Good afternoon. Welcome to the cbdMD Fourth Quarter and Fiscal 2019 Earnings Call and Update. This afternoon, the company issued a press release that provided an overview of its fourth quarter and full fiscal year results which followed the filing of its annual report on Form 10-K. Today's conference is being recorded and will be available online at cbdmd.com in accordance with cbdMD's retention policies. [Operator Instructions]. At this time, I would like to turn the conference over to Mark Elliott, the company's Chief Financial Officer. Mark, please go ahead.

Thanks, Jess, and thank you all for joining cbdMD Fourth Quarter and Fiscal 2019 Earnings Conference Call. On the call today, we also have our Chairman and Co-CEO, Marty Sumichrast. Following the safe harbor statement, Marty will provide an overview of our business, then I'll provide a summary of the quarterly and annual 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 fiscal year ended September 30, 2019 is filed with the SEC today, 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.com. Any forward-looking statements made on this conference call speak only as of today's date, Wednesday, December 18, 2019, and cbdMD does not intend to update any of these forward-looking statements to reflect events or circumstances that would occur after today's date. With that, I'd like to turn the call over to Chairman and Co-CEO, Marty Sumichrast. Marty?

Mark, thank you, and thanks to everyone who's listening in on the call this afternoon. Before I get into the results from the last quarter in fiscal 2019, let's take a minute and review our history so that our recent accomplishments can be put in some perspective. In just 1 year, we have built 2 of the leading CBD brands in America, cbdMD and Paw CBD. We built an infrastructure that is more advanced than most of our competitors in the U.S. CBD industry with over 130 SKUs, 170 employees, 11 departments, full-scale manufacturing, distribution and warehousing facilities. Building this infrastructure now has been an important part of our plan since we envision significant growth over the next several years. Now let's talk about our results. Our overall e-commerce sales for the September 2019 fiscal quarter were $5.1 million or 54% of our total net sales, and for the fiscal year ended September 2019, our e-commerce sales were $14.8 million or 63% of our total net sales. We continue to experience rapid growth and our sales metrics continue to remain very strong as we drive online sales through the use of gorilla marketing, social media, athletic sponsorships and influencer affiliate programs. As of November 19, and we had over 200,000 active e-commerce subscribers. Our average repeat online order now exceeds $130 and our online customer reorder rate has increased throughout the year. These are very strong metrics. On the brick-and-mortar side of our business, we're also experiencing tremendous success in growing the amount of retail stores who currently carry our brand. Our wholesale and retail customer sales for September 2019 fiscal quarter were $4.4 million or 46%. And for the fiscal year ended September 2019 were $8.9 million or 37%. This is very impressive since almost all of our brick-and-mortar…

Thank you, Marty. Effective September 30, 2019, we have now completely focused our business and efforts on our CBD business as we have ceased operations of our legacy business operations, and therefore, have accounted for them as discontinued operations in our financial statements included in the Form 10-K. With this being the case, comparatives to last year are not reflective of what the current business has accomplished as our involvement in the CBD business only began on December 20, 2019. This was following our acquisition of Cure Based Development. I will, however, provide some comparatives to indicate progress as appropriate. On a GAAP basis, our total net sales for the fourth quarter ended September 30, were approximately $9.5 million, which was up approximately 18% from our third quarter ended June 30, 2019. For the year ended September 30, 2019, we had net sales of approximately $23.7 million, which is reflective of just over 9 months of CBD sales. While we don't include in our financials Cure Based Development sales prior to our December 2018 acquisition in accordance with GAAP, based on the unaudited financials of Cure Based Development which we have reviewed, the cbdMD brand generated approximately $1.7 million in comparative sales from the quarter ended September 30, 2018, and $3.9 million in sales for the year ended September 30, 2018. This would reflect increases for the cbdMD brand year-over-year up 462% for the fourth quarter and 507% for the year. Our total gross sales for the fourth quarter were $9.9 million with approximately $364,000 of allowances or discounts. Our total gross sales for the year -- for fiscal year 2019 were approximately $28.1 million, with $4.4 million of allowances and discounts. Gross profit as a percentage of net sales came in at 56.7% for the fourth quarter and 61.3%…

Thanks, Mark. As everyone can see, we've made tremendous progress in just 1 year. And we're excited about the quarter we just finished, we're excited about the quarter we're in and on what we can deliver to our shareholders in 2020 and beyond. So with that, I'd like to open up the line for questions and answers.

