cbdMD, Inc.

Good afternoon. Welcome to the CBDMD Inc. Second Quarter Fiscal 2024 Results Conference Call. This afternoon, the company issued a press release that provided an overview of the second 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 a 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 Chief Accounting Officer. Brad, please go ahead, sir.

Thank you, Carl, and thank you all for joining CBDMD's March 31st 2024 Second Quarter Fiscal 2024 Earnings Call and Update. On our call today, we also have Ronan Kennedy, our 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 and uncertainties that may cause our actual results to differ materially from those indicated, including risks described in the company's Form 10-K annual report for the fiscal 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, Wednesday, May 15, 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 securities laws. With that, I'd like to turn the call over to Ronan.

Thank you, Brad. Good afternoon, everyone. We've come a long way in the last two years. Although our results for the second quarter of fiscal 2024 did not meet our expectations, we are confident that the operational changes we have implemented will drive significant progress moving forward. First, we've bolstered our wholesale leadership, as mentioned on our prior call. Our quality products, regulatory resume, including our clinicals and safety data, along with the additional leadership depth, is having an impact, and we are seeing our pipeline increase. Our direct-to-consumer business faced challenges last quarter. Admittedly, we scaled back our marketing spend too much, and our customer journey and messaging missed the mark. The CBDMD brand, known for promoting an active lifestyle and addressing specific consumer needs, remains uniquely positioned to leverage our clinical studies and safety data to communicate the tangible benefits of our products. In response, we have revitalized our marketing strategy. We've strengthened our team by bringing on a seasoned performance marketer, or streamlining our marketing vendors in refocusing our message on a need-based functional solutions that enhance our customers' active lifestyles. These changes have already yielded an improvement in our meta-engagement rates on Instagram from the second quarter, signaling more effective communication. Our next goal is to convert these engagement gains into tangible revenue increases. Despite a decline in overall direct-to-consumer revenue, our subscription base not only held firm but expanded. Maintaining customer retention is paramount We are actively enhancing our subscription program and prioritizing the customer experience to support this goal. During our last call, we discussed our strategy to diversify into non-cannabinoid markets, particularly through our functional mushroom brand, ATRX Labs. We're excited to report the launch of our ATRX Platinum line, now available in 1,500 GNC corporate stores nationwide. We believe the significant retail presence boosts the brand's credibility and and marks a confident step in the functional mushroom category, which faces fewer regulatory hurdles than CBD. As we continue to ramp up marketing for ATRX, we are optimistic about its potential in the expanding natural products market. We believe the best way to drive shareholder value is to run a profitable business and simplify our capital structure. Our team continues to make expense rationalizations a priority quarter after quarter. In March, we consolidated our executive offices and warehouse and entered into agreements with our current landlord on our historical executive offices. When the company fulfills its obligations in these agreements, including making payments through July, the headquarter lease will terminate at the end of July 2024. The savings from exiting this lease make up a good portion of the $2.4 million in annualized expense cuts we have enacted. We started realizing the benefits in April and expect these savings to be fully realized by August with the lease termination. Although the recent proxy vote regarding the conversion of our Series A preferred did not go as hoped, we have deepened our engagement with shareholders and have taken their feedback seriously. Clearly, there is more work to be done to present the right solution, communicate effectively with all shareholders, and secure the necessary support. We remain convinced that converting the preferred shares is the optimal route for enhancing long-term shareholder value and should aid to increase share appreciation and liquidity. Adopting an all-common capital structure will not only strengthen our book value of equity, but also improve our company's ability to attract and execute strategic opportunities, providing clear pathways for potential transactions. The feedback from the vote has galvanized our commitment to reach short-term profitability. Based on the initiatives in place, we believe CBDMD is in a great position to make significant P&L improvements to the remainder of the fiscal year. With that, I'll turn the call back over to Brad to provide more detail on the quarter and our cost initiatives.

