Q2 2022 cbdMD Inc Earnings Call
Afternoon, The company issued a press release that provided an overview of 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 CBD MD Dot com in accordance with CBD md's retention policies.
All participants on this call will be in a listen only mode and the call will be followed by a question and answer session.
At this time I would now like to turn the conference over to Ronen Kennedy, The company's Chief Financial Officer, and Chief Operating Officer Ronen. Please go ahead.
Thank you Charles and thank you all for joining the CB and the March 31, 2022 second quarter of fiscal 2022.
<unk> call an uptake on the call today, and we also have our chairman and co CEO , Marty as Jim Chris as well as Dr. Civil Swift, our Vice President Brian .
Scientific and regulatory affairs following the Safe Harbor statement, Marty will provide an overview of our business and Dr. Swift, We will provide an update on the current regulatory climate for CBD as well as an update from our AMD 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 purposes of Safe Harbor provisions under the private Securities Litigation Reform Act of 1995 <unk>.
<unk> 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 dot CBD and the dot 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 CVD MD 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 <unk>, Chairman and co CEO Marty <unk>.
Thank you very much ronen and good afternoon, everyone. We appreciate you joining us today.
As we entered calendar 2022, the CBD industry.
Experienced its first negative revenue growth.
At <unk>, 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.
We're pleased to report that we accomplished this goal and net sales rebounded from 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 and 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.
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.
For those of you that may be learning about CVD <unk> for the first time, let me take a few minutes to explain what we've accomplished over the past three years.
We build a diversified sales channel has generated over $125 million in net sales. We are one of the largest direct to consumer engines in the CBD industry and in retail we have placed our products in over 6000 outlets and just last quarter, we added over 850 GNC stores to our distribution.
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We have built over $1 5 million customer orders since inception have one of the industry's leading <unk>.
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 have.
<unk> operates one of the industry's leading R&D departments.
And 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 farmer Mac, we have one of the strongest catalogs of partnerships in our industry, including affiliated Influencers and high profile athletes, such as Bubba Watson, Jimmy Johnson and Daniel Cormier.
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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.
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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 sell a competitive price point <unk>.
Our expansion into new categories and markets show promise our market share continues to make 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 brands mainstream acceptance as the regulatory climate codify, we're committed to the progress at our CBD AMD Therapeutics division and providing the necessary resources to ensure.
<unk> success with that I will now turn the call over to Dr. Civil Swift one of our managing directors at CVD, <unk> Therapeutics, and the Vice President scientific and regulatory affairs at CBD MD. 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 the citizen petition to FDA.
Petition with mail on February 21, 2022.
And then we requested several types of relief, including removing CBD from the dry preclusion left we.
We believe we are well founded arguments why CBD should not drive concluded.
Do not expect the FDA to provide a substantive reply before the 180 day response timeline.
As approximately August 22022.
Instead, we expect them to stay they need additional time to apply or claim delay due to other agency priorities.
We will determine our next steps.
At time.
Our novel Food applications are now validated in the UK and the EU, which means we are now in the risk of that.
And the governments are analyzing our dossier.
This is expected to take nine to 12 months.
We anticipate a full novel towards approval after completion of the risk assessment, which can take up to an additional six months for the administrative processes.
In the UK, our product can be legally full during the entire process until final approval.
In the EU, we will be seeking opportunities as they may emerge during the risk assessment.
Approximately 40 of our products has been approved by men.
The Costa Rican health Ministry, we have an additional approximately 40 products submitted for approval.
Actively engaged in the process to obtain sanitary registrations and several other Latin American countries.
We are working on deal terms to enter Mexico with one of our two currently authorized distributors.
Before the world change to allow us to register ourselves.
Our clinical study with Colorado State University performed on osteoarthritis dogs.
Herman our proprietary patent pending Glenn efficacy on joint stiffness <unk>.
This comfort and mobility and the population will complete in the next few months.
Study also explored potentiation with aspirin to determine if the combination of aspirin plus CBD had greater efficacy.
The early unofficial results indicate the gate and those were improved when osteoarthritis dogs will given our product.
Our projects with University of Mississippi has successfully identified a novel cannabinoid <unk>.
The method for how to produce adjustable quantity of the cannabinoid pipeline novel synthetic methodology developed at the National Center for natural products research.
The next step is to test this new can have a nice to talk to city before we scale up production or using a new formulation, 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 and 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 with the University of Mississippi has informed us about potentiation between botanical dietary ingredients in cannabinoid <unk>.
Inclusion of these ingredients and formulations needs to enhance the fact and several of the identified ingredients already included in our functional formulas.
We have a high level of confidence that future clinical studies will prove that the <unk>.
<unk> formula as have greater efficacy than any supplements containing those ingredients.
As well as any competitive product 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 CVD <unk> cannot be the aisle CVD products and healthy adult participants.
And then points, including immunity pain inflammation mood and sleep.
We are also assessing toxicity and safety in the study participants.
We will report interim result, as soon as all participants have completed their third visit.
UCLA has invited us to be a product sponsor for clinical drug study.
The initial studies on th television for alcohol use disorder.
They have several products projects, we believed 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 Dragon Therapeutics division as funds become available.
