cbdMD, Inc. (YCBD) Q2 2021 Earnings Report, Transcript and Summary

Good afternoon. Welcome to the cbdMD, Inc. March 31, 2021, Second Quarter Fiscal 2021 Earnings Call and Update. This afternoon, the company issued a press release that provided an overview of its second quarter fiscal 2021 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 at cbdmd.com in accordance with cbdMD's retention policies. [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, Catherine, and thank you all for joining the cbdMD's March 31, 2021 second quarter of fiscal 2021 earnings call and update. On the call today, we also have our Chairman and Co-CEO Marty Sumichrast. Following the safe harbor, Marty will provide an overview of our business, then I'll provide a summary of the quarter financial results. Following that, we'll open up the call for questions. 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 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 March 31, 2021, annual report on Form 10-K for the year ending September 30, 2020, 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 12, 2021, 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 cbdMD's Chairman and Co-CEO, Marty Sumichrast.

Thank you very much, Ronan, and good afternoon, everyone. We appreciate you joining us today. We are very excited about the long-term vision to be the leading global CBD consumer brand and company. Despite the impact to our business from the COVID-19 pandemic and the duration and magnitude of the lockdowns that were greater than we initially anticipated, we believe that our responsiveness and our ability to make adjustments to our business has allowed us to successfully deliver the largest fiscal Q2 net sales in our history. cbdMD increased its year-over-year net sales in Q2 by 26% to $11.8 million, while virtually maintaining almost a 70% gross profit margin. This growth rate was exceptional considering our March quarter net sales have historically been impacted by seasonality. I want to thank our team for their hard work and dedication to keeping the health and safety of our employees a top priority, while also delivering these results. We believe our business is at the precipice of more significant growth. We believe substantial net sales growth is achievable in the near term-based on anticipated launch of a variety of new products, new partnerships and sponsorships, new channels of distribution and new international markets. We're excited about the long-term potential to grow our core U.S. business and increase our wholesale footprint as the FDM channel opens up to CBD products, particularly our ingestible line. Based on this outlook, we are now providing net sales guidance of $15.5 million to $16.25 million for the first quarter of fiscal 2022, ending December 31, 2021, end of this calendar year. We entered calendar 2020 with a very healthy cash position of $28.3 million and opportunistically deployed capital in our Q2 into new product development, new channel distribution, our new science division, cbdMD Therapeutics, marketing and related infrastructure. We believe this investment has created a solid foundation for future top line growth. We remain confident that we will continue to gain market share in the total addressable global CBD market, while, at the same time, delivering on positive non-GAAP adjusting operating income during this fiscal year. We believe the strength of our balance sheet and access to capital will continue to be our key competitive strength and differentiator in the CBD industry, helping us to support our long-term financial flexibility. We seek to continue to evolve our business to stay at the forefront of our industry. We remain focused on maximizing our growth in net sales, achieving profitability, and most importantly, our cost containment. Our brands continue to lead the market in brand awareness and social media reach as our Meltwater M-Score, which measures editorial mentions, reach, tonality, was a 78 for fiscal Q2, which was 8 points ahead of our nearest competitor. We continue to strengthen our portfolio of strategic athletes and sponsorship programs. We recently extended our sponsorship with professional rally driver megastar Ken Block. We signed an exclusive sponsorship agreement to be the official CBD partner of the NOBULL CrossFit Games, and signed Master Champion and 9 time PGA winter Patrick Reed, who we are thrilled to have on team cbdMD. We continue to achieve product awards, and we are proud to announce the both of our CBD product line and our CBD pet product line, Paw CBD, were 2021 product of the year winners, with cbdMD serving as the first CBD brand to ever earn the prestigious award in back-to-back years, along with serving as the first CBD company to win product of the year since the CBD category was introduced in 2020, this year's cbdMD's CBD Gummies were named the most innovative product in the CBD ingestibles category. In addition, Paw