Q3 2022 cbdMD Inc Earnings Call
you
Good afternoon. Welcome to the CBDMD, Inc.'s June 30, 2022, third quarter of fiscal 2022 The name is 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 10Q.
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 presentations 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. To join the question queue, you may press star then 1 on your telephone keypad.
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, Gaylene, and thank you all for joining the CBDMD's June 30, 2022, third quarter of fiscal 2022 earnings call-in update.
On the call today, we also have our chairman, Scott Stevens, as well as our president, Kevin McDermott, and Dr. Sybil 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.
DBDMD 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 10Q for the quarter ending June 30, 2022, and our other filings with the SEC, all of which can be received on the SEC'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 CBDMV's Chairman Scott Steep.
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 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 advisor 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 and begun to execute on a winning plan.
Without tipping our hat to the competition, I can say this.
That's one. Science matters.
and two, that delivering product efficacy is the central focus of meeting the consumer's needs and building a successful company.
On that note, we are pleased to announce the appointment of Dr. Sybil Swift to fill a 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 McDermott.
as president. Kevin brings years of experience delivering revenue and earnings growth in a wide variety of organizations, especially ones that are not in the
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.
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 continue to strengthen the business fundamentals of CBMD.
For the quarter ending June 2022, we recorded a gap loss from operations of 33 million.
Excluding non-cash goodwill impairment of $31 million, we cut our adjusted non-GAAP operating loss in half when compared to the prior year and 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 believed our sales trends had firmed up, but they were impacted by macroeconomic inflationary pressure as well as disruptions that occurred as a result of the unanticipated parting ways of both Mr. Kaufman and Mr. Sumichrist.
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 continue into this quarter.
We are attracting more traffic and customers at significantly lower investment levels.
As a result, we are starting to see positive impacts to our direct-to-consumer revenue during the current quarter and are working to fine-tune growing traffic and conversion rate.
Our investments in product development have paid off as products launched during the third quarter of 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 improve efficacy of our products, differentiate ourselves, and strategically target markets, customer needs, channels, and geographies.
We have a robust pipeline and our team is excited about planned launches over the next two quarters.
We sold our manufacturing facilities to one of our key suppliers during the quarter.
Minor disruptions aside, this is resulting in significant ongoing savings, a nimbler supply chain, and a more predictable cost of goods sold. We now have a strategic balance sheet asset aligned with our core business.
that has potential for appreciation as compared to depreciating equipment.
We added specific food, drug, mass, and convenience channel resources during the quarter and have targeted efforts on a focused product assortment.
Our team, brand, and growing regulatory resume is resonating.
and starting to create opportunities.
We anticipate more news to come.
We continue to focus on international opportunities where our brand, product, science and distribution line up. These opportunities take longer to execute on them than moves made in the U.S.
We anticipate speaking about some of these initiatives before the end of the year.
We continue to drive our business forward all while dealing with disruption
the cost and distraction of migrating to an ERP.
Less than a year after going live on NetSuites, Oracle cited industry concerns and terminated our contract. Effective August 1, we successfully migrated to Acme.
Our new leadership team is all about delivering tangible results and executing according to our plan.
To speak more about the direction of our business, I'm pleased to introduce for the first time our new president, Kevin McDermott. Kevin has been a welcome addition to the CBDMD's executive leadership.
Thank you Ronan, good afternoon.
It is a great opportunity to step into a situation where 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, the respective 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 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 light our loyal customer base with value products that effectively address their needs.
We will re-engage with customers who have casually 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 and enough 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. Sybil 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. We have a petition with mails on February 21, 2022, and the FDA has until August 22, 2022 to respond.
Based on my experience, during the almost five and a half years, I worked at the FDA and then for the leading national trade group for dietary supplements before joining the team at CBDMD. I started working at the653 and the
We do not expect a substantive response.
Instead, we expect them to state they need additional time to reply or claim delay due to other agency priorities.
