cbdMD, Inc. (NYSE:YCBD) Q4 2022 Earnings Conference Call December 15, 2022 4:15 PM ET
Company Participants
Ronan Kennedy – CFO and COO
Kevin MacDermott – President
Sibyl Swift – VP of Scientific and Regulatory Affairs
Conference Call Participants
Operator
Good afternoon. Welcome to cbdMD Inc.’s September 30 Fourth Quarter and Fiscal 2022 Earnings Call and Update. This afternoon, the company issued a press release that provided an overview of its fourth quarter and fiscal year 2022 results, which follows the filing of its annual report on Form 10-K. 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 presentation, 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 now like to turn the conference over to Ronan Kennedy, the company’s Chief Financial Officer and Chief Operating Officer. Ronan, please go ahead.
Ronan Kennedy
Thank you, Trice, and thank you all for joining the cbdMD’s fiscal 2022 earnings call and update. On the call today, we also have Kevin MacDermott, our President and Dr. Sibyl Swift our Vice President of Scientific and Regulatory Affairs.
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 risks described in the company’s annual report on Form 10-K for the quarter ending September 30, 2022, and our other filings with the SEC, all of which can be reviewed on the company’s website at www.cbdmd.com or on the SEC website at sec.gov.
Any forward looking statements made on this conference call speak only as of today’s date Thursday, December 15, 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 Kevin.
Kevin MacDermott
Thank you, Ronan. Happy Holidays everybody. 2022 was a reset year for cbdMD. We began the year taking aggressive action to rationalize our spend and focus on profitability. We’ve made a lot of great strides, but it remains a difficult environment for the CBD industry. We spent a lot of time studying the market and consumers and in addition to addressing our cost structure, spent most of the year designing our business to address the following challenges, product efficacy, affordability, and education.
CBD is often misunderstood in its impact question. We took this to heart and we wanted to ensure that our brand and products are never questioned for their quality or efficacy. With that imperative in mind, we scrutinized our U.S. product portfolio and launched some of the highest concentration products in the market. This reset resulted in cutting our human product SKUs from over 150 to just over 40. Our emphasis was to be sure that if you take our products that you would feel their impact, so our lineup now features CBD’s strengths that range from 1,500 milligrams to 7,500 milligrams. That means if you consume our products, you will feel the benefit of taking properly.
We know this through consumer feedback and the results of our two-year long clinical studies. Everyday wellness products were not enough. We knew we could provide consumers more and further differentiate our product portfolio. In October, we completed development of our product design to address the pain management market, for cbdMD MAX. cbdMD MAX provides consumers a naturally derived alternative for pain with the unique combination of cbdMD’s proprietary cannabinoid blend and Univestin, a clinically proven natural ingredient with a long legacy of safe human consumption.
Pain impacts millions of Americans, we’re excited about the product line extensions of channel opportunities that will come with cbdMD MAX. In order to generate growth and attract new customers, it’s imperative that our offer is effective, and at a price that consumers can afford as they take CBD as part of the everyday regimen. We expect consumers to take these effective, high-strain products that must be affordable, especially in today’s economic climate. We believe our products are some of the most competitively priced products in the category.
We expect that our disruptive value will result short term impact to our top line, but as we begin our marketing push at the end of the calendar year 2022 and entering the new calendar year 2023, not only do we expect to attract switches from within the category, with our ongoing educational efforts, the new segmentation initiatives and tailored cohort messaging, we believe we will attract new consumers into the category.
We introduced this new highly effective offer pricing in late September. In anticipation of this new product lineup, we discounted our inventory during the summer so as to avoid any significant write-down. That had a compression effect on revenue resulted in consumer stockpiling, elongating our turn cycle. Keeping this in mind, we were intentionally cautious in promoting the new offer to our base of loyal customers heading into the calendar fourth quarter to be sure our messaging coincided with the new demand.
Approaching the end of the year as the demand from our base returns, we will begin to heavily promote this new lineup and value proposition expecting to delight our base, track switches from other CBD brands. Our expectations going into calendar 2023 are positive.
I’ll now speak to our wholesale offers. Our inside sales team, in anticipation of the new product release, got advanced access to the new SKUs and pricing at the end of August and offer them at great introductory rates to offset any pushback from our base of loyal retailers. The new rate card and simplified SKU set has been well received, and we expect that by the end of the calendar year, the approximately 30%-plus compression impact on B2B revenue will be overcome by new added customer relationships in shorter term cycles.
Again, we have high expectations for 2023. And through September, our product shipped to over 330,000 domestic retail locations since January.
On the grocery front, we entered into a relationship with Wegmans Grocery with five functional SKUs, and these products are currently on the shelves of over 80 stores. This announcement has helped us gain traction in discussions with other grocery chains and big box retailers who had previously been cautious about engaging with the category.
