cbdMD Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
December 22, 2023

There are 7 speakers on the call.

Operator

Good afternoon. Welcome to the cbdmd, Inc. 4th Quarter and Fiscal 2023 Earnings Call and Update. This afternoon, the company issued a press release that provided an overview of the results for its Q4 12 months fiscal period ended September 30, 2023, which follows the filing of its annual report on Form 10 ks. Today's conference call is being recorded and will be available online along with our earnings press release covering our financial results and non GAAP presentation at cbdmd.com in accordance with cbdmd's retention policies.

Operator

All participants on this call will be in listen only mode. After the presentation, there will be an opportunity to ask questions. At this time, I'd like to turn the conference over to Brad Whitford, this company's Vice President of Finance. Brad, please go ahead.

Speaker 1

Thank you, Gaylene, and thank you all for joining cbdMD's September 30, 2023 Q4 fiscal 2023 earnings call and update. On the call today, we also have Ronan Kennedy, our Interim CEO and Chief Financial Officer and Doctor. Sybil Swift, our Chief Science Officer. We'd like to remind everyone that various remarks with our future expectations, plans and prospects constitute forward looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. CbdMD cautions that these forward looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those indicated, including risks described in the company's annual report on Form 10 ks for the year ended September 30, 2023, and our other filings with the SEC, all of which can be reviewed on the company's website at www.cbdmd.com or on the SEC's website at www.sec.gov.

Speaker 1

Any forward looking statements made on this conference call speak only as of today's date, Friday, December 22, 2023, And cbdMD does not intend to update any of these forward looking statements to reflect events or circumstances that would occur after today's date, except as may be required by federal securities laws. And with that, I'd like to turn the call over to Ronan. Ronan?

Speaker 2

Thank you, Brad. Good afternoon, everyone. During fiscal 2023, cbdMD has navigated through a transformative phase, Making significant strides in our operational turnaround plan. Despite facing headwinds with the revenue declines, we successfully enhanced our overall operation and significantly curtailed our cash burn, particularly in the 3rd 4th quarters. The CBE market, while challenging, remains ripe with opportunities.

Speaker 2

Our focus is steadfast on reversing the revenue trend in 2023 and achieving positive EBITDA in 2024. Our diligent efforts this year have led to a $55,800,000 improvement in GAAP loss from operations for the full year 2023 and a non GAAP operating adjusted loss improvement of $7,700,000 for the This fiscal discipline coupled with strategic decisions resulted in $15,800,000 year over year reduction in cash SG and A costs for 2023 and $3,000,000 for the Q4. While overall revenues declined sequentially, we continue to make incremental improvements to our adjusted EBITDA and

Speaker 1

cash flow. On our last call,

Speaker 2

we were excited about the transition to our e commerce platform. We continue to see benefits from the lower cost structure an increase in our base of loyal subscribers since making the conversion. Our November site refresh aims to further optimize conversion rights, extend customer lifetime value and acquire new customers efficiently. Despite experiencing downtime issues at Meta again, our marketing team continues to focus on elevating our brand and niche and quality of content with everything we do. We regularly reassess every line item, channel and vendor for On the wholesale front, we continue to focus on developing new strategic relationships and selling into larger accounts and leveraging distribution networks to expand their reach.

Speaker 2

We are excited to announce that cbdMD launched in 160 Sprouts Market stores across the nation this month. We are continuing engaging with new retailers and focused incremental opportunities during calendar 2024. Internationally, our brand reputation, clinical data and safety data continue to create opportunities. Our PAW CV products are now registered in Central America and we began shipping in Costa Rica in December. We continue to grow our business in Brazil and are working on other actionable international distribution opportunities.

Speaker 2

Despite the longer lead times in the international sales cycle, we see these high Entry barrier markets as promising avenues for sustained growth. Last quarter, I stated that product development and innovation are important tenants. We continue to invest in our core CBD and Empower CBD brands and are excited about the new CBD and we have in store for 2024. That said, we recently took the opportunity to survey the landscape, ingredient trends and review our customer feedback And our team made the decision to launch 2 new brands HempMD and ATRx during this current quarter. Both brands provide new opportunities for growth that do not face the same regulatory and channel impediments as CBD.

