cbdMD, Inc. (YCBD) Q2 2022 Earnings Report, Transcript and Summary

Good afternoon, and welcome to cbdMD, Inc.'s March 31, 2022, Second Quarter of Fiscal 2022 Earnings Call and Update. This afternoon, the company issued a press release that provided an overview of its second quarter of 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 its earnings press release covering our financial results and non-GAAP presentation at cbdmd.com, in accordance with cbdMD's retention policies [Operator Instructions]. At this time, I would now 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, Java, and thank you all for joining the cbdMD's March 31 2022, second quarter of fiscal 2022 earnings call and update. On the call today, we also have our Chairman and Co-CEO, Marty Sumichrast; as well as Dr. Sibyl Swift, our Vice President of Scientific and Regulatory Affairs. Following the Safe Harbor statement, Marty will provide an overview of our business. Then Dr. Swift will provide an update on the current regulatory climate for CBD as well as an update from our cbdMD Therapeutics division. And finally, I'll provide a summary of the quarterly 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 purpose 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 ended March 31, 2022, 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, Friday, May 13, 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 Laws. With that, I'd like to turn the call back 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. As we entered calendar 2022, the CBD industry had just experienced its first negative revenue growth. And here at cbdMD, we too experienced four quarters of net sales decline. So our goal coming into calendar 2022 was to reverse the decline and turn the sales trend back to positive. We're pleased to report that we accomplished this goal and net sales rebounded for the sequential quarter. We also made a lot of hard choices regarding our cost structure. We reduced our payroll significantly during the quarter, which meant we had to part with many team members. We also had to take a hard look at our marketing spend, which has always been our largest expenditure. We challenged our marketing team to find ways to reach new customers in a more cost-effective manner. And furthermore, to find ways to better our customer experience so we can retain our existing customers longer. Operationally, we embarked on an overall cost savings program that gets us to cash flow breakeven at revenue rates that we achieved only a few quarters ago. Our goal is to achieve cash flow breakeven during calendar 2022. To those of you that may be learning about cbdMD for the first time, let me take a few minutes to explain what we've accomplished over the past three years. We've built a diversified sales channel that's generated over $125 million in net sales. We have one of the largest direct-to-consumer engines in the CBD industry. And in retail, we have placed our products in over 6,000 outlets. And just last quarter, we added over 850 GNC stores to our distribution list. We have filled over 1.5 million customer orders since inception, have one of the industry's leading customer service and satisfaction ratings and have received multiple product of the year awards for several of our products. We have developed and maintained a highly diversified SKU rationalization process and have built a fully developed infrastructure, which has significant growth capacity. We operate one of the industry's leading R&D departments which fuels product development and innovation. And we have a valuable pipeline of research studies, which we believe will further separate our brands from our competition. We recently expanded our full spectrum lineup with novel products that fully comply with Federal 2018 Farm Act. We have one of the strongest catalogs of partnerships in our industry, including affiliated influencers and high-profile athletes such as Bubba Watson, Jimmie Johnson and Daniel Cormier. We have expanded international distribution to over 30 countries, and we believe we are positioned to experience significant growth as the regulatory clarity develops. And finally and most importantly, we provide our customers with some of the most unique and accessible health and wellness choices in the CBD industry. As we speak today, we believe that our sales trends have firmed up and we are optimistic in an upward sales trajectory as we continue through calendar 2022 and into 2023. Our new sales and marketing strategies have been implemented and near-term results are showing promise. We believe that our premium brands not only provide a compelling customer experience, but we do so at competitive price point. Our expansion into new categories and markets show promise. Our market share continues to remain strong, and we are optimistic about our future. We have had numerous regulatory research and development achievements this past quarter, which we believe will result in our brand's mainstream acceptance as the regulatory climate codifies. We are committed to the progress at our cbdMD Therapeutics division and providing the necessary resources to ensure its success. With that, I will now turn the call over to Dr. Sibyl Swift, one of our Managing Directors at cbdMD Therapeutics and the Vice President, Scientific and Regulatory Affairs at cbdMD. Dr. Swift, please go ahead.