CBD Hard Chews for dogs are in 2021 product of the year honors in the CBD pet category, a product of the year award first for the pet-friendly brand powered by cbdMD. Our goal is to foster a robust culture of innovation and brand development. We are continuously evaluating options to connect with consumers through our compelling brand propositions and delivering compelling innovation so that cbdMD can meet the needs of an ever-evolving consumer preferences in the marketplace. To further expand our demographic, we successfully launched our cbdMD Botanicals earlier this year. Next month, we'll be launching 3 new cbdMD Gummies, one for sleep, one for recovery and, my personal favorite, our apple cider vinegar flavor. In addition, next month, we'll also be launching our new cbdMD drink mixes, which will be available in basic, energy and recovery flavors. Internationally, we're expanding our presence as well. Today, we've sold our products in over 31 countries. We are leveraging our success in the U.S. market as we find significant opportunities internationally. With more than 500 million people across the United Kingdom and the European Union, we've officially filed our novel food application with the United Kingdom's Food Standard Agency. The application includes all requisite data to allow for the validated submission and thorough scientific assessment. A similar submission was simultaneously made to the European Food Safety Authority to ensure compliance for the European markets. Our products have been offered for sale in the U.K. since mid-2019. Our application is currently undergoing a review process, which we believe will be completed by the end of 2021, although no assurances can be made. This application includes detailed analysis of ingredient characterization, quality and stability of our product, hemp sourcing, extraction controls, labeling, testing requirements and the underlying intake and toxicological data related to safe consumption of the proprietary cannabinoid blend ingredients in our cbdMD product line. cbdMD believes this step is important as a precursor for its preparation of its FDA NDIN submissions, Australian TGA submissions, various sanitary regulations in Latin America and other regulatory submissions throughout the world. We believe that completion of this extensive pre-clinical research required to support the application provides cbdMD with a valuable tool for other regulatory approvals around the world. Our team at cbdMD understands the importance of brand equity and selling good, quality and safe products. As one of the leading consumer CBD brands in the world, we believe cbdMD is in a unique position to explore the therapeutic potential of CBD and the other lesser-known cannabinoids to support scientific advancement through clinical trials and to perform toxicity studies to demonstrate the safety of cannabinoids as novel therapies. In order to isolate and quantify the company's ongoing investments in science related to its existing and future products, including research and development, activities for therapeutic applications and with the mission to provide our customers with therapeutic options to replace opioids and other prescription pain killers and bring to market novel therapies for conditions where people suffer from pain, inflammation, sleeplessness or anxiety, such as osteoarthritis, fibromyalgia, insomnia and anxiety disorders. In March 2021, we formed cbdMD Therapeutics LLC, a new wholly owned subsidiary. We are also thrilled to have appointed Dr. Sibyl Swift, a former U.S. Food and Drug administration officials to serve as our Co-Chair of cbdMD Therapeutics as well as our new Vice President for Scientific and Regulatory Affairs. These new novel therapies will be the first identified through the core of cbdMD's current dietary supplement science and research to further expand our brand's use and acceptance by consumers worldwide. We believe that the launch of the cbdMD therapeutic signals to the marketplace that cbdMD is committed to providing the necessary resources to ensure the success of this mission. We envision that the work we are embarking upon at cbdMD Therapeutics may lead to partnerships with some of the most preeminent companies and universities in the world, and that the science we expect to develop at cbdMD Therapeutics will not only further distance our brand from our competitors, but will also build a significant lead on any new entrants in the market. I am proud of all of our employees and our Board for their contribution to further cbdMD's vision, especially during the difficult COVID-19 pandemic. We take great pride in leading with strong values, we are committed to advancing the health and wellness of people's lives to the better by investing in our products, our brands, our people and the world we live in. With that, I'll now turn the call over to Ronan, who will take you through the financial results. Ronan, go ahead.