Thanks, Renan. Total net sales for the second quarter of fiscal 2024 were 4.4 million, or a 29 percent decrease from the prior year comparative quarter, a total of 6.2 million. Our quarterly e-commerce direct-to-consumer business generated sales of 3.6 million in the second quarter of fiscal 2024. This was a 25 percent year-over-year quarterly decrease. We believe the quarter-over-quarter decrease is primarily attributable to the continued reduced marketing expenses and microeconomic forces on consumers, as well as our messaging. E-commerce represented 83% of our total net sales for the second quarter of 2024, versus 78% in the prior year comparative quarter. Our wholesale business generated $750,000 of net sales for the second quarter of fiscal 2024, down 44% as compared to 1.35 million for the comparative quarter in fiscal 23. This decrease is primarily attributable to the one-time credit of $440,000 issued to a wholesale customer related to expiring inventory from a March 2022 purchase. We continue to see shelf space for traditional CBD categories shrink at mass retail industry-wide. We worked with GNC for the last year to drive sales through and worked to creatively leverage our relationship with GNC and our new ATRX brand to construct a win-win in a challenging situation. Excluding this credit, our non-GAAP wholesale revenue would have been approximately 1.2 million, or a 12% year-over-year decrease. Our gross profit as a percentage of net sales came in at 59% for the second quarter of fiscal 24, as compared to 64% in the prior year comparative quarter. The wholesale credit that was issued was the main driver of the gross profit decline, and we expect this to normalize next quarter. Our SG&A expenses for the second quarter of fiscal 24 totaled 4.1 million, compared to 5.4 million in the prior year comparative quarter. Our costs came down across the board as management continues to focus on profitability. Excluding depreciation, amortization, and stock expense, cash SG&A expenses came down 1.1 million year-over-year. Overall, this resulted in a loss from operations of approximately 1.5 million for the second quarter of fiscal 24. as compared to a $1.4 million loss from the prior year period. Our non-GAAP adjustments to operating expenses for the second quarter of fiscal 24 include $440,000 related to the wholesale credit issued, $12,000 in non-cash employee stock expense, $291,000 in depreciation and amortization expense, $58,000 associated with potential mergers and acquisition transactions and proxy expenses, and 72,000 associated with non-cash accelerated amortization of expenses related to terminated IT contracts, resulting in a non-GAAP adjusted operating loss of 680,000 for the second quarter of fiscal 24, as compared to a 790,000 non-GAAP adjusted operating loss in the second quarter of fiscal 23. 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 statements for the second quarter of 24 includes a non-cash contingent liability expense of 1.4 million related to the change in fair value of the convertible notes issued during the quarter. As a result of the contingent liability, the balance of the notes totaled $2.7 million at the end of the second quarter, despite only having a principal balance at March 31st, 2024 of approximately $1.54 million. Since quarter end, approximately one-third of the principal balance has been converted to equity. Excluding the proceeds from the convertible notes, during the second fiscal quarter of 24, we utilized approximately $600,000 of cash. Our non-GAAT Adjusted operating loss totaled approximately 680,000, and we were able to generate approximately 100,000 to offset this loss through our net working capital. We had cash and cash equivalents of approximately 2.1 million and working capital of approximately 3.2 million, excluding the 2.7 million of dividends on March 31st, 2024. As compared to cash and cash equivalents of approximately 1.8 million and working capital of approximately 4.1 million, as of September 30th, 2023. Our current assets as of March 31st, 2024 decreased approximately 8.1% from September 30th, 23 to 7.4 million. A primary driver of the decrease in current assets was the usage of cash for operations. As of March 31st, 2024, the company's total current liabilities were 7 million, of which approximately 1.3 million is accounts payable, $2.7 million is accrued dividends, $560,000 of accrued rent, and $700,000 of other accrued expenses. We continue to manage cash and our liquidity carefully. Achieving positive EBITDA is our number one goal. As Ronan alluded to earlier, we enacted numerous initiatives that are projected to eliminate significant costs out of our operations starting in April. We renegotiated pricing in terms of vendors. lowered some of our product unit costs that are starting to flow through our COGs, reassessed any expiring contracts, cut nonessential expenses, sublet out additional space available in our warehouse, and more recently, reduced our nonessential headcounts. Together with the elimination of the headquarters facility comprising 85,000 in rent and over 20,000 in facility costs per month, these savings are impactful. especially as compared to our current non-GAAP adjusted EBITDA run rate of 680,000 for the second quarter. We anticipate realizing savings of 110,000 per month by June and ultimately expect over 200,000 a month by August when the headquarter lease is eliminated. We have other projects identified and are working to further drive efficiencies and lock these into our plan. These savings put us in a strong position to eliminate our operating cash burn by the end of the year. With that, I'll turn the call back over to Randy.