We have several administrative options available to us should they be non-responsive, and we will continue to pursue our claims aggressively, as we strongly believe our positions 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 UK and the EU, and the governments are actively analysing our safety dossier. This is expected to take 9 to 12 months.
We anticipate a full novel foods approval in both the UK and the EU after completion of the risk assessment.
19 CBD applications were validated by EFSA for the EU market.
On June 7th, 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 is the only applicant that was able to provide a substantive response to EFSA's gap analysis.
based on the comprehensive and detailed safety studies the company conducted in calendar year 2020.
In the UK, our products are currently being legally sold and will remain on the market during the entire process until final approval. In the EU, we will be seeking opportunities as they may emerge during the risk assessment phase.
46 of our products have been approved in Costa Rica by the Health Ministry, MENSA, and we have several more planned for submission.
We are actively engaged in the process to obtain sanitary registrations in several other Latin American countries, and we continue to explore ways to enter Mexico with one of two currently authorized distributors before the laws change to allow us to register ourselves.
More speculatively, a recent report by Health Canada on the safety of CBD could lead to a change in the import laws of Canada, and we are prepared to submit our safety dossier to gain market approval from Health Canada as a natural health product should this occur.
The clinical study with Colorado State University to determine our core products efficacy on joint stiffness discomfort and mobility in dogs is concluding this month.
Early unofficial results indicate positive outcomes, and we will publish the results next quarter, leading to claims-based marketing for our paw line of dog products sometime in early fiscal 2023.
The human clinical trial to assess the impact of our core broad spectrum product in healthy adult participants on immunity, pain, inflammation, mood, and sleep concludes this month.
Preliminary results are positive and indicate our product has multiple measurable benefits to human health and wellness.
We expect to publish our findings in Q1 2023 and launch marketing campaigns focused on educating our customers on the clinically proven benefit of our core products.
Before turning the call over to Mr. Kennedy.
I want to reiterate the value of our comprehensive safety study and clinical research to the growth of the company into both domestic and international markets.
Our safety dossier has now been challenged and found to be sufficient by both the UK FSA and EU EFSA, while the safety dossiers of our competitors in some cases have not met the same high bar.
We have used data from our safety dossier to demonstrate credibility and the safety of our products.
to major sports leagues and athletes around the world.
It has opened doors with major retailers who are starting to question the brands they carry to ensure the products on the shelves are safe and contain what is listed on the labels.
We have used our safety data as the basis for our citizens' petition and intend to use it before the FDA in an administrative challenge, a new dietary ingredient notification submission, or a Generally Recognized to Safe notification.
It underpins our entire product line and differentiates our company as being one of the only companies in the world with this level of sophisticated and comprehensive data on the safety of our core proprietary broad spectrum blend.
We continue to push the boundaries and lead with science.
We are the only company to have products on the market with a coveted NSF certified for sport designation.
while others attempt to follow the trail that we have blazed.
This means we are the only company that can provide assurance to its customers that they will not fail a drug test if they take our NSF certified for sport products. This is not just for athletes. It includes first responders, government workers, and anyone with a job who may be subject to drug testing.
We are exploring the potential of our products to optimize both athletic and everyday performance through science and data collection and are excited to announce that it will be just this
kicked off a study with WHOOP that will provide data about the benefits of our products augmented with their biometric monitoring capabilities.
Remember.
Science takes time.
Research takes time and CVDMD is investing in the research to back our products and demonstrate actual efficacy to the public. This will build investor value and long-term profitability through sales growth and repeat purchases by consumers who trust the brand because of our science first approach. It is truly an exciting time to be working for CVDMD. With that I would like to turn it back over to Ronan.
Thank you, Civil.
Total gap 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 ecommerce 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 ecommerce sales were down only 17% compared to the quarter a year ago, despite 32% reduction in our marketing spend. Our ecommerce sales were down only 17% compared to the quarter a year ago, despite reducing our marketing spend. Our ecommerce sales were down only 17% compared to the quarter a year ago, despite reducing
Ecommerce 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, 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.
