YCBD Q1 2021 Earnings Call
Company Representatives: Marty Sumichrast - Chairman, Co-CEO Ronan Kennedy - Chief Financial Officer Ken Cohn - Chief Marketing Officer
Operator: Good afternoon. Welcome to the cbdMD Inc. December 31, 2020, First Quarter Earnings Call and Update. This afternoon, the company issued a press release that provided an overview of its first quarter fiscal 2021 results, which followed the filing of its quarterly report 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. All participants on this call will be in a listen-only mode. The call will be followed by a question-and-answer session. At this time, I would like to now turn the call over to, Ronan Kennedy, the company’s Chief Financial Officer. Ronan, please go ahead.
Ronan Kennedy: Thank you, Paul, and thank you all for joining the cbdMD’s December 31, 2020, first quarter fiscal 2021 earnings call and update. On the call today we also have our Chairman and Co-CEO, Marty Sumichrast; as well as our Chief Marketing Officer, Ken Cohn. Following the Safe Harbor statements, Marty and Ken will provide an overview of our business, and then 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. 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 the risks described in the company's quarterly report on Form 10-Q for the quarter ending December 31, 2020, 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 viewed on the company's website at 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, Tuesday, February 09, 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 maybe required by federal securities laws. With that, I'd like to turn the call over to cbdMD's Chairman and Co-CEO, Marty Sumichrast.
Marty Sumichrast: Ronan, thank you, and welcome to everyone who’s joining us this afternoon. On our last earnings call I said I believe cbdMD was one of the most powerful CBD companies in the world. I believe today's record results back up that statement. With approximately 80% of our net sales last quarter coming from e-commerce channel, I believe we can now add that we're one of CBD industry's most powerful e-commerce brands as well. Our brands online success has fueled our e-commerce business, which continues to drive our sales growth. Based on a recent report from SimilarWeb, cbdMD.com ranks at the top, as one of the most visited CBD websites in the world. As we push ahead into fiscal 2021, we believe our plan to expand our reach into a new product category such as the launch of cbdMD Botanicals, our beauty and skincare brand, will help continue to drive our sales, as well as diversify and expand our customer demographics. Despite the COVID-19 pandemic, we continued to show record net sales results, $12.3 million for the quarter ended December 31, 2020, which was the year-over-year quarterly net sales growth of 22%. At the same time we also reported record quarterly gross profit margins of 72%. We remain focused on our core competency, which is our direct-to-consumer e-commerce engine, which increased 41% year-over-year and 13% sequentially on a quarterly basis. We have one of the strongest balance sheets in the CBD industry, $28.8 million in cash at the end of last quarter and virtually no debt. We reduced our year-over-year quarterly operating loss by 71% and non-GAAP adjusted quarterly operating loss by 90%. We continue to find efficiencies in our operations. We decreased our total quarterly operating expenses by 15% year-over-year and 2% sequentially, while at the same time making significant investments in regulatory and R&D initiatives. We remain confident that we’ll continue to gain share, market share of total addressable global CBD market, while at the same time delivering on a positive non-GAAP adjusted operating income during this fiscal year. With respect to regulatory matters, cbdMD continues to show leadership in the industry. This commitment was evident by our recent announcement that we’ve retained former FDA official Dr. Sibyl Swift as our regulatory consultant to oversee our upcoming GMP audits and prepare the company for its products for future certifications. The addition of Dr. Swift demonstrates to our customers and our continued commitment to the quality and safety of our products Dr. Swift’s involvement also demonstrates to the FDA and to other global regulatory authorities that cbdMD’s commitment to achieving the highest regulatory standards and a science based approach will be instrumental in strengthening our position at CBD industries leader in regulatory and GMP compliance. Finally, we're pleased to announce that Adara Acquisition Corp, a newly formed blank-check company or SPAC priced its initial public offering of $100 million yesterday. Today the units commenced trading on the NYSE American Stock Exchange under ticker symbol ADRA.U. cbdMD is an investor in Adara Sponsor LLC, the primary sponsor of Adara Acquisition Corp. Now it's my pleasure to introduce Ken Cohn, our Chief Marketing Officer, who will talk about our brands and marketing strategies. Ken, go ahead.
