Q2 2024 cbdMD Inc Earnings Call

Participants

Bradley Whitford; Chief Accounting Officer; cbdMD Inc

T. Ronan Kennedy; Interim Chief Executive Officer, Chief Financial Officer; cbdMD Inc

Presentation

Operator

Good afternoon. Welcome to the cbdMD Inc second quarter fiscal 2024 results conference call. This afternoon, the company issued a press release providing an overview of the second quarter results, which followed the filing of its quarterly report on Form 10-Q. Today's conference call is being recorded and will be available online along with our earnings press release covering our financial results and non-GAAP presentation at cbdMD.com. In accordance with cbdMD retention policies.
(Operator Instructions) I would now like to turn the conference over to Brad Whitford, the company's Chief Accounting Officer. Brad, please go ahead, sir.

Bradley Whitford

Thank you, Carl, and thank you all for joining cbdMD March 31 2024 second quarter fiscal 2024 earnings call and update. On our 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 Safe Harbor provisions of 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 Form 10-K , annual report for the fiscal year ended September 30th, 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, Wednesday, May 15, 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.

T. Ronan Kennedy

Thank you, Brad, and good afternoon, everyone. We've come a long way in the last two years. Although our results for the second quarter of fiscal 2024 did not meet our expectations, we are confident that the operational changes we have implemented will drive significant progress moving forward. First, we have bolstered our wholesale leadership as mentioned on our prior call.
Our quality products, regulatory resonate, including our clinicals and safety data, along with the additional leadership depth is having an impact and you're seeing our pipeline increase. Our direct to consumer business faced challenges last quarter. Admittedly, we scaled back our marketing spend too much in our customer journey and messaging. Mr. Mark. The cbdMD brand known for promoting an active lifestyle and addressing specific consumer needs remains uniquely positioned to leverage our clinical studies and safety data to communicate the tangible benefits of our products.
In response, we have revitalized our marketing strategy. We've strengthened our team by bringing on seasoned performance marketer or streamlining our marketing vendors in refocusing our message on a need base functional solutions that enhance our customers' active lifestyles. These changes have already yielded an improvement in our meta engagement rates on Instagram from the second quarter, signaling more effective communication.
Our next goal is to convert these engagement gains into tangible revenue increases. Despite the decline in overall direct-to-consumer revenue, our subscription base not only held firm but expanded maintaining customer retention is paramount, and we are actively enhancing our subscription program and prioritizing the customer experience to support this goal.
During our last call, we discussed our strategy to divest and diversify into a non cannabinoid market, particularly through our functional motion brand, ATRx Labs. We're excited to report the launch of our ATRx platinum line now available in 1,500 GNC corporate stores nationwide. We believe a significant retail presence, boost the brand's credibility and marks a confident step in the functional mushroom category, which faces fewer regulatory hurdles than CBD.
As we continue to ramp up marketing for ATRx, we are optimistic about its potential in the expanding natural products market. We believe the best way to drive shareholder value is to run a profitable business and simplify our capital structure. Our team continues to make expense rationalizations a priority quarter after quarter.
In March, we consolidated our executive offices and warehouse and enter into agreements with our current landlord on our historical executive offices. When the company fulfills its obligations in these agreements, including making payments through July, the headquarter lease will terminate at the end of July 2024.
The savings from the exiting this lease make up a good portion of the $2.4 million in annualized expense cuts we have enacted. We started realizing the benefits in April and expect these savings to be fully realized by August with the lease termination.
Although the recent proxy vote regarding the conversion of our Series A preferred and that goes out. We have deepened our engagement with shareholders and have taken their feedback seriously. Clearly, there's more work to be done to present the right solution, communicate effectively with all shareholders and secure the necessary support.
We remain convinced that converting the preferred shares is the optimal route for enhancing long-term shareholder value and should aid to increase share appreciation and liquidity. Adopting an all common capital structure will not only strengthen our book value of equity, but also improve our company's ability to attract and execute strategic opportunities providing clear pathways for potential transactions.
The feedback from the vote has galvanized our commitment to reach short term profitability. Based on the initiatives in place, we believe cbdMD is in a great position to make significant P&L improvements through the remainder of the fiscal year.
With that, I'll turn the call back over to Brad to provide more detail on the quarter and our cost initiatives.

