cbdMD, Inc.: Form 10-Q for the period ended Jun 30, 2023

The following discussion of our financial condition and results of operations for the three and nine months ended June 30, 2023 and the three and nine months ended June 30, 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.

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 2022 10-K, this report, and our other filings with the Securities 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.

Our Company

General

We own and operate the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and cbdMD Botanicals. We believe that we are an industry leader producing and distributing broad spectrum CBD products and now full spectrum CBD products. Our mission is to enhance our customer’s overall quality of life while bringing CBD education, awareness and accessibility of high quality and effective products to all. We source cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in 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 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 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

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.

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 the National Animal Safety Council’s rigorous audit and meet their Quality Seal standard.

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.

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.

cbdMD Therapeutics

We formed our wholly owned subsidiary, cbdMD Therapeutics, for the purposes of isolating and quantifying our ongoing investments in science related to our existing and future products, including research and development activities for therapeutic applications and to explore potential cannabinoid-based medicines.

In August of 2022 the Company concluded a randomized, double blind, placebo controlled clinical study in dogs performed in conjunction with Colorado’s State University’s veterinary program. Preliminary results indicate that our proprietary broad spectrum hemp extract improved mobility, gait, and quality of life in dogs with osteoarthritis. These results are expected to provide claims related to our proprietary broad spectrum blend’s efficacy and drive new product development to address the needs of the nearly $2 Billion canine arthritis treatment market according to Expert Market Research.

In September of 2022 the Company concluded a multi-year randomized, double blind, placebo controlled clinical study in healthy adults utilizing its proprietary hemp extract blend which demonstrated significant benefits in many areas, including reduction of pain, reduced inflammation, improvements to several immunity markets, and improved mood, and these results are further driving the refinement of current products and the development of new products which utilize the same proprietary blend of hemp extracted cannabinoids.

We believe the results from both of the clinical studies provide us a unique and differentiated competitive marketing advantage for certain of our products and has already started creating additional B2B wholesale opportunities for our organization. In addition, these results will inform near term product development efforts, and serve as preliminary data for future clinical studies.

The formation of Therapeutics has also led to the identification of a novel cannabinoid that will be patented and utilized in future formulations for cbdMD. We believe the Company’s investments into therapeutics R&D will continue to benefit current products and dietary supplement development.

Recent Developments

The Company continues to work on revenue growth and focus on our operating costs in an effort to generate profitable earnings and cash flow. During the third fiscal quarter, the Company migrated it's ecommerce platform, as it found it could drive traffic to it's website, but that the conversion rate lagged and the legacy platform was somewhat cumbersome to make changes to. Migrating to the leading direct to consumer ecommerce platform lowers the Company's ongoing IT and infrastructure costs to support our website, allows the Company to be more nimble and as well as plug into best-in-class tools for ecommerce business.

Additionally, the Company continues to engage in industry advocacy and is working with multiple industry groups and legislatures on potential regulatory patents for the category.

During the second quarter, the Company launched its first products on Amazon in the UK. cbdMD is one of only a handful of companies approved to sell CBD products in the Amazon UK CBD pilot program due to its validated Novel Foods application. Brands approved to sell CBD through Amazon UK are required to pass compliance checks by Amazon and now must have a credible application for Novel Foods Authorization which has been validated by the United Kingdom's Food Standards Agency. Starting in the fourth quarter, the Company is beginning to see growth coming from this channel.

During the third fiscal quarter we continued to make headway to improve the overall operation of our business. We continue to be disciplined on our costs, working with multiple brokers to shed our corporate office, as well as working with our marketing vendors to drive growth back into the business for the fourth quarter.

Growth Strategies

We continued to pursue many strategies to grow our revenues and expand the scope of our business in fiscal 2023 and beyond:

• Grow Core Revenue Channels

Direct to Consumer: The last several quarters we pulled back on sponsorships, expensive influencers and high acquisition cost marketing spend that resulted in low lifetime value customers. As a result, overall revenues have declined, but we believe we are in a better position to improve profitability and are now investing carefully in efforts with strong measurable return on spend to drive traffic and conversion rates.

Wholesale: We continue to focus on the right product at the right price for the right channel and adding channel specific distributors and brokers to help us scale in the food drug and mass channel (“FDM”). Our products are available throughout GNC and Wegmans' retail footprints. We continue to build relationships with key retailers and moved to a new boutique sales agency with deep natural and grocery channel-specific experience, focused on developing a pipeline of opportunities we believe are strategic to the category and our brand, though we can make no guarantee on how long specific retailers will maintain a presence within the cbd sales channel.

• Product Innovation: We believe innovation is key to the long-term success of any consumer brand. We invest in new product development and brand extension that we believe will (i) give us a competitive advantage in the marketplace; (ii) attract new customers; and (iii) open up additional revenue opportunities. During fiscal 2022 we launched an industry first NSF for Sport product line with World Anti-Doping Association (WADA) level assurance, a line of Delta 9 gummies and microdose products, along with a number of functional gummies and capsules. Based on customer feedback and preliminary clinicals we launched a new line of high-strength CBD products at the end of September 2022 and further launched cbdMD Max for Pain at the end of calendar 2022. During August 2023, we expanded our lineup of hemp-derived Delta 9 gummies, Uplift, Elevate and Relax that provide a daily routine for energy and focus, stress relief, and calming effects. We have a robust pipeline of products to launch during the second half of calendar 2023 that we believe will open up additional distribution channels as well as grow our addressable market.
• International Expansion: We continue to explore sales into markets outside of the United States. Our products are currently available in 31 countries. We generally partner with local wholesalers and local legal counsel who can help navigate the laws and regulatory requirements within their jurisdiction. We continue to pursue key wholesale accounts in several international markets and are gaining market share in Central America through our sanitary registration approvals. We are also expanding our E-commerce business to consumers in the United Kingdom (U.K.) and in March 2022, we received notice that the products we submitted have been validated in the UK as well as in the EU. We continue to work on strategies to continue to expand in the EU, Israel and other major markets which is primarily driven by the regulatory environment. In late fiscal year 2022, we registered and began selling products in Japan.
• Acquisitions: We evaluate acquisitions where we believe (i) there is an accretive customer base that can lower our cost of customer acquisitions through either a complementary direct to consumer base or wholesale channels, or (ii) the target has a profitable business or easily attainable cost synergies that can quickly help contribute and accelerate profitability of our Company. The rights and preferences of our outstanding shares of our Series A Preferred continues to create challenges with M&A opportunities.

Results of operations

The following tables provide certain selected consolidated financial information for the periods presented:

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.

Net Sales

We had total net sales of $6.1 million and $8.6 million for the three months ended June 30, 2023 and 2022, respectively, resulting in a decrease in net sales of $2.5 million or 28.8% year over year. This decrease is attributable to a decrease of $1.5 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 $960,473 in mainly attributed to our lower price structure over the prior year period. During the quarter two events impeded our growth. We were gaining strong momentum on Meta, however in early June they changed category marketing rules and with 'cbd' in our name, it took up much of June and July to regain access to Meta marketing. Additionally, in June we migrated our ecommerce platform, creating some temporary disruptions during the month. We are now working to optimize the platform to its fullest. As a result, our sequential overall revenue remained flat. Our E-commerce business increased by approximately 2.3% for the three months ended June 30, 2023 versus the three months ended March 31, 2023, primarily attributable to the changes to our market team and infrastructure while wholesale sales decreased approximately 17% for the three months ended June 30, 2023 from the three months ended March 31, 2023. We believe the current macro inflationary environment continues to impact discretionary spending with consumers as well as wholesale customers. We remain cautiously optimistic on a pipeline of opportunities both domestically and internationally and believe we will see revenue growth in the coming quarters.

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 38.5% and 33.1% for three months ended June 30, 2023 and 2022, respectively. This overall decrease in our cost of sales quarter over quarter is primarily attributable to decreased overhead allocation related to the closure of our lab and manufacturing facility in the second quarter of 2022, which increased margins for that quarter, offset by a new product mix with higher costs in late 2022.

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 June 30, 2023 and 2022:

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Our overall operating expenses decreased by $2.6 million or 31.6% for the three months ended June 30, 2023 over the three months ended June 30, 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 ($1.2 million), advertising, marketing, sponsorships and affiliate commission expenses ($2.0 million), reduction in depreciation expense ($0.06 million) related to the closure of our lab and manufacturing facility in fiscal 2022, and R&D and regulatory spend ($0.09 million), partially offset by an increase in non-cash stock compensation ($1.0 million) as a result of a $1.5 million contra-expense for stock compensation in the prior year quarter related to forfeited RSUs and options.

Excluding non-cash depreciation, intangible amortization, and non-cash stock expenses, and non-cash a360 marketing expense we reduced our cash adjusted operating expenses from $8.8 million to $4.5 million for the three months ended June 30, 2022 and June 30, 2023 respectively.

