Q4 2023 cbdMD Inc Earnings Call
Presentation
Operator
Welcome to the cbdMD, Inc. Fourth Quarter and Fiscal 2023 earnings call and update this afternoon, the company issued a press release that provided an overview of the results for its fourth quarter and 12 months fiscal period ended September 30, 2023, which followed the filing of its annual report on Form 10-K. 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.(Operator Instructions)
I'd like to turn the conference over to Brad Whitford, this Company's Vice President of Finance. Brad. Please go ahead.
Thank you, Galen, and thank you all for joining cbdMD September 30, 2023, Fourth Quarter and Fiscal 2023 earnings call and update on the call today, we also have Ronan Kennedy, our Interim CEO and Chief Financial Officer, and Dr. Sibyl Swift, our Chief Science 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 year ended September 30, 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 Friday, December 22nd, 2023, 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.
And with that, I'd like to turn the call over to Ronan.Ronan?
Thank you, Brad, and good afternoon, everyone. During fiscal 2023, cbdMD has navigated through a transformative phase, making significant strides in our operational turnaround plan. Despite facing headwinds with revenue declines, we successfully enhanced our overall operation and significantly curtailed our cash burn, particularly in the third and fourth quarters.
The CV market while challenging, remains ripe with opportunities, our focus is steadfast on reversing the revenue trend in 2023 and achieving positive EBITDA in 2024 for our diligent efforts this year have led to a $55.8 million improvement in GAAP loss from operations for the full year 2023 and a non-GAAP operating adjusted loss improvement of $7.7 million for the year. This fiscal discipline coupled with strategic decisions resulted in $15.8 million year-over-year reduction in cash SG&A costs for 2023 and $3 million for the fourth quarter, while overall revenue declined sequentially, we continue to make incremental improvements to our adjusted EBITDA and cash flow.
On our last call, we are excited about the transition to our e-commerce platform. We continue to see benefits from the lower cost structure and an increase in our base of loyal subscribers since making the conversion and November site refresh aims to further optimize conversion rate, extend customer lifetime value, and acquire new customers efficiently despite experiencing downtime issues that matter. Again, our marketing team continues to focus on elevating our brand image and quality of content with everything we do we regularly reassess every line item channel and vendor for performance.
On the wholesale front, we continue to focus on developing new strategic relationships and sign into larger accounts and leveraging distribution networks to expand our reach. We are excited to announce that cbdMD launched in 160 Sprouts market stores across the nation this month. We are continually engaging with new retailers and focused on incremental opportunities during calendar 2024. Internationally, our brand reputation, clinical data and safety data continue to create opportunities or positivity product are now registered in Central America, and we began shipping Costa Rica in December. We continue to grow our business in Brazil and are working on other actionable international distribution opportunity despite the longer lead times and the international sales cycle. We see these high entry barrier markets of promising avenues for sustained growth. Last quarter, I stated that product development and innovation are important tenants. We continue to invest in our core CVD and an impossibly brand and are excited about the new EBITDA and the impulse in the products that we have in store for 2024. That said, we recently took the opportunity to survey the landscape in green trends and review our customer feedback. And our team made the decision to launch two new brands at MD & A TRX during this current quarter. Both brands provide new opportunities for growth for do not face the same regulatory and channel impediments as do. And then the collection of curated have product primarily designed for sale and hand Patriot acts as a new nutraceutical brand that will provide functional nine cannabinoid and health solutions to our customers with an initial focus on emerging functional measure margin.