Full-sale net sales are down 24% compared to the year-ago quarter of June 2021.
Our gap 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 the result of our team's effort to find fixed cost reductions through our business, including significant reduction in our fixed overhead.
Based on ongoing initiatives and product mix forecasts, we anticipate gross margins in the mid to upper 60% range in the coming quarters.
Our SG&A expense for the third quarter 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 in depreciation, amortization of intangibles and other expenses.
The decrease also includes a contract spent of $1.5 million related to RSU and stock options that were forfeited during the third quarter.
Excluding non-cash depreciation, amortization, as well as stock expense, our adjusted SG&A costs dropped from $12.7 million last year to $8.7 million for 2022.
We anticipate further improvements in the fourth quarter tied to the realization of full quarter benefits from adjustments made during the third quarter as well as additional cost saving initiatives.
For the nine months ending June 30, 2022, operating expenses for fiscal 2022 totaled $31.7 million down from $36.8 million the prior year.
This decrease was driven by reductions in almost all areas of cash expenses, partially offset by increases in depreciation, amortization, and intangibles.
This decrease also includes the previously mentioned contra expense related to forfeited hours using stock options.
Excluding non-cash depreciation, amortization, and stock-to-com expense, our adjusted cash operating expenses dropped from $34.1 million to $29.5 million.
As mentioned before, the initiatives implemented during the first half of fiscal year have further reduced our operational cost run rate going forward.
We anticipate operating expenses to be in the $8 million range for the fiscal fourth quarter.
Overall, our gap loss from operations totaled $33.1 million for the third quarter of fiscal 2022 as compared to $6.7 million in loss from the prior year period.
We saw our stock price move significantly while we navigated the separation of our former CEO and the resulting quarter-ending stock price triggered an analysis under AFC350 that ultimately caused a goodwill impairment charge.
Excluding the non-cash impairment of goodwill of approximately $30.8 million, our non-GAAP loss from operations was $2.3 million.
The year-over-year decrease of $4.4 million is mainly due to a $1.7 million drop in gross profit dollars attributed to the decline in revenue, which was offset by reductions in our operating costs.
Our nine months ending June 30, 2022, gap loss from operations totaled $63.3 million as compared to $12.6 million in the prior year period. Excluding non-cash impairment of goodwill and tangibles of $48.9 million during the first and third quarters of fiscal 2022.
Loss from operations was 14.4. The year-over-year increase of $1.8 million is primarily driven by $6.8 million decrease in drop in gross profit dollars tied to revenue, partially offset by $3.8 million decrease in operating costs.
Our non-GAAP adjustments to operating expenses for the third quarter of fiscal 2022 include $938,000 non-cash stock gain, depreciation and amortization expense of $436,000, $108,000 for non-executive severance payments during the quarter, and a goodwill charge of $30.8 million, resulting in a non-GAAP adjusted operating loss of $2.7 million for the third quarter of fiscal 2022.
as compared to 5.2 million non-GAAP adjusted operating loss in the third quarter of fiscal 2021.
non-GAAP adjusted operating loss in the third quarter of fiscal 2021. The decrease
In non-GAAP adjusted operating loss over the prior year period is primarily attributed to lower operating expenses offset by a drop in revenue and corresponding gross profit. Sequentially we reduced our non-GAAP adjusted operating loss by a million dollars from the March 2022 quarter.
Other income and expenses on our Consolidated Income Statement include a $602,000 accrual associated with the separation agreement with our former CEO , $88,000 net gain from the sale of our manufacturing assets, and a non-cash contingent liability gain of $1.9 million related to the earn-out associated with our December 2018 acquisition of Cure Based Development.
This gain corresponds to the revaluation of 458,877 earn-out shares issued in May, as well as the revaluation of the remaining earn-out shares at the end of the quarter.
