cbdMD Inc (YCBD) 2020 Q2 法說會逐字稿

Good afternoon, and welcome to the cbdMD Second Quarter Fiscal 2020 Earnings Call and Update.

Today, the country -- the company issued a press release that provided an overview of the second 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. (Operator Instructions)

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.

Thank you, Christie. And thank you all for joining the cbdMD Second 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 the risks described in the company's annual report on Form 10-K for the year ended September 30, 2019, as amended, and as filed with the SEC in 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, May 18, 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?

Mark, thank you, and thanks to all of those who are listening in on today's call this afternoon.

Before we talk about our second quarter, let me update everyone on how COVID-19 pandemic has affected our business. In early March, we started to take measures at our company to help secure the health of our employees and vendors. When the stay-at-home order in North Carolina was implemented, we temporarily closed our corporate office, instituted remote workforce and altered work schedules at our manufacturing and warehouse facilities. We also took steps to increase production to build up our finished goods inventory as well as purchased additional raw material inventory items, thereby allowing us to maintain production if supply chain interruptions were to happen, which, at this point, I'm happy to say, has not happened. In short, while we have had to make significant logistical changes during the past 60 days, our team has risen to the challenge, and our business has remained fully open and operational. We are happy to report that as of today, we are not aware of any of our employees who have tested positive to COVID-19. Along with taking the necessary safety measures, we also immediately instituted a rigorous cost containment plan across all departments and shifted resources from our B2B retail brick-and-mortar sales to our direct-to-consumer online sales. The result has been quite remarkable. While we normally don't discuss results mid-quarter, we are in an unprecedented time. And therefore, I've decided to talk about what our company's operations now look like in April, our first full post-COVID impacted month.

First of all, our overall sales in April were in line with monthly sales from our March ending quarter, effectively meaning our sales have not gone down. Second, we are seeing a significant shift in our overall sales blend, where now our direct-to-consumer online sales are tracking at 80%, up from 62% of overall sales in fiscal 2019. This, of course, has helped us maintain a very healthy overall gross profit margin, which we believe we can maintain at 65% or higher going forward. Third and most dramatic, our overall operating expenses have been reduced approximately 40% in April from our monthly average in the prior quarter. Some of this operational cost reduction is the direct result of cancellation of certain spends, but others such as travel and trade shows are a direct effect from the changing environment brought on by COVID-19 pandemic. The net result of all these changes is that in April, we are showing an approximate 85% decrease in our loss from operations from just a few months ago. And we are also seeing this carry through as we cross the midway point in May. While the uncertainty caused by the pandemic requires us to withdraw our fiscal 2020 financial guidance, based on what we're experiencing, we remain confident that we will achieve our target of a positive cash flow by the end of 2020 and perhaps sooner. In addition, with approximately $14.8 million in cash on hand at March 31, 2020, and the dramatic improvement in our overall operating results, we believe we have more than enough financial cushion to get us to profitability absent of any unforeseen impact from COVID-19.

Despite these truly horrific times, we are thankful that earlier this year, we made bold strategic decisions such as becoming fully capitalized in January of 2020; paying for our infrastructure, so we have almost no debt; maintaining and strengthening our online direct-to-consumer business model, which had allowed us to pivot when needed; and choosing to operate our business with a view towards variable cost initiatives instead of like many of our competitors who are locked in long-term arrangements, are now drowning in debt and have no way to generate sales because they embarked on a bet-it-all big-box retailer strategy.

I am on the record last year saying I believe 2020 was a year that the CBD industry would see an industry-wide shakeout. I said that hundreds of smaller brands who jumped into this space would simply not be able to survive competition and regulation. Now that COVID-19 pandemic is upon us, this shakeout in the CBD industry is now magnified in its intensity.

When we entered the public market as a pure-play CBD company in December of 2018, our sales were a fraction of the leaders. Now in less than 18 months, we are not only one of the biggest CBD companies in America, but we also have 2 of the most recognizable CBD brands in America. With that said, I'm pleased to announce that cbdMD reported $9.4 million in quarterly net sales for the second quarter of fiscal 2020. This is a 67% increase over the same quarter last year. And our gross profit margins remain strong at 67% year-to-date.

Our overall direct-to-consumer e-commerce sales for the March fiscal quarter was $6.8 million or 72% of our total net sales, an increase of $2.5 million or 58% from the prior year's quarter.

Our B2B brick-and-mortar sales were $2.6 million or 28% of our total net sales, an increase of $1.2 million or 85% from the prior year's quarters.

Direct-to-consumer e-commerce sales for the 6 months ending March were $13.6 million or 70% of our total net sales, an increase of $8.9 million or 189% from the prior year period. Our B2B brick-and-mortar sales were $5.9 million or 30% of total net sales, an increase of $4.5 million or 321% from the prior year period.