Thank you, Marty, and welcome, everybody. On a GAAP basis, total net sales for the second quarter of fiscal 2021 hit another all-time high of $11.8 million or a 26% year-over-year increase and a seasonal sequential dip of 4%. For the 6 months ending March 2021, we reported total sales of $24.1 million, a 24% increase compared to $19.5 million in the same period of last fiscal year. Our quarterly e-commerce business generated sales of $8.4 million in the second quarter of fiscal 2021, a 23% year-over-year increase. E-commerce for the quarter represented approximately 71% of our total net sales. For the 6 months ending March 31, 2021, e-commerce generated $18.1 million of net sales compared to $13.7 million for the comparative prior fiscal year period, representing 75% of our total net sales. We remain focused on our non-GAAP operating KPIs associated with our direct-to-consumer business and saw an average order value, retention rates and web traffic strengthened toward the end of the quarter and into April. Our wholesale business generated $3.4 million of net sales for the second quarter of fiscal 2021 as compared to $2.6 million for the comparative quarter in fiscal 2020. For the 6 months ending March 31, 2021 and 2020, our wholesale business generated $6.1 million and $5.9 million, respectively, of net sales. We are starting to see an uptick of account activity and are cautiously optimistic about wholesale prospects over the coming quarters, as vaccination rates increase, we see relief from governmental restrictions and people slowly return to pre COVID-19 normalcy. During the quarter, demand for our Paw CBD was strong, and our initial release of cbdMD Botanicals was well received. We look to continue to capitalize on this in coming quarters. In addition, we onboarded a new distributor in the U.K. and expect to see growth in this market with further clarity on our FSA registration. Our GAAP gross profit remained strong as a percent of net sales, came in at 69% for the second quarter of fiscal 2021 compared to 71% for the comparative prior year period. For the 6 months ending March 31, 2021 and 2020, gross profit was 71% and 67%, respectively, as a percentage of total net sales. Based on our category sales mix, ongoing operational leverage and our asset-light model, we expect to maintain our gross profit margins between 65% and 70%. Our operating expenses for the March 31, 2021, quarter, totaled $12.3 million, which is flat compared to the March 31, 2020 quarter. Operational expenses were up 15.6% over the December 31, 2020, quarter, mostly due to a $1.1 million increase in discretionary marketing as well as $560,000 increase in noncash stock expense. For the 6 months ending March 31, 2021, operational expenses dropped to $22.9 million from $24.8 million in the comparative fiscal period in 2020. Overall, this resulted in a GAAP loss from operations of approximately $4.1 million for the March 31, 2021, quarter, a $1.5 million improvement from the $5.6 million loss in the prior year period. The reduction in operating income of $2.4 million over the December 2020 quarter is mainly attributed to the $1.1 million increase in marketing spend, $560,000 in noncash stock comp and $700,000 drop in gross profit. For the 6 months ending March 31, 2021 and 2020, our GAAP loss from operations totaled $5.9 million and $11.7 million, respectively. The improvement stems from an approximate $4.0 million increase in gross profit dollars as a result of increased revenue, as well as $1.9 million reduction in operating expenses. Our nonrecurring operating expenses for the second quarter of fiscal 2021 include a $300,000 onetime accrued expense related to severance, $860,000 in noncash stock expense and depreciation expense of $240,000, resulting in a non-GAAP adjusted operating loss of $2.7 million in the second quarter of fiscal 2021 as compared to $4.9 million of non-GAAP adjusted operating loss in the second quarter of fiscal 2020. The decrease in non-GAAP adjusted operating loss over the prior year period was mainly attributed to cost tightening and an increase in gross profit dollars resulting from improvements in both revenue and gross margin. We continue to pursue several objectives to drive operational efficiency and lower our cost structure. More recently, we added additional merchant processing relationships during the current fiscal third quarter. This not only provides redundancy, but based on our current volumes, we anticipate cost savings in the range of $125,000 to $175,000 per quarter. Other income expenses on our consolidated operating income statement, including noncash contingent liability charge related to the December 2018 acquisition of Cure Based Development. In March of 2021, 3.348 million earn-out shares were issued corresponding to the second earn-out period. At the time of issuance, we booked a $3.1 million contingent liability expense and a value of $11.3 million was subsequently