cbdMD, Inc.

Good afternoon and welcome to the CBDMD Inc. conference call to discuss results for their second quarter fiscal 2025 period ending March 31st 2025. This afternoon the company issued a press release that provided an overview of its second quarter results which followed which followed the filing of its quarterly report on Form 10Q. Today's conference call will be recorded and will be available online along with the earnings press release covering financial results and non-GAAP presentation at cbdmd.com in accordance with CBDMD's retention policies. All participants have been joined to the call in listen-only mode and following the presentation, there will be 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 like to turn the conference over to Brad Whitmore, the company's chief accounting officer. Brad, please go ahead.

Thank you, Galen, and thank you all for joining CBDMD's March 31st, 2025 second quarter of fiscal 2025 earnings call and 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 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 for the fiscal quarter ended March 31st, 2025, 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, May 15th, 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 it may be required by federal security falls. With that, I'd like to turn the call over to Ronan.

Good afternoon, everyone, and thank you for joining us today. Over the past several quarters, we've set two clear goals. One, drive revenue growth and achieve profitability. And two, resolve our capital structure and regain compliance with the NYS American listing standards. This quarterly update, I'm pleased to report progress on both fronts. Our top priority for the second quarter and into Q3 was preparing for our annual meeting and securing shareholder approval on two mission-critical proposals, the conversion of our Series A preferred stock and a reverse split. This was a complex undertaking involving multiple shareholder classes and two failed prior attempts over the last 18 months. I want to thank our shareholders for the strong vote of confidence The successful approval of these measures represents a major milestone in CBDMD's reset and long-term positioning. With the Series A conversion complete, approximately 6.7 million in accrued dividends in our shares of Series A preferred stock were converted into common stock, raising our pro forma non-GAAP adjusted book value from approximately 670,000 to over 7 million as of March 31st, 2025. well above the $4 million threshold required by the NYC Americans. The exchange also eliminated legacy obligations, including $4 million in annual dividends and over $50 million in preferred waterfall payouts, and simplified our capital structure. After discussions with regulators, our board determined conducting the reverse stock split was an important step to protect against the NYC Americans' 10-cent delisting threshold. Between the preferred conversion and the reverse stock split, We now have approximately 8.9 million shares of common stock outstanding, no debt, no warrant overhang, and a clean cap table, putting us in a position to fully regain compliance by the end of our fiscal year. After two years of heavy lifting, CBDMD is now operating with a strong foundation and greater strategic flexibility. We're energized by what this unlocks for the future. On the operational side, we continue to demonstrate meaningful year-over-year progress across the P&L. even if Q2 performance was not as strong as Q1. We're executing against three revenue growth priorities. First, growing our direct-to-consumer business. While our Q2 marketing performance fell short of expectations, we acted swiftly, making leadership changes in March and instilling a renewed urgency across the team. We're laser-focused on enhancing customer acquisition, experience, and retention. Second, expanding our core wholesale business. Wholesale revenue is up 13% on a trailing 12-month basis. We've added new sales reps focusing on high-quality partnerships and working to ensure CBMD remains the preferred brand in our category. Finally, Scallion Herbal Oasis, our hemp-derived THC seltzer brand. I'm excited to officially call it award-winning. All four flavors recently meddled at the 2025 High Spirits Award. We've added distribution partners in Alabama, Florida, and North Carolina. While some rollout momentum slowed in Q2 due to legislative activity, we're ramping it up again and have new markets and retail placements in the pipeline. We expect to announce additional wins this third quarter. The THC Seltzer category is booming. According to Euromonitor, sales more than doubled in 2024 and projected to exceed $4 billion by 2028. As alcohol consumption declines, we're seeing clear signs that consumers are seeking functional social alternatives and OASIS is built for that future. We also know that the long-term success of this category will depend on regulatory clarity. We are currently tracking active legislation in over 23 states, and we strongly support smart regulation that ensures customer safety and trust. With our internal regulatory and legal experience, we're confident in our ability to adapt quickly to an evolving landscape. All this strategic and operational progress is beginning to show up in our financial performance. While we still have work ahead, the year-over-year trends across revenue margins and EBITDA reflect a business that's becoming more efficient, more disciplined, and better positioned to scale. With that, I'd like to turn it over to Brad to walk through the financial details of the quarter.