As previously discussed, we completed an $18.9 million equity offering in January, and a few weeks ago, we received a $1.5 million loan from the Paycheck Protection Program, which could be forgiven based on future criteria being met. Coupled together, and with a significant reduction in our operating burn, we are confident we are fully financed to operate to profitability, again, with a significant cash cushion. We will continue to drive online sales through the use of various digital marketing programs. Currently, we have over 250,000 active e-commerce subscribers, a number that continues to grow every month.

On the B2B 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 6,300 retail doors, an increase of over 1,000 doors since last quarter, and we continue to see an increase in our international sales as we are now currently selling to wholesale customers in 16 international markets. While the COVID-19 pandemic has affected our overall B2B brick-and-mortar distribution channels, we are hopeful that during the next 12 to 18 months, a vaccine will be discovered, at which point we believe that B2B brick-and-mortar will quickly return to pre-COVID levels.

During calendar 2019, we invested heavily in brand development, acquiring brand building assets as well as our physical infrastructure with the build-out of our 40,000 square foot full-scale manufacturing facility; our 80,000 square foot logistics, warehouse and distribution center; and our 50,000 square foot headquarters. We continue to invest in R&D and testing to ensure the highest safety and quality for all of our products. Our commitment to quality was recently rewarded as we were honored in February to have 2 of the best-selling products, our CBD PM Sleep Aid and our cbdMD Freeze Topical voted the winner of the prestigious 2020 Product of the Year Award in the Sleep Aid and CBD Topical categories, respectively. This is America's largest consumer-voted award for product innovation as 40,000 voters participated in an online study organized by independent research firm, Cantor Media Group.

We are also pleased to announce in March that we added to NSF international dietary supplements Good Manufacturing Process, GMP, registration. We entered 2020 with a significant tailwinds in product and brand development where our accolades saw the prestigious industry-leading predictive analytics and market research firm for the CBD industry, the Brightfield Group, named cbdMD a top 10 domestic brand in 2 booming categories, topicals and skincare and beauty. And in November 2019, cbdMD was 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 a survey conducted by Brightfield Group of more than 3,500 cbdMD users.

Paw CBD, our dynamic pet product offering, which consists of a comprehensive line of CBD pet products for dogs, cats and horses, was also ranked by Brightfield as one of the top 5 brands in the animal CBD market. These achievements solidify that our cbdMD and Paw CBD brands now sit atop the CBD industry as 2 of the most trusted CBD brands in the market today. This brand-building success has also presented us with new exciting opportunities, such as our recently announced plan, started a joint venture with holistic pet foods leader, Halo, a premium, natural pet food brand with a rich 30-year operating history, who has a long-standing distribution channels in many large big-box retailers such as PetSmart and Petco. 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 this year.

Our sponsorship and influencer partnerships are first-in-class in the CBD industry and include such multibillion-dollar partners such as Life Time Fitness and Bellator MMA, a wholly owned subsidiary of Viacom. We are pleased to announce that our agreement with Life Time, where cbdMD is an exclusive CBD partner of Life Time, is expanding to include the sales of CBD products throughout both Life Time e-commerce and retail in-club channels, With approximately 2 million active members, Life Time provides an incredible opportunity to directly offer a robust line of THC-free CBD products to this targeted base of consumers who are laser-focused on the importance of health and well-being each and every day. We feel confident that if our products are introduced online through their shop Life Time website and in their 145-plus fitness facilities nationwide, sales will be significant. One indication of the potential demand among their membership is that research provided to us by Life Time indicated that cbdMD was the #1 search term on the Life Time e-commerce website since our partnership began in October 2019. We are excited to get our products in Life Time spas and cafes as well as in the hands of all of their nutritionists and fitness coaches serving their 2 million members. cbdMD and our commitment to health and wellness represents a perfect fit with Life Time since our roster of team cbdMD athletes include some of the biggest and most notable individuals in their respective sports. Our products are THC-free and, like Life Time, cbdMD is a leading trusted brand, which, as consumer purchase data regarding CBD, suggests is a dominant factor in decision-making.

Finally, with respect to the regulatory climate for CBD, prior to COVID-19, it was our expectation that the FDA would announce regulatory guidance for CBD in the first half of 2021. Now that the government is fast-tracking business in America in an effort to restart our economy, we would hope that the FDA would release its CBD guidance sooner, hopefully, by the end of 2020, possibly by enacting legislation like H.R.5587, which is currently working its way through the House of Representatives.

Now let me turn the call over to Mark to review our most recent financial results.

Thank you, Marty. I'm going to start with a brief summary of our GAAP-based results.

