cbdMD, Inc.

Good afternoon and welcome to CBDMD Inc's September 30th, 2021, fourth quarter and fiscal year 2021 earnings call and update. This afternoon, the company issued a press release that provided an overview of its fourth quarter and fiscal year 2021 results, which followed the filing of its annual report on Form 10-K. Today's conference call is being recorded and will be available online along with our earnings press release covering our financial results and non-GAAP presentation 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 and Chief Operating Officer. Ronan, please go ahead.

Thank you, Kate, and thank you all for joining the CBDMD's September 30th, 2021, fourth quarter and fiscal year 2021 earnings call and update. On the call today, we have our chairman and co-CEO, Marty Sumacrest, as well as Dr. Sybil Swift, our vice president of scientific and regulatory affairs. Following the safe harbor statement, Marty will provide an overview of our business, then Dr. Swift will provide an update on the current regulatory climate for CBD, as well as an update from our CBDMD therapeutics division. And finally, 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 Security Litigation Reform Act of 1995. CBMD cautions that these forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those indicated, including risks described in the company's annual report on Form 10-K for the year ended September 30, 2021, and 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, Friday, December 17, And CBDMD does not intend to update any of these forward-looking statements to reflect events on circumstances that would occur after today's date, except as may be required by federal security laws. With that, I'd like to turn the call over to CBDMD's chairman and co-CEO, Marty Simacrest.