Ken Cohn: Thank you, Marty, and welcome everyone. I said on our last earnings call that I believe 2020 was the year of separation within the CBD category. I believe that both of our brands cbdMD and Paw CBD continue to separate themselves and now are the leaders in both brand recognition and financial performance in the CBD industry. We continue to lean heavily on the accumulation and usage of data to make informed, strategic decisions, decisions that point us towards further accelerating our brands, driving consumer trust and capitalizing on our surging ecommerce traffic, while simultaneously educating, informing and converting both new and returning customers alike. We focused on key performance indicators or KPIs, including average order value, retention rate and website traffic. We utilize these non-GAAP measures in internally analyzing the effectiveness of our advertising spend, and marketing initiatives, and believe these metrics are important to our investors and their review of our financial performance. Our customer retention rate representing existing customers who purchased at least once during the quarter continue to increase over the prior quarter due a heavy focus on keeping and re-engaging existing customers, in particular, over the holiday season. Average order value continued to decline to just over $90 with larger holiday [Audio Gap] as we focused on getting customers to purchase multiple times, in particular during Cyber month, with the median frequency at 39 days, and regarding our direct to consumer website traffic, our new website traffic increased 7% over the prior quarter, with several contributing factors, including traffic via paidsocial and native advertising among others. Coincidentally we were Number 1 and the CBD category for web traffic in the month of December 2020 according to SimilarWeb. In terms of specific advertising sub-department highlights, let's start with our continued focus on podcasts, which have proven historically to be strong traffic and conversion drivers for cbdMD, since they provided cbdMD with our best overall quarter in terms of return on advertising spend. Moving forward, we continue to explore additional opportunities with high profile podcasters who deliver deep, quality, strategic audiences. Second, with a continued focus on education, promotions, cross selling, up-selling and segmentation, our email open rates and associated purchases continue to increase, proving to us that email remains one of the most cost effective tools to customer engagement and conversion. We also launched our first ever SMS campaign with very promising initial results. Third, as I discussed during our last call, cbdMD’s first nationally viewed television advertising campaign entitled Conquer the Day was broadcast in both 15 second and 30 second commercial formats across multiple, national cable networks. Our campaign delivered very promising metrics, including strong average order values and very encouraging direct-to-consumer websites sales. As such, we are expanding our TV Advertising campaign in 2021 with an eye on launching our next campaign soon. Paw CBD showed excellent first year results and the brand's metrics continue to move in a positive direction. We are seeing the direct-to-consumer power of cbdMD.com translate into significant growth for pawcbd.com. Concurrent with a large focus on new customer acquisition, we recently updated the pawcbd.com website as we look to deliver an industry leading experience online for all customers, with an eye on increasing Paw CBD dominance in the CBD pet market. In terms of a few additional highlights for the Paw CBD brand, we are excited to launch our advertising partnership with Tripadvisor as well as Paw CBD’s first national TV campaign which occurred this past weekend during the Puppy Bowl on Animal Planet and Discovery Plus. We remain proud of the awards and accolades we have received for many of our products. Over the past few years cbdMD was named the top 10 domestic branded in Topical and Skin Care/Beauty category by the Brightfield Group, who also after conducting a survey of more than 3500 CBD users ranked cbdMD number one in terms of overall consumer satisfaction, number one in unaided consumer awareness, and number one in high quality, innovative and reliable CBD products. Paw CBD has also won several awards, including Pet Innovation Award for best Dog Calming Products 2020 and 2019’s Pet Business Magazine industry recognition award for Dog Calming Aids. We were also pleased to announce recently that cbdMD officially entered the Global Beauty and Skin Care market with its launch of cbdMD Botanicals, a naturally derived skin care line featuring 15 luxury products. cbdMD Botanicals offers consumers luxury botanical skincare, while at the same time being cost conscious in the beauty and skin care market, and with our proven track record of providing our customers with some of the best-selling products across multiple CBD categories. We believe that cbdMD Botanicals will be well received in the growing, multi-billion global beauty and skin care market. Our wholesale distribution channel has also made significant strides domestically and internationally. We are seeing a significant increase in international expansion, with strategic partnerships throughout the Caribbean market and in Mexico, where we have added two distributors. Also, due to the trending success of our pet brand, Paw CBD has been added to the CBD [Audio Gap] as well as featured live on the Bulldog Shopping Network. We're also seeing our customer average order amounts increase on a month-to-month basis as this channel recovers from the pandemic. With that, I'll now turn the call over to our CFO, Ronan Kennedy to review our most recent financial results.