Speaker 2

HempMD is a collection of curated hemp products primarily designed for sale on Amazon. ATRx is a new nutraceutical brand that will provide functional non cannabinoid health solutions to our customers with an initial focus on the emerging functional mushroom market. As mentioned in our press release, we are excited to announce the launch of our first ATRX product, the Ultimate Mushroom Daily Gummy. The Ultimate Mushroom Daily Gummy's proprietary blend is designed to enhance focus, memory, support gut health, reduce inflammation and boost immunity and pairs well with our core CDMD products as part of an everyday routine. We received positive feedback and growing interest from several retailers and are already in discussions about expanding the ATRX line into multiple brick and mortar retailers.

Speaker 2

These new brands not only complement our core offering, but also open up new channels for growth beyond the regulatory confines of CVs. Since our last call, we invested significant management resources on both M and A opportunities as well as our special meeting of shareholders and proxy statement to convert our Series A preferred stock and address our capital structure. It is clear from discussions within our industry, we have a great platform and there are significant synergies that exist with a roll up or other M and A. However, complexity and procedural challenges associated with our multi class equity structure continue to be problematic to advancing the transaction. With respect to our proxy vote, we were unsuccessful achieving the preferred votes necessary to pass the proposed resolution.

Speaker 2

We believe our current structure has a negative impact on the combined market capitalization of the company and significantly limits our ability to raise capital, ultimately putting the company and NYSE listings at risk. We received feedback from shareholders during the last proxy process and working with others with our board members on alternatives. Cleaning up our capital structure is one of our highest priorities going into calendar 2024. With that, I'll turn the call over to Doctor. Stibelsweft.

Speaker 3

Thank you, Ronen. My comments today are focused on science and regulatory updates. On prior calls, I discussed our biometric study with Wu to measure the benefits of consuming cbdMD products daily. I'm pleased to announce the 1st cohort of participants in our study is completing this month, with study conclusion estimated to be in the 3rd calendar quarter of 2024 and data to be published shortly thereafter. This study was designed to gather data about our core broad spectrum blends impact on sleep and recovery and will be used in marketing campaigns and consumer education initiatives to increase brand loyalty and further drive revenue.

Speaker 3

Just after our last call in September, we published the first of several journal articles on the company's safety data and regulatory toxicology and pharmacology, a high impact factor peer reviewed toxicology journal. The journal publication details the safety of our proprietary broad spectrum CBD blend by analyzing the several of the globally recognized studies performed on the company's proprietary broad spectrum blend, including prenatal development and a 90 day study of oral consumption with the recovery period. The study concluded that cbdMD's proprietary broad spectrum blend is safe when consumed at 160 milligrams per day in a 70 kilogram human, which equates to £154 for those of us who do not work in the metric system. The real world application of this study is that our products are safe to consume when used in dietary supplement products at approximately 1 milligram per pound of body weight per day. The significance of this study is demonstrated by the fact it has already been cited in other metastudy papers on the subject of CBD safety.

Speaker 3

It is also a key example of cbdMD's commitment to science, which has laid the foundation for cbdMD to deliver superior everyday wellness products that are formulated to specifically address the needs of its customers. The publication of our data reinforces to our customers, stakeholders and regulators the company's unwavering commitment to science and safety. We continue to build on the strong science foundation with our new line of functional mushroom products in the ATRx brand, beginning with our superior mushroom gummy. In recognition of the significant amount of scientific information pertaining to the benefits of functional churns for optimizing health, we are including them in our new ATRx products to provide our customers with effective functional health and wellness products. In our last earnings call, I discussed some of my activities before Congress and how I provided written testimony to Representative Comer's office to support oversight hearings into how the FDA has mishandled CBD as a dietary ingredient.

Speaker 3

Further to those efforts, the company submitted a detailed 21 page response for the July 27 request for information or RFI regarding the regulation of cannabidiol products issued by a bicameral health committee leaders and a bipartisan requests for information regarding FDA regulation of CBD. The RFI asks subject matter experts and stakeholders for input on key areas pertaining to FDA regulation of CBD. We reviewed the RFI as a critical opportunity for the company to provide decision makers in Congress with substantive information from a top CBD brand that has taken tremendous strides to be fully compliant with the Food, Drug and Cosmetic Act. We submitted our response to the request directly under the cbdMD brand to ensure the bicameral bipartisan congressional committee received the requisite information to make an informed decision about the safety of our products and the right path towards regulatory clarity. After submitting the RFI, we followed up by meeting with key staff on the Energy and Commerce Committee, where we discussed the data in our safety study.

