (5,582,260 )
Impairment of goodwill and other intangible
assets 30,776,436 - 30,776,436
Operating income from operations (33,126,659 ) (6,675,620 ) (26,451,039 )
(Increase) decrease on contingent liability 1,943,000 6,871,000 (4,928,000 )
Net (loss) income before taxes (31,634,143 ) 1,640,288 (33,274,431 )
Net (loss) income attributable to cbdMD Inc.
common shareholders $ (32,634,644 ) $ 977,007 $ (33,611,651 )
Nine Months Ended June 30,
2022 2021 Change
Total net sales $ 27,543,601 $ 34,687,436 $ (7,143,835 )
Cost of sales 10,176,085 10,444,353 (268,268 )
Gross profit as a percentage of net sales 63.1 % 69.9 % -6.8 %
Operating expenses 31,690,915 36,846,371 (5,155,456 )
Impairment of goodwill and other intangible
assets 48,959,721 - 48,959,721
Operating income from operations (63,283,120 ) (12,603,288 ) (50,679,832 )
(Increase) decrease on contingent liability 8,246,000 (10,500,000 ) 18,746,000
Net loss before taxes (55,453,289 ) (21,133,808 ) (34,319,481 )
Net loss attributable to cbdMD Inc. common
shareholders $ (58,454,792 ) $ (21,589,418 ) $ (36,865,374 ) 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 Ended
June 30, June 30,
2022 % of total 2021 % of total
Wholesale sales $ 2,079,592 24.2 % $ 2,740,523 26.0 %
E-commerce sales 6,513,301 75.8 % 7,820,000 74.0 %
Total Net Sales $ 8,592,893 $ 10,560,523
Nine Months Nine Months
Ended Ended
June 30, June 30,
2022 % of total 2021 % of total
Wholesale sales $ 7,382,880 26.8 % $ 9,049,068 26.1 %
E-commerce sales 20,160,721 73.2 % 25,638,368 73.9 %
Total Net Sales $ 27,543,601 $ 34,687,436
Net Sales
We had total net sales of $8,592,893 and $10,560,523 for the three months ended
June 30, 2022 and 2021, respectively, resulting in a quarter over quarter
decrease in net sales of $1,967,631 or 18.6%. This decrease is attributable to a
decrease of $1.3 million in e-commerce sales and a decrease of $0.66 million in
wholesale sales quarter over quarter. While management is disappointed with the
year over year net sales decrease, the revenue is generally in line with macro
competitive trends in the overall CBD industry. Sequentially, the Company's
revenue declined 11%. Our Wholesale declined approximately $661,000 , in-part
related to revenue associated with a pipeline fill during the second quarter, as
well as additional orders on the books that were delayed at the end of the
quarter. We have successfully implemented a $1.0 million reduction in marketing
expenses, while e-commerce remained consistent with our previous calendar
quarter. We believe the current macro inflationary environment is impacting
discretionary spending with consumers as well as wholesale customers. We
continue to work on a pipeline of opportunities both domestically and
internationally and believe we will see revenue growth in the coming quarters.
31--------------------------------------------------------------------------------
Table of Contents
We had total net sales of$27,543,599 and$34,687,436 for the nine months endedJune 30, 2022 and 2021 respectively, resulting in a year over year decrease in net sales of$7.1 million , primarily attributable to a$1.7 million , or 20.4% reduction in wholesale sales and reduction in e-commerce sales of$5.5 million . We continue to invest in new channels and sales relationships and work to expand the life time value of our customers. 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 31.0% and 31.9% for three months endedJune 30, 2022 and 2021, respectively and 36.9% and 30.1% for the nine months endedJune 30, 2022 and 2021, respectively. Year over year, the reduction in our cost of sales for theJune 30, 2022 quarter is a result of operational gains from the elimination of overhead and lower freight costs that were partially offset by increase in unabsorbed overhead resulting from the$1.9 million drop in revenues. The decrease in our cost of sales for the nine months endedJune 30, 2022 over prior year is also the result of operational gains from the elimination of overhead and lower freight costs, partially offset by an increase in unabsorbed overhead resulting from the$7.4 million drop in revenues, as well as a one-time charge of$878,142 related to the rationalization of a number of SKUs and product lines during the first quarter of fiscal 2022.
The changes made during the last quarters have eliminated significant fixed overhead and were aimed at lowering overall costs and making our cost of sale more variable in nature we believe ultimately more predictable.
