cbdMD Q1 2024 Earnings Call Transcript

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Provided by Quartr
February 13, 2024

There are 7 speakers on the call.

Operator

Good afternoon. Welcome to the cbdmd, Inc. December 31, 2023, 1st fiscal 2024 Quarter Earnings Call and Update. This afternoon, the company issued a press release that provided an overview of its Q1 results, which follow the filing of its quarterly report on Form 10 Q. 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. The call will be followed by a question and answer session. At this time, I would now like to turn the conference over to Brad Rickford, the Company's VP of Finance. Brad, please go ahead.

Speaker 1

Thank you, Asiya, and thank you all for joining cbdMD's December 31, 2023 First Quarter of Fiscal 20 24 Earnings Call and Update. On the call today, we also have Ronan Kennedy, our Interim CEO and Chief Financial Officer. We'd like to remind everyone that various remarks about 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 uncertainties that may cause our actual results to differ materially from those indicated, including risks described in the company's quarterly report on Form 10Q for the quarter ended December 31, 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. Any forward looking statements made on this conference call speak only as of today's date, Tuesday, February 13, 2024, And CVDMD 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 With that, I'd like to turn the call over to Ryan.

Speaker 2

Thank you, Brad. Good afternoon, everyone. It has only been a short busy few weeks since our year end call. We continue to make progress on our expenses and year over year gains on net income and non GAAP adjusted EBITDA. We remain disciplined about our cost controls, but ultimately missed on our goals of sequentially growing revenue for the quarter.

Speaker 2

We did not hit this goal for December. Significant resources were allocated to a number of larger strategic initiatives that are helping pave the way for growth in 2024 and beyond. This included launching our 2 new brands, HempMD and our functional mushroom line, ATR Slabs. Revenue remains a top priority. We know that we must grow revenues to deliver positive cash flow and are committed to growth.

Speaker 2

We are constantly assessing our team and vendor base to ensure we believe we have the organization needed for growing revenues and delivering profits. In January, we added Joe I've had Jim to our team to head up our wholesale efforts. We're excited for his energy and passion he brings our company into the CBD industry. His knowledge and contact base helps expand our reach and we plan to get more aggressive with opportunities internationally as well as here in the USA. Furthermore, we are taking steps to ensure we win on e commerce and get back to growth.

Speaker 2

On our last call, we just announced our Sprouts launched, And we are pleased with the velocity out of the gates and initial reorders. Similarly, the day of the call, we launched our initial ATRX product, The ultimate mushroom daily gummy in Amazon. In a few short weeks, we have started ramping up sales and are getting great feedback and reviews from customers. Outside of Amazon, ATRX is showing encouraging signs just a few weeks into our launch. We received orders from a national retailer to roll out 4 new ATRX functional products.

Speaker 2

These products were recently nominated in the 2024 Natural Choice Awards by Whole Foods Magazine, a testament to their innovation and market potential. We are actively building interest with other retailers and look forward to announcing further placements. Last week, we announced the closing of the gross proceeds of $1,250,000 from a handful of institutional investors. We believe the funding was necessary to assist with the working capital needed to expand ATRx and provide working capital to support our ongoing operations. Capital availability is challenging at the moment and given our preferred structure and pending proxy created additional challenges To the financing.

Speaker 2

I continue to review multiple strategic opportunities that are presented to me. The complexity and procedural challenges stemming from our multi class equity continue to be problematic to advance strategic transactions. We recently filed our preliminary proxy statement in connection with our annual meeting and have included an additional proposal to convert our outstanding preferred stock. We continue to believe in all common capital structures should unlock additional enterprise value for the company and open up additional strategic opportunities. The accrued preferred dividend continues to pose a risk to all shareholders As it reduces our equity value by $1,000,000 a quarter, putting the company on a path in the near term to fall below the minimum $6,000,000 net book value requirement under the NYSE American rules.

Speaker 2

It is very important for shareholders to consider this as they review the forthcoming definitive proxy statement. With that, I'll turn the call over to Brett.

Speaker 1

Thanks, Ronen. Total net sales for the Q1 of fiscal 2024 were 5,400,000 or a 12% decrease from the prior year comparative quarter total of $6,100,000 Our quarterly e commerce direct to consumer business generated sales $4,400,000 in the Q1 of fiscal 2024. This was a 10% year over year quarterly decrease. We believe the quarter over quarter decrease is primarily attributable to continued reduced marketing expenses and microeconomic forces on consumers. E Commerce represented 82% of our total net sales for the Q1 of 2024 versus 80% in the prior year comparative quarter.

Speaker 1

Our wholesale business generated $1,000,000 of net sales for the Q1 of fiscal 'twenty four, down 19% as compared to 1,200,000 the comparative quarter in fiscal 2023. This decrease is primarily attributable to changes in state regulatory rules on certain CBD products. Our GAAP gross profit as a percentage of net sales came in at 66% for the Q1 of fiscal 2024 as compared to 59% in the prior year comparative quarter. Our team's focus on cost controls helped improve gross margins for the quarter. Our SG and A expenses for the Q1 of fiscal 2024 totaled $4,600,000 compared to $7,600,000 in the prior year comparative quarter.