Speaker 3

Although we have yet to obtain regulatory clarity, the company believes a consistent message to Congress is required to move Origin before. Due to the fact Congress has yet to act, the battleground has shifted to combating burdensome state regulations and we are working with our trade groups to block or delay unfavorable state legislation. In recent months, by working closely with our trade groups, we have been successful in stopping several attempts to limit the amount of cannabinoids per serving and per container in hemp derived cannabinoid products. In light of the regulatory burdens placed on our industry, we continue our efforts to educate consumers and regulators alike. We are crafting education campaigns based upon the data derived from our extensive safety dossier in clinical studies.

Speaker 3

This messaging will be leveraged to educate customers on why cbdMD products are superior to others in the market and to educate state regulators to form the gaps in their knowledge and refute any untoward messaging they may have received about the safety and efficacy of our products. We believe that by taking a proactive approach at the state level, we will ensure our customers have access to safe and efficacious products, while we also remove unnecessary roadblocks to selling our products in all 50 states. These education campaigns are also going to be leveraged for our marketing team for consumer outreach. So our customers know how to identify safe and efficacious products and understand why our significant investment in science and quality matters, ultimately leading to increased sales. We continue to maintain compliance with all responsible dietary supplement brands should by addressing the four corners of the Food, Drug and Cosmetic Act, good manufacturing practices, labeling claims, Adverse Event Reporting and Ingredient Safety.

Speaker 3

We know our products are safe and effective because we invested in the science to support them being so. We will continue to tirelessly advocate for regulatory clarity for hemp derived products, while also focusing on education to ensure that our customers have access to botanically derived solutions and understand why they are necessary for their everyday health and wellness.

Speaker 2

With that, I will

Speaker 3

turn the call over to Brad.

Speaker 1

Thanks, Chivil. Total net sales for the Q4 of fiscal 2023 were $5,700,000 or a 27% decrease from the prior year comparative quarter total. Sequentially, sales were essentially flat. For the 2023 fiscal year, audited net sales totaled $24,100,000 as compared to $35,400,000 in the prior year. Our quarterly e commerce direct to consumer business generated sales of $4,600,000 in the Q4 of fiscal 2023.

Speaker 1

This was a 26% year over year quarterly decrease. We believe year over year sales were impacted as a result of reduced to underperforming marketing expenses and microeconomic forces on consumers. E Commerce represented 81% of our total net sales for the Q4 of 2023 versus 80% in the

Speaker 2

prior year

Speaker 1

comparative quarter. For the to 80% in the prior year comparative quarter. For the fiscal year ended 2023, e commerce generated $19,400,000 of net sales compared to $26,400,000 for the compared to prior fiscal year, a 26% decrease. E commerce represented 81 Our total net sales for the fiscal year ended 2023. While sales decreased year over year, we improved our overall direct to consumer revenue to marketing spend from 1.6 in 2022 to 2.8 in 2023.

Speaker 1

This means we are spending more effectively for the year operated at a more sustainable marketing spend ratio of 36% of revenue as compared to 62% of direct to on revenues in 2022. Our wholesale business generated $1,100,000 of net sales for the Q4 of fiscal 2023, down 32% as compared to $1,500,000 for the comparative quarter in fiscal 2022. This decrease is primarily attributable to our lower price structure over the prior year period and changes in state regulation of certain CBD products. For the fiscal years ended December 30, 2023, 2022, our wholesale business generated net sales of $4,700,000 $8,900,000 respectively. Our gross profit as a percentage of net sales came in at 62% for the Q4 of fiscal 2023 as compared to 64% in the prior year comparative quarter.

