cbdMD(YCBD) - 2023 Q4 - Annual Report

Part I Item 1. Business cbdMD, Inc. operates nationally recognized CBD brands, focusing on profitability through cost optimization, e-commerce re-platforming, and new product launches - The company owns and operates nationally recognized CBD brands including cbdMD, Paw CBD, and hempMD[24][25][26] - Recent strategic shifts focus on achieving positive earnings through cost optimization, website re-platforming, and launching new brands like hempMD and ATRx[28][32][35] - Growth strategies include product innovation (e.g., NSF for Sport, Delta 9 gummies, ATRx), expanding retail channels (e.g., Sprouts Supermarkets), and international expansion across 31 countries[36][37] Marketing & Sponsorships Spend | Fiscal Year | Marketing & Sponsorships Spend (Millions USD) | | :--- | :--- | | 2023 | $6.9 million | | 2022 | $16.4 million | - Sales are primarily driven by e-commerce, accounting for approximately 80% of sales in fiscal 2023, up from 75% in 2022[44] - Manufacturing is fully outsourced to third-party cGMP certified manufacturers following the sale of manufacturing assets in fiscal 2022 to reduce fixed overhead[46][47] - The company completed two clinical studies in fiscal 2023, demonstrating benefits in humans for pain and mood, and improved mobility in dogs with osteoarthritis in collaboration with Colorado State University[50][51] - As of December 1, 2023, the company had approximately 52 full-time employees[68] Item 1A. Risk Factors The company faces significant risks including substantial operating losses, liquidity concerns, capital structure limitations, declining revenue, and an uncertain regulatory environment - The company has a history of losses, reporting an operating loss of $24.2 million in fiscal 2023 and $78.3 million in fiscal 2022, raising substantial doubt about its ability to continue as a going concern[75][76] - The outstanding Series A Preferred Stock, with its $50 million liquidation preference, significantly limits the company's ability to pursue strategic investments or M&A activities[79] - Net sales have declined for two consecutive years, decreasing by 32% to $24.2 million in fiscal 2023, following a 20% decrease in 2022[80] - The lack of a clear regulatory framework for CBD from the FDA and varying state laws creates significant uncertainty, potential compliance costs, and could slow market growth[100][103] - The company is subject to NYSE American's continued listing standards, and failure to meet them could result in the delisting of its securities[105] - In August 2023, the board of directors suspended dividend payments on the Series A Convertible Preferred Stock to conserve cash[107] Item 1B. Unresolved Staff Comments This item is not applicable as the company is a smaller reporting company - Not applicable to a smaller reporting company[118] Item 2. Properties The company leases a 50,000 sq ft headquarters and an 80,000 sq ft warehouse in Charlotte, NC, with the headquarters lease currently in default - The company's headquarters is a leased 50,000 sq ft facility in Charlotte, NC, with the company behind on lease payments and having received a default notice as of September 2023[119] - An 80,000 sq ft warehouse is also leased in Charlotte, NC, with a portion of the space being sublet to offset expenses[119] Item 3. Legal Proceedings The company is involved in a class action lawsuit stayed pending FDA clarity and a trademark cancellation proceeding against Majik Medicine, LLC - A class action lawsuit filed by Cynthia Davis in California against the company has been stayed until the FDA or Congress provides definitive action on CBD's regulatory status[120] - The company's subsidiary, CBDI, is in a legal dispute with Majik Medicine, LLC to cancel their trademark for "CBD MD", with the case currently in discovery[121] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable to our company[123] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock and Series A Preferred Stock are listed on NYSE American, with common stock dividends not intended and preferred stock dividends suspended in August 2023 to conserve cash - The company's common stock (YCBD) and Series A Convertible Preferred Stock (YCBDpA) trade on the NYSE American exchange[126] - On August 22, 2023, the Board of Directors suspended the monthly cash dividend payment on the 8.0% Series A Cumulative Convertible Preferred Stock to conserve cash[128] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2023, cbdMD experienced a 32% decrease in net sales to $24.2 million, driven by market softness and reduced marketing, leading to tightened liquidity and substantial doubt about its going concern ability Results of Operations Fiscal 2023 saw total net sales decrease 32% to $24.2 million, driven by declines in both e-commerce and wholesale, while operating expenses were significantly reduced despite a $13.2 million intangible asset impairment | Metric | Fiscal 2023 (USD) | Fiscal 2022 (USD) | | :--- | :--- | :--- | | Total Net Sales | $24,155,362 | $35,403,224 | | Gross Profit % | 62.0% | 63.1% | | Loss from Operations | $(22,487,549) | $(78,266,515) | | Impairment of Intangibles | $13,219,000 | $60,955,970 | | Net Loss to Common Shareholders | $(26,940,209) | $(74,085,698) | | Sales Channel | Fiscal 2023 (USD) | % of Total | Fiscal 2022 (USD) | % of Total | | :--- | :--- | :--- | :--- | :--- | | E-commerce sales | $19,436,124 | 80.5% | $26,435,203 | 74.7% | | Wholesale sales | $4,719,238 | 19.5% | $8,968,021 | 25.3% | - The 32% decrease in net sales was attributed to broader CBD category softness, macro inflationary pressures, and reduced unprofitable marketing expenses[138] - Operating expenses (excluding impairments) decreased by approximately $15.1 million (37.5%) in FY2023, primarily due to a $5.3 million reduction in payroll and an $8.3 million reduction in marketing expenses[141] Liquidity and Capital Resources The company's financial position weakened, with cash decreasing to $1.8 million and working capital declining, raising substantial doubt about its going concern ability despite improved cash used in operations | Metric | Sept 30, 2023 (Millions USD) | Sept 30, 2022 (Millions USD) | | :--- | :--- | :--- | | Cash and cash equivalents | $1.8 million | $6.7 million | | Working capital | $3.4 million | $10.7 million | - The company's ability to continue as a going concern is in substantial doubt due to its history of losses, current working capital, and the need for improved profitability or additional funding[156] - Net cash used by