cbdMD Inc

Previous 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.

Current wording

The following discussion of our financial condition and results of operations for the three and nine months ended June 30, 2024 and the three and nine months ended June 30, 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 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.

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 solutions 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

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.

Current wording

Management continues to be very focused on our goal of 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

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.

Current wording

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 December 2023, the Company launched its new functional mushroom line of products with its Super Gummy under the ATRx brand on ATRxlabs.com. At our core, we are committed to natural health and wellness solutions, recognizing the benefits of functional mushrooms alongside hemp. During late April 2024 we launched our 4 SKU ATRx Platinum line into GNC. Management made a strategic decision to work with GNC on an exclusive initial launch of the Platinum line to help offset some legacy inventory issues tied to a $1 million cbdMD order from March of 2022. Working GNC on this launch give the brand a springboard into national distribution and helps accelerate ATRx brand awareness. Additionally, we have a wider store distribution footprint as ATRx products do not have the same geographic limitations as CBD products within the GNC footprint.

Current wording

During December 2023, the Company launched its new functional mushroom line of products with its Super Gummy under the ATRx brand on ATRxlabs.com. At our core, we are committed to natural health and wellness solutions, recognizing the benefits of functional mushrooms alongside hemp. During late April 2024 we launched our 4 SKU ATRx Platinum line into GNC. Management made a strategic decision to work with GNC on an exclusive initial launch of the Platinum line to help offset some legacy inventory issues tied to a $1 million cbdMD product order from March of 2022. Working with GNC on this launch provides the brand a springboard into national distribution and we believe helped accelerate ATRx brand awareness. Additionally, we have a wider store distribution footprint as ATRx products do not have the same geographic limitations as CBD products within the GNC footprint.

Previous wording

During March 2024 we added to our wholesale team, bringing in a VP of Wholesale with significant CBD industry experience. We are seeing wholesale opportunities begin to pick up and bare optimistic a number of international opportunities we have been working on for the last several quarters have revenue goals by the end of the year. At the end of the quarter, we made additional performance marketing hire to help reinvigorate our direct-to-consumer business and deepen our performance driven culture.

Current wording

During March 2024 we added personnel to our wholesale team, bringing in a VP of Wholesale with significant CBD industry experience. We are seeing wholesale opportunities begin to pick up and we are optimistic a number of international opportunities we have been working on for the last several quarters will generate revenues by the end of the calendar year. At the end of the quarter, we made additional performance marketing hire to help reinvigorate our direct-to-consumer business and deepen our performance driven culture.

Previous 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.

Current wording

During March 2024, we attempted to automatically 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

During March 2024, we entered into agreements with our sub-landlord for the Red Oak Sublease. As a result of these agreements, we anticipate an estimated $20,000 reduction monthly operating costs in utilities and maintenance related to the Red Oak Sublease that will roll off by the end of the third fiscal quarter. Should we fulfill the obligation of the agreements through the end of July 2024, the legacy lease will terminate, saving approximately a further $85,000 in rent on a monthly basis.

Current wording

During March 2024, we entered into agreements with our sub-landlord for the Red Oak Sublease. As a result of these agreements, we anticipate an estimated $20,000 reduction monthly operating costs in utilities and maintenance related to the Red Oak Sublease that will roll off by the end of the third fiscal quarter and we fulfilled the obligation of the agreements in July 2024, terminating future obligations under the lease, saving approximately a further $85,000 in rent on a monthly basis. While we satisfied this agreement and no longer have a future lease obligation, we continue to negotiate with the landlord on back rent due.

Previous 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.

Current wording

We had total net sales of $5.2 million and $6.1 million for the three months ended June 30, 2024 and 2023, respectively, resulting in a decrease in net sales of $0.9 million or 16% quarter over quarter. This decrease is partially attributable to a decrease of $1.0 million in e-commerce sales year over year while wholesale sales increased by $0.1 million. Sequentially, revenue grew by 15.4%. Our team continues to focus on all areas of driving revenue improvement. Despite the overall category facing challenges, we remain optimistic about our product's market positioning in fiscal 2024 and into 2025. Revenues appear to be holding and with continued cost reductions, 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 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.

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 35% and 35% for three months ended June 30, 2024 and 2023, respectively. This decrease in cost of sales is mostly attributed to ongoing cost saving initiatives. We anticipate future 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 and six months ended March 31, 2024 and 2023:

Current wording

The following tables provide information on our operating expenses for the three and nine months ended June 30, 2024 and 2023:

Previous 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.

Current wording

Our overall operating expenses decreased by approximately $1.9 million or 24% for the three months ended June 30, 2024 as compared to the three months ended June 30, 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, including the elimination of the Red Oak Lease. While we are working to reduced fixed overhead costs, we do anticipate an increase in our advertising and marketing expenses for the fourth fiscal quarter.

Previous wording

For the six months ending March 2024, year to date operating expenses decreased by $4.3 million as management continues to focus on operational efficiencies across the board.

Current wording

For the nine months ending June 2024, year to date operating expenses decreased by $6.1 million as management continues to focus on operational efficiencies across the board.

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 $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.

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 $90,363 at September 30, 2023 , respectively. The fourth and final marking period ended and the final issuance of shares occurred in January 2024, therefore there is no ongoing liability recorded.

Previous 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.

Current wording

We had cash and cash equivalents on hand of $2.3 million and negative working capital of of $567,610.

Previous 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.

Current wording

We entered into a securities 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.

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 $0.7 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.

Current wording

Our goal from a liquidity perspective is to use operating cash flows to fund day to day operations and, while improving, we have not met this goal as cash flow from operations has been a net use of $0.1 million three months ended June 30, 2024. Management believes the quarterly cash consumption should continue to improve in subsequent quarters.

Previous wording

cbdMD defines Adjusted EBITDA as Earnings Before Interest, Taxes, Depreciation and Amortization excluding (1) stock based compensation; (2) one time inventory adjustments; (3) impairment of goodwill and other intangible items; (4) one-time severance accruals; (5) non-cash trade credits; and (6) accruals/expenses for discretionary bonuses, and (7) other one-time expenses related to M&A or other corporate actions.

Current wording

cbdMD defines Adjusted EBITDA as Earnings Before Interest, Taxes, Depreciation and Amortization excluding (1) stock based compensation; (2) one time inventory adjustments; (3) mergers and acquisitions and financing transaction expenses; (4) one-time severance accruals; (5) non-cash trade credits; and (6) non-cash accelerated amortization of expense related to terminated IT contracts.

Previous wording

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

Current wording

Adjusted EBITDA for the three and nine months ended June 30, 2024 and June 30, 2023 is as follows:

Previous wording

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

Current wording

(2) Represents expenses incurred in relation to M&A and financing activities during the nine months ended June 30, 2024.