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 nine months ended
Three Months Three Months
Ended Ended
June 30, June 30,
2022 2021 Change
Staff related expense $ 2,874,938 $ 4,455,640 $ (1,580,702 )
Accounting/legal expense 262,307 237,357 24,950
Professional outside services 237,877 304,570 (66,693 )
Advertising/marketing/social media/events/tradeshows 3,415,575 4,796,929 (1,381,354 )
Sponsorships 227,084 520,208 (293,124 )
Affiliate commissions 287,026 482,026 (195,000 )
Merchant fees 255,956 496,963 (241,007 )
R&D and regulatory 113,751 674,874 (561,123 )
Non-cash stock compensation (938,285 ) 959,319 (1,897,604 )
Intangibles Amortization 277,354 - 277,354
Depreciation 158,556 246,533 (87,977 )
All other expenses 1,110,792 690,772 420,020
Totals $ 8,282,931 $ 13,865,191 $ (5,582,260 )
32--------------------------------------------------------------------------------
Table of Contents
Nine Months Nine Months
Ended Ended
June 30, June 30,
2022 2021 Change
Staff related expense $ 10,119,111 $ 12,076,025 $ (1,956,914 )
Accounting/legal expense 828,016 772,921 55,095
Professional outside services 648,764 899,195 (250,431 )
Advertising/marketing/social media/events/tradeshows 11,839,584 11,856,233 (16,649 )
Sponsorships 1,012,767 1,629,637 (616,870 )
Affiliate commissions 853,559 1,354,102 (500,543 )
Merchant fees 751,328 1,618,100 (866,772 )
R&D and regulatory 550,268 1,060,605 (510,337 )
Non-cash stock compensation 851,517 2,049,326 (1,197,809 )
Intangibles Amortization 607,025 - 607,025
Depreciation 770,336 719,856 50,480
All other expenses 2,858,641 2,810,371 48,270
Totals $ 31,690,915 $ 36,846,371 $ (5,155,456 )
Our overall operating expenses decreased by $5,582,260 or 40% three months ended
June 30, 2022 over the three months ended June 30, 2021 and decreased $5,155,456
or 14% for the nine months ended June 30, 2022 versus the nine months ended June
30, 2021 . The quarter over quarter decrease was primarily driven by
management's ongoing efforts to reduce our cost structure including decreases in
staff related expenses ($1.58 million ), advertising, marketing, sponsorships and
affiliate commission expenses ($1.89 million ) well as a merchant processing fees
($241,000 ) attributable to (i) on boarding new processors during the third
quarter of 2021 at much lower rates as well as (ii) lower volume, reduction in
stock expense ($1,897,142 ) which includes $1,485,142 of contra-expense for stock
compensation related to forfeited RSUs and options, and R&D and regulatory spend
($561,000 ). These decreases were offset by an increase in other expenses
($420,000 ) and an increase in the amortization of intangibles ($277,000 ) that
increased this quarter as we began amortizing our trade names as referenced in
Note 5. The reduction of $3.67 million for the nine months ended June 30, 2022
versus June 30, 2021 is due to an reduction in compensation ($1.9 million ),
advertising, marketing, sponsorships and affiliate commission expenses ($1.13
million ), merchant fees ($867,000 ), and R&D and Regulatory ($510,000 ), partially
offset by increase in stock compensation ($287,000 ) as well as depreciation and
amortization ($862,000 ).
Excluding non-cash depreciation, intangible amortization, and non-cash stock
expenses, we reduced our adjusted operating expenses from $12.7 million to $8.8
million for the three months ended June 30, 2021 and June 30, 2022 respectively
and from $34.1 million to $29.2 million the nine months ended June 30, 2021 and
June 30, 2022 respectively.
While our goal is to continue to improve year-over-year performance, management
is also very much focused on improving the sequential performance and cash flow
of the business. Excluding the stock compensation expense reversal of
$1,485,142 related to forfeited RSUs and stock options, sequentially we reduced
our expenses by $1.68 million . We reduced marketing expense by over $1.0 million
while increasing traffic to our websites. Marketing costs will continue to come
down during the fourth quarter as we rationalize expiring influencer contracts
and focus on the most profitable customer acquisition and retention activities.
In the third quarter of 2022, we took further steps to reduce our overall
headcount, including the outsourcing of our production facility, resulting in a
reduction of of 16 positions (105 employees by June 30, 2022 ). These steps
coupled with the full quarter benefit of reductions during the second quarter of
fiscal 2022 resulted in over $608,000 in sequential payroll cost savings. Since
the reductions occurred over the course of the quarter, we expect to realize
additional savings during the fourth quarter of fiscal 2022 as we benefit from a
full quarter of savings. We are active in working to rightsize our corporate
office and warehouse and believe significant additional savings exist should we
be successful in our efforts. We continue to pursue all avenues that will
help lower our costs while maintaining our quality, efficacy and service for our
customers; position us for revenue growth; and promote a culture of performance
and success.