Thank you, Marty. And it's a pleasure to be able to talk with everyone on the call today. On our last call, we spoke about our decision to send a Citizen's Petition to FDA. That petition was mailed on February 21, 2022. In it, we requested several types of relief including removing CBD from the Drug Preclusion List. We believe we have well-founded arguments why CBD should not be drug precluded. We do not expect the FDA to provide a substantive reply before the 180-day response time line, which is approximately August 22, 2022. Instead, we expect them to state they need additional time to reply or claim delay due to other agency priorities. We will determine our next steps at that time. Our novel food applications are now validated in the UK and the EU, which means we are now in the risk assessment phase, and the governments are analyzing our dossiers. This is expected to take 9 to 12 months. We anticipate a full novel foods approval after completion of the risk assessment, which can take up to an additional six months for the administrative processes. In the UK, our products can be legally pulled during the entire process until final approval. In EU, we will be seeking opportunities as they may emerge during the risk assessment phase. Approximately 40 of our products have been approved by MINSA, the Costa Rican Health Ministry. We have an additional approximately 40 products submitted for MINSA approval. We are actively engaged in the process to obtain sanitary registrations in several other Latin American countries. And we are working on deal terms to enter Mexico with one of our two currently authorized distributors before the laws change to allow us to register ourselves. Our clinical study with Colorado State University performed on osteoarthritic dogs to determine our proprietary patent-pending blends’ efficacy on joint stiffness, discomfort and mobility in this population will complete in the next few months. The study also explores potentiation with aspirin to determine if the combination of aspirin plus CBD had greater efficacy. The early unofficial results indicate that gait and moves were improved when osteoarthritic dogs were given our product. Our projects with the University of Mississippi has successfully identified a novel cannabinoid and a method for how to produce a testable quantity of the cannabinoid by applying novel synthetic methodology developed at the National Center for Natural Products Research. The next step is to test this new cannabinoid for toxicity before we scale up production or use it in new formulations, but it is available and ready for study. We believe this cannabinoid can be protected as IP, and we believe there is a pathway to FDA approval pending positive results in the toxicity studies. We have spoken to the University of Mississippi, and we believe we can quickly ramp this up and conclude validation testing within six months. The work at the University of Mississippi has informed us about potentiation between botanical dietary ingredients and cannabinoids. Inclusion of these ingredients in formulation leads to enhanced effects and several of the identified ingredients are already included in our functional formulas. We have a high level of confidence that future clinical studies will prove that the functional formulas have greater efficacy than any supplements containing those ingredients as well as any competitive products on the market. We have discussed partnership with trusted ingredient suppliers to complete efficacy studies to prove that our proprietary formulations have improved activity over competing products in both the cannabinoid and traditional dietary supplement space. Partnerships such as these will yield products that are more effective while sharing the cost of the studies required. The University of South Carolina project is a randomized, placebo-controlled, double-blind study to assess the impact of cbdMD's cannabidiols CBD products in healthy adult participants on endpoints, including immunity, pain, inflammation, mood and sleep. We are also assessing toxicity and safety in the study participants. We will report interim results as soon as all participants have completed their third visit. UCLA has invited us to be a product sponsor for clinical drug studies. The initial study is on THCV for alcohol abuse disorder. They have several products -- projects, we believe to be interesting, including pain and opioid addiction that we believe will be available to us to sponsor. It speaks to the prestige of our quality program to be invited to sponsor this level of work. We anticipate longer-term benefits in the drug and therapeutics division as funds become available. With that, I would like to turn it over to our Chief Financial and Chief Operating Officer, Ronan Kennedy. Ronan, please go ahead.

