YCBD - cbdMD Inc. (YCBD) Q4 2022 Earnings Call Transcript
cbdMD, Inc. (YCBD)
Q4 2022 Earnings Conference Call
February 13, 2022 4:15 PM ET
Company Participants
Brad Whitford - VP of Finance
Ronan Kennedy - CFO and COO
Kevin MacDermott - President
Conference Call Participants
Presentation
Operator
Good afternoon. Welcome to cbdMD 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, which followed the filing of its quarterly report on Form 10-Q.
Today's conference call is being recorded and will be available online along with 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 listen-only mode. This call will be followed by a Question-And-Answer Session.
At this time, I would now like to turn the conference over to Brad Whitford, the company's VP of Finance. Please, Brad, go ahead.
Brad Whitford
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. 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-Q for the quarter ended December 31, 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's website at www.sec.gov.
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 securities laws.
With that, I'd like to turn the call over to Kevin.
Kevin MacDermott
Thank you, Brad. Hi, good afternoon, everybody, especially to our shareholders. Just a few months ago, we spoke about how 2022 was a reset year for cbdMD. The calendar year culminated with us predominantly completing that process. This reset was critical for us to get the business healthy and reestablish a foundation for what we feel best positions us for growth.
We made great strides in rightsizing our cost structure, along with making sure we have the talent and propel outside relationships to drive that growth. We made a lot of hard organizational decisions and we had to unwind from past initiatives and sponsorships that never delivered on the promise.
That is behind us. We have now segue to an all-out focus on revenue, our approach is purposeful. We expect to grow the top-line while holding our expenses relatively flat, accelerating along the path to profitability.
I want to stress that this was not about shrinking cost to manage a smaller revenue base, but about creating a flexible company with the right cost structure and preparation for sustainable and profitable growth.
No longer are we burdened by [Indiscernible] overhead and unproductive spend. Paving 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.
Those components are in place. 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 to revenue ratio.
As you can see, pending top line gains will translate into a much improved bottom-line. Have we met us and for that matter, our own expectations on top line growth, certainly not, revenue trends have been disappointing, but our operating income continues to improve.
Ronan will speak to our overall financials. 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.
On our December call, I stated that we would begin our marketing push at the end of the year and entering into January. Here is what we've done in that regard. We announced our new CMO, Shannon Charles, Shannon brings to us a fresh perspective in positioning brands and wellness products to consumers and retailers.
Our digital and direct marketing experience and relationships will be a nice boost to our go-forward strategy, as well as our bottom line, for a proven track record in helping brands turn around messaging, packaging and position, as well as to expand as a welcome addition to our team. We've engaged with RIQ, a leader in the direct-to-consumer digital marketing field to support our marketing efforts.
We have entered into an advertising and marketing engagement with A360 Media. These steps not only augment our capabilities, but gains us access to a print and digital subscriber base to which we will share our proposition. That's a significant set of eyeballs and demographics that we haven't reached in the past.
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 for the value of our proposition, as well as sharing our planned product line extensions, resulting into a larger cost size later in 2023.
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. We believe in the high-strength products we launched at the end of September 2022, we believe those products are priced affordably to make them part of consumers' daily wellness regimen.
We know that the quality of our products are among the best in the market. We have many reasons to be optimistic, though as mentioned, we are disappointed on revenue, but with the improvements that we put in place and are now executing on, we expect to generate results. The CBD market is a multibillion-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.
On a final note, before I turn it over to Ronan, 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. Despite the comprehensive set of regulations in place since the FDA started specifically regulating diary 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 complying with the existing regulatory framework to prove our products as safe and efficacious for our customers.
Look, we have demonstrated 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 and our clinical trials proving their efficacy.
As the industry leader, we look forward to working with other responsible brands and industry trade groups to best address this issue ensuring that our customers in the broader CBD market continue to have access to products that are safe and to help address their health and wellness needs.
With that, I'd like to turn it over to Ronan. Ronan?
Ronan Kennedy
Thank you, Kevin. Total net sales for the first quarter of fiscal 2023 were $6.1 million or a 34% decrease from the prior year comparative quarter total. Our quarterly e-commerce business generated sales of $4.9 million in 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, a pullback in marketing spend and macroeconomic forces on consumers. E-commerce represented 81% of our total net sales for the first quarter of 2023 versus 76% in the prior year comparative quarter. 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 look to sell through legacy inventory before bringing on new products.
In addition, we had a few topical products that were out of stock during the quarter. The 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 profit margins in the mid-60s range when factoring in the sales mix.
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 onetime sponsorship termination expense mostly made up of $885,000 and accelerating a non-cash stock expense associated with grants in prior years.
Excluding the onetime 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 -- with $277,000 non-cash intangible expense as we began amortizing intangibles in January 2022.
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. 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.
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.
Our non-GAAP adjustments to operating expenses for the first quarter of fiscal 2023 include a 137 non-cash employee stock expense, $377,000 depreciation and 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.
The decrease in non-GAAP adjusted operating loss over the prior year period is primarily attributed to management's focus on our cost structure and profitability.
