cbdMD, Inc.

Good afternoon. Welcome to the CBDMD Inc. fourth 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 fourth quarter and 12-month fiscal period ended September 30th, 2023, which followed the filing of its annual report on Form 10-K. 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 presentations at cbdemd.com in accordance with CBDMD's retention policies. All participants on this call will be in listen-only mode. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. 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.

Thank you, Gaylene, and thank you all for joining CBDMD's September 30th, 2023 fourth quarter and fiscal 2023 earnings call and update. On the call today, we also have Ronan Kennedy, our Interim CEO and Chief Financial Officer, and Dr. Sybil Swift, our Chief Science Officer. We'd like to remind everyone that various remarks without 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-K for the year ended September 30th, 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, Friday, December 22nd, 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 security laws. And with that, I'd like to turn the call over to Ronan. Ronan?

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 revenue declines, we successfully enhanced our overall operation and significantly curtailed our cash burn, particularly in the third and fourth quarters. The CB market, while challenging, remains ripe with opportunities. 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 $55.8 million improvement in gap loss from operations for the full year 2023, and a non-GAAP operating adjusted loss improvement of $7.7 million for the year. This fiscal discipline coupled with strategic decisions resulted in $15.8 million year-over-year reduction in cash SG&A costs for 2023 and $3 million for the fourth quarter. While overall revenues declined sequentially, we continue to make incremental improvements to our adjusted EBITDAI cash price. On our last call, we were excited about the transition to our e-commerce platform. We continue to see benefits from the lower cost structure and 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 image and quality of content with everything we do. We regularly reassess every line item, channel, and vendor for performance. On the wholesale front, we continue to focus on developing new strategic relationships and selling into larger accounts and leveraging distribution networks to expand our reach. We are excited to announce that CBDMD launched in 160 Sprouts market stores across the nation this month. We are continually engaging with new retailers and focused on incremental opportunities during calendar 2024. Internationally, our brand reputation, clinical data, and safety data continue to create opportunities. Our Paul CBD products are now registered in Central America, and we began shipping Costa Rica in December. We continue to grow our business in Brazil and are working on other actionable international distribution opportunities. 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 Paul CBD brands, and are excited about the new CBD, MD, and policy B products that 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 two new brands, HempMD and ATRX, during this current quarter. Both brands provide new opportunities for growth, but do not face the same regulatory and channel impediments as CBDs. 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 CBD and B products as part of an everyday routine. We've 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. These new brands not only complement our core offerings, but also open up new channels for growth beyond the regulatory confines of CBDs. Since our last call, we invested significant management resources on both M&A opportunities as well as our special meeting of shareholders and proxy statements 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&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. We believe our current structure has a negative impact on the combined market capitalization of the company and significant limits our ability to raise capital, ultimately putting the company and NYSE listing at risk. We received feedback from shareholders during the last proxy process, and I'm working 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 Dr. Stegall-Swester.

Thank you, Ronan. My comments today are focused on science and regulatory updates. On prior calls, I discussed our biometric study with WOUP. to measure the benefits of consuming CBD and B products daily. I am pleased to announce the first cohort of participants in our study is completing this month. The study conclusion estimated to be in the third calendar quarter of 2024 and data to be published shortly thereafter. This study was designed to gather data about our core blood spectrum blend impact on sleep and recovery and will be used in marketing campaigns and consumer education initiatives to increase brand loyalty and further drive revenue. 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 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 consumptions 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 pounds 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 meta-study papers on the subject of CBD safety. 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 mushrooms 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. Further to those efforts, the company submitted a detailed 21-page response to the July 27th Request for Information, or RFI, regarding the regulation of cannabidiol products issued by a bicameral health committee leaders in a bipartisan request for information regarding FDA regulation of CBD. The RFI asked subject matter experts and stakeholders for input on key areas pertaining to FDA regulation of CBD. We viewed 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 CDMD 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. Although we have yet to obtain regulatory clarity, the company believes a consistent message to Congress is required to move our agenda forward. 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 for 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 and clinical studies. 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 fill in 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 by 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 as 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. 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. With that, I will turn the call over to Brad.

