Q2 2025 cbdMD Inc Earnings Call

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16-05-2025

Brad Whitford; Chief Accounting Officer; cbdMD, Inc.
Ronan Kennedy; Chief Executive Officer & Chief Financial Officer; cbdMD, Inc.
Tom McGovern; Analyst; Maxim Group LLC
Adam Waldo; Analyst; Lismore Partners, LLC
Operator
Good afternoon, and welcome to the cbdMD, Inc. conference call to discuss results for their second quarter of fiscal 2025 period ending March 31, 2025. This afternoon, the company issued a new press release that provided an overview of its second quarter results, which followed the filing of its quarterly report on Form 10-Q. Today's conference call will be recorded and will be available online along with the earnings press release covering financial results and non-gap presentation at cbdmd.com in accordance with cbdMD's retention policies. (Operator Instructions) At this time, I would like to turn the conference over to Brad Whitmore, the company's Chief Accounting Officer. Brad, please go ahead.
Brad Whitford
Thank you, Galen, and thank you all for joining cbdMD's March 31, 2025, second quarter of fiscal 2025 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 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 -- or Form 10-Q, excuse me, for the fiscal quarter ended March 31, 2025, and our other filings for the SEC, all of which can be reviewed on the company's website at www.cbdmd.com or on the SEC's website at www.sec.gov. Any forward-looking statements made on this conference call speak only as of today's date, Thursday, May 15, 2025, 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 acceptance may be required by Federal Security laws. With that, I'd like to turn the call over to Ronan.
Ronan Kennedy
Good afternoon everyone, and thank you for joining us today. Over the past several quarters, we set two clear goals, one, drive revenue growth and achieve profitability, and two, resolve our capital structure and regain compliance with the NYSE American listing standards. This quarterly update, I'm pleased to report progress on both fronts. Our top priority for the second quarter and into Q3 was preparing for our annual meeting and securing shareholder approval on two mission critical proposals, the conversion of our Series A preferred stock in a reverse split. This is a complex undertaking involving multiple shareholder classes and two failed prior attempts over the last 18 months. I want to thank our shareholders for the strong vote of confidence. The successful approval of these measures represents a major milestone in cbdMD's reset and long term. With the Series A conversion complete, approximately $6.7 million in accrued dividends and our shares of Series A preferred stock were converted into common stock, raising our pro forma non-GAAP adjusted book value from approximately $670,000 to over $7 million as of March 31, 2025, well above the $4 million threshold required by the NYSE American. The exchange also eliminated legacy obligations, including $4 million in annual dividends and over $50 million in preferred waterfall payouts and simplified our capital structure. After discussions with the regulators, a board determined conducting the reverse stock split was an important step to protect against the NYSE American's $0.10 delisting threshold. Between the preferred conversion and the reverse stock split, we now have approximately 8.9 million shares of common stock outstanding, no debt, no warrant overhang, and a clean cap table, putting us in a position to fully regain compliance by the end of our fiscal year. After two years of heavy lifting, cbdMD is now operating with a strong foundation and greater strategic flexibility. We're energized by what this unlocks for the future. On the operational side, we continue to demonstrate meaningful year-over-year progress across the P&L. Even if Q2 performance was not as strong as Q1. We're executing against three revenue growth priorities, first, growing our direct to consumer business. While our Q2 marketing performance fell short of expectations, we acted swiftly, making leadership changes in March and instilling a renewed urgency across the team. We'll be laser focused on enhancing customer acquisition, experience and retention. Second, expanding our core wholesale business. Wholesale revenue is up 13% on a trailing 12 month basis. We've added new sales reps focused on focusing on high quality partnerships and working to ensure cbdMD remains the preferred brand in our category. Finally, scaling Herbal Oasis, our hemp derived THC seltzer brand, and we started to officially call it award winning. All four flavors recently meddled at the 2025 High Spirits Award. We've added distribution partners in Alabama, Florida, and North Carolina. While some rollout momentum slowed in Q2 due to legislative activity, we're ramping it up again and having new markets and retail placements in the pipeline. We expect to announce additional wins this third quarter. The THC seltzer category is booming. According to Euromonitor, sales more than doubled in 2024 and projected to exceed $4 billion by 2028. As alcohol consumption declines, we're seeing a clear signs that consumers are seeking functional social alternatives and Oasis is built for that future. We also know that the long-term success of this category will depend on regulatory clarity. We are currently tracking active legislation in over 23 states and we strongly support smart regulation that ensures customer safety and trust. With our internal regulatory and legal experience, we're confident in our ability to adapt quickly to an evolving landscape. All this strategic and operational progress is beginning to show up in our financial performance. But we still have work ahead, the year-over-year trends across revenue margins reflect the business that's becoming more efficient, more disciplined, and better positioned to scale. With that, I'd like to turn it over to Brad to walk through the financial details of the quarter.
