Good afternoon. Welcome to the cbdMD Inc.'s June 30, 2022 Third Quarter of Fiscal 2022 Earnings Call and Update. This afternoon, the Company issued a press release that provided an overview of its third quarter of the fiscal year 2022 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's retention policies. All participants on this call will be in listen only mode. The call will be followed by a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Ronan Kennedy, the Company's Chief Financial Officer and Chief Operating Officer. Ronan, please go ahead.

Thank you, Gailene, and thank you all for joining the cbdMD's June 30, 2022 third quarter of fiscal 2022 earnings call and update. On the call today, we also have our Chairman, Scott Stephen; as well as our President, Kevin MacDermott; and Dr. Sibyl Swift, our Vice President of Scientific and Regulatory Affairs and recently appointed new Board member. 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 quarterly report on Form 10-Q for the quarter ending June 30, 2022, and our other filings with the SEC, all of which can be reviewed on the Company's website at www.cbdmd.com or at the SEC's website at sec.gov. Any forward-looking statements made on this call speak only as of today's date, Thursday, August 11, 2022, 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 law. With that, I'd like to turn the call over to cbdMD's Chairman, Stephen.

Thank you very much, Ronan, and good afternoon, everyone. We appreciate you joining us today. I joined the call today to let you know that our Board has taken and will continue to take the right steps to ensure that we have a profitable and winning strategy, and the right resources and leadership team in place to drive long-term shareholder value. Our business has been challenged as of late, many of the same challenges that the entire industry is experiencing. But that is not surprising. New industries with rapid growth often make mistakes and experiences challenges similar to the ones we are presently experiencing. Understanding what went wrong and adapting quickly is the key to developing a vision and a strategy that will be both disruptive and successful in the industry. In early 2022, in light of the challenges that the industry is experiencing, the Board of Directors hired a strategic adviser with extensive experience in distribution channels, category management, understanding how consumers shop, SKU optimization, big data analytics, and who has successfully influenced the path of highly regulated industries for decades. His experience augments the exceptional executive leadership team that we have and has -- which is crafting, and begun to execute on a winning plan. Without tipping our hat to the competition, I can say this: one, science matters; and two, that delivering product efficacy is the central focus of meeting the consumers' needs and building a successful company. On that note, we are pleased to announce the appointment of Dr. Sibyl Swift to fill our recently vacated non-independent seat on our Board of Directors. We believe her appointment can help guide the Board and the executive team on the matters of science and regulation, and shows our commitment to investing in products that are safe and effective for our consumers, while at the same time, meeting the industry-leading levels of regulatory standards and vigor. Furthermore, we have bolstered the Company's leadership team in the June quarter with the appointment of Kevin MacDermott as President. Kevin brings years of experience delivering revenue and earnings growth in a wide variety of organizations, especially ones with a high focus on customer retention and high lifetime value. We believe we have a powerful executive team that is taking strong and rapid action in the light of the challenges of the industry, and they are capable of executing on their plan to get the Company profitable and positioned for growth and segment domination. We know a company delivering consistent profits will be impactful to our stock price and our shareholders. I and the entire Board are committed to ensuring that we have the right leadership in place and the right plan so that we can achieve shareholder growth and customer satisfaction. With that, I'd like to turn the call back to Ronan. Ronan?

Thank you, Scott. Last investor call, we made a commitment to The Street on $10 million in cost savings, significantly lower SG&A and improved earnings. Despite the macro headwinds and leadership disruptions, we delivered on these goals and continued to strengthen the business fundamentals of cbdMD. For the quarter ending June 2022, we recorded a GAAP loss from operations of $33 million. Excluding noncash goodwill impairment of $31 million, we cut our adjusted non-GAAP operating loss in half when compared to the prior year and then now have achieved four consecutive quarters of adjusted operating income improvement. We remain committed to delivering revenue growth and positive adjusted operating income during the balance of this calendar year. Last quarter, we indicated we believe our sales trends have firmed up, but they were impacted by macroeconomic inflationary pressure as well as disruptions that occur as a result of the unanticipated parting ways of both Mr. Coffman and Mr. Sumichrast. Despite these challenges, our team hunkered down and focused on executing. While our direct-to-consumer revenue was sequentially flat, we held the line while reducing our marketing spend approximately 20% or $1 million and operated with a leaner organization. The team's work has positioned us for future growth and resulted in website traffic gains that began in May and continued into this quarter. We are attracting more traffic and customers at significantly lower investment levels. As a result, we are starting to see positive impact to our direct-to-consumer revenue during the current quarter and are working to fine-tune growing traffic and conversion rates. Our investments in product development have paid off as products launched during the third quarter are presently building strong momentum in the current quarter. We continue to improve this process and believe investing in product development is an important way to…

