LFTD Partners (LIFD) 15 Nov 242024 Q3 Earnings call transcript

Welcome to LFTD Partners Third Quarter 2024 Earnings Conference Call. This call is being recorded. [Operator Instructions]. I will hand the conference over to Gerry Jacobs, the Chairman and CEO of LFTD Partners, Inc. Please go ahead.

Good morning, and welcome to LFTD Partners earnings conference call to discuss the third quarter of 2024.

Our earnings press release and financial statements for the third quarter of 2024 have been filed with the SEC, and links to both can be found on our website, www.lftdpartners.com. On today's call, we will answer some -- we shall share some comments on our quarterly performance, and we will answer some questions at the end of the call. A replay of this call will be available for an extended period of time accessible through the Investors section of our website.

Here's the safe harbor notice.

Some of the statements that we will make today regarding our business, operations and financial performance, including words such as may, might, would, should, could, potentially hope, believe, expect, project and similar verbiage are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially. The listeners should not place undue reliance upon such statements.

For more information, please refer to the risk factors discussed in our most recent Form 10-K filed with the SEC. We undertake no obligation to update these forward-looking statements.

During Q3, we welcomed Sharial Howard to our Board of Directors. Sharial is an accomplished real estate professional who has worked closely for years with our Board member, Kevin Rocio. We look forward to working with Sharial to grow our company.

We will be holding a shareholders meeting on December 6 in Orlando to vote on the election of our Board of Directors and to vote on the engagement of our outside auditing firm Fruci & Associates. By now, all of our shareholders should have received by mail are proxy materials any shareholders who have not received our proxy materials because their address is on file with our transfer agent or out of date should promptly contact our transfer agent, which is Colonial Stock Transfer in Salt Lake City. I encourage all shareholders to participate in the votes.

Now I'd like to address a few topics that have impacted our business over the past few months.

First of all, consumers nationally have been reducing their spending on discretionary items, including hemp-derived cannabinoid products. Nick is going to comment on some important initiatives that he and his team had lifted made have been working on during this challenging sales environment, to grow herbs direct-to-consumer sales and direct to retailer sales, to expand sales of our Rebel Energy Gummies and Mielos Wellness Gummies and to reduce our operating expenses.

Secondly, opponents led by the big marijuana companies are continuing to lobby at both the federal and state levels for prohibitions and/or severe restrictions against hemp-derived cannabinoid products.

Our company and other members of the hemp industry have been spending a great deal of time, energy and money attempting to persuade legislators to support regulatory guardrails that would prohibit sales of intoxicating hemp-derived cannabinoid products to minors that would prohibit packaging intended to appeal to minors and that would require rigorous lab testing of all products.

Third, we are in serious discussions with certain potential acquisition candidates that sell both hemp-derived and non-hemp derived products.

One of these potential acquisition candidates is also involved in the U.S. marijuana industry and is expanding into the European Union.

We are actively exploring potential capital raises to fund such potential acquisitions, including using debt or equity or a combination of the 2.

We are subject to nondisclosure agreements, so I'm not in a position to provide much more detail at this point in time.

While these potential acquisitions are extremely high priority for us, I must caution that no assurance can be given that these discussions will be successfully concluded. At this point in time, I'll turn the presentation over to Nick Warrender, our Vice Chairman and Chief Operations Officer, and the Founder and CEO of our wholly owned subsidiary, Lifted Made.

Thank you, Gerry, and good morning, everyone. I'd like to provide information regarding some exciting developments and updates regarding LFTD.

During Q3, we launched the newest iteration of our best-selling flagship brand, Urb, featuring a Fly High theme. We're using 2 major initiatives to intensively push these relaunched products in a way that is intended to significantly increase our direct-to-retailer and direct-to-consumer online sales. Increase our direct-to-retailer sales, we've built a 15-person team of boots on the ground.

We have a meeting face-to-face with 100 LFTD shops and an intensive city-by-city push.

