Q1 2024 cbdMD Inc Earnings Call

Participants

Brad Whitford; VP of Finance; cbdMD, Inc.

Ronan Kennedy; Interim CEO & CFO; cbdMD, Inc.

Anthony Vendetti; Analyst; Maxim Group LLC

Jim Schaeffer

Thomas McGovern; Analyst; Maxim Group LLC

Presentation

Operator

Good afternoon. Welcome to the cbdMD Inc's December 31, 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 10-Q. 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 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 like now like to turn the conference over to Brad Whitford, the company's VP of Finance. Brad, please go ahead.

Brad Whitford

Thank you, [Ahiya], and thank you all for joining cbdMD December 31, 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 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 quarterly report on Form 10-Q for the quarter ended December 31, 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, Tuesday, February 13, 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.

Ronan Kennedy

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. Since we remain disciplined about our cost controls, but ultimately missed our goals of sequentially growing revenue for the quarter, but 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 two new brands HAM-D in our function, much like a TRX less 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 bank had Jim 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 has 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 strong Sprouts launch, and we are pleased with the velocity out of the gates and initial reorders. Similarly, the data call, we launched our initial ATX product, the ultimate mushroom daily gummy on Amazon in the future. We just started ramping up sales and are getting great feedback and reviews from customers. Outside of Amazon ATX is showing encouraging signs just a few weeks into our launch. We received orders from a national retailer to rollout for new ATRIX functional products. These products were recently nominated in the 2024 and Natural Choice Awards by Whole Foods magazine and testament to our innovation and market potential. We're actively building interest with other retailers and look forward to announcing further costs.
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 assess what the working capital needed to expand a TRX and provide working capital to support our ongoing operations capital availability is challenging at the moment and given our preferred structure and pending proxy created additional challenges to refinance. And I continue to view multiple strategic opportunities that are presented the complexity and procedural challenges stemming from our 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 an all common capital structure should unlock additional enterprise value for the Company and open up additional strategic opportunities. The accrued preferred dividends continues to pose a risk to all shareholders as it reduces our equity value by $1 million 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. It's very important for shareholders to confirm as they review the forthcoming definitive proxy statement. With that, I'll turn the call over Brad.

Brad Whitford

Thanks, Ronan. Total net sales for the first quarter of fiscal 2024 was $5.4 million or 12% 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% year over year quarterly decrease. We believe the quarter-over-quarter decrease is primarily attributable to continued reduced marketing expenses and micro economic forces on consumer 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 calls came down across the board and 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 million in the current quarter.
Overall, this resulted in a loss from operations of approximately $1.1 million for the first quarter of fiscal 2024 compared to $4.1 million loss from the prior year period. Our non-GAAP adjustments to operating expenses for the first quarter of fiscal 2024 four 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 profitability.
Other income expense on our consolidated income statement for the first quarter of 2024 includes a non-cash contingent liability gain of $70,000 related to our December 2018 acquisition of Cure Based Development, final marketing 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 31st, 2023, as compared to cash and cash equivalents of approximately $1.8 million and working capital of approximately $3.4 million as of September 30th, 2023. Our current assets as of December [31], 2023, decreased by approximately 8.7% from September 30, 2023 to $7.4 million, a primary driver of the decrease in current assets was the usage of cash for operations. As of December 31, 2023, the company's total current liabilities were six points over $6 million, of which approximately $1.6 million is accounts payable and $3.1 million of 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 Ronan.

Ronan Kennedy

Thanks, Brad. At the heart of cbdMD lies 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 motion brand TTRRx. The next few months are critical as we look to continue to build momentum and over-deliver on a TRx retail launch and prepare for any 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 and now invite you to we are I'll now invite your questions to further discuss that.

Question and Answer Session

Operator

We will now begin the question and answer session. So during the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. You are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, press star then two.
Anthony Vendetti, Maxim Group.

Anthony Vendetti

Thank you, yeah, Ronan I was just wondering if you could talk a little bit more about on the relationship with Sprouts Farmers Market, how many products are available and how many locations? And then is that the new mushroom DTXDXT. product, is that is that going to be available?
There is a available at different locations?

Ronan Kennedy

Hi, Anthony of So we launched in the 160 Sprouts stores. We're pretty happy with the with two skews on two of our gummy skews, and we're pretty happy with the velocity of those out of the gates. We continue to sort of show work with them to deepen the relationship and figure out what other opportunities we have to gain shelf space on one of the things we have on, we are looking or would love to sort of continue to expand is on of our functional gummy product through ATRX arm with Sprouts. But we're still working through our relationship in that and on opportunities to expand with them.

Anthony Vendetti

And then, Ronan, you had mentioned on the last call that we at that time you had you had some issues with the Facebook, your Facebook account. Have you regained access to your Facebook account and have any of the issues around advertising been resolved? There is impact of running there?