With that I would like to turn it over to our chief financial and Chief Operating Officer Brendan Kennedy.
Brendan Please go ahead.
Thank you civil and welcome everyone.
Total GAAP net sales for the second quarter of fiscal 2022, or $9 6 million versus net sales of $9 3 million for the quarter ending December 31, 2021, or a sequential growth of three 3%.
Net sales for the March 31, 'twenty, two 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.
Seven 5%.
E Commerce sales were down 24% compared to the quarter a year ago E. Commerce represented 68% over 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 sequential increase of 38, 2% wholesale net sales were down 11, 3% compared to the year ago quarter of March 31st 2021.
Our GAAP gross profit margin decreased to six 7% in the second quarter of fiscal 2022 from 69% in the second quarter of fiscal 2021. This decline is primarily based on lower manufacturing operating leverage because of the year over year decline in sales, we've implemented numerous cost saving initiatives to offset input.
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 sequentially. This drop was led by a reduction in payroll professional fees.
<unk> expenses merchant processing fees noncash stock expense.
And other expenses were offset by an increase in depreciation and amortization of intangibles as well as the R&D and regulatory expenses.
And our prior 10-Q, we started amortizing our intangible is beginning with the current quarter.
Excluding noncash depreciation and amortization as well as our stock expense.
Adjusted operating cost dropped from $11 $2 million last year to $10 million for 2022, while a marked improvement. This does not capture all of the cost savings initiatives, we implemented during the quarter.
During the timing of the implementation, we expect further reductions of our payroll marketing and other expenses lowering the operating cost run rate during the third quarter.
Our six months ended March 31, 2022 operating expenses for fiscal 2022 totaled $3 4 million up from $23 million in the prior year, while almost all areas of cash expenses were down $400000 increase was driven by a 340000 increase in depreciation three.
$30000 of amortization of intangibles and 700000 increase in noncash stock compensation.
Excluding noncash depreciation amortization and stock compensation expenses, our adjusted cash operating cost dropped from $21 4 million to $24 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.
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From the prior year period.
Year over year increase in loss was mainly due to $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 months ended March 31, 2020 to GAAP loss from operations totaled $30 1 million as compared to $5 $1 million loss in the prior year. The difference was 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 754000 noncash stock expense depreciation and amortization expense of 600000, resulting in a non-GAAP adjusted operating loss of $3 6 million for the second quarter of fiscal 2022 as compared to $2 eight.
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 growth.
Gross profit offset by lower operating expenses.
Sequentially, we reduced our non-GAAP adjusted operating loss by 800000 from the December 2021 quarter.
Other income and expenses on our consolidated income statement, including noncash contingent liability gain of 343000.
Related to our December 2018 acquisition of cure based development.
During December we issued 440243 earn out shares corresponding to the third period under the terms of the acquisition.
At the time of issuance, we booked 42000 and valuation.
The decrease in subsequently reclassified 325.
From a contingent liability to additional paid in capital on a consolidated balance sheet. The remaining earn out shares revalued at the end of the quarter, resulting in a noncash contingent liability gain of 148000 for the quarter. The changes in valuation of the contingent liability is primarily result of a decrease in the market price of our common stock.
Period.
8% to $1 four per share.
During the second fiscal quarter of 2022, we utilized approximately $6 3 million of cash.
Including cash used from operations of our adjusted non-GAAP operating loss of $3 5 million $1 million of paid dividends one to bring our accounts payable down with the reduction of our costs and an increase in receivables of approximately 140000.
We remain laser focused on cash generation and our projected much lower burn rate because of the restructuring completed during the last quarter as well as in April .
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 32021.
Current assets as of March 31, 2022 decreased approximately 33% from September 32000, $21 million to $23 million a primary driver for the decrease in cash or cash flow from operations.
As of March 31, 2022, the company's total current liabilities were $5 7 million of which approximately $2 seven as accounts payable and $1 1 million was accrued expense.
Our last on our last quarterly conference call, we committed to a $10 million annualized reduction in costs during the second fiscal quarter ending March maybe.
And we began implementing changes, which we believe will result in $4 million run rate reduction over the next 12 months. We believe we have achieved and you will see this flush out during the third quarter.
We lowered our marketing expenses reduced head count and payroll realigned our shipping and distribution costs and lowered almost every area of our operating costs.
We did this well recruiting and upgrading talent in several areas migrating more of our organization to a performance compensation model.
Growing top line for the first time in the last five quarters. Additionally in April we took the further step to simplify our operations and reduce our unabsorbed overhead expenses by entering into a transaction with one of our highly valued suppliers to acquire or manufacturing equipment for cash and other consideration and takeover production in certain of our products going forward. We believe this.
We will have a positive impact on our gross margins.
We paid downloads on 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 key.
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 strategic strategies to drive revenue with SKU rationalization rationalization, we perform is allowing us to simplify the message for consumers.
We're investing in a customer attribution model and making real time changes to our marketing spend.
Additionally, we continue to invest carefully and new product development focused on scientific based function and claims as Marty alluded to earlier, we are optimistic about the balance of 2022 calendar year.
With that I'd like to now turn the call back over to Marty.
Thanks, Ronen and with that I'd like to open the line for Q&A.
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Thank you so much for your participation and have a pleasant rest of your day.