On a GAAP basis, our total net sales for the second quarter of fiscal 2020, which ended March 31, were approximately $9.4 million. As Marty said, this was a 67% increase for the period year-over-year. For the 6 months ended March 31, our net sales were approximately $19.5 million. Again, this was a 220% increase over the same period year-over-year and a 111% increase based upon the pre-acquisition and post-acquisition net sales of the brand, which we acquired in late December 2018. Gross profit as a percentage of net sales came in at 70.9% for the second quarter of fiscal 2020. This is compared to 66% for the comparative prior year period. And for the 6 months ended March was 67% compared to 65.9% for the comparative prior year period.

We did have an inventory adjustment in March 2020. And with that, our gross profit for the 3 and 6 months ended would have been 67% and 65%, still in line with our projections. During the balance of fiscal 2020, we expect to maintain our gross profit as a percentage of net sales between 63% and 68%, very healthy margin. Our operating expenses for the March quarter were $12.2 million, of which approximately $665,000 was noncash expense. The result was a cash use of approximately $4.2 million for the quarter. Our year-to-date operating expenses were $24.8 million, of which approximately $1.6 million is noncash expense. This results in a cash use of approximately $9.1 million year-to-date. As discussed earlier, our operating costs were reduced by approximately 40% in April from our monthly average in the prior quarter, which has resulted in a dramatic reduction in our loss from operations, as Marty indicated.

Our major operating expenses for the periods ending March 31 were as follows: wages of approximately $3.9 million for the quarter and $7.9 million fiscal year-to-date; expenses for direct marketing, advertising, social media and events of $3.4 million for the quarter and $5.8 million fiscal year-to-date, all of which are a key part of the strategy in building the brand and creating visibility. Our sponsorship was approximately $1.4 million for the quarter and $3.6 million fiscal year-to-date.

As Marty mentioned previously, with our brand foundation established in 2019, we are now transitioning to activating and leveraging our marketing, advertising and sponsorships, and we are managing future expense and ongoing commitments in this area.

Affiliate commissions of $385,000 for the quarter and $929,000 fiscal year-to-date. We had merchant fees, which were $674,000 for the quarter and $1.4 million fiscal year-to-date as we process our sales transactions predominantly online. But we are also now getting reduced processing fees as the industry has matured, and this will be effective for us in April.

Our professional services of approximately $329,000 for the quarter and $842,000 in fiscal year-to-date as we use third-party providers for specialty items, including information technology, investor relations, media and third-party lab and warehouse certification process. Our accounting, legal services and business insurance of approximately $503,000 for the quarter and $991,000 fiscal year-to-date. This includes legal and accounting fees related to all our required SEC filings and business insurance coverages to address risk exposure in the CBD industry and as a public company. We had rent of approximately $394,000 for the quarter and $744,000 fiscal year-to-date for our corporate office, warehouse and laboratory facilities.

And finally, we had noncash stock compensation expense related to stock and options of approximately $435,000 for the quarter and $1.1 million fiscal year-to-date. Our other income expense includes a large noncash contingent liability change, and this is related to the December 2018 acquisition of Cure Based Development. The contingent liability is revalued at the end of each quarter. And during the second quarter of fiscal 2020, we had a decline in value by approximately $21 million to $7.8 million. This created another noncash income for this 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 and the issuance of the first earn-out shares for the merger.

In addition, our shareholder equity increased from $55 million at December 31 to $92 million at the end of March. This change of more than $36 million in shareholder equity was primarily driven by net income for the period and 2 issuances: one, the issuance of shares related to the January underwritten offering; and 2, the issuance of earn-out shares for the first measurement period related to the Cure Based Development merger, as the revenue target for calendar 2019 for this measurement period was exceeded by 69%. We had cash and cash equivalents of approximately $14.8 million and working capital of approximately $19.1 million at March 31, 2020. This is compared to cash on hand of $4.7 million and working capital of $12 million as of September 30, 2019. Our current assets as of March 31, 2020, increased 58% from September 30, 2019, to $24.8 million. The primary driver of the increase in current assets was the increase in cash and our increase in inventory.

As of March 31, 2020, the company's total current liabilities were $5.8 million, of which approximately $3.5 million is accounts payable. The company has a $205,000 of long-term debt, which is made up of a financing note on equipment for our manufacturing facility.

As Marty had indicated, with COVID-19, we've implemented several measures that we believe will allow us to adjust to the changing environment, ensure sufficient liquidity to support the business for the next several months. Specific measures, among other things, include the following: we negotiated with our landlords to receive temporary rent deferrals on our facilities by use of our security deposits; we have worked with our vendors to defer payments as needed; we have suspended sponsorship and affiliate agreements until we see stability in events and facilities; and we shifted our sales focus efforts to our direct-to-consumer online sales; and finally, as Marty indicated, we bulked up inventory levels to ensure our ability to fulfill in the event supply chains were impacted. As we continue to navigate with uncertainty, we have taken and continue to take all prudent steps to analyze expenditures and reduce those we believe we can, without having a negative impact on the business. And because of these reductions, we anticipate that our operating expenses will be reduced significantly during the balance of fiscal 2020.