Speaker 1

Our costs came down across the board as management continues to focus on profitability. Excluding depreciation, amortization and stock expense, Cash SG and A expenses came down $1,900,000 from $6,200,000 last year to $4,300,000 in the current quarter. Overall, this resulted in a loss from operations of approximately $1,100,000 for the Q1 of fiscal 2024 as compared to $4,100,000 loss from the prior year period. Our non GAAP adjustments to operating for the Q1 of fiscal 2024 included $17,000 in non cash employee stock expense, $284,000 in depreciation and amortization expense and $68,000 associated with mergers and acquisition transaction expenses as well as proxy resulting in a non GAAP adjusted operating loss of $698,000 for the Q1 of fiscal 2024 as compared to $2,600,000 non GAAP adjusted operating loss in the Q1 of fiscal 2023. 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

Other income expense on our consolidated income statement for the Q1 of 2024 includes a non cash contingent liability gain of 70 related to our December 2018 acquisition of Cure Based Development. The final marking period ended in November and we completed the final earn out distribution in January of 2024. We had cash and cash equivalents of approximately $1,500,000 and working capital of approximately $1,400,000 on December 31, 2023, as compared to cash and cash equivalents of approximately $1,800,000 and working capital of approximately $3,400,000 as of September 30, Our current assets as of December 31, 2023 decreased by approximately 8.7% from September 30, 2023 to $7,400,000 A primary driver of the decrease in current assets was the usage of cash for operations. As of December 31, 2023, the company's total current liabilities were $6,000,000 of which approximately $1,600,000 accounts payable and $3,100,000 is accrued expenses. We are committed to prudently managing our cash position while rebuilding our revenue and optimizing our cash SG and A expenses.

Speaker 1

We recently closed on new financing that provides additional working capital and bolsters our balance This added approximately $1,200,000 after fees to our balance sheet and our cash position today is approximately 2,500,000 In addition, we continue to reassess every expense line on our P and L and are working to streamline costs out of our infrastructure, while focusing on thoughtfully targeted marketing spend to generate positive ROI and revenue growth. With that, I'll turn it back over to Raymond.

Speaker 2

Thanks, Brad. At the heart of cbdMD lies our unwavering dedication to offering our customers Natural wellness solutions that significantly enhance their daily lives. CbdMD remains a brand with very strong loyal customer base with tremendous potential. We are encouraged by the strong rapid adoption of our new functional mushroom brand, ETRX. The next few months are critical as we look to continue to build momentum and over deliver on our TRx retail launch and prepare for our annual meeting.

Speaker 2

Our commitment to responsibly managing our brand and maximizing shareholder value remains steadfast as we continue to navigate the complexities of our turnaround plan. Thank you for your continued support and belief in our vision. I now invite your questions to further discuss those.

Operator

We will now begin the question and answer session. The first question comes from Anthony Vendetti with Maxim Group. Please go ahead.

Speaker 3

Thank you. Ronen, I was just wondering if you could talk a little bit more about the relationship with Sprouts Farmers Market. How many products are available and how many locations? And then is that the new mushroom DXT product, is that going to be available there or is that available at different locations?

Speaker 2

Yes. Hi, Anthony. So we launched in 160 Sprout stores. We're pretty happy with 2 SKUs, 2 of our gummy SKUs And we're pretty happy with the velocity of those out of the gates. We continue to sort of show work with them to deepen the relationship and figure out what other opportunities we have to gain shelf space.

Speaker 2

One of the things we have, we are Looking and would love to sort of continue to expand is our functional gummy product through ATRx with Sprouts, but we're still working through our relationship and opportunities to expand with them.

Speaker 3

And then Ronen, you had mentioned on the last call that we had that You had some issues with the Facebook your Facebook account. Have you regained access to your Facebook account? Have the issues around advertising been resolved? Everything's back up and running there?

Speaker 2

Yes. This is sort of midway through the Q1. We did have sort of full access and we're continuing to work to improve and optimize our return to that channel.

Speaker 3

Okay. And then just in terms of the mushroom SKU that you're talking about, Where is that currently being launched? How many locations? And can you Elaborate a little bit more on the opportunity there?

Speaker 2

Yes. So we are not able to say what retailer. I think We made the sort of the decision a little earlier to announce that just because we went out and found some additional financing and needed to sort of leverage some bolster our balance sheet to support some of the working capital build. It is with a national retailer. We are sort of finalizing how expansive that launch will be.

Speaker 2

And at this point, there are 4 SKUs For new SKUs that the launch is part of, so we're pretty excited about getting that placement and building the inertia for this new brand.

Speaker 3

Okay. And then on the Integration onto the Shopify platform, how is that going? Are all your e commerce sites now on the Shopify platform?

Speaker 2

Yes. All the sites having converted over and we're continuing to sort of leverage the Shopify network and sort of optimize that to our benefit.

Speaker 3

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

Speaker 3

Thanks.

Operator

The next question comes from Jim Schafer, Private Investor. Please go ahead.

