Title

Presentation

cbdMD, Inc. misses on earnings expectations. Reported EPS is $-1.74 EPS, expectations were $-0.04.

Operator: Good afternoon. Welcome to cbdMD’s, Inc. March 31, 2023, Second Quarter of Fiscal ’23 Earnings Call and Update. This afternoon, the company issued a press release that provided an overview of its first (sic) second quarter results and subsequent 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 cbmd.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 like to turn the conference over to Brad Whitford, the company’s VP of Finance. Brad, please go ahead.

Brad Whitford: Thank you, Ariel, and thank you all for joining cbdMD’s March 31, 2023, second 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. Sibyl Swift, our Chief Science Officer. We’d like to remind everyone that various remarks about future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. cbdMD cautions that these forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those indicated, including risks described in the company’s quarterly report on Form 10-Q for the quarter ended March 31, 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, Monday, May 15, 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.

Ronan Kennedy: Thank you, Brad. Good afternoon, everyone, and especially to our shareholders. Our results in the second quarter show that we are building the right strategic plans and the right team to deliver on results. Make no mistake, operating in our industry remains challenging, and we continue to have work left in order to deliver acceptable results, but we have proven that we are consistently delivering improvements and getting ever so close to a profitable quarter. 2022 was a busy year of change for the company. We moved to an asset-light model shedding our manufacturing overhead. We made hard decisions to say goodbye to many of our colleagues and friends and significantly reduced our staff. We made leadership changes, shed up productive contracts and reposition our product portfolio to a higher strength offering.

In 2023, we continue to operate with conviction to implement further cost controls and are now operating with a sense of urgency across the entire business. During the second quarter, we changed out our entire marketing team, our agency partners and revamped our marketing spend. As a result, we stabilized our direct-to-consumer revenue on significantly lower spend. While year-over-year results were down, we generated positive sequential revenue growth for the quarter despite significant changes to our organization and spend levels. Year-over-year, we reduced SG&A spend by $6 million for the March quarter or an annualized rate of $24 million versus last year. Our SG&A costs are the lowest they’ve been since cbdMD was acquired by the public company.

As Brad will explain, our adjusted EBITDA for the quarter was just a tad under $800,000 loss, resulting in an approximate $3 million improvement over prior year and $1.8 million improvement versus the December quarter. This represents one of the best net performing quarters we have had as a public brand on significantly lower revenues than the prior better quarters. We are not satisfied or done and are moving with haste. We have a fantastic base platform and with just a little growth, we expect to have a positive EBITDA business. During the quarter, we successfully marketed on Meta after struggling during 2022. We continue to optimize our spend across channels and are carefully ramping based on performance. As our new team marked on our direct-to-consumer business and started to drive traffic, we saw a number of areas where we can improve on our customer experience, conversion rates and become more nimble.

We are working to address these items and expect positive changes to our consumer experience with our online store in the coming months. We were excited to recently announce our launch on Amazon U.K. We are invited into the UKCV program and quickly reacted to comply with their onboarding process. There is a limited brand set in the CBD program in the U.K., and Amazon requires validated FSA product. While it did not have a significant impact in the second quarter, we believe we have partnered with experienced resources and expect meaningful growth out of the U.K. in the coming quarters. We believe Amazon is a critical channel to ensure our products are part of the go-to marketplace for consumers worldwide. As Sibyl will speak to more, we completed our PET clinical study and are excited about the credibility it brings to our products.

While others may have a small survey-based clinicals, we design ours with statistically significant participants for double-blind placebo and we confirm our surveys with biological data. We continue to elevate the bar and believe these studies can support a structure function claims submission for a typical supplement. We are actively working to convert this investment into revenue dollars. Our team has also continued to expand our NSF for Sport offering. Not only are we the first to commercialize NSF for Sport product in our industry, we were the first brand to certify the gun [ph] We now have three SKUs and higher strength products available under this certification. We continue to see significant and growing inbound interest from athletes and trainers across multiple professional leagues as they come to us to purchase NSF for sport product.