Ronan Kennedy: Thank you, Ken. I'm going to start with a brief summary of our GAAP based results. On a GAAP basis total net sales for the first quarter hit another all-time high of $12.3 million or 22% increase, year-over-year increase and a 5% sequential quarterly increase. Our quarterly e-commerce sales also hit a record high of $9.7 million in the first quarter of fiscal 2021, a 41% year-over-year increase and 13% sequential quarterly gain. E-commerce now represents approximately 78% of our total revenue. Our wholesale business generated $2.6 million of net sales for the first quarter of fiscal 2021, as compared to $3.2 million for the comparative quarter in fiscal 2020. The first quarter of fiscal 2020 was the last quarter prior to COVID-19 and we believe the year-over-year performance is primarily a result of the broader impact experience by brick and mortar retailers nationwide over the last 12 months. Our GAAP gross profits as a percent of net sales came in at 72% for the first quarter of fiscal 2021, compared to 64% for the comparative prior year period. The strength of our e-commerce sales and improvement in our operations help drive these positive results. Going forward, we expect to maintain our gross profit margins between 65% and 70%, provided we maintain similar e-commerce revenues as a percent of our total revenue. Our operating expenses for December 31, 2020 quarter were $10.7 million, which was a decrease of 15% over the December 31, 2019 quarter and a decrease of 2% from the quarter ending September 30, 2020. Overall, this resulted in a GAAP loss from operations of approximately $1.76 million for the December 31, 2020 quarter, a $4.35 million improvement from the $6.11 million loss from the prior year period, and a $2.8 million improvement over the quarter ending September 30, 2020. Our non-recurring operating expenses for the first quarter of fiscal 2021 included a $403,000 one time accrued expense related to severance and together with $300,000 in discretionary bonus accrual, $300,000 in non-cash stock expenses and depreciation expenses of $233,000 resulted in a non-GAAP adjusted operating loss of $523,000 for the first quarter of fiscal 2021 as compared to a $5 million non-GAAP adjusted operating loss in the first quarter of fiscal 2020. The decrease in non-GAAP adjusted operating loss over the December 31, 2020 quarter was mainly attributed to cost cutting and an increase in gross profit dollars resulting from improvements in both revenues and gross margins. We spent $304,000 on regulatory and R&D this past quarter, and we ramped up our – as we ramped up our regulatory efforts and increased our quarterly sequential marketing and sponsorship expenses over $290,000. We continue to pursue several objectives to drive operational efficiency and lower our cost structure. Other income expenses on our consolidated income statement includes a non-cash contingent liability charge related to the December 2018 acquisition of Cure Base Development. The contingent liability is revalued at the end of each quarter and during the first quarter of fiscal 2021 we had an increase in value of $8.5 million, which created the corresponding other non-cash increase in contingent liability related to the earn-out shares. The change in valuation of the contingent liability was primarily a result of the increase in the market price of our common stock during the period from $2 to $2.95 a share. Any increase in our common stock price increases the contingent liability - an increase in contingent liability impacting net income. In addition, the other income expenses included a $540,000 realized gains from the sale of investments, marketable and other security. We had cash and cash equivalents of approximately $28.8 million and working capital of approximately $30.6 million on December 31, 2020 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 December 31, 2020 increased approximately 37% from September 30, 2020 to $37.4 million. A primary driver of the increase in current assets was the approximate $15.8 million in net proceeds from a preferred offering in December of 2020. As of December 31, 2020 the company's total current liabilities were $6.7 million, of which approximately $2.1 million is accounts payable and $2.3 million is accrued expense. The company has approximately $209,000 of finance notes on equipment for our manufacturing facility, as well as a $1.45 million SBA loan from the Paycheck Protection Program. As mentioned, we ended the quarter with $28.8 million in cash and cash equivalents and coupled with our non-GAAP adjusted operating loss trend, we remain confident in executing our 2021 plan. Our plan remains to utilize our strong balance sheet to make further scientific and regulatory investments, direct incremental strategic marketing efforts, including increasing our TV spend, grow our recently launched U.K. business, and support our efforts to expand our product portfolio. With that, I'd like to now turn the call back over to Marty.