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.
33--------------------------------------------------------------------------------
Table of Contents
The following tables provide information on our approximate corporate overhead
for the three and nine months ended
Three Months Three Months
Ended Ended
June 30, June 30,
2022 2021 Change
Staff related expense $ 288,570 $ 432,844 $ (144,274 )
Accounting/Legal expense 195,056 190,199 4,857
Professional outside services 119,330 100,370 18,960
Travel expense 2,526 6,972 (4,446 )
Business insurance 167,387 155,838 11,549
Non-cash stock compensation (938,285 ) 959,319 (1,897,604 )
Totals $ (165,417 ) $ 1,845,542 $ (2,010,959 )
Nine Months Nine Months
Ended Ended
June 30, June 30,
2022 2021 Change
Staff related expense $ 917,144 $ 1,283,240 $ (366,096 )
Accounting/legal expense 578,356 655,939 (77,584 )
Professional outside services 282,030 272,055 9,975
Travel expense 3,933 6,974 (3,041 )
Business insurance 530,742 425,704 105,038
Non-cash stock compensation 851,517 2,049,326 (1,197,809 )
Totals $ 3,163,721 $ 4,693,238 $ (1,529,517 ) Excluding the
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 nine months ended
Three Months Three Months
Ended Ended
June 30, June 30,
2022 2021 Change
Staff related expense $ 80,346 $ 90,041 $ (9,695 )
Accounting/legal expense 3,119 $ - 3,119
R&D and Regulatory 112,364 615,497 (503,133 )
Totals $ 195,829 $ 705,538 $ (509,709 )
Nine Months Nine Months
Ended Ended
June 30, June 30,
2022 2021 Change
Staff related expense $ 251,787 $ 90,041 $ 161,746
Accounting/legal expense 3,119 $ - 3,119
R&D and Regulatory 482,579 615,497 (132,918 )
Totals $ 737,485 $ 705,538 $ 31,947
The Therapeutic operating expenses include research and development activities
for therapeutic applications. This division was formed during the third quarter
of fiscal 2021. Our human and pet clinical studies remain underway and we
anticipate initial results during the fourth quarter of 2022 and the first
quarter of 2023.
Goodwill Impairment
We had goodwill at December 31, 2021 of $56,670,970 . We perform a Step 0
goodwill impairment analysis annually following the steps laid out in ASC
350-20-35-3C. Our annual impairment analysis includes a qualitative assessment
to determine if it is necessary to perform the quantitative impairment test. In
performing a qualitative assessment, we review events and circumstances that
could affect the significant inputs used to determine if the fair value is less
than the carrying value of goodwill. From time to time we also evaluate goodwill
impairment on a quarterly basis if any triggering events have occurred that
would require such analysis. For the three months ended December 31, 2021 , we
performed a Step 0 goodwill impairment analysis on consolidated goodwill and
determined that a triggering event had occurred to necessitate performing the
quantitative impairment test. After performing the quantitative impairment test
in accordance with ASC 350-20-35-3C, we determined that goodwill was impaired by
$13,898,285 . We recorded this impairment to reduce total goodwill on its
condensed consolidated balance sheets and has recorded the corresponding
impairment expense on its condensed consolidated statement of operations as of
December 31, 2021 . We performed the same analysis as of June 30, 2022 and
determined that goodwill was impaired by $30,776,436 . We has recorded this
impairment to reduce total goodwill on its condensed consolidated balance sheets
and has recorded the corresponding impairment expense on its condensed
consolidated statement of operations as of June 30, 2022 .
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.
