cbdMD Inc (YCBD) 2024 Q4 法說會逐字稿

Good afternoon. Welcome to cbdMD Inc.'s September 30, 2024 fourth fiscal 2024 quarter and fiscal 2024 earnings call and update. This afternoon, the company issued a press release that provided an overview of its fourth-quarter results, 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 presentations at cbdmd.com in accordance with cbdMD's retention policies. (Operator Instructions)

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, Ashia, and thank you all for joining the cbdMD's September 30, 2024 fourth quarter of fiscal 2024 earnings call and update. On the call today, we also have Ronan Kennedy, our CEO and Chief Financial Officer; and Dr. Sybil Swift, a member of the company's Board of Directors and former 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-K for the fiscal year ended September 30, 2024, 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, Wednesday, December 18, 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 the 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. We've been fully focused on executing this plan and delivering meaningful and measurable results. We continue to work diligently on the revenue side, but I'm pleased to report that nearly every other key financial metric showed significant improvement year over year for both the fourth quarter and the full fiscal year.

Our net loss improved by well over $19 million for the year. For the fourth quarter of fiscal 2024, our net loss was reduced to a paltry $152,000, as compared to a prior period loss of $15.9 million. Our normalized gross margins were some of the strongest in the industry, and our S&GA is lean and nimble. We have two consecutive quarters of nearly eliminating our non-GAAP adjusted EBITDA loss. We continue to strengthen our balance sheet liquidity as our cash position net of debt continues to improve while many of our public peers are trending in the opposite direction. We believe we have a strong runway heading into 2025.

While our team has made impressive progress on the financial side, we're equally focused on elevating the customer experience and enhancing our product portfolio. Earlier in 2024, we restructured our marketing resources, and while those created some temporary headwinds in the fourth quarter, the results began to materialize by the quarter's end. We are now seeing strong momentum in organic traffic, achieving first-page and top SEO rankings for high-volume, high-intensity search terms, a significant improvement from being buried on page six on Google searches.

Organic traffic levels have rebounded to multi-year highs, a testament to our improved ad creative and sharper focus on marketing our brand in more exciting, more compelling, and discoverable. In 2025, we will continue to refine the customer journey, both pre- and post-purchase, to ensure an engaging and seamless experience.

On the product side, our mandate in 2024 was clear: improve taste, experience, and efficacy. Taste, as you know, is a time-intensive iterative process. Thanks to the findings from our recent studies, which Sybil will elaborate on, we successfully relaunched our sleep product with better taste and improved, more effective [CBD-anchored] formula. Earlier customer feedback has been overwhelmingly positive.

Additionally, we've expanded into the beverage market. This summer, we introduced mixers, offering exceptional value per serving and unmatched portability. And just a few weeks ago, we launched Oasis Social Tonics, a fast-acting, great-tasting hemp-derived beverage alternative to alcohol. Early reviews have been outstanding; and this week, we began shipping pallets to our first distribution partners.

Beverage is one of the fastest-growing categories in the hemp-derived space. And with our strong brand reputation, we believe Oasis can become a leading choice in 2025. The hemp-derived cannabinoid markets remain dynamic, with state-level regulation presenting both challenges and opportunities. While proposals for restrictive policies persist, we remain active in promoting education and advocating for smart, responsible regulation. Our strategy of building a diverse product portfolio helps us mitigate this risk and adapt to the changing market conditions.

Turning to our functional mushroom brand, ATRx Labs, we achieved increased sales volume on Amazon while maintaining steady performance through GNC. To accelerate growth, we appointed a dedicated brand manager in Q4 and are excited about several innovative products planned in 2025.

On the NYSE compliance front, we received approval in August for our plan to address the delist notice regarding our equity falling below $4 million thresholds. As of September 30, we were just shy of $2 million. While we've made meaningful progress on the operation in our balance sheet, addressing the preferred dividend dual equity class structure is critical.

