cbdMD, Inc.

Good afternoon. Welcome to the CBDMD Inc's December 31st, 2020 first quarter earnings call and update. This afternoon, the company issued a press release that provided an overview of its first quarter fiscal 2021 results, which followed the filing of its quarterly report form 10Q. Today's conference call 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 Ronan Kennedy, the company's Chief Financial Officer. Ronan, please go ahead.

Thank you, Paul, and thank you all for joining the CBDMD's December 31, 2020, first quarter fiscal 2021 earnings call and update. On the call today, we also have our chairman and co-CEO, Marty Sumacrest, as well as our chief marketing officer, Ken Cohn. Following the Safe Harbor statements, Marty and Ken will provide an overview of our business, and I'll provide a summary of the quarterly financial results. Following that, we'll 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 risk and uncertainties that may cause our actual results to differ materially from those indicated, including risks described in the company's quarterly report on Form 10-Q for the quarter ending December 31, 2020, and your report on Form 10-K for the year ending September 30, 2020, and our other filings with the SEC, all of which can be viewed on the company's website at 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, Tuesday, February 9, 2021, 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, except as may be required by federal securities laws. With that, I'd like to turn the call over to CBDMD's chairman and co-CEO, Marty Sumacrest.

Ronan, thank you, and welcome to everyone who's joining us this afternoon. On our last earnings call, I said I believe CBDMD was one of the most powerful CBD companies in the world. I believe today's record results back up that statement. With approximately 80% of our net sales last quarter coming from e-commerce channel, I believe we can now add that we're one of CBD industry's most powerful e-commerce brands as well. Our brand's online success has fueled our e-commerce business, which continues to drive our sales growth. Based on a recent report from SimilarWeb, cbdmd.com ranks at the top as one of the most visited CBD websites in the world. As we push ahead into fiscal 2021, we believe our plan to expand our reach into a new product category such as the launch of CBDMD Botanicals, our beauty and skincare brand, will help continue to drive our sales as well as diversify and expand our customer demographics. Despite the COVID-19 pandemic, we continued to show record net sales results, 12.3 million for the quarter, end of December 31, 2020, which was a year-over-year quarterly net sales growth of 22%. At the same time, we also reported record quarterly gross profit margins of 72%. We remain focused on our core competency, which is our direct-to-consumer e-commerce engine, which increased 41% year-over-year and 13% sequentially on a quarterly basis. We have one of the strongest balance sheets in the CBD industry, $28.8 million in cash at the end of last quarter and virtually no debt. We reduced our year-over-year quarterly operating loss by 71% and our non-gash-adjusted quarterly operating loss by 90%. We continue to find efficiencies in our operations. We decreased our total quarterly operating expenses by 15% year-over-year and 2% sequentially, while at the same time making significant investments in regulatory and R&D initiatives. We remain confident that we'll continue to gain market share of total addressable global CBD market, while at the same time delivering on a positive non-GAAP adjusted operating income during this fiscal year. With respect to regulatory matters, CBDMD continues to show leadership in the industry. This commitment was evident by our recent announcement that we've retained former FDA official Dr. Sybil Swift as our regulatory consultant to oversee our upcoming GMP audits and prepare the company for its products for future certifications. The addition of Dr. Swift demonstrates to our customers and our continued commitment to the quality and safety of our products. Dr. Swift's involvement also demonstrates to the FDA and to other global regulatory authorities that CBDMD's commitment to achieving the highest regulatory standards and a science-based approach will be instrumental in strengthening our position as CBD industry's leader in regulatory and GMP compliance. we're pleased to announce that Adara Acquisition Corp., a newly formed blank check company, or SPAC, priced its initial public offering of $100 million yesterday. Today, the units commenced trading on the NYSE American Stock Exchange under ticker symbol ADRA.U. CBDMD is an investor in Adara Sponsor LLC, the primary sponsor of Adara Acquisition Corp. Now it's my pleasure to introduce Ken Cohn, our Chief Marketing Officer, who will talk about our brands and marketing strategies. Ken, go ahead.

