cbdMD, Inc. (NYSE American: YCBD) Q2 2019 Earnings Conference Call May 16, 2019 9:00 AM ET
Mark Elliott - Chief Financial Officer and Chief Operating Officer
Marty Sumichrast - Chairman and Chief Executive Officer of Level Brands
Scott Coffman - Founder and Chief Executive Officer of cbdMD
Conference Call Participants
Scott Rothbaum - Joseph Gunnar & Company
David Bannister - The Market Analysis Group
Steve Emerson - Emerson Investment Group
Good morning. Welcome to the cbdMD Second Quarter Fiscal 2019 Earnings Call and Update. This morning, the company issued a press release that provided an overview of its second quarter results, which followed the filings of its quarterly report on Form 10-Q last evening. Today’s conference is being recorded and will be available via replay. All participants on this call will be in 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, Chief Financial Officer and Chief Operating Officer. Mark please proceed.
Thank you, Latonya, and thank you all for joining the cbdMD second quarter fiscal 2019 earnings conference Call. On the call today, I also have our Chairman and CEO, Marty Sumichrast, as well as Scott Coffman, Founder and CEO of our subsidiary CBD Industry, which operates the cbdMD brand.
Following the Safe Harbor statement, Marty will provide an overview, of our significant accomplishments for the quarter. Then Scott will go into further details about cbdMD, its performance and the overall opportunity ahead. I will then provide a summary of the quarterly financial results and then we will 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 risks described in the Company’s filings with the SEC. Any forward-looking statements made on this conference call speak only as of today’s date, Thursday, May 16, 2019, 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 CEO, Marty Sumichrast. Marty?
Mark, thank you for the introduction and thanks to everyone who is listening on the call this morning. As many of you know, on December 21st last year, we purchased cbdMD. Since that date, we’ve been on an incredible growth trajectory.
Prior to the acquisition, we modeled the business based on what we could do in sales for the first five years. Those projections were the basis for the five year $300 million revenue earn out that we currently have in place.
Just to refresh everyone’s memory, the first two years of those earn outs were $20 million in 2019 and $40 million in sales in 2020.
What we can share today is that for the March 31st quarter, which is our first full quarter of sales with cbdMD, we reported approximately $5.7 million in net sales, which is 78% ahead of the budgeted earn out projection that we had for the March quarter and based on what we are seeing in this quarter, we are currently trending on a revenue pace that puts us a full year ahead of our original estimates.
While we can assure that this rate of growth will continue, we are obviously very pleased with these initial results and the current trajectory path of the business. So, while some of our competitors reported virtually stagnant sequential revenue growth, cbdMD sales grew by 55% from the December to the March quarter.
While the above expected growth is a good thing, it also brings a host of operational challenges which our team is dealing with on a daily basis.
Some of these examples are as follows: we increased our headcount significantly where we’ve grown from approximately 50 to 135 people in just the first five months. We are having to expand our office space and we are taking on an additional 30,000 square feet.
And also in order to meet demand, we are in the process of expanding our current manufacturing and distribution center something we didn’t think we would have to address until late 2020. And now, we have adequate capital available to address all of these needs and fuel this exciting and dynamic growth.
At the end of March, we had cash of just over $4.6 million and approximately $12.3 million in working capital and just yesterday, we completed the secondary offering which provided us an additional $12.6 million in cash.
Now I would like to turn the call over to Scott Coffman to talk more about the accomplishments to-date and our plans for the future. Scott, the floor is yours.
Thanks, Marty. And thanks to all of you for your interest in cbdMD. I launched cbdMD in mid-2017 with a singular goal, to create the biggest consumer brand in America. In order to successfully create and grow our brand in a new emerging industry, immensely focused on that goal. That is why decision-making revolves around brand building.
We all get ourselves before we make a decision, have a good impact on brands. While revenue is great and we were plenty of that, it’s not the same as building the brand. Let me give you three good examples of brand building that we have already accomplished that explains our thought process.
The first was our name change from Level Brands to cbdMD. This is a no brainer since it was made at the first of only pure play CBD companies listed from a national U.S. Exchange. We have seen immediate results in our brand recognition and enhanced credibility with our suppliers, customers, distributors and retailers.
The second was our partnership with 2 Time Masters Champion and 15 PGA Tour Champion Bubba Watson. Like other athletes we have sponsored before Bubba had to use and test our product before he would choose us as being one his sponsors. We are excited to watch him tee off today at the PGA Championship with cbdMD on his hat and we are proud to be the first CBD sponsor of a major PGA Championship. We wish him the best of luck at best paid in golf course.
We value our partnership with the big three sports leagues makes CBD the first CBD company to partner with professional sports leagues. And now CBS Sports will be broadcasting the base three games over the summer as cbdMD brand will get great - significant amount of TV time and so our logo will be next to Adidas in front of all the players jersey, on the back boards, as well as other prime brand positioning placements.
We are grateful to Ice Cube that he and his partners has a vision to allow their athletes to use cbdMD to help with their whole body recovery. We’ve had a lot of first in our show history. We were the first CBD company to appear in major magazine ads such as Entrepreneur, Rolling Stone and now ELLE. We were even awarded number one Editors Choice by Entrepreneur for CBD companies.
We were the first CBD company to be allowed at digital billboards Time Squares, which debuted on New Year’s Eve of 2018. We were even the founders of National Hemp and National CBD Day by the National Calendar Company. And on the CBD brand is our incredible team. We have a proven internet marketing team and proven strategy.
Our customer acquisition strategy is based on a pure payback basis, and like any good business we invest in those strategies and product that generate good return and at the same time enhance our brand. We keep tight controls on our variable spend and so far upfront investments have proven to produce the returns expected by building our brands.
We are seeing extraordinary returning customer rates and I’m very pleased with potential lifetime value of our new customers. Our ecommerce platform remains robust and are currently tracking over 70% of our sales online.
We continue to expand our sales force targeting retail distribution. We have increased our retail store count from 600 doors to over 2000 doors since December. We continue to see strong demand on the brick and mortar retail front. Since we are in the infancy of the CBD market the cost to acquire customers is most likely at its lowest point right now. Because of this, we are investing aggressively for brand promotion and customer acquisition.
Next year we will convert this spend as a percent of revenue. Currently, we intend to keep increasing our spend as necessary to achieve the results we are looking for. Overall, we are encouraged by our growth rate in the second quarter are optimistic about 2019.
With that, I’d like to turn the call over to Mark Elliott to talk about our financial results.
Thank you, Scott. I am going to start with a brief summary of our GAAP-based results. In its first year, cbdMD had sales of just over $7 million of which over 80% was online. And sales for cbdMD products have grown sequentially throughout the year from just under $600,000 in the quarter ending March 31, 2018 to over $5.7 million during the quarter ending March 31, 2019.
Overall, total net sales for the second quarter ended March 31 was $5.7 million, up 84% in the same period last year. Gross sales was just under $7.8 million for the quarter. Gross profit as a percentage of net sales came in 52.4% for the quarter. cbdMD reports as part of the product division in our financials for segment reporting purposes. And this segment accounted for 99% of the total net sales for the March 31 quarter. Our cost of sales in the product segment were 36%
We expect – cost of sales as a percentage of net sales between 25% and 40% going forward. Our major operating expenses include wages, advertising and marketing, travel, rent, professional service fees, public company-related expenses and expenses related to distribution and trade shows.
Our overall operating expenses were approximately $4.5 million in the second quarter. This was representing a multi-million dollar increase over the prior year period and really attribute to the ramp up of our CBD operations after the cbdMD merger.
If you look at our financials, you will see this consideration for the merger we have a contractual obligation and earn out provision to issue shares. To account for these, we booked a large contingent liability on our balance sheet. So the value of the slice will only be valued at each reporting period and the increase or decrease is booked as a non-cash other expense to our income statement.
This contingent liability increased significantly from December 31 to the March 31 period and it created a non-cash expense of $30.9 million and it is primarily due to the increase in our share price from December 31 through March 31 respectively. This large non-cash expense related to this contingent liability created significant impact to our net loss attributable to common shareholders for the March 31 quarter.
That came in at $31.8 million, again, of this, $30.9 million was a non-cash expense for this liability. We had cash on hand of approximately $4.6 million and working capital of $12.3 million at the quarter ended on March 31, 2019. This is compared to cash on hand of $4.3 million and working capital of $10.8 million at September 30, 2018 our fiscal year end.
As of March 31, and for September 30, 2018, our current assets increased approximately 20% to $14.1 million, while our current liabilities also increased 93% to $1.8 million. Both of these changes are related to the ramp up of the cbdMD business. As Marty previously indicated, we just completed the secondary offering which provided another $12.6 million net of expenses and this was the upon issuance of 2.3 million shares at a price of $6 per share.
With that, I’d like to now turn the call back to Marty.
Great. Mark, thank you and now, let’s open up the line for questions that anybody has for us.
[Operator Instructions] Our first question comes from Scott Rothbaum with Joseph Gunnar & Company. Please proceed with your question. Scott, your line is live.