Thank you, Ronan. Good afternoon. It's a great opportunity to step into a situation with the talent of this company, both domestically and internationally, has laid the foundation for cbdMD to deliver superior, everyday wellness products that are formulated to specifically address the needs of our customers. As leaders in this category, we believe focusing on education for our existing customers, prospective ones and the rest of the marketplace will help the industry continue to mature. I say the rest of the marketplace because that encompasses not only consumers, but retailers and distributors alike on the science, benefits, effectiveness and the value of our offering. This is a key component to our ongoing acquisition, retention and distribution growth. I am here to drive growth. We know that our existing customers trust the brand and see the value. We will continue to delight our loyal customer base with value products that effectively address their needs. We will reengage with customers who have casualty purchased from us in the past and win them back when they see our value proposition. We will attract new customers who already exist in the category by effectively promoting the value of our offering. From there, we will sustain that growth by thoughtfully augmenting our current acquisition channels and successfully engaging with new ones. We will enhance our channels by increasing our sales capacity, strategically expanding into new relationships with additional sales and distribution partnerships. Our products are found on the shelves of over 6,000 retail locations around the globe. We are placing significant attention on methodically increasing that door count, with an emphasis on placing the right products in the right locations at the right price points and maximizing our allotted footprint at a sell-through rate that excites our retail base. You will hear from Dr. Swift next, who will speak to our progress on clinical research, which forms the foundation of our education initiative. We recognize the importance of educating our customers on the multitude of benefits of our products. In an industry fraught with false and egregious claims that are not supported by science, cbdMD is backed by science and is the brand that customers trust to provide them with quality products whose benefits are proven. This will permeate throughout our messaging to drive conversion rates and increase market share. With that, I'll turn the call over to Dr. Sibyl Swift.

Thank you, Kevin, and it's a pleasure to be able to talk with everyone on the call today. On our last call, we discussed our citizens petition to FDA. That petition was mailed on February 21, 2022, and the FDA has until August 22, 2022, to respond. Based on my experience during the almost 5.5 years I worked at the FDA and then to the leading national trade group for dietary supplements before joining the team at cbdMD, we do not expect a substantive response. Instead, we expect them to state they need additional time to apply or claim delay due to other agency priorities. We have several administrative options available to us should they be nonresponsive, and we will continue to pursue our claims aggressively as we strongly believe our position, as stated in the citizens petition, are correct. If we are successful, we believe this will open up significant market opportunities for our products. Our novel food applications are now in the risk assessment phase in both the U.K. and the EU, and the governments are actively analyzing our safety dossier. This is expected to take 9 to 12 months. We anticipate a full novel foods approval in both the U.K. and the EU after completion of the risk assessment. 19 CBD applications were validated by EFSA for the EU market. On June 7, EFSA placed a hold on all applications, effectively stopping review. Our company engaged with EFSA and provided detailed answers and explanations to their concerns, and they lifted the hold on our application, moving into active risk assessment analysis. Currently, cbdMD's application is the only one that is not under hold and in risk assessment, all other applications are expected to be on hold until 2024. Highlighting our company's dedication to science and safety, cbdMD…

Thank you, Sibyl. Total GAAP sales for the third quarter of fiscal 2022 were $8.6 million versus net sales of $9.6 million for the quarter ending March 2022, for a sequential decrease of 11%. Our net sales for June 30, 2022 quarter were down 19% compared to the prior comparative quarter. Our quarterly e-commerce business generated $6.5 million, essentially flat over the quarter, ending March 31, 2022, despite reducing our marketing investment by $1 million in the quarter. Our e-commerce sales were down only 17% compared to the quarter a year ago, despite a 32% reduction in our marketing spend. E-commerce represented 75% of our total net sales during the third quarter of fiscal 2022. Our wholesale business, including brick-and-mortar retail customers, was $2.1 million versus $3 million for the quarter ending March 2022 and or a sequential decrease of 32%. The sequential decline is in part due to some pipeline fills that occurred during the prior quarter as well as some supply chain disruptions causing stock outages. Wholesale net sales were down 24% compared to the year ago quarter of June 2021. Our GAAP gross profit margin improved to 69% in the third quarter of fiscal 2022 from 68% in the third quarter of fiscal 2021, and is up 2% sequentially. The increase is a result of our team's effort to refine fixed cost reductions through our business, including significant reduction in our fixed overhead. Based on ongoing initiatives and product mix forecast, we anticipate gross margins in the mid- to upper 60% range in the coming quarters. Our SG&A expense for the third quarter of fiscal 2022 totaled $8.3 million, down $5.6 million from the prior year and $3.1 million sequentially. This drop was led by a reduction in almost all expense categories, with the exception of increase…

[Operator Instructions] Our first question is from Jeff Porter with Porter Capital Management.