Thank you, Marty, and welcome, everyone. I said on our last earnings call that I believe 2020 was the year of separation within the CBD category. I believe that both of our brands, CBDMD and POSCBD, continue to separate themselves and now are the leaders in both brand recognition and financial performance in the CBD industry. We continue to lean heavily on the accumulation and usage of data to make informed strategic decisions, decisions that point us towards further accelerating our brands, driving consumer trust, and capitalizing on our surging e-commerce traffic. while simultaneously educating, informing, and converting both new and returning customers alike. We focused on key performance indicators, or KPIs, including average order value, retention rate, and website traffic. We utilized these non-GAAP measures in internally analyzing the effectiveness of our advertising spend and marketing initiatives. and believe these metrics are important to our investors in their review of our financial performance. Our customer retention rate, representing existing customers who purchased at least once during the quarter, continued to increase over the prior quarter due to a heavy focus on keeping and reengaging existing customers, in particular over the holiday season. average order value continued to climb to just over $90 with larger holiday as we focused on getting customers to purchase multiple times, in particular during Cyber Month with the median frequency at 39 days. And regarding our direct-to-consumer website traffic, our new website traffic increased 7% over the prior quarter were several contributing factors, including traffic via paid social and native advertising, among others. Coincidentally, we were number one in the CBD category for web traffic in the month of December 2020, according to SimilarWeb. In terms of specific advertising sub-department highlights, let's start with our continued focus on podcasts, which have proven historically to be strong traffic and conversion drivers for CBDMD, since they provided CBDMD with our best overall quarter in terms of return on advertising spend. Moving forward, we continue to explore additional opportunities with high-profile podcasters who deliver deep, quality, strategic audiences. Second, with a continued focus on education, promotions, cross-selling, up-selling, and segmentation, our email open rates and associated purchases continue to increase, proving to us that email remains one of the most cost-effective tools to customer engagement and conversion. We also launched our first-ever SMS campaign with very promising initial results. Third, as I discussed during our last call, CBDMD's first nationally telemarketed first nationally viewed television advertising campaign entitled conquer the day was broadcast in both 15 second and 30 second commercial formats across multiple national cable networks. Our campaign delivered very promising metrics, including strong average order values and very encouraging direct to consumer website sales. As such, we are expanding our TV advertising campaign in 2021, with an eye on launching our next campaign soon. PawCBD showed excellent first-year results, and the brand's metrics continue to move in a positive direction. We are seeing the direct-to-consumer power of CBDMD.com translate into significant growth for PawCBD.com. Concurrent with a large focus on new customer acquisition, we recently updated the PawCBD.com website. as we look to deliver an industry-leading experience online for all customers, with an eye on increasing PawCBD's dominance in the CBD pet market. In terms of a few additional highlights for the PawCBD brand, we are excited to launch our advertising partnership with TripAdvisor, as well as PawCBD's first national TV campaign, which occurred this past weekend during the Puppy Bowl on Animal Planet and Discovery+. We remain proud of the awards and accolades we have received for many of our products. Over the past two years, CBDMD was named the top 10 domestic brand in the topical and skincare slash beauty categories by the Brightfield Group, who also, after conducting a survey of more than 3,500 CBD users, ranked CBDMD number one in terms of overall consumer satisfaction, number one in unaided consumer awareness, and number one in high-quality, innovative, and reliable CBD product. PawCBD has also won several awards, including Pet Innovation Award for Best Dog Calming Product of 2020 and 2019's Pet Business Magazine Industry Recognition Award for Dog Calming Aid. We were also pleased to announce recently that CBDMD officially entered the global beauty and skincare market with its launch of CBDMD Botanicals, a naturally derived skincare line featuring 15 luxury products. CBDMD Botanicals offers consumers luxury botanical skincare while at the same time being cost-conscious in the beauty and skincare market. And with our proven track record of providing our customers with some of the best-selling products across multiple CBD categories, we believe that CBDMD Botanicals will be well received in the growing multi-billion dollar global beauty and skincare market. Our wholesale distribution channel has also made significant strides domestically and internationally. We are seeing a significant increase in international expansion with strategic partnerships throughout the Caribbean market and in Mexico, where we have added two distributors. Also, Due to the trending success of our pet brand, Paw CBD has been added to the CV as well as featured live on the Bulldog Shopping Network. We're also seeing our customer average order amounts increase on a month-to-month basis as this channel recovers from the pandemic. With that, I'll now turn the call over to our CFO, Ronan Kennedy, to review our most recent financial results.