The changes in valuation of our contingent liability are primarily a result of the decrease in market price of our common stock during the period of $1.04 to $0.44 per share.
During the third fiscal quarter of 2022, we used approximately $3.8 million in cash. The main components include cash used from operations, our adjusted non-GAAP operating loss of $2.7 million and $1 million in paid dividends.
We anticipate making strong improvements in cash flow from operations in each of the next two quarters.
We have cash and cash equivalents of $9.6 million and working capital of approximately 14.1 on June 30, 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.
The current assets of June 30, 2022 decreased approximately 46% from September 2021 to 19.9 million.
The primary driver of the decrease of cash is our cash flow from operations.
As of June 30, 2022, the company's total current liabilities are $5.7 million, of which approximately $2.3 million is the AP and $2.3 million is accrued expense.
We are pleased with our progress but not satisfied with the results.
Our leadership team is driven to deliver on profits.
and stock appreciation, not flashy attempts of revenue at all costs.
We are committed to a plan to get profitable that has sober assumptions around revenue growth and can be executed within our balance sheet by our team through the end of the year and beyond.
We know the potential of a profitable CBDMD and remain focused on delivering for customers and shareholders alike.
With that, I'd like to now open the line up for Q&A.
Thank you. We'll now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys.
To withdraw your question, please press star then 2.
We'll pause for a moment as callers join the queue.
Once again, if you have a question, please press star then 1.
Our first question is from Jeff Porter with Porter Capital Management. Please go ahead.
Hello, 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? Take me through how that transaction developed.
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 that for them to close the transaction, they did not want any association tied to either the company or the executive. So with that we...
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, you know, 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 a feasible.
Okay.
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? I'm trying to gain some insight into what level of sales it will take to be profitable.
Sure. So we're forecasting about 8 million SGNA in...
in our fiscal fourth quarter, which is the current quarter, and then based on sort of our internal forecasts are forecasting a relatively similar for...
Yes, for the December quarter.
So...
If your gross margins hold you'll need to get to Right around 11 and a half million a quarter in sales if I'm doing the math right
to sort of be cash flow neutral? Yeah, I mean remember there's some add backs, ties to depreciation, amortization and...
and our stock expense. Yeah, no, I'm just looking on a cash flow basis.
Yeah, I mean, look, we're not providing guidance at this time, but, you know, you...
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 balances yet because we have a significant inventory built.
No, we don't have a large inventory bill. We are very closely managing our inventory and...
Yeah, don't foresee a massive increase requirement to execute our plan. Okay, so is there a significant accounts receivable, which is sort of normal?
Yeah, I mean, uh...
Yeah, we carry sort of a typical accounts receivable. We did pick up, you know, we do have some of 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?
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.
Okay.
Thank you.
Once again, if you have a question, please press star then 1.
Our next question is from Bob Berschler.
a private investor, please go ahead.
Yes, gentlemen, I am going back to the Adara.
explanation for the previous question. The Blightstone Donaldson group that bought it is a private equity firm in Charlotte.
Is that correct?
That is correct and they are part of, you know.
They have a position in the sponsor entity already.
Oh 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, you know, at least on paper right now it's at least a...
roughly six million dollar plus.
value, so to have sold it for a million dollars.
It seems I understand how quickly you had to do it.
But, obviously from a shareholder's perspective, could have used...
more than just getting your million dollars 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 mean, unfortunately it was a difficult situation. There was not a lot of time and we had to make the best decision for the company. I think, well, from a stock price, it appears to have a larger value on paper. There is a lockup period.
that would require us to hold the securities for a period, you know, the reasonable period of time afterward. Six months, I think six months, but regardless. And I understand that you, a condition of the purchase was for you to sell it, I guess I'm just.
certainly would have been more attractive.
Yeah, I mean, like, we would have liked to have more time.
Unfortunately, we didn't.
Okay.
Thank you very much.
pu.
With no further questions in queue, this does conclude our conference call for today. Thank you so much for your participation.