Transcript
Good afternoon. Welcome to cbdMD's June 30, 2024 Third Fiscal 2024 Quarter and Earnings Call and Update. This afternoon, the company issued a press release that provided an overview of its third 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 the cbdMD retention policies. All participants on this call are in listen-only mode. The call will be followed by a question-and-answer session. At this time, I would now like to turn the conference over to Brad Whitford, the company's Chief Accounting Officer. Brad, please go ahead.
Thank you, Brenda, and thank you all for joining cbdMD's June 30th, 2024 third quarter of fiscal 2024 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 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 quarterly report on Form 10-Q for the quarter ended June 30th, 2023, and our other filings with the SEC, all of which can be reviewed on the company's website or on the SEC's website. Any forward-looking statements made on this conference call speak only as of today's date, Wednesday, August 14th, 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.
Thank you, Brad. Good afternoon everyone. On our last call, I discussed key initiatives designed to propel the company forward on our path to profitability. Over the past few months, we've been fully focused on executing this plan and delivering measurable results. While year-over-year revenues were down, nearly every other key financial metric improved significantly. Gross margins increased, SG&A expenses decreased, and we saw improvements in operating income, net income, and EBITDA. Even sequentially, our key metrics trended positively, including revenue growth. These numbers reflect only a portion of the efficiencies we implemented since our last call, and I am extremely proud of our team's resilience and hard work as we continue to undergo a positive change. Our direct-to-consumer segment saw incremental gains during the quarter as we focused on enhancing customer experience, refining our messaging, and ensuring we have the right resources in place to drive revenue growth. We recognize there is still work to be done in optimizing our customer acquisition funnel, and we plan to increase marketing spend in the current quarter to support this. Our wholesale business was bolstered by a number of new customer wins, in addition to consistent reorders from core customers. We are actively collaborating with our retail partners to better position our products in the market, both in terms of consumer appeal and economic viability for retailers. Our ATRx brand made some progress during the quarter. We are ramping up marketing efforts and working to drive further growth this quarter. The CBD category remains challenging due to dynamics in the industry. We've observed some consolidation and seen a number of participants exit the market. We remain vigilant, particularly regarding the regulatory environment, which continues to evolve rapidly at the state level. Our focus is on remaining agile and strategically investing in marketing dollars to ensure sustainable, profitable growth. One of cbdMD's value propositions is its brand built on a foundation of trust. It stands for safe, effective products based on science and backed by clinical research to help you in your everyday life. During June, our human clinical study was published in a leading peer-reviewed Sports Nutrition Journal, supporting statements around pain reduction, improved mood, and reduced stress. We also received feedback on our UK FSA submission during the quarter. We've answered all the questions and received positive feedback that our dossier is in the final review to establish the approved serving size. The UK FSA is in the final stages of reviewing the safety levels outlined in our submission, and we are confident our data supports daily levels much higher than the arbitrary provisional accepted daily intake levels proposed at 10 milligrams per day. In June, we received notice from the NYSE American that we fell below the minimum book value listing requirement of $3.5 million. This did not come as a surprise and something we disclosed in our recent proxy statement should a proposal to amend the Series A preferred stock designation not receive shareholder approval. Our preferred dividend continues to accrue at $1 million per quarter, which negatively impacts equity as it shifted to a liability. One of the most straightforward paths to regaining compliance is addressing our accrued preferred dividend. In early July, we submitted a plan to the NYSE outlining several parallel strategies we are pursuing to regain compliance with the NYSE American continued listing standards by the December 2025 deadline. We expect to hear back from the NYSE American this month. Maintaining our listing on a major market is critical for preserving and enhancing shareholder value. With that, I'll turn things over to Brad to provide more insight into our financials.