Our NSF-certified SKUs helped pave the way for acceptance for our CBD products in Wegmans. NSF product certification guarantees what is on the label is in the product. Achievement of the certification is another way that we at cbdMD demonstrate our leadership and quality products for our customers and will undoubtedly lead to more opportunities in the grocery and big box space.
Our category leading NSF for sports certified line is a key component to growth in the sector. We were the first CBD company to commercialize NSF for sport products and remain the only company actively selling NSF for sports CBD products. We believe this line opens the CBD category to a wider customer base than just athletes, including a number of key professions that could benefit tremendously from safe CBD products.
By way of expansion, we have operationalized a presence in Japan, standing up systems and support team and began shipping product in late fiscal 2022. We expect this market to expand and other opportunities to opened up during calendar 2023.
cbdMD is one of only a handful of companies in the risk assessment phase with the UK Food Standards Agency where our data is actually being analyzed by government authorities. We are currently allowed to sell during the assessment phase with the anticipation being fully approved shortly. In the EU, we believe we are the only company within the risk assessment phase. All companies were put on hold, but we were able to clear that hurdle by providing substantive responses to government authorities and therefore, we believe we have a significant advantage over any other company to be first approved.
That being said, we’re focusing on our UK supply chain and logistics with the intent to conduct e-commerce at scale. We anticipate some further announcements in the UK during the beginning of the 2023 calendar year. The investment in our safety and sciences allowing us to more effectively communicate to the overall market that cbdMD cannabinoid-based products are a safe alternative for everyday wellness.
Our R&D efforts have paved the way to educate, open new channels and partnerships, countries and customers have contributed to a robust pipeline of opportunities that we are developing for you 2023
And with that, I’ll let Sibyl speak to ongoing regulatory and R&D efforts.
Sibyl Swift
Thank you, Kevin. On our last call, Kevin said that we have laid the foundation for cbdMD to deliver superior everyday wellness products that are formulated to specifically address the needs of our customers. We have discussed our Citizens Petition to FDA on several of our last call. We began the process in February through our Trade Association, the Natural Products Association, or NPA, and the FDA had until August 22 to respond. As we anticipated, the FDA did not provide a substantive response. And true to form, they stated they needed more time to consider our request.
In light of the agency’s current approach to regulating dietary ingredients, and my over half decade of experience working at the agency, we believe that now is the time to stand up as an industry and ensure that the agency does not block innovation in the dietary supplement space. While there has been little movement at the federal level towards regulatory clarity for hemp-derived cannabinoid products, states continue to introduce legislation to ensure that consumers have access to safe products that are effective. Maintaining compliance with multiple different state regulations is challenging, but is now a known cost to operate in the cannabinoid space.
We are actively engaged with state agencies whenever possible, to present reasonable legislative solutions to ensure that our customers have access to products that support their wellbeing. We are also working with the NPA to directly collaborate with Congress persons and their staff on Capitol Hill to educate them on the challenges that current regulatory regime presents, but more importantly, on the opportunities that responsible legislation and their engagement with the agency would provide to reputable companies like cbdMD and our customers who deserve safe and effective botanically drives wellness solutions at affordable prices.
Our novel foods applications are still actively being analyzed as part of the risk assessment phase by the governments in both the UK and EU. We believe we are still the only applicant that has an active risk assessment and not held by EPSA on a clock stop. While other brands including some of our top competitors in the United States, were removed from the market in the UK for marketing products whose THC levels were above the legal limit, our products are still allowed to be legally sold. We will be pursuing similar opportunities in the EU, as we emerge from the risk assessment phase.
We currently have 46 products approved and being sold in Costa Rica, with several more plans for submission. We also have five products approved in Ecuador. In Mexico, the Health Ministry, COFEPRIS is currently working through details related to implementing regulations after laws recently passed to legalize cannabis. We are actively engaged with the Health Ministry and have been informed it could take more time. We are not content to wait until the final rules are implemented. And therefore, we have identified a potential white label partner who holds grandfathered permits to manufacture. We’re in the final stages of evaluating a partnership to distribute our brand in Mexico.
We are excited to announce that the clinical study performed at the University of South Carolina to assess the efficacy of our core broad-spectrum blends in healthy human subjects has completed. Our first set of results demonstrate that our broad-spectrum hemp extract reduces the perception and intensity of pain in healthy adults. The second set of results demonstrated reduced anger and stress in men and women respectively, which led to overall mood improvement.
We have also found significant benefits in a number of other key areas that matter to our customers, including immune support and sleep. We expect to publish our findings in a peer-reviewed journal sometime in 2023. Once published, the data from the study will be submitted to the Food and Drug Administration as part of the regulatory submission for a structure function claim notification, which is a process whereby manufacturers and form FDA have their intent to make statements about their products benefits on the structure or function of the body.
We firmly believe that our products are not drug precluded, and that we are fully compliant with all applicable dietary supplement regulations. Submitting our regulatory package in support of a structure function claim notification is another way that we demonstrate that we are leaders in the industry. We are advocates for regulatory clarity and fair treatment for our industry and will continue to fight while others choose to sit back and wait. We will pave the way for legal cannabinoid products
The data will also be instrumental to guiding our product development roadmap. It confirms that our products will help our customers to support their everyday health and wellness. We will use the data to guide future functional formulas in areas that matter most to our customers. After publishing the data, we will launch marketing campaigns focused on educating our customers on the clinically proven benefits of our core products. We want our customers to understand how our products can help them to achieve their goals. Our formulas pair our clinically proven ingredients with functional ingredients that are also clinically studied and proven to support areas that matter most to them, including sleep, mode and recovery.
The data has already guided our recent launch of new flagship products, including tinctures, gummies and soft gels containing the same broad-spectrum blend that was studied in the human clinical. The studies’ results will also guide future investigational studies executed by cbdMD’s therapeutics division. We are excited to announce the clinical study at Colorado State University explored our core broad-spectrum hemp extracts benefits for dogs in the areas of mobility and active lifestyle is also concluded. cbdMD’s broad spectrum hemp extract improved quality of life, as well as measures of pain severity, and pain interference from the canine brief pain inventory scores.
With that, I would like to turn it back over to Ronan.
Ronan Kennedy
On a GAAP basis, total net sales for the fourth quarter of fiscal 2022 were $7.9 million were 19% decrease from prior year’s comparative quarter total. For our fiscal year ended September 30, 2022 audited in net sales totaled $35.4 million, a 20% decrease compared to $44.5 million in fiscal 2021. Our quarterly e-commerce direct-to-consumer business generated sales of $6.3 million in the fourth quarter of fiscal 2022. This was a 13% year-over-year quarterly decrease. For fiscal year-end 2022, e-commerce generated $26.4 million of net sales compared to $32.9 million for the comparative prior fiscal year or 19% decrease. E-commerce represented 79% of our total net sales for the fourth quarter, and 75% for the fiscal year-ended 2022.
Our wholesale business generated $1.6 million of net sales for the fourth quarter of fiscal 2022, down 37% compared to $2.5 million for the comparative quarter in fiscal 2021. Kevin previously mentioned our sell-through strategy prior to our transition to our higher strains offering, this had a large impact — larger impact on our wholesale business as we transitionally offering and had sold several products out of stock prior to the reset.
For the fiscal year-ended September 30, 2022 and 2021, our wholesale business generated net sales of $8.9 million $11.6 million respectively. Product sales totaled $3.7 million for 2022.
Our GAAP gross profit as a percentage of net sales came in at 64% for the fourth quarter of fiscal 2022, this compares to 58% for the comparative prior year period. For the fiscal year-ended September 30, 2022 and 2021, gross profit was 63% and 67% respectively, as a percent of total net sales. We expect to maintain gross profit margins in the mid-60s when factoring in the sales mix.
Our operating expenses for the fourth quarter fiscal 2022 totaled $7.9 million, beating the $8 million target we provide in our last call and which was down from $12.7 million as compared to the prior year period. Operating expenses decreased 38% from the prior fiscal year, mainly due to sizable cost reductions across all areas of our business.
For the fiscal year-ended September 30, 2022, operating expenses decreased to $39.5 million from $49.6 million in 2021. This decrease is mainly due to reductions across all areas of our operating expenses, that was partially offset from an $884,000 non-cash intangible expense as we gained amortizing intangibles during the fiscal year. Overall, this resulted in a GAAP loss from operations of approximately $14.8 million for the fourth quarter of fiscal 2022, as compared to $7 million loss from the prior year period.
Excluding the $11.9 million goodwill impairment our non-GAAP loss from operations totaled $2.9 million or $5.1 million improvement over the prior year. Sequentially operating income declined slightly from the June 2022 quarter to the fourth quarter of 2021. This is primarily attributed to $1.4 million drop in gross profit while achieving $1.1 million in net cost savings reduction, mostly from marketing and payroll expenses.
For the fiscal year-ended September 30, 2022, and 2021 our GAAP loss from operations totaled $78.1 million and $19.6 million respectively. Excluding the $60.9 million of goodwill and intangible impairment our non-GAAP loss from operations improved to $17.2 million a $2.4 million year-over-year improvements despite the drop in revenue.
