cbdMD, Inc.

Good afternoon. Welcome to the CBDMD Inc. December 31, 2024, first fiscal quarter of 2025 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 10-Q. Today's conference call is being recorded and will be available online following 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. At this time, I'd like to turn the conference over to Brad Whitford, the company's Chief Accounting Officer. Brad?

Thank you, Galien, and thank you all for joining CBDMD's December 31st, 2024, first quarter of fiscal 2025 earnings call-in update. On the 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 the 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 fiscal year ended September 30, 2024, 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, Thursday, February 13th, 2025, 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.

Good afternoon, everyone, and thank you for joining us today. On our last call, we laid out two corporate priorities. achieving profitability, and resolving our capital structure and listing challenges. I'm thrilled to be speaking with you today, not only to report on a historic quarter, but to highlight the stronger foundation we built and the exciting opportunities ahead. This year marks CBDMD's operating subsidiary's 10th anniversary, and our progress over the last quarter underscores a significant turnaround moment for the company. We delivered on our commitment during the first fiscal quarter. Revenue rebounded and grew sequentially over the fourth quarter. Gross margins held strong, demonstrating the durability of our model. SG&A costs improved, reflecting disciplined expense management. Most importantly, we generated positive net income and, for the first time in company history, achieved a positive non-gap adjusted EBITDA. This is a major milestone for CBDMD, and I want to recognize our entire team for the resilience, hard work, and focus over the last year in making this happen. Our focus remains on optimizing the business, strengthening our team, and enhancing our customer experience. We've been deliberate in ensuring we have the right talent in place. We've added key hires to our sales organization and marketing teams, bringing in deep expertise across CBD, hemp-derived beverages, and other consumer products. These moves position us well to accelerate growth. This quarter, we launched new and enhanced formulations on our sleep and calm products, improving both efficacy and taste. We believe innovation is a key driver of future revenue growth, and our pipeline to upgrade some of our products has us excited for what's ahead. Our Oasis Social Tonic line has been well-received, confirming our belief in the enormous potential of this category. We are in final contract negotiations with multiple distributors, and we expect to make key announcements in the coming weeks. Additionally, we already have national retail ready to take the product as soon as distribution is secure. This is a huge growth opportunity, and we're committed to establishing Oasis as a major player in the fast-emerging hemp-derived beverage sector. We are entering 2025 with momentum, financial discipline, and a clear roadmap for sustainable profitability. This quarter is a foundation, not a peak, and we are focused on scaling our success to deliver a profitable full year in 2025. With that, I'll turn the call over to Brad, who will walk you through our financials.

Thanks, Brennan.

Total net sales for the first quarter of fiscal 2025 were 5.1 million, or a 5% decrease from the prior year comparative quarter, and a 12% increase from the fourth quarter. Our quarterly e-commerce direct-to-consumer business generated sales of 3.9 million in the first quarter of fiscal 2025. This was a 10% year-over-year quarterly decrease. E-commerce represented 77% of our total net sales for the first quarter of 2025 versus 82% in the prior comparative quarter. Our wholesale business generated $1.1 million of net sales for the first quarter of fiscal 2025, up 22% as compared to $950,000 for the comparative quarter in fiscal 2024. During the fourth quarter of 2024, we mentioned certain international wholesale customers were temporarily impacted due to certain re-registration issues. Revenue has since rebounded once this temporary issue was resolved. Our gross profit remained at a healthy 66% for the first quarter of 2025. Our SG&A expenses for the first quarter of fiscal 2025 totaled $3.4 million compared to $4.6 million in the prior year comparative quarter. The expense reduction was focused on payroll, professional fees, marketing fees, and the elimination of the HQ lease in addition to other cost savings initiatives. Overall, this resulted in a loss from operations of approximately $86,000 for the first quarter of fiscal 2025, as compared to a $1.1 million loss from the prior year period. After adjustments to the fair value of the notes and interest expense, net income totaled $15,000 as compared to a loss of $977,000 in the first quarter of fiscal 2024. Our non-GAAP adjustments to operating expenses for the first quarter of fiscal 2025 include $3,000 in non-cash employee stock expense and $298,000 in depreciation and amortization expense, resulting in a non-GAAP adjusted EBITDA profit of $214,000 for the first quarter of fiscal 2025. as compared to a 698,000 non-GAAP adjusted EBITDA loss in the first quarter of fiscal 2024. The EBITDA improvement in non-GAAP adjusted operating income and loss over the prior year period is primarily attributed to management's focus on our cost structure and profitability. On our last call, we highlighted that during the first quarter, we had some larger prepaid balances due. between our D and O insurance and our ERP, and we'll be reducing some of our payables during the first quarter as well. We continue to carefully manage working capital. We had cash and cash equivalents of approximately 2 million and working capital of approximately negative 2.8 million as of December 31st, 2024, compared to 2.4 million and a working capital deficit of approximately 2.2 million on September 30th, 2024. The main difference that reduced our net working capital is the incremental $1 million of accrued preferred dividends that is a short-term liability on our balance sheet. Excluding the respective $5.7 and $4.7 million of accrued dividends, we had positive adjusted net working capital of $2.8 million as of December 2024 and $2.4 million as of September 2024. We anticipate slight increases in our operating costs in the current quarter related to the extension of our current warehouse and office lease. We also anticipate some increases in our marketing expenses during the quarter. The remaining balances of the company's convertible notes were converted to common stock during January 2025, and the company is now debt free, excluding liabilities incurred in the ordinary course of business and accrued dividends. This frees up cash previously allocated for the notes maturity date to be used for working capital purposes. With that, I'll turn the call back over to Ronan.