Bradley Whitford

Thanks, Ronan. Total net sales for the second quarter of fiscal 2024 were $4.4 million or 29% decrease from the prior year comparative quarter totaled $6.2 million. Our quarterly eCommerce direct to consumer business generated sales of $3.6 million in the second quarter of fiscal 2024. This was a 25% year over year quarterly decrease. We believe the quarter-over-quarter decrease is primarily attributable to the continued reduced marketing expenses and macroeconomic forces on consumers as well as our messaging.
E-commerce represented 83% of our total net sales for the second quarter of 2024 versus 78% in the prior year comparative quarter. Our wholesale business generated $750,000 of net sales for the second quarter of fiscal 2024, down 44% as compared to $1.35 million for the comparative quarter in fiscal 2023.
This decrease is primarily attributable to the one-time credit of $440,000 issued to a wholesale customer related to expiring inventory from a March 2022 purchase. We continue to see shelf space for traditional CBD category shrink at mass retail industry wide. We worked with GNC for the last year to drive sales through and work to creatively leverage our relationship with GNC and our new ATRx brands to construct a win-win in a challenging situation.
Excluding this credit our non-GAAP wholesale revenue would have been approximately $1.2 million or 12% year over year decrease. Our gross profit as a percentage of net sales came in at 59% for the second quarter of fiscal '24 as compared to 64% in the prior year comparative quarter. The wholesale credit that was issued was the main driver of the gross profit decline, and we expect this to normalize next quarter.
Our SG&A expenses for the second quarter of fiscal '24 totaled $4.1 million compared to $5.4 million in the prior year comparative quarter. Our costs came down across the board as management continues to focus on profitability. Excluding depreciation, amortization and stock expense, cash SG&A expenses came down $1.1 million year over year. Overall, this resulted in a loss from operations of approximately $1.5 million for the second quarter of fiscal '24 as compared to a $1.4 million loss from the prior year period.
Our non-GAAP adjustments to operating expenses for the second quarter of fiscal '24 include $440,000 related to the wholesale credit issued $12,000 in non-cash employee stock expense, $291,000 in depreciation and amortization expense, $58,000 associated with potential mergers and acquisition transactions and proxy expenses, and $72,000 associated with non-cash accelerated amortization of expenses related to terminated IT contracts.
Resulting in a non-GAAP adjusted operating loss of $680,000 for the second quarter of fiscal '24 as compared to a $790,000 non-GAAP adjusted operating loss in the second 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. Other income expense on our consolidated income statements for the second quarter of '24 includes a non-cash contingent liability expense of $1.4 million related to the change in fair value of the convertible notes issued during the quarter.
As a result of the contingent liability, the balance of the notes totaled $2.7 million at the end of the second quarter despite only having a principal balance at March 31, 2024 of approximately $1.54 million. It's the end of -- since quarter end, approximately one-third of the principal balance has been converted to equity.
Excluding the proceeds from the convertible notes during the second fiscal quarter of '24, we lost approximately $600,000 of cash. Our non-GAAP adjusted operating loss totaled approximately $680,000, and we were able to generate approximately $100,000 to offset this loss through our net working capital.
We had cash and cash equivalents of approximately $2.1 million in working capital of approximately $3.2 million excluding the $2.7 million of dividends on March 31, 2024 as compared to cash and cash equivalents of approximately $1.8 million and working capital of approximately $4.1 million as of September 30, 2023.
Our current assets as of March 31, 2024, decreased approximately 8.1% from September 30, 2023 to $7.4 million, a primary driver of the decrease in current assets was a usage of cash for operations. As of March 31, 2024, the company's total current liabilities were $7 million, of which approximately $1.3 million, accounts payable, $2.7 million in accrued dividends, $560,000 of accrued rents and $700,000 of other accrued expenses.
We continue to manage cash and our liquidity carefully. Achieving positive EBITDA as our number one goal. As Ronan alluded to earlier, we enacted numerous initiatives that are projected to eliminate significant costs out of our operations starting in April. We renegotiated pricing in terms of vendors, lowered some of our product unit costs that are starting to flow through our COGS reassessed any expiring contracts, cut nonessential expenses, sublet out additional space available in our warehouse and more recently reduced our nonessential headcounts.
Together with the elimination of the headquarters facility comprising comprising $85,000 in rent and over $20,000 facility calls per month fee savings are impactful, especially as compared to our current non-GAAP adjusted EBITDA run rate of $680,000 for the second quarter. We anticipate realizing savings of $110,000 per month by June and ultimately expect over $200,000 a month of August from the headquarter leases eliminated.
We have other projects identified and are working to further drive efficiencies and unlock these into our plan. The savings put us in a strong position to eliminate our operating cash burn at by the end of the year.
With that, I'll turn the call back over to Ron.