Thanks, Brad. We've made significant strides in addressing our infrastructure costs, moving away from previous inefficiencies, and shedding sins from past management. However, revenue generation has proven to be our main challenge, offsetting many of the operational improvements we've implemented in recent quarters. While it might be tempting to attribute revenue declines to broader industry trends within the CBD sector, we at CBDMD do not accept this as an excuse. Our goal is clear. to stabilize our revenue base and return to a path of modest growth. Transformation and turnarounds are seldom straightforward. We acknowledge that the past few quarters have been tough for our shareholders, but our team remains optimistic about the current state of our business. Halfway into the quarter, we are seeing signs of revenue stabilizing and our wholesale pipeline increasing. We are on track to significantly reduce expenses by August and at the brink of eliminating future liabilities. With a dedicated team bolstered by some great new talent, an exciting new brand that just launched nationwide in retail, ongoing strategic interest in the company, and improving operating cash burn, we are well positioned for the future. We recognize that the true measure of our success will be reflected in our results. We are committed to executing our strategic plan diligently over the coming months and delivering value to our shareholders. Thank you for your continued support and belief in our vision. I now invite your questions to further discuss the business.

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. We'll pause for a moment as callers join the queue. The first question comes from Anthony Vendetti of Maxim Group. Please go ahead.

Hey, guys. This is Thomas McGovern on for Anthony. So, yes, the first question is on, you had discussed, you know, a revised marketing approach, you know, obviously e-commerce sales down this quarter. So, First of all, I wanted to see if you could provide a little bit more color on what that meant, you know, how you guys can continue to, you know, drive these high engagements on platforms like Meta and then, you know, how your strategy to convert those into sales. And the second question off of that is, you know, were any of the insights that, you know, maybe informed this revised strategy, were those brought on in part or, you know, in whole from the transition to Shopify's platform? Kind of trying to look for an update on that. on how that transition is going and maybe what insights you guys have gained since the transition. Thanks.

Sure. Look, so we manage our KPIs pretty closely. And pretty early on, we're seeing sort of at the start of the quarter, seeing that it was not trending in the right direction. We did a pretty deep dive review of a lot of sort of our spend and performance. And, you know, I think as we the team looked at it and realized we were not hitting the mark on our messaging and the funnels for our customers. So we've been evaluating every piece of activity that we're doing. We're working on putting much stronger messaging and customer funnels in place, designing our campaigns in a much tighter way, and really putting a much tighter performance marketing strategy in place across the board. You know, we've changed up some of our organization. We've changed up some of our agencies because what we were doing wasn't working. So we're committed to making sure that we do what's needed to stabilize our revenue and make strong gains at the business level. With respect to Shopify, I think, you know, having Shopify has allowed us to remain nimble But, you know, as far as sort of the implementation, I mean, we're fully implemented and, you know, we're constantly looking at, you know, A-B testing and benchmarking what we're doing relative to, you know, our market as well as sort of other leading direct-to-consumer brands.