The preferred dividend accrual at $1.25 million and totaling $4.7 million at year end remains the single largest challenge to compliance. We are actively engaging with shareholders, soliciting feedback, and collaborating with our Board on potential solutions. In the coming months, we expect to present proposals that prioritize the long-term interests of both common and preferred shareholders.

Let me be clear. Maintaining our NYSE American listings is paramount to preserving and enhancing shareholder value. In summary, we've made significant strides this year in improving our operations, balance sheet, and product offering. We have a strong foundation heading into 2025, a clearer path to profitability, and a focused, committed team ready to execute.

With that, I'll turn things over to Sybil to provide the science update, followed by Brad to provide a more detailed overview of our financials.

Thank you, Ronan. In September 2024, our canine clinical study, which was conducted in 2023 at the prestigious Colorado State School of Veterinary Medicine, was published in Frontiers in Veterinary Science, a peer-reviewed journal. The title of the study was the evaluation of the effects of cannabidiol administration with and without nonsteroidal anti-inflammatory drugs in dogs with mobility disorders.

This study substantiated our claims of managing mobility and quality of life. Dogs treated with 5 milligrams per kilogram daily of CBD alongside NSAIDs, which are commonly prescribed for pain and inflammation in companion animals, demonstrated improvements in pain relief, mobility, and overall quality of life. The combination of CBD and NSAIDs did lead to an elevation in liver enzyme markers, as would be expected with NSAID treatment alone, but no signs of clinically relevant liver damage were observed.

The study concluded that cbdMD's core broad-spectrum blend is safe and effective when consumed by dogs up to 5 milligrams per kilogram daily, which is equivalent to 20 milligrams and a 10-pound dog, or approximately 197 milligrams and a 100-pound dog. We've already begun to incorporate these valuable insights into our Paw CBD line, both in our marketing and in the formulation of new products to specifically address pet owners' needs. The publication of this data reinforces our commitment to science and safety to our customers, stakeholders, and regulators.

On previous calls, I've discussed the initiation of our biometric study with WHOOP. The study was designed to allow us to gather data about our core broad-spectrum blends impact on sleep and recovery by tracking a range of metrics including sleep stages, respiratory rate, and heart rate variability.

The study concluded daily consumption of 100 milligrams of our broad-spectrum CBD significantly improved markers for sleep quality, including an average increase of 3% per night in rapid eye movement or REM sleep and further improvements per night in slow-wave sleep within the first week of supplementation.

These stages of sleep are critical for cognitive function, memory consolidation, and physical recovery, further demonstrating CBD's potential to optimize restorative processes. The study's results not only provide support for CBD's role in recovery but also open the door to its integration into performance and wellness strategies. This has already begun to be integrated into marketing campaigns and consumer education to further drive revenue.

I'll now turn the call back to Brad for a review of our financials.

Thanks, Sybil. Total net sales for the fourth quarter of fiscal 2024 were $4.6 million, or a 20% decrease from the prior-year comparative quarter total. For the 2024 fiscal year, net sales totaled $19.5 million as compared to $24.1 million in the prior year. Our quarterly e-commerce direct-to-consumer business generated sales of $3.7 million in the fourth quarter of fiscal 2024. This was a 19% year-over-year quarterly decrease.

Some of the year-over-year decline is tied to a reduction of marketing expenses. During the fourth fiscal quarter, we made some changes to our email marketing based on a vendor recommendation. And unfortunately, this impacted revenues. We quickly reversed course and saw this recover in the first fiscal quarter.

E-commerce represented 80% of our total net sales for the fourth quarter of 2024 versus 81% in the prior-year comparative quarter. For fiscal year '24, e-commerce generated $15.7 million in net sales compared to $19.4 million for the comparative prior fiscal year, or a 19% decrease. E-commerce represented 81% of our total net sales for fiscal year into 2024.

