Good afternoon. And welcome to the cbdMD Third Quarter Fiscal 2020 Earnings Call and Update. This morning, the company issued a press release that provided an overview of its third 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. All participants on this call will be in a listen-only mode. The call be followed by a question-and-answer session. 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, Melinda, and thank you all for joining the cbdMD third quarter fiscal 2020 earnings call and update. On the call today, we also have our Chairman and Co-CEO, Marty Sumichrast, as well as our Chief Marketing Officer, Ken Cohn. Following the Safe Harbor statement, Marty and Ken will provide an overview of our business, and 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 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 risks described in the company’s annual report on Form 10-K for the year ended September 30, 2019 as amended, our Form 10-Q for the period ended June 30,2020 is filed with the SEC, 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.com. Any forward-looking statements made on this conference call speak only as of today’s date, Wednesday, August 12, 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 welcome to everyone who is joining us this afternoon. As you're all aware from this morning's earnings release, cbdMD reported its single biggest net sales in its history in it's June 2020 quarter. cbdMD is now one of the most recognized and trusted CBD brands in America and our Pet brand, Paw CBD has in just one year because it become its own top-tier leaning pet brand in the US CBD pet market. Having two national brands has separated ourselves from our competitors. And now, with our current financial trajectory, we are demonstrating to the financial community that we can grow our market share, our brands value, and do so with a fundamentally sound business model. We significantly reduced our loss from operations and non-GAAP adjusted loss from operations for the third quarter of fiscal 2020 by 80% and 90% respectively, from the comparable quarter in fiscal 2019. Even more impressive, on a sequential quarterly basis, we reduced our loss from operations and non-GAAP adjusted loss from operations from our March to June quarter of 2020 by 76%, and 96% respectively. Our goal remains to achieve positive adjusted income from operations by the end of calendar 2020. Before I get into specifics of the June quarter, let me update everyone on how we've dealt with the COVID-19 pandemic. 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 a remote work structure 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…

Thank you, Marty. After spending 2019 focused on accumulating a deep, innovative portfolio of strategic marketing assets, which allowed us to build the cbdMD brand, we found ourselves according to third-party data, in the number one position across several industry defining metrics, including share a voice and unaided brand awareness. As we plan for the future, we truly looked at 2020 as the year of separation within the CBD category. In particular, this past quarter offered a landscape of opportunity for cbdMD to drive distinction. We faced a number of questions and challenges coming into this past quarter. How are we going to continue to accelerate the CVD brand? How are we going to continue to drive trust and credibility? And most important, how are we going to do so through the lens of being on a pathway to profitability? Those were the intersecting elements we asked the team to adopt, live and breathe every day. This mindset took on a heightened level of importance when COVID-19 hit at the outset of this past quarter, and required added layers of discipline. The team effectively pivoted to a work from home remote workplace, with all the pieces in place to diminish potential sources of disruption and increase our focus on proven systems, processes, and assets, all while doing everything we could to reinforce a strong culture. More so than ever, we lean heavily on making data-driven decision, with insights garnered over the past year, doing more with less, and displaying vigilance about being accountable for every investment, every commitment. Data aided us in amplifying the effectiveness of our email marketing, with segmentation of messaging and creative, which resulted in an increasingly cost effective pathway to customer engagement, retention, and ultimately, e-commerce sales. Our email programs generated 23% more revenue this quarter,…

Thank you, Ken. 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 - the third quarter, I'm sorry, fiscal 2020, which ended June 30, were approximately $106 million. As Marty previously indicated, this was a 33% increase for the period year-over-year. For the nine months ended June 30, 2020, net sales were approximately $30 2 million. This was a 114% increase over the same period year-over-year. Gross Profit as a percentage of net sales came in at 64.7% for the third quarter of fiscal 2020. This is compared to 63.4% for the comparative prior period. And for the nine months ended June 30, 2020 was 66.3% compared to 64.5% for the comparative prior year period. We also had a one-time abnormal inventory adjustment in the quarter as we disposed of labels and packaging due to regulatory changes, and the amount of 233,000 was charged to operating expense. During the balance of fiscal 2020, we expect to maintain our gross profit as a percentage of net sales between 63% and 70%, a very healthy margin. As discussed last quarter, during the three months ended June 30, 2020, the company implemented various cost control methods measures with a focus on supporting the business growth, while reaching a positive cash flow operation, in addition adjusted other expenses in relation to the COVID pandemic. As a result, our operating expenses for the June 2020 quarter were $8.2 million, which is a reduction of over 33% from the June 2019 quarter. Overall, this resulted in an operating cash use of approximately $1.13 million for the June 2020 quarter. Again, a significant reduction from our average operating quarterly cash use of between $4 million and $4.5 million…

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

Thank you. [Operator Instructions] And we will take our first question from Paul Cooney with Joseph Gunnar. Please go ahead, sir.