Speaker 1

For fiscal 2023, gross margins totaled 62% as compared to 63% from the prior year. Excluding impairment of goodwill and other intangible assets in those periods, our SG and A expenses for the Q4 of fiscal 2023 totaled $5,500,000 compared to $7,900,000 in the prior year comparative period. Excluding an increase in intangible amortization, Costs came down across the board as management continues to focus on profitability. Excluding depreciation, amortization, stock expense and our A360 amortization, cash, SG and A expenses came down almost $3,000,000 from $7,100,000 last year to $4,200,000 in the current quarter. Sequentially, cash SG and A declined approximately $200,000 primarily due to reductions in payroll, legal and other on SG and A expenses.

Speaker 1

For the full year 2023, SG and A expenses dropped $15,400,000 from $39,600,000 to 24,200,000 During the Q4 of 2023, market forces and trends caused us to reassess the useful lives of our intangible assets. While the significant decline in the combined and market capitalization of our traded securities created a triggering event under ASC 360, and we were required to perform a multi step valuation under GAAP. We ultimately adjusted the useful life of our trademarks and incurred a non cash impairment charge is $13,200,000 In the prior fiscal year, we incurred a non cash impairment charge of $4,300,000 related to intangible assets and $56,700,000 related to goodwill. Overall,

Speaker 2

this resulted in

Speaker 1

a loss from operations of approximately $15,200,000 for the Q4 of fiscal as compared to $14,800,000 loss from the prior year period. Excluding 2023 and 2022 impairment charges during the Q4, non GAAP operating income totaled $2,000,000 as compared to $2,800,000 for 2022. The full fiscal year operating loss totaled $22,400,000 as compared to an operating loss of $78,300,000 in 2022. Our non GAAP adjustments to operating expenses for the Q4 of fiscal 2023 included the $13,200,000 intangible impairment charge, $33,000 in non cash employee stock expense, dollars 667,000 in depreciation and amortization expense and $609,000 associated with non cash payer credits related to our marketing agreement with A360 $70,000 in inventory write downs and $45,000 in the year end bad debt accrual resulting in a non GAAP adjusted operating loss of $572,000 for the Q4 of fiscal 2023 as compared to a $2,200,000 non GAAP adjusted operating loss in the 4th quarter of fiscal 2022. The decrease in non GAAP adjusted operating loss over the prior year period is primarily attributed to management's focus on our cost structure and profitability.

Speaker 1

For the 2023 fiscal year, our non GAAP adjusted EBITDA loss totaled $5,500,000 as compared to $13,200,000 for fiscal 2022. The company has made significant strides during the last two quarters of the fiscal year and is operating at a much improved rate than the 2023 full year totals. Other income and expense on our consolidated income statement for the Q4 of 2023 includes a non cash contingent liability gain of $34,000 related to our December 2018 acquisition of Curebase Development. The final marking period ended in November And we will be closing the earn out shortly, which we anticipate will have an immaterial financial impact on our 1st fiscal quarter of 2024. In addition, we incurred a non cash expense related to our investment in steady state based on several factors, including but not limited to Overall declining industry market valuations and moving cbdMD's business to alternative suppliers, we believe it was prudent to revalue this investment.

Speaker 1

During the 4th fiscal quarter of 2023, we utilized approximately $1,000,000 of cash. The main components included our Adjusted non GAAP operating loss of $570,000 and dividends paid of $660,000 with working capital adjustments making up the difference. We had cash and cash equivalents of approximately 1,800,000 and working capital of approximately $3,400,000 on September 30, 2023, as compared to cash and cash equivalents of approximately $6,700,000 and working capital of approximately $10,700,000 as of September 30, 2022. Our current assets as of September 30, 2023 decreased approximately 49% from September 30, 2022 to $8,100,000 A primary driver of the decrease in current assets was the usage of cash for operations and the reduction of prepaid sponsorships by $1,300,000 mostly attributed to the termination of an Affin sponsorship. As of September 30, 2023, the company's total current liabilities were $4,600,000 of which approximately $1,900,000 is accounts payable and $1,500,000 is accrete expenses.

Speaker 1

We are committed to prudently managing our cash and liquidity position while rebuilding our revenue and optimizing our cash SG and A We continue to reassess every line item on our P and L and are working to squeeze costs out of our infrastructure while focusing on smart marketing expenses to generate positive ROI and revenue growth. And with that, I'll turn the call back over to Ronen.

