cbdMD Inc

Previous wording

The following discussion of our financial condition and results of operations for the three months ended December 31, 2023 and the three months ended December 31, 2022 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.

Current wording

The following discussion of our financial condition and results of operations for the three and six months ended March 31, 2024 and the three and six months ended March 31, 2023 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.

Previous wording

We own and operate the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and hempMD. We believe that we are an industry leader producing and distributing hemp derived solution including broad spectrum CBD products and full spectrum CBD products. Our mission is to enhance our customer’s overall quality of life while bringing cannabinoid 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 the 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 and Delta 9 products contain a variety of cannabinoids and terpenes in addition to CBD while maintaining small amounts of THC that falls within the limits set in the 2018 Farm Act. In addition to our core brands, we also operate cbdMD Therapeutics, 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 and Proline Global that houses some of our newer brands.

Current wording

We own and operate the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and functional mushroom brand ATRx Labs. We believe that we are an industry leader producing and distributing hemp derived solution including broad spectrum CBD products and full spectrum CBD products. Our mission is to enhance our customer’s overall quality of life while bringing cannabinoid and mushroom 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 the 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 and Delta 9 products contain a variety of cannabinoids and terpenes in addition to CBD while maintaining small amounts of THC that fall below the level of detection and are within the limits set in the 2018 Farm Act. In addition to our core brands, we also operate cbdMD Therapeutics, 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 and Proline Global that houses some of our newer brands.

Previous wording

Our cbdMD brand of products includes an array of high-grade, premium every day and functional CBD products, including tinctures; gummies; topicals; capsules; drink mixes; and sleep, focus and calming aids. In addition we have clinical based claims and industry leading strength and concentrations to drive product efficacy.

Current wording

Our cbdMD brand of products includes an array of high-grade, premium every day and functional CBD products, including tinctures; gummies; topicals; capsules; and sleep, focus and calming aids. In addition we have clinical based claims and industry leading strength and concentrations to drive product efficacy.

Previous wording

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.

Current wording

cbdMD, Paw CBD and ATRx 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.

Previous wording

Management continues to be very focused on delivering positive earnings through a combination of optimizing our product portfolio, right-sizing our cost structure and investing in marketing that will provide positive return on customer acquisition. During fiscal 2023 we made significant changes to our marketing and overall operations including re-platforming our website to significantly reduce our operating costs. While revenue decreased, our cash burn has been significantly reduced.

Current wording

Management continues to be very focused on delivering positive earnings through a combination of optimizing our product portfolio, right-sizing our cost structure and investing in marketing that will provide positive return on customer acquisition. During fiscal 2023 we made significant changes to our marketing and overall operations including re-platforming our website to significantly reduce our operating costs. Ongoing revenue decreases offset a majority of the infrastructure savings, however we significantly reduce the Company’s cash burn during the year.

Previous wording

cbdMD recently expanded its retail reach in December 2023 by launching several products throughout Sprouts Supermarkets.

Current wording

While revenue in the second quarter was challenging, we remain focused on top line improvements during 2024. cbdMD expanded its retail reach in December 2023 by launching several products throughout Sprouts Supermarkets and more recently added to Door Dash as a customer.

Previous wording

During the fourth quarter of fiscal 2023 we also attempted to convert the Series A Preferred stock to common stock through a shareholder vote to amend our Series A Preferred Stock designation. Ultimately, we were unable to get the required votes needed to approve the amendment and we canceled the shareholder meeting. We believe the combined market capitalization of both our common and Series A Preferred is being impacted due to our current capital structure. Our goal is to simplify our capital structure and we believe it will help unlock additional equity value and open up more strategic activity for the Company. The Company has a new proposal to convert all of the Company's Series A Preferred stock to be voted on by its shareholders at the Company's 2024 annual meeting.

Current wording

During March 2024, we attempted to convert the Series A Preferred stock to common stock through a shareholder vote to amend our Series A Preferred Stock designation. We were unable to get the required votes needed to approve the amendment. We believe the combined market capitalization of both our common and Series A Preferred is being impacted due to our current capital structure. Our goal is to simplify our capital structure and we believe it will help unlock additional equity value and open up more strategic activity for the Company.

Previous wording

We had total net sales of $5.4 million and $6.1 million for the three months ended December 31, 2023 and 2022, respectively, resulting in a decrease in net sales of $0.7 million or 12% quarter over quarter. This decrease is partially attributable to a decrease of $0.5 million in e-commerce sales as we continue to reduce marketing spend as part of our continued efforts to improve profitability. Wholesale sales decrease of $0.2 million, in part due to state level restrictions that had a year over year impact to accounts in key geographic regions. In response, management has embarked on several corrective measures, including the appointment of a new Vice President of Wholesale, the introduction of new customer acquisition strategies, and the replacement of underperforming vendors and agencies. Despite the overall category facing challenges, we remain optimistic about our product's market positioning in 2024, amidst increasing global tensions and the election year.