So far, our team has spent time in Houston, Dallas, Austin, Atlanta, and we'll be continuing on to other metro areas. Increase our direct-to-consumer online sales, we've engaged some of the country's best online marketing firms to accelerate Urb's SEO and other online marketing efforts. We're hopeful that these 2 major marketing initiatives will significantly expand our sales volumes and profit margins and make us less reliant on current distributors. We're also spending time, energy and money on marketing 2 of our new hemp free brands, Mielos and Rebel Energy Dummy. These 2 non-hemp brands are very important for LFTD because many large grocery and convenience store chains are not equipped or interested in handling product SKUs that are illegal in some of the states. They want products that can be brought into their distribution centers and shipped all over the country without worrying about violating state and local laws.

We expect our marketing efforts on Mielos and Rebel Energy Gummies will gain traction during the holiday season from Thanksgiving through the New Year, which is historically a very busy season for our products. We've also been focused on reducing expenses. We've reduced our payroll expenses 8% from Q1 '24 to Q2 '24 and reduced our payroll expense another 8% from Q2 to Q3 2024. Professional fee expenses also came down 40% from Q1 to Q2 '24 and then another 33% from Q2 to Q3. We -- and we have been proactively reduced our CapEx spending from $747,000 in the prior year to $310,000 year-to-date and are containing our CapEx spending going forward.

As a result of these initiatives, our cash from operating activities only fell by $68,000 year-to-date and nearly all of our decline in cash was due to investing and financing activities. At this point, I will turn the presentation over to Jake Jacobs, our President and Chief Financial Officer.

Thank you, Nick. My comments will be based on quarter-over-quarter comparisons of the third quarter of 2024 to the third quarter of 2023, unless I state otherwise.

Our consolidated net sales were $8.6 million, down 34% due to a number of headwinds.

Firstly, prohibition of or tighter regulation of intoxicating hemp-derived products has been adopted or proposed in many states that are significant markets for LFTD, such as in California. Consumers are economically stressed and have been selectively reducing their discretionary spending. There is also greater competition in the marketplace for branded hemp-derived and psychoactive products that are similar to those that LFTD sells. More distributors are creating their own brands and selling their own branded products at low prices. There's increased competition for products containing more milligrams of cannabinoids or active ingredients per unit at a lower price point and other competing brands are paying distributors and wholesalers more than what LFTD is willing to pay for valuable shelf space.

Our total cost of goods sold was $4.9 million down 43%. LFTD industry and customer preferences are constantly and quickly evolving. Consequently, LFTD finds it extremely difficult to predict future sales of its products and to anticipate raw goods needs for future production. This exposed is lifted to the risk that it will need to write off obsolete raw goods causing an increase in cost of goods sold. Written off inventory decreased to $330,000 compared to $597,000.

Excluding the effect of written off inventory gross margin as a percentage of net sales was 47% compared to 38%. Operating expenses were $3.9 million, up 4%. The primary driver for this increase in operating expenses was $864,000 of bad debt expense. The delay in LFTD receipt of payments from certain customers, primarily distributors have increasingly become an issue for LFTD. Certain customers have become slower to pay LFTD for purchased products and these slow-paying customers disregard payment terms. Management speculate that some slow-paying customers may be slow paying LFTD because of their own sales collection issues, which may in part be caused by the regulatory uncertainty over our industry. The company has an accounting protocol, which effectively causes the company to recognize an allowance for doubtful accounts for all invoices older than 90 days. Consequently, the delay in LFTD receipts of payments from certain customers as a direct impact on the company's net receivables, net income and earnings per share. Operating loss was $141,000 compared to operating income of $659,000. Net other expenses were $48,000 compared to $80,000. LFTD partners' net loss was $194,000 or $0.01 per share compared to income of $617,000 or $0.04 per share. Basic and diluted weighted average shares outstanding for the quarter were 14.8 million shares.