T. Ronan Kennedy

Thanks, Brad. We made significant strides in addressing our infrastructure costs moving away from previous inefficiencies and shutting things from past management. However, revenue generation has proven to be our main challenge, offsetting many of the operational improvements we've implemented in recent quarters. While it might be tempting to attribute revenue declines to broader industry trends within the CBD sector. We at cbdMD do not accept this as an excuse.
Our goal is clear to stabilize our revenue base and return to a path of modest growth. Transformation and turnarounds are seldom straightforward. We acknowledge that the past few quarters have been tough for our shareholders, but our team remains optimistic about the current state of our business. Halfway into the quarter, we are seeing signs of revenue stabilizing in our wholesale pipeline increasing.
We are on track to significantly reduce expenses by August and at the brink of eliminating future liabilities. With a dedicated team bolstered by some great new talent, an exciting new brand that just launched nationwide and retail ongoing strategic interest in the company and improving operating cash burn, we are well positioned for the future.
We recognize that the true measure of our success will be reflected in our results. We are committed to executing our strategic plan diligently over the coming months and delivering value to our shareholders. Thank you for your continued support and belief in our vision. I now invite your questions to further the discuss business.

Question and Answer Session

Operator

(Operator Instructions) Anthony Vendetti, Maxim Group.

Hi guys. This is (inaudible) The first question is on your discussed revised more seating approaching, obviously e-commerce sales down this quarter. So first of all, I wanted to see if you could provide a little bit more color on what that means or how you guys can continue to drive these high engagements on platforms like meta and then you had your strategy to convert those into sales.
And the second question off of that is when is the insight that maybe informed this revised strategy with those brought on in part or in whole from the transition to Shopify's platform, kind of look for an update on and how that transition is going and maybe what insights you guys have gained since the transition there? Thanks.

Bradley Whitford

Sure. Look. So we manage our KPI's pretty closely and pretty early on. So we're seeing sort of at the start of the quarter seeing that was not trending in the right direction. We did a pretty deep dive review of a lot of sort of our spend and performance. And I think as we as a team looked at it, and I realized we were not hitting the mark on our messaging and the funnels for our customers. So we've been evaluating every piece of activity that we're doing.
We're working on putting much stronger messaging and customer falls in place, designing our campaigns in a much tighter way and really putting a much tighter performance marketing strategy in place across the board. We've changed up some organization. We changed up some agencies because what we were doing wasn't working. So we're committed to making sure that we do what's needed to stabilize our revenue and I may make strong gains for -- at the business level.
With respect to Shopify, I think you're having Shopify has allowed us to remain nimble. But as far as the implementation, we were fully implemented and we're constantly looking at AV testing and benchmarking what we're doing relative to our market as well as are other reasons, direct-to-consumer brands.

Brad I appreciate that color. And then a last question before I hop back in the queue. Can you guys comment all on the performance you guys are seeing abroad? And then maybe specifically with what's going on sales trends on amazon.uk and then if you guys have any near term plans for some additional international expansion? Thanks.

T. Ronan Kennedy

Yes, sure. Look, our UK business has been reasonably steady over the last few months. I think what we are excited about is there's some movement on the FSA in the UK. We think over the summer there might be some news back. I think that will afford us some exciting news and differentiation in the marketplace and allow us to sort of invest more heavily or in that market.
We do see, I think, especially in certain international markets, we are seeing growing interest and I think as I referenced in the early on the call, it's really a regulatory resonating in the science and clinicals that are making a difference as we see opportunities and opportunities are coming our way. So we do see international markets strengthening right now for us on the wholesale side.

Great. I appreciate you taking my question. I'll hop back in here.

Bradley Whitford

Thanks.

Operator

(Operator Instructions) Anthony Vendetti, Maxim Group.

Just wanted to see if I could have just finished or follow up with one last question. Just looking at a brick and mortar retail expansion. You talked about GNC on the past couple of calls, you talked about Sprouts markets. I know that I think that the last time we spoke it was about 175 locations. Just wondering, though, if there's been any expansion within the Sprouts net worth or conversations surrounding that?
And then maybe just more broadly kind of zoomed out how do you guys look at retail expansion and particularly with this ATRx labs brand? I know that you guys are probably going to have an easier time at least ramping retailer brick-and-mortar availability of these products as they're facing less regulatory backlash or enough. I guess, hurdles, if you will see if any, any comments on that would be helpful. Wll, thanks.

T. Ronan Kennedy

Sure. So look, I would say mass with specifically with Sprouts, we have not further penetrated the Sprouts footprint. We're continuing work with them to optimize sell through. As we look at the broader landscape, I think in mass retail, I think we do see CBD as a category as a challenging category for a lot of these mass retailers. And I think there's a few niches that you are seeing some growth in certain beverage type products. But I think some of the more traditional CBD products have had a tougher time at mass retail that really gained strong traction.
That was one of the reasons why we created ATRx line. It's a new category. It's a again, it's a functional category. It doesn't have the some of the same challenges in state level regulatory framework. So I think you can create challenges for a lot of these larger brands that have footprints across multi-state territories. So it is easy for their groups to sort of wrap their head around it.
It's easier for us to market. We can market through different channels, broader channels, more traditional channels than a lot of the CBD category. So we are continuing to engage in discussions with other retailers with ATRx and but first and foremost, are focuses you is around this launch at GNC and making sure that we build upon the success that we've had since launching into that into that channel.

If I can just just one kind of follow-up on that. When you guys first launched ATRx and [Hinton D] back in the fourth quarter, the fiscal fourth quarter, as you mentioned that you didn't really see the two product lines while they showed a lot of promise materially impacting top line in 2024.
Given that now it's six months or so has passed and we're starting to see a lot of interest, at least from my seat. It did seem that there's a lot of interest what is being well received in the market with this launch at GNC. Has your outlook on that changed at all? Could you see ATRx kind of getting to the point where it is materially impacting top line? If not in 2024, at least in 2025.

T. Ronan Kennedy

Look, I think ATRx certainly has a lot more legs, but an opportunity with it and we do have some ambitious goals. I think first and foremost, I think we have -- looking at it with a pretty sober eyes that our first goal is to shore up our revenue, stabilize our revenue and then be able to grow from there. Part of that strategy is ATRx continue to build upon what we've put in place here over the first few months with the brand.

Got it. Appreciate that detail, guys. Thanks for taking all my questions.

T. Ronan Kennedy

Thanks.

Operator

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

T. Ronan Kennedy

Thank you, everyone, for attending the call and your ongoing support and we look forward to our upcoming call in August. Okay.

Operator

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