Current wording

We had total net sales of $4.4 million and $6.2 million for the three months ended March 31, 2024 and 2023, respectively, resulting in a decrease in net sales of $1.9 million or 29% quarter over quarter. This decrease is partially attributable to a decrease of $1.3 million in e-commerce sales year over year. Wholesale sales decrease of $0.6 million, in part due to the $0.44 million credit issued to GNC related to the $1 million order shipped during the March 2022 quarter. We incurred this credit in part due to expiring product and replacing a significant balance of the expiring product with the ATRx Platinum line of functional mushrooms. During the quarter management embarked on several corrective measures to increase our understanding of wholesale customers operations, including the appointment of a new Vice President of Wholesale, the introduction of new customer acquisition strategies, and the replacement of under performing vendors and agencies and hiring new performance marketer. Despite the overall category facing challenges, we remain optimistic about our product's market positioning in 2024. Revenues appear to be holding and based on the cost reductions in the works, we are designing the Company to be profitable at significantly lower revenue levels than in the past.

Previous wording

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 33.8% and 41.4% for three months ended December 31, 2023 and 2022, respectively. This overall decrease in our cost of sales quarter over quarter is primarily attributable to decreased overhead allocation of approximately $80,000 related to overall headcounts reductions quarter over quarter as well as decreased freight changes of approximately $230,000 as we switched to a more cost effective freight provider subsequent to the first quarter of fiscal year 2023, which increased margins for that quarter.

Current wording

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 41.0% and 35.6% for three months ended March 31, 2024 and 2023, respectively. This increase in cost of sales is mostly attributed to the $440,000 credit issued to GNC during the quarter. We anticipate cost of sales to be in line with our historical averages prior to the March 2024 quarter.

Previous wording

The following tables provide information on our operating expenses for the three months ended December 31, 2023 and 2022:

Current wording

The following tables provide information on our operating expenses for the three and six months ended March 31, 2024 and 2023:

Previous wording

Our overall operating expenses decreased by $3.0 million or 39.3% for the three months ended December 31, 2023 over the three months ended December 31, 2022. The year over year decrease was primarily driven by management's continued ongoing efforts to reduce our cost structure including decreases in staff related expenses ($0.9 million), advertising, marketing, sponsorships and affiliate commission expenses ($0.5 million), a reduction of ($0.9 million) related to a one time non-cash stock compensation for a terminated contractual obligation, a reduction of intangibles amortization of ($0.1 million) as a result of the intangibles impairment and change in useful life that occurred in fourth quarter of fiscal year 2023, and a reduction of approximately ($0.5 million) across all other expense areas quarter over quarter.

Current wording

Our overall operating expenses decreased by $1.3 million or 25% for the three months ended March 31, 2024 over the three months ended March 31, 2023. The year over year decrease was primarily driven by management's continued ongoing efforts to reduce our cost structure including decreases in staff related expenses, advertising, marketing, sponsorships and affiliate commission expenses, professional, accounting and legal expenses, and a reduction of intangibles amortization. As previously discussed, we have a number of initiatives in place with a target to further reduce G&A costs by an estimated $0.2 million a month by August, including the elimination of the Red Oak Lease.

Previous wording

The following tables provide information on our corporate overhead for the three months ended December 31, 2023 and 2022:

Current wording

The following tables provide information on our corporate overhead for the three and six months ended March 31, 2024 and 2023:

Previous wording

Our corporate operating expenses are down quarter over quarter by ($90,000) or 12.4%. This decrease in primarily related decreased headcount and non-cash stock compensation, slightly offset by increases in accounting/legal /professional outside services as we incurred expenses tied to the initial proxy statement filed for a shareholder proposal to convert our series A preferred stock as well as M&A diligence and structuring that occurred during the December 2023 quarter.

Current wording

Our corporate operating expenses are down quarter over quarter by $290,000 or 28%. This decrease in primarily related decreased non-cash stock compensation, accounting/legal expenses and business insurance expenses.

Previous wording

The following tables provide information on our approximate corporate overhead for the three months ended December 31, 2023 and 2022:

Current wording

The following tables provide information on our approximate corporate overhead for the three and six months ended March 31, 2024 and 2023:

Previous wording

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 $20,611 at December 31, 2023, as compared to $90,363 at September 30, 2023, respectively. The fourth and final marking period ended and the final issuance of shares occurred in January 2024.

Current wording

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 $0 at March 31, 2024, as compared to $90,363 at September 30, 2023, respectively. The fourth and final marking period ended and the final issuance of shares occurred in January 2024.

Previous wording

We had cash and cash equivalents on hand of $1.5 million and working capital of $1.4 million at December 31, 2023 as compared to cash and cash equivalents on hand of $1.8 million and working capital of $3.4 million at September 30, 2023. Our current assets decreased approximately 8.7% at December 31, 2023 from September 30,2023, which is primarily attributable to a decrease in cash used to fund operations. Our current liabilities increased by 27.9% at December 31, 2023 from September 30, 2023, and is primarily attributable to dividends on the preferred stock that have been accrued but not paid.