Thank you very much, Ronan, and good afternoon, everyone. We appreciate you joining us today and appreciate your understanding for yesterday's technical delay. Next week will be our three-year anniversary of our company entering the CBD industry with the acquisition of the CureBase Development, the owner of our flagship brand, CBDMD. It's also the three-year anniversary of the passage of the Farm Bill, which decriminalized CBD in the U.S. Three years ago, we were an unknown startup brand competing against thousands of other CBD brands. In 2019, our first year in the CBD business, we grew very quickly to become one of the top 20 CBD brands in America. In 2020, our second year in the CBD business, despite the COVID pandemic, we grew again, this time by over 77%. Now, as we finish our third year, we are firmly positioned at the top of the CBD industry with our three leading brands. According to the Brightfield Group, a leading industry analytics firm, the CBD industry today is approximately a $4 to $5 billion market, and it's broken down into three groups. The first group is made up of the top 20 CBD brands, and they represent approximately 19% of the U.S. CBD market, with CBDMD's market share representing approximately 1.3% of the total U.S. CBD market. The second group is the pharma drug group, which is represented by one main player, Jazz Pharmaceuticals, and their FDA-approved epileptic seizure reduction drug, Epidiolex. And they alone control 14% of the entire market. The third group, which is the vast majority of the U.S. CBD market, is made up of over 2,000 smaller brands, which represent 67% of the entire U.S. CBD market. Compare this to a more mature industry, such as the energy drinks, where the top five established players control 65% of the market. CBDMD, like the overall industry, grew significantly in 2019 and 2020. This year, according to the Brightfield Group, the U.S. CBD market experienced its most challenging year with year-over-year growth rates expected to be nearly flat at 2.5%. Despite this anemic industry growth, CBDMD was able to outpace the industry and we grew net sales by 6% and gross sales by over 10% from 2020. We were able to maintain our product pricing, firm up our product purchasing, which resulted in an increase to our gross profit margin to a record high of 67% in fiscal 2021 from 63% in 2020. Slower than anticipated sales in the second half of our fiscal year, our increased marketing costs in the first half of our fiscal year, which have now been reduced, combined with several product delays, which were caused by supply chain disruptions, as well as setup costs for new distribution channels, coupled with our investment in the therapeutics division, resulted in a gap operating loss for the fiscal 2021 of $19.6 million. While we are now seeing a return in consumer demand as we enter our fiscal 2022 year, and we are optimistic the calendar 2022 will return to higher sales growth rates as new products reach our customers and distribution channels become available, we're withdrawing our previously announced sales guidance for the quarter ending December 31st, 2021. The question before us is what will be the future of the CBD industry in the next three years? What roles will innovation, regulation, and consolidation play? The Brightfield Group estimates the CBD industry will grow at a healthy rate of 21% in 2022, and then nearly double by the end of 2024. In the next three years, we believe that new regulations, which will be promulgated by regulatory authorities, which will have a dramatic effect on many of the 2,000 smaller CBD brands, as they will be unable to meet new best practice regulations. And these new regulations and safeguards are needed in our industry, and there continues to be significant consumer product confusion. Proper guardrails in the CBD industry will allow trusted, safe, and compliant brands to fill the growing demand. Marketing and distribution channels, which up until now have been closed to CBD brands, should open, which will in turn allow greater access to new consumers. This natural evolutionary cycle has been witnessed in countless other industries. We believe that 2022 represents the beginning of a watershed phase in the CBD industry, where relatively few select CBD companies who currently own well-established brands and have the vision the resources and the infrastructure will gain a larger market share of an even larger total addressable market or TAM. With our team of seasoned industry veterans, our strong balance sheet, and our three powerful and leading CBD brands, we believe CBDMD is positioned very well as we enter into this new phase of industry growth and consolidation. Our three goals are, one, to continue to outpace overall industry growth, two, increase our share of the total addressable market, and three, to achieve positive adjusted EBITDA. And, of course, it goes without saying our mission that we always focus on is to bring the highest quality CBD products to our customers. We believe these goals can be achieved with the launch of new innovative products. As a multi-year recipient of Product of the Year awards, CBDMD has regularly been recognized for our outstanding new products. One example of a new product is our CBDMD Botanicals line that was relaunched this past Monday. and it's generated excitement from a number of new national accounts. We plan to increase our U.S. B2B wholesale and distribution channels now that the brick and mortar stores are starting to recover from the pandemic, especially in the food, drug, and mass channel. We recruited consumer products veteran Dave Johnson to become our Senior Vice President of Business Development. to lead our FDM sales effort under the direction of our executive management. We plan to expand into more international markets as registration, regulation, and compliance become clearer. We are currently selling to over 30 international markets, and we are registering our products in several major markets, such as the UK, Central America, Brazil, and Japan. We are also seeing some of our best-selling categories start to expand as more state regulators allow the sale of ingestibles. We have built CBDMD's brand on the back of our innovative marketing efforts. We recently hired Matt Koatman as our new Chief Marketing Officer and he is reinvigorating and realigning our marketing strategy under the direction of our executive management with incredible opportunities for 2022. The brand recognition we have built through our sponsorships, which we believe is the best in class, and we plan to leverage those sponsorships, which we believe will result in more rapid expansion of our retail footprint. We have already started new activations with our industry-leading partnerships with iconic brands CrossFit and Bellator, as well as others. And you'll be hearing much more about those plans coming to life very soon. We are in a unique position to secure co-branding efforts with non-CBD established brands and expand marketing and sales opportunity with global sports organizations as our brands continue to lead the market in brand awareness and social media reach. We continue to explore potential accretive M&A opportunities, such as the purchase of direct CBD online or online marketplace. We continue to obtain official certifications that strengthen our brand's appeal, such as PAW CBD certification from the NASC or National Animal Supplement Council, A non-for-profit group committed to protecting and enhancing the health of companion animals throughout 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 animals. Having the NASC certification is a pivotal step to access mass retail distribution. as we believe such certification is a gating requirement for several retailers in this segment of the CBD category. Finally, we are committed to the progress at our CBDMD Therapeutics Division and providing the necessary resources to ensure its success. And with that, it's my pleasure to now turn the call over to Dr. Sybil Swift, one of our managing directors at CBDMD Therapeutics, and the Vice President of our Science and Regulatory Affairs at CBDMD. Dr. Swift was formerly the Associate Director for Research and Strategy at the FDA's Office of Dietary Supplements Program and will now provide an important regulatory update. Dr. Swift, please go ahead.

Thank you, Marty. And it's a pleasure to be able to talk with everyone on the call today. In January of 2021, CBDMD recruited me with a clear mandate to accelerate the already robust science program and initiate public interactions with the FDA with the ultimate goal of filing regulatory submissions. Make no mistake, the CBD industry is being held back by inefficient and unresolved regulations from my former employer that result in major barriers in such areas as banking, media, and most importantly, mass distribution. We have seen this quagmire effect even basic partnerships that have nothing to do with our business. These arbitrary decisions are based on the FDA's ongoing negligence to act like a responsible regulatory agency. That same resistance to a responsible solution, a reasonable solution, has led to the federal government withholding access to potential healthcare products from the American public that are formulated with CBD and other cannabinoids. Our belief is these products are safe and effective. This is a classic case of the government getting in the way of a reasonable solution. Here is how CBDMD is planning on tackling this issue. We intend to continue to lead the industry with a robust science program. This year, we've announced partnerships with leading universities, Colorado State, University of South Carolina, and the University of Mississippi, regarded as an FDA center of excellence. The study with Colorado State is exploring the ability of our proprietary cannabinoid blend to reduce pain and inflammation in arthritic dogs, including a unique blend of our cannabinoids and commonly used in said drugs to determine if there is greater efficacy to explore with further drug development. Positive results in dogs are also indicative of the same response in humans, and this study may provide data encouraging further drug discovery for human products. At the University of South Carolina, we have initiated a human preclinical study that will not only provide data to support the efficacy of our products for pain, inflammation, sleep, and mood. The study is also designed to provide additional support for the safety profile of our proprietary broad spectrum blend. We believe the work with Ole Miss will identify new cannabinoids with therapeutic potential that can be patented, which we believe have tremendous benefit to our consumers. We'll also explore the use of these cannabinoids with other botanical ingredients, to discover patentable formulations with specific functional needs. Our commitment to advancing the science of cannabinoid products by demonstrating the safety and efficacy of our current products while identifying novel cannabinoids in proprietary blends ensures we will be the leaders in the next generation of cannabinoid formulations. The body of safety data we have compiled to date and continue to generate gives us the confidence to take a more aggressive regulatory approach as we look to 2022. We have analyzed the landscape and assessed the likelihood that the FDA will provide a regulatory pathway for CBD. We see no indication the FDA will act on their own. Numerous partisan and bipartisan bills have been proposed this year. However, they have yet to result in legislative action. Therefore, we believe the most effective path forward is going to require advocacy and public interactions with the agency. Last week, we requested requested a pre-submission meeting with the FDA to discuss the quality and safety data in our dossier with agency officials in the Office of Food Additive Safety and the Office of Dietary Supplement Programs. We are evaluating both the NDIN and self-affirmed GRAS pathways, and we'll be discussing both with the agency. This is the first of several meetings we plan to hold with the agency on this topic. We will use the feedback from the first meeting with FDA to inform our decision regarding which type of submission we will submit to on a proprietary broad-spectrum blend. We anticipate additional regulatory submissions to support the safety of novel cannabinoid blends. Thank you. And now I will turn it back over to Ronan Kennedy, our Chief Financial and Chief Operating Officer. Ronan?

