Transcript
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.
Thank you, Trice, and thank you all for joining 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 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.
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, we 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. We took this to heart and 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 ensure that if you take our products, you would feel their impact; so our lineup now features CBD 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 them 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 a 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 and 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 their 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 in the category. We expect that our disruptive value will have a short-term impact on our top line, but as we begin our marketing push at the end of calendar year 2022 and entering the new calendar year 2023, we not only expect to attract switches from within the category but, 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 to avoid any significant write-downs. That had a compression effect on revenue, resulting in consumer stockpiling and 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 ensure 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 and attract 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 offered them at great introductory rates to offset any pushback from our base of loyal retailers. The new rate card and simplified SKU set have 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. 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 of our CBD products in Wegmans. NSF product certification guarantees what is on the label is in the product. Achievement of this 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 of 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 teams, and began shipping products in late fiscal 2022. We expect this market to expand and for other opportunities to open 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 of 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 allows 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 in 2023. And with that, I'll let Sibyl speak to ongoing regulatory and R&D efforts.
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 discussed our Citizens Petition to the FDA on several of our last calls. 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 congresspersons and their staff on Capitol Hill to educate them on the challenges that the 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 derived 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 with 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 ready to wait until the final rules are implemented. 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 demonstrates 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 inform the FDA of 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 in guiding our product development roadmap. It confirms that our products will help our customers 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 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, mood, 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 study. The studies' results will also guide future investigational studies executed by cbdMD's therapeutics division. We are excited to announce that the clinical study at Colorado State University, which explored our core broad-spectrum hemp extracts benefits for dogs in the areas of mobility and active lifestyle, has 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.
On a GAAP basis, total net sales for the fourth quarter of fiscal 2022 were $7.9 million, a 19% decrease from the same quarter the previous year. For the fiscal year ended September 30, 2022, 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, reflecting a 13% decrease year-over-year. For the fiscal year-end 2022, e-commerce generated $26.4 million of net sales compared to $32.9 million for the prior fiscal year, marking a 19% decline. 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% from $2.5 million for the same quarter in fiscal 2021. Kevin previously mentioned our sell-through strategy prior to our transition to higher strains; this significantly impacted our wholesale business as we transitioned our offerings and sold several products out of stock before the reset. For the fiscal year ended September 30, 2022 and 2021, our wholesale business generated net sales of $8.9 million and $11.6 million, respectively. Product sales totaled $3.7 million for 2022. Our GAAP gross profit as a percentage of net sales was 64% for the fourth quarter of fiscal 2022, up from 58% in the same period last year. For the fiscal years ended September 30, 2022 and 2021, gross profit was 63% and 67%, respectively, as a percentage of total net sales. We anticipate maintaining gross profit margins in the mid-60s considering the sales mix. Our operating expenses for the fourth quarter of fiscal 2022 totaled $7.9 million, outperforming the $8 million target we provided in our last call, and decreased from $12.7 million compared to the prior year. Operating expenses fell 38% from the previous fiscal year, mainly due to substantial 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, mainly due to reductions in operating expenses, though partially offset by an $884,000 non-cash intangible expense as we began amortizing intangibles during the fiscal year. This resulted in a GAAP loss from operations of approximately $14.8 million for the fourth quarter of fiscal 2022, compared to a $7 million loss from the prior year. Excluding the $11.9 million goodwill impairment, our non-GAAP loss from operations totaled $2.9 million, reflecting a $5.1 million improvement over the previous year. Sequentially, operating income slightly declined from the June 2022 quarter to the fourth quarter of 2021, primarily due to a $1.4 million drop in gross profit while achieving $1.1 million in net cost savings, mainly from marketing and payroll expenses. For the fiscal years 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 improvement despite the revenue decline. Our non-GAAP adjustments to operating expenses for the fourth quarter of fiscal 2022 included a $275,000 non-cash stock expense, $456,000 in 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 compared to a $4.7 million loss in the same quarter of fiscal 2021. The reduction in non-GAAP adjusted operating loss compared to the previous year is due 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 the 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 amounted to $13.1 million, representing a $0.5 million improvement over the prior year, despite the significant revenue drop. We invested $565,000 in cbdMD Therapeutics' R&D during fiscal 2022, down from $650,000 in 2021. Much of this investment was made early in the year, but we are now beginning to see benefits from the clinical results mentioned earlier. We believe this will provide a unique position for both product effectiveness and education in the category. Other income and expenses in our fiscal 2022 consolidated income statement included a $0.25 million gain from the sale of assets early in the year, as well as a non-cash contingent liability gain of $8.5 million related to our December 2018 acquisition of Cure Based Development. The earn-out contingent liability is currently listed on our balance sheet at $276,000. We are now in the fourth marking period that continues through November 2023. During the fourth quarter of fiscal 2022, we utilized about $2.8 million in cash, which included our adjusted non-GAAP operating loss of $2.1 million, and paid dividends of $1 million, with some working capital adjustments making up the difference. We reported cash and cash equivalents of $6.7 million and working capital of approximately $10.7 million on September 30, 2022, compared to $26.4 million in cash and cash equivalents and about $29.6 million in working capital as of September 30, 2021. Current assets as of September 30, 2022 decreased approximately 56% from September 30, 2021, totaling $16 million. The main cause for the decline in current assets was the cash utilized for operations. As of September 30, the company's total current liabilities were $5.2 million, which included approximately $2 million in accounts payable and $2 million in accrued expenses. As our audited consolidated financial statements for the fiscal year ending September 30, 2022 include an independent audit opinion, which highlights our ability to continue as a going concern, we are highly focused on managing our cash position and liquidity. We continue to work on optimizing our cost structure to enhance our operations. We are cautiously optimistic about our competitive product position and our ability to grow quarterly sales in calendar 2023. With our current selling, general and administrative costs, a small increase in revenue could significantly impact our bottom line. We are exploring various avenues to improve liquidity while being considerate of our existing shareholders. Adara has filed their proxy vote and, assuming it obtains the necessary votes, they expect to close their transaction in January, which will return our $1 million investment. We are in the process of applying for an employer retention credit and looking into several strategic partnerships and other options that could help reduce our burn rate, accelerate profitability, or improve our liquidity situation in 2023. As Kevin mentioned, we have a distinctive and appealing product offering that allows customers to gain benefits without high costs. We remain dedicated to the business, attracting new customers, and fulfilling our commitments to stakeholders. Now, I would like to hand the call back to Kevin.
Thank you. That wraps up today's discussion. And we'll just open it up for Q&A.
Thank you, Kevin. We will now begin the question-and-answer session. The first question comes from Richard Molinsky, a private investor. Please go ahead.
Hi, guys, how you doing? Congratulations. I love the product, as you know. You mentioned this $1 million payment that you're going to receive in January. Can you just explain that a little bit further to me, if you don't mind? And I have one more question after that.
Sure. So we previously had invested $1 million in the Adara stack that's been sitting on our balance sheet. As part of the situation that happened, we ended up signing a new agreement to receive the capital back upon 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 is likely going to happen. At that time, we would get our capital back.
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 strategic moves or get to profitability. This $1 million total will definitely help. But is there anything you could talk about? Will this be enough money, do you think, to see whether you are executing, or could there be something else to talk about that would help the finance structure?
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.
You got it. No problem. I know you do. And I appreciate that. Good luck to you.
Thanks, Richard.
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.