In addition to further bolster our working capital, on April 27, 2020, we received a loan in the principal amount of $1,456,100 under the Paycheck Protection Program or the PPP, which was established under the recently enacted CARES Act administered by the SBA. The intent and purpose of the PPP is to support companies during the COVID-19 pandemic by providing funds for certain specified business expenses with a focus on payroll. As a qualifying business as defined by the SBA, we are using the proceeds from this loan to primarily help maintain our payroll as we navigate our business with the focus on returning to fully normal operations.

With that, I'd like to now turn the call back over to Marty.

Thanks, Mark. Before we open the line for Q&A, I'd like to make a few final observations. As we are all aware, consumer health and overall well-being are more important now than ever. The COVID-19 pandemic has filled us all with so much uncertainty and with the economic downturn comes a heightened sense of stress across the country and the entire world. We've been fortunate as a brand to maintain course, and we've even experienced growth during these challenging times. With one of the industry's most dominant digital footprint, we've been able to capitalize on an increased online audience as many are still confined to constraints of their homes and looking for alternative ways to enhance their everyday wellness. Armed with this powerful set of resources acquired over the past 2 years, we've been able to push forward while others are limited with subpar saturation and minimal brand recognition. Although no one could anticipate anything of this magnitude, prioritizing DTC e-commerce and online sales over mass B2B wholesale distribution has proven vital and the right decision.

While many of our competitors have extended terms and offered consignment deals, we've been able to conserve cash flow and collect on sale for all DTC online orders and the majority of our B2B wholesale deals. Given the foundation we've built, we're confident that we will weather the storm and come out the other side even stronger than before.

With that, I'd like to open up the line for Q&A.

(Operator Instructions) And we'll take our first question from Scott Fortune with Roth Capital Partners.

Congratulations, guys. Real quick. Can you expand a little bit on the Paw penetration? I know you're looking for natural or national pet channel from that standpoint. Where are you in those discussions? And kind of where is that business going and trending from a percentage of overall revenues currently?

Well, right now, Paw is trending at about 5% to 6% of overall sales. We actually had a great month in April, one of our best months online in Paw. We see it continuing to increase. We're really attacking the online marketplace as we are overall with the company. We're looking to get a few certifications on the pet side, and then we think we will be able to penetrate some of the bigger box stores. But right now the online is really doing tremendous, and we're pushing very heavily into that space.

Okay. And then just to switch to the online side, can you provide a little more color on KPIs on your online DTC business? I know you acquired new users. Kind of what's that growth in acquisition costs? And do you see if you're slowing down the marketing and advertising spend kind of looking out here, that repeatable business continuing from an online side of things? How are you looking at that?

Yes. I mean, look, it's interesting. We did cut back on some of the marketing spend we have, but it was really more of a question of figuring out what was working for us, what was sort of the maximize of the dollars we spent in some of the partnerships and the relationships that we've had. Two of the big sponsorships we're going ahead with is Life Time and Bellator. And with each one of these, they're multibillion-dollar companies, we've taken that. And instead of being just strictly a PR relationship, we've talked to them about going out and selling the product as part of the relationship. And that's really powerful when you talk about Life Time with 2 million active members. Now a lot of their facilities are just getting back up and running. But the opportunity to Life Time is enormous. And both in their e-commerce platform and in stores, we think, as I said earlier, the #1 search term in the Life Time e-commerce site was cbdMD. And so when you walk into a Life Time facility and you see all of the digital ads and everything, people want the product, and now we're going to start loading the product in there. So we see the opportunity with Life Time is enormous. Same thing with Bellator. I mean look, Bellator is owned by Viacom, which is CBS. We think the opportunity is through potential TV advertising. And we're talking to them about that. We've always been the first, and we believe we could be one of the first out of the gates on mainstream TV. And we're working with our relationships to do that. Our podcasts, which have been incredibly successful and even more so now as people are listening to more podcasts, recently, our return has been exceptional. So we're investing more on our podcasts. We have great partners of Joe Rogan and, of course, Barstool, and we're really excited about the return on investment through those different podcasts.

Okay. Sounds good. And then lastly, are you able to sell your full portfolio of products to Life Time? Or is that kind of a limited amount of SKUs?

Well, we're going to start with topicals. And we're going to be pushing into the different SKUs. But they're very excited about the opportunity. The brands are very cohesive. And they're just a tremendous partner to work with, and we couldn't be luckier than to have the leadership that they have at Life Time. It's really a wonderful opportunity for us.

And our next question comes from Paul Cooney with Joseph Gunnar.