Thank you, Sybil. On a GAAP basis, total net sales for the fourth quarter of fiscal 2021 were $9.8 million, or a 16% increase from prior year's fourth quarter fiscal total. For our fiscal year on September 30, 2021, audited net sales totaled $44.5 million, a 6% increase compared to $41.9 million for the fiscal 2020. Our quarterly e-commerce direct-to-consumer business generated sales of $7.3 million in the quarter of fiscal 2021. While this is a 15% year-over-year quarterly decrease, for the fiscal year ended 2021, e-commerce generated 32.9 million of net sales compared to 30.5 million for the comparative prior fiscal year, or an 8% increase. E-commerce represented 74% of our total net sales before for both the fourth quarter and the fiscal year ended 2021. Our wholesale business generated 2.5 million of net sales for the fourth quarter of fiscal 2021, down 18%, as compared to $3.1 million for the comparative quarter in fiscal 2020. For the fiscal year ended September 30, 2021 and 2020, our wholesale business generated $11.6 million and $11.4 million, respectively, for net sales. POS sales saw a strong increase during the year and generated $5.7 million for 2021, a 26.7% increase from prior year, as we were optimistic about the potential with this frame. Our GAAP gross profit remained strong as the percent of net sales came in at 59% for the fourth quarter of fiscal 2021 after accounting for some one-time packaging write-offs for regulatory labeling changes, as well as other year-end and revenue adjustments. This compares to 54% for the comparative prior fiscal year quarterly period. For the fiscal year ended September 30th, 2021 and 2020, gross profit was 67% and 63% respectively. as a percentage of total net sales. We expect to maintain gross profit margins in the mid-60s range when factoring in the sales mix with our recent acquired business. Our operating expenses for the fourth quarter fiscal 2021 totaled $12.7 million, which is up from $10.9 million as compared to the prior year. Operating expenses increased 17% from the prior fiscal quarter, mainly due to the $1.3 million increase in advertising, marketing, and sponsorship spend, Other contributing factors were $470,000 increase in compensation, $560,000 increase in non-cash stock expense, and a net reduction in other expenses of over $400,000. For the fiscal year ended September 30, 2021, operating expenses increased to $49.6 million from $43.9 million in the comparative fiscal year in 2020. This increase is mainly due to the $1.3 million in compensation, $1.1 in stock comp, an increase in $2.8 million in our net advertising, marketing, and sponsorship spend, $1 million in R&D and regulatory, while achieving $900,000 reduction in other controllable costs. Overall, this resulted in a gap loss from operations of approximately $7 million for the fourth quarter of fiscal 2021, as compared to $4.5 million loss for the prior year period. Sequentially operating income declined 0.3 million from the June 2021 quarter to the fourth quarter of 2021. This is primarily attributable to the 1.4 million drop in gross profit while achieving 1.1 million in net cost reductions, mostly from marketing and payroll expenses. For the fiscal year ended September 30th, 2021 and 2020, our gap loss from operations totaled 19.6 million and $17.6 million respectively. Our non-GAAP adjustments to operating expenses for the fourth quarter fiscal 2021 included $150,000 one-time accrued comp expense, $1.1 million in non-cash stock expense depreciation of $300,000, and $670,000 of non-cash inventory charge resulting in a non-GAAP adjusted operating loss of $4.7 million for the fourth quarter fiscal 2021. as compared to a $1 million non-GAAP adjusted operating loss in the fourth quarter of fiscal 2020. The increase in non-GAAP adjusted operating loss over the prior period is primarily attributable to the increase in operating expenses. Sequentially, we reduced our non-GAAP adjusted operating loss by $650,000 from the June 2021 quarter to the September 2021 quarter. For fiscal 2021, our non-GAAP adjusted operating loss totaled $13.6 million. The increase over our prior year is mainly attributable to the increase in marketing expenses. We invested $650,000 on CBDMD Therapeutics and related R&D since its founding in the third quarter of fiscal 2021, and we will continue to invest in CBDMD Therapeutics' mission. Other income expenses on our consolidated income statements for fiscal 2021 include $130,000 non-cash deferred tax gain in addition to our non-cash contingent liability gain of $3.7 million related to our December 2018 acquisition of CureBase Development. During August, we issued 503,275 earn-out shares corresponding to the third earn-out period under the terms of the acquisition. At the time of issuance, we booked $222,000 valuation decrease and subsequently reclassified $920 million from a 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, ending September 30, 2021, resulting in a non-cash contingent liability gain of $3.5 million for the quarter. The changes in the valuation of the contingent liability are primarily a result of a decrease in the market price of our common stock during the period from $2.90 to $2.08 per share. During the fourth quarter of 2021, we utilized approximately $7.7 million of cash. The main components include cash used from operations, our adjusted non-GAAP operating loss of $4.7 million, $1 million in paid dividends and $2 million for the purchase price of direct CBD online. We had cash and cash equivalents of $26.4 million and working capital of $29.6 million on September 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 of September 30, 2021 increased approximately 54% from September the prior year to $36.5 million. A primary driver of the increase in current assets was approximately $15.8 million and $15.1 million of net proceeds from our Series A preferred stock offering in December of 2020 and July of 2021, respectively. As of September 30, 2021, the company's total current liabilities were $6.9 million, of which approximately $2.9 million is accounts payable and $2.7 million is accrued expense. The company has approximately $168,000 of financing notes and equipment for our manufacturing facility. Our cash position remains strong despite a difficult second half of our fiscal of 2021. Since year end, we have invested in inventory tied to new product launches, as well as precautionary measures to protect against potential supply chain issues in today's business environment. Since mid third, fiscal quarter of 2021, we've made several changes to personnel and have been taking steps to reduce our quarterly operating expenses by several million dollars per quarter and realign our marketing spend to get performance back on track and drive revenue of our core business. The operations from our recent acquisition were consolidated at the beginning of the first fiscal quarter of 2022, and we're working to maximize the synergies available from this business. As Marty previously mentioned, we invested in several growth initiatives, such as the MFI and foreign registrations, which we anticipate will lead to revenue opportunities during fiscal 2022. We remain optimistic about our new product initiative set to launch in the coming months, and coupled with a number of our initiatives, we are focused at building inertia during fiscal 2022. With that, I'd like to now turn the call back over to Marty.

