Q1 2023 cbdMD Inc Earnings Call
Speaker 2: Good afternoon, welcome to CBD MD Inc's December 31, 2022 first quarter of fiscal 2023 earnings call and update. This afternoon, the company issued a press release that provided an overview of its first quarter results. The company also issued a press release that provided an overview of its first quarter results. This afternoon, the company issued a press release that provided an overview of its first quarter results.
Speaker 2: which followed the filling of its quarterly report on Form 10Q.
Speaker 2: 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.
Speaker 2: All participants on this call will be in a lesson-only mode. This call will be followed by a question-and-answer session.
Speaker 2: At this time, I would now like to turn the conference over to Brad Whitford, the company's VP of Finance.
Speaker 2: Please, Brad, go ahead.
Speaker 3: Thank you, Brenda, and thank you all for joining CBDMD December 31, 2022, first quarter of fiscal 2023 earnings call and update. On the call today, we also have Kevin McDermott, our president, and Ronan Kennedy, our chief financial and chief operating officer.
Speaker 3: 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.
Speaker 3: 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 annual report on Form 10Q for the quarter ended December 31, 2022 and our other filings with the SEC.
Speaker 3: 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.
Speaker 3: Any forward-looking statements made on this conference call speak only as of today's date, Monday, February 13, 2023, 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 security laws.
Speaker 3: With that, I'd like to turn the call over to Kevin.
Speaker 4: Thank you, Brad. Hi, good afternoon everybody, especially to our shareholders.
Speaker 4: Just a few months ago, we spoke about how 2022 was a reset year for CBDMD.
Speaker 4: The calendar year culminated with us predominantly completing that process.
Speaker 4: This reset was critical for us to get the business healthy and reestablish a foundation for what we feel best positions us to grow.
Speaker 4: We made great strides in right-sizing our cost structure, along with making sure we had the talent and proper outside relationships to drive that growth.
Speaker 4: We made a lot of hard organizational decisions.
Speaker 4: And we had to unwind from past initiatives and sponsorships that never delivered on the promise.
Speaker 4: That is behind us.
Speaker 4: We have now segued to an all-out focus on revenue. Our approach is purposeful.
Speaker 4: We expect to grow the top line while holding our expenses relatively flat, accelerating along the path to profitability.
Speaker 4: I want to stress that this was not about shrinking costs to manage a smaller revenue base.
Speaker 4: but about creating a flexible company with the right cost structure in preparation for sustainable and profitable growth.
Speaker 4: No longer are we burdened by unwieldy overhead and unproductive spend.
Speaker 4: Saving our way to profitability doesn't excite anyone, but getting our cost structure right, getting the operation in order, and making sure our primary focus is having the right products at the right price point supported by the right message has been our sole focus over the past few quarters.
Speaker 4: Those components are in place.
Speaker 4: A year ago, our SG&A was approximately $12 million in the first quarter of 2022, and now with the benefit of our transformational initiatives taking hold, we anticipate it will be approximately $6 million for the second quarter and will represent a much lower cost of revenue ratio.
Speaker 4: As you can see, pending top line gains will translate into a much improved bottom line.
Speaker 4: Have we met yours, and for that matter, our own expectations on top-line growth?
Speaker 4: Certainly not. Revenue trends have been disappointing, but our operating income continues to improve. Ronan will speak to our overall financials.
Speaker 4: But as you see, we have thoughtfully addressed our overall SG&A, and in terms of marketing, going forward we've made sure that our spend on marketing has an acceptable return.
Speaker 4: On our December call, I stated that we would begin our marketing push at the end of the year and entering into January .
Speaker 4: Here's what we've done in that regard.
Speaker 4: We announced our new CMOS, Shannon Charles.
Speaker 4: Shannon brings to us a fresh perspective in positioning brands and wellness products to consumers and retailers.
Speaker 4: Her digital and direct marketing experience and relationships will be a nice boost to our Go Forward strategy as well as our bottom line.
Speaker 4: Proof-and-track record in helping brands turn around messaging, packaging and position, as well as to expand as a welcome addition to our team.
Speaker 4: We've engaged with REQ, a leader in the direct consumer digital marketing field.