Congratulations again on everything you're doing. The Life Time thing, especially, seems like it's -- it could be a home run. You touched a little bit about -- on to the -- the Bellator relationship. And I was wondering if you could just help me understand a little more as far as how that could generate revenue for you guys?

Thanks, Paul. First of all, Bellator and Scott Coker, the President of Bellator, has been a tremendous supporter of ours. Early on, they -- they were our partner when CBD was something that was a little touchy. Their parent company is Viacom, which is CBS, and they went to bat for us. And we became their exclusive CBD partner, and that has really blossomed. We think now that the potential over the next year or 2 is to work directly through Bellator into Viacom, into CBS and really make some headway into the mass media. Traditionally, that's been a little difficult with CBD, but now we think there's a real potential in there. And we're really very happy that Scott and his team over at Bellator are helping us in that regard. We think the opportunity is pretty enormous to be one of the first companies out in the space of mass TV advertising. So we look forward to that, and we look forward to Bellator fights coming in. I know, Paul, you're a big fan. And we're excited to see the next fights and get America sports back into action. We're excited about this weekend. We're excited to see Bubba playing again in June in PGA and so we're ready to go.

And next, we'll move to Michael Lavery with Piper Sandler.

Can you just touch a little bit on the consumer and some of the marketing? And I guess the 2 things I'd love to understand is just some of what you're finding to be the most effective to drive traffic through the website and what some of the marketing levers are that seem to be working. And with the consumer, do you have a sense of how much -- some -- especially on your own site, how many of -- how much of the growth is from, well, new to the category or more just gaining share?

Right. Well, we've been focusing on getting the repeat customer, but the market is really growing. And so we've been able to hit different areas. It's been pretty interesting to find different pockets to market to. And so we continue to expand our reach into different areas. I would say that we've had a pretty steady, consistent repeat customer business, and we continue to drive on that. But certainly, as we look at whether it's the different athletic places that we go to and the different -- whether it's different podcast or whatever we're doing, we're actively expanding our reach. We think the CBD industry is still in its infancy. We think the big mass audience is yet to be really tapped. And so a wider audience is available, and we continue to test every day, every month new marketing plans, and we invest in those that show good returns. We don't want to go into everything, but I can assure you that we're very conscious of our ROI on the different spends, and we're very adept to take an advantage of those ones that are showing a very high return on investment.

And our next question comes from Pablo Zuanic with Cantor Fitzgerald.

I want to ask a question about the category in general. During COVID, we've seen grocery stores, a lot of pantry loading numbers go up. We've seen e-commerce go up, right? I'm just trying to understand how the CBD category is behaving here. From my point of view, it's behaving as somewhat of an indulgence category, and that surprised me. And I say that because your e-commerce sales were flat quarter-on-quarter, which was good compared to Charlotte's Web down 5%, I think CVS was down and CV Sciences was down like 20%, but you didn't see growth there. And a lot of other consumer categories saw significant e-commerce growth during COVID. And then on the B2B side, is that 20% decline really because of less traffic to the stores? Or is it just the competition that we've talked about so many times before? Or is it that the vape shops were closed? Again, because grocery items in the grocery chain have been up significantly during COVID. So I'm just trying to understand your view about the category and then maybe some color, given all the brand investments and the brand metrics you've given us, which, of course, are very good, why aren't we seeing that result in terms of continued sequential growth in e-commerce?

Yes. I mean, look, I'll handle the brick-and-mortar sales first. We chose to go the path of a lot of little stores as opposed to the big brand -- the big retailers, which I think has paid off for us. Now that being said, when COVID hit, a lot of the smaller stores have been closed. So we saw a significant downtick in sales to a lot of the smaller stores. We did see pockets of increase, whether it's the compound pharmacies or some of the other places that remained open. But a lot of the smaller retailers that we had simply were unable to stay open. And so we saw a downtick in that. On the online, we saw a very nice uptick. And so to answer your first question, whether it's an indulgence, I don't think that it is. I think people -- remember, CBD is something that you have to take consistently. It's not something that you take once. It's something that gets into your system and works on a consistent basis. And so I think people when they couldn't go to their stores were going online. I think the other thing is, I think, people are looking for brands now in the CBD space. We've seen a lot of our stores telling us that a lot of these sort of smaller brands that really don't have any real presence but are just CBD in a bottle are not being carried anymore and that the retailers are now starting to look finally for national brands because that's what the consumers are asking for. And this is something that I've been saying now for quite a while, which is a lot of these sort of fly-by-night CBD brands that popped up last year when things were easy were going to go by the wayside in 2020, and now with COVID, that's accelerated. And so I think the combination of consumers now looking at CBD as a true health and wellness product and looking at that they want to buy a health and wellness product in a brand they can believe in. We are one of the top brands and most trusted brands in the country. So they're looking to carry us on their shelves and consumers are looking for us when they walk in the stores, I think, is playing well to us. And I think it's just a matter of time before some of the stores start to open back up again. We expect the brick-and-mortar sales to come back. It's going to take a little bit of time, as you know, for a lot of these stores to open up, but we expect that to come back. In the meanwhile, our online business really is humming, and it's really increasing, and we're seeing the data. And we're very, very positive about it. So we're -- but we do think, as I've said, that brand matters. We have the brand. And I think, ultimately, that will drive sales of cbdMD going forward.

