cbdMD, Inc.

Good afternoon. Welcome to the CBDMT Inc's December 31st, 2023, first fiscal 2024 quarter earnings call and update. This afternoon, the company issued a press release that provided an overview of its first quarter results, which followed the filing of its quarterly report on form 10Q. 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. All participants on this call will be in listen-only mode. The call will be followed by a question and answer session. To join the question queue, you may press star then one on your telephone keypad. At this time, I would now like to turn the conference over to Brad Whitford, the company's VP of Finance. Brad, please go ahead.

Thank you, Ashia, and thank you all for joining CBDMD's December 31st, 2023, first quarter of fiscal 2024 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 provision 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 quarterly report on Form 10-Q for the quarter ended December 31st, 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.scc.gov. Any forward-looking statements made on this conference call speak only as of today's date, Tuesday, February 13th, 2024, 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. With that, I'd like to turn the call over to Ronan.

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 revenues for the quarter. 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 two new brands, HempMD and our functional mushroom line, ATR Express. Revenue remains a top priority. We know that we must grow revenues to deliver positive cash flow and are committed to growth. 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 Bagajian 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. On our last call, we just announced our Sprouts launch, and we are pleased with the velocity out of the gate and initial reorders. Similarly, the day of the call, we launched our initial ATRX product, the ultimate mushroom daily gummy on 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 four new ATRX functional products. 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 prices. Last week, we announced the closing of the gross proceeds of $1.25 million 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, it created additional challenges to the financing. I continue to review multiple strategic opportunities that are presented. The complexity and procedural challenges stemming from a multi-class equity structure 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 structure 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 a million dollars a quarter, putting the company on a path in the near term to fall below the minimum 6 million net book value requirement under the NYSE American rules. 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.

Brett Redfearn Thanks, Rennan. Total net sales for the first quarter of fiscal 2024 were 5.4 million, or a 12 percent decrease from the prior year comparative quarter total of 6.1 million. Our quarterly e-commerce direct-to-consumer business generated sales of 4.4 million in the first quarter of fiscal 2024. This was a 10 percent 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 first quarter of 2024 versus 80% in the prior year comparative quarter. Our wholesale business generated 1 million of net sales for the first quarter of fiscal 24, down 19% as compared to 1.2 million for 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 first quarter 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&A expenses for the first quarter of fiscal 2024 totaled 4.6 million, compared to 7.6 million in the prior year comparative quarter. Our cost came down across the board as management continues to focus on profitability. Excluding depreciation, amortization, and stock expense, cash SG&A expenses came down 1.9 million from 6.2 million last year to 4.3 in the current quarter. Overall, this resulted in a loss from operations of approximately 1.1 million for the first quarter of fiscal 2024, as compared to 4.1 million lost in the prior year period. Our non-GAAP adjustments to operating expenses for the first quarter of fiscal 2024 for 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 expenses, resulting in a non-GAAP adjusted operating loss of 698,000 for the first quarter of fiscal 2024, as compared to 2.6 million non-GAAP adjusted operating loss in the first quarter 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. Other income expense on our consolidated income statement for the first quarter of 2024 includes a non-cast contingent liability gain of 70,000 related to our December 2018 acquisition of CureBase 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 $1.5 million and working capital of approximately $1.4 million on December 31, 2023, as compared to cash and cash equivalents of approximately $1.8 million and working capital of approximately $3.4 million as of September 30, 2023. Our current assets, as of December 31st, 2023, decreased by approximately 8.7 percent from September 30th, 2023, to 7.4 million. A primary driver of the decrease in current assets was the usage of cash for operations. As of December 31st, 2023, the company's total current liabilities were 6 million, of which approximately 1.6 million is accounts payable and 3.1 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 recently closed on new financing that provides additional working capital and bolsters our balance sheet. This added approximately $1.2 million after fees to our balance sheet, and our cash position today is approximately $2.5 million. In addition, we continue to reassess every expense line on our P&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 Randy.

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, CTRX. The next few months are critical as we look to continue to build momentum and over-deliver on our CTRX retail launch and prepare for our annual needs. 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 this.

We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, press star, then 2. The first question comes from Anthony Vendetti with Maxon Group. Please go ahead.

Thank you. Yeah, Ronan, I was just wondering if you could talk a little bit more about the relationship with Sprouts Farmer's Market, how many products are available and how many locations, and then is the new mushroom DXT product, is that going to be available there or is that available in different locations?

