cbdMD, Inc.
Q1 2019 Earnings Call Transcript

Published: 15 Feb 2019

[Operator:]

Good morning, and welcome to Level Brands First Quarter Fiscal 2019 Earnings Call and Update. Yesterday the company issued a press release that provided an overview of its first quarter results, which followed the filings of its quarterly report on Form 10-Q yesterday. Today’s conference is being recorded and will be available online at levelbrands.com. All participants on this call will be on a listen-only mode. The call will be followed by a question-and-answer session. At this time, I would like to turn it over to Mark Elliott, Chief Financial Officer and Chief Operating Officer. Mark?

[Mark Elliott:]

Thank you, Michelle, and thank you all for joining the Level Brands first quarter fiscal 2019 earnings conference Call. On the call today, I also have our Chairman and Chief Executive Officer, Marty Sumichrast, as well as Scott Coffman, the CEO of our subsidiary cbdMD. Following the Safe Harbor statement, Marty will provide a high level business overview, which will include our December 2018 mergers with Cure Based Development, which included our acquisition of the cbdMD brand. We generally refer to this transaction, which is described in detail 8-K that we filed on December 20, with the acquisition of cbdMD. We now operate this business within our cbdMD subsidiary. Scott will then 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 Marty will finish up by providing some additional corporate updates. We will then open 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. Level Brands caution 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, Friday, February 15, 2019, and Level Brands 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?

[Marty Sumichrast:]

Mark, thank you. Thanks for the introduction and thanks to all of those who are listening in on the call this morning. I’d like to start the call by talking about our move into the rapidly growing CBD space, and specifically our transformative acquisition of cbdMD in late December, 2018. We first entered into the CBD market about a year ago, we entered through a licensing arrangement and at that time the CBD market was just starting to expand. There were few players in the federal uncertainty around CBD created a bit of a gray area in the market. As the year developed, we recognized the pro hemp legislation was most likely going to pass as Congress took up the 2018 Farm Bill, which included the hemp-rider. We decided that we would expand into the CBD market. However, as an NYSE American listed company, we had to wait until the Farm Bill was signed by the President. On December 20, 2018, immediately following the signing of the Farm Bill by the President. We closed the acquisition of cbdMD, a company founded by Scott Coffman. CBD is now off the Schedule 1 list of controlled substances and we believe the market will see enormous sustainable growth rates. Some studies have suggested that the CBD market, which was probably under $1 billion in 2018 can exceed $20 billion within the next five years and other studies are suggesting over $50 billion in the next decade. We chose cbdMD for three simple reasons; first, I believe in the jockey and not the horse. Scott Coffman is simply one of the most extraordinary proven business operators, I have ever met. His team including President Caryn Dunayer is filled with top notch talent. Second Scott’s mission of brand first is the right approach. I believe that there is no dominant CBD brand in America today, while sales goals are important, the value of our brand is critical to the value of the overall business. And third, Scott is vested and certainly well incentivized to make cbdMD a huge success. We acquired cbdMD in an all-stock transaction with 50% of the merger consideration based on Scott and his team achieving significant revenue milestones. We are all one now, all pulling on the same rope and that team mentality is critical for us to accomplish the enormous success, we believe we can achieve in the years ahead. By any metric, what Scott and his team accomplished in their first year of sales is truly extraordinary, with very little capital they generated over $7.5 million in sales in 2018. They finished the year on a sequential sales ramp that annualized, put them over a $15 million run rate. And all this with the cloud of regulatory uncertainty and limited capital constraints, other metrics were equally impressive as gross margins exceeded 70% and the brand was recognized in a series of first in their innovative marketing strategies. Last year over 80% of the sales were online in a market where it was limited by the availability to purchase key AdWords on Google and Facebook. So how are we doing it, simply put, cbdMD is deploying an updated version of Guerilla marketing in an Internet age that gives us sustainable competitive advantage. With that, it’s my great pleasure to turn the call over to Scott Coffman to talk more about cbdMD’s accomplishments to-date and our future plans. Scott, please go ahead.

[Scott Coffman:]

Thanks, Marty. And thanks to all of you for your interest in Level Brands. I launched cbdMD in mid-2017 with a singular goal, to create biggest consumer CBD brand in America. I know what it takes to build a brand in a new emerging market, CBD strategy then rise at very simply another brand I built with scratch in the Ecigs base Blu. We built Blu on one basic premise. With one of the number one brand in the space, Blu faced even different regulatory challenges, when we started, but our goal never changed. Our focus on brands were to be successful and 40 months, we sold the company for $135 million in cash to Lorillard Tobacco. Many of the same team members that help us – help me built Blu with – are with us today. As Marty said last year, our first year of sales we generated over $7.5 million in revenue of which over 80% was online. And our sales on streets – sequentially throughout the year of just under $600,000 in our first quarter to over $3.6 million in our fourth quarter. Despite limited working capital and historic cloud of regulatory uncertainty, cbdMD has become one of the leading online CBD brands in America and made the accomplishment in just one our first year. And we’ve had a lot of efforts last year. We were the first company to appear in major magazine ads such as Entrepreneur, Rolling Stone and now L. We were even awarded, number one Editor’s Choice pick by Entrepreneur for CBD companies. We were the first to be allowed at digital billboards on 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 finally, we are the first New York Stock Exchange American-listed company with operations in the CBD space. While we will not discuss certain numbers of strategies of our business due to competitive reasons there are two important points, I would like to make. First, we have a proven internet marketing team and our proven strategy. Our customer acquisition strategy is based on a pure payback basis, like any good business we invest in those strategies and product that generate a half return at the same time enhanced our brand. We keep tight controls on our variable spend and so far upfront investments have proven very profitable. We are seeing extraordinary returning customer rates, and I’m very pleased with potential lifetime value of each new customer. We will continue to expand our sales force and that’s all achieving retail distribution. Second, since we are in the infancy of CBD market. The cost to acquire customers is most likely at its lowest point right now. Because of this, we have already started to invest a significant part of our working capital for brand promotion and customer acquisition. Starting in 2020, we will convert this spend as a percent of revenue. We intend to keep increasing our spend as always our ratio that makes sense. We are encouraged by cbdMD preliminary growth rates in January and are optimistic about 2019. With that, I’d like to turn the call over to Mark Elliott to talk about our financial results.

[Mark Elliott:]

Thank you, Scott. I want to start with a brief summary of our financial results. Then I’ll highlight some pro forma data to help everyone gain a better understanding of what the cbdMD acquisition may including empower. Overall, our total sales for the first quarter ended December 31, was $1.2 million of 82% from the same period last year. The increase in net sales was primarily due to the acquisition of cbdMD, which contributed approximately $465,000 in just a 11 days for the period. Gross profit as a percentage of net sales came in at 60% for the quarter. cbdMD will be reported as part of the products division for segment reporting going forward. Looking at our segments, our sales were led by our licensing and our product segments, each accounting for 42% and 38% of total net sales respectively, with our brand management entertainment segment accounted for 20%, again it is important to point out that cbdMD only contributed to sales for 11 days of this quarter. Our major operating expenses include wages, advertising, travel, rent, professional service fees, public company-related expenses and expenses related to distribution and trade shows. Our overall operating expenses were approximately $1.5 million, which is down 12% from the prior year period. Our interest expense of approximately $2,900 in the first quarter was offset by interest income of approximately $47,000 creating a net interest income of approximately $44,000 for the period. Our net loss attributable to common shareholders improved 48% moving from a net loss of over $1.1 million last year to $584,000. Again this is for the three months ending December 31. We had cash on hand of approximately $8 million and working capital of $13.9 million at December 31, 2018, as compared to cash on hand of $4.3 million and working capital of $10.8 million at September 30, while our current assets as of December 31, increased 33% from September 30 to $15.7 million. In the quarter, we did close to secondary offering in October, which provided approximately $6.3 million of net proceeds upon the issuance of approximately 1.9 million shares of our common stock. With the cbdMD acquisition closing the final days of the quarter, taking a look at pro forma data, I think it’s helpful. For comparison purposes, assuming we acquired cbdMD on October 1, 2017, our year-over-year sales growth for the quarter ending December 31, would have come in at a 541% increase over the prior year, that would be sales of approximately $4.4 million for the quarter. And it’s important to note, again, the pro forma data which is contained in our 10-Q filed yesterday is for informational purposes only and there are no assurances that actual results would have similar – been similar during this period at the acquisition actually occurred on October 1, 2017. With this acquisition, we did report significant balance sheet entries both of assets and liabilities in the purchase accounting process. We had intangible assets and goodwill in total of $76.8 million as well as recorded contingent liability of $71 million, that’s associated with the shares to be issued, as well as earn-out possibilities. With that, I’d like now to turn the call back to Marty.

[Marty Sumichrast:]

Thanks, Mark. Given that our mission is to make cbdMD, the leading CBD brand in America. At our next Annual Shareholder Meeting in March, we are proposing to change the name of our company to cbdMD, Inc. We believe changing our corporate name to cbdMD, Inc. reflects the primary focus of our company. And as an NYSE American listed Company, we are provided a unique platform to promote our brand. If this is approved at the meeting, we also expect our ticker symbol to change shortly thereafter to better reflect the new branding. Also at the March Annual Meeting will be considering the expansion of our Board to include three new Directors. The total slate of nine directors up for election at the Annual Meeting includes three leading brand building executives. Peter Ghiloni, Scott Stephen and Billy Raines, each one of them we’ve provided a brief summary of on our press release this morning. They’ve each been involved with building incredible brands in their careers, and we’re confident they will add value to our brand building efforts. Finally, I’d like to take a moment to talk about the revenue earn-out hurdles for the cbdMD acquisition agreement. As I stated earlier, we purchased cbdMD in an all-stock transaction where we paid 50% of the total potential merger consideration upfront and the other 50% is payable if cbdMD achieves $300 million in sales over the next five years starting January of 2019. The first milestone is $20 million measured in calendar 2019, followed by $40 million measured in calendar 2020 then another $80 million measured in the subsequent 18 month period and the final $160 million measured in the final 18 month period. As each of these milestones are reached additional shares are earned and issued. As I stated earlier, we believe the structure aligns all of our interests together. Thank you. We look forward to sharing our future successes. And with that, I’d like to open up the line for the Q&A. Michelle?

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ron Nash with Nash Partners. Please proceed with your question.

[Ron Nash:]

Yes, good morning. This question is for Scott. Scott, how would you compare the landscape right now of CBD versus the landscape when you first started Blu?

[Scott Coffman:]

The landscapes are very similar and regulatory concerns of what we had in both industries, although probably a little bit more regulatory concerns in the electronic cigarette industry. When we started Blu, we were not the first company to be there, there was already a range of companies in the business already, just like there are in CBD. Our performance in Blu with basically first year sales were smaller than what they were currently at our cbdMD, the other factor was the fact that in Blu our strategy was to become a brand, we were focused singularly on one thing, being the most recognizable brand in the industry, which is why Lorillard came to us and purchased us among all other electronic cigarettes. We have the same focus and the same people with cbdMD, that we are in the same sort of environment and we’re going to do the same thing would just try to build the most successful brand in the industry.

[Ron Nash:]

But is the landscape, meaning, right now are you running into as many hurdles in the CBD area, as you did in Blu? Or is it less cumbersome?

[Scott Coffman:]

Well, okay, pretty much the same hurdles as far as an advertising, in other words, I can buy terms in Google, I can advertise in Facebook, I can advertise on TV unlimited some place it won’t take, what I do because they won’t take CBD. So all of that is almost mimicking, what we did in the electronic cigarette industry as far as hurdles from regulatory from FDA and things like that, very similar in the fact that we ended up dealing with some different states making different laws all the time. And we have to monitor those hurdles and just change as legislation change for state to get our product in every state that are in the U.S.

[Ron Nash:]

Great. Thank you very much. Good luck.

[Marty Sumichrast:]

Thanks, Ron.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Paul Cooney with Joseph Gunnar & Company. Please proceed with your question.

[Paul Cooney:]

Hey, guys, congratulations, phenomenal growth. Just wondering and I don’t know if you guys could speak to this, or provide any type of guidance, but can you give us an idea of how things are going. I know you had a greatest December, but can you give us an idea of how January was? How February is going?

[Marty Sumichrast:]

Hey, good morning, Paul. Thank you for your support.

[Paul Cooney:]

Hey, Marty.

[Marty Sumichrast:]

Yes, I mean, look, I think right now we’re confident you know we in the – we have a revenue earn-out target with cbdMD that we’ve said is $20 million. I think we’re going to stick with that and say, we’re very confident in that based on where we are, we – as Scott said and we’ve said, and what’s really truly remarkable is that cbdMD started generating revenue only a year ago. And so it’s been quite an interesting year with the merger and with the consolidation and all the integration. I think what we’re going to do is hold off making any kind of guidance or anything at this point. Let us get our first full quarter under our Bell, we come out in May, I think will be – I think better prepared to talk about where we are with regard to that. So all I can say is that we feel really good about things right now. So I know that’s not what you want to hear, Paul, but that’s where we’re today. Yes.

[Paul Cooney:]

Okay. And I know in the press release you talked about signing with retailers in different stores. How is that going and what are the hurdles there?

[Marty Sumichrast:]

Well, I think obviously a tremendous amount of the retail universe was not available prior to the Farm Bill, now with the Farm Bill passing and CBD is in approved to retailers we’re seeing the tremendous amount of inbound calls, from the retailers we’re adding a retail sales force expanding quite rapidly. And we plan on really growing the retail side of the business, as we said over 80% of the businesses was online last year. We hope to continue to maintain a healthy online. I think we feel that no matter where we go, our goal is to at least have half the business online. We think the scalability online is really there for us. But on the retail, absolutely, we’re making a big push. And I think we’ll have a lot of things and a lot of players that we can put our products into this year so.

[Paul Cooney:]

Thanks, guys.

[Marty Sumichrast:]

Hope you got it. Thanks, Paul.

[Operator:]

Thank you. With no further questions in the queue, I would like to turn the call back over to Mr. Sumichrast, Mr. Elliott, and Mr. Coffman for any additional or closing remarks.

[Marty Sumichrast:]

Thank you, Michelle. Look, I’d like to thank everyone for their questions. We look forward to sharing the ongoing achievements in the next months and quarters ahead. Everybody have a great day, enjoy your weekend and thank you, Michelle.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you so much for your participation. Have a wonderful day. You may now disconnect.