We see this designation critical to consumers outside of professional athletes and believe the designation continues to enhance the credibility of the cbdMD brand. During the last 6 months, we focused on our business fundamentals and metrics. New product development has slowed. Our product development team has continued to work in the background on newer products that we believe will fill gaps in meeting our customers’ needs, but also a new and innovative products that we believe will span our addressable market, opening both new customers and new channels. These should start in June and continue throughout the summer. Our goal is to work within our balance sheet and use the business improvements to provide enough liquidity that for what the company needed.

While you can see we made very strong strides to operate in a much leaner and disciplined organization, the margin of era [ph] became too small. We worked to set up an equity line of credit to be able to provide extra liquidity as needed in a smart and judicious way. Unfortunately, our stock came under strong pressure, and we needed to implement the reverse split to maintain compliance with the NYSE American. The post-split pressure continued effectively limiting on the capital cushion available under our equity line. We ultimately made the difficult decision to raise capital under our existing shelf registration to bolster our balance sheet and provide comfort that we have capital to provide a long enough runway to profitability. The capital markets are incredibly challenging at the moment, especially after the April banking crisis.

In closing, the all common deal was an important factor as we looked at the capital markets. Maxim did a solid job in a very difficult market. We remain very focused on our capital structure and are exploring strategic options that we believe could have benefit to the company. On a final note, before I turn it over to Sibyl, I’m very encouraged by some of the industry activity we are seeing. While we believe the FDA continues to ignore safety and science available to them, we are seeing many conversations underway between our peers, industry organizations and elected officials on delivering a response to the FDA. We’ve seen the FDA’s posture have real commercial impact and impede the growth of an industry that we believe provides real value to its customer base.

Never ever been more encouraged about the resources coming together to put forward a strong response to the FDA’s statements earlier in the year. Many of our CBD industry peers operate legitimate businesses, care about safety of consumers and understand that the industry is poised for significant growth with regulatory clearing. Like a title wave sometimes it can be hard to understand inertia behind the wave until it gets to shore. We believe there is an industry well-built. And with that, I’d like to turn things over to Sibyl.

Sibyl Swift: Thank you, Ronan. My comments will be focused in two areas. First, I will update you on the science behind our dietary supplement products. And second, I will update on our current efforts to obtain fair and sensible regulations at both the state and federal levels. In the past, we have discussed our approach to science and laid the foundation for cbdMD to deliver superior everyday wellness products that are formulated to specifically address the needs of our customers. I will now update you on our two recently completed clinical studies. The data from our clinical study performed at the University of South Carolina to assess the efficacy of our core broad-spectrum blend and healthy human subjects is still on track for publication.

Based on the preliminary findings of that study, we know that CBD really does improve our customers’ health and wellness in some key areas, and we’re excited to share that data and our messaging to our customers. Of note, among other encouraging results, our core broad spectrum blend indicated positive outcomes from mood improvement, pain reduction and reduction of inflammation in healthy adults. This information will serve as a foundation for our focus on educating our customer base about the benefits of CBD. The clinical study at Colorado State University School of Veterinary Medicine, export our core broad-spectrum hemp extract benefits on dogs mobility and quality of life. That study provided data from the Canine Brief Pain Inventory survey, which utilizes a series of clinical questions to determine how pain interferes with the dogs typical activities or pain interference and pain severity, as well as objective gate analysis and clinical owner-oriented outcomes as they more than accurately assess the dog’s quality of life.

I’m pleased to inform you that our broad spectrum hemp extract positively impacted most of the outcome measures assessed using the client-specific outcome measures and the CPPI [ph] as compared to baseline measures. The results of a trend for improvement in objective data analysis and accelerometry both objective measures, which would not be impacted by caregivers perception. In other words, the dog’s behavior improved. Activity increased and pain scores decreased when they consumed our broad spectrum hemp extract compared to baseline. That data supports what we have known for some time. Dogs with movement issues show improvement when they consume cbdMD’s broad-spectrum hemp extract. We will publish the data from this study later in 2023. The data generated from our clinical studies will be instrumental to guiding our product development road map.