Hey, guys. Great quarter, you guys are not going to blow out of the park. Very happy to be associated with this company. Would like to know, Marty, and I know you touched on a bit on the call. But if you could comment a little bit more about the regulatory environment the FDA what's being expected in this regard? You know, out there if we see any hurdles or anything like that.

Paul, thanks for the question. I have with me here Lance Blundell. Lance is our in-house Counsel and in charge of our regulatory affair, so I think it would be great if Lance you could kind of comment on that for us, would you?

Yeah, sure, no problem. Hey, Paul. So, right now…

How are you?

Doing well, today. So, the company - we're committed to compliance with the dietary supplement Health and Education Act of 1994 and the 2018 Farm Bill, when you put those two together, it sets out the regulatory framework for hemp derived cannabinoids. We believe that those hemp extracted cannabinoid products are going to fall under the well established rules of the dietary supplement Health and Education Act. And we're essentially following those rules now in anticipation of that. So we do things like adhere to GMP standards, validate our hemp supply chain all the way back to the US based hemp farmers. We test our raw material components to ensure that there's no detectable THC, which is an even stricter standard than under the 2018 Farm Bill. And we validate that all our raw materials meet quality standards. On the state by state level, each state is addressing hemp extracts in their own regulations. And I believe our company's operations are compliant with these individual state laws. Moving forward, the company's prepared to submit a new dietary ingredient notification to the FDA. Should that be required by the FDA in the future? That's generally our position right now with regards to regulatory.

That's it. Well, thank you for the question. Appreciate your support.

Thanks, guys. Good luck.

Next we go to the line of Aaron Grey with Alliance Global Partners. Please go ahead.

Hi, good evening. Thanks for the questions and congrats also on the quarter. So first one for me, you guys, you know did well in terms of, obviously, brand exits the e-commerce, which worked well for you guys mid-COVID. One thing I'd be curious about is, you know whether or not you have an idea in terms of like whether or not there's more consumers, new consumers coming onto the e-commerce platform are those who were previously buying in brick and mortar, you know, specifically for the, you know, cbdMD brand, or any type of you know, consumer dynamic trends you saw specifically a mid-COVID that helped with your e-commerce, you know, performance compared to some others? Thanks.

Ken, why don't you handle that? Good to talk to you, Aaron. Ken, why don't you handle that?

Sure. Aaron, thanks for the question. So a couple key points that stand out for me would be the unique visitors to our site went up, you know, give or take 12% and then if we isolate from a retention standpoint, our returning customers, our retention actually went up 10%. And then our average order value among those retain customers went up 6%. So all the metrics that we were looking at, you know, Q3 over Q2, were positive from an e-commerce standpoint.

Well, thanks for that. That's a super helpful and great commentary. Just one more from me. Definitely starting to get some great traction in terms of the possibility pet brand. Just curious, Mark you were talking about you know, how under appreciate of a category you know, that is, so I was wondering, those consumers are they currently you know, human CBD consumers who are then buying CBD for their pets or you also finding new consumers who might not even be using themselves, you know, coming and using CBD for their pets, just curious, where you see the innings of pet CBD products and , where you see that kind of category evolving overall? Thanks.

Yeah, I think you know, I'll touch on it and I like get Ken's thoughts on it. But I think it's a combination of both and we're now doing a really good job of cross-selling, you know, it's just such a huge market and we're just, we're really just starting, we're in the you know, the first bottom of the first inning, so to speak. And, you know, for us really playing hard at the digital side of it, as been - as shown a lot of traction Ken you want to kind of touch on anything from your side on it?

Sure. Yeah, just a couple things that I would add, the data that we're seeing among our cbdMD consumer base mirrors what the industry is showing, which is 70% of CBD consumers on the human side also have pets. And so, you know, in conjunction with what Marty referenced a lot of cross promotion, segmentations in terms of email, our digital and our banner ad buys in terms of, you know, reaching millennial audiences, older audiences, specifically, a pod based, pet based audience. I feel like we're in a really, really good position.