Sequentially, our non-GAAP adjusted operating loss increased by $0.5 million from the September 2022 quarter. Based on January's results and quarter run rate, we are anticipating a large reduction in both GAAP and our non-GAAP adjusted operating losses for the second quarter.
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. Most of our clinical studies are wrapping up and their costs were front-loaded. 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.
Other income, expenses on our consolidated income statement for the first quarter of 2023 include a non-cash contingent liability gain of $61,000 related to the December 2018 acquisition of Cure Based Development. The earn-out contingent liability is currently on our balance sheet at $215,000. We are now in the fourth marketing period that runs through November 2023.
During the fourth – during the first quarter of 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.
We had cash and cash equivalents of approximately $3.3 million and working capital of approximately $6 million on December 31, 2022, compared to cash and cash equivalents of approximately$6.7 million and working capital of approximately $10.7 million as of September 30, 2022.
For current assets as of December 31 decreased approximately 28% from September to $11.5 million. The primary driver of the decrease is 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 sponsorship.
As of December 31, the company's total current liabilities were $5.5 million, of which approximately $1.7 million as accounts payable and $2.6 million accrued expenses. We remain very focused on managing our cash position and liquidity. We continue to address our cost structure to improve our burn.
As of early February, our total headcount is approximately 60 employees as compared to 90 at the end of our fiscal year. We have sublet approximately half of our warehouse and continue to seek alternatives to lower the cost of our headquarter lease. 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. We are pursuing multiple avenues to improve our liquidate while being mindful to our existing shareholders. Adara’s shareholders approved the proxy vote and on February 10, Adara closed this transaction, resulting in a $1 million return back to our balance sheet on Friday.
Last week, we entered into a strategic transaction with A360 that expands our marketing relationships with them and the way its structured provides us access to valuable marketing without impacting liquidity. We are continuing to pursue additional strategic partnerships and other avenues that could accelerate profitability or improve our liquidity position throughout 2023. We remain focused on the business, attracting new customers and delivering for all our stakeholders.
And with that, I'd now like to open up the call to questions.
Question-And-Answer Session
Operator
[Operator Instructions] The first question comes from Todd Justice, a shareholder. Please go ahead.
Unidentified Analyst
Hello. Good afternoon.
Kevin MacDermott
Hi, Todd.
Unidentified Analyst
Hey, how are you? So just, first question is for Kevin. So, with our marketing efforts and the hiring of the new CMO, can you give us some background on Shannon, what she is going to bring to the table?
Kevin MacDermott
Sure. Shannon comes out of the food and supplement space. She has been involved with just a whole host of curated marketing initiatives around consumer wellness and I think that's going to be little bit of an add to the organization, getting that direct-to-consumer, wellness product and branding into our portfolio. And I think what we haven't done a great job of in the past is opening up our efforts to a broader set of demographics.
So I think we've been really good at the fringe athlete and the Joe Rogan demographic, if you will and we'll continue to support that, but now opening up to that wider set of consumers, we're pretty confident that's going to bring added growth and Shannon has been pretty successful with that in the past.
Unidentified Analyst
Where has she been successful at? I'm failing to see where her experience, what positions she's held in the past at this level?
Kevin MacDermott
Well, I don't want to get too heavily into Shannon's qualifications. But most recently, at Naturade, she did a great job of taking that brand from relative obscurity into a high growth and a subsequent acquisition. And we are pretty confident that is going to help us out quite a bit.
Unidentified Analyst
Yes, okay. And so, my other question is, where do we stand on cash available to run the company?
Ronan Kennedy
At the end of the quarter, we had $3.3 million cash on hand. We just got back $1 million and we've made some pretty large strides with the activity 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.
Unidentified Analyst
Yes. But Adara, obviously, it was our last – unfortunately, we got that money back because if we could have kept that in there, I think that had been a great thing for the company, we would have made money, but we got $1 million in capital back, right? But that's it. There is no other land minds coming, no other big windfalls of cash.
So it's only going to be a sales and how well we run the company at this point, right? So with our cash burn, I mean, I can do the math, I can – with our cash burn and the cash that we have on hand, say starting today, I mean, I figure we got four to six months at best of cash.
Ronan Kennedy
Look, we are not making any specific projections on that, although we can say as we continue to sort of make progress.
Unidentified Analyst
Well, I get you are not making projections. I don't need the projections. I can see – I can do my 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 to salvage the kind of cash position we're in.
Ronan Kennedy
I guess, we feel like we've made the cuts that have needed to are focused on our top-line and have been very focused on our liquidity position and making sure we have enough capital in the business to operate going forward.
Unidentified Analyst
And so based off of your assessment, how much capital we have, how much runway do we have at this point?
Ronan Kennedy
Look, I guess I'll go back to what our balance was at the end of the quarter and plus the incremental capital that we had and believe we are in a much better spot today than we were 30 days ago, both on sort of our cash position and our operating run rate.
Unidentified Analyst
Okay.
Kevin MacDermott
That's a tempered optimistic outlook, but we'll see. I guess we'll see.
Unidentified Analyst
Thank you.
Operator
This concludes today's question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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cbdMD, Inc. (YCBD) Q4 2022 Earnings Call Transcript