Speaker 4

Hi, Ronen. Thanks for taking my call. First, regarding the Annual meeting preliminary proxy, I've identified at least 2 clerical errors and have emailed the details to ircdbmd.com. Hopefully you got that. For my question, the deal laid Okay.

Speaker 4

Yes. The deal laid out for converting the Series A preferred stock to common stock isn't any better than the August 20 23 deal, the offering is twice as much of a pie that's half the size as it was in August. So what gives you confidence The proposal will pass the 2 thirds majority shareholders, Series A shareholders vote?

Speaker 2

Look, Jim, I think what we've tried to do is take some feedback that we received around sort of where people were looking from an ownership standpoint and understanding that sort of the preferreds felt they needed a greater ownership stake. At the same time, we have to balance sort of The requirement of making sure we believe we can get the common to vote for the proposal without the common, Sort of any proposal is going to work. So it's sort of a sort of challenge to navigate sort of the and balance sort of the demands of both shareholder classes, but knowing that ultimately if Neither class votes in favor, then I think it puts the listing at risk for everybody. So We try to sort of ensure that the preferred end up with A materially increased amount of ownership over where the proposal was last year. We've tried to add some incremental Cash to the balance sheet and position us the companies that are coming through this, we have working capital in unit and can hopefully unlock some additional value for shareholders cleaning up service dual class structure.

Operator

The next question comes from Bob Berlacher, a Private Investor. Please go ahead.

Speaker 5

Hey, Ronen. The gentleman just before me asked a similar question, but by my back of the envelope, Again, depending on the convert that you just did financing, the common stock, If it is lucky enough to hold at these levels, I would assume that once those converts are converted. The stock will come under some kind of pressure and the preferreds based on your Even 6 to 1 are going to own less of a percentage as the gentleman before me said than You know, the offer that you made months ago. So like him, I'm a preferred holder as you know. I don't understand how you think you're going to potentially get 2 thirds of the vote and yet we'll spend money on this Proxy solicitation.

Speaker 5

And I just I want to know what calculation management or the Board did to come up with the 6 for 1, but also with the financing that was just done, The dilution, if you throw that into the common count, we're going to get 80% or less of the company as preferred holders. And I'd just like to know what your comments are on that please.

Speaker 2

Sure, Bob. Look, I think Our goal is to be able to pay off the financing over the 18 months and minimize the dilutive impacts on that. And then fundamentally, we were trying to take some of the feedback around Ensuring we had additional capital on the balance sheet and a plus 90% ownership of the preferred. I think given the markets and given our capital structure.

Speaker 5

I'm sorry, go ahead. I interrupted. Go ahead. Sorry.

Speaker 2

I think additionally given where the Book value of equity trends were. I think we would have liked to have had some additional runway before we proxy this. And What we saw was some concern about where the book value of equity was ending up in the coming months and felt it prudent to try to move to get ahead of that and minimize incremental expenses tied to proxy, including in your annual meeting.

Speaker 5

How would you expect to pay back the debt, Whether the preferreds convert or not, where is the cash flow that the company is going to potentially generate a profit that are going to potentially be able to retire $1,250,000 on top of the fact or 1.5 really. On top of the fact that there's nothing to prevent the convert holders from converting in advance of that 18 month maturity and selling stock which is fine, but again increasing the common share count and therefore not only diluting the common holders, but diluting the preferred holders in the event that we might convert.

Speaker 2

Our goal is to continue to improve the overall financials and get to positive EBITDA and generate earnings so that we can fund this business and create a sustainable business plan.

Speaker 5

Okay. All right. Thank you for answering my questions. I appreciate it.

Operator

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

Speaker 6

Hey, guys. Yes, I just wanted to hop on, first ask a follow-up on Anthony's question about Sprouts Farmers Markets. I mean, so You just said 150 locations, which was the figure that was given at the end of the fiscal year 2023. However, in your press release, dated January 18, 2024, you mentioned there was 175 locations. So I just wanted to clarify that.

Speaker 6

Is it 150 locations versus now 175 locations?

Speaker 2

Tom, I think it was closer to the 175 locations.

Speaker 6

Okay. Okay. I appreciate that clarity. And then finally, just real quick, just wanted to see if there was any notable updates on your efforts In pursuing FDA regulation of CBD products, if so, what are they? And if not, maybe Do you have any expectations on when we could expect some developments in that front, whether there's some upcoming events or dates that we should be looking out for that could serve as a catalyst for

Speaker 2

Yes. Look, we're staying close to Sort of what is happening and trying to make sure that we have a voice. I guess, given where the political climate is today and forthcoming election, We don't really see any material movement at the national level here for 2024. We are seeing an increase in activity at the state level. So we're staying as on top of that as much as we can to ensure that sort of we're aware of what's happening, we can voice and we can reach out to appropriate states and educate them about our product and category and all the benefits and hopefully improve or sort of minimize any changes to the state level legislation.

Operator

This concludes the question and answer session. I would now like to turn the conference back over to Willdan Kennedy for any closing remarks. Please go ahead.

Speaker 2

Thank you again for your ongoing support and we look forward to our upcoming shareholder meeting at the end of March. Thank you.

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