Speaker 2

Thanks, Brad. As we reflect on our journey this past year, it's clear that our commitment to providing customers with superior natural products An exceptional customer experience remains a cornerstone for building a robust and vibrant brand. This unwavering belief in our mission continues to guide us, yet the way we operate at cbdMD has evolved significantly over the past year. Today, we stand more disciplined, agile and laser focused on optimizing cash flow than we did before. The encouraging improvement in our bottom line and substantial reduction on our cash burn toward the later half of the year are testament to this evolution.

Speaker 2

The The CBD market still presents a tremendous opportunity for us despite the ongoing regulatory complexity. We are continually strengthening the foundation and market position of cbdmd and our pipeline for new opportunities both domestically and internationally is expanding. Our new brands HempMD and ATRx has not only opened doors to exciting distribution channels and customer acquisition prospects, but also provide us with additional pathways to rejuvenate our revenue streams. Looking ahead at 2024, we recognize it is a crucial year for the company. Our focus is set on growing sales and addressing our capital structure.

Speaker 2

We approach these challenges and opportunities with a blend of enthusiasm and strategic results, fully dedicated to taking steps necessary to yield tangible improvements for our shareholders. Thank you for your continued support and belief in our vision. I now invite the call to open up for questions.

Operator

Thank you. We will now begin the question and answer session. You will hear a tone acknowledging your request. Our first question is from Adam Waldo with Lismore Partners. Please go ahead.

Speaker 4

Yes. Good day. Ronan, thanks very much for taking my questions. I think in your prepared remarks, you Gave us data that allows to back into the notion that free cash flow was negative $500,000 or $600,000 in the September quarter. Can you give us a sense for what the cash burn rate, if applicable, is looking like here as we're almost finished the fiscal Q1?

Speaker 4

And then I have a follow ups.

Speaker 2

Sure. So, I would say we are working Hard to make some improvements here this quarter. We did incur some additional expenses tied to the proxy and some of the development costs. But we are expecting Somewhat improved slightly improved bottom line numbers for I guess

Speaker 4

the December So somewhat better sequential cash burn than in the fiscal Q4, which obviously was a nice improvement on the fiscal Q3. So okay. So we're getting closer and closer to cash breakeven. You enumerate both on in the press release and on 10 ks filing in more detail about the numerous product and channel opportunities you're pursuing for returning to revenue growth in fiscal 2024. What are you starting to see here in the fiscal Q1 quantitatively that would suggest that we're Tracking in that direction and in particular what product and channel opportunities do you see as having the greatest potential Numerical effect on the company's revenue in fiscal 2024?

Speaker 2

Yes, Adam, thanks. A couple of questions in there. So let me try to answer them. I think going into 2024, we continue to see our Delta 9 products As some of the leaders of our product portfolio, we are very excited and encouraged with the New brands that have launched this quarter and think that by the end of calendar 2024, they can contribute in a pretty meaningful way. And then we continue to work tirelessly to on the core brands to maximize higher marketing and acquiring customers and really rebuilding now that we've got some good underpinning with the new platform and similar changes we've done going off the end of the year.

Speaker 4

Okay. So that's good color.

Speaker 1

What sort of I mean, we're very late in

Speaker 4

the fiscal Q1. What sort of year over year revenue growth are we spoke or year over year revenue comparison Are we seeing during the fiscal Q1?

Speaker 2

We're not providing guidance at this time.

Speaker 4

Okay. Last question. I appreciate you taking my questions. Obviously, the attempt to convert the Preferred into common is a 3:one ratio did not work out. You've alluded both in the press release and in prior press releases and and SEC filings to other avenues to deal with the capital structure issue.

Speaker 4

Can you speak to various Specific initiatives that you're thinking about pursuing there? Can you address that a little bit more specifically at this time?

Speaker 2

Sure. Look, we're working with our Board on an alternative proposal. We've been as I mentioned on the call earlier, we were engaging in several potential strategic transactions that could couple with a proposal. However, I think just the complexities of the structure and the approval process became very daunting. So our focus is to work to Come to shareholders with a new proposal here in the future and get to a point where we can clean up the capital structure and Opportunities for us strategically.

Speaker 4

Okay. Thanks very much and best of luck moving forward.

Speaker 2

Thank you, Alan.