Could you give me a little color on the decision to sell the interest in Adara Acquisition? And did you try to market that position to potential investors? Have -- take me through to how that transaction evolved?

Sure. So mid-June, as -- after we had sort of fielded the noise related to our former CEO, Adara came to us and apparently the target they were working with made it a requirement for them to close the transaction. They did not want any association tied to either the Company or the executives. So with that, we worked to quickly negotiate terms that were acceptable to all parties in order for them to continue the process with their acquisition.

Okay. Did you try to market your position broadly to hedge funds and private equity groups? Because as I read it, you're getting a contingent payment of $1 million if the SPAC deal closes. Is that accurate? Which basically is a return of your initial investment?

That's correct. It would be a return of the initial investment. Jeff, I would say given what was happening and how fast it was happening in the time, there was not a significant amount of time to be able to go market that. And I think part of the challenge was making sure that the sponsor entity had its rights within the operating agreement from a first right of refusal.

Okay. Can you give some guidance sort of going forward on -- I think you mentioned the expense reduction was going to be $8 million in the next quarter. Do you have a target for what it would then be in the fourth quarter of the year? And I'm trying to gain some insight into what level of sales it will take to be profitable.

Sure. So we are forecasting about $8 million in SG&A in our fiscal fourth quarter, which is the current quarter. And then based on sort of our internal forecast, are forecasting at a relatively similar for the December quarter.

So if your gross margins hold, you'll need to get to right around $11.5 million a quarter in sales, if I'm doing the math right, to sort of be cash flow neutral?

Yes. I mean, remember, there's some add-backs tied to depreciation and amortization and our stock expense.

Yes -- no, I'm just looking on a cash flow basis.

Yes. I mean, look, we're not providing guidance at this time, but I think you're looking at this in the right direction.

Okay. And just a little more color. You mentioned working capital of a little over $14 million. I haven't looked at the balance sheet, is that because we have a significant inventory build?

No, we don't have a large inventory build. We are very closely managing our inventory and don't foresee a massive increase requirement to execute our plan.

Okay. Is that -- so is there a significant accounts receivable, which is sort of normal?

Yes. I mean we carry sort of a typical accounts receivable. We did pick up -- we do have some -- our normal operating receivables, and we do have some other receivables on our balance sheet as well.

Okay. So at the present time, you think you guys have the balance sheet to get you through the other side here to start generating positive cash flow?

That's correct.

Our next question is from [Bob Buchler], a private investor.

Going back to the Adara explanation for the previous question. The Blystone-Donaldson group that bought it as a private equity firm in Charlotte, is that correct?

That is correct, and they are part of -- yes, they have a position in the sponsor entity already.

They do. Okay. So they just -- okay. And again, the prior question was asked if you guys were able to market that at all to anybody. It just seems that at least on paper right now, it's at least roughly $6 million-plus value, so to have sold it $4 million seems -- and I understand how quickly you had to do it. But obviously, from a shareholders' perspective, could have used more than just getting your $1 million back. And so I'm just questioning again why it wasn't at least shown to other particular -- or other potential investors. It just seems like a huge discount from at least where the value of the stock is trading right now. There is no relationship between, I would assume, the Company management, board or anything to this Blystone-Donaldson group?

That is correct. There is no related parties associated with that. I think, unfortunately, it was a difficult situation. There is not a lot of time. And we had to make the best decision for the Company. I think while from a stock price it appears to have a larger value on paper, right? The -- there is a lockup period that would require us to hold the securities for a period -- a reasonable period of time...

Six months. I think six months.

Right. So...

But regardless -- and I understand that you -- a condition of the purchase was for you to sell it. I guess I'm just -- it certainly would have been...

We would've liked to have had more -- yes. I mean, look, we would have liked to have more time. Unfortunately, we didn't.

With no further questions in queue, this does conclude our conference call for today. Thank you so much for your participation.