cbdMD, Inc. (YCBD) Q3 2023 Earnings Report, Transcript and Summary

Good afternoon. Welcome to cbdMD Inc.'s June 30th Third Quarter of Fiscal 2023 Earnings Call and Update. This afternoon, the company issued a press release that provided an overview of its third quarter and 9-month fiscal results and will file its quarterly report on Form 10-Q later today. Today's conference call is being recorded and will be available online along with our earnings press release covering our financial results and non-GAAP presentation at cbdmd.com in accordance with cbdMD's retention policies. [Operator Instructions] At this time, I would like to turn the conference over to Brad Whitford, the company's VP of Finance. Brad, please go ahead.

Thank you, Ariel, and thank you all for joining cbdMD's June 30, 2023 third quarter of fiscal 2023 earnings call and update. On the call today, we also have Ronan Kennedy, our Interim CEO and Chief Financial Officer; and Dr. Sybil 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 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-Q for the quarter ended June 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, Thursday, August 10, 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. With that, I'd like to turn the call over to Ronan.

Thank you, Brad. Good afternoon, everyone, especially to our shareholders. I appreciate your patience while we're dealing with some technical issues with the [indiscernible]. Our results in the third quarter show ongoing stabilization of our business as we continue to execute on a sound strategic plan. We continue to operate in a challenging environment, but our team has been up to the challenge and is consistently delivering quarterly improvements. We had a busy quarter in which we had a reverse stock split, capital raised and completely changed out our e-commerce operating platform. I'm incredibly proud of our team for their dedication and focus resulting in significant year-over-year operating income improvement along with numerous sequential gains. Year-over-year, our efforts resulted in a $30 million improvement in GAAP income from operations and in non-GAAP adjusted EBITDA improvement of $2.1 million for the quarter. Cash SG&A costs dropped approximately $4 million year-over-year. While overall revenues demonstrated sequential stability, our direct-to-consumer revenues experienced growth, overcoming challenges stemming from the e-commerce platform transition and Meta's industry category rule changes. Sequentially, cash SG&A costs continue to come down and we are at our lowest level since the merger at the end of 2018. We made further improvements to our non-GAAP adjusted EBITDA by $200,000 over the March 2023 quarter. An analysis of our operating income and non-GAAP adjusted EBITDA over the last 8 quarters reveals a robust trend of sequential gains, underscored by the comprehensive transformation of every facet of our business. We continue to operate with conviction and haste and based on our current trends, expect ongoing improvements during the fourth quarter. On our last call, I spoke about identified challenges with conversion and our ability to be nimble. We made the determination to migrate our e-commerce platform to the platform built for today's direct-to-consumer e-commerce businesses. We completed the transition in mid-June with no negative impact to traffic and performance. We are now focused on the second phase of the transition to optimize our customer experience. We are just getting started to leverage new tools to drive conversion subscription and AOV and are starting to ramp up our marketing expense to drive traffic and revenue. We successfully grew profitable customer acquisition on Meta during the third quarter until they changed the category rules in early June. It took us into mid-July to clear the new rules, and we are working to rebuild the prior performance. We've identified several new-to-us acquisition channels and are working expeditiously to achieve results from these during the fourth quarter. Our marketing team has been hard at work building a strong pipeline of opportunities and partnerships to enhance our brand awareness through the balance of the calendar year. We continue to focus on elevating our brand image and quality of content with everything we are doing, both on and offline. Now that we have a full operating quarter of experience in the U.K. on Amazon, the numbers are not as large as we want them to be yet, but we are seeing weekly growth accelerate as we learn. We believe that over the coming months, we will have the potential for meaningful revenue streams and expand the ways we can leverage the Amazon platform. We continue to listen to our customers and innovate from their feedback, resulting in an expansion of our strong performing hemp-derived Delta-9 line. While we're only a week into this launch, we are getting positive feedbacks from consumers and wholesale customers alike. Product development and innovation are important tenants, providing customers with novel and effective natural wellness solutions. We're excited about our forthcoming additional line extensions, which we expect to announce before the end of the fiscal year. We've made tremendous progress on our business this year and are zeroing in on positive EBITDA. While operations continue to improve, we are similarly focused on our capital structure and balance sheet. We are actively looking to monetize assets on our balance sheet and have several groups focused on a solution to our onerous corporate lease. In the past several quarters, we have had multiple conversations on M&A that have had the potential to transform our company yet stalled after clarification of our current challenging capital structure. This is punitive in preventing potential significant value creation for both classes of our shareholders. We have over $20 million of combined market capitalization between our common and Series A preferred shares. On August 1st, we filed a proxy statement for special meeting with shareholders for proposal to convert our outstanding Series A preferred shares to common shares. Our Board and I strongly believe that the proposal addresses multiple strategic reasons that benefits both class of shareholders. First, we believe converting will have a significant positive cash flow impact to the company. We are making strong EBITDA progress, but the dividend creates a significant higher hurdle for sustainability. Second, we believe an all common structure should enhance liquidity for the current preferred shareholders who have limited share trading volume from which to monetize their investment. Additionally, we believe an all common capital structure positions shareholders for stronger potential upside, especially as we continue to improve our financials and hit our goal of positive EBITDA. The proposal also significantly enhances our ability to attract strategic deals as well as M&A and utilize our public currency for the right accretive strategic deals. There are several other strategic benefits outlined in our proxy statement, and we will be reaching out to many of our shareholders in the coming weeks. Our shareholders are urged to read the definitive proxy statement and other relevant materials when they become available. Before I turn things over to Sybil, I want to share some context about why we continue to double down our efforts to engage Washington through our direct engagement, supplement industry trade groups and working with multiple cannabinoid industry advocacy groups. As recently as the June quarter, I can attest that the government agency statements in rhetoric this year, signing and reversed a committed prominent retail national rollout of our THC-free broad-spectrum products. The lost opportunity is challenging and slows our progress. Consumers should be concerned. Despite being a well-established ingredient that has been available for decades and has undergone the same rigorous safety and efficacy testing as hundreds of other dietary supplements, CBD products like ours are vilified, thus scaring reputable national retailers in the category while myriad of multi-letter and new and synthetic compounds with no safety are widely available on tens of thousands of doors nationwide. We're under no illusions of a quick silver bullet fix and are excited about our progress building a profitable future in the absence of any regulatory change. I continue to be encouraged about the growing support from our elected officials as well as the other respected industry competitors uniting efforts to address policy out of D.C. With that, I'll turn it over to Sybil.