Operator

The next question

Speaker 5

So I know when as we've been discussing for this year, you talked about moving your e commerce sites over to Shopify. Is that largely done? And what have you noticed in terms of KPIs or sales trends on Shopify. Is it too early to see the benefits of that? And then follow-up would be Any color on how the products are selling on Amazon?

Speaker 5

And then lastly, I have a SKU question.

Speaker 2

Sure. So with respect to Shopify, we have been seeing some of the benefits Both from sort of lower cost structure since we made that migration. We've seen once we get people to the site, we're doing a much better job converting subscribers. So we've seen some growth on that front. And we just in the last 30 days sort of did a larger site Conversion and continue to sort of utilize new tools to work to AB testing and really drive our conversion optimization throughout the site.

Speaker 2

So we're excited about where we're positioned and the opportunity to take it in 2024. So that was your first question. Your second question, anything going on again?

Speaker 5

Yes, sure. Amazon, how is that going? And then on the number of SKUs, I know you've cut costs significantly and reduced the number of SKUs, particularly ones that are unprofitable. Is that largely done At this point, I know there'll always be some churning as you continue to evolve, but is The mass reduction in SKUs largely complete at this point.

Speaker 2

Yes. So I'll address the Amazon question first. In the U. K, we continue to see sort of a steady business out of the U. K.

Speaker 2

On Amazon. In the U. S, our launch with the Hembd is really in the last 30 days. It's really too early to give you too much Information on that, but and then I think our ATRX brand just launched today. So we're excited to see how that does here in the coming quarters.

Speaker 2

And then with respect to the SKU list, I think we're continuing to try to rationalize SKUs that really don't perform and invest behind SKUs that do perform. We think the significant rationalization has been done. We're coming out with some newer SKUs. We are looking at some setting some of the slower movers to make sure that our investments in working capital and resources are dedicated on the highest value skews that we have.

Speaker 5

Okay, great. Thanks very much. I'll hop back in the queue.

Operator

The next question is from Thomas McGovern with Maxim Group. Please go ahead.

Speaker 6

Hi, Roden. Yes, just one real quick question here. A lot of my outstanding questions have already

Speaker 1

been covered. So just real

Speaker 6

quick, you guys mentioned Congrats on, 1st of all, on getting into Sprouts markets, 160 stores, it's great. You mentioned that you are looking to And further in fiscal year 2024. I was just trying

Speaker 1

to get a read if

Speaker 6

you have any kind of insight on the magnitude of that potential expansion. Could we expect that to see it add more stores or could it potentially double in size? Just anything you could give a kind of context on that 92 would be appreciated.

Speaker 2

Sure. With specifically with Sprouts, again, we just launched this month. Our goal is Yes, we've not throughout the whole system. Our goal is to continue to penetrate and roll out throughout the Sprout system. We've been talking with some other retailers.

Speaker 2

We've actually with some of the changes we made to our team this year, we're getting access to Retailers that we never had access to, so we're very excited about some of the conversations that are going on. However, sort of just time wise, It gets very lumpy and long term in sort of winding up the reviews and rollout. So, I think we are seeing opportunity and engagement on the CBD and rebrand. And then we are starting to see and we shared sort of an early look at ATRx And that's a deal with a number of parties as well and encouraged with the opportunity that exists with those brands in the mass retail space as well.

Speaker 6

Understood. I appreciate the color. I'll hop on now. Thanks.

Operator

The next question is from Adam Waldo with Lismore Partners. Please go ahead.

Speaker 4

First, appreciate your permitting the follow-up. I apologize. I Yes, through the rest of the 10 ks. And one important question is regarding the headquarters lease. What can you say as to the current status of that lease here in December relative to what was in the K as of the end of the September quarter in terms of being current on that lease and future corporate headquarters location plans for the company?

Speaker 4

Thank you.

Speaker 2

Look, we're continuing to try to negotiate and find alternative tenants for the facility. And there has been a little bit of interest. It's a very challenging market. And we're cautiously optimistic that in 2024, we'll be able to find somebody to step in and take over that facility And shed that significant expense.

Speaker 4

Very helpful. Best of luck with that. Thank you again.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Ronan Kennedy for any closing remarks.

Speaker 2

Thank you again for your ongoing support and time today. And we wish you all a happy holidays and look forward to our upcoming call in February. Thank you.

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