reclassified from the contingent liability to additional paid-in capital on our consolidated balance sheet. The remaining contingent liability shares were revalued at the end of the quarter, resulting in a total noncash contingent liability expense of $8.87 million for the quarter. The changes in valuation of the contingent liability was primarily a result of the increase in market price of our common stock during the period from $2.95 to $4.14 per share. Any increase in our common stock price increases the contingent liability and creates an increase in the contingent liability impacting net income. Over the last 2 years, the contingent liability had a volatile impact on our financial statements. While shares are earned based on revenue, historically, they have remained part of the liability calculation for multiple quarters after earned until the end of the corresponding market period. This creates an overhang impact as these earned shares remain in each quarterly valuation. In March, we entered into Addendum No. 1 to the merger agreement, which amended the measurement periods within the third marking period and allows for quarterly revenue measurement and share issuance, beginning with the quarter ending March 31, 2021. For each of the next 6 quarters, there will be a revenue measurement in an earn-out calculation along with a corresponding share issuance, removing earned shares from future quarterly valuation updates. As a result of this change, the earned shares will no longer create a multi-quarter overhang in the valuation calculation. We believe, over time, this has the potential to reduce the volatile impact the contingent liability has on the company's net income. There is no change in the earn-out calculation, and this change did not impact the valuation at March 31, 2021. During the quarter, we utilized approximately $5 million of cash. The main components include our adjusted non-GAAP operating loss of $2.7 million, $560,000 of dividends paid, working capital increase of approximately $900,000 and a $750,000 increase in our investment in ADRA Acquisition Corp., an NYSE-listed special purpose acquisition company, or SPAC. This investment remains held at cost on our balance sheet but equates to roughly 634,000 shares and 1 million warrants. We had cash and cash equivalents of approximately $23.7 million and working capital of approximately $27.9 million on March 31, 2021, compared to cash and cash equivalents of approximately $14.8 million and working capital of approximately $16 million as of September 30, 2020. Our current assets as of March 31, 2021, increased approximately 47% from September 30, 2020, to $34.7 million. A primary driver of the increase in current assets was the approximate $15.8 million in net proceeds from our Series A preferred stock in December of 2020. As of March 31, the company's total current liabilities were $6.8 million, of which $2.8 million is in accounts payable and $1.7 million is accrued expenses. The company had approximately $197,000 of financing notes on equipment for our manufacturing facility as well as a $1.45 million SBA loan from the Paycheck Protection Program. We have submitted our application for 100% forgiveness on the PPP loan and are in the middle of the forgiveness process. In an effort to continue to drive operational excellence, our team implemented NetSuite as our new ERP this past quarter. Our goal is to improve the richness of the information and have access to critical real-time data to drive better business decisions. We are already seeing a positive impact on the visibility of our supply chain, and believe we will only continue to drive efficiency into our operation as we continue to fine-tune and optimize our new system. Quality products are a key part of our strategy. Our quality and operations team underwent several quality audits during the quarter, including the renewal of our NSF certification and recently announced U.S. Hemp Authority. cbdMD is committed to providing high-quality, trustworthy products. We are in the middle of pursuing additional certifications, which we expect to be able to announce through the balance of the year. Our balance sheet remains strong. We continue to focus on operational excellence and quality products. We have great new marketing partnerships we are in the process of activating. We are cautiously optimistic on an uptick in our wholesale business, and we have a robust pipeline of new products that we'll launch over the coming months. All in all, we continue to be confident in our ability to execute on our 2021 plan and are remaining focused on building long-term shareholder value. And with that, I'd like to now turn the call back over to Marty.

Well, thank you, Ronan. With that, I'd like to open up the line for any Q&A. Catherine?

[Operator Instructions].With no questions in the queue, this does conclude our conference call for today. Thank you so much for your participation. End of Q&A: