Blueprint
YCBD Earnings Call Script
1Q20
OPERATOR
Good
afternoon. Welcome to the cbdMD First Quarter Fiscal 2020 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 report on Form 10-Q. Today’s
conference 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 now like to turn the conference over to Mark Elliott, the
Company’s Chief Financial Officer. Mark, please go
ahead.
MARK ELLIOTT - INTRODUCTION
Thank
you _________, and thank you all for joining the cbdMD first
quarter fiscal 2020 earnings conference call. On the call today we
also have our Chairman and co-CEO, Marty Sumichrast.
Following
the safe harbor statement, Marty will provide an overview of our
business, then I’ll provide a summary of the quarterly
financial results, Following that, we’ll open the call up 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 risks described in the Company’s Annual
Report on Form 10-K for the year ended September 30, 2019, as
amended, as filed with the SEC 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, Thursday, February 13, 2020, 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.
With
that, I’d like to turn the call over to Chairman and co-CEO,
Marty Sumichrast. Marty?
SUMICHRAST – BACKGROUND AND HIGHLIGHTS
Mark,
thank you and thanks to all of those who are listening in on the
call this afternoon.
I am
pleased to announce that cbdMD reported another record quarter of
revenue growth with over $10.14 million in quarterly net sales. In
calendar 2019, our first full year of CBD sales, we generated over
$33 million in total net sales, which was well ahead of our initial
expectations of $20 million. Our gross profit margins remain strong
at 63.5%, we are fully financed and expect to achieve monthly
positive cash flow in the last quarter of calendar
2020.
We
continue to drive online sales through the use of various digital
marketing tactics, athlete and major league partnerships, and high
traffic affiliate programs. Currently we have over 222,000 active
e-commerce subscribers an increase of over 10% since last quarter.
On the brick and mortar side of our business, we continue to grow
the amount of retail stores who currently carry our brands. We are pleased
to announce that our retail reach is now over 5,300 retail doors an
increase of over 1,000 doors since last quarter and we have also
increased our international presence and are now currently selling
to wholesale customers in 16 international markets, up from 10
markets last quarter.
During
calendar 2019, we invested heavily in brand development, acquiring
brand building assets as well as our physical infrastructure, with
the build-out of full scale manufacturing, distribution, logistics
and warehousing facilities. We
continue to invest in R&D and testing to ensure the safety and
quality of our products. Every batch of finished goods
are tested with a full panel by an ISO certified testing laboratory
to ensure the quality and purity, as well as to ensure we meet our
label claims for potency.
In
addition to growing our revenues and infrastructure, we also set
out to create a leading brand, something we believe is critical to
the long term success of our company. We believe that we have been
extremely successful in this effort…in fact we believe that
we have built two of the leading CBD brands in America, cbdMD and
Paw CBD. Our brands have received recognition from some of the
leading market analytics firms in the CBD industry. For instance,
in July 2019, the Brightfield Group, one of the leading predictive analytics
and market research firms for the CBD industry, named cbdMD
a Top 10 domestic brand in two booming categories, Topicals and
Skincare/Beauty. In a November 2019 survey conducted by Brightfield of more
than 3,500 CBD users, cbdMD ranked the highest in terms of overall
consumer satisfaction as well as the highest in unaided consumer
awareness of any of the top 20 CBD brands. In the animal health
side of our business, Paw CBD’s product offering which
consists of a comprehensive line of CBD pet products for dogs, cats
and horses, was recently
ranked by the Brightfield Group as one of the top five brands in
the animal CBD market. Our brand building success has presented us
new exciting opportunities, such as our recently announced plan to
start a joint venture with holistic pet foods
leader Halo, a premium, natural pet food brand with a rich 30-year
operating history who has long standing distribution channels in
many large big box retailers such as Pet Smart and Pet Co.
Paw CBD is currently sold via independent pet store channels and
online at pawcbd.com. Our goal is for Paw CBD to be in over 1,000
retail stores, grooming salons and veterinary clinics by the end of
calendar 2020.
Our
overall e-commerce sales for the December fiscal quarter increased
to $6.8mm million or 67% of our total net sales, up from $5.1
million in our prior quarter. Conversely, our brick and mortar
sales decreased to $3.3 million or 33% of our total net sales, from
$4.4 million in our prior quarter.
Our
sponsorship and influencer partnerships are first-in-class in the
CBD industry and include such brands as The BIG3, Life Time
Fitness, The World Surf League, Supercross, Nitro Circus, and
Bellator (MMA). Our social media reach is also enhanced by our
podcast relationships that include some of the biggest names in
podcast. Our Team cbdMD athletes
continue to be tremendous ambassadors for our brand. And now that
we have assembled all of these assets, we are focused on activating
significant campaigns in 2020 with all our partners and ambassadors
while controlling our overall advertising and marketing
spend.
Before
I turn it over to Mark, I think it’s important to comment on
the state of the overall CBD industry. In 2018, the CBD industry
started its hyper growth, which was accelerated with the passage of
the Farm Bill in December 2018. Scores of new CBD companies flooded
the market. Most of these companies were 100% outsourced with
online distribution models. Very few of these companies focused on
brand creation. Despite the fact that the overall demand for CBD
was increasing as the popularity in the product segment grew, by
September of last year, the online traffic at the top 30 CBD sites
started to decrease. This signaled a saturation point. To make
matters worse, at the same time, the FDA made negative statements
about CBD which caused many retailers, especially the larger retail
chains, to re-think their buy orders for CBD products. At the same
time, the THC cannabis companies missed forecasts and disappointed
investors, which resulted in a collapse of share prices. Short
sellers piled into the sector and exasperated the market reaction.