[Operator Instructions]. We'll go first to Bill Sutherland at Benchmark Company.

The cost -- the customer acquisition costs. I know it's a number you can't really isolate very well, but is your sense that it will be coming down as you -- now that you built up this asset base of influencers and other marketing assets?

Yes. I think that the first quarter of next year, into the second, talking about calendar quarter of next year, will start to show a decline. And in our model, we're showing, as we push into that calendar third, fiscal fourth quarter, that those costs come down, the overall spend is coming down. We've reduced that and we're going to be cash flow positive, as we said, at the end of the fiscal year. Starting October 1 of next year we'll be cash flow positive. So those costs we see coming down. We did invest, as you know, heavily into acquiring all these assets. And now it's a question of activating them and deploying them. And that's what we're focusing on for 2020.

And I noticed the sales allowance line in the quarter, if I'm doing my math right, came down a lot. Is that just going to move around just based on revenue mix?

Yes, it does. We run different programs, different promotions. We're constantly testing out in the market what works, so that's going to bounce around a little bit from quarter-to-quarter. But we're trying, obviously, to make that a little more consistent as we go into next year.

And then, Marty, I didn't quite understand, maybe I just didn't hear it clearly, the revenue guidance now that you're having us think about for this fiscal year. It's pulled in slightly, not much, but I'm just curious. You said it's to -- related to a focus on cash flow, or is it more related to just this backdrop we have with the FDA dragging its feet and so forth?

No, it's -- so as you know, look, we -- a couple of quarters ago, the general consensus out in the space was growth to some extent at any cost. And despite the fact that I think we've been incredible stewards of capital, everything we've done, everything you've heard, we've done it under $20 million, which is really unheard of in this space comparative to our peers and people even in the cannabis space. The consensus has changed to get to profitability quicker. And as you know, we don't want to give up high growth. We don't think there's going to be a better time to get market share or get customers. And so we're going to continue to push on that, but we have pulled the lever back on some of the spends. We're probably not going to pick up as many new partners and athletes. We're just going to focus on activating what we have. So we've reduced the burn that we anticipate over the next 9 months. And we -- and -- but we still are going to maintain, I think, a very healthy revenue growth of between $62 million and $70 million. Again, Bill, this does not include any mass retail deals that we could get. And remember, we built our business on the smaller retail channel. So some companies out there have kind of bet the farm on the bigger mass retail plays, we've done the exact opposite, okay? We've called and are selling to over 4,000 smaller. I mean, the largest one we have is about 300 doors. And the rest are -- we have 140 doors and then everything under that. So we're not beholden on any big groups and we're not building the company on that. We're building it on a strong e-commerce platform and a continued build in the retail channel. These retailers, we don't have to give terms to and they pay upfront, which is kind of nice. So we don't have any bad debt expense. And we don't have to worry about a big retailer and the trauma of getting product returns. So that's the new guidance. We think it's strong, and we think it's very doable. And obviously, as always, we're looking to exceed it. But that's where we're at right now.

No, it's impressive. And just the most interesting channel, I thought that you opened up was the Life Fitness. Maybe you can give us some more color on that, what you see there?

Yes. So Life Time -- originally, the Life Time deal was to be done with pure marketing and PR. We were in all their fitness facilities. You could use a coupon code and buy our product. But what happened was is that so many of their members were coming to their facilities and asking, "Hey, where can we buy it? Where can we buy cbdMD?" And so now they've called us and said, "Hey, we need to get you in the facilities sooner than later." And we just met with them. We're in the process, and we hope that very early into next year, we're going to start loading all of our products into the Life Time cafes, into their spas, into their fitness training areas. They are one of the largest spa chains in North America because of the size of their chain. So we think the potential with Life Time is enormous. And we're really excited about it. They're great people, great brand, great company, and it's a great relationship to have.