Ronan Kennedy

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

Anthony Vendetti

Okay. And then and then just in terms of the mushroom skew that you're talking about, where is that currently being launched? How many M&A locations? And can you elaborate a little bit more on the opportunity there?

Ronan Kennedy

Yeah. So we are not able to say what retailer. I think we made the sort of the decision a little earlier to to announce that just because we went out and found some additional financing and spend needed to sort of leverage and bolster our balance sheet to support some of the working capital build that is within National at retail. We are first finalizing on you how expansive that that launch will be on. And at this point, the four skews for new skus that the launch is part of. So we're pretty excited about getting that placement and building the inertia four for this new brand.

Anthony Vendetti

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?

Ronan Kennedy

Yes, for all sites having converted over and we're continuing to sort of leverage the certified network and to optimize that turbine.

Anthony Vendetti

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

Ronan Kennedy

Thanks.

Operator

And again, if you have a question, please press star then one.
Jim Schaeffer, private investor.

Jim Schaeffer

Hi, everyone, and thanks for taking my call. First, regarding the annual meeting, preliminary proxy have identified at least two clerical errors and have e-mailed the details to ir at CDBMD. dot com. So you got that from I --
Yes, G&A expenses at the deal late.
Okay. 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 that two-thirds majority shareholders Series A. shareholders vote?

Ronan Kennedy

Yeah, look, I think you know, we've tried to do is take some feedback that we received around sort of where people were looking from an ownership standpoint on and understanding that sort of the preferreds were 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 for the the proposal or without the common on sort of any proposal isn't going to work. So it's sort of challenge to navigate sort of the and balance sort of the demands of both shareholder questions. But knowing that ultimately, if no, neither class votes in favor, then I think yes, but the listing at risk for everybody. So and yes, we're trying to sort of ensure that the preferred end up with the significant now of a materially increased amount of ownership over were where the proposal was last year on year, we've tried to add some incremental cash to the balance sheet and will position us for the companies that come in through this year. We have working capital in the unit and can hopefully unlock some additional value for shareholders cleaning up the cleanup service dual-class structure.

Jim Schaeffer

Okay, thanks.

Operator

[Bob Becker], private investor.

Hi Ronan, 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 year, even 61 are going to bone a less of a percentage as the gentleman before me said than some, you know, the offer that you made months ago. So I 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. And I just wanted 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, you were going to get 80% or less of the company as preferred holders. And I'd just like to know what your comments on that please.

Ronan Kennedy

Sure [Bob], have a look, I think, yes, our goal is to be able to pay off the financing over 18 months and minimize the dilutive impact from that. And then fundamentally, we were trying to take some of the feedback around ensuring we had some additional capital on the balance sheet and now a plus 90% ownership of the preferred. And I think you've given the market and given a lot of your peers in France?

I'm sorry, go ahead.
I'm sorry.

Ronan Kennedy

I know Additionally, given where the book value of equity trends were and it's now as we would have liked to have had some additional runway before we proxy desks.
And what we saw was some concern about where the book value of equity was unknown and in the coming months and felt it prudent to trying to move to get ahead of that and minimize incremental expenses tied to the proxy, including in our annual meeting.

How would you expect to pay back the debt on whether the preferreds convert or not, where is the cash flow that the company is going to potentially generate profits that are going to potentially be able to retire [11/4 million] on top of the fact of [$1.5 million] [really] come on top of the fact that there's nothing to prevent the convert holders from converting in advance of that 18 month maturity and now 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.

Ronan Kennedy

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

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

Operator

Thomas Macoven, Maxim Group.

Thomas McGovern

Hey, guys.
Yes, I just wanted to hop on a first as a follow-up on Anthony's question. About Sprouts Farmers Markets. I mean, so you sold 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, as you mentioned, there was 175 locations. I just wanted to clarify that. Is it 150 locations or about 175 locations?

Ronan Kennedy

Kind of -- I think it was closer to the 175 locations.

Thomas McGovern

Okay. I appreciate the clarity and then finally, just real quick, just wanted to see if there's any notable updates on your efforts to pursue a FDA regulation of CBD products? And if so, what are they? And if not maybe do you have any expectations on when we could expect some developments in upfront, whether there are some upcoming events or dates that we should be looking out for that could serve as a catalyst for achieving FDA regulations?

Ronan Kennedy

Yeah. Look, we're staying close to on sort of what is happening and trying to make sure that we have a voice on, I guess, given where the political climate is today and forthcoming election, we don't really see a and in material movement at the national level here for 2024, we are seeing an increase in activity at the state level bomb. So we're staying as is on on top of that as much as we can and two to ensure that sort of we're aware what's happening we can voice on. We can reach out to appropriate state on and educate them about our product and category and our benefits and and hopefully improve or sort of minimize any changes to that by state level legislation?

Thomas McGovern

Well, I appreciate you taking the time to answer your questions.

Operator

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.

Ronan Kennedy

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

Operator

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