During the 9 months ended September 30, 2024, cash used in operating activities was $67,000. At September 30, 2024, we had total outstanding vested and exercisable options and warrants of $3.5 million with a weighted average exercise price of $3.97, which if all were exercised, would generate proceeds of $13.7 million, ignoring any cashless exercise features. In regards to our September 30, 2024 balance sheet compared to our December 31, 2023 balance sheet, cash on hand, which includes $1 million of restricted cash decreased 22% to $4.1 million, down from $5.3 million. Inventory decreased 4% to $9.7 million, down from $10.1 million. Current assets decreased 19% to $17.4 million, down from $21.6 million. Current ratio increased to 2.64 from 2.49. Working capital decreased 16% to $10.8 million, down from $12.9 million and notes payable to Surety Bank decreased 10% and to $3.8 million, down from $3.85 million.

We will now answer questions that have been submitted to us. [Operator Instructions].

Okay.

So the first question we have is, will the Board of Directors' quarterly fees be reduced commensurate with the dramatic decline in revenue over the last 4 years. Gerry, do you want to take this one?

Yes. I mean we've got a Board of Directors that is, in our opinion, hanging in, in a very challenging environment in our industry with a lot of regulatory risk. A lot of issues that companies like ours are having to negotiate, and they're doing it in the context also of a very litigious industry and doing it in a context where it's impossible to get directors and officers insurance. In our opinion, at this point in time, $4,000 per quarter for independent directors functioning this environment is very reasonable. And when you look at our filings, it's not like we've been issuing warrants or options to the directors on top of these very modest fees. That's -- I realize reasonable people may differ on this point. But in management's opinion, these quarterly fees being paid to the directors are very, very reasonable in this environment.

All right.

The second question we have is revenues have now decreased over 50% from their high 2.5 years ago. What is the plan to turn around the company? Nick, do you -- do you want to take this one?

Yes. I mean --

Can you guys hear me?

Yes. 2.5 years ago, we didn't face the regulatory uncertainty that we've been facing in the last 2 years. I'd like to think we've done a great job in certain states proposing proper regulations to not only stabilize the industry but create a fair playing field, which I believe works to our advantage. We've always focused on doing things the right way, doing things the compliant way rather than the easy path.

So for us, it has been a fight where we've been extremely engaged in both the federal and on a state-by-state basis. And protecting this industry while simultaneously, there's been mass amounts of saturation, economic impact for your average consumer. And that's the reason why we have taken a new approach to really focusing on direct to retail and direct-to-consumer as well as spending a lot of time, energy and money and expanding outside of hemp to where we can leverage our current infrastructure to do so. These things take time, but we're working harder than we ever have, and I realize that the results aren't as great as I believe everybody would like to see, but we are optimistic based on the work that we have put in and understand that we need to change to get a different outcome, and we've been making those changes over the last year to position ourselves to continue to tackle this industry, but to also expand outside of it.

All right. The next question is what about reducing the compensation to the 3 highest compensated officers? Gerry?

Yes. I mean if you look at our industry, our company has performed a very high end of the performance of companies in the cannabis industry. Without any exaggeration, 95% of the companies in the cannabis industry, the publicly traded companies have been for years, hemorrhaging millions, if not hundreds of millions of dollars. I mean billions of dollars of investor money have been lost by these companies. And those companies typically pay significantly higher executive compensation than our business. I mean, the CEOs of some of our competitors have paid millions of dollars to their CEOs who have had been leading companies that have been, like I said, losing the same amount of money. A $250,000 salary for our CEO, my salary, is drastically less than what these other money-losing competitors are doing and same thing in the case of Nick and Jake. I encourage any shareholder who is concerned about executive compensation to do some sort of comparison on your own between what we pay, which is extremely modest relative to the compensation being paid by our competitors. And our results have been significantly better than 95% of the industry.

Okay. What percentage of the current Board, besides Nick and his father, have any experience in the hemp marijuana industry? Gerry?

Yes. I mean at this point, our entire Board is just up to our next in terms of the complexities and interaction with the cannabis industry, both Marijuanas and hemp.