For fiscal 2024, our marketing spend to direct-to-consumer revenue totaled 27% as compared with 36% in the prior year. We continue to test and iterate to find the right marketing spend to revenue ratio and position the company to grow in fiscal 2025. Our wholesale business generated $900,000 of net sales for the fourth quarter of fiscal 2024, down 17% as compared to $1.1 million for the comparative quarter in fiscal '23.

During the quarter, we had some regulatory changes that temporarily impacted certain international customers as they were required to re-register their NSAIDs. Order demand has rebounded during the first quarter of fiscal '25. For the fiscal years into September 30, 2024, and '23, our wholesale business generated net sales of $3.8 million and $4.7 million, respectively.

Our gross profit as a percentage of net sales came in at 54% for the fourth quarter of fiscal '24 as compared to 62% in the prior-year comparative quarter. During the fourth quarter, we wrote off approximately $588,000 related to legacy botanical products and outdated packaging that were all greater than two years old. The adjusted non-GAAP gross profit totaled 67% when excluding this write-off.

For fiscal 2024 and fiscal 2023, gross margins totaled 62%. Excluding impairment of goodwill and other intangible assets in both periods, our SG&A expenses for the fourth quarter of fiscal 2024 totaled $2.7 million compared to $5.5 million in the prior-year comparative quarter. 2024 included a $700,000 gain related to the settlement of our headquarters lease liability.

The expense reduction was across the board as a result of management's efforts to focus on profitability. For the full 2024 fiscal year, SG&A expenses dropped $8.9 million from $24.2 million to $15.3 million. Overall, this resulted in a loss from operations of approximately $300,000 for the fourth quarter of fiscal 2024, as compared to $15.2 million from the prior-year period. Excluding 2023 impairment charges during the fourth quarter, non-GAAP operating loss totaled $2 million. The full fiscal year operating loss totaled $3.3 million as compared to an operating loss of $24.5 million in 2023.

Our non-GAAP adjustments to operating expenses for the fourth quarter of fiscal 2024 included [$6,000] in non-cash employee stock expense, $287,000 in depreciation and amortization expense, $588,000 in inventory write-down, and a $700,000 gain related to the settlement of our headquarters lease liability, resulting in a non-GAAP-adjusted operating loss of $131,000 for the fourth quarter of fiscal 2024 as compared to a $572,000 non-GAAP-adjusted operating loss in the fourth quarter of fiscal '23.

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 2024 fiscal year, our non-GAAP-adjusted EBITDA loss totaled $1.5 million as compared to $5.5 million for fiscal 2023. The company made significant strides during the last two quarters of the fiscal year and is operating at a much improved rate compared to the 2024 full-year total.

We are pleased we were able to increase the cash on our balance sheet to an additional $200,000 from the June quarter to a total at fiscal year end of $2.4 million. This was the result of our minimal adjusted non-GAAP operating loss of $131,000 and carefully managed working capital. This is the second consecutive quarter we've improved our cash balance. We had cash equivalents of approximately $2.4 million and working capital of approximately negative $1 million on September 30, 2024, as compared to $1.8 million and working capital of approximately $3.4 million on September 30, 2023.

The main difference that reduced our net working capital is the incremental $4 million of accrued preferred dividends that is a short-term liability on our balance sheet. Our current assets as of September 30, 2023 decreased approximately 20% from September 30, 2022 to $6.7 million. A primary driver of the decrease in current assets was a $1.7 million reduction in inventory. As of September 30, 2024, the company's total current liabilities were $7.4 million, of which approximately $4.7 million is the Series A preferred dividend accrual.

During November, we signed a 19-month extension to our current offices and warehouse lease. Market rates have unfortunately increased. And under GAAP, we will be re-amortizing our right-of-use asset and lease liability beginning in December and estimate an approximate $25,000 a month increase, net of our sublet contracts, despite the cash impact not occurring until March 2025.

We have some annual prepaids, such as our ERP, that usually results in an increase in prepaids this quarter and anticipate reducing some of our payables during the first quarter. So we anticipate working capital to consume a few hundred thousand dollars during the quarter.