Thanks, Renan. Total net sales for the first quarter of fiscal 2025 were 4.7 million, representing an 8.6% increase from the prior year comparative quarter total and a 7.9% decrease from the first quarter. As Renan mentioned, we are focused on three key areas to improve our quarterly revenue numbers. Our quarterly e-commerce direct-to-consumer business was flat year-over-year and generated sales of 3.6 million in the second quarter of fiscal 2025. E-commerce represented 77% of our total net sales for the second quarter of 2025 versus 83% in the prior year comparative quarter. Our wholesale business generated 1.1 million of net sales for the second quarter of fiscal 2025, up 22% as compared to 750,000 for the comparative quarter in fiscal 2024. Our gross profit remained healthy at 62% for the second quarter of 2025. The increase in our warehouse rent flowed through in full this quarter, including some one-time increases in CAM costs. Despite this, we continue to operate with some of the leading gross margins in the industry. Our SG&A expenses for the second quarter of fiscal 2025 totaled $3.5 million, compared to $4.1 million in the prior year comparative quarter. The expense reduction was primarily due to reductions in payroll, professional fees, and the elimination of the headquarters lease, in addition to other cost-saving initiatives. while slightly offset by an increase in marketing expense. For the six months ended March 31st, 2025, SG&A's expenses were down 1.8 million across the board and came in at 6.9 million. We are continuing to review operating costs across the board to ensure we remain efficient and help us return to positive income and EBITDA during the second half of the year. Overall, this resulted in a loss from operations of approximately $485,000 for the second quarter of fiscal 2025 as compared to a $1.5 million loss from the prior year period. After adjustments to the fair value of the notes and interest expense, net loss totaled $480,000 as compared to a loss of $3 million in the second quarter of fiscal 2024. Our non-GAAP adjustments to operating expenses for the second quarter of fiscal 2025 included $2,000 in non-cash employee stock expense and $286,000 in depreciation and amortization expense, resulting in non-GAAP adjusted EBITDA loss of $197,000 for the second quarter of fiscal 2025 as compared to a $680,000 non-GAAP adjusted EBITDA loss in the second quarter of fiscal 2024. The EBITDA improvement non-GAAP adjusted operating loss over the prior year period is primarily attributed to management's focus on our cost structure and profitability. We had cash and cash equivalents of approximately $1.7 million in working capital of approximately negative $3.7 million for March 31st, 2025, as compared to $2.4 million in working capital deficit of approximately $2.2 million on September 30th, 2024. The main factor contributing to the reduction in 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 6.7 and 4.7 million of accrued dividends, we had positive adjusted net working capital of 2.8 million as of March 25 and 2.4 million as of September 24. We invested approximately 400,000 in inventory during the quarter. We were running a little too lean at the start of the quarter and needed to bolster a few key skews. Additionally, we invested in our OASIS inventory as we began rolling out to distributors. We continue to focus on improving our working capital and managing our cash carefully. With that, I'll turn the call back over to Ronan. Thank you, Brad.

Operationally, we've transformed this business. Our mandate is profitable growth, and we remain firmly committed to delivering a profitable 2025. The successful capital restructuring not only improves our balance sheet, but also opens the door for future strategic opportunities, including M&A. The right transaction could be truly transformational, creating opportunities to expand into new categories, reach broader customer segments, open additional sales channels, and realize meaningful operational synergies. Our capital structure is now clear, our stock is more investable, and we're seeing increased inbound interest since the annual meeting. We are evaluating these opportunities with discipline and clear focus on long-term value creation. We consider this our great reset, a clean slate to create long-term value. We're no longer weighed down by the past. We're now powered by a lean organization, loyal customer base, and category-extending brands. Our cash flow remains low. We believe we have the working capital to execute our growth plan. We believe we're in a stronger position than many of our public peers, with stronger gross margins, substantially debt-free with approximately $1.7 million in cash and no material liabilities beyond normal working capital and lease liabilities. Our battle-tested team has showed time, and again, that we can evolve, adapt, and deliver. We're grateful for the shareholder support shown in April, and we're more focused than ever on driving the results in the quarters to come. Thank you, and let's open it up for questions.