Awesome. Thanks for the color and best luck guys, I'll jump back in the queue.

Thanks, Aaron.

Next we go to Peter Wright, private investor. Please go ahead.

Yes, thank you for taking my question and congratulations on the great quarter guys. My first question is how do you think TV is going to impact YCBD, what metrics do you think are most important there when you think of the average purchase they'll be making acquisition costs total customer value, how do you think that changes as you enter the TV space? And my second question is on broad spectrum and in light of regulations and inefficiencies and being able to communicate you know, product efficacy on kind of a relative to competitor basis, you guys are clearly doing something that your competitors aren't clear in your market your game. So what are you guys doing there maybe on an R&D side that you can share with us or how our customers and investors going to find comfort that your product is better than the other brands out there?

ell, Peter, thanks, those are great questions. I'm glad I got Ken and Lance here. You know, just overall, we are super excited about the work we're doing on the TV side. And I think, you know, I don't want to get ahead of ourselves. But we've got big plans. You know, we've, we're fortunate in our partnership Bellator, who's owned by Viacom to kind of have a direct path into a - into the TV space that you know, nobody that I know in the CBD industry has. So we're excited to do that and stay tuned between now and the end of the year, that You're going to see a lot from us, Ken, I would say this, do you want to add anything to that? And then I would I say from the other side of the broad spectrum, maybe Lance can touch on that as well.

Perfect. Yeah. Just a couple things to add. And it's an excellent question as it relates to TV. We look at television, as the category transitions over to being a little bit more mainstream. We think it provides an excellent complement to what we're already doing digitally, socially, email, affiliate, you name it, we think it's a perfect complement. We think it's a perfect opportunity to drive more people into the funnel. Much of what you see us do is going to just continue to drive them to our website. But we think TV provides excellent scale, but we've got to manage that against what doors are currently open. Not all the doors are currently opened to TV, but we're going to take advantage of those that are. So that's Marty, that's what I'd like to add.

Lance, you want to touch on the broad spectrum?

Sure. Hey, Peter, good question on that broad spectrum. As you've probably seen from our marketing materials, we characterize our product as a hybrid broad spectrum. And the reason we do that is because we have our own proprietary specification that we manufacture to, which is, is a more consistent specification is really the best way to characterize it. As you know, we have ongoing R&D and we recently announced the filing of a provisional patent. That patent relates to processes and methods that will further our reach in that space of formulations that are unique and novel. So the goal for us is always going to be to have the superior product on the market and set ourselves apart through intellectual property in that regard.

Great. Thank you guys very much. Great, quarter.

Thank you.

Next, we go to the line of Scott Fortune with Roth Capital Partners. Please go ahead.

Congrats on a good quarter. Just real quick want to kind of get into the shift away from a little bit of the sponsorships and, and the marketing side, great job on kind of limiting costs, but still, you know, growing that, and were you kind of targeting kind of specific marketing spend and what are you seeing that come through that, as you mentioned on your call that you want to get more into the education or the content now can step us through how we look at the marketing spins going forward from here?

Ken, I'll turn it over you, but Scott just on a high level, we look at our marketing budget and I've always said, we - are our cost is payroll marketing and then obviously other costs which are - which you know run the business, but marketing is one of our big numbers. And, you know, we said at the beginning of the year that we spent a lot of money building the brand and we've successfully done that. And obviously, we pause well now. And now it was returned beginning of the year, I said, look, we have to now get to profitability. And so, you know, when COVID came up, you know, crisis brings clarity. And so we went through and we made decisions, we had at some point, we had a high of like, 63 athletes, and we took it down, you know, tuned into the 20s. And it wasn't an easy thing to do, was something that we felt was the right move. And what we found is that, you know, we could continue to build a brand and do what we needed to do, but do it in a fundamentally fiscally sound way. And so that was kind of the direction that, you know, we gave the marketing team and Scott, I would turn it over Ken, why don't you talk about the more specifics on the plans - on the marketing side?