Marty Sumichrast: Thank you, Ronan. With that, I'd like to open up the lines for any question-and-answers, Q&A.
Operator: Certainly! [Operator Instructions] And we do have a question coming from Scott Fortune. Scott your line is live, please announce your affiliation and pose your question.
Scott Fortune: Good afternoon, guys. Thanks for taking the question. I kind of want to get a sense of the growth here kind of quarter-over-quarter, what you're seeing. The COVID impact for you, I know your e-com has been strong, but kind of a slowing quarter-over-quarter growth and then the $28 million in cash, kind of what were you deploying that to continue to drive growth going forward, whether its expanding doors or like you said, the marketing side of things. Can you provide a little color?
Marty Sumichrast: Yes Scott, this is Marty. So we are seeing, you know continued strength on the direct-to-consumer business. On the brick and mortar side of the business, as you know the big retailers are still out of the game for the most part and our strategy of dealing with a lot of smaller retailers, has kept that business still relatively stable. I would say it's on its way back to where it was pre-COVID levels. You know my sense is we are going to probably be there towards the end of this quarter, early next quarter, so. And then we are talking – there is going to be a, I think and a more willingness from the big box folks as we get into the second half of calendar 2021. You know the whole situation with legislation around marijuana certainly helps CBD. We’ve been positioning ourselves as a leader in the branding space, and so we believe that when that time comes, we're going to be really well positioned to move into there. As far as utilizing the capital, look we've taken a business that was burning $5 million, $6 million a year ago down to you know pretty much near breakeven. Two quarters ago we were – our adjusted number was I think 180,000. We went a little bit deeper in September with about 1 million, now we're back to you know 523,000. So I think that's going to continue to improve sales. As sales continue to improve with our margins, we can reinvest those dollars. So we are not having to use the capital to kind of deficit spend to some extent. We're looking at opportunistic ways to utilize that capital. So we are going to be spending more money as Ronan said on television. That's been a really great return for us. Our podcast, that's been a really great return for us, and we've got some other exciting things on the horizon. So we think we're going to have a really great 2021 and you know we've now been at this for eight quarters since going – you know taking cbdMD public, besides one quarter which was the March quarter of last year when the pandemic hit. We’ve had seven out of eight straight increases and you know we anticipate that's going to continue again and again, you know. So we're excited about that and also our Paw brand is really also getting a tremendous amount of traction from retailers and the online space.
Scott Fortune: Okay, I appreciate that. You are getting more competition from MarthaStewart coming on the Pet CBD, that’s all helped growing the overall market from that stand point, and you’ve done a great job of expanding products and innovations. Just kind of step me though, us through the Botanicals and the luxury side. That seems like a new channel or a new demographic that you are going after. Kind of how do you see that growing or the cadence of that growth throughout 2021 you know going forward.
Marty Sumichrast: Yes, you know one of the things that we really wanted to do is expand the demographic into the female demographic, and you know try to hit that demographic, female over the age of 35. So we did a couple things. We started really marketing toward that demographic. If you go to our – if you go to cbdMD.com and go to our commercial that Ken mentioned Conquer the Day, you'll see that it was really focused towards that female demographic, and now the launch of the botanicals line really goes after that demographic. So we started it, selling it exclusively online and now as we push into this year, we were sort of getting a tremendous amount of interest from all of our retailers and for new retailers to carry that line. Ken, would you like to add anything to that to Scott.
Ken Cohn: The only thing I would add is it’s a great entry point into the cbdMD family and once we get them into the family, I think it's an extra – it's an exceptional way for them to try other products that are part of our brand portfolio. Other than that Marty, I think you nailed it.
Scott Fortune: Okay, I appreciate it. Thanks for the color and I’ll jump in the queue.
Marty Sumichrast: Thanks Scott.
Operator: Thank you. And with no further questions in the queue, that does conclude our conference call for today. Thank you so much for your participation.