operating activities significantly improved, decreasing to $4.3 million for FY2023 compared to $15.0 million for FY2022[157] Critical Accounting Policies Management identifies critical accounting policies including inventory valuation, revenue recognition upon shipment, and impairment of long-lived assets, with a $13.2 million impairment loss recognized in fiscal 2023 - Inventory is valued at the lower of cost or net realizable value, with write-offs based on analyses of inventory levels and forecasted sales[163] - Revenue is recognized when the performance obligation is met, which occurs upon shipment of the product to the customer (FOB shipping)[165] - Long-lived assets are reviewed for impairment when events indicate the carrying value may not be recoverable, with impairment losses of $13,219,000 in fiscal 2023 and $4,285,000 in fiscal 2022[166][167] Item 8. Consolidated Financial Statements and Supplementary Data Audited consolidated financial statements show a decline in assets and a significant net loss, with the auditor expressing substantial doubt about the company's going concern ability due to recurring losses and a $174 million accumulated deficit Report of Independent Registered Public Accounting Firm The auditor, Cherry Bekaert LLP, expressed substantial doubt about the company's going concern ability due to historical losses and a significant accumulated deficit, identifying intangible asset impairment as a Critical Audit Matter - The auditor's report contains a paragraph expressing "Substantial Doubt about the Company's Ability to Continue as a Going Concern"[212] - The going concern doubt stems from the company's history of losses, including a net loss of approximately $23 million in the current year, and an accumulated deficit of approximately $174 million as of September 30, 2023[212] - The audit identified "Intangible Asset Impairment" as a Critical Audit Matter due to significant estimates and subjective judgments in determining asset fair value[217][219] Consolidated Financial Statements Consolidated financial statements reflect a challenging fiscal year with total assets decreasing to $16.2 million, a net loss of $22.9 million, and a net cash use of $4.9 million, resulting in an ending cash balance of $1.8 million Balance Sheet Highlights | Balance Sheet Highlights | Sept 30, 2023 (USD) | Sept 30, 2022 (USD) | | :--- | :--- | :--- | | Cash and cash equivalents | $1,797,860 | $6,720,234 | | Total current assets | $8,070,041 | $16,011,603 | | Intangible assets | $3,219,090 | $17,834,549 | | Total assets | $16,195,283 | $40,791,909 | | Total liabilities | $7,163,999 | $9,367,478 | | Total shareholders' equity | $9,031,284 | $31,424,431 | Statement of Operations Highlights | Statement of Operations Highlights | Fiscal 2023 (USD) | Fiscal 2022 (USD) | | :--- | :--- | :--- | | Total Net Sales | $24,155,362 | $35,403,224 | | Gross Profit | $14,977,659 | $22,336,585 | | Loss from operations | $(22,487,549) | $(78,266,515) | | Net Loss | $(22,938,209) | $(70,083,693) | | Net Loss per share (Basic) | $(13.32) | $(55.80) | Cash Flow Highlights | Cash Flow Highlights | Fiscal 2023 (USD) | Fiscal 2022 (USD) | | :--- | :--- | :--- | | Cash used by operating activities | $(4,302,051) | $(14,967,150) | | Cash provided by (used) by investing activities | $702,451 | $(688,680) | | Cash provided by financing activities | $(1,322,774) | $(4,035,360) | | Net decrease in cash | $(4,922,374) | $(19,691,190) | Notes to Consolidated Financial Statements Notes to financial statements detail substantial doubt about going concern, $13.2 million intangible asset impairment, suspension of preferred stock dividends, $2.5 million from a public offering, and a full valuation allowance against deferred tax assets - A 1-for-45 reverse stock split was effected on April 24, 2023, with all share numbers in the report reflecting this split[242] - Note 5: The company recorded a total impairment charge of $13,219,000 for its definite-lived intangible assets (tradenames and technology) during fiscal year 2023 due to market conditions and a decline in market capitalization[299] - Note 8: In May 2023, the company completed a public offering of 1,350,000 shares of common stock, raising net proceeds of approximately $2.5 million[319] - Note 15: The company has established a full valuation allowance of $16.5 million against its net deferred tax assets due to the uncertainty of their realization[376][377] Item 9A. Controls and Procedures Management, including the Interim CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of September 30, 2023, based on the COSO 2013 framework - Based on an evaluation as of September 30, 2023, the Interim Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[174] - Management assessed the effectiveness of internal control over financial reporting using the COSO 2013 framework and concluded such controls were effective as of September 30, 2023[179] Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Shareholders - The information required by this Item is incorporated by reference from the company's proxy statement for its 2024 Annual Meeting of Shareholders[185] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Shareholders - The information required by this item is incorporated by reference from the Proxy Statement[186] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information regarding security ownership of certain beneficial owners, management, and related shareholder matters is incorporated by reference from the company's definitive Proxy Statement - The information required by this item is incorporated by reference from the Proxy Statement[187] Item 13. Certain Relationships and Related Transactions, and Director Independence Information concerning certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive Proxy Statement - The information required by this item is incorporated by reference from the Proxy Statement[188] Item 14. Principal Accounting Fees and Services Details regarding principal accounting fees and services are incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Shareholders - The information required by this item is incorporated by reference from the Proxy Statement[189] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report, including various agreements and certifications - This item provides an index of all exhibits filed with or incorporated by reference into the annual report, including agreements, bylaws, and certifications[196][199] Item 16. Form 10-K Summary No summary is provided under this item - None[197]