Since September 30, 2024, note holders have converted approximately $760,000 of the principal balance on our outstanding notes. And as of the annual report filing date, the remaining principal balance totaled $364,000 due in July 2025. Considering our cash balance and lack of operating burn, we believe we are entering into calendar 2025 with a very strong liquidity position and believe we have well over eight quarters of runway when using our non-GAAP-adjusted EBITDA from the fourth quarter before factoring in ongoing business improvement. Additionally, we are encouraged with how the current quarter is shaping up, and we believe we'll be recouping most of the sequential revenue we lost during the fourth quarter.

With that, I'll turn the call back over to Ronan.

Thank you, Brad. Looking back on fiscal 2024, we are proud of the progress we've made in transforming cbdMD into a leaner, more efficient, and more focused organization. While challenges persist in the market, our team's discipline, execution on cost reductions, operation efficiencies, and product enhancements has significantly strengthened our foundation.

The $19 million year-over-year improvement in net loss, coupled with two consecutive quarters of near breakeven non-GAAP adjusted EBITDA, demonstrates our ability to drive measurable results. As we enter 2025, we remain committed to delivering profitability, further strengthening our balance sheet, and capitalizing on significant opportunities ahead of us.

We also recognize the urgency which we must operate. The dynamic nature of the hemp-derived industry demands focus, adaptability, and innovation. Whether it's our improved customer experience, the momentum in our organic traffic, or the successful launch of our Oasis Social Tonics, we are making meaningful strides to position ourselves as a category leader.

With the functional mushroom brand ATRx gaining traction in our expanding product portfolio, we believe we are well positioned to seize growth opportunities in 2025. Their early feedback and traction for Oasis alone fuels our excitement as we continue to address high-potential markets with innovative, high-quality products that align with our evolving consumer products.

Finally, 2025 marks the 10-year anniversary of the cbdMD brand, a milestone that underscores our resilience and our commitment to long-term success. Our mission remains clear: to build a strong, profitable company that delivers value to our shareholders, customers, and partners for the next decade and beyond. We are more focused, more energized, and more determined than ever to execute on this vision. I'd like to thank our team, our shareholders, and our customers for their continued support as we drive this next chapter of growth.

With that, we'll open up the call for questions.

(Operator Instructions) Adam Waldo, Lismore Partners LLC.

Yes, good day, Ronan and team. I hope you can hear me okay.

Yes, hi, Adam. How are you?

I'm well, and you, Ronan?

Good, thank you.

So you all made, obviously, a lot of progress on a lot of fronts, so I hope you don't mind if I ask a few questions. To what extent was the $2.9 million in fiscal fourth quarter SG&A expense, the new baseline that we should think about for future quarters? Or do you think there's further progress that you can make in fiscal first quarter 2025 and beyond?

Yes, so in that $2.9 million, it does include -- we had the benefit of about a $700,000 one-time pickup as we settle out of the headquarters lease. But I think if you add that back, it's closer to like 3.5. As we go into the next quarter, I think the one expense that we do see likely having a sort of impact is the new warehouse lease. We should increase that a little bit, which Brad talked about.

We're continuing to try to find and other expenses and chip away at it. It's getting harder to find sort of bigger expenses to move the needle. We're making progress on some of our product costs as we continue to work with suppliers and work on formulations. So we're trying to find areas there to pick up points of profit on top of our SG&A.

Okay, very helpful. You've given guidance, obviously, for the first quarter 2025 revenues to approach $5 million. You booked about $4.5 million. If I'm doing math, probably the fiscal fourth quarter, and you generated about $170,000 of operating cash flow in fiscal 4Q and about $80,000 of free cash flow.

So do you expect that you'll be free cash flow positive again here in the fiscal first quarter, given the approximately 10% sequentially higher revenue outlook that you've offered? Or are there more one-time items or higher marketing investments that might impact that?