Thank you, Brad. While we are pleased with our financial progress, the second key pillar of our focus for us has been addressing our capital structure and regaining compliance with the NYSE American Continued Listing Standards. As part of this effort, we filed our proxy for our annual meeting today. While it includes standard annual meeting items, I wanted to highlight two critical proposals that represent a measured strategic solution for our shareholders and the company's long-term success. First, we are excited to nominate two new board members. Now that CVMD is on a stronger financial footing, we believe these candidates bring valuable expertise and fresh energy to help us capitalize on growth opportunities and drive further success. Over the past year, we've actively engaged our shareholders, particularly our preferred class, to listen to and respond to their concerns from prior attempts at conversion. The two biggest priorities we heard were profitability and ownership. With respect to profitability, we believe we've delivered. Year over year, we have significantly improved our financial performance, culminating in a positive net income and adjusted EBITDA this quarter for the first time. We have taken the ownership feedback seriously. To that end, This new proposal is an improvement over prior attempts. Our prior shareholder proposals to convert our Series A preferred did not pass at ratios of 1 to 3 and 1 to 6. As proposed under a preliminary proxy statement, we intend to ask our shareholders to approve a conversion ratio of 1 to 13, representing approximately 90 percent of the as-converted common stock. The reality is there is no perfect solution, and we are navigating a complex set of challenges in restructuring our capital base. However, we are committed to finding a balanced approach that benefits all stakeholders in the loan market. This proposal represents a practical and equitable solution to clean up our capital structure, a superior option compared to past proposals based on direct shareholder and financial professional feedback, and we believe the best path forward to regain compliance with the NYSE American Stockholder Equity Requirements well ahead of the December 2025 deadline. Without a resolution to our capital structure, the ability to fully unlock shareholder value remains at risk due to the potential delisting. The financial results of Q1 demonstrate that the profitability is achievable, and we are proving that a sustainable, thriving business model in this industry is possible. Just a few years ago, in fiscal 2021, we had a net loss of $23 million, and for fiscal 2022, a net loss of $70 million, which included goodwill impairment. Today, we have transformed into a leaner, more disciplined organization that is resilient, adaptive, and focuses on long-term success. While the hemp and CBD category remains a challenging industry, we've demonstrated we can evolve, navigate volatility, and stay focused on delivering value to shareholders. We're in a pivotal moment in CBDMD's history. This vote is critical to ensuring we can fully leverage the progress we've made and operate as a NYSE-listed profitable company poised for growth. We urge all shareholders to support their conversion proposal, which protects the company's future, enhances shareholder value, and keeps us on track to capitalize on the momentum we've built. And with that, I'll open up the call to questions.

Thank you. We'll now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speaker phone, please pick up your handset before pressing any keys. To withdraw your question, press star then two. We'll pause for a moment as callers join the queue. Our first question is from Adam Waldo with Lismore Partners LLC. Please go ahead.