[Operator Instructions]. We move next to Paul Cooney at Joseph Gunnar.

Congratulations on another great growth quarter. Just wondering, Marty, can you maybe talk a little bit more about the international expansion?

Yes. Thanks, Paul. So a couple of quarters ago, we had said that we weren't really looking necessarily to promote international expansion because the U.S. market is so huge. But what we found is a lot of our wholesale accounts have come to us and said, "Look, we can sell products internationally." And so what we've done is we're starting to establish partnerships and relationships with wholesalers that distribute in these different countries. And we see -- for us, it's great because we just ship to 1 location and then they ship overseas. We think that trend is significant. And we think 2020, the opportunity for international expansion and we're already in a couple pretty big countries. We're looking at the Asian market very heavily. We think the opportunity is huge over there. And I think 2020, you're going to see the expansion into a lot more international markets. And we didn't factor in, in our growth estimates those numbers. So those are going to be bonus numbers as we expand.

We'll move next to Steve Emerson at Emerson Investment Group.

Congratulations on another great quarter. Can you give us some flavor on how the acceleration is going or carrying into the current quarter? And could you give us any granularity how September as a month looked?

Well, what I can tell you is we're having another record quarter this quarter, and we're excited to talk about that when we finish up on both sides, both on the e-commerce side, where we had an incredible holiday period over Thanksgiving. We just -- we were really just blown away by the numbers. And we expect a strong -- we're seeing strong holiday sales right now going into Christmas. So we're expecting another record quarter. As far as the mix is concerned, we're on target for -- to continue the mix of 55% e-commerce, 45% brick-and-mortar. And I mean, yes, that's where we are right now. We think 2020 is shaping up to be an enormous year for us. A lot of the smaller brands that are out there are -- we're taking market share. We're taking market share from the bigger brands. And we think that will continue.

[Operator Instructions]. We'll move next to Scott Fortune at Roth Capital Partners.

Can you provide a little more color on the trajectory in kind of the pet. I know you guys have just launched that, but the Paw CBD and how that's trending? I know you're expecting it to be a percentage of your revenues, but where can we expect that in 2020 to make a dent in the revenues from that standpoint?

Yes, Scott. Right now, we're running at about 7.5% to 8% of sales for Paw. We expect that to increase next year with the certification that we're working on right now. The NASC certification, I think, will be really important for us. With that certification, you can get into a bunch of the mass retailers. Our goal in Paw was to be at 1,000 retail locations by the end of next calendar year. I think we're easily going to hit that much earlier in the year. And I would hope that Paw is going to be in the 15% to 20% of sales for next year. We see just in a -- it's sort of a greener field. There's not a lot of competition. And we think that our products were formulated really -- and well, we already got an award for that, which is really amazing. So that's on the Paw. As far as the overall ramp, as I said, we're looking at $62 million to $70 million for fiscal 2020, slightly over 50% will be e-commerce. The balance will be brick-and-mortar. And we're not counting on any large retail, mass retail orders, many of which we're working on right now to sort of fill that. So we hope that -- we hope we get those and exceed those numbers.

Okay. And then a little bit of follow-up. So I take it your guidance does not include the FDA coming on board here. Any color from the FDA? And then it seems like the whole industry, in general, is kind of seasonal in a sense where third quarter is very flat. And then you kind of ramp up again. Kind of any indications from a seasonal why the flatness? I know you guys did grow, but kind of flatness from quarter-over-quarter.