Can I just ask -- just 2 quick follow-ups. So the guidance -- I know there's no guidance for the full year, but the idea that you get to positive cash flow or positive EBITDA by the end of the year, is that possible if flat -- if sales remain flat? And related to that, and I don't want to put words in your mouth, but you've talked about April being flattish versus March, which is good, I guess, you're guiding for flat sales for the second quarter, but you've talked about e-commerce being 80% of sales compared to 72%, right? So the way we interpret that is that e-commerce in the June quarter is accelerating after apparent, based on the numbers you gave us, flat growth sequentially, March versus December. Obviously, e-commerce must have accelerated, but on the other hand, B2B continues to worsen. If you can just give some color about cadence and characterize the second quarter on what I said. And then also, if you can deliver on that positive cash flow guidance if sales remain flat from here to the end of the year.

Yes. I mean, look, we're trying to be conservative and say if we had continued with our sales in Q1 with very, very modest growth, we've been able to cut operating expenses. Margins, because of the online sales, continue to trend in the right direction. We don't think it's going to take much of a bump on our sales to get to cash flow positive. I mean, we burned about, call it, $1.8 million a month in the first quarter. We reduced that by 85%. So now you're down to $250,000, call it, a month, and it's not going to take much if we are consistent on our spend and hold tight to increase sales even marginally between now and the end of the year to get to that cash flow breakeven when you're talking about north of 65% margin. So it's really -- it's not a complicated formula. And we're trying to be conservative and talk about neutral sales, although I will say I'm optimistic about an uptick as we continue, and we're seeing a little bit of that this quarter. And as retail picks up, we expect a pickup as well. So the key is cost containment. And that's what we've done, and that's what we're going to continue to do.

(Operator Instructions) And next, we'll move to [David Sholev], Private Investor.

Congratulations on an amazing quarter. It's exciting, especially for those of us who've been sticking around for the last year or so. So looking forward to even better days ahead. If I heard you correctly, you mentioned that you suspended most of your sponsorships. And I'm curious to what extent you think that affected sales. And if it didn't, why you think it didn't? And in general, what kind of lessons are to be learned from cutting off a major source of previous branding?

Yes. I mean, look, that's a great question. When COVID hit in the middle of March, one of the first things that went are sports, right? And so having a very large sports program, we went out to all of our athletes and we said, everybody is on hold, okay? We didn't expect anybody to perform, but we didn't expect to be compensating anybody. And so for the month of April, we held everybody and that's pushed into May. And then as we looked forward, we said, okay, who -- because we don't know what's going to happen in sports, right? You've got like the PGA, which is a great example. They're going to start-up again, but they're not going to start up with fans. You have different leagues that we were dealing with and nobody really knows what it's going to look like. So we've kind of taken the position that we like -- we see what we can do with Life Time because we see their membership, and we see the ROI that we can pull. We see the same thing with Bellator, and we have a handful of athletes that we believe can drive our brand, but we're looking at how do we reengage those athletes as sports come back. And -- because it's one thing to have an athlete perform in front of 50,000 fans, it's another to have an athlete perform with no fans. So you've got to really stop and say, okay, let's look at this whole thing in its entirety and figure out what's in the best interest of the company and work out a deal, and we found that most of our athletes understand, I mean, look, they get it. And so we've really gone through and worked with all of our athletes to figure out what the future looks like. And in some cases, we're basically saying, we don't know what the future looks like. So we're going to hold for right now. And so we're very fortunate because we've got great athletes. It's not their fault. None of this is their fault. It's not our fault either. This is something that comes totally out of left field, but you have to deal with it. And so we've really looked at it in the entirety and said, how are we going to move ahead, how does this work? And until we know, until we figure that out, we're going to put a hold on a lot of it and then reemerge sort of with a new framework that is very ROI-centric, okay, which we want athletes that not only promote the brand, but also we can tie an ROI to because I think last year, we spent a lot creating the brand, and we've done that. We have the brand now. And so now it's a question of sales, and now it's a question of return on investment and brand building, in my opinion, right now is best through sales. And so that's what we're focusing on. And our partners get that. And so that's what we're doing. So the lessons to learn are, we did a great job last year. We really did. We went from a company that was in the back of the pack, as I said, to, I think, one of the leading brands, if not the leading brand. We have 2 leading brands in both cbdMD and Paw. A company with significant revenue, significant financial strength. And so we're very proud of what we did. But now we have to focus on getting to profitability and maximizing all of our relationships to generate bottom line dollars. And that's what we're doing. So I hope that answers your question.