Our non-GAAP adjustments to operating expenses for the fourth quarter of fiscal 2022, include a $275,000 non-cash stock expense, $456,000 depreciation and amortization and $11.9 million of goodwill impairment resulting in a non-GAAP adjusted operating loss of $2.1 million for the fourth quarter of fiscal 2022 as compared to a $4.7 million non-GAAP adjusted operating loss in the fourth quarter of fiscal 2021. The decrease in the non-GAAP adjusted operating loss over the prior year period is primarily attributed to management’s focus on our cost structure and profitability.
Sequentially, we reduced our non-GAAP adjusted operating loss by $0.6 million from the June ’22 quarter to September ’22 quarter. We now have five consecutive quarters of improvement in our non-GAAP adjusted operating loss. For fiscal 2022, our non-GAAP adjusted operating loss totaled $13.1 million and represents a $0.5 million improvements in the prior year despite the significant drop in revenue.
We invested $565,000 in cbdMD Therapeutics’ R&D during fiscal 2022 as compared to $650,000 in 2021. Much of this was front-loaded in the year, but we are now reaping some of the benefits through the clinical results Sibyl mentioned earlier. We believe this will provide a unique differentiated position for both product efficacy and education in the category.
Other Income expenses in our consolidate income statement for fiscal 2022 include a $0.25 million gain related to the sale of assets early in the year, in addition to a non-cash contingent liability gain of $8.5 million related to our December 2018 acquisition of Cure Based Development. The earnout contingent liability is currently on our balance sheet at $276,000. We’re now in the fourth marking period that runs through November 2023.
During the fourth quarter — of fiscal quarter of 2022, we utilized approximately $2.8 million of cash. The main components of this included our adjusted non-GAAP operating loss of $2.1 million paid dividends of $1 million with some working capital adjustments making up the difference.
We had cash and cash equivalents of $6.7 million and working capital of approximately $10.7 million on September 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 as of September 30, 2022 decreased approximately 56% from September 30, 2021 to $16 million. The primary driver of the decrease in current assets was the usage of cash for our operations.
For the September 30, the company’s total current liabilities were $5.2 million, of which approximately $2 million is accounts payable and $2 million accrued expenses. As our audited, consolidated financial statements for the fiscal year-ended September 30, 2022 containing audit opinion from an independent registered public accounting firm and including an excellent [indiscernible] paragraph related to our ability to continue as a growing concern. We remain very focused on managing our cash position and liquidity.
We continue to address our cost structure to improve our bar. We optimistic about a 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.
We are pursuing multiple avenues to improve our liquidity, while being mindful to our existing shareholders. Adara has filed their proxy vote, and assuming it receives the votes and anticipates closing their transaction in January which will return our $1 million investment. We’re in the process of filing for an employer retention credit, and pursuing several strategic partnerships and other avenues that could either reduce our burn, accelerate profitability or improve our liquidity position in 2023. As Kevin mentioned, we truly have a unique and compelling product offering that allows customers to benefit from its efficacy without breaking the bank.
We remain focused on the business, attracting new customers and delivering for our stakeholders.
With that I’d like to turn the call back over to Kevin.
Kevin MacDermott
Thank you. That wraps up the today’s discussion. And we’ll just open it up for Q&A.
Question-and-Answer Session
Operator
Thank you, Kevin. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Richard Molinsky [ph], a private investor. Please go ahead.
Unidentified Analyst
Hi, guys, how you doing? Congratulations. And I love the product — I love the product as you know. You mentioned about this $1 million payment that you’re going to receive in January, you were mentioning. Can you just explain that a little bit further to me if you don’t mind? And I have one more question after that.
Kevin MacDermott
Sure. So we previously had invested $1 million in the Adara stack that’s been sitting on our balance sheet. And our last — all we — as part of sort of the situation that happened, ended up signing new agreement to receive the capital back upon a closure of that transaction. So that transaction has been moving forward. They filed the sort of final proxy to prove the merger, so I think most parties are assuming that that is likely going to happen. At that time that we would get our capital back.
Unidentified Analyst
Okay. So with that capital, and a plan, which you’ve been on, which is to get to profitability. And I know, I’ve asked you this before. But my hope is that we don’t have to go back to the equity markets, you could do some strategically or get to the profitability, $1 million dollars definitely going to help. But is there anything you could talk about? Will this be enough money do you think to see whether you are executing or there could be something else to talk about that would maybe help the finance structure?
Ronan Kennedy
Look, Richard, we’re looking at a lot of different alternatives right now. So it can’t be anything specific. But we got a lot of things in the works.
Unidentified Analyst
You got it. No problem. I know you do. And I appreciate that. And good luck to you.
Kevin MacDermott
Thanks, Richard.
Operator
[Operator Instructions] As there are no further questions from the phone lines, this concludes the Q&A session and today’s conference call. You may disconnect your lines. Thank you for participating. And have a pleasant day.
Be the first to comment