Thanks, Sybil. Total net sales for the fourth quarter of fiscal 2023 were $5.7 million, or a 27% decrease from the prior year comparative quarter total. potentially sales were essentially flat. For the 2023 fiscal year, audited net sales totaled 24.1 million as compared to 35.4 million in the prior year. Our quarterly e-commerce direct-to-consumer business generated sales of 4.6 million in the fourth quarter of fiscal 2023. This was a 26% year-over-year quarterly decrease. We believe year-over-year sales were impacted as a result of reduced underperforming marketing expenses and microeconomic forces on consumers. E-commerce represented 81% of our total net sales for the fourth quarter of 2023 versus 80% in the prior year comparative quarter. For the fiscal year ended 2023, e-commerce generated 19.4 million of net sales compared to 26.4 million for the comparative prior fiscal year, a 26% decrease. E-commerce represented 81% of 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. This means we are spending more effectively and for the year operated at a more sustainable marketing spend ratio of 36% of revenue as compared to 62% of direct-to-consumer revenues in 2022. Our wholesale business generated 1.1 million of net sales for the fourth quarter of fiscal 2023, down 32% as compared to 1.5 million 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 into September 30th, 2023 and 2022, our wholesale business generated net sales of 4.7 million and 8.9 million respectively. Our gross profit as a percentage of net sales came in at 62% for the fourth quarter of fiscal 2023 as compared to 64% in the prior year comparative quarter. For fiscal 2023, gross margins totaled 62% as compared to 63% for the prior year. Excluding impairment of goodwill and other intangible assets in both periods, our SG&A expenses for the fourth quarter of fiscal 2023 totaled 5.5 million, compared to $7.9 million 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&A expenses came down almost $3 million from $7.1 million last year to $4.2 million in the current quarter. Coincidentally, cash SG&A declined approximately $200,000, primarily due to reductions in payroll, legal, and other professional expenses. For the full year 2023, SG&A expenses dropped $15.4 million from $39.6 to $24.2 million. During the fourth quarter of 2023, market forces and trends caused us to reassess the useful lives of our intangible assets. While the significant decline in the combined 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 of $13.2 million. In the prior fiscal year, we incurred a non-cash impairment charge of $4.3 million related to intangible assets and $56.7 million related to goodwill. Overall, this resulted in a loss from operations of approximately 15.2 million for the fourth quarter of fiscal 2023, as compared to 14.8 million lost from the prior year period. Excluding 2023 and 2022 impairment charges during the fourth quarter, non-GAAP operating income totaled 2 million as compared to 2.8 million for 2022. The full fiscal year operating loss totaled $22.4 million as compared to an operating loss of $78.3 million in 2022. Our non-GAAP adjustments to operating expenses for the fourth quarter of fiscal 2023 included the $13.2 million in tangible impairment charge, $33,000 in non-cash employee stock expense, $567,000 in depreciation and amortization expense, and $609,000 associated with non-cash AR credits related to our marketing agreement with A360. $70,000 in inventory write-down and $45,000 in year-end bad debt accrual, resulting in a non-GAAP adjusted operating loss of $572,000 for the fourth quarter of fiscal 2023, as compared to a $2.2 million non-GAAP adjusted operating loss in the fourth 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. For the 2023 fiscal year, our non-GAAP-adjusted EBITDA loss totaled $5.5 million as compared to $13.2 million 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 four-year totals. Other income and expense on our consolidated income statement for the fourth quarter of 2023 includes a non-cash contingent liability gain of $34,000 related to our December 2018 acquisition of SecureBase 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 first fiscal quarter of 2024. In addition, we incurred a non-cash expense related to our investment in steady stakes, 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. During the fourth fiscal quarter of 2023, we utilized approximately $1 million 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 $1.8 million and working capital of approximately $3.4 million on September 30, 2023, as compared to cash and cash equivalents of approximately $6.7 million and working capital of approximately $10.7 million as of September 30, 2022. Our current assets of the September 30th, 2023 decreased approximately 49% from September 30th, 2022 to 8.1 million. A primary driver of the decrease in current assets was the usage of cash for operations and the reduction of prepaid sponsorships by 1.3 million, mostly attributed to the termination of an athlete's sponsorship. As of September 30th, 2023, the company's total current liabilities were 4.6 million, of which approximately $1.9 million is account stable and $1.5 million is accrued expenses. We are committed to prudently managing our cash and liquidity position while rebuilding our revenue and optimizing our cash SG&A expenses. We continue to reassess every line item on our P&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 Renan.

Thanks, Brian. As we reflect on our journey this past year, it's clear that our commitment to providing customers with superior natural products and acceptable 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 CBD&D has evolved significantly over the past year. Today, we stand more disciplined, agile, and laser-focused on optimizing cash flow than ever before. The encouraging improvements in our bottom line and the substantial reduction in our cash balance toward the later half of the year are testaments to this evolution. 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, HapMD and ATOX, 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 as a crucial year for the company. Our focus is set on growing sales and addressing our capital structure. We approach these challenges and opportunities with a blend of enthusiasm and strategic resolve, fully dedicated to taking the steps necessary to real 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.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Our first question is from Adam Waldo with Lismore Partners. Please go ahead.