Sure. And I want to go back to what I said a little earlier, which was really leveraging the data that we now have at our disposal to make informed decisions. Now that, you know, we've been doing this a little bit, we can now lean on that data to you know, frankly, do more with less. And so, for instance, we have a real keen sense in terms of what podcasts can do and not do for us and we've really honed in on those podcasts better driving revenue and those that don't. The same thing in terms of email, we have a real good sense of what to say and when to say it, how to segment, when did - when to deliver educational messaging versus promotional messaging. And based on how we, you know, kind of delineate our display, we're gaining more and more insight into the right messages, the wrong messages, the different audiences, and TVs going to also play a role in this, what we're building is certainly going to drive people to the website to learn more, but even just the tonality and the content of it will be rooted in education. And then some there's some other things in television that we're going to be doing to in particular, that are firmly rooted in education. And frankly, it's critical because we're even still seeing that as today. That, you know, a good portion of consumers have heard about this thing called CBD, but an even higher percentage still don't know what to do with and so we want to keep taking the leadership role and an innovator as a relates to education. Does that help answer your question a bit?

Yeah, no, it's perfect. I appreciate that. And then real quick one, last question. Can you provide a little more insight on kinds of MN&A side opportunity? As you know, you said competitors are being consolidated or gone the wayside. We're seeing a lot more inquisitive. Some of the viewer compares looking at acquisitions. What do you think from a valuation standpoint, or area or segments that you might think that look attractive for you guys to build this into a bigger brand potentially?

Well, you know, Scott, last year everybody told me we had to vertically integrate. We had to do this. We had to do that. We stuck to our guns. You know, we had a business plan. We've executed on it. You know, Brightfield came out and said that the top 20 CBD companies account for 17% of the sales. You know in a more mature universe, it's the other way around, the top 20 companies have, you know, 80 plus percent. So, you know, there's 2500 and I wouldn't even call them brands because they're not. They're companies that have CBD products. You know, we're a brand. We're one of the leading brands. And now what you're going to see is you're going to see as regulation comes out, as competition comes out, you know, this 83% market share is going to - is up for grabs. And, you know, Brightfield put us at like one 1.5% market share, we see a huge opportunity to grab that other 83% of the market share and we're going to get a big piece of that. And we don't need to go out and buy other brands. We know how hard it is to build a brand. We've successfully done it twice in 18 months, and so we're not interested in. In doing that. We're going to continue building cbdMD. We think we are the leading brand. Paw has got a huge runway for us. So we're going to stick to our business plan. We know who we are, we know what we do well, and we're not going to get sidetracked.

Okay, thanks, guys.

Sure.

Next we go to the line of Gerald Pascarelli with Cowen. Please go ahead.

Hi, good evening. Thanks very much for taking the questions. So start in the top line, you have 13% growth, in particular, in this backdrop is certainly encouraging. Just curious to get some more color to try to understand if you guys saw any shifts in your sales mix or your business mix as consumers pivoted to online over the course of the quarter? Thanks.

Yeah, I mean, we saw, obviously the consumer habits because of COVID, caused some of that shift. I mean anywhere you look, the online businesses have done better. The fact that we've positioned ourselves in our core business, we are really, really good in online marketing. That's our core competency. Now, we've got a tremendous wholesale business in 18 months a go from zero to 6300, stores is impressive. But our but our bread and butter is our online business. So, you know, this really came at a time and we were able to take advantage of it. I mean, again, we are an incredible team, if you listen to the three gentlemen on the phone, we've got an amazing team of people, and I couldn't be more prouder and they are so dedicated., I mean, we never missed a beat. We had, you know, our lab our manufacturing, our distribution, our logistics center, you know, under conditions, I mean, the country was shut down for two months and we continue to send out, you know, every morning, thousands of orders sitting on the debt and getting them out every single day. And it's just been it's been incredible and the growth has been incredible. And so as far as you know, any type of consumer thing, I mean, Ken, if you want to kind of talk about that, but I would say all, all over it's been it's been a pretty rising tide environment for us. But Ken, if you want to sort of touch on that - if you have any additional thoughts?

Yeah, I think I heard in their questions about our products and maybe our product mix and what we saw was really kind of a solidification of those products that continue to kind of search to the top for us on a month-by-month, quarter-by-quarter basis. It was gummies gummies and more gummies, as well as our sleep products, and then our soft gels continue to rise in popularity. But, you know, but those are the things that jumped off the page at me. And it's really no surprise when you think about folks being at home for two, three months at a pop 24 seven, but it really just kind of solidifies things for us in those areas.

Does that answer you question.