Yes. It's interesting. It's a new industry, and we saw that as well, but I'm not so sure I'm prepared to necessarily say it's seasonal. I think that -- clearly, we're seeing a pretty significant uptick in the quarter we're in right now, much like the business saw a year ago. So in that respect, I guess, I see your point. As far as the FDA is concerned, look, we're -- as I said in my statement, we are really spending a lot of money, a significant amount of our budget on R&D and testing. And we're scheduled to be GMP certified this month. We are working with our lobbying groups in D.C. I think we have a seat at the table in discussions with the FDA. They know who we are. And we're providing them with some of the data that we're getting, some of the results of the different trials that we're doing. And I think that the FDA is -- has a couple of decisions they have to make as far as how they want to address the CBD market. And we will continue to comply with that, and hopefully, guide them in a way that is positive towards the industry. The industry is growing, and it's not going anywhere. And I think making sure that everybody knows what the rules are and plays by the rules is beneficial to the serious brands and companies that are out in the space. I don't think anybody who is in this business, such as us, want to have any bad actors in the neighborhood. And so when you look at those FDA warning letters that went out recently, when you read them, clearly, those people were making health claims that were lots of times just ridiculous, to be honest with you. And it's the kind of thing that we don't want in our industry. You know as well as I do, we don't do that. And we stay right down the middle of the fairway. So we're very hopeful into -- going into 2020 about how the FDA views our industry. And we're not planning on any type of dislocation in the -- from the FDA as far as the CBD industry, provided, however, that you maintain a proper business regimen, which we do. So...

We'll return to Bill Sutherland at Benchmark Company.

Yes, I just want to follow up on the seasonality idea of just -- how should we think about the cadence as you look at your revenue rolling out just in real general terms for the fiscal '20?

We think that -- again, it's hard for me to give a long-standing historical view on where we've come because we've been at it. cbdMD went to market in early '18. We acquired it at the end of '19. The Farm Bill hadn't passed. So this year really is the first true year in business. And as far as seasonality is concerned, we did see a flat. In 2018, the brand saw flat sequential growth but that was partly due to the fact that there was an islets shortage. And so it was a little bit difficult to grow in the face of that. I think that we did grow from $8 million to $9.5 million, which I think is probably the highest growth rate of any of our competitors. And we feel like we can continue or certainly exceed that growth rate in the quarter we're in right now. And so I think as far as seasonality, I'm not sure, I -- as I said, I'm not sure, I necessarily view that as a hard and fast. A year from now, I think I'll have a little bit more clarity on it. As far as how we're looking at the growth, we're looking at continued growth that we look at between now and the end of the fiscal year and beyond. We're not necessarily looking -- again, it could change, right? We could get a piece of business in that could bump a quarter, but we're generally looking at it as a pretty steady increase month-over-month as we go out through the end of next year.

Okay, that's helpful. And then I've read some press about the growers having excess supply in some cases, I'm not sure about the quality of it, but I'm curious from the perspective of your cost to sales, Marty, are you guys benefiting to some degree from the...

Yes. Yes. And we are -- and we're going to probably announce, hopefully, beginning of next year, there's -- we're in discussions with 1 group, processing group, that we have a lot of confidence in. It's well-funded, private, deep pockets behind them, and I think does a tremendous job and is able to give us very high quality, not only CBD, but certain other cannabinoids that we buy and infuse. And we're getting just tremendous pricing. And so we're able to maintain our margins going forward partly because of that ability to secure, I think, some of the best pricing in the market today in quantity and in reputable quantity, which is critical because we want to make sure our customers know that all of our materials we use are from compliant extraction facilities and are the highest quality and have integrity in everything from the seed out to the product we deliver.

We'll move next to David Chuleta [ph], a Private Investor.

Marty, I noticed there seems to be a fairly significant increase in average order value. And I'm wondering if you can flesh that out a bit and account for what you attribute that to?

Yes. I mean, we've seen -- we -- our repeat customers come in and ordered up, and we're really happy about that. I think that goes to the power of the brand. People are coming in. They might see our brand from some of the advertising or marketing or -- and then they try the product and they love the product. So they reorder and they're reordering at a significant increase from initial orders. Also, what's interesting is, we have a lot of customers that come in and order for themselves, and we cross-sell the Paw CBD brand, and there's a lot of our customers who have pets. And so we're finding that they're ordering Paw CBD for their pets. And so that's helped as well. So it's a bunch of combination of factors, but it certainly is trending in the right direction. And we're happy to report that.

And gentlemen, at this time, I have no other questions holding. So I'll turn the conference back for any additional or closing comments.

All right. Well, listen, thank you all very much for your time and for your support and happy holidays to everybody here at cbdMD and a happy new year. Thank you, all.

Thank you.

Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect your phone line at this time, and have a great day.