Thank you, Sibyl, and welcome, everyone. Total GAAP net sales for the second quarter of fiscal 2022 were $9.6 million versus net sales of $9.3 million for the quarter ending December 31, 2021, or a sequential growth of 3.3%. Our net sales for the March 31, 2022 quarter were down 18% compared to the prior year comparative quarter. Our quarterly e-commerce direct-to-consumer business generated sales of $6.6 million versus $7.1 million for our quarter ending December 31, 2021, or a sequential decline of 7.5%. Our e-commerce sales were down 24% compared to the quarter a year ago. E-commerce represented 68% of our total net sales during the second quarter of fiscal 2022. Our wholesale business, including brick-and-mortar retail customers, was $3 million versus $2.2 million for the quarter ending December 31, 2021, or a sequential increase of 38.2%. Wholesale net sales were down 11.3% compared to the year ago quarter of March 31, 2021. Our GAAP gross profit margin decreased to 67% in the second quarter of fiscal 2022 from 69% in the second quarter of fiscal 2021. This decline is primarily based on lower manufacturing and operating leverage because of the year-over-year decline in sales. We've implemented numerous cost-saving initiatives to offset and improve gross profit margins and expect to realize these in the third quarter. Our operating expenses for the second quarter of fiscal 2022 totaled $11.4 million, down from $12.3 million in the prior year and down $500,000 sequentially. This drop was led by a reduction in payroll, professional fees, marketing expenses, merchant processing fees, noncash stock expense and other expenses were offset by an increase in depreciation, amortization of intangibles as well as R&D and regulatory expenses. As mentioned in our prior 10-Q, we started amortizing our intangibles beginning with the current quarter. Excluding noncash depreciation, amortization, as well as our stock expense, our adjusted operating costs dropped from $11.2 million last year to $10 million for 2022. While a marked improvement this does not capture all the cost-saving initiatives we implemented during the quarter. During the timing of the implementation, we expect further reductions of our payroll, marketing and other expenses, lowering operating cost run rate during the third quarter. Our six months ended March 31, 2022, operating expenses for fiscal 2022 totaled $23.4 million, up from $23 million in the prior year. While almost all areas of cash expenses were down, the $400,000 increase was driven by a $340,000 increase in depreciation, $330,000 of amortization of intangibles and $700,000 increase in noncash stock compensation. Excluding noncash depreciation and amortization and stock compensation expenses, our adjusted cash operating costs dropped from $21.4 million to $20.4 million. As mentioned before, the initiatives implemented during the second quarter have further reduced our operating cost run rate going forward. Overall, our GAAP loss from operations totaled $5 million for the second quarter of fiscal 2022 as compared to $4.2 million of loss from the prior year period. The year-over-year increase in loss is mainly due to a $1.7 million drop in gross profit dollars attributed to the decline in revenue, which was partially offset by reductions in our operating costs. Our six month ended March 31, 2022, GAAP loss from operations totaled $30.1 million as compared to $5.4 million loss in the prior year. The difference is primarily due to a noncash impairment of goodwill and intangibles of $18.2 million during the first quarter as well as a $5.6 million drop in gross profit because of lower sales. Our non-GAAP adjustments to operating expenses for the second quarter of fiscal 2022 includes $754,000 noncash stock expense, depreciation and amortization expense of $600,000, resulting in a non-GAAP adjusted operating loss of $3.6 million for the second quarter of fiscal 2022 as compared to $2.8 million of non-GAAP adjusted operating loss in the second quarter of fiscal 2021. The increase in non-GAAP adjusted operating loss over the prior year period is primarily attributed to a drop in revenue and corresponding gross profit, offset by lower operating expenses. Sequentially, we reduced our non-GAAP adjusted operating loss by $800,000 from the December 2021 quarter. Other income and expenses on our consolidated income statement, including noncash contingent liability gain of $353,000 related to our December 2018 acquisition of Cure Based Development. During December, we issued 440,243 earn-out shares corresponding to the third earn-out period under the terms of the acquisition. At the time of issuance, we booked a $42,000 valuation decrease and subsequently reclassified 325,000 from the contingent liability to additional paying capital on a consolidated balance sheet. The remaining amount of shares were revalued at the end of quarter, resulting in a noncash contingent liability gain of $148,000 for the quarter. The changes in valuation of the contingent liability are primarily a result of a decrease in the market price of our common stock during the period from $1.08 to $1.04 per share. During the second fiscal quarter of 2022, we utilized approximately $6.3 million of cash. The main components include cash used from operations of our adjusted non-GAAP operating loss of $3.5 million, $1 million of paid dividends, $1 million to bring our accounts payable down with the reduction of the cost and an increase in our receivables of approximately $940,000. We remain laser-focused on cash generation and are projecting much lower burn rate because of the restructuring completed during the last quarter as well as in April. We had cash and cash equivalents of approximately $13.3 million and working capital of approximately $18.5 million on March 31, 2022, compared to cash and cash equivalents of approximately $26.4 million and working capital of approximately $29.6 million as of September 30, 2021. Our current assets as of March 31, 2022, decreased approximately 33% from September 30, 2021, to $24.3 million. The primary driver for the decrease in cash is our cash flow from operations. As of March 31, 2022, the company's total current liabilities were $5.7 million, of which approximately $2.7 million is accounts payable and $1.1 million is accretive expenses. On our last quarterly conference call, we committed to a $10 million annualized reduction in costs during the second fiscal quarter and in March. We began implementing changes, which we believe will result in $10 million run rate reduction over the next 12 months. We believe we have achieved this, and you will see this flesh out during the third quarter. We lowered our marketing expenses, reduced headcount and payroll, realigned our shipping and distribution costs and lowered almost every area of our operating costs. We did this while recruiting and upgrading talent in several areas, migrating more of our organization to a performance compensation model and growing top line for the first time in the last five quarters. Additionally, in April, we took a further step to simplify our operations and reduce our unabsorbed overhead expenses by entering into a transaction with one of our highly vetted suppliers to acquire our manufacturing equipment for cash and other consideration and take over production of certain of our products. Going forward, we believe this will have a positive impact on our gross margins. We paid down the note from the equipment and anticipate a slight GAAP gain on the sale of assets in our current quarter. We negotiated to reinvest the cash proceeds into equity, strategically aligning us with an upstream partner and provide further access to R&D as well as regulatory resources. We have more cost savings identified, which we intend to implement these during the second half of our current fiscal year. While our cost reductions and discipline are critical, we remain focused on getting revenue back on track. We have several strategic initiatives in place and are executing on customer and channel-specific strategies to drive revenue. The SKU rationalization we performed is allowing us to simplify the messaging for our consumers. We are investing in our customer attribution model and making real-time changes to our marketing spend. Additionally, we continue to invest carefully in new product development focused on scientific-based function and claims. As Marty alluded to earlier, we are optimistic about the balance of the 2022 calendar year. With that, I'd like to now turn the call back over to Marty.

Thanks, Ronan. And with that, I'd like to open the line for Q&A.

Thank you. [Operator Instructions] With no questions in the queue, that does conclude our conference call for today. Thank you so much for your participation, and have a pleasant rest of your day. : :