Thank you, Ronan. My comments are focused on 2 key areas today, updates on our science and our lobbying efforts. Our commitment to science has demonstrated that our products are safe, and our core broad-spectrum blend is effective for mood improvement, pain reduction and reduction of inflammation in healthy adults. This data has paved the way for partnerships with well-renowned institutes such as the University of South Carolina and the Steadman Philippon Research Institute. We are collaborating with both organizations to submit proposals to Congressionally Directed Medical Research Program, CDMRP, request for proposals. Our study with WHOOP to gather data about our core broad-spectrum blends impact on sleep and recovery is kicking off this week with participants that include professional athletes and professional sports team trainers. We are recruited and will begin collecting data this month. We have discussed our steps to address the lack of regulatory clarity at the federal level. We are actively engaged with several trade associations across the hemp and dietary supplement space. Since the start of the calendar year, we have been in D.C. on the hill directly lobbying and with our associations every month. The tone and tenor of these meetings has changed significantly since the company first began lobbying in 2020. Congress people are asking questions about FDA and they're in action and actively participating to find a solution. I am being asked to direct questions about my time at the agency. Congress people want to know my opinion on FDA statements and opposition to a regulatory pathway as a former FDA official. These meetings have included time spent with Representative Comer's Chief of Staff and Leader of [indiscernible] Council. Representatives Comer recently called an Oversight hearing, where stakeholders presented their opinions on safety, regulations and other key topics. Prior to the hearing, Representative Comer's office requested that I provided a written statement for the record based upon my almost 6 years of experience regulating dietary supplements while at the FDA and cbdMD's experience to-date with the FDA with the goal of providing clarity on how the FDA can adequately regulate hemp-derived ingestible and topical cannabinoid products under current authorities. Following the Oversight meeting, a bicameral request for information to subject matter experts and stakeholders regarding FDA regulation of CBD was issued. This is an opportunity for our industry to stand together and present our arguments as to why we deserve federal clarity and an opportunity for clear regulations. We are leading efforts to refine responses for many of the leading CBD brands to ensure that we are aligned. We are working with our trade associations and independently to submit responses to the request for information to ensure that our industry is represented in a manner that resonate with the Energy and Commerce Committee and help committee members to make sure that they receive information they need to support a path to federal regulation. At cbdMD, we are keenly aware there are rules and guidelines for providing safe dietary supplement products to consumers under the Dietary Supplement Health and Education Act. We have adhered to the 4 corners of these guidelines through our commitment to third-party cGMP certifications, proper labeling with adequate instructions for use, adverse event tracking and reporting and independent safety testing of our hemp-derived cannabinoid ingredient. We go the extra mile by publicly posting current certificates of analysis detailing the chemical analysis of every product we sell, which is something no other non-hemp derived dietary supplement does. With regards to safety and efficacy, we have made significant investment in both safety and clinical studies for efficacy. We have successfully navigated the regulatory submission processes in other countries, including U.K., EU and several Latin American countries. Despite our wealth of data providing the safety and efficacy of our products, we have attempted to work through this process with the U.S. FDA to no avail. It is our position at cbdMD, based upon a reasonable interpretation of applicable federal law, that our products are fully compliant and legal dietary supplements under the Food Drug and Cosmetic Act as amended by the Dietary Supplement Health and Education Act. We maintain compliance the same as all responsible dietary supplement brands by addressing the 4 corners of the act, CGMP, labeling and claims, adverse event reporting and ingredient safety. We have sold millions of servings to hundreds of thousands of consumers without any adverse events. Our products have been consumed by Olympic athletes, UFC champions, top professional golfers, motor sport champions and athletes in the NFL, NHL, NBA and MLS just to name a few. First responders rely on our products to help them with maintaining health and wellness. cbdMD has earned customer trust and established ourselves as leaders in the industry. We are considering all of our options to ensure that our customers are not denied access to safe, efficacious dietary supplements, and we hope that this Oversight hearing can shed like into why the FDA has failed in their statutory obligations and possibly bring a responsible and reasonable conclusion to the sparse without the need to seek redress in the court. Thank you for that, Ronan. Back to Brad.

Thank you, Sybil. Total net sales for the third quarter of fiscal 2023 were $6.1 million or a 28% decrease from the prior year comparative quarter total. Sequentially, sales were essentially flat. Our quarterly e-commerce direct-to-consumer business generated sales of $5 million in the third quarter of fiscal '23. This was a 26% year-over-year quarterly decrease. We believe year-over-year sales were impacted as we reduced underperforming marketing expenses and macroeconomic forces on consumers. Sequentially, we improved e-commerce sales by 2.6%. E-commerce represented 82% of our total net sales for the third quarter of '23 versus 76% in the prior year comparative quarter. Our wholesale business generated $1.1 million of net sales for the third quarter of fiscal '23, down 46% as compared to $2.1 million for the comparative quarter in fiscal '22. This decrease is primarily attributable to our lower price structure over the prior year period. Our gross profit as a percentage of net sales came in at 63% for the second quarter of fiscal '23. This compares to 69% for the comparative prior year period. We expect to maintain gross profit margins in the mid-60s range when factoring in sales mix. Our SG&A expenses for the third quarter of fiscal '23 totaled $5.7 million, which is down from $8.3 million in the prior year comparative quarter when excluding $30 million of impairment of goodwill and intangibles. Costs came down across the board as management continues to focus on profitability. Excluding depreciation, amortization, stock expense, our A360 amortization, cash SG&A expenses came down over $4 million from $8.7 million last year to $4.4 million in the current quarter. Sequentially, cash SG&A declined approximately $400,000, primarily due to reductions in payroll, legal and other operating expenses. Overall, this resulted in a loss from operations of approximately $1.8 million for the third quarter of fiscal 2023 as compared to $2.4 million loss from the prior year period, excluding the impairment of goodwill and intangibles. Meaning we reduced our loss by $600,000 over the prior year on a GAAP basis. Sequentially, operating loss increased by $400,000 as our amortization of our A360 noncash expense increased nearly $700,000 over the March 2020 quarter. Our non-GAAP adjustments to operating expenses for the third quarter of fiscal 2023 included $61,000 in non-cash employee stock expense, $376,000 in depreciation and amortization expense and $779,000 associated with non-cash AR credits related to our marketing agreement with A360, resulting in a non-cash adjusted operating loss of $608,000 for the third quarter of fiscal 2023 as compared to a $2.7 million non-GAAP adjusted operating loss in the third 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. Sequentially, our non-GAAP adjusted operating loss improved about $200,000 from the March 2023 quarter. Based on July's results and current quarter run rate, we are anticipating a continued reduction in both GAAP and our non-GAAP adjusted operating loss for the fourth quarter. We invested $25,000 on cbdMD Therapeutics R&D during the second quarter of fiscal 2023 as compared to $114,000 in 2022. Most of our clinical studies are wrapping up and their costs were front-loaded. Sybil previously mentioned kicking off our new study with WHOOP. This was accrued for in prior quarters. We continue to believe the results from our clinical studies provide us with a unique differentiated position for both product efficacy and education in the category. Other income expense on our consolidated income statement for the third quarter of 2023 includes a non-cash contingent liability gain of $45,000 related to our December 2018 acquisition of Cure Based Development. The earn out contingent liability is currently on our balance sheet for $122,000. We are now in the fourth marketing period that runs through November of 2023. During the third fiscal quarter of 2023, we utilized approximately $1.7 million of cash. The main components included our adjusted non-GAAP operating loss of $600,000 and paid dividends of $1 million, while working capital adjustments make up the difference. We had cash and cash equivalents of approximately $2.8 million and working capital of approximately $5.7 million on June 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 as of June 30, 2023, decreased approximately 37% from September 30, 2022, to $10.1 million. A primary driver of the decrease in current assets was the usage of cash for operations and the reduction of prepaid sponsorships by $1.2 million, mostly attributed to the termination of the athlete sponsorship. In May, we completed an underwritten public offering of 1,350,000 shares of our common stock at a public offering price of $2.10 per share. Gross proceeds from the offering before deducting underwriting discounts and commissions and offering expenses were approximately $2.8 million. As of June 30, 2023, the company's total current liabilities were $4.4 million, of which approximately $1.4 million is accounts payable and $1.7 million is accrued expenses. We maintained a strong commitment to prudently managing our cash position and ensuring liquidity. Our unwavering attention is directed towards rebuilding our revenue and optimizing our cash SG&A expenses. We anticipate ongoing decreases in IT and payroll expenditures due to our migration to Shopify freight and other areas. Our team is actively engaged in projects aimed at refining our cost structure and enhancing cash margins. Our focus remains determined on delivering value to all of our shareholders. And with that, I'll turn it back to Roman.

Thanks, Brad. On wavering commitment to a prosperous future has been resolute underscored by calculator hard decisions and swift action we've taken over the last 8 quarters. Our strategic choices continue to yield positive outcomes, evident in our stabilized revenue and constantly improving EBITDA. We are meticulously building a health and wellness business centered around natural products, tailored to thrive within the current regulatory framework, while maintaining the agility to navigate future uncertainties and adapt to varying macroeconomic conditions. With our sites firmly set on achieving breakeven EBITDA this quarter, we are driven by an exceptional and determined team that remains dedicated to tangible results. The upcoming months hold promise and our team's enthusiasm is palpable, as we anticipate the opportunities that lie ahead. With that, I'd like to open up the call for questions.

[Operator Instructions] Our first question comes from Adam Waldo of Lismore Partners.

Couple of questions as it relates to the outlook for your ambition to achieve EBITDA breakeven here in the third quarter and then your outlook prospectively for the fourth quarter. When we last met following first quarter results, you were hoping to achieve that over the couple of -- next couple of quarters as I kind of look at cash burn here in the second quarter, you maybe burn something on a little more than $1 million. What do you see as to the cash burn outlook for the third and fourth quarters absent any impact in the potential proxy proposal for the special meeting?

I think when you look at the dividend, it sits at $1 million a quarter. Outside of that, we continue to make operating improvements quarter-over-quarter. We've got our sights from -- our operating cash flow, excluding the dividend for, I guess, our fiscal third quarter, I think we were down to about $600,000, I think maybe an extra $100,000 for working capital. Our goal is breakeven for this quarter, excluding the dividend and continuing to improve thereafter.

And how much visibility do you feel you have on that now in terms of the outlook for the third quarter? And I know, obviously, the fourth quarter will come into view over time given it is small?

Look, there's no -- we are working very hard at hitting those numbers. We're confident in where our cost structure is and has migrated to since the last quarter, and we're continuing to see top line nudge in encouraging direction. Beyond -- right now, I guess, for us to continue to forecast out beyond and have clarity. I think we continue to improve our fundamentals and are working to accelerate. So we sort of aren't providing guidance going into the December 30.

Last question is around, obviously, the capital structure discussion here extensively in the recent proxy for the special meeting, obviously, some additional color here in the press release. You've laid out some of the downside scenarios, obviously, that arise for preferred holders and arguably common holders as well, if it's not approved. But obviously, at this point, the capital structure, such that the company is being run for the preferred holders. So they also effectively control the boat. So do you feel you've offered enough enticement to the preferred holders that they'll own pro rata approximately 80% of the company given that they basically own all of it now, plus are entitled to a dividend, whether it accrues in liquidation or -- I shouldn't say liquidation, in a strategic M&A environment?

Look, we've worked hard on a solution. It's been challenging due to the fact that those securities are public. And we think that it requires both classes of shareholders to approve. So it's a balancing act of making sure we provide sufficient to both classes so that there's a prosperous future for -- an upside for both classes of shareholders.

Final question if you'll permit me. With respect to option resets and restricted stock resets for management employees, will all of them suffer a similar dilution to the common shareholders? I didn't see that clearly addressed in the proxy during the press release. So can you comment on that to the extent that you're willing to do so on a public call?

Look, our equity plans are tied to the existing common stock and the provisions are sort of set. So there's -- at this point in time, there's been no reset to any of the plans that are currently outstanding. So we would be similarly diluted alongside the common shareholders, yes, along the common shareholders.

Yes, I'm going to put it differently, I guess, historical grants would all be diluted pro rata and then prospective grants will be whatever they'll be under the Board approved compensation plans. Fair comment?

Correct, yes.

[Operator Instructions] Our next question comes from Anthony Vendetti of Maxim Group.

Ronan, I was just wondering, I know you've had to call a lot of products, and I know you canceled some contracts with some sports figures and so forth to cut cost, and you've already done a lot of that. I was wondering if you have an update. Obviously, you'll always be looking over the product portfolio, but are you largely done with the initial round of cuts and then is it just going to be an ongoing review? Or is there still more to go in terms of getting to where -- in terms of rightsizing the portfolio and getting where you need to be right now? And then if so, as you look to add selectively do the new products that you may launch in the future have to have a mid-60%-plus gross margin?

Look, we are constantly evaluating our product portfolio to ensure that we've got products that meet our customers' needs. We look at that through sell-through data, through reviews, through customer feedback with our customer service line. So I think there isn't -- should always be a never-ending sort of assessment of where we're at with, do we have the right product portfolio, what are the low-hanging fruit that are underperforming and how do we continue to evolve and make a more effective product portfolio that we have an exciting consumer base for? So are we done? We should never be done trying to optimize our product portfolio. We are trying to be very smart as we come out with new skews about how do they fit within the portfolio? What are the new -- why is it coming out? How does it fit our customer need? And really understand the justification and then really look at sort of what distribution channel is it targeting and what are appropriate gross margins for those products. So while we have products at healthy gross margins, if we're able to sort of open up new channels and new markets, we would certainly look at evaluating sort of various different gross margin requirements as we continue to evolve our product portfolio.

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Kennedy for any closing remarks.

I'd like to thank everyone's support today and look forward to a lot more vocal activity over the coming 60 to 90 days as we continue to move toward fiscal year-end. Thank you very much for your support, and we look forward to our call in December.

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