cbdMD, Inc.

At this time, I would now like to turn the conference over to Ronan Kennedy, the company's chief financial officer and chief operating officer. Ronan, please go ahead.

Thank you, Catherine, and thank you all for joining the CBDMD's June 30th, 2021, third quarter fiscal 2021 earnings call and update. On the call today, we also have our chairman and co-CEO, Marty Sumacrest. 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 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 the 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 their actual results to differ materially from these indicated, including risks described in our company's quarterly report on Form 10-Q for the quarter ending June 30, 2021, annual report on Form 10-K for the year ended September 30, 2020, and our other filings with the SEC, all of which can be viewed 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 today speak only as of today's date, Thursday, August 12, 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 law. With that, I'd like to turn the call over to CBDMD's Chairman and Co-CEO, Marty Sumacris.

Thank you very much, Ronan, and good afternoon, everyone. We appreciate you all joining us today. Once again, CBDMD delivered top line sales that outpaced the overall industry trend. Despite the impact from the COVID-19 pandemic, we believe that our responsiveness and our ability to adjust our business has allowed us to maintain year-over-year sales levels. I want to thank our team for their hard work and dedication. keeping the health and safety of our employees a top priority while also delivering on these results. With that said, while we appreciate the hard work and dedication of our entire team, we know that we can do better, and we will do better. Our goal is to get back to year-over-year growth rates in the 20% to 25% range or higher, while at the same time be mindful of our cash spend. Getting back to achieving net sales growth in the near term is our top priority, and we believe we can do this based on the anticipated launch of a variety of new products, new partnerships and sponsorships, new channels of distribution, and new international markets, all which have been put into place and we are executing on this quarter. We see significant long-term potential, not only in our core U.S. market, but also in the global market. We expect an increase of our wholesale footprint as we anticipate additional mainstream retail channels to open up to the CBD category, especially to leading brands such as ours. As the company reopened earlier this year and we saw customer habits shift slightly from online to brick-and-mortar stores, we were able to pivot accordingly. With this reopening of the B2B wholesale channels, we are seeing more and more opportunity in specialty retail channels. We are also very well positioned, as compared to most of our competitors, to make significant headway in traditional brick-and-mortar retail chains. The brand recognition we have built through our sponsorships, we believe, is best in class. And we plan to leverage those partnerships, which we believe will result in a more rapid expansion of our retail footprint. With the reopening of the country, we've already started new activations with our iconic leading partnerships with brands CrossFit and Bellator. And you'll hear about more of those plans coming to life very soon. As we continue to sort through a variety of market conditions, One issue we've experienced is production delays with several of our vendors, specifically impacting several new product launches. For that reason, and while we remain bullish on the outlook for our brand sales growth, we are now revising down our net sales guidance for the first quarter of our fiscal 2022, ending December 31, 2021, from a range of $15.5 million $16.25 million to a range of $14.9 million to $15.5 million, or a 20% to 25% year-over-year sales growth for the December 31, 2021 quarter. Reaching these performance metrics helps us achieve our goal of positive adjusted EBITDA results in the near term. we had a very healthy cash position of 18.9 million as of June 30th. The next day, July 1st, we closed a secondary offering of our Series A preferred shares, which increased our cash on hand further by approximately 15.3 million to over $34 million. We continue to open new international markets and our products are represented now in over 31 countries. We are in a unique position to secure marketing and sales opportunities with global sports organizations, which we believe will only be available to very few well-capitalized and well-recognized CBD brands such as ours. We are also looking at potential M&A opportunities within the CBD industry, such as our reach and purchase of DirectCBD Online, our new online marketplace. As always, CBDMD has been an innovative marketing leader in the CBD industry. Our team CBDMD has a roster of athletic champions that is unmatched in our industry and includes, but is not limited to, Masters Champion Bubba Watson and Patrick Reed, seven-time Mr. Olympia Flex Lewis, and two-time UFC champion Daniel Cormier. With such an incredible roster of champions, we recently filed for the trademark CBDMD brand of champions, which we believe personifies our brand. Our CBDMD and PAW CBD brands continue to lead the market in brand awareness and social media reach. Our new CBDMD Botanicals brand is already in its second phase of new product development in just its first year. We also continue to strengthen our portfolio of strategic athletes and sponsorship programs. We continue to be recognized for our outstanding products as we've been a multi-year recipient of Product of the Year awards. In addition, we are pleased to announce that PawCBD, has received its official certification from the NASC, or National Animal Supplement Council, a non-for-profit group committed to protecting and enhancing the health of companion animals through the country. NASC has dedicated itself to safety and quality in the animal supplement space in the United States, identifying and certifying only the best quality products for cats, dogs, and horses. Having the NASC certification is a pivotal step to access mass retail distribution, as we believe such certification has been a gating requirement for a number of retailers in this segment of the CBD category. We understand the importance of brand equity and how critical it is that our customers know we are always selling superior, quality, safe products. In order to assure our customers that CBDMD products are at the forefront of quality and safety, we continue to invest in robust protocols and always with an eye towards the future. As I've said many times, the therapeutic potential of CBD as well as other lesser-known cannabinoids is incredible. We are working to tap into this therapeutic potential. as we continue to support scientific advancements through clinical trials and perform toxicity studies to demonstrate the safety of cannabinoids as novel therapies. We are aggressively developing significant and valuable IP. In order to better organize all our scientific endeavors, we launched CBDMD Therapeutics earlier this year, and we'll be providing the necessary resources to ensure its success, which recently included the hiring of former FDA official Dr. Sybil Swift and the commencement of several industry-leading studies on CBD safety. Fostering a robust culture of innovation and brand development has been an instrumental piece of our success. We are continuously evaluating options to connect with our consumers through our compelling brand propositions and innovation so we can meet the needs of our consumers' preferences in the marketplace. We continue to evolve our business to stay at the forefront of our industry. We take great pride in leading with strong values. We are committed to advancing the health and wellness of people's lives for the better by investing in our products, our brands, and our people. We remain confident that we will continue to gain market share in the global CBD market. With that, I will now turn it back over to Ronan, who will take you through our financial results for the period ended June 30th. Ronan, go ahead.

Thank you, Marty, and welcome, everyone. On a gap-based total net sales for the third quarter of fiscal 2021, we're 10.6 million or flat over the prior year's total. Although this was a sequential dip of 10% from the second quarter of fiscal 2021, for the nine months ending June 30th, 2021, we reported a total net sales of 34.7 million, a 15% increase compared to 30.2 million in the same period of last fiscal year. Our quarterly e-commerce direct-to-consumer business generated sales of 7.8 million in the third quarter of fiscal 2021. While this was a 4.9% year-over-year quarterly decrease, for the nine months ending June 30, 2021, e-commerce generated $25.6 million of net sales compared to $21.9 million for the comparative prior fiscal year period, or a 17% increase. E-commerce represented 74% of our total net sales for the quarter and nine months. Our wholesale business generated 2.7 million of net sales for the third quarter of fiscal 2021, up 13.7% as compared to 2.4 million for the comparative quarter in fiscal 2020. For the nine months ending June 30, 2021 and 2020, our wholesale business generated 9.0 million and 8.3 million, respectively, of net sales. POS CBD sales saw a strong increase during the quarter, and we are optimistic about the revenue opportunity with our recent NESC quality seal certification. Our GAAP gross profit remained strong and as a percent of net sales came in at 68% for the third quarter of fiscal 2021 compared to 65% from the comparative prior fiscal year period. For the nine months ending June 30th, 2021 and 2020, gross profit was 70% and 66% respectively as a percentage of total net sales. Based on our category sales mix, ongoing operating leverage, and our asset late model, we expect to maintain our gross profit margins between 65% and 70% on our CBDMD and PAW CBD business. For modeling purposes, we anticipate the incremental direct CBD online business will have a small impact to our overall consolidated blended gross margins in future quarters. Our operating expenses for June 30th, 2021 quarter totaled $13.8 million, which was up from $8.2 million as compared to the June 30, 2020 quarter. Operating expenses were up 15.6% over the prior fiscal quarter, mainly due to a $3 million increase in advertising, influencer, and marketing spend, which we have already reduced this quarter. Other contributing factors were $1.1 million increase in compensation, $650,000 increase in R&D and regulatory, and a $630,000 increase in non-cash stock expense. For the nine months ending June 30, 2021, operating expenses increased to $36.8 million from $33.1 million in the comparative fiscal period in 2020. Overall, this resulted in a gap loss from operations of approximately $6.6 million for the June 31, 2021 quarter, as compared to the $1.3 million loss from the prior year period. Sequentially, operating income declined $2.5 million over the March 2021 quarter. This is primarily attributable to $1 million in gross profit, $540,000 of compensation, a $750,000 increase in marketing and influencer expense, and $590,000 increase in R&D. For the nine months ending June 30, 2021 and 2020, Our gap loss from operations totaled $12.6 million and $13 million, respectively. Our non-gap adjustments to operating expense for the second quarter of fiscal 2021 include a $150,000 one-time accrued compensation expense, $987,000 in non-cash stock expense, and depreciation expense of $246,000, resulting in a non-gap adjusted operating loss of $5.8 million. $39 million for the third quarter of fiscal 2021 as compared to 187,000 non-GAAP-adjusted operating loss in the third quarter of fiscal 2020. The increase in non-GAAP-adjusted operating loss over prior year period is primarily attributable to the aforementioned increase in operating expenses. We invested $615,000 on CBD therapeutics and related R&D this past quarter, and we anticipated ongoing investment, albeit at lower levels, during the next few quarters as we continue to invest in the CBDMD therapeutic mission. Other income expenses on our consolidated income statement include a $1.5 million gain from the extinguishment of the PPP loan, in addition to a non-cash contingent liability gain of $6.8 million related to the December 2018 acquisition of CureBase Development. During May, we issued 562,278 earn-out shares corresponding to the third earn-out period. At the time of issuance, we booked a $522,000 valuation decrease and subsequently reclassed $1.3 million from contingent liability to additional paid-in capital on the consolidated balance sheet. The remaining earn-out shares were revalued at the end of the quarter, resulting in a total non-cash contingent liability gain of $6.3 million for the quarter. The change in the valuation of the contingent liability are primarily a result of decrease in the market price of our common stock during the period from $4.14 to $2.90 per share. During the quarter, we utilized approximately $5.2 million of cash. The main components include cash, our adjusted non-GAAP operating loss of $5.4 million, $560,000 of paid dividends, 85,000 of capital investments with the balance coming from a reduction of working capital. We had cash and cash equivalents of approximately $18.9 million and working capital of approximately $23.2 million on June 30, 2021, 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 June 30, 2021, increased approximately 26% from September 2020 to $30 million. A primary driver of the increase of the current asset was approximately $16.8 million in net proceeds from our Series A preferred stock offering in December 2020. As of June 30, 2021, the company's total current liabilities were $6.7 million, of which approximately $3.1 million is accounts payable and $2.3 million is accrued expenses. The company has approximately $182,000 of financing notes on equipment for our manufacturing facility. Our balance sheet remains strong, even more so after the proceeds from our July preferred offering. Going into the fall, we anticipate increasing our inventory level slightly in preparation of a number of new product launches, as well as for precautionary measures to protect against potential supply chain issues in today's business environment and an expected increase in demand from anticipated future distribution partnerships. Since mid-third fiscal quarter, we have made a number of changes to personnel, and are taking aggressive steps to reduce and align our marketing spend to get performance back on track and drive revenue of our core business. Additionally, we expect to have the operations of our recent acquisition consolidated during this quarter and are working to maximize the synergies available from this business. We remain optimistic about our new products set to launch in the coming months, and coupled with a number of other initiatives, we are confident in the positive outlook of our business going into the second half of the calendar year. With that, I'd like to now turn the call back over to Marty.

Thank you. Why don't we open it up for questions? Catherine?

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone now. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone now. Please hold a few moments while we poll for questions. As a reminder, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone now. Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone now. Your first question is coming from David Shalev. Your line is live.

Hi, guys. I'm happy to see the strong cash position, but I'm wondering if you can add some color as to the promises made or the indications made last year about being cash flow positive by the end of last year. It looks like we're still quite a ways from that now. And operating expenses have been a bit up and down. You made reference to decreasing operating expenses going forward. Can you just give some background as to what's happening in that department?

Yeah, this is Marty. Thanks for the question. Look, you know, we are, as you know, the CBD industry is a relatively new industry. We are sort of navigating it. We see opportunities that have kind of come to us, and we decided to take advantage of those opportunities. There were some marketing sponsorships that we took advantage of. Patrick Reed was one of them. You know, that really wasn't on our agenda. We ended up taking advantage of it because it was a really unique opportunity because we're very strong in the golf sector. We also took advantage of CrossFit in the quarter, which we think is going to be an enormous opportunity with 11 million CrossFit folks. Our team was up in Madison, Wisconsin two weeks ago, activating at the CrossFit Games. It was an enormous success. So we're very excited about that. And so we, you know, we felt that it was really important as we, you know, talked to a lot of the peers in the industry, you know, there is an increased competition in the industry and and we felt that in order to maintain our market share and really grow for the future and set things up, which we believe we did in the first half of the year, that's starting to pay off now, that we should invest in some of these opportunities. The other thing is on the therapeutic side, we invested into CBDMD therapeutics. We feel that that is... vital for the long term as we are studying and will come out hopefully with successful studies on safety as well as other claims that we'll be able to make on the products, which we think really elevates our brands above most of the competition. So we just feel that those are right decisions to make. and we think that they're paying off, as I said in my comments, if we can get our revenue to where we think we can get it in the next couple of quarters, you know, that should get us fairly close to that adjusted EBITDA number that, you know, we're hoping to get to. So hopefully that answers your question.

All right. Thank you.

Sure.

Your next question is coming from Pablo Zuanek. Your line is live.

Yes, hello, Marty. Can you hear me? I think there's something wrong with the line.

I can hear you, Pablo, loud and clear.

That's good. So can you just talk in general about the pet category? I mean, obviously, Martha Stewart launched the CBD brand with Canopy Growth. What are you seeing there? You talked about growth in your line. Just some color in terms of category size. competitive environment within the pet category and more color in terms of where you are in terms of share, if you have a sense on that. Thanks.

Yeah, I mean, look, we think paw CBD, it's our fastest growing category on a percentage basis. We think the opportunity for us is pretty large in that category. There's not a lot of competitors, unlike, you know, the human space, the animal CBD space doesn't really have a lot of competition. We're spending, interestingly enough, a significant amount of our therapeutics dollars on the pet side. We think that by the end of the year, we're going to have some studies that are going to be able to say that our brand is able to help dogs in their mobility, which would be an tens of millions of pets suffer from mobility issues, particularly as they get older. So the market is there. I can't talk about the size of the market. Pablo, I've seen numbers as low as $50 million to as high as $350 million. as we stand today. I think we are one of the leaders in the CBD pet market. I think we're probably in the top five. And we've got some new products coming out. I think the biggest thing that we did was get the NASC certification. That's been a barrier to entry on a lot of the mass retail. As the retailers tell us, in order to get in there, we have to have that certification. And that certification took us a long time because of COVID and they couldn't come out here and do all the onsite inspections, but we finally got it. We're very pleased with that. We expect really robust growth on the PAW CBD MD side, and we're going to be starting marketing PAW CBD as really for the first time as its own standalone brand in certain sponsorships that we have. And so that's going to be a very interesting place. And interestingly enough, and lastly, a lot of big global sports organizations, believe it or not, are actually asking us to lead with PAW CBD as a brand to get in there first before we go with the CBDMD brand. So there's just an enormous amount of demand for it. We continue to see it growing rapidly. And... and we're very pleased with its success so far.

Thank you. And then just a quick follow-up, and again, I'm sorry if I misheard or joined the call late. You gave guidance for the December quarter in terms of sales, but had you given guidance for the September quarter? And that 25% growth is, I suppose, year-on-year, right? But just some color there. Thank you.

Yeah, no, we had put out our December, our first quarter of our next fiscal year guidance of 15.5 to 16.25. We have a lot of products. You know, we actually put out a press release in April. We were trying to get some products out for the end of last quarter. And just with all the production delays, you know, businesses having, you know, whether it's finding employees, I can go down the list of issues that I'm sure, you know, you're seeing in other companies. So we were a little bit late on that. Those products are coming out now. They should be coming out, you know, in the next 60 to 90 days. Those products are drink mixes, which we think is going to be really big. We just saw those come in to the warehouse, so we're excited about that. And so we think that, together with a couple other initiatives, should really be able to ramp our two quarters out. So we pulled back guidance a little bit from 15.5% to 16.25% to 14.9% to 15.5%. which was still going to be a 20% to 25% year-over-year sales growth from the December 31, 2021 quarter.

But are you going to guide or give any comments on the September quarter right now or no guidance?

The one we're in right now, no.

Okay. Okay, that's good. Thank you.

Okay. Thanks, Bob.

Your next question is coming from Ron Nash. Your line is live.

Yes. Thank you. There's been some reports coming out pertaining to that Amazon could be opening up their lines for CBD. Are you aware of this? And if you are, is there anything contemplated going forward?

Thanks, Ron. Thanks for the question. Look, we are aware of this. You know, there's no guarantees that they're going to do it. There is no guarantees that if they do it, we'll be one of the chosen brands. We feel that we will be. We certainly are, as you know, one of the biggest brands in the country. We've been working very actively. If they make a decision, they make a decision, and it goes very quickly, so you better be ready, and we feel we're ready. We're cautiously optimistic, and as soon as we know we'll let all of our shareholders know.

Have you been in touch with Amazon at all pertaining to this possibility?

We've been working through the correct channels to be ready in case they choose to move on the sector, and we're part of that. Roden, you want to add anything? Very good.

No, Marty, I think you covered it. I think we feel pretty good about our strategy. We're ready to go live very quickly if and when Amazon makes that move.

Very good. Thank you very much. Appreciate that. Thanks, Ron.

Your next question is coming from Mike Pfeiffer. Your line is live. Hi.

Can you size the CrossFit opportunity and the timeline potentially to monetize it? And then the second question is, are you comfortable with the partnerships you have now, or are there things that you see on the horizon that may be coming your way? And I don't know if you can talk about that at all. Thanks.

Thanks for the question, Mike. You know, If you'd have asked me a month ago what I thought the CrossFit opportunity was, I would tell you I thought it was very big just because of the sheer metrics that CrossFit has, which is 7,000 locations in the U.S., another 7,000 globally, 11 million CrossFit people in the U.S. I mean, it's an enormous company and an incredible, iconic brand. But it really wasn't until I went to Madison, Wisconsin a couple weeks ago, and we had a whole team up there of almost a dozen folks, and I really got to see the CrossFit community at the CrossFit Games. And I got to tell you, I came back as excited about this relationship as I've been about anything that we've done. I think the opportunity is – I mean, I can't – I think the financial opportunity is really significant. I think the branding opportunity is equally significant. You have to do it in an authentic way. You know, the CrossFit community is not a community where you can just throw a corporate name at it. You have to be authentic, and it's what we continue to hear from the members of CrossFit. So we have... hit the ground running, whether it's local activations here in our Charlotte metro area where we're doing that right now with a number of the leading gyms, whether it's going out and activating nationally to additional games that are put on across the United States. We're going to be announcing the addition of several high-profile CrossFit athletes which we're really excited about. In addition to that, there are other brands that are CrossFit brands, and we had an opportunity to meet with them and learn from them how they have been so successful in being in the CrossFit community. And so we've had just an enormous amount of communication with them, not only to learn how to do that effectively, but also to co-brand with them. And so you're going to hopefully see us co-branding with some pretty large brands. And we're going to be starting to do this across the board. Bellator, which we're also an exclusive CBD brand, which is owned by CBS Viacom, the president of Bellator, Scott Coker, has done an incredible job. We're starting to activate now at Bellator fights. They're now being sold out. The league itself is just blowing up because everybody is into MMA, and they do such a great job, and they're fighters everywhere. are just incredible. So we're activating there and we're looking at building partnerships with those different partners, Monster being the biggest one there. So we just have a tremendous opportunity in front of us because of who we are, our position in the CBD market, our prominence as a NYSE listed company, how well we're capitalized. We have an incredible team. uh, of, of folks that are, are dying to get out there and communicate and, and do these different partnerships. So that's a long answer to a short question. As far as going forward, we are seeing global sports leagues, uh, wanting to open the category. And we're just honored that, that we are a lot of times their first call because they see what we've done. They see the brand, they see our brand of champions and, um, We think the future is so incredibly bright for where we can take CBDMD, PAW CBD, and now CBDMD botanicals, which you're going to hear a lot about in the next coming quarter. So that's my answer to you.

Thanks a lot.

Sure.

Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone now. Your next question is coming from Gary DeStefano. Your line is live.

Hey, Marty. Hey, Ronan. Thanks, first and foremost, for reflecting on this quarter. Just a quick question. Apologies if I missed it. Can you just speak to the acquisition of directcbdonline.com? You know, whatever you could say about it at this point, maybe more generally. just kind of what the thought process was around it and how early steps of integration have gone thus far?

Okay. Well, I'll talk about just sort of the overall thought process, and Ronan can talk about the integration. Look, John Wiesenham and his partner, Brad, are just terrific entrepreneurs. They're here in Charlotte. They built a great platform in direct CBD. online and we got to know them because they've been buying our product from us and we we felt that for us this was a good strategic fit of human capital because now John is our CRO and Brad is our head of procurement and and they have done a tremendous job in just a few weeks that we've been here we see we see a significant change in and uptick in all the performance. So that's number one. Number two is we felt that it was interesting to be able to see the trends and what's going on in the overall CBD market. And so this gives us insight into that. And so that was kind of the concept. I think we structured the deal in a good way. I think it was a good value for the shareholders, and we're excited to see it grow. And as far as the integration, Ronan, you want to talk about that?

Yeah, so having it locally here in Charlotte, it's making it easy for us to kind of integrate the teams And we're working, you know, to pretty much, you know, by the end of – within the next – within this quarter, we'll have the operations fully consolidated and really working to kind of streamline all operating expenses and maximize all the synergies we expect to get out of that business.

Great. That's fantastic. Congratulations. Just one follow-up question separate from the acquisition. Any – Any initial thoughts regarding the international rollout of the CBDM MD platform? Is it going as expected or anything worth noting there?

Well, it's interesting. If you'd asked me a year ago whether I thought we would be in international markets, I would tell you that it really wasn't our focus because the U.S. market is so big and the opportunities, and it's really kind of come to us. I mean, we had... uh, distributors and, and, and folks around the globe wanting our product, um, we decided that we would, um, make a push into the UK. So we filed, uh, the application that we, we had to do, uh, had to get in there in March and we submitted that and we're waiting on, uh, on, on the response from the, uh, from the regulators there, we think we're in good shape there and that will allow us to really make a push into that market and then also into the EU. And then we're also looking in Asia and stay tuned because I think we've got some very interesting things going on there. Clearly several Asian markets really love our brand and so we're making a very concerted push there. But, yeah, I mean, 31 countries representing our brand, that's pretty neat, and it really gives us an ability to grow in those different markets. So we think the international play, you know, it's a longer-term objective, but we think it's going to continue to grow, and we can do it in a way that's cost-effective.

That's great. Seems like there's a lot to look forward to. Appreciate your guys' time. Thanks.

Thank you.

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