Thank you, Ken. I'm going to start with a brief summary of our GAAP-based results. On a GAAP basis, total net sales for the first quarter hit another all-time high of 12.3 million, or a 22% increase, year-over-year increase, and a 5% sequential quarterly increase. Our quarterly e-commerce sales also hit a record high of 9.7 million in the first quarter of fiscal 2021, a 41% year-over-year increase, and 13% sequential quarterly gain. E-commerce now represents approximately 78% of our total revenue. Our wholesale business generated 2.6 million of net sales for the first quarter of fiscal 2021 as compared to 3.2 million for the comparative quarter in fiscal 2020. The first quarter of fiscal 2020 was the last quarter prior to COVID-19, and we believe the year-over-year performance is primarily a result of the broader impact experienced by brick and mortar retailers nationwide over the last 12 months. Our GAAP gross profits as a percent of net sales came in at 72% for the first quarter of fiscal 2021, compared to 64% for the comparative prior year period. The strength of our e-commerce sales and improvement in our operations help drive these positive results. Going forward, we expect to maintain our gross profit margins between 65% and 70% provided we maintain similar e-commerce revenues as a percent of our total revenue. Our operating expenses for December 31st, 2020 quarter were $10.7 million, which was a decrease of 15% over the December 31st, 2019 quarter and a decrease of 2% from the quarter ending September 30th, 2020. Overall, this resulted in a gap loss from operations of approximately $1.76 million for the December 31, 2020 quarter, a $4.35 million improvement from the $6.11 million loss from the prior year period, and a $2.8 million improvement over the quarter ending September 30, 2020. Our non-recurring operating expenses for the first quarter of fiscal 2021 included a $403,000 one-time accrued expense related to severance, and together with $300,000 in discretionary bonus accrual, $300,000 in non-cash stock expenses, and depreciation expenses of $233,000 resulted in a non-GAAP adjusted operating loss of $523,000 for the first quarter of fiscal 2021 as compared to a $5 million non-GAAP adjusted operating loss in the first quarter of fiscal 2020. The decrease in non-GAAP adjusted operating loss over the December 31st, 2020 quarter was mainly attributed to cost tightening and an increase in gross profit dollars resulting from improvements in both revenues and gross margin. We spent $304,000 on regulatory and R&D this past quarter, and we ramped up our regulatory efforts and increased our quarterly sequential marketing and sponsorship expenses over $290,000. we continue to pursue several objectives to drive operational efficiency and lower our cost structure. Other income expenses on our consolidated income statement include the non-cash contingent liability charge related to the December 2018 acquisition of CureBase Development. The contingent liability is revalued at the end of each quarter, and during the first quarter of fiscal 2021, we had an increase in value of $8.5 million, which created the corresponding other non-cash increase in contingent liability related to the earn-out shares. The change in valuation of the contingent liability was primarily a result of the increase in the market price of our common stock during the period from $2 to $2.95 a share. Any increase in our common stock price increases the contingent liability and creates an increase in contingent liability impacting net income. In addition, the other income expenses included a $540,000 realized gain from the sale of investments on marketable and other securities. We had cash and cash equivalents of approximately $28.8 million and working capital of approximately $30.6 million on December 31, 2020 compared to cash and cash equivalents of approximately $14.8 million and working capital of approximately $16 million as of September 30, 2020. Our current assets as of December 31, 2020 increased approximately 37% from September 30, 2020 to $37.4 million. A primary driver of the increase in current assets was the approximate $15.8 million in net proceeds from our preferred offering in December of 2020. As of December 31, 2020, the company's total current liabilities were $6.7 million. of which approximately $2.1 million is accounts payable and $2.3 million is accrued expense. The company has approximately $209,000 of financing notes on equipment for a manufacturing facility, as well as a $1.45 million SBA loan from the Paycheck Protection Program. As mentioned, we ended the quarter with $28.8 million in cash and cash equivalents, and coupled with our non-GAAP adjusted operating loss trend, we remain confident in executing our 2021 plan. Our plan remains to utilize our strong balance sheet to make further scientific and regulatory investments, direct incremental strategic marketing efforts, including increasing our TV spend, grow our recently launched UK business, and support our efforts to expand our product portfolio. With that, I'd like to now turn the call back over to Marty.