Brad Whitford
Thanks, Ronan. Total net sales for the first quarter of fiscal 2025 were $4.7 million, representing an 8.6% increase from the prior year comparative quarter total and a 7.9% decrease from the first quarter. As Ronan mentioned, we are focused on three key areas to improve our quarterly revenue numbers. Our quarterly e-commerce direct to consumer business was flat year over year and generated sales of $3.6 million in the second quarter of fiscal 2025. E-commerce represented 77% of our total net sales for the second quarter of 2025 versus 83% in the prior year comparative quarter. Our wholesale business generated $1.1 million of net sales for the second quarter of fiscal 2025, up 22% as compared to $750,000 for the comparative quarter in fiscal 2024. Our gross profit remained healthy at 62% for the second quarter of 2025. The increase in our warehouse rent flowed through in full this quarter, including some one-time increases in cam costs. Despite this, we continue to operate with some of the leading gross margins in the industry. Our SG&A expenses for the second quarter of fiscal 2025 totaled $3.5 million compared to $4.1 million in the prior year comparative quarter. The expense reduction was primarily due to reductions in payroll, professional fees, and the elimination of the headquarters lease in addition to other cost saving initiatives, while slightly offset by an increase in marketing expense. For the six months ended March 31, 2025, SG&A expenses were down $1.8 million across the board and came in at $6.9 million. We are continuing to review operating costs across the board to ensure we remain efficient and help us return to positive income and even during the second half of the year. Overall, this resulted in a loss from operations of approximately $485,000 for the second quarter of fiscal 2025. As compared to a $1.5 million loss from the five-year period, after adjustment to the fair value of the notes and interest expense, net loss totaled $480,000 as compared to a loss of $3 million in the second quarter of fiscal 2024. Our non-GAAP adjustments to operating expenses for the second quarter of fiscal 2025 included $2,000 in non-cash employee stock expense and $286,000 in depreciation and amortization expense, resulting in non-GAAP adjusted EBITDA loss of $197,000 for the second quarter of fiscal 2025 as compared to $680,000 non-GAAP adjusted EBITDA loss in the second quarter of fiscal 2024. The EBITDA improvement non-gap adjusted operating loss over the prior year period is primarily attributed to management's focus on our cost structure and profitability. We had cash in cash equivalent of approximately $1.7 million in working capital of approximately $3.7 million in March for March 30, 2025 as compared to $2.4 million in working capital deficit of approximately $2.2 million on September 30, 2024. The main factor contributing to the reduction in our net working capital is the incremental $1 million of accrued preferred dividends that is a short-term liability on our balance sheet. Excluding the respective $6.7 million and $4.7 million of accrued dividends, we had positive adjusted net working capital of $2.8 million as of March '25 and $2.4 million as of September '24. We invested approximately $400,000 in inventory during the quarter. We were running a little too lean at the start of the quarter and needed to bolster a few key SKUs. Additionally, we invested in our Oasis inventory as we began rolling out to distributors. We continue to focus on improving our working capital and managing our cash carefully. With that, I'll turn the call back over to Ronan.