34--------------------------------------------------------------------------------
Table of Contents
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 endedJune 30, 2022 and 2021, we recorded$0 and$2,852 , respectively, and for the nine months endedJune 30, 2022 and 2021 we recorded$(33,350) and$545,562 , respectively, including impairments. The realized loss in 2022 was a result of our shares in Isodiol being delisted while the realized gain in 2021 was driven by the sale of our investment inFormula Four Beverages, Inc. that was previously written to zero in the prior year based on prior information related to the company's performance and COVID-19 impacts. Restructuring expenses
During the quarter the Company entered into a separating agreement with its
former CEO. The Company booked a onetime restructuring charge of
Gain on the sale of assets
As mentioned in Note 2, the Company sold it manufacturing assets during the
quarter for a total value of
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. The value of the non-cash contingent liability was$702,000 atJune 30, 2022 , as compared to$16,200,000 atSeptember 30, 2021 , respectively. First quarter adjustment to the the contingent liability comprised of$366,841 associated with the decrease of the value of the Third Marking Period shares prior to their issuance inDecember 2021 , while the remaining$5,329,159 is associated with the decrease in the remaining contingent shares as ofDecember 31, 2021 . Second quarter adjustment to the contingent liability comprised of$41,916 associated with the decrease of the value of the Third Marking Period shares prior to their issuance inMarch 2022 , while the remaining$246,915 is associated with the decrease in the remaining contingent shares as ofMarch 31 , 2022.During the third quarter of fiscal 2022 we had a decrease in value of$1,943,000 to the contingent liability which is recorded as other income in our consolidated statement of operations for the third quarter of fiscal year 2022. The decrease in value is comprised of$90,792 associated with an increase of the value of the Fourth Marking Period shares prior to their issuance inMay 2022 , while the remaining $1,839,2072 is associated with the decrease in the remaining contingent shares as ofJune 30, 2022 . We utilize both a market approach and a Monte Carlo simulation in valuing the contingent liability and a key input in both of those methods is the stock price. The main driver of the change in the value of the contingent liability was the decrease of our common stock price, which was$0.44 atJune 30, 2022 as compared to$2.08 atSeptember 30, 2021 . We expect to continue to record changes in the non-cash contingent liability through the balance of the earnout period. 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$0 atJune 30, 2022 as compared to$416,000 atSeptember 30, 2021 respectively.
Liquidity and Capital Resources
We had cash and cash equivalents on hand of$9,553,670 and working capital of$14,133,054 atJune 30, 2022 as compared to cash and cash equivalents on hand of$26,411,424 and working capital of$29,595,214 atSeptember 30, 2021 . Our current assets decreased approximately 45.6% atJune 30, 2022 fromSeptember 30, 2021 , which is primarily attributable to a decrease in cash used to fund operations. Our current liabilities decreased by 17.2% atJune 30, 2022 fromSeptember 30, 2021 , and is primarily attributable to decreases in accounts payable and accrued expenses.
During the three and nine 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 2022 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 it's strategy and path to profitability within it's 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 of these quarterly financial statements. The Company's ability to continue as a going concern is dependent upon its ability to improve profitability 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 the quarterly 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 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$3.7 million and$4.6 million (excluding the reclassification of$939,826 of the SBA loan to short term liabilities) for the three months endedJune 30, 2022 and 2021, respectively and$16.8 million and$8.3 million for the nine months endedJune 30, 2022 and 2021, respectively. Management believes the quarterly cash consumption will continue to improve in subsequent quarters and we have sufficient capital to execute our plan to profitability. 35
--------------------------------------------------------------------------------
Table of Contents Adjusted EBITDA Adjusted EBITDA for the three and nine months endedJune 30, 2022 andJune 30, 2021 is as follows: Three months Three months Nine Months Nine Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2022 2021 2022 2021 (Unaudited) GAAP (loss) from operations$ (33,126,659 ) $ (6,675,620 ) $ (63,283,120 ) $ (12,603,288 ) Adjustments: Depreciation & Amortization 435,910 246,533 1,377,361 719,856 Employee and director stock compensation (1) (938,285) 959,319 851,517 2,049,326 Other non-cash stock compensation for services (2) - 28,650 - 97,721 Inventory adjustment(3) - 50,000 878,142 50,000 Write down of legacy accounts receivable (4) - - - - Impairment ofGoodwill and other intangible assets (5) 30,776,436 48,805,436 - Accrual for severance 107,261 - 129,761 703,022 Accrual / expenses for discretionary bonus - 150,000 150,000 450,000 Non-GAAP adjusted (loss) from operations$ (2,745,337 ) $ (5,241,118 ) $ (11,090,9031 ) $ (8,533,363 ) (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) Write down of legacy accounts receivable. (5) Represents non-cash goodwill impairment of$13,744,000 and impairment of the cbdMD trademark of$4,285,000 . Adjusted EBITDA for the quarter endingJune 2022 improved by over$2.5 million over prior year as a result of over$4.0 million in improvement operating costs that were partially offset by a reduction in revenue and corresponding gross profit. Year to date Adjusted EBITDA declined by$2.5 million mostly related to a reduction in gross profit that was partially offset by reduction in operating costs. This is the fourth consecutive quarter of Adjusted EBITDA improvement and a$1 million improvement over the prior sequential quarter. Management expects continuous improvement in future quarters as a result of ongoing improvements in operating costs and improving revenue. 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.
© Edgar Online, source