Yes, good day, Ronan and Brad. I hope you can hear me okay. Yes. Hey, Adam. How are you? I'm well, Ronan. Thanks. Hope you are as well. So I wanted to just drill down a little bit more on the herbal oasis social tonics progress. Obviously, you press release that launch on November 14, on your last quarterly call on December 18. You know, you weren't comfortable saying much about it yet in terms of the prospective revenue margin structures, working capital and the like, that would be associated with it because it was very early days. What more can you say on those topics now?

Look, Adam, I think it's been a well-received product. It's moving a little. The wholesale distribution side, I think, is moving a little slower than we liked, and it's just, I think, the process of iteration on legal documents. I think, you know, we continue to be excited about the product. We do see some... that the wholesale margin will not be the same as some of our wholesale products today, but we believe it is really incremental revenue for us and opens up the incremental contribution profit dollars that this category can bring us.

Right, and I noticed on the website that you're also offering at DTC. How do you think the DTC margins will look on that versus the rest of the product portfolio?

Look, on the DTC side, it is a little tighter than some of our other products, but we still see it as a very viable channel. We see others in the category very successfully growing profitably in this category as well, albeit it may not be as profitable as some of our higher-end SKUs that we have on the website.

Okay. Did you book any revenue from DTC? in the December quarter, or are you booking your first revenue here in the first quarter?

Yeah, we did book some in the December quarter. We've not disclosed that, but it really only had five or six weeks of revenue for the quarter, and we have not provided a disclosure on that.

Okay, that's fair. On the convertible notes, you achieved conversion of all the remaining principal and interest in January. So what were the total shares of common stock outstanding as of the start of February pro forma for that final conversion?

Yeah, it's just a tad over 6.2 million in total shares outstanding.

Okay, thanks. And then my last question is on liquidity outlook in the working capital area. And on the last quarterly call on December 18th, you guided for what you thought was a liquidity runway of at least eight quarters, which would take you out through the end of fiscal 2026. Do you still hold that view as we sit today?

Look, we still believe we are in one of the best positions we've been in a long time. You know, when you look at the cash on hand balance, we're continuing to fight every day for profitability. and ensure that we can operate a positive EBITDA business, which should generate cash to the bottom line.

Okay. And so you'd expect sort of normal working capital relationships in upcoming quarters because it's a little bit, obviously, you guided on December 18th in that call to expect a bit of an uptick in working capital needs here in the fiscal first quarter, which is what eventuated. Would you expect more normal working capital relationships in upcoming quarters?

Yeah, I think that's a fair statement.

Okay, thanks very much. Best wishes moving forward. Good job.

Thanks, Dan.

Once again, if you have a question, please press star, then one. The next question is from Thomas McGovern with Maxim Group. Please go ahead.

Hey, guys. Congrats on the quarter, and thank you for taking the time to answer my questions. So, yeah, just high level, you know, it's Great to hear that you guys have received a lot of industry interest, it sounds like, for your Oasis beverage product line. I just want to kind of get a better idea of the trends you're seeing across your product tech categories. Back in fiscal year 24, we saw retailers starting to pull back shelf space for a lot of these products, but with the national retailer kind of already lined up for you guys once you figure out distribution, it seems that there might be great interest in this specific category, and I wanted to get an idea if that could be indicative of a of a category turnaround more broadly or if it's more specific to the beverages.

Thanks. Yeah, thanks, Thomas. I think, look, we're seeing – I would say, look, we see that the beverage market has grown significantly in 2024 and continues on that trajectory into 2025. I think, you know, on a whole, it's probably the fastest growing category across sort of CBD and hemp. I think the national retailer, it is not, is only, only sells in some specific jurisdictions. It's not 50 states, just given some of the state level rules. And it also depends on sort of how fast we can build out our distribution. So I think we're excited. It gives credibility to what we're doing. and I think it helps us participate and build inertia in the category. We're continuing to fight day in and day out about the core CBD business that we operate and continue to advance that forward. we still see opportunity for us to perform better in sort of the broader category. And we're doing that, you know, and focused on doing that in a profitable way. And then we've got the Oasis beverage to provide us sort of another growth channel for our CBD business.

Understood. I appreciate that thorough answer.

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

Thank you again for attending today's call and we look forward to our shareholder meeting in April. Have a great day.

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