Certainly. 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 speakerphone please pick up your handset before pressing any keys. To withdraw your question please press star then 2. Our first question is from Adam Waldo with Lismore Capital. Oh sorry he disappeared. Our next our first question is from Tom McGovern with Maxim Group. Please go ahead.

Hey, guys. Thanks for taking my question. Yeah, so just want to start first with the Herbal Oasis brand. Obviously, you announced that you were launching it back in November. Now you've had some time to actually commercially roll it out. You mentioned those distributors and plans to really fuel the growth now that you kind of worked through some of the capital structure concerns. that were a priority in prior quarters. So just maybe, could you give us a little bit more color on that kind of, how does that expansion look from your perspective? Just, you know, what are some maybe milestones we should look out for kind of targets? You know, if there are any specific distribution channels you're looking to get into with the brand or, or specific markets you're looking to expand into any details on that would be helpful. Thank you.

Sure. Thomas. Look, we, we, we, had started discussions back in the December quarter with a number of distributors and started getting commitments during the March quarter. You know, in March, we, you know, some of those discussions took a little longer than we liked, and we started seeing some legislation pop up toward the end of March, which kind of slowed some of the shipments into those distributors. We did ship at the end of March into one. We shipped... In April, we had some shipments, and then I think we recently announced in May we started shipping into Charlotte. So I think it was a little frustrating that, you know, I think some of the regulatory stuff that the sensor resolved itself slowed down our progress a little bit. But, you know, we've got, you know, feet on the street in some of our core markets and closing doors on a daily basis. So for us, I think, you know, we're trying to work with key distribution networks in various states. Some states, it's easier to get full state coverage. Others, it's broken up into more kind of county-based systems. So I think we're out there talking to distributors every day, working to secure opportunities for our brand and continue to march and build our distribution footprint beyond sort of the southeast where we're at today.

Understood. I appreciate that, Collin. Just to follow up on that. So, you know, can we be looking at 25 as kind of a development or, you know, commercial ramp period and then maybe start to expect Herbal Oasis to be more of a key driver of growth or a material driver of growth in 26? Or, you know, should we start to expect that, hey, maybe once it starts hitting the distribution channels, there should be some relatively rapid uptick and we can start to see Oasis materially impacting top line in the back half of this year?

I think we should start being able to see toward the back end of this year some good contribution from the brand.

Appreciate that clarity. And then last question for me. Since the conversion of preferred into common equity obviously increases financial flexibility for you guys, Just maybe walk me through high level how you expect it to impact your strategy moving forward. I know that now you'll have access to some shelf registration that was locked up due to the cap structure. So just curious, does this alter your expectations for growth or give you any more clarity on what we should be expecting for 2025 in terms of growth initiatives?

Yeah, Thomas, I think for the shelf to come back into play, we have to complete our next audit. So it's realistically that doesn't come into play. back into play until December sometime. I think for us, it sort of gives us, I would say a couple of things are critical here. One, you know, we're now in a really great position to maintain our listing, right? We were on a path with the NYSE so that by the end of the year, we potentially were delisted. So from a preservation of value for shareholders and giving, you know, not only customers, shareholders, employees alike, The fact that we now, you know, we're in a great position on a go-forward basis to main CBDMD as a listed company on the NYC American. I think, you know, strategically, we've, you know, had to turn, you know, we've had numerous discussions with various parties over the last few years. And I think, you know, people really didn't see, you know, they saw the YCB stock and the price and sort of, looked at it, and then as they sort of, you know, ended up sort of doing research later down and understood the preferred, I think, you know, there wasn't much value or credence in sort of the value of our stock. And that's either for strategic investment, that's for doing M&A, that's for trying to find sort of the right influencers and allow them to sort of participate. So I think that now is very easy to understand our capital structure and really understand the value of our stock. given that it's just a clean, you know, common stock structure, it allows us to use that currency for the right deals where we believe there's sort of strong alignment and creating value in the future for our shareholders.