Great. I appreciate that, Collar. And then last question before I hop back into the queue. Can you guys comment at all on the performance you guys are seeing abroad, maybe specifically with what's going on in sales trends on Amazon.UK? And then if you guys have any near-term plans for some additional international expansion. Thanks.

Sure. Look, our UK business has been reasonably steady over the last few months. I think what we are excited about is there's some movement on the FSA in the UK. We think over the summer there might be some news back, and I think that would afford us some exciting news and differentiation in the marketplace and allow us to sort of invest a little bit heavier in that market. We do see, I think, especially in certain international markets, we are seeing growing interest. I think as I referenced earlier in the call, it's really a regulatory resume. and the science and clinicals that are making a difference as we see opportunities and opportunities are coming our way. So we do see international markets strengthening right now for us on the wholesale side.

Great. I appreciate you guys taking my question. I'll hop back into you.

Thanks, Thomas.

Once again, if you have a question, please press star 1. Please press star then 1 now. We'll pause for a moment as callers join the queue. The next question comes from Anthony Vendetti of Maxim Group. Please go ahead.

Yeah, it's Tom again. I just wanted to see if I could hop in and just, you know, finish our follow-up with one last question. Just looking at brick-and-mortar retail expansion, you talked about GNC. In the past couple calls, you talked about Sprouts markets. I know that I think that's the last time we spoke. It was about 175 locations. Just wondering if there's been any expansion within the Sprouts network or conversations surrounding that, and then maybe Just more broadly, kind of zoomed out, you know, how do you guys look at retail expansions, particularly with this DATRX Labs brand? I know that you guys are probably going to have an easier time at least ramping retail or brick-and-mortar availability of these products as they're facing, you know, less regulatory backlash or, you know, I guess hurdles, if you will. Any comments on that would be helpful as well. Thanks.

Sure, sure. So, look, I would say, At Mass, specifically with Sprouts, we've not further penetrated the Sprouts footprint. We'll continue to work with them to optimize sell-through. As we look at the broader landscape, I think in mass retail, I think we do see CBD as a category, as a challenging category for a lot of these mass retailers. I think there's a few... niches that you are seeing some growth in certain beverage-type products. But I think some of the more traditional CBD products have had a tougher time at mass retail that really gained strong traction. That was one of the reasons why we created the ATRX line. It's a new category. Again, it's a functional category. It doesn't have some of the same challenges in state-level regulatory frameworks that I think create challenges for a lot of these larger brands that have footprints across multi-state territories. So it's easy for their groups to sort of wrap their heads around it. It's easier for us to market it. different channels, broader channels, more traditional channels than a lot of the CBD category. So we are continuing to engage in discussions with other retailers with ATRX, but first and foremost, our focus is around this launch at GNC and making sure that we build upon the success that we've had launching into that channel.

Got you. And if I can, just one kind of follow-up on that. You know, when you guys first launched ATRX and HempMD back in the fourth quarter, the fiscal fourth quarter, that is, you know, you mentioned that you didn't really see these two new product lines. While they showed a lot of promise, materially impacting top line in 2024, given that, you know, now six months or so has passed and we're starting to see, you know, a lot of interest, you know, at least from my seat, it seems that there's a lot of interest being well-received in the market, you know, with this launch at GNC. Has your outlook on that changed at all? Could you see ATRX kind of getting to the point where it is materially impacting top line, if not in 2024, at least in 2025?

Look, I think ATRX certainly has a lot more legs and opportunity with it. We do have some ambitious goals. I think, you know, first and foremost, I think, you know, we have, you know, I think are looking at it with a pretty sober eyes that, you know, Our first goal is to shore up our revenue, stabilize our revenue, and then be able to grow from there. Part of that strategy is ATRX continuing to build upon what we've put in place here over the first few months with the brand.

Got it. Appreciate that detail, guys. Thanks for taking all my questions.

Thanks, Al.

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 everyone for attending the call and your ongoing support. We look forward to our upcoming call in August. Have a good day.

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