It does. Thanks, Marty. I just - that that's super helpful. I just have one more on the on the gross margin. I'm just - I'm trying to understand the interplay between your e-commerce mix and how that equates to your margins because that 77% I believe that's obvious I think, that's the highest in the company's history. And when I look at what – what the mix was last quarter, I think it was 72. And your margin like I think was 71%, something very robust. And so I guess any color you could offer just on the inner play between your channel mix and how that equates to gross margin would be helpful. Thank you

Yeah, I mean, obviously to direct to consumer space, you know, you have a higher margin business. And so you saw, you know, a good steady stream of, you know, where we try to keep the margin between really in the high 60s. Our goal is, you know, we always - our goal is to try to keep it to get it at 70%. We did have this inventory charge that we had to take, and that was basically because we switched, we went to a 100,000 square foot logistics center in December. And so, you know, we - and then we had to COVID happened. So, we were looking to try to get our inventory counts, and we weren't able to get that done. It's a little bit later in the third quarter. So - but as far as margins are concerned, yeah, I mean, we think we can continue to do it. We think as the online business continues to remain strong, continues to stay in that north of 65%, 70% of our business, our margins continue to remain strong. We feel that we don't see any drop in that. We see a pretty consistent - I don't know, Mark, if you want to add anything to that.

Yeah, well, I think like you mentioned, Marty, the inventory adjustment we have, which is certainly somewhat of an impact. But I think the other aspect is, as we've had the manufacturing maturation process on the product lines, we've gotten better at some aspects. We're now going through that on the Paw line. That's really our sales have moved there. We've really retooled what we're doing on that end, and I think up front, there's a little extra cost to get that where we want and now that we've got the sales moving forward, we're looking at the efficiencies that will decrease the cost on the production side, on the on the pet line. So I think again, we'll continue to shoot for - continue to deliver honestly, I think you know, as we said in that high 60% gross margins and really I think we're going to be able to get to the 70% range here soon.

That's great. , super helpful context. Thanks very much for the color and congratulations on a really solid quarter.

Thanks.

And our final signal comes from the line of Private Investor, Cody Johnson. Please go ahead.

Hi, everyone. Thanks for having me and congratulations on the great quarter. Just wanted to jump back to the enforcement policy for CBD submitted by the FDA. I guess, I think the hemp industry is really looking for the enforcement policy to hopefully turn around the price of hemp and curious as to what that looks like for cbdMD you know, the increased price in hemp what sort of - with that kind of an environment, does that lead to compressed margins for cbdMD? Or does the increase in price get passed along to the consumer in any way? Just get your thoughts on that. Thanks so much.

We're not seeing an increase in isolate prices. If anything, we're seeing a decrease in isolate prices. And because we're such a big buyer, we get the - I think the best prices and from the best sources, most importantly, and I don't see really anything that that the FDA is going to do on enforcement that will change that. I think that we forecast a certain price on our on our isolate as remaining consistent. There's a lot of people that think most people actually you know, think it probably has an opportunity to go down is such a huge supply of hemp that's being grown out there and being processed. So I don't I don't see that as an as an impact. We were maintaining our prices. We think we're - we think our prices are very competitive. We try to stay competitive in the marketplace. In fact, we think we were very competitive on a mass market basis. You know, I'll say this and I'll make a little bit of news at the end of the call. You know, we've had a lot of retailers come to us and said that we - they they've had problems with a lot of other CBD companies and CBD, and again, I call them - don't call them brands, because they're really not brands, they are CBD products. We're announcing now that GNC has decided to come to us. They are going to put us on line and start us in 80 of their largest franchises. We are going to - we're going to perform. I think that's the big question a lot of these retailers, they're concerned about the performance. So we said, hey listen, we don't mind showing you that we can demonstrate that our product sells. And so the goal is - and we think this is something that will resonate amongst all the major retailers, is, hey, let's go online, let's go on your site, let's get into a select group. As I said, we're starting with 80 with GNC, and then let's - if that's successful, which we believe it will be, then we're going to go into their other 900 plus corporate stores. We think that will resonate throughout the entire industry, because it doesn't provide a risk for them where they're taking on a brand, putting it in their stores, and hey, guess what it doesn't sell and they got to ship it back which we've seen a lot of our competitors have to suffer through. So we're excited about that. We think that's just one of just a lot of things that we have on schedule for the company between now and Thanksgiving. Stay tuned. And so we're excited about what's in front of us.

Great, great. Yeah, thanks so much and congratulations on the new avenue at GMC too.

Thank you.

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