Understood. Well, congrats on working through that. Congrats on the quarter. And, you know, looks like you're positioning yourself nicely for 25. I appreciate, again, you taking the time to answer my questions. I'll hop out of here. Thanks.

Thanks, Thomas.

Once again, if you have a question, please press star then one. Our next question is from Adam Waldo with Lismo Partners. Please go ahead.

Hi, good day, Ronan and Brad. I hope you can hear me okay. Yes, Adam, how are you? I'm well, Ronan, and you? I'm great, thank you. Well, congrats on the conversion. I wonder if we can talk about the working capital situation going forward and how that respectively translates into cash burn or cash generation. So over the last three fiscal quarters, you've averaged a cash burn of about $275,000 a quarter. You did better than that, obviously, here in the last quarter at around $200,000. Are you still comfortable, based on what you're seeing in terms of the working capital requirements, particularly of the Herbal Oasis Tonics new products, that the company's liquidity runway remains sufficient through the end of fiscal 2020? 2026, as you had indicated, was your outlook on the fiscal fourth quarter 2024 results call on December 18th?

Look, Adam, I think we understand what happened this quarter. We're working to tighten that up and make sure that we get back to a scenario where we're in a much better positive EBITDA and cash generation situation. So I think we're still feeling comfortable as of today with where we're at and the working capital that we have on a go-forward basis.

Okay. And so, am I right to correct to infer that you're still comfortable with that guidance that you issued on December 18th that you thought liquidity outlook was sufficient through at least the end of fiscal 2026? In other words, another six quarters from here? That is what we have modeled out. Okay. Terrific. And then switching gears, you know, you made a number of comments on today's call and in the recent press release around the successful conversion of the Preferred to Common about the company being, you know, well-positioned going forward for strategic activity. And that was obviously a key criterion for the conversion in the first place. So as you look forward, what types of strategic activity do you think board members and management would find most attractive. Can you comment on that at all?

Look, I think, you know, as I sort of spoke about in some of my closing statements, I think we're looking at opportunities where we think, you know, there's a really good either, you know, cost synergies to shrink out of a business, open up new channels, and or sort of acquire new customers. where we think there's sort of a great customer overlap and are able to sort of look at it as one and one equals three. I think that's both inside the cannabinoid space and outside the cannabinoid space.

Okay, that's very helpful. And I guess the final question, actually, let me go back to the last part of what you said, outside the cannabinoid space. Could you flesh that out any more or add to that?

Yeah, I don't think it needs to be a CBD company. We certainly think there's plenty of opportunity. I think you've seen the number of companies in the space shrink over the last few years. We think there's still plenty of opportunity and plenty of, we'll call it, overhead in the space. So for the right brand and the right structure, I think we're interested, where we think one-on-one is going to be greater than two.

Understood. And I guess the final thing, following up on Thomas' line of questioning around herbal oasis, what kind of sort of financial and operating performance metrics on that new product set can you offer us this quarter, if any? Or should we look for more disclosure to come as you'll reach the materiality threshold that you seem to be signaling you would expect to see sometime before the end of this fiscal year?

So, look, what I'll say is there was really the revenue impact came at the very end of the March quarter. And we're starting to see that pick up here moving through the third quarter here. So I think we're not, you know, we have, I think, stated before that, you know, the gross margins on this product are not quite the same as our core business. But from our standpoint, we view it as incremental contribution dollars. and are looking at sort of volume play because it is a different business than shipping, you know, gummies and pills majority direct to consumer.

Very good. Thank you so much and best wishes for upcoming quarters. Adam, thank you very much. I appreciate it.

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

Thank you again to our shareholders for your support and everyone for attending today's call. We look forward to our next earnings call in August. Have a great afternoon.

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