Sure it does. I appreciate it. Every crisis is an opportunity. So...

Crisis brings clarity.

And next, we'll move to Bill Sutherland with Benchmark.

What happened with international? And what's that looking like?

Well, it's interesting. Obviously, the COVID thing has impacted international as you would expect. With that being said, we have -- because the brand is so strong, we have some large distributors in Europe and in Asia that want to rep the brand, something that 6 months ago, we didn't really even have on the agenda. And so we're in the process of working that. We've just kind of picked up 16 -- 13 or 16 different countries right now that we're selling to, but we think international's got some legs. And so we're looking at it instead of being -- looking at it from a very cost expensive point of view of setting up operations and things like that, I think it's a better thing for us to do is find partners and distribute the brand through those partners. And we're pretty confident, the COVID thing aside, that there's a tremendous demand for cbdMD internationally. And we expect this year to get back on track on that. So stay tuned.

Okay. So did you guys actually break out how the revenues went in March and April relative to the first part of the quarter?

Well, I think we did talk about our first quarter. We did say April trended very heavily towards online, and I can send you this -- Mark can send you this when we get offline, Bill. It was very dramatic as far as -- I mean, look, we entered COVID and in our first month post COVID or in the middle of it, our sales didn't go down, which is shocking. And you would think that would be the other way. Margins stayed strong and even inched up because of the big shift to the online. You couple that with such a huge, dramatic reduction in operating expenses. April was bottom line the best month we've ever had and pretty darn close to getting to breakeven. And so we are continuing to push that. The trend looks good in May, and our goal is to get to profitability as soon as possible and keeping margin up, keeping costs down and having the right blend of business and also increasing that over the next quarter or 2 is going to get us there.

Right. I was just curious what the run rate kind of is at this point that you've got -- that you've moved to.

Well, we don't think we're going to be below what we did in the first quarter. Let's put it that way. We feel pretty confident we'll meet that or exceed it.

That's impressive because I know you had bigger months in January, February, I presume. So...

Yes. Well, we did that $9.4 million in March, and we're certainly looking at that target. It's not more in June. But it's the middle of May, and anything can happen. But Bill, I'm an eternal optimist.

Is -- what's the status of Life Time as far as their centers? Are they opening as we speak?

Yes. I mean, look, they're -- they furloughed 35,000 people and closed all 145 of their facilities. And I just absolutely -- it was -- I feel for them. That's got to be very difficult. They're an incredible team. The management is just phenomenal people. Their whole team is dedicated to opening back up, to getting life back to normal, and we're supporting that. And we -- I know they're opening in some states, depending on what the different open laws are. I know they're getting through it. And I'm confident that they're going to come out the other side, and they're a great partner to have.

Yes. I was just curious how many centers they were getting open. I assume they're going to be moving quickly. Last one for me is on inventory. I know you stocked up. Is it going to be kind of back to a normal level of -- and turns going forward? Or how do you feel about the supply chain at this point?

Yes, Bill, this is Mark. Yes. No, obviously, I think that the preparation was to see what was going to happen with the supply chain. And we feel really good about that right now as we've worked with the various aspects of that. I do believe we're going to continue to watch our inventory and see what the turn is that's there, and we see no reason to keep that level of -- that we ramped up with to prepare for what might happen. So I think we're in a good position there. I expect us to continue in a normal manufacturing process at this time unless, again, there's something that changes as we continue to move forward. But there's nothing that indicates that right now.

The balance right now as far as availability of raw extracts and other materials that you guys work with, what's that like right now? What's the pricing like?

Well, when you say what's the pricing, obviously, you're probably talking about our isolate, which is obviously the largest ingredient, most expensive. But certainly, there's supply out there. That price has come down significantly over the last 6 to 9 months. We have maintained a nice supply. As that has come down, we have continued to purchase. So we have it so that we can fulfill. And again, we'll continue to do that, and we'll continue to watch what's happening with the price point on it.

And next, we move to Paul Bornstein with Black Diamond.

It's nice that the company has a good management team that cut expenses, and now you can start focus on ramping up margins, low -- margin improvement from online. So my question is trying to understand the competitiveness of the marketplace. There's a lot of products out there. You're building a good brand. But can you get price increases on any of them? Or you kind of just stay in the current price level since you had sales on that? And I'm trying to understand the consumer sensitivity to pricing for some of your products.