Thank you, Ronan. With that, I'd like to open up the line for any questions and answers. Q&A.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. And once again, ladies and gentlemen, if you do have any questions, please press star one on your phone at this time. And we do have a question coming from Scott Fortune. Scott, your line is live. Please announce your affiliation and pose your question.

Good afternoon, guys. Thanks for taking the questions. Kind of want to get a sense of, you know, the growth here kind of on quarter over quarter, what you're seeing. the COVID impact for you. I know e-comm's been strong, but kind of a slowing quarter of growth. And then the $28 million in cash, kind of where you're deploying that to continue to drive growth going forward, whether that's expanding doors or, like you said, the marketing side of things to provide low color.

Yes, Scott, this is Marty. So, you know, we're seeing, you know, continued strength on the direct-to-consumer business. On the brick-and-mortar side of the business, as you know, the big retailers are still out of the game for the most part, and our strategy of dealing with a lot of smaller retailers is you know, has kept that business still relatively stable. I would say it's on its way back to where it was pre-COVID levels. You know, my sense is we're going to probably be there, you know, towards the end of this quarter, early next quarter. So, and then, you know, we are talking, there is going to be a I think, and a more willingness from the big box folks as we get into the second half of calendar 2021. You know, the whole situation with legislation around, you know, marijuana certainly helps CBD. We've been positioning ourselves, you know, as a leader in the branding space. And so we believe that when that time comes, we're going to be really well-positioned to move into there. As far as utilizing the capital, look, we've taken a business that was burning $5 million, $6 million a year ago down to pretty much near break-even. Two quarters ago, our adjusted number was, I think, 180 grand. We went a little bit deeper in September with about a million. Now we're back to 523. So I think that's going to continue to improve sales. As sales continues to improve with our margins, we can reinvest those dollars. So we're not having to you know, to use the capital to kind of deficit spend to some extent. We're looking at opportunistic ways to utilize that capital. So, you know, we're going to be spending more money, as Ronan said, on television. That's been a really great return for us. Our podcasts, that's been a really great return for us. And we've got some other exciting things on the horizon. So You know, we think we're going to have a really great 2021. And, you know, we've now been at this for eight quarters since going and taking CBDMD public besides one quarter, which was the March quarter of last year where the pandemic hit. You know, we've had seven out of eight straight increases. and you know we we anticipate that's going to continue uh again and again um you know so we're we're excited about that and also you know our paw brand is really also getting a tremendous amount of traction um from from retailers and and the online space okay i appreciate that yeah yeah you get more competition from martha stewart coming on the pet cbd that's all helped uh growing the the overall market from that standpoint but

And you've done a great job of expanding products and innovation. Just kind of step me through the botanicals, kind of the luxury side that seems like a new channel or new demographic that you're going after. Kind of how do you see that growing or the cadence of that growth throughout 2021 here going forward?

Yeah, well, you know, one of the things that we really wanted to do is expand the demographic into the female demographic and try to hit that demographic female over the age of 35. So we did a couple of things. We started really marketing towards that demographic. If you go to CBDMD.com and go to our commercial that Ken mentioned, Conquer the Day, you'll see that it was really focused towards that female demographic. And now the launch of the botanicals line really goes after that demographic. So we started it, selling it exclusively online. And now as we push into this year, we're sort of getting a tremendous amount of interest from all of our retailers and from new retailers to carry that line. Ken, would you like to add anything to that, to Scott?

The only thing I would add is it's a great entry point into the CBDMD family. And once we, you know, once we get them into the family, I think it's an extra, it's an exceptional way for them to try other products that are part of our brand portfolio. Other than that, Marty, I think you nailed it.

Okay, I appreciate it. Thanks for the color. I'll jump in the queue.

Thanks, Scott.

Thank you. And with no further questions in the queue, that does conclude our conference call for today. Thank you so much for your participation.