CBD companies, such as ours, were thrown into the mix with cannabis
companies. We saw our short interest rise from approximately
600,000 shares at the end of June 2019 to near 3 million shares by
the end of December 2019. This perfect storm of events dislocated
the overall CBD market, and of course had a profound negative
effect on our share price. It was clear to us that the CBD market
was in the middle of a massive reset and, for us, we needed to get
fully financed so we could weather the storm and come out the other
side with continued growth and increased market share. We went into
the market in early January 2020 and completed our largest ever
financing, albeit at a price that was severely discounted to our
trading price. We were able to complete the financing with straight
common stock and yesterday it was reported that our short interest
declined by more than 70% in January. While this is little
consolation to our existing investors who saw a significant price
decline, I believe that we are in a stronger financial position,
something that can’t be said for many of our competitors. Our
focus now is on executing our business plan for 2020 and getting to
profitability. History has shown, as new industries emerge and go
through growing pains like we are, they finally mature. When that
happens, it’s usually a handful of brands that remain and
dominate the market and ultimately command higher valuation
multiples. We believe cbdMD and Paw CBD will be two of those
brands.
Now let
me turn the call over to Mark to review our most recent financial
results.
[BREAK TO MARK]
MARK ELLIOTT – FINANCIAL HIGHLIGHTS
I’m
going to start with a brief summary of our GAAP-based
results
On a
GAAP basis, our total net sales for the first quarter of fiscal
2020 which ended December 31st were approximately $10.14 million.
This was a 285% increase for the period year over year, based upon
the pre-acquisition and post-acquisition net sales of the brand
which we acquired in late December 2018. This is also an increase
of 6% from our last quarter which ended September 30,
2019.
Gross
profit as a percentage of net sales came in at 63.5% for the first
quarter of fiscal 2020, compared to 64.4% for the comparative prior
year period, and were an improvement from our last quarter ending
September 30, 2019, which was 56.7%. During the balance of fiscal
2020 we expect to maintain our gross profit as a percentage of net
sales of between 60% and 65%.
Our
major operating expenses were as follows:
●
Wages of
approximately $3.9 million;
●
Expenses of $2.4
million for direct marketing and advertising, including social
media, events, tradeshows, all a key part of the strategy in fiscal
2019 in building the brand and creating visibility;
●
Sponsorships of
approximately $2.1 million; again this is part of the strategy in
building the brand and being recognized as one of the top brands
– we believe results indicate this is being accomplished. As
Marty mentioned previously, with our brand foundation established
in 2019 we are now transitioning from building to leveraging our
marketing, advertising, sponsorships and expect to control future
expense and commitments for this going forward;
●
Affiliate
commissions of $544,000 as we built multiple channels for reaching
consumers;
●
Merchant fees were
$740,000 as we processed our sales transactions predominantly
online;
●
Professional
services of approximately $513,000 as we use third party providers
for specialty items including IT, IR, media, and third party
certifications;
●
Accounting, legal
services and business insurance of approximately $488,000 –
which includes legal and accounting fees relating to all of our
required SEC filings and business insurance coverages to address
risk exposure in the CBD industry;
●
Travel accounted
for about $204,000;
●
Rent of
approximately $350,000 for our corporate office, warehouse and
laboratory facilities; and
●
Non-cash stock
compensation expense – related to stock and options of
approximately $680,000.
Other
income / expense includes a large non-cash contingent liability
change, related to the December 2018 acquisition of Cure Based
Development. The contingent liability is revalued at the end of
each quarter and during the first quarter of fiscal 2020 that value
declined by approximately $16.9 million, to approximately 33.7
million, which created other non-cash income for the change in
value. The changes in the valuation of the contingent liability was
primarily a result of the change in the market price of our common
stock from period to period.
We had
cash and cash equivalents of approximately $3.7 million and working
capital of approximately $9.4 million at December 31, 2019 compared
to cash on hand of $4.7 million and working capital of $12.0
million as of September 30, 2019. Our current assets as of December
31, 2019 decreased 5.5% from September 30, 2019 to $14.9 million. A
primary driver of the decrease in current assets was the decrease
in cash, accounts receivable, and merchant reserve, which was
offset partially by an increase in our inventory. As of December
31, 2019, the Company’s total current liabilities were $5.5
million, of which approximately $3.6 million is accounts payable.
The Company has $183,000 of long term debt, which is made up of a
financing note on equipment for our manufacturing facility. As
Marty mentioned, in January 2020, we completed a follow-on firm
commitment underwritten public offering of shares of our common
stock for gross proceeds of $18.4 million. The net proceeds from
this offering are not reflected in our first quarter financial
statements as the offering closed after the end of the
quarter.
With
that, I’d like to now turn the call back over to
Marty.
[BREAK TO Marty]
As you
can see, we have made tremendous progress and continue to execute
on our overall plan. With that, I'd like to open up the line for
Q&A.
[Q&A SESSION]
OPERATOR
With no
further questions in the queue, that does conclude our conference
call for today. Thank you so much for your participation. Have a
wonderful day, and you may now disconnect.