Speaker 4: to support our marketing efforts. We have entered into an advertising and marketing engagement with A360 Media.
Speaker 4: These steps not only augment our capabilities but gain us access to a print and digital subscriber base to which we will share our proposition.
Speaker 4: That's a significant set of eyeballs and demographics that we haven't reached in the past.
Speaker 4: With this, we are confident that our message and brand will be introduced to a broader range of segments in the immediate future, creating interest in the category that wasn't there before and exposing those who are existing CBD consumers to the value of our proposition as well as sharing our planned product line extensions.
Speaker 4: resulting into a larger cart size later in 2023.
Speaker 4: These key steps, along with better retargeting and an increase to our social and other media diversification efforts, will move the revenue needle in a positive direction.
Speaker 4: We believe in the highest-ranked products we launched at the end of September 2022.
Speaker 4: We believe those products are priced affordably to make them part of consumers daily wellness regimen
Speaker 4: We know that the quality of our products are among the best in the market.
Speaker 4: We have many reasons to be optimistic. Though as mentioned, we have disappointed on revenue, but with the improvements that we put in place and are now executing on, we expect to generate results.
Speaker 4: The CBD market is a multi-billion dollar market and is expected to grow. We expect to gain more share as well as being part of that growth. I look forward to sharing with you the progress on our next call.
Speaker 4: On a final note, before I turn it over to Ronan.
Speaker 4: Recently the FDA principal deputy director Janet Woodcock issued a statement on behalf of that agency stating that the FDA does not have the tools to properly regulate CBD needs congressional action to direct them.
Speaker 4: Despite the comprehensive set of regulations in place since the FDA started...
Speaker 4: specifically regulating dietary supplements in 1994, the FDA is delaying in their responsibilities. As leaders in our industry, we are disappointed the agency continues to disregard the efforts that we have put into compliance with the existing regulatory framework.
Speaker 4: to prove our products are safe and efficacious for our customers.
Speaker 4: What we are demonstrated.
Speaker 4: ethical and responsible provider of CBD products. We have shared on previous calls, we have invested heavily into science with our extensive toxicity studies demonstrating the safety of our products in our clinical trials proving their efficacy.
Speaker 4: As the industry leader, we look forward to working with other responsible brands and industry trade groups that best address this issue, ensuring that our customers and the broader CBD market continue to have access to products that are safe and to help address their health and wellness needs.
Speaker 4: With that, I'd like to turn it over to Ronan. Ronan?
Speaker 5: Thank you, Kevin. Total net sales for the first quarter of fiscal 2023 were 6.1 million, over 34% decrease from the prior year comparative quarter total.
Speaker 5: or quarterly e-commerce business generated sales of 4.9 million on the first quarter of fiscal 2023. This was a 31% year over year quarterly decrease. We believe sales were impacted during the quarter by pantry loading prior to our new high-strength product offering launch. We'll pull back in marketing spend and macroeconomic forces on consumers.
Speaker 5: Ecommerce represented 81% of our total net sales for the first quarter of 2023, versus 76% in the prior year comparative quarter.
Speaker 5: Our wholesale business generated $1.2 million of net sales for the fourth quarter of fiscal 2023, down 46% as compared to $2.2 million for the comparative quarter in fiscal 2022. Revenues were impacted as we transitioned to new SKU offering as retailers looked to sell through legacy inventory before bringing on new products.
Speaker 5: In addition, we had a few topical products that were out of stock during the quarter.
Speaker 5: A gross profit as a percentage of net sales came in at 59% for the first quarter of fiscal 2023. This compares to 54% for the comparative prior year period. We expect to maintain gross profits margins in the mid 60s range when factoring in the sales mix.
Speaker 5: Our operating expenses for the first quarter fiscal 2023 totaled 7.6 million, which is down from 11.9 million in the prior year comparative quarter. The current quarter includes approximately $900,000 in one-time sponsorship termination expense, mostly made up of $885,000 and accelerating a non-cash.
Speaker 5: stock expense associated with grants in prior years. Excluding the one-time stock expense, costs came down across the board as management continues to focus on profitability. This decrease is mainly due to reductions across all areas of our operating expense that was partially offset from
Speaker 5: with $277,000 non-cash intangible expense as we began amortizing intangibles in January 2022.