As mentioned in our press release, we are excited to announce the launch of our first APX product, the ultimate mushroom daily gun, the ultimate mushroom daily Garmin's proprietary blend is designed to enhance focus memory support, guys have got help reduce inflammation and boost immunity and pairs well with our core cbdMD products as part of an everyday routine, we have received positive feedback and growing interest from several retailers and are already in discussions about expanding the TRX line into multiple brick-and-mortar retailers. These new brands that complement our core offering but also open up new channels for growth beyond the regulatory confines of CVS. Since our last call, we invested significant management resources on both M&A opportunities as well as a special meeting of shareholders and proxy statements to convert our Series A. preferred stock and address our capital structure. It was clear from the structure within that from discussions with in our industry we have a great platform and there are significant synergies that exist with a rollup or other M&A. However, complexity and procedural challenges associated with our multi-class equity structure continued to be problematic to advancing the transaction. With respect to our proxy, though we were unsuccessful achieving the preferred votes necessary to pass and propose resolution. We believe our current structure has a negative impact on the combined market capitalization of the Company and significantly enhance our ability to raise capital, ultimately putting the Company on an NYSE listing. It works. We received feedback from shareholders in our proxy process and working with other with our board members on alternatives, cleaning up our capital structure as one of our highest priorities going into calendar 2024 for that, I'll turn the call over to Dr. Sibyl Swift.
Thank you, Ron. And my comments today are focused on science and regulatory updates. On prior calls, I discussed our biometric study was able to measure the benefits of consuming cbdMD products daily. I'm pleased to announce the first cohort of participants in our study is completing this month. The study's conclusion estimated to be in the third calendar quarter of 2024 and data to be published shortly thereafter. This study was designed to gather data about our core broad Spectrum Brands' impact on frequent recovery and will be used in marketing campaigns and consumer education initiatives to increase brand loyalty and further drive revenue. Just after our last call in September, we published the first of several journal articles on the company's safety, data and regulatory toxicology and pharmacology, a high-impact factor peer review toxicology Journal, The Journal publication fields that details the safety of our proprietary broad-spectrum CBD plan by analyzing several of the globally recognized studies performed on the Company's proprietary by Spectrum blend, including prenatal development and a 90 day study of oil consumption. But the recovery period. The study concluded that cbdMD is proprietary. Broad-spectrum blend is safe when consumed at 160 milligrams per day and a 70 kilogram human, which equates to GBP154 for those of us who do not work in the electric system available at the application of this study is that our products are safe to consume and use and dietary supplement products at approximately 1milligrams per pound of body weight per day. The significance of the study is demonstrated by the fact we've already been cited and other medical papers on the subject of CV safety. It is also a key example of cbdMD is commitment to science, which has laid the foundation for cbdMD to deliver superior everyday wellness products. It is formulated to specifically address the needs of its customers. Publication of our data reinforces to our customers, stakeholders and regulators, the company's unwavering commitment to science and safety. We continue to build on the strong science foundation with our new line of functional mushroom products and a TRX brand beginning with our superior mushroom gummy in recognition of the significant amount of scientific information pertaining to the benefits of functional options for optimizing health. We are including them in our new ARX products to provide our customers with effective functional health and wellness products. In our last earnings call, I discussed some of my activities before Congress and high provided written testimony to representative commerce office to support oversight hearings into how the FDA has mishandled CBD as a dietary ingredient.
Further to those efforts, the Company submitted a detailed 21 page response to the July 27th request for information or RFI regarding the regulation of cannabidiol products issued by bicameral health committee leaders and a bipartisan request for information regarding SEC regulation of CTG, the RFI asks subject matter experts and stakeholders for Impella and key areas pertaining to FDA regulation of CBD. We review the way we view the RFI as a critical opportunity for the company to provide decision makers and Congress with substantive information from a top CBD brands that has taken tremendous strides to be fully compliant with the Food Drug and Cosmetic Act. We submitted our response to the request directly under the cbdMD brand to ensure the bicameral bipartisan congressional committee received the requisite information to make an informed decision about the safety of our products and the right path towards regulatory clarity after submitting the RFI. We followed up by meeting with key staff on the Energy and Commerce Committee, where we discuss the data in our safety study. Although we have yet to obtain regulatory clarity, the Company believes the consistent message to Congress is required to move our agenda forward due to the fact Condor Congress has yet to act. The battleground has shifted to combating burdensome state regulations, and we are working with our triggers to block or delay on favorable state legislation in recent months. By working closely with our trade group, we have been successful in stopping several tends to limit the amount of cannabinoids for serving and per container and hemp-derived cannabinoid products. In light of the regulatory burdens placed on our industry. We continue our efforts to educate consumers and regulators alike. We are crossing education campaigns based upon the data derived from our extensive safety dossier and clinical studies. This messaging will be leveraged to educate customers on why cbdMD products are superior to others in the market and to educate state regulators to fill in the gaps in their knowledge.
Understood any untoward messaging, they may have received about the safety and efficacy of our products. We believe that by taking a proactive approach at the state level, we will ensure our customers have access to safe and efficacious products. While we also remove unnecessary roadblocks to selling our products in all 50 states, these education campaigns are also going to be leveraged by our marketing team for consumer outreach, so our customers know how to identify safe and efficacious products and understand why our significant investment in science and Quality Matters ultimately leading to increased sales. We continue to maintain compliance with all responsible dietary supplement brands should by adjusting the Four Corners, the Food Drug and Cosmetic Act, good manufacturing practices, labeling claims, adverse event reporting and ingredient safety. We know our products are safe and effective because we invested in science to support them being. So we will continue to tirelessly advocate for regulatory clarity for hENT drive products while also focusing on education to ensure that our customers have access to tactically drive solutions, and I understand why they're necessary for their everyday health and wellness. And now I will turn the call over to Brad.
who thinks civil total net sales for the fourth quarter of fiscal 2023 were $5.7 million or 27% decrease from the prior year comparative quarter. Total Sequentially, sales were essentially flat for the 2023 fiscal year. Audited net sales totaled $24.1 million as compared to $35.4 million in the prior year.
Our quarterly e-commerce direct-to-consumer business generated sales of $4.6 million in the fourth quarter of fiscal 2023 fiscal the 26% year over year quarterly decrease. We believe year over year sales were impacted as a result of reduced underperforming marketing expenses and macroeconomic forces on consumers. E-commerce represented 81% of our total net sales for the fourth quarter of 2023 versus 80% in the prior year comparative quarter. For the fiscal year ended 2023, e-commerce generated $19.4 million of net sales compared to $26.4 million for the comparative prior fiscal year, a 26% decrease. E-commerce represented 81% of our total net sales for the fiscal year ended 2023. While sales decreased year over year, we improved our overall direct to consumer revenues from marketing spend from $1.6 million in 2022 to $2.8 million in 2023. This means we are spending more effectively and for the year operated at a more sustainable marketing spend ratio of 36% of revenue as compared to 62% of direct-to-consumer revenues in 2022. Our wholesale business generated $1.1 million of net sales for the fourth quarter of fiscal 2023, down 32% as compared to $1.5 million for the comparative quarter in fiscal 2022.
This decrease is primarily attributable to our lower price structure over the prior year period and changes in state regulation of certain CBD products for the fiscal years ended September 30, 2023, and 2022 our wholesale business generated net sales of $4.7 million and $8.9 million, respectively. Our gross profit as a percentage of net sales came in at 62% for the fourth quarter of fiscal 2023 as compared to 64% in the prior year comparative quarter. For fiscal 2023, gross margins totaled 62% as compared to 63% from the prior year, excluding impairment of goodwill and other intangible assets in both periods, our SG&A expenses for the fourth quarter of fiscal 2023 totaled $5.5 million compared to $7.9 million in the prior year comparative period. Excluding an increase in the intangible asset amortization, cost came down across the board as management continues to focus on profitability, excluding depreciation, amortization, stock explants A360 amortization cash SG&A expenses came down almost $3 million from $7.1 million last year to $4.2 million in the current quarter. Sequentially, cash SG&A declined approximately $200,000, primarily due to reductions in payroll, legal and other professional expenses for the full year 2023, SG&A expenses dropped to $15.4 million from $39.6 million to 24.2 million during the fourth quarter of 2023 market forces and trends caused us to reassess the useful lives of our intangible assets. While the significant decline in the combined market capitalization of our traded securities created a triggering event under A360, and we were required to perform a multi asset valuation under GAAP. We ultimately adjusted the useful life of our trademarks and incurred a noncash impairment charge of $13.2 million in the prior fiscal year, we incurred a non-cash impairment charge of $4.3 million related to intangible assets and $56.7 million related to goodwill.
Overall. This resulted in a loss from operations of approximately $15.2 million for the fourth quarter of fiscal 2023. As compared to $14.8 million loss from the prior year period, excluding 2023 and 2022 impairment charges during the fourth quarter, non-GAAP operating income totaled $2 million compared to $2.8 million for 2020 to the full fiscal year, operating loss totaled $22.4 million as compared to an operating loss of $78.3 million in 2022. Our non-GAAP adjustments to operating expenses for the fourth quarter of fiscal 2023 included the $13.2 million intangible impairment charge, $33,000 in non-cash employee stock expense, $667,000 in depreciation and amortization expense and $609,000 associated with non-cash pay. Our credits related to our marketing agreement with A360. $70,000 inventory write-down and $45,000 in the year end bad debt accrual, resulting in a non-GAAP adjusted operating loss of $572,000 for the fourth quarter of fiscal 2023 as compared to $2.2 million non-GAAP adjusted operating loss in the fourth quarter of fiscal 2022. 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 for the 2023 fiscal year, our non-GAAP adjusted EBITDA loss totaled $5.5 million compared to $13.2 million for fiscal 2022. The Company has made significant strides during the last two quarters of the fiscal year and is operating at a much improved rate than the 2023 full year totals for the other income and expense on our consolidated income statement for the fourth quarter of 2023 includes a noncash contingent liability gain of $34,000 related to our December 2018 acquisition of Cure Based Development, the final marking period ended in November, and we will be closing the gap of the earn out shortly, which we anticipate will have an immaterial or financial impact on our first fiscal quarter of 2024. In addition, we incurred a non-cash expense related to our investment in steady state based on several factors, including but not limited to overall declining industry market valuations and moving cbdMD business to alternative suppliers, we believe it was prudent to revalue this investment during the fourth fiscal quarter of 2023, we utilized approximately $1 million of cash. The main components included our adjusted non-GAAP operating loss of $570,000 and dividends paid of $660,000 with working capital adjustments, making up the debt. We had cash and cash equivalents of approximately $1.8 million and working capital of approximately $3.4 million of September 30, 2023, as compared to cash and cash equivalents of approximately $6.7 million and working capital of approximately $10.7 million as of September 30, 2022. Our current assets over September 30, 2023, decreased approximately 49% from September 30th, 2022 to $8.1 million, a primary driver of the decrease in current assets was a usage of cash for operations and the reduction of prepaid sponsorships by $1.3 million, mostly attributed to the termination of an app and sponsorships as of September 30th, 2023, the Company's total current liabilities were $4.6 million, of which approximately $1.9 million as accounts payable and $1.5 million 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 continue to reassess every line item on our P&L and are working to three squeeze cost out of our infrastructure while focusing on smart marketing expenses to generate positive ROI and revenue growth.
And with that, I'll turn the call back over to Ronan. and
Thanks, Ben. As we reflect on our journey this past year, it's clear that our commitment to providing customers with superior natural products, exceptional customer experience remains our cornerstone for building a robust environment, right? This unwavering belief in our mission continues to guide us with the way we operate at. Cbdmd has evolved significantly over the past year today, we stand more disciplined, agile, and laser-focused on optimizing cash flow than ever before, encouraging improvements in our bottom line and a substantial reduction in our cash burn for the later half of the year are testament to this evolution. Brazilian market CBD market still presents a tremendous opportunity for us. Despite the ongoing regulatory complexity, we are continually strengthening the foundation and market position of cbdMD and our partner pipeline for new opportunities, both domestically and internationally is explained by new brands, have MD & A TRX. I've not only opened doors to exciting distribution channels and customer acquisition prospects, but also provide us with additional pathways to rejuvenate our revenue streams.
Looking ahead to 2024, we recognize it is a crucial year for the Company focuses on growing sales and addressing our capital structure. We approach these challenges and opportunities with a blend of enthusiasm and strategic results for a dedicated to taking the steps necessary to yield tangible improvements for our shareholders. Thank you for your continued support and belief in our vision and our budget for all of Knight now invite the call open up for questions.
Question and Answer Session
Operator
Thank you. 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'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 two. And our first question is from Adam Waldo with Lismore Partners. Please go ahead.
Good day, everyone, and thanks very much for taking my questions. I think in your prepared remarks, you gave us the data that allows to back in to the notion that free cash flow was negative $500,000 or $600,000 in the September quarter. Can you give us a sense for what the cash burn rate, if applicable, is looking like cures for almost finished the fiscal first quarter? And then I have a couple of follow-ups.
I'm sure so on. I would say we are working hard to make some improvements here this quarter, we did incur some additional expenses tied to the proxy and some of the development costs, Alan, but really on CCL are expecting we somewhat improved slightly improved bottom line numbers for the fourth quarter for, I guess, the December quarter.
So somewhat better sequential cash burn than in the fiscal fourth quarter, which obviously was a nice improvement on the fiscal third quarter.
So.
Okay, so we're getting closer and closer to cash breakeven as you enumerate both on the press release and on the 10 K filing in more detail about the numerous product and channel opportunities you're pursuing for recurring revenue growth in fiscal 2024. What are you starting to see here in the fiscal first quarter quantitatively that would suggest that we're tracking in that direction. And in particular, what product and channel opportunities do you see as having the greatest potential numerical effects on the Company's revenue in fiscal 24?
Yes. I don't have a couple of questions in there, Sumit, and we're trying to answer them. But I think going into 2024. We continue to see data nine products as some of the leaders of our product portfolio. We are very excited and encouraged with on the new our new brands that have launched this quarter and think that by the end of calendar 2024, they can contribute in a pretty meaningful way. And then we continue to work tirelessly to two on the on the on the core brands to maximize higher marketing and acquiring customers and really building now that we've got some good on it. And with the new platform and similar changes you don't often Timotheo.
Okay.
So that's good color on what sort of I mean, we're very late in the fiscal first quarter. What sort of year-over-year revenue growth we spoke of year-over-year revenue comparison. Are we seeing during the fiscal first quarter?
We're not providing guidance at this time.
Okay.
Last question.
Appreciate you taking my questions. Obviously, the attempt to convert. The preferred to common is a 3-to-1 ratio did not work out. You've alluded both in the press release and in the prior press releases and SEC filings to other avenues to seek to deal with the capital structure issue. Can you speak to various specific initiatives that you're thinking about pursuing there? Can you just add a little bit more specifically at this time?
Sure. Look, we're working with our Board and on a alternative proposal. And we've been, as I mentioned on the call, oil, we were engaging in several potential strategic transactions that that could coupled with the proposal on how other than just the complexities of the structure and improve the process, it became very daunting. So our focus is to talk to them come to shareholders with a new proposal here in the future. And I think it gets to a point where we can clean up the capital structure and open up opportunities for us.
Yes.
Okay.
Thanks very much and best of luck moving forward.
Thank you.
Operator
Once again, if you have a question, please press star then one. The next question is from Anthony Vendetti with Maxim Group. Please go ahead.
Thanks. Thanks, Ron. And so I know when as we've been discussing here, you talked about moving your e-commerce sites over to Shopify, Tom, is that largely done? And what have you noticed in terms of KPI.'s WERE sales trends on Shopify? Is it too early to see the benefits of that and then follow-up would be any color on how the products are selling on Amazon? And then lastly, I have a few questions.