Ronan Kennedy
Thank you, Brad. Operationally we've transformed this business. Our mandate is profitable growth, and we remain firmly committed to delivering a profitable 2025. The successful capital restructuring not only improves our balance sheet but also opens the door for future strategic opportunities, including M&A. The right transaction could be truly transformational, creating opportunities to expand into new categories, reach broader customer segments, open additional sales channels, and realize meaningful operational synergy. Our capital structure is now clear. Our stock is more investable and we're seeing increased inbound interest since the annual meeting. We are evaluating these opportunities with discipline and clear focus on long-term value creation. We consider this a great resets, a clean slate to create long term value. We're no longer weighed down by the past. We're now powered by a lean organization, loyal customer base, and category expanding brands. Our cash burn remains low. We believe we have the working capital to execute our growth plan. We believe we're in a stronger position than many of our public peers, with stronger growth margins, substantially debt free, with approximately $1.7 million in cash and no material liabilities beyond normal working capital and lease liabilities. Our battle tested team has showed time and again that we can evolve, adapt, and deliver. We're grateful for the shareholder support shown in April and we're more focused than ever on driving the results in the quarters to come. Thank you. And let's open it up for questions.
Operator
(Operator Instructions) Tom McGovern, Maxim Group.
Tom McGovern
Hey, guys, thanks for taking my questions. Yeah, so just want to start first with the Herbal Oasis brand. Obviously, you announced that you were launching it back in November. Now you've had some time to actually commercially roll it out. You mentioned those distributors and plans to really fuel the growth now that you kind of work through some of the capital structure concerns. That were a priority in prior quarters. So just maybe could you give us a little bit more color on that kind of how does that expansion look from your perspective, just, what are some maybe milestones we should look out for kind of targets, if there are any specific distribution channels you're looking to get into with the brand or specific markets you're looking to expand into any details on that would be helpful. Thank you.
Ronan Kennedy
Sure, Thomas. Look, we had started discussions back in the December quarter with a number of distributors and started getting commitments during the March quarter. In March, we, some of those discussions took a little longer than we liked and we started seeing some legislation pop up toward the end of March which kind of slowed some of the shipments into those distributors. We did ship at the end of March and to one we shipped in April we had some shipments and then I think we recently announced in May we started shipping in Charlotte. So I think it was a little frustrating that, I think some of the regulatory stuff that has since resolved itself, slowed down our progress a little bit, but you know we've got feet on the street in some of our core markets and closing doors on a daily basis. So for us, I think we're trying to work with key distribution networks in various states. Some states it's easier to get full state coverage. Others it's broken up into more kind of county-based systems. So I think you know we're out there talking to distributors every day, working to secure opportunities for our brand and continue to march and build our distribution footprint beyond sort of the Southeast where we're at today.
Tom McGovern
Understood. I appreciate that. Just to follow-up on that, so should we be looking at 25 it's kind of a development or commercial ramp period and then maybe start to expect Herbal Oasis to be more of a key driver of growth or a material driver of growth in '26, or should we start to expect that, hey, maybe once it starts hitting the distribution channels there should be some relatively rapid uptake and we could start to see Oasis materially impacting top line in the back half of this year?
Ronan Kennedy
I think we should start being able to see towards the back end of this year, some good contribution from the brand.
Tom McGovern
Appreciate that clarity. And then last question for me, since this post conversion, the conversion is preferred into common equity, obviously. Increases financial flexibility for you guys. Just maybe walk me through high level how you expect it to impact your strategy moving forward. I know that now you'll have access to some self-registration that was locked up due to the cap structure. So just curious, does this alter your expectations for growth or give you any more clarity on what we should be expecting for 2025 in terms of growth initiatives?
Ronan Kennedy
Yeah, Thomas, I think for the shelf to come back into play, we have to complete our next audit, so it's realistically that doesn't come in. Back into play until December sometime, I think for us it sort of gives us, I would say a couple things are critical here. One, we're now in a really great position to maintain our listing, right? We were on a path with the NYSE, so that by the end of the year we potentially were delisted. So from a preservation of value for shareholders and giving not only customers, shareholders, employees alike, the fact that we now, we're in a great position on a go forward basis to main cbdMD as a listed company on the on the NYSE American. I think, strategically we've had to turn off -- we've had numerous discussions with various parties over the last few years, and I think, people really didn't see, they saw the YCB stock and the price and sort of looked at it and then as they sort of, ended up sort of doing research layer down and understood the preferred, I think, there wasn't much value or credence in sort of the value of our stock and that's either for strategic investment. That's for doing M&A, that's for trying to find sort of the right influencers and allow them to sort of participate. So I think that now is very easy to understand our capital structure and really understand the value of our stock, given that it's just a clean, common stock structure, it allows us to use that currency for the right deals where we believe there's sort of strong alignment and creating value in the future for our shareholders.