Speaker 5: Overall, this resulted in a loss from operations of approximately $4 million for the first quarter of fiscal 2023 as compared to a $25 million loss in the prior year period.
Speaker 5: Excluding the $18.1 million of goodwill impairment, our non-GAAP loss from operations in the prior year quarter totaled $7 million, meaning we reduced our loss by $3 million over the prior year on a non-GAAP basis.
Speaker 5: Sequentially operating loss improved 10.8 million from the September 2022 quarter. This is primarily attributable to the 11.9 million in goodwill impairment during the September quarter.
Speaker 5: Our non-GAAP adjustments to operating expenses for the first quarter of fiscal 2023 include 137 non-cash employee stock expense.
Speaker 5: $377,000 depreciation amortization expense, and $884,000 associated with the final expense to terminate the sponsorship agreement, resulting in a non-GAAP adjusted operating loss of $2.6 million for the first quarter of fiscal 2023, as compared to a $4.4 million non-GAAP adjusted operating loss in the first quarter of fiscal 2022.
Speaker 5: we are anticipating a large reduction in both gap and non-gap adjusted operating losses for the second quarter.
Speaker 5: We invested $162,000 on CBDMD's Therapeutics R&D during the first quarter of fiscal 2023 as compared to $348,000 in the prior year.
Speaker 5: Most of our clinical studies are wrapping up and their costs were front-loaded.
Speaker 5: We continue to believe the results from our clinical studies provide us a unique, differentiated position for both product efficacy and education in the category.
Speaker 5: Other income expenses on our consolidated income statement for the first quarter of 2023 include a non-cash contingent liability game of $61,000 related to the December 2018 acquisition of peer-based development.
Speaker 5: The Earn-Out Contingent Liability is currently on our balance sheet at $215,000. We are now in the fourth marking period that runs through November 2023.
Speaker 5: During the fourth, for...
Speaker 5: during the first
Speaker 5: For the fiscal 2023, we utilized approximately 3.4 million of cash. The main components include our adjusted non-GAAP operating loss of $2.6 million, paid dividends of $1 million, and some working capital adjustments making up the difference.
Speaker 5: We had cash and cash equivalents of approximately 3.3 million and working capital of approximately 26 million on December 31, 2022 compared to cash.
Speaker 5: and cash equivalents of approximately 6.7 million and working capital of approximately 10.7 million as of September 30, 2022.
Speaker 5: Our current assets as of December 31 decreased approximately 28% from September to $11.5 million. The primary driver of the decrease in current assets was the usage of cash for operations and the reduction of a prepaid sponsorship by $1.3 million, mostly attributed to the termination of an athlete's sponsorship.
Speaker 5: As of December 31st, the company's total current liabilities were $5.5 million, of which approximately $2.7 million is accounts payable and $2.6 million accrued expenses.
Speaker 5: We remain very focused on managing our cash position and liquidity. We continue to adjust our cost structure to improve our burn.
Speaker 5: As of early February , our total headcount is approximately 60 employees as compared to 90 at the end of our fiscal year. We've sublet approximately half of our warehouse and continue to seek alternatives to lower the cost of our headquarter lease.
Speaker 5: We are optimistic about our competitive product position and cautiously optimistic about our ability to grow quarterly sales in calendar 2023. With our current SG&A, a small increase to revenue will have a big impact to the bottom line.
Speaker 5: We are pursuing multiple avenues to improve our liquidity while being mindful to our existing shareholders.
Speaker 5: The Dara shareholders approved the proxy vote on February 10th, but Dara closed its transaction, resulting in a million dollars returned back to our balance sheet on Friday. Last week we entered into a strategic transaction with A360 that expands our marketing relationships with them in the way its structure provides us access to valuable marketing without impacting liquidity.
Speaker 5: We are continuing to pursue additional strategic partnerships and other avenues that could accelerate profitability or improve our liquidity position throughout 2023.
Speaker 5: We remain focused on the business, attracting new customers, and delivering for all our stakeholders.
Speaker 5: And with that, I'd now like to open up the call to questions.
Speaker 2: We will now begin the question and answer session.
Speaker 2: To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request.