We have to be in order to be constantly reacting to all the moving pieces in this industry, both regulatory, competitor movements, as well as making sure that our company is continuing to operate in a completely legal fashion. There is a requirement for independent Board members that they have to be independent of the industry.

So by definition, our independent Board members are -- have principal businesses that are outside the cannabis industry. But at this point, because of everything we've been going through since we acquired LFTD all of our Board members, Sharial has just joined within the last couple of months. But other than Sharial, the remainder of our Board members have been educated by participating in the industry dramatically in terms of going out what's going on in both marijuana and hemp.

Okay. The next question we have is from Pablo Zuanic from Zuanic & Associates. Is there interest in increasing the equity stake 5% in Ablis hemp beverages? Can they explain despite the market pressures your sales of edibles continue to increase? Can you give some connect for this? While vape continues to decline, can you explain the resilience of edible? With Republicans controlling the Senate, how are you thinking the 2025 farm bill and the impact on the hump industry?

Well, I mean, Pablo has raised a number of different points. I'll try to walk through some of them.

In terms of Ablis, which is a company in Oregon that we own 4.9% of that has CBD beverage products and is now launching into THC beverages. Those folks have navigated just like we have an extremely difficult set of industry challenges, competitors as well as challenges on the retailing side of dealing with retailers that have a great deal of anxiety branching into THC products, which are controversial.

We have a lot of confidence in Jim Bendis, who's the Founder and CEO of Bendistillery and the principal owner of Ablis.

We have had conversations from time to time with Jim, about the potential of Ablis and/or Bendistillery merging with us. To this point, there isn't a mutual consensus in terms of how a transaction, a merger might occur under what valuation and so forth. But that is a potential down the road, not speaking for Jim, but -- we think that that's a potential. And we're -- I'm on the Board on Bendistillery and Ablis. We're closely monitoring what they're doing. We like what they're doing. We're optimistic about Ablis' growth and the people that they have. But where that eventually ends up if we were to have a larger stake, that remains to be seen. It has been discussed from time to time, but no decisions or mutual agreement to do anything further are in place at this point in time.

In terms of the question that Pablo raised in terms of sales of edibles as compared to sales of vapes. I mean, I believe that there are reasons why consumers have migrated towards edibles and away from vapes.

Some of it I think, relates to the ease of using gummies edibles. Also, it eliminates safety issues that some people have experienced now with our vapes, with some other companies face.

So there are safety concerns. But both channels, edibles, gummies and vapes are still very vibrant sales opportunities that LFTD has. Both of them are significant. Nick, do you care to make any additional comments on this?

I do. Minnesota is a great example to look at where that was a market that we've captured a lot of market share over the years. But with the shift in regulations that basically banned vapes but opened up limited milligram caps for beverages and edibles. Really, over this year, we've continued to expand in capturing more market share for the edible category in Minnesota, which has been rather drastic. And we're seeing that in other states as well, right, Iowa being another state.

So there are states that just due to newly implemented regulations, either limit or banned vapes based entirely while edibles are still a category that's open.

We are continuing to explore a lot of tech in beverage. It's something that we're actively pursuing and participating in, but we're -- we believe edibles are here to stay even in states where there's extremely tight regulations.

Okay. And then Pablo raised and last question, in terms of -- as with Republicans controlling the Senate, does that change the calculus or the thinking about the farm bill -- extension of the farm bill? Nick, I guess, you'd probably be the best person to answer that.

We've worked closely with a lot of Republican states over the last few years.

So our relationships have expanded. But this has been a bipartisan issue in our perspective of really working with both sides.

So for us, it's important to protect the industry through sensible regulations. We're excited to work with the new administrations and continue to push forward and legitimizing the hemp industry and protecting consumers simultaneously.

Okay. Looks like there aren't any other questions. This concludes today's, right -- let me just make sure. No, there are none.

Okay. This concludes today's conference, and you may disconnect at this time. Thank you for your participation.