Our overall operating expenses, excluding goodwill and intangibles impairment, decreased by $13.0 million or 41.0% for the nine months ended June 30, 2023 over the nine months ended June 30, 2022. The year over year decrease was primarily driven by management's ongoing efforts to reduce our cost structure including decreases in staff related expenses ($4.1 million), advertising, marketing, sponsorships and affiliate commission expenses ($8.6 million), reduction in stock expense ($0.5 million), reduction in depreciation expense ($0.5 million) related to the closure of our lab and manufacturing facility in fiscal 2022, and R&D and regulatory spend ($0.4 million), partially offset by an increase in all other expenses ($0.1 million) and an increase of ($0.9 million) non-cash expense related to accelerated stock compensation amortization tied the termination of a contractual obligation, and an increase in intangible amortization expense.

Excluding non-cash depreciation, intangible amortization, and non-cash stock expenses and non-cash a360 marketing expense, and we reduced our cash adjusted operating expenses, excluding goodwill and intangibles impairment, from $29.5 million to $15.5 million for the nine months ended June 30, 2022 and June 30, 2023 respectively.

We continue to show strong year over year improvements operating a more disciplined SG&A cost structure. We have remained very focused on our sequential performance and trends as we are fixated on delivering a profitable quarter. We continued to make significant headway on our cost structure during the third fiscal quarter and were able to maintain our revenue base while stabilizing our SG&A costs. As part of our strategic plan to grow revenue, we began ramping up marketing spend in the third quarter, resulting in a slight increase in SG&A resulting in a sequential increase of operating losses; from a $1.5 million operating loss in the second fiscal quarter to $1.8 million for the third fiscal quarter. This increase in sequential SG&A is primarily a result of an increase in our non-cash marketing expenses related to our February 2023 contract with a360. Excluding this non-cash expense, our cash SG&A dropped $0.3 million sequentially and we improved our non-GAAP adjusted EBITDA by $200,000 for the quarter. We continue to focus on optimizing our marketing spend and working with our agencies to remain nimble and find new channels of growth, especially considering of the temporary disruption with Meta. We believe migrating to one of the fastest growing platforms not only allows the brand to be nimbler and plug into a robust ecosystem built for brands to scale, but also lowers our ongoing operating costs compared to the prior platform.

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.

The following tables provide information on our corporate overhead for the three and nine months ended June 30, 2023 and 2022:

Our corporate operating expenses are down quarter over quarter (excluding a one time reversal of forfeiture of unvested stock options) and year to date for the nine months ended June 30, 2023 versus 2022 as a result of our ongoing efforts to reduce our cost structure across the board as well as a significant reduction in the amount of non-cash stock compensation expense that has been issued year over year.

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 June 30, 2023 and 2022:

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 have concluded, and we are waiting for our independent peer reviewed results to be published.

Goodwill Impairment

The Company had goodwill at March 31, 2022 of $42,772,685. The Company impaired goodwill in subsequent reporting periods of fiscal 2022 and goodwill was fully impaired by September 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.

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 $122,230 at June 30, 2023, as compared to $276,000 at September 30, 2022, respectively. 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 requirement for the earn-out provision for the Twenty Two Earnout Shares was never met and at September 30, 2022 the balance of this obligation was zero.

Liquidity and Capital Resources

We had cash and cash equivalents on hand of $2.8 million and working capital of $5.7 million at June 30, 2023 as compared to cash and cash equivalents on hand of $6.7 million and working capital of $10.7 million at September 30, 2022. Our current assets decreased approximately 37.8% at June 30, 2023 from September 30, 2022, which is primarily attributable to a decrease in cash used to fund operations as well as a one-time non-cash expenses of approximately $885,000 related to previously un-expensed stock amortization related to an terminated contractual obligation, in addition to receiving our $1.0 million investment in Adara back in full. Our current liabilities decreased by 17.1% at June 30, 2023 from September 30, 2022, and is primarily attributable to decreases in accrued expenses and accounts payable.

On March 2, 2023, we entered into a purchase agreement with Keystone Capital Partners, LLC, which provides that subject to the terms and conditions set forth therein, we may sell to Keystone up to 281,934 shares of our common stock, from time to time during the term of the purchase agreement. Under the terms and subject to the satisfaction of the conditions set forth in the purchase agreement for a period of 12 months, subject to a blackout period from April 30, 2023 through July 14, 2023 under the terms of our recent underwritten public offering. the Company has the right, but not the obligation, to sell to Keystone, and Keystone is obligated to purchase, up to 281,934 shares of common stock. Upon entering into the Purchase Agreement the Company agreed to issue to Keystone 392,282 shares of common stock of the Company as the Commitment Shares as consideration for Keystone’s commitment to purchase shares of common stock upon the Company’s direction under the purchase agreement.

As of August 10, 2023, the Company also has up to 273,044 shares available to be sold under its agreement with Keystone, which it may drawdown on such agreement, subject to trading volume requirements of our common stock and further subject to the blackout period referenced above.

In May of 2023, we closed an underwritten public offering of shares of out common stock at a public offering price of $2.10 per share. Net proceeds from the offering after deducting underwriting discounts and commissions and offering expenses were approximately $2.5 million.

Management has concluded that substantial doubt exists about our ability to continue as a going concern for the next twelve months from the date hereof. Our current capital resources, including our equity line of credit with Keystone may not be sufficient to support our planned operations for the next twelve months from the date hereof. We believe that our cash and cash equivalents on hand should be sufficient to fund operations, however, depending upon our operating results and cash burn over the next five months, we may be required to raise additional capital to fund operations or scale back our operations or accrue Series A Preferred dividends. We expect to continue to incur losses for the foreseeable future as we continue our efforts to increase sales, develop additional products, seek acquisitions and mergers, continue research and development, reduce operating expenses and attempt to achieve profitability. The rights and preferences of our outstanding shares of our Series A Preferred continues to create challenges with M&A opportunities. Furthermore, in the event we identify an acquisition candidate, such acquisition may require immediate capital to close such acquisition. These factors, individually and collectively, raise substantial doubt about our ability to continue as a going concern, and therefore, could materially limit our ability to raise additional funds through an issuance of debt or equity securities or otherwise.

During the three and nine months ended June 30, 2023 we used cash primarily to fund our operations.

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. Unless the Company’s balance sheet significantly improves soon, the Company will be prohibited under the North Carolina Business Corporation Act from paying dividends and ultimately not pay (and accrue) monthly dividends. Under North Carolina law, no distribution may be made if, after giving it effect: (1) the corporation would not be able to pay its debts as they become due in the usual course of business; or (2) the corporation's total assets would be less that the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. Further, notwithstanding these factors, we may not have sufficient cash in the future to pay dividends on the Series A Preferred Stock. The Company’s board of directors has recently adopted resolutions declaring it advisable to amend the Certificate of Designation for the Series A Preferred Stock to provide that each share of Series A Preferred will be automatically converted into three shares of common stock and directing that the proposed amendment be submitted for consideration by the Company’s shareholders at a Special Meeting on September 22, 2023. The amendment requires the approval of both our Series A Preferred and common stock holders, voting as separate classes.

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 $4.0 million and $13.0 million for the nine months ended June 30, 2023 and 2022, respectively. Management believes the quarterly cash consumption should continue to improve in subsequent quarters.

Adjusted EBITDA

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.

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.

Our management uses and relies on Adjusted EBITDA, which is a non-GAAP financial measure. We believe that management, analysts and shareholders benefit from referring to the following non-GAAP financial measure to evaluate and assess our core operating results from period-to-period after removing the impact of items that affect comparability. Our management recognizes that the non-GAAP financial measures have inherent limitations because of the excluded items described below.

We have included a reconciliation of our non-GAAP financial measure to the most comparable financial measures calculated in accordance with GAAP. We believe that providing the non-GAAP financial measures, together with the reconciliation to GAAP, helps investors make comparisons between cbdMD and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measure and the corresponding GAAP measure provided by each company under applicable rules of the Securities and Exchange Commission.

The following table presents a reconciliation of GAAP loss form operations to Adjusted EBITDA.

Adjusted EBITDA for the three and nine months ended June 30, 2023 and June 30, 2022 is as follows:

(Unaudited)

(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) Represents non-cash goodwill impairment of $30,776,436 during the June 2022 quarter in addition to 13,898,285 of non-cash goodwill and impairment of the cbdMD trademark of $4,285,000 during the balance of the nine months ended June 2022.

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 2022 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.

Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this report, our interim principal executive officer and Chief Financial Officer has concluded that our disclosure controls and procedures were effective to ensure that the information relating to our company, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our interim principal executive officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Accordingly, we incorporate by reference the risk factors disclosed in Part I, Item 1A of our 2022 10-K. See also "Liquidity and Capital Resources" above.