Speaker 2: If you are using a speakerphone, please pick up your handset before pressing any keys.
Speaker 2: To withdraw your questions, please press Start and 2. We will pause for a moment as callers join the queue.
Speaker 2: Once again, if you have a question, please press star then 1.
Speaker 2: The first question comes from Todd Justice, a shareholder.
Speaker 2: Please go ahead.
Speaker 6: Hello?
Speaker 7: Good afternoon.
Speaker 5: Hey, how are you? This first question is for Kevin.
Speaker 8: So...
Speaker 9: with our marketing efforts in the hiring of the new CMO.
Speaker 9: Can you give us some background on Shannon, what she's going to bring to the table?
Speaker 4: Sure.
Speaker 4: Shannon comes out of the food and supplement space. She's been involved with, you know, just...
Speaker 4: When it comes out of the food and supplement space, she's been involved with just a whole host of
Speaker 4: curated marketing initiatives around
Speaker 4: consumer wellness and I think that's going to be a little bit of an add to the organization, getting that direct to consumer wellness product and branding.
Speaker 4: into our portfolio. And I think what we haven't done a great job of in the past is...
Speaker 4: opening up our reference to a broader set of demographics. I think we've been...
Speaker 4: We've been really good at the fringe athlete and the
Speaker 4: you know, the Joe Rogan demographic, if you will, and you know, we'll continue to support that, but now, you know, opening up to that wider set of consumers, we're pretty confident that's going to bring added growth, and Shannon's been pretty successful with that in the past.
Speaker 9: Where has she been successful at? I'm failing to see what her experience, what position she's held in the path at this level. I'm failing to see what her experience, what position she's held in the path at this level.
Speaker 4: Well, I don't want to get into too heavily into Shannon's qualifications, but most recently at Nature Aid, she did a great job of taking that brand from relative obscurity into a high growth and a subsequent acquisition.
Speaker 4: And, you know, we're pretty confident that she's going to help us out quite a bit.
Speaker 6: Then Yeah, okay.
Speaker 9: And so my other question is, where do we stand on cash available to run the company?
Speaker 5: As the end of the quarter, we had $3.3 million cash on hand. We just got back $1 million. We've made some pretty large strides with the activity.
Speaker 5: that happened through the end of December and into January . So we are anticipating a much, much sort of improved quarter for the second quarter going forward.
Speaker 9: Yeah but Adara obviously was our last you know unfortunately we got that money back because if we could have kept that in there I think that would have been a great thing for the company.
Speaker 9: We made money, but we got a million in capital back, right? But that's it. There's no other landmines coming, no other big windfalls with cash. So it's only going to be all sales and how well we run the company at this point, right? So with our cash burn, we're going to be able to make a lot of money.
Speaker 9: I mean I could do the math. With our cash burning, the cash that we have on hand saying...
Speaker 9: starting today, I mean, I figure we got four to six months at best of cash.
Speaker 9: Look, we're not making any specific projections on that, all we can say is we've continued to sort of make progress. I get you're not making projections. I don't need the projections. I can see, I can do my own math. My question is, what are we going to do? I mean, the cuts we're making aren't anywhere close to seeing being deep enough.
Speaker 5: to salvage the kind of cash position we're in. I guess, you know, we feel like we've made the cuts that have needed to or focused on our top line and, you know, have been very focused on our liquidity position and making sure we have enough capital in the business to operate going forward.
Speaker 9: And so based off of your assessment, how much capital do we have? How much runway do we have at this point?
Speaker 5: Look, I guess I'll go back to what our balance was at the end of the quarter plus the incremental capital that we had. And, you know, believe we're in a much better spot today than we were 30 days ago, both on sort of our cash position and and.
Speaker 5: are operating run rate.
Speaker 5: are operating run rate.
Speaker 9: run rate
Speaker 10: That's a, that's a, yeah.
Speaker 9: Tempered optimistic outlook, but we'll see. I guess we'll see.
Speaker 9: outlook but yeah we'll see I guess we'll see. Thank you.
Speaker 11: This concludes today's Question and Answer session and today's conference call. You may disconnect your lines.
Speaker 11: Thank you for participating and have a pleasant day.
Speaker 1: We why?
Speaker 1: And I.