It confirms our products can help customers support their everyday health and wellness. We will use the data to guide future functional formulas in areas that matter most to our customers. After publishing the data and well-respected peer-reviewed journals, we will launch marketing campaigns focused on educating customers on the benefits of our core products, so they can better understand how our products can help them to achieve their goals. Our approach to developing compelling dietary supplements in a crowded field is to develop formulas which pair with our clinically proven cannabinoid ingredients with other clinically studied functional ingredients that have been proven to support areas that matter most to our customers, including sleep, mood and recovery.

The data from our clinical studies has already informed our most recent launch of new flagship products for human consumers, including gummies, tinctures and softgels, containing the same broad spectrum blend that was studied in the human clinical. The study’s results will also guide future investigational studies executed by cbdMD’s therapeutics division. On the regulatory front, I would like to update you on our recent efforts at both the state and federal levels. We have previously discussed our steps to address the lack of regulatory clarity and challenging the FDA’s position in refusal to regulate. Filing our citizen petition was a required step to follow the well-established required regulatory pathway to challenge the agency. In January of this year, the FDA formally denied our petition and at the same time used a press release to state that they require a new regulatory path for all hemp products.

We strongly disagree with the basis for the denial and are considering all available options. Our products are dietary supplements and any responsible manufacturer of hemp-derived supplements already complies with all applicable federal regulations. I want to be very clear here as a former FDA official. It’s been a decade since CBD was introduced as a dietary supplement choice and almost 5 years since the 2018 farm bill passed. In that time, the FDA has been given over $5 million to study CBD and has squandered that money on inappropriate and poorly designed studies. And after all of that, the FDA recently stated they do not have any path forward for hemp drive dietary supplements. This lack of FDA guidance has forced states to step in, specifically to address the recent concerns of THC derivatives like Delta 8, Delta 10, CHCO and HHC, none of which are legitimate hemp-derived dietary supplements and all of which further confuse the objective of clear regulation of our products is dietary supplements.

We have been and will continue to educate legislators at both the state and federal levels to ensure that customer access to legitimate hemp-derived dietary supplements is preserved. In the states, we have been active as a company providing comments and testimony and public hearings and working with trade groups and lobbyists to help craft positive regulation in states like Colorado, Florida and Virginia. Although there are still some hurdles to overcome with different regulatory requirements in different states that impact the sales of hemp-derived CBD products. I can say that our efforts were successful and our products are able to be sold in those markets. We will continue to work directly and with trade groups and lobbyists to craft state regulatory policy and to amend existing regulations to ensure there is a robust market for our products.

At the federal level, we’ve been speaking directly with legislators and committee staff for the past several years, and I’m encouraged by the recent level of engagement by both legislators and their staff. When the FDA denied our citizen petition and simultaneously stated, they needed Congress to provide a new path forward for all had products. We immediately contacted legislators and the committee staffers who have been active in discussing hemp policy and provided them with our extensive safety and toxicology data, both face-to-face meetings and did follow-up phone calls where we helped to educate them on the science behind our safety studies. Notably former H.R.841from last year’s session was reintroduced in the house as H.R. 1629. This bill has significant bipartisan support in the last health session and shows the intent of Congress to regulate hemp drive cannabinoid’s dietary supplements.

We believe our efforts, along with the efforts of our trade groups, was instrumental in making this happen, and we are actively engaged with the bill sponsors to help further tailor the language so that it has a chance of passing in this session. Just last week, myself and a colleague we run [ph] the hill directly lobbying members of the Health Energy and Commerce Committee, whereas H.R. 1629 will undergo debate and mark up before moving on. We spoke with the stoppers in many offices, including Crenshaw, the Larocca, Dunkin’ and Pence [ph] We also spent significant time speaking directly to representative Brett Guthrie [ph] who is the Chair of the Health Committee that will be tasked with moving H.R. 1629 forward. He was fully engaged, and we feel that he understood our concerns.