Current wording

We had cash and cash equivalents on hand of $2.1 million and working capital of $3.2 million (excluding $2.7 million of accrued dividends) at March 31, 2024 as compared to cash and cash equivalents on hand of $1.8 million and working capital of $4.1 million at September 30, 2023 (excluding $0.7 million in accrued dividends). Our current assets decreased approximately 8.1% at March 31, 2024 from September 30, 2023, which is primarily attributable to a decrease in inventory and accounts receivables. Our current liabilities increased by 49% at March 31, 2024 from September 30, 2023, and is primarily attributable to dividends on the preferred stock that have been accrued but not paid and unpaid rent for the Red Oak Lease.

Previous wording

Subsequent to the period covered by this report, as disclosed under note 16 to the unaudited financial statements included in this report, the Company entered into a Purchase Agreement dated January 30, 2024 with five Investors whereby the Investors advanced the Company an aggregate of $1,250,000 gross proceeds and the Company issued each Investor an 8% Senior Secured Original Issue 20% Discount Convertible Promissory Note, in the aggregate principal amount of $1,541,666. The Company intends to use the proceeds from the issuance of the Notes for working capital and general corporate purposes, including, but not limited to inventory investment to assist with orders and funding proxy expenses.

Current wording

The Company entered into a Purchase Agreement dated January 30, 2024 with five Investors whereby the Investors advanced the Company an aggregate of $1,250,000 gross proceeds and the Company issued each Investor an 8% Senior Secured Original Issue 20% Discount Convertible Promissory Note, in the aggregate principal amount of $1,541,666. The Company intends to use the proceeds from the issuance of the Notes for working capital and general corporate purposes, including, but not limited to inventory investment to assist with orders and funding proxy expenses. Under GAAP the convertible feature of the Notes creates a non-cash contingent liability. Due to the common stock price increase from the issuance date to the end of the second quarter the FMV of the Notes increased, resulting in a FMV for the Notes of $2.7 million as of March 31, 2024. As of this filing, the actual Notes principal balance has been reduced to approximately $1 million through a series of partial conversions of the Notes.

Previous wording

During the three months ended December 31, 2023 we used cash primarily to fund our operations.

Current wording

During the three and six months ended March 31, 2024 we used cash primarily to fund our operations.

Previous wording

We do not have any commitments for capital expenditures. We have a commitment for cumulative dividends at an annual rate of 8% payable monthly in arrears for the prior month to our preferred shareholders. As of September 2023, we have stopped paying this dividend in cash monthly and are accruing this dividend on a monthly basis.

Current wording

We do not have any commitments for capital expenditures. We have a commitment for cumulative dividends at an annual rate of 8% payable monthly in arrears for the prior month to our preferred shareholders. As of September 2023, we have suspended paying the dividend in cash and are accruing this dividend on a monthly basis.

Previous wording

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 substantial doubt 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.

Current wording

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 substantial doubt about the Company’s ability to continue as a going concern within twelve months after the date that these 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.

Previous wording

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 $0.1 million and $12.1 million for the three months ended December 31, 2023 and 2022, respectively. Management believes the quarterly cash consumption should continue to improve in subsequent quarters.

Current wording

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 $0.7 million and $1.7 million for the three months ended March 31, 2024 and 2023, respectively. Management believes the quarterly cash consumption should continue to improve in subsequent quarters.

Previous wording

To supplement the Company's unaudited interim consolidated financial statements presented in accordance with U.S. GAAP, the Company uses certain non-GAAP measures of financial performance. Non-GAAP financial measures are not prepared in accordance with, or as an alternative to U.S. GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company's performance that either excludes or includes amounts, or is subject to adjustment that have such an effect, that are not normally excluded or included in the most directly comparable financial measure that is calculated and presented in accordance with U.S. GAAP. Adjusted EBITDA as presented below is a non-GAAP measure.

Current wording

To supplement the Company's unaudited interim consolidated financial statements presented in accordance with US GAAP, the Company uses certain non-GAAP measures of financial performance. Non-GAAP financial measures are not prepared in accordance with, or as an alternative to US GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company's performance that either excludes or includes amounts, or is subject to adjustment that have such an effect, that are not normally excluded or included in the most directly comparable financial measure that is calculated and presented in accordance with US GAAP. Adjusted EBITDA as presented below is a non-GAAP measure.

Previous wording

Adjusted EBITDA for the three months ended December 31, 2023 and December 31, 2022 is as follows:

Current wording

Adjusted EBITDA for the three and six months ended March 31, 2024 and March 31, 2023 is as follows:

Previous wording

(3) Represents expenses incurred in relation to M&A and financing activities during the quarter ended December 31, 2023.

Current wording

(3)Represents expenses incurred in relation to M&A and financing activities during the six months ended March 31, 2024.