Yes, but we are -- our goal is to get to EBITDA positive. We are not making that sort of forecast, but that continues to be our goal. As Brad mentioned, we do -- typically in the fourth quarter, we have annual prepaid with insurance and ERP cost that consume some working capital for us. And we did have some payables that we had to come down. So I think, outside of our operations, we are expecting to consume a few 100,000 of cash for working capital during the quarter.

But I think, all in all, I think we're -- when we look at it even sort of with that, we feel we are in very good spot with kind of where we see cash relative to our burn and have -- feel very confident in our liquidity position going into the next year. And our ability to pay down the debt should not see any more conversions and have strong liquidity into the year.

Right. I mean, $0.36 million of principal is left, and given your liquidity profile, looks pretty good. Is there any meaningful accrued interest, or was that baked into the $0.36 million in the press release?

There is. I think that was just the principal balance. The interest amount is relatively negligible at this point with the conversions that have happened.

Okay. Last question, if you'll permit me. You issued a very intriguing press release on November 4, obviously, around the new Herbal Oasis Social Tonics, which are and hemp-derived seltzers, as the press release explained. And you gave a little commentary on that in today's press release and on the call. But I wonder, could you provide us some quantification of the incremental annual revenue opportunity that you're targeting for the new product in fiscal '25 and beyond, as well as on the go-to-market model and prospective margin structure of that product?

Sure. I guess what I'll say is I think we're seeing this as one of the fastest-growing categories. I think there are some estimates right now that in 2024, this has jumped to about an $800 million a year category and continues to grow rapidly. We see it is starting to get relatively crowded. We took some extra time getting to market to make sure we felt we had a really top-notch product from sort of a proprietary [nanoliposome], so it helps with fat absorption.

We focused on taste. We focused on the formula and the experience. We're getting great reviews from customers. We're having tremendous dialogue with distribution partners. I think, right now, we're hoping to grow both direct-to-consumer, which continues to be a large part of that category, along with wholesale.

Clearly, on the wholesale side, the margins are going to be a little bit tighter. The profitability of that is not quite as strong as our and the usual wholesale margin profile. But we see this as an incremental growth opportunity. So as this adds to our revenue base, we may see some blending down on our gross margin while gross profit dollars increase.

Right, okay. But no sort of target for total revenue in 2025? It's just too hard to say. Maybe you will address that in a future quarter?

Yes, I think that's a little early right now for us to speak to the market.

Okay. Thank you very much.

Thanks, Adam.

(Operator Instructions) Thomas McGovern, Maxim Group.

Hey, guys. Thanks for taking my question. So first question would be on marketing. You guys talked a lot about it on the last call and mentioned at the beginning of this call that you're still looking to find that right revenue or right spend mix on marketing and maybe kind of doing an overhaul of the marketing strategy to focus on the functionality of your product. So I just want to get an update, maybe a little bit more detail on where you are with revising your marketing and customer retention strategies.

Yes, hey, Thomas. Look, we are constantly evolving that based on market conditions, based on what we're seeing algorithms happen. So I think this will never stop evolving as we continue to get smarter. We continue to try to work on upping our talent and our resources around this to help us, leveraging tools.

We are in the process of switching some of our subscription continues to be a very healthy part of our business. We're working on enhancing that program and enhancing our loyalty. It's a huge priority for us going into 2025. There's still a whole lot of opportunity for us. We're working as fast as we can. We have leaned our team down. So I think some things may not happen quite as quick as I'd like, but we're trying to be smart about our investment spend and make sure that we're doing this in a way that's responsible but yet moves as quick as possible.

Understood. I appreciate that color. My second question is on just kind of the mix of revenues. So e-commerce continues to be the majority of your net revenue. I think you said it was around 82% this quarter, fairly consistent with where it's been in the past. I'm just curious. As you guys are kind of developing this ATRx brand, which I know has probably easier access to retail space as compared to some of your CBD or THC products -- and you guys did just launch this Oasis line of THC seltzers and just mentioned that you could be looking at maybe a slightly higher mix in the wholesale category.