Good morning guys. Congrats on an awesome quarter.
A question for you Scott, I know your background is in ecommerce. And obviously, the company had a big presence online over 70% of your sales. Do you see maintaining that presence?
Yes, so, because my background is online, we have built an infrastructure of a very large team to create this online traffic. So, 70-30 is great. The problem we’ll have is, retail is drawing at a heavy level now that more retail stores are opened up. Our goal is to always to maintain above 50% hopefully, no more than a 60%, 40% online to retail.
We also believe in our view that, as more and more people start to purchase the product, even if they are purchasing in retail and beginning for the first two months, they are going to go back to online, because you’d have to take the product every month and have more convenience just to have it delivered to your door.
So we are a online marketing-first company, which keeps us with new users coming online and we also believe that a lot of retail users are going to convert back to online. So, I’d like to keep 70-30 with the growth of our retail begin so quickly, I think that we are going to be able to maintain more of a 60-40 going forward.
Okay. Thanks for clarifying.
Our next question comes from David Bannister with The Market Analysis Group. Please proceed with your question.
Hey guys. Great quarter. I am also a shareholder and I have been writing about your company for my subscribers. I was just curious a little bit about the potential for lack of supply. One of my concerns as a shareholder too and an analyst would be, are you be able to continue to distribute products and have enough supply of your oil, et cetera going forward and just wondered what your thoughts around that.
We remain opportunist that our, right now of our one plan that we keep that has been expanding, if you think that how our sales somewhere at $25 million and we are already in construction of a new lab which in a 30,000 square foot building that would accommodate big box stores moving large orders.
So we are addressing those features right now. We believe we have the capacity at this point to control half of the supply that we would need up to the point where we get our new lab brought online.
Well, it sounds great. Have you guys thought about any further expansion of your product lines? Or as you have seen in the CBD market, things are exploding in that area?
Yes, so, a couple of things that you will see that will just come out this week, we are the first company that’s going to come out with a true patch product. By that I mean, there are no companies out there right now who do – you are seeing in the vitamin world, where people are doing 30-day patches knowing the industry has been able to do that because of the cost.
In the next two weeks, we want to patch that will allow you to take the product every day if you don’t want to take it as a supplement of any type that’s also an easy way first time people feel more comfortable doing that as under an eight hour release, the brand new product that we are coming out with.
We are also on June 1st launching a very expanded brand into the pet market where we are going to increase our product offering probably by almost 10-fold across the brand on pet treat, pet supplements and having a new separate brand powered by cbdMD called Pal CBD that will be one of the largest brands in the pet market.
Yes, just as an interesting side note, I have personally seen with my own eyes of dogs go from super high anxiety for months and months and we went on to Pet CBD Oil and it dramatically changed before my eyes in about a three or four week window, it was amazing.
And the great thing about that is, we agree, and there is very few things people want to give their dogs that they feel safe about and CBD is one of those things where it builds up in your dog and what we are seeing it for long, older dogs and think the market is just exploding and there is very few companies doing a variety of pet products. We will probably add at least the second largest line of pet products by June 1 that will be out there.
Excellent. Thanks so much guys.
Thank you for the question.
Our next question comes from Steve Emerson with Emerson Investment Group. Please proceed with your question.
Congratulations and what an amazing job.
How much of your sales was wholesale, distributors and retail? And are there any change 2000 doors is a lot of doors, or is there any particular change you can share with us?
So, right now, we are still 70% online, 30% wholesale business. Now, what we are seeing is, because of the Farm Bill taking it off of scheduled yet, those doors are opening way more for us. It’s a big box store. For other retailers that are going to carry us. It’s just a slow process of how they are integrating their products in there.
But we are seeing retail sales pick up dramatically, and then what we are doing, we are also seeing that the number one thing that is separating us from a lot of companies is the fact that we are on the stock exchange which gives them the real comfort of going with a new product from a company that is on the stock exchange and also the combination of Bubba Watson.
So, lots of stores are willing to carry CBD. Right now, they are trying to figure out which one is the safest, most trusted brand they can put in their stores and that’s where we are getting leverage over a lot of the companies.
With no further questions in queue, I would like to turn it back over to Mr. Sumichrast and Mr. Elliott for any additional or closing remarks.
Great. First of all, thanks everybody. Thanks for the questions. I believe we are in an amazing position right now in the market. We got at the right team at the right time and we look forward to sharing our ongoing achievements with everyone in the months and quarters ahead. So, thank you very much. I’ll turn it back to Latonya.
Ladies and gentlemen, that does conclude our conference for today. Thank you so much for your participation. Have a wonderful day and you may now disconnect.