Sure. So with respect to Shopify, we have been seeing the benefits, both from sort of lower cost structure. Since we made that migration we've seen once we get people to the site, we'll do a much better job converting them into subscribers as we've seen some growth on that front.
Andrew, on the just in the last 30 days, sort of doing a larger site conversion and continue to sort of utilize new tools to on the work to A/B testing and really drive our conversion optimization throughout the throughout the site. So we're excited about where we're positioned, and we now have the opportunity to take it in 2024. I'm sorry, what was your first question?
Your second question, anything from Amazon for Amazon?Tom, how is that? How's that going? And then on the number of SKUs. I know you've cut costs significantly and reduce the number of SKUs, particularly ones that are unprofitable.
Is that largely done? And at this point, I know there will always be some trimming as you continue to evolve, but is the mass reduction in SKUs skews largely complete at this point?
Yes. I'll address the Amazon question first. In the UK, we continue to see sort of a steady business out of the UK on in on Amazon in the U.S., our launch, what they have been doing, it was really in the last 30 days that drew to Troy, to give you too much inflammation on that. But I mean, I think our ATRX. brand is launched today. So we're excited to see how that how that done here in the coming quarters.
And then with respect to the five Qs, I think we're continuing to rationalize SKUs that really don't perform and invest behind screws that do perform on the significant route rationalization has been done. We were coming out with some newer skews on we are looking at sunsetting some of the slower movers to make sure that our investments in working capital and resources are dedicated on IW. five. Please go ahead.
Okay, great. Thanks very much. I'll hop back in the queue.
Operator
The next question is from Thomas McGovern with Maxim Group. Please go ahead.
Yes, just one real quick question here. A lot of my outstanding questions have already been covered. So just really quick. I know you guys mentioned, you know, congrats on first of all, getting into Sprouts market to 150 stores. It's great. You mentioned that you are looking to expand further in fiscal year 2024. I was just trying to get a read if you have any kind of insight on the magnitude of that potential expansion. Could we expect that to see it and more stores we could potentially double in size of entity? You have to give a kind of contact from a nine to be appreciated.
Sure. We'll on specifically with Sprouts again, we just launched this month. Our goal is to we've not throughout the whole system. Our goal is to continue to penetrate more and more and roll out throughout the Sprouts system. We've been talking with some other retailers. We've actually on some of the changes we made to our team this year. They're getting access to retailers that we've never had access to. So we're very excited about some of the conversations are going on. However, sort of just timewise, it gets very lumpy and long term and sort of lining up the reviews and rollout. So on the I think we are seeing opportunity in engagement on activity and rebound. And then we are starting to see, and we shared sort of an early look at the TRX and MDD with a number of parties as well on and encouraged with the opportunity are that the debt that exists with the with those brands in the mass retail space.
Understood. I appreciate the color. I'll hop on.
Operator
Nothing once again, if you have a question, please press star then one, the next question is from Adam Waldo with Lismore Partners. Please go ahead.
Our first, appreciate your permitting, the follow-up. I apologize. I just get through the rest of the 10 K and one important question is regarding the headquarters lease. What can you say as to the current status of that lease here in December relative to what was in the K as of the end of the September quarter and in terms of being current on that lease and future corporate headquarters location play into the company? Thank you.
Yes, look, we're continuing to trying to negotiate and find alternative tenants for the facility on hand. And now there has been a little bit of interest. It's a very challenging market, and I'm cautiously optimistic. We'll in 2024 with the VeriFone family will step in and take over that facility and then shed that significant expense on.
Well, very helpful. Best of luck with that. Thank you.
Operator
Again, 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 again for your ongoing support and time today, and we wish you all a happy holidays and look forward to our upcoming call in February. Thank you.
Operator
This concludes today's conference call. You may disconnect your lines.
Thank you for participating and have a pleasant day of the Company.