Yeah, hi, Anthony. So we launched in 160 Sprout stores. We're pretty happy with two skews, two of our gummy skews, and we're pretty happy with the velocity of those out of the gates. We continue to sort of work with them to deepen the relationship and figure out what other opportunities we have to gain shelf space. One of the things we have, we are looking and would love to sort of continue to expand our functional gummy product through ATRX with sprouts. But we're still working through a relationship and opportunities to expand with them.

And then, Ronan, you had mentioned on the last call that we had that you had some issues with your Facebook account. Have you regained access to your Facebook account? And have the issues around advertising been resolved? Is everything back up and running there?

Yes, as of sort of midway through the first quarter, we did have sort of full access and we're continuing to work to improve and optimize our return to that channel.

Okay. 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?

Yeah, so we are not able to say what retailer. I think we made the decision a little earlier to announce that just because we you know, went out and found some additional financing and needed to sort of leverage some, I guess, bolster our balance sheet to support some of the working capital bills. It is with a national retailer. We are sort of finalizing, you know, how expansive that launch will be. And, you know, at this point, there are four SKUs for new SKUs that the launch is part of. So we're pretty excited about getting that placement and building the inertia for those new brands.

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?

Yes, all the sites have been converted over and continue to sort of leverage the Shopify network and sort of optimize that to our benefit.

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

Once again, if you have a question, please press star then one. The next question comes from Jim Schaefer. Private investor, please go ahead.

Hi, Ronan. Thanks for taking my call. First, regarding the annual meeting preliminary proxy, I've identified at least two clerical errors and have emailed the details to ir at cdbmd.com. Hopefully you got that. For my question, the deal late... Okay, yeah. The deal laid out for converting the Series A preferred stock to common stock isn't any better than the August 2023 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 that the proposal will pass the two-thirds majority shareholders, Series A shareholders vote?

Yeah, look, Kim, I think, you know, what we've tried to do is take some feedback that we received around sort of where people were looking from the 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 isn't going to work. So it's sort of a sort of challenge to navigate sort of the imbalance, sort of the demands of both shareholder classes, but knowing that ultimately if, you know, neither class votes in favor, then I mean, you know, it puts the listing at risk for everybody. So, you know, we tried to sort of ensure that, you know, the preferred end up with a significant, you know, a materially increased amount of ownership over where the proposal was last year. You know, we've tried to add some incremental cash to the balance sheet and, you know, position the companies that are coming through this. You know, we have working capital we needed and can, you know, hopefully unlock some additional value for shareholders cleaning up service dual-class structures.

Okay, thanks.

The next question comes from Bob Berlacher, a private investor. Please go ahead.

Hey, Ronan. 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 six to one, are going to own less of a percentage, as the gentleman before me said, than the offer that you made months ago, so like him, and I'm a preferred holder, as you know, I don't understand how you think you're going to potentially get two-thirds of the vote, and yet we'll spend money on this proxy solicitation. I want to know what calculation management or the board did to come up with the six for one, 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.

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

I'm sorry. Go ahead. Go ahead. Sorry.

I think, you know, additionally, Given where the book value of equity trends were, I think, you know, we would have liked to have had some additional runway before we proxied this. And, you know, what we saw was some concern about, you know, 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 proxies. including in the annual meeting.

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 one and a quarter million dollars on top of the fact, or one and a half, 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.

I mean, look, our goal is to continue to improve the overall financials and get the positive EBITDA and generate earnings so that we can fund this business and create a sustainable business fund.

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

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

Hey, guys. Yeah, I just wanted to hop on. First, I have to follow up on Anthony's question about Sprouts Farmers Market. 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. I just wanted to clarify that. Is it 150 locations versus now 175 locations? um tom i think it was closer to the 175 location okay okay i appreciate that clarity and then finally uh just real quick just wanted to see if there was any uh notable updates on your efforts to in pursuing fda regulation of cbb products you know if so what are they and if not maybe uh Do you have any expectations on when we could expect some developments in that front, you know, whether there's some upcoming events or dates that we should be looking out for that could serve as a catalyst for achieving FDA regulations?

Yeah, 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 elections, we don't really see a... any material movement at the national level here for 2024 we are seeing an increase in activity at the state level um so we're staying as uh on top of that as much as we can um uh to to ensure that sort of we're aware of what's happening we can voice and we can reach out to appropriate states um and educate them about our product and category and all the benefits and and hopefully um you know, improve or sort of minimize any changes to state level legislation.

Got it. I appreciate you taking the time to answer my question.

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

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

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