Tom McGovern
Understood. Well, congrats on working through that. Congrats on the quarter and then, looks like you're positioning yourself nicely for '25. I appreciate again you taking the time to answer my questions. I'll hop out of the queue.
Operator
(Operator Instructions) Adam Waldo, Lismore Partners.
Adam Waldo
Hi, good day, Ronan and Brad. Well, congrats on the conversion. I wonder if we can talk about the working capital situation going forward and how that respectively translates into cash burn or cash generation. So over the last three fiscal quarters, you've averaged a cash burn of about $275,000 a quarter. You did better than that obviously here in the latest quarter around $200,000. Are you still comfortable based on what you're seeing in terms of the working capital requirements, particularly of the Herbal Oasis Tonics new products that the company's liquidity runway remains sufficient through the end of fiscal 2026, as you had indicated was your outlook on the fiscal fourth quarter 2024 results call on December 18?
Ronan Kennedy
Adam, I think we understand what happened this quarter. We're working to tighten that up and make sure that we get back to scenario where you know we're in a much better positive EBITDA and cash generation situations. I think we're still feeling comfortable as of today with where we're at and the working capital that we have on a go forward basis.
Adam Waldo
Okay. And so am I right to correct to infer that you're still comfortable with that guidance that you issued on December 18 that you thought liquidity outlook was sufficient through at least the end of fiscal 2026, in other words, another six quarters from here?
Ronan Kennedy
That is what we have modeled out.
Adam Waldo
Okay, terrific. And then switching gears, you made a number of comments on today's call and in the recent press release around the successful conversion of the preferred to common about the company being, well positioned going forward for strategic activity, and that was obviously a key criterion for the conversion in the first place. So as you look forward, what types of strategic activity do you think board and management would find most attractive? Can you comment on that at all?
Ronan Kennedy
Look, I think, as I sort of spoke about in some of my closing statements, I think we're looking at opportunities where we think there's a really good either you know cost synergies to shrink out of a business, open up new channels and or sort of acquire new customers where we think there's sort of a great customer overlap and are able to sort of look at it as one and one equals three. I think that that's both inside the cannabinoid space and outside the cannabinoid space.
Adam Waldo
Okay, that's very helpful and I guess the final question I actually let me go back to the last part of what you said outside the cannabinoid space. Could you flesh that out anymore or add to that?
Ronan Kennedy
Yeah, I don't think it needs to be a CBD company. We certainly think there's plenty of opportunity. I think you've seen the number of companies in the space shrink over the last few years. We think there's still plenty of opportunity and plenty of we'll call it overhead in the space, so for the right brand and the right structure, I think we're interested, where we think, one on one is going to be greater than two.
Adam Waldo
Understood. And I guess the final thing following-up on something on Thomas's line of questioning around Herbal Oasis, what kind of sort of financial and operating performance metrics on that new product set can you offer us this quarter, if any, or should we look for more disclosure to come as you'll reach the materiality threshold that you seem to be signaling you would expect to see sometime before the end of this fiscal year.
Ronan Kennedy
So look, what I'll say is there was really the revenue impact came at the very end of the March quarter, and we're starting to see that pick up here moving through the third quarter here, so I think we're not, we have, I think stated before that, the gross margins on this product are not quite the same as our core business. But from our standpoint we view it as incremental contribution dollars and are looking at sort of volume play because it is a different business than shipping gummies and pills, majority direct to consumer.
Adam Waldo
Very good. Thank you so much and best wishes for upcoming quarters.
Ronan Kennedy
Adam, thank you very much. I appreciate it.
Operator
This concludes the question-and-answer session. I'd like to turn the conference back over to Ronan Kennedy for any closing remarks.
Ronan Kennedy
Thank you again to our shareholders for your support and everyone for attending today's call. We look forward to our next earnings call in August. Have a great afternoon.
Operator
This brings to a close today's conference call. You may disconnect your line. Thank you for participating and have a pleasant day.