Just curious, as we look at 2025, do you expect e-commerce to kind of still maintain that low 80% range on net revenue, or do you think that revenue mix will change as some of these other brands start to develop, maybe see a little bit more sales in retail and wholesale?

Look, I could see wholesale taking up a little bit larger percent, but the goal from our standpoint is to grow both sides. And hopefully, it balances out. But I don't think it would be unreasonable to see a little bit of the mix shift more wholesale in 2025.

Got you. And kind of just to follow up on that, we spoke in the past about how there's kind of been some ups and downs with the retail landscape for CBD. I'm just curious. As it stands now, how do you see that outlook in 2025? Do you expect there to be any kind of inflection point potentially where you could start to see retail shelves opening back up to CBD products? Or do you think that the statement's been made by some of these big box stores that for the time being, until something changes on a federal level or this stuff becomes regulated by the FDA, that it's still going to be tough to expand or even in some cases maintain shelf space for your CBD products?

Yes, I think for the legacy-type product, you aren't really going to see a major shift in sort of the attitude toward the category. I think on the beverage side, you are seeing some additional retail really starting to sort of see this category and pay attention. So depending on the state and the jurisdiction, but until there's better clarity at the federal level, I mean, I don't see a compelling reason for a retailer to make a strong move into the category.

And maybe some of my peers may disagree, but I think there has to be a compelling reason for them to take up shelf space given some of the risk. And especially, with when you look at some of these larger retailers, they want to build a national program. And when you have state by state level regulations, it creates a lot of complexity for the large state box to get their arms around it and build programs, state specific. So I think it just becomes a harder category for some of that to get their arms around.

Got you. Okay, final question from me. In the past election cycle, there was a lot of conversation going on about the legalization of recreational marijuana. Less so focused on CBD, but I'm curious if you have any high-level commentary on the incoming president and then if you think his cabinet or the switch will potentially facilitate improvements in the market. Do you see it as it's kind of a neutral transition or potentially negative? Just curious if you have any high-level commentary on that, and if there's been any developments on that FDA front in terms of regulating CBD as separate from the current supplement regulations. Thanks.

Thomas, I don't have any comments on the change in administration. I think we're all hopeful something will happen. With the last administration where it was probably the highest likelihood of getting it done in the first two years, it didn't happen. So at this stage, I don't know. Sybil, do you have any comments on the FDA that you want to share?

So it's difficult to say something predictive. I do think that there is a recognition that the incoming administration will be friendly novel botanical space. That's all that we can hope for, and it seems like they will. As far as conversations and legislation and FDA changing, I would love to say that there will be a change. But I think that we all just have to kind of wait and watch and look for legislation that's being introduced or somebody who's willing to step forward and test this new administration and see if they really are willing to take it. But that's all that we can say is maybe.

Understood. Again, I appreciate you guys taking the time to answer all the questions.

Sure. Thanks, Thomas.

Adam Waldo, Lismore Partners LLC.

Just one quick housekeeping follow up. How many shares have you now issued cumulatively from the conversion of the notes? How many new shares? Maybe it's what, about [900,000] principal, maybe $8 million total if there's accrued unpaid interest. But how many shares were issued in total? Thanks.

In total, since the note converted, Adam -- sorry, off the top of my head, I don't have them. It is above 1 million. and we are sitting about 5 million. Brad, it's what, about [5.5 million]?

Yes, Ronan, I believe -- give me one second. I can tell you what that is. Let's see. I think it's between 1.6 million and 2 million.

1.6 million and 2 million new shares from the conversion to date?

Yes, I think it's probably close to a little over 2 million shares since this was issued.

Okay, thank you very much.

Sure.

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

Thank you again for attending today's call. We hope everybody has a wonderful holiday and look forward to our upcoming call in February. Thank you.

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