Well, it's a great question. Look, I think that last year, what we saw particularly in the second half of the year as a lot of these smaller brands came on to market and started struggling with their ability to stay relevant and sell, a lot of them went into the brick-and-mortar channel and did a lot of price dumping as they really didn't have an online strategy. And so there was a lot of competition, a lot of price dumping going in to the second half of the year. And you saw that. And then what's happened is, as we got into the beginning of the year, that started to wane and then COVID hit, and a lot of these smaller brands simply are unable to compete. A lot of them -- I mean, we see it all the time, a lot of them going out of business. And the retailers who are carrying them don't want them and are returning them because they're fearful of having a brand that isn't around anymore. So as far as we're concerned, we're not seeing really any price compression. What we're seeing is really on the online, a very robust business in the brick-and-mortar side, really a shrinking competition and -- which bodes well if you have a national brand, which is what we've built. So...

Yes, Paul, I would just add that from that perspective, as we're going out there to continue to keep the products visible, it's the -- as we said earlier, it's leveraging what we did prior. So the brand has been built through that visibility. Now we're doing things that make it easier to, one, acquire the product, so things like we've rolled out auto-ship capabilities on our online site. The other things that we've done would be really content-focused campaigns because there's still a big aspect of education that the consumer wants. They want to understand about the product, what's in them. Obviously, the quality aspects that we take, that we continue to promote on those things that we believe definitely sets us apart and then just helping them understand what they should be looking at when they're looking at various competitors and products. So I think those are big things that we're doing that are really targeted towards the consumers and are help driving the direct-to-consumer online sales that we're having.

Yes. Well, it seems like the name brand gives you a little edge since you've worked on that and built it up because there's a real lot of products out there for the consumer to digest. So you've cut through the narrow door and you're inside now. So you should be able to leverage it some more. So that should get your sales going even more so and that's why you get cash flow positive at the end of the year or maybe even before depending on the sales results since you've got major expenses out of the way.

And next, we'll move to [Greg Grates], a Private Investor.

Gentlemen, as Life Time comes on stream, I would assume that when you ship something to them directly, that's a retail sale. How about if they sell something through their e-commerce site? Is your facility used as a fulfillment center for their e-commerce site?

Yes.

And next, we'll move to [Darry Curtis] with Spartan Capital.

Can you hear me?

Yes.

Good, good. I'm loving it. It's amazing. I'm very, very pumped. To me, it's -- about 7,000% in increase in sales is the real big story. I know everyone's just looking at the net income of $35 million of loss and $33 million of trailing 12 months, but that huge growth is very impressive, that 7,000% is what I'm looking at. Keep it going. Everyone has to understand.

Thank you.

Our last question comes from Steve Emerson with Emerson Investments.

Congratulations on surviving the virus and bringing strength to strength. How much of your monthly Internet sales are repeat customers? And perhaps how long does the average customer stay a customer? And if you could, how much does it cost you to market -- or to bring on a new customer?

Steve, well, thanks. As you know, the situation with us and our repeat customers is that sometimes people log in as guests in our website as opposed to have an account. So it's a little bit difficult sometimes to figure out the accurate repeat customer account. But what we are seeing and what we can track, I think, is very healthy. And -- but of course, we're certainly working on improving that. As far as our marketing spend, that, again, is getting changed as we sort of enter this new area. We're obviously spending a lot more last year to acquire new customers. Now that we've built the brand, now that we've found channels that we can market and advertise to, that we're seeing proven returns. Some of these podcasts, for instance, are doing just tremendous for us. We continue to push on those channels that are proven success strategies for us.

So I don't want to give you a hard number right now because we're in the middle of making that turn. But I will tell you that the overall marketing budget that we are working with, while it still remains very healthy, has been, we've managed to cut that back and realign that sort of with a goal towards where the revenue is and how we have to get to cash flow breakeven. And I think we've done that in just 6 weeks, and as one of the earlier callers says crisis brings clarity. So we've really taken a look at it. And we're happy to say that even though we've had significant reductions in a lot of the operating costs and, as I said, some of those operating cost reductions are directly COVID impact, like we're not traveling, we're not doing trade shows, those kind of things, some of them are choices that we're making in the marketing sponsorship fields. And -- but what we're happy to look and see that our revenue continues to maintain. I mean if I was sitting here in the middle of March, and you would have asked me if I thought we would be flat the next month, I would probably tell you I didn't think so. So I'm very happy that April was a consistent month, as we looked from the first quarter. I think that in itself was an incredible achievement. And now we're looking at May, and May looks a little bit stronger. And we're hopeful that June will continue to show strength. So that's where we're at. And I feel really good about the decisions we've made and feel really positive that we have enough capital. We have over $14 million, and then we got $1.5 million from PPP. So we're really in a good spot. And with no debt and a variable cost structure for the most part on the marketing side, we're able to be flexible to get to the profitability, I think, in the short term.

And 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.