Well, thank you, Ronan. With that, everyone, I'd like to open the line up for Q&A. Kate?

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, you may press star 1 on your phone at this time. If you wish to leave the queue, you may press star 2. We do ask that if you are listening via speakerphone to please pick up your handset for optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone now. Please hold for just a moment while we pull for questions.

Thank you.

Our first question today is coming from Mike Pfeiffer at Oppenheimer. Your line is live. You may begin. Hi.

Thanks for taking my question. Just to dig a little deeper on the comments you just made, Can you provide more color on the role of therapeutics that the division will play in 22? And are we looking at opportunities on the dietary supplement side versus the drug side? And as a follow-up, what potential revenue windfall is possible through these efforts? Thanks so much.

Well, thanks, Michael. I appreciate the question. You know, I think what would be helpful is to have – Sybil talk about the therapeutics division and the role that it plays in our overall business strategy. Sybil, would you like to respond to Michael's comments?

Absolutely. Thank you, Marty. Michael, thank you for that question. So we look at therapeutics as a very unique opportunity to leverage our experience with dietary supplements. And as we're looking towards therapeutic studies and how to best design them, there's a real opportunity to design them in such a way that the data can be leveraged for dietary supplement applications as well. And so we've, as we're working through this last year, we've received some significant experience, significant interest from other entities and how we can work together and how with that supplement knowledge and the design of some of those basic studies with that preliminary data will lend itself to support safety submissions and formulations for supplements that can also be continued further for drug applications.

And so I guess, you know, with that, Mark, I mean, I don't know the timeframe on, you know, these different strategies on the therapeutics, but could you talk if possible about potential revenues from this? Is that something in 22 or is that further out? How do we, how should we think about that? How soon can the company benefit from therapeutics?

Well, I think what we're trying to initially do with therapeutics is provide a the ability to make claims on products that currently we're not able to do. And I think that drives sales, it drives product development, you know, on our core business. Beyond that, what we're probably and hopefully going to see are areas of development that, you know, we can utilize And we would only do that in a partnership with a third party as far as any type of drug development is not really the business that we're in. But we think that the initial stage is if we can work with these universities and as well as other partners and be able to get the kind of safety data and the kind of uh results that that we believe are out there in these studies it will really benefit our ability to market uh not only the existing products we have uh but many of the products we have in our pipeline so um you know i think it's something that in 2022 uh will hopefully be able to uh interact with our current portfolio of products simply would you like to sort of maybe kind of hone down, because I think that's what Michael's asking on the timing, when that can benefit our existing product base.

I think that we stand to see benefits beginning next year on the existing product base. The way that the studies are designed, like Marty kind of began to allude to, is to lend immediate support for the claims that we'd like to make in the areas that I highlighted in some of my remarks. but also to provide safety for those other submissions. And they're leading to and rolling to and combining together to start incrementally increasing in out years. But we definitely anticipate seeing those benefits next year.

Great. Sounds exciting. I appreciate you taking my questions. Thank you. Thanks, Michael.

Thank you. Our next question today is coming from Hunter Diamond. Please announce your affiliation. Hunter Diamond with Diamond Equities. My apologies. Your line is live. You may begin.

Hi, everybody. Thanks for taking my call. Firstly, I just want to say I'm a big fan of the product. I think the CBD products are terrific, and the website development is amazing. My question is on the preferred. I just wanted to get an idea, you know, what's been the outreach? I know the deal was at $750, and, you know, what's caused the decline?

Well, you're correct. The last financing was done at $750 on the preferred. You know, I don't really comment on the stock prices. Obviously, you know, the entire cannabis sector has seen a pretty dramatic sell-off, you know, over the past six months. And I would imagine that... You know, both are common and preferred, you know, have, you know, been affected, you know, by that. But, you know, as far as outreach is concerned, we treat them and our shareholders on both of those the same. And we, you know, provide all the same information and talk to, you know, both groups concurrently.

Absolutely. And much, much appreciated. And of course, you know, the company like anyone can't control the stock prices and there's been secular headwinds. I guess my question is generally, as you know, as a financial professional, preferreds tend to hold up, you know, they tend to be, you know, maybe older people looking for income. And to me, the yields are extremely attractive here, right? And no interest rate environment. And so I'm just curious, you know, over the next couple of months with the company, you you know, possibly be more proactive in going to family offices and for the preferred specifically, because I think obviously the investors who did the deal, myself included, um, you know, haven't been thrilled with it just because, you know, it's down 25% and it takes, you know, two and a half years of dividends just to break even. So I think hopefully that's a fair, you know, request, or I just be curious your thoughts.

Well, I mean, you know, we are not, um, mean we're you know we believe that the uh you know a lot of the results of of the of the pricing um as i said have been you know an industry-wide um negative uh you know across the board in in this in this sector and and but as far as you know contacting uh, our shareholder base, uh, we certainly, um, uh, intend to and continue to reach out to our shareholders, both in the common and the preferred. Uh, I think you are right. I think the, uh, you know, the, the, um, the rate of, of dividend, uh, on the preferred where it is priced now, um, you know, I believe is in excess of, uh, at 12, 13%. So it, you know, I think it, it, um, you know, it's pretty dramatic. So, but yeah, you can count on us to get out and talk about the story and, and you're going to hopefully see as we get into the beginning of January, you know, some discussion about new directives that we have, which ultimately drive revenue and ultimately get us closer, you know, to the positive adjusted EBITDA that we're, you know, that we're looking to get to.

Great. Perfect. And like I said, I'm a big fan of the company. I've noticed all the website developments, the points and the great marketing. And I think everything the company is doing is terrific and I'm a customer as well. And so, like I said, I just think, you know, for the preferred investors, obviously you want to take care of the shareholders who finance the company. And so, you know, additional outreach, you know, couldn't hurt. And I think the preferred actually is at 15% yield now. So to me it's, it's a somewhat easy product to market. Um, given the company, I think, is very well positioned financially. So, again, appreciate the time and congrats on the results. Thank you for being a customer and a shareholder. I appreciate it.

Thank you. We have no further questions in the queue at this time.

I would now like to turn the call back to Marty for closing comments.

Well, Kate, thank you. To all our shareholders, thank you very much and appreciate the support and wish everybody a wonderful and safe holidays and a happy new year, and we'll talk to you next year. Thank you so much.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. We thank you for your participation.