We also met with the lead stopper for FDA issues in the Energy and Commerce Committee, and she also expressed the desire to get clarity and help get sensible hemp drive dietary supplement regulations on the books. There is much more work to do in a short time, but the groundwork has been laid, and we will continue to be engaged. We also spoke with the staff counsel, Chief Oversight Counsel and the staff Director for Congressman Jamie Comer, who recently sent a letter to the FDA demanding answers to questions related to the agency failure to regulate CBD as a dietary supplement. As with everyone we spoke to on this recent lobbying trip, they appeared fully engaged, and we’re asking questions to help them better understand and articulate the issues they will be seeking to answer in an upcoming oversight hearing.

Our involvement was representative of Comer’s office and their request for us to all up with them as they pursue oversight, gives us hope that our issues will finally be addressed that there is a willingness in Congress to get something done this session. Lastly and certainly not least, we have the opportunity to spend time with the North Carolina Pimasertib [ph] and we’re able to discuss our issues and our suggested path forward. He is a avid consumer dietary supplements and was very interested in hearing about our specific issues and educating themselves on the topic. Given that similar bio graph [ph] represents the home state of cbdMD and is also the junior member on the Senate Health Committee, we believe that our efforts to inform and educate [indiscernible] will pay dividends in the future if the bill is introduced in the Senate as all FDA-related legislation must pass through Health Committee.

Through our trade groups and the NPA pack, a political action committee focused on supporting legislators, who take action for sensible dietary supplement regulations, we will further our support for those congresspersons willing to hear our issues and take action. To further our efforts to educate both legislators and the public about the safety of hemp-derived dietary supplements, we are working with other leading hemp-derived supplement companies and a leading objective third-party safety and toxicology firm to bring the industry safety data together to recommend a safe daily use of CBD based on science. We are also working with other like-minded hemp drive supplement companies who hold themselves to the highest standard to unite on a strategy to progress the dietary supplement path for CBD.

In closing, we firmly believe our products are not drug precluded. But our products are legitimate, botanically derived dietary supplements within the definition set forth [indiscernible] and that we are fully compliant with all applicable dietary supplement regulations. We are advocates for a science-based approach to health and wellness with regulatory clarity and fair treatment for our industry domestically and internationally. We believe we are the leaders of the industry and will continue to fight while other choose to sit back and wait while we pave the way for legal cannabinoid products. With that, I would like to turn it back over to Brad.

Brad Whitford: Thank you, Sibyl. Total net sales for the second quarter of fiscal ’23 were $6.2 million or a 35% decrease from the prior year comparative quarter. Our quarterly e-commerce direct-to-consumer business generated sales of $4.9 million in the first quarter of fiscal ’23. This was a 26% year-over-year quarterly decrease. We believe sales were impacted during the quarter by pantry loading prior to our new high-strength product launch, a pullback in marketing spend and microeconomic forces on consumers. E-commerce represented 78% of our total net sales for the second quarter of ’23 versus 72% in the prior year comparative quarter. Our wholesale business generated $1.4 million of net sales for the second quarter of fiscal ’23, down 56% as compared to $3 million for the comparative quarter in fiscal ’22.

Revenues were impacted as we transitioned to the new SKU offering with lower wholesale price points as compared to the prior year. Our gross profit as a percentage of net sales came in at 64% for the second quarter of fiscal ’23. This compares to 67% for the comparative prior year period. We expect to maintain gross profit margins in the mid-60% range when factoring in sales mix. Our operating expenses for the second quarter of fiscal ’23 totaled $5.4 million, which is down from $11.5 million in the prior year comparative quarter. Excluding accounting and other professional expenses, costs came down across the board as management continues to focus on profitability. This decrease is mainly due to reductions across all areas of our operating expenses and was partially offset by $277,000 non-cash intangible expense as we began amortizing intangibles starting in January ’22.