Thanks, Ronan. Total net sales for the third quarter of fiscal 2024 were $5.1 million. While this represented a 15% decrease from the prior year comparative quarter total of $6.1 million, sequential revenues improved by 18%. Our quarterly e-commerce direct-to-consumer business generated sales of $3.9 million in the third quarter of fiscal 2024. This was a 25% year-over-year quarterly decrease but a 9% sequential increase. We believe the year-over-year decrease is primarily attributable to continued reduced marketing expenses, competition in the category, and macroeconomic forces on consumers. E-commerce represented 76% of our total net sales for the third quarter of 2024, compared to 82% in the prior year comparative quarter. Our wholesale business generated $1.2 million of net sales for the third quarter of fiscal 2024, up 10% compared to $1.1 million for the comparative quarter in fiscal 2023. The increase is primarily due to the growth of certain CBD accounts and new customer acquisition. Our gross profit as a percentage of net sales increased to 65% for the third quarter of fiscal 2024, compared to 63% in the prior year comparative quarter. This increase is driven by ongoing efforts to control product costs. Our SG&A expenses for the third quarter of fiscal 2024 totaled $3.8 million, compared to $5.7 million in the prior year comparative quarter. Our costs came down across the board as management continues to focus on efficiencies to drive profitability. Overall, this resulted in a loss from operations of approximately $400,000 for the third quarter of fiscal 2024, compared to a $1.8 million loss from the prior year period. Our non-GAAP adjustments to operating expenses for the third quarter of fiscal 2024 include $9,000 in non-cash employee stock expense and $287,000 in depreciation and amortization expense, resulting in a historic non-GAAP adjusted operating loss of $87,000 for the third quarter of fiscal 2024, compared to a $600,000 non-GAAP adjusted operating loss in the third 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. Other income expense on our consolidated income statement for the third quarter of 2024 includes a non-cash contingent liability gain of $850,000 related to the change in fair value of our convertible debt. As a result of the contingent liability, the GAAP balance of the notes totaled $1.4 million at the end of the third quarter, despite only having a principal balance at June 30, 2024, of approximately $1.07 million. During the quarter, we continued our focus on expenses, balance sheet, and cash flow management. This focus allowed us to generate approximately $200,000 of cash during the third quarter of fiscal 2024. We had cash and cash equivalents of approximately $2.3 million and negative working capital of approximately $567,000 on June 30, 2024, as our working capital was significantly negatively impacted by the $3.7 million of accrued dividend payable. At September 30, 2023, we had cash and cash equivalents of approximately $1.8 million and working capital of approximately $3.4 million. Our current assets as of June 30, 2024, decreased approximately 9.6% from September 30, 2023, to $7.3 million. A primary driver of the decrease in current assets was the usage of cash for operations. As of June 30, 2024, the company's total current liabilities were $7.8 million, of which approximately $1.2 million is accounts payable, $3.7 million accrued dividends, $800,000 of accrued rent for our former executive offices, and $400,000 of other accrued expenses. We are currently negotiating with our former landlords for our executive offices on a resolution to the background. Achieving positive EBITDA remains our top priority, and with this quarter's record non-GAAP EBITDA loss of just $87,000, we are closer than ever to reaching that goal. Last quarter, we identified approximately $200,000 in monthly efficiencies that we began implementing in April, including renegotiating vendor terms, eliminating contracts, securing facility savings, reducing headcount, and tightening non-essential spending. These measures have already had a significant impact, contributing to our progress this quarter. However, due to the timing of implementation, only a portion of these efficiencies were realized in the June quarter. We expect additional savings to be realized in the current quarter, particularly with the elimination of our headquarters facility rent, approximately $85,000 per month in August. These savings position us well to eliminate our operating cash burn in the coming quarters. We remain diligent in controlling costs and are actively exploring other ways to enhance and strengthen our balance sheet and cash position. With that, I'll turn the call back over to Ronan.
Thanks, Brad. In our last call, we emphasized that the best path to creating shareholder value lies in two key areas: running a profitable business and streamlining our capital structure. We continue to make significant strides toward profitability with notable progress in the third fiscal quarter. Our industry-leading gross margins are a testament to our efforts, and we remain committed to driving revenue growth while maintaining a lean and efficient operation. Although we've seen progress this past quarter, we are particularly excited about the efficiencies expected to materialize in the September and December quarters, which we believe will help push us across the profitability threshold. One of the key concerns raised by shareholders in the last proxy was our cash burn and our ability to manage within our balance sheet, particularly with concerns about dilution post-conversion. We are optimistic that this quarter's results and positive trajectory will resonate with our shareholders, and we feel confident in our ability to operate at or above breakeven levels. We understand the importance of addressing our multi-class capital structure and firmly believe that simplifying our equity structure is essential, alongside profitability, to unlocking the full enterprise value of the company. Over the coming months, we intend to reengage in discussions to find a viable solution that benefits all stakeholders. Our approach is to operate with the urgency of a 100-meter sprinter while maintaining the endurance of an Ironman triathlete, making consistent and steady progress despite the challenges we encounter. We made considerable headway in strengthening the business and resolving a number of legacy issues. cbdMD remains a strong brand that resonates with customers and is backed by a dedicated and talented team. We are fully committed to executing on our strategic plan diligently in the months ahead, with the goal of delivering meaningful value to our shareholders. Thank you for your continued support and confidence in our vision. I now welcome your questions.
We will now begin the question-and-answer session. The first question comes from Gene Schaefer with a private investor. Please go ahead.
Hi, thank you. I was wondering if you can share the details of the plan you submitted to NYSE American to address the compliance issue?
Well, look, there are several paths that we have that we think can help us stabilize our book value of equity. There are things on our balance sheet we are working on. We believe there's going to be another proposal to our shareholders, and we're looking at every sort of opportunity that we see as a viable solution to bolster and stabilize that book value of equity.
Okay. Is the December 31, 2025 date or December 5, 2025 date a typo?
Sorry, I didn't hear all the questions; it broke up.
Yes. You said that compliance...
Yes. Can you repeat the question, Gene?
Regain compliance with the continued listing standards by December 5, 2025. Is that a typo? Should it be 2024?
No, it's what they asked us to do is to present the plan to get back into compliance by December of 2025.
Okay. And it's mid-August now? Have you heard a response?
We have not received a response yet.
Okay. Thank you.
You’re welcome.
The next question comes from Thomas McGovern with Maxim Group. Please go ahead.
Hey, guys. How's it going? Congrats on the quarter. Yes. So, first question is on sequential sales growth. I'm just curious, last quarter, you guys announced the hiring of some key sales personnel, as well as this revamped strategy that was, from my understanding, focusing more on the functionality of the products. So maybe you can walk me through first in the second quarter how much of the sequential improvement can be attributed to this new strategy, these new salespeople? And then maybe if you want to start talking a little bit about the recently published data and how you guys plan if you're planning to incorporate that into your sales approach for marketing?
Sure. Look, some of our key new customer wins came from some of the new sales team we retained, so it did contribute to the quarter, for sure, as well as some of the changes that we've been making on the direct-to-consumer side. I think some of the changes we made did have positive benefits during the quarter. And then I think historically, the June quarter tends to be good to us from a seasonality standpoint. With respect to the published data, we are continuing to weave our messaging with the results of that into our marketing. We have to be careful because it doesn't cover every SKU. So it's really just our broad spectrum of products that we've got the strongest claim around that we can leverage from the clinical studies.
I understand and appreciate that information. My next question is about the study specifically. Could you provide more detail on the actual results of the study? From what I've read in the publication, it seems the most significant finding was in pain reduction or perceived pain between the test group and the control group. Was this the only statistically significant difference observed? Additionally, if you could elaborate on the researchers' conclusions from the study, I would appreciate it.
Sure. This is where I wish our clinical team was on the line to help us. But I think statistically, we were pleased with the results in general. We felt like all three claims provided us statistically significant data. We're continuing to look around and assess what are the other opportunities there are to strengthen the data and leverage our claims around our products. But that said, we don't want to over-index just on the value of that study. We've got to get out and deliver messaging that's compelling, engaging, and interesting to consumers across all our product categories, and this covers only a handful of our SKUs in our product portfolio.
Understood. I appreciate you taking the time to answer my questions.
Thanks.
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 we look forward to our upcoming call in December. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.