Yes, good day. Ronan, thanks very much for taking my questions. I think in your prepared remarks, you gave us data that allows us to back into the notion that pre-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 per almost finished the fiscal first quarter, and then have a couple follow-ups.

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, you know, are expecting Slightly improved bottom line numbers for, I guess, the December quarter.

So somewhat better sequential cash burn than in the fiscal fourth quarter, which obviously was a nice improvement on the fiscal third quarter. Okay, so we're getting closer and closer to cash break even. You enumerate both in the press release and on 10-K filing in more detail. about the numerous product and channel opportunities you're pursuing for return to revenue growth in fiscal 2024. What are you starting to see here in the fiscal first quarter 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 24?

Yeah, Adam, thanks. There's a couple questions in there, so let me try to answer them. I think going into 2024, we continue to see 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 on the core brand to maximize how we're marketing and acquiring customers and really rebuilding now that we've got some good underpinnings with the new platform and some of the changes we've done to our marketing team as well.

Okay, so that's good color. What sort of – I mean, we're very late in the fiscal first quarter. What sort of year-over-year revenue growth or year-over-year revenue comparison are we seeing during the fiscal first quarter?

We're not providing guidance at this time.

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

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 approval process became fairly daunting. So our focus is to work to... Come to the shareholders with a new proposal here in the future and get to a point where we can clean up the capital structure and open up opportunities for our strategic.

Okay. Thanks very much, and best of luck moving forward. Thank you, Adam.

Once again, if you have a question, please press star, then 1. The next question is from Anthony Vendetti with Maxim Group. Please go ahead.

Thanks. Thanks, Ronan. 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? And then lastly, I have a few questions.

Sure. So with respect to Shopify, you know, 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 the subscribers. So we've seen some growth on that front. And we've just, in the last 30 days, sort of did a larger site conversion and continued to sort of utilize new tools to work to A-B testing and really drive conversion optimization throughout the site. 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 to add on again?

Oh, yes, sir. 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 will always be some trimming as you continue to evolve, but is the mass reduction in SKUs largely complete at this point?

Yes, 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. on Amazon. In the U.S., our launch with the HMDs, It was really in the last 30 days, so it's really too early to give you too much information on that. And then I think our ATRX brand just launched today, so we're excited to see how that does here in the coming quarters. And then with respect to the SKUs, I think we're continuing to try to rationalize SKUs that really don't perform and invest behind SKUs that do perform. We think significant rationalization has been done. As we're coming out with some newer SKUs, we are looking at sunsetting some of the slower movers to make sure that, you know, our investments in working capital and resources are dedicated on the high value SKUs that we have.

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

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

Yeah, just one real quick question here. A lot of my outstanding questions have already been covered. So just real quick, you guys mentioned, you know, congrats on, first of all, on getting into Sprouts Markets, 150 stores. It's great. You mentioned that you are looking to expand further in fiscal year 2024. I was just trying to get a read if you have any kind of insight on the magnitude of that potential expansion. You know, could we expect that to see it, you know, add more stores or could it potentially double in size? If anything, to give a kind of context on that, 92 would be appreciated.

Sure. Specifically with Sprouts, you know, again, we just launched this month. Our goal is to – you know, we've not throughout the whole system. Our goal is to continue to penetrate and, and, and, and roll out throughout this, this system. You know, we've been talking with some other retailers, you know, we've actually, um, you know, with some of the changes we made to our team this year, we're getting, uh, access to retailers that we've never had access to. Uh, so we're very excited about some of the conversations that are going on. Uh, however, sort of just time-wise, uh, it gets very lumpy and long-term and sort of lining up the reviews and rollout. So, you know, I think we are seeing opportunity and engagement on the CBD and D brand, and then we are starting to see, you know, we shared sort of an early look at ATRX and MD with a number of parties as well and encouraged with the opportunity that exists with those brands in the mass retail space as well.

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

Once again, if you have a question, please press star then 1. The next question is from Adam Waldo with Lismore Partners. Please go ahead.

I appreciate your permitting the follow-up. I apologize. I just didn't get through the rest of the 10-K. 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 of the company? Thank you.

We're continuing to try to negotiate and find alternative tenants for the facility. And, you know, there has been a little bit of interest. It's a very challenging market. And, you know, 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.

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

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

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.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.