Overall, this resulted in a loss of operations of approximately $1.4 million for the second quarter of fiscal ’23 as compared to $4.7 million loss for the prior year period, meaning we reduced our loss of $3.3 million over prior year on a GAAP basis. Sequentially, operating loss improved $2.5 million from the December ’22 quarter. This is primarily attributable to our continued reductions in operating expenses during the second quarter. Our non-GAAP adjustments to operating expenses for the second quarter of fiscal 2023 included a $118,000 in non-cash employee stock expense, $380,000 in depreciation and amortization expense and $108,000 associated with non-cash AR credits related to our marketing agreement with A360, resulting in a non-GAAP adjusted EBITDA loss of $795,000 for the second quarter of fiscal ’23 as compared to a $3.6 million non-GAAP adjusted EBITDA loss in the second quarter of fiscal ’22.

The decrease in non-GAAP adjusted EBITDA loss over the prior year period is primarily attributed to management’s focus on our cost structure and profitability. Sequentially, our non-GAAP adjusted EBITDA loss improved by $1.8 million from the December ’22 quarter. Based on April’s results and our current quarter run rate, we are anticipating a continued reduction in both GAAP and our non-GAAP adjusted EBITDA loss for the third quarter. We invested 137,000 on cbdMD Therapeutics R&D during the second quarter of fiscal ’23 as compared to $193,000 in 2022. Our large clinical studies have concluded and we continue to seek opportunistic ways to enhance our science in a cost-effective way. We continue to believe the results from our clinical studies and other science provide us with a unique differentiated position for both product efficacy and education in that category.

Other income expense on our consolidated income statement for the second quarter 2023 includes a non-cash contingent liability gain of $48,000 related to our December 2018 acquisition of Cure Based Development. The earnout contingent liability is currently on our balance sheet for $167,000. We are now in the fourth marketing period that runs through November 2023. During the second fiscal quarter of ’23, we utilized approximately $1.7 million of cash. The main components include our adjusted non-GAAP EBITDA loss of $795,000 and paid dividends of $1 million. We had cash and cash equivalents of approximately $1.7 million and working capital of approximately $5.5 million on March 31, 23, as compared to cash and cash equivalents of approximately $6.7 million and working capital of approximately $10.7 million as of September 30, ’22.

Our current assets as of March 31, 23 decreased approximately 37% from September 30, 2022, to $10.1 million. A primary driver of the decrease in current assets was the uses of cash for operations and the reduction of prepaid sponsorship by $1.2 million, mostly attributed to the termination of athlete sponsorship. As of March 31, 2023, the company’s total current liabilities were $4.7 million, of which approximately $1.4 million of accounts payable and $2.1 million as accrued expenses. We remain very focused on managing our cash position and liquidity. After our recent common stock offering, we had over $4 million in cash and are continuing to explore strategic ways to enhance our balance sheet. We continue to focus on our cash SG&A expenses and have some projects in the works to continue to optimize our costs and enhancing [ph] our margins.

We remain focused on driving business KPIs, attracting new customers and delivering for all of our stakeholders. With that, I’ll turn it back over to Ronan.

Ronan Kennedy: Thanks, Brad. We have a passionate and committed team here at cbdMD. This team believes in the power of cbdMD products, cannabinoids and the opportunity to do something special with the cbdMD platform. We have great award-winning products. We believe our science is second to none, and we have a strong voice in Washington. We have stabilized our revenue and our business fundamentals continue to improve. We are committed to move with the sense of urgency to create value for all our shareholders. And with that, I’d like to now open up the call for some questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Anthony Vendetti of Maxim Group. Please go ahead.

Operator: [Operator Instructions] Our next question comes from Peter Merkel [ph] of Megas Management. Please go ahead.

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

Ronan Kennedy: Thank you, everyone, for your questions and interest, and we look forward to speaking again on our third fiscal quarter call in the next few months.

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