June 27, 2019
Dear Shareholders:
We write to update on the state of our company, Medical Marijuana, Inc. Our organization has grown tremendously in 2017 and 2018 and we believe the company is on course to achieve new heights in 2019.
Our slogan, “A Company of Firsts”™, prevails as we lead the CBD industry toward national and international opportunities. At our inception, we were the first publicly traded company vested in the cannabis and industrial hemp space in the United States and we have had many significant accomplishments since that time. We have brought about many industry firsts, including establishing in 2012 the world’s first supply chain of industrial hemp-derived cannabidiol (CBD) consumer nutraceutical products. Subsequently, we were awarded the first distribution rights for these products into the countries of Brazil (April 2014) and Mexico (February 2016). In the U.S., we developed and marketed the first fully THC-free version of CBD nutraceuticals. Soon thereafter, the World Anti-Doping Agency approved CBD for professional sport and Olympic competition.
Since pioneering the first CBD products to market in 2012, the cannabis and CBD industries have exploded, with many legitimate (and less-than-legitimate) industry players entering the space. We maintain our leadership through our international expansion efforts where today we now ship to over 40 countries worldwide making branded products available through e-commerce, direct sales, retail and wholesale distribution channels.
In many countries we have been directly responsible for changing laws and regulations to allow nutraceutical hemp-based CBD consumer products to be marketed. In November 2017, our HempMeds Mexico™ President Raul Elizalde addressed the World Health Organization at its hearings on CBD – with favorable outcomes for the CBD movement.
One Plant | Three Initiatives – Overview
As an industry leader we have always recognized the need to stay ahead of trends. At our inception, we had the foresight to predict the explosion of the CBD market we see today, and because we feel confident in our projections for the CBD industry of 2025, we plan accordingly. We have developed a streamlined, organizationally-efficient business strategy led by robust governance that we believe will result in an upward, consistent trajectory. Some of our changes have taken time to develop, but with the tremendous growth in 2018 and solid first quarter performance of 2019, we expect such financial and operational successes to continue.
We also believe our investments in AXIM Biotechnologies, Inc. (OTCQB: AXIM) and Kannalife, Inc. continue to hold promise in the development of pharmaceuticals. We are just starting to see FDA and industry acceptance of CBD as an active ingredient in pharmaceuticals, and it is exciting to be part of industry efforts to develop and deliver therapeutic products to treat medical conditions.
As many of you may know, we recently had the opportunity to present at the US FDA Hearings on Cannabis and CBD on May 31, 2019. The FDA, under new federal guidelines for the legalization of hemp and its derivatives as an agricultural crop pursuant to the 2018 Farm Bill (aka Agricultural Improvement Act of 2018), has separated CBD and its derivatives from regulation under the U.S. Controlled Substances Act as a Schedule I drug. During our presentation, we shared that as an originator of the supply of safe and effective CBD products, backed by thousands of articles from the research community, we believe non-psychoactive hemp products containing CBD will support our Endogenous Cannabinoid System. Further, we presented that CBD is an essential nutritional supplement for optimal health, just as is Vitamin C. This is important for investors and industry members to understand: that we believe CBD and other cannabinoids play an essential role in overall health and wellness and that supplements should be available to all, without the need for doctor prescription.
First Initiative – R&D
We remain focused on assisting in efforts to establish 50 mgs per day of botanical CBD as a recommended daily intake for an adult. The pharmaceutical interests are giving young children 400 – 700 mgs CBD daily and if these patients were adults, they would receive 1,500 – 2,500 mgs of CBD daily. Thus a clear distinction exists between supplemental serving portions and pharmaceutical doses.
As these general wellness and natural supplements become more regulated and accepted, we will continue to be the leader in providing transparency in our supply chain, cGMP-quality ingredients and transparent Certificates of Analysis. Although many competitors have emerged, we are the only company to have listing in the Prescribers Digital Reference (PDR), thus allowing doctors and pharmacists a glimpse of our products, their composition and relevant clinical data.
Internally, our Medical Marijuana, Inc. team has developed personnel resources for the future. In looking at Botanical Drug development, we have hired Dr. Levan Darjania, a pre-clinical pharmaceutical development expert who heads our R&D and Project Analysis Divisions. We have undertaken stability studies to ensure our products will withstand the challenges of foreign countries and climate extremes. We are thrilled to announce a 9-month stability study of our RSHO-X™ product as a recent milestone accomplishment. We invite you to read the press release here.
Second Initiative – Operations Group Leads Growth
Over the last few years, our management team has implemented aggressive strategic plans that are now bearing fruit. In 2016, we were experiencing multiple organizational challenges including the inability to achieve profitability from operations as well as shrinking market share due to increased competition. Now, we could not be prouder to report that we have successfully grown our company in three short years from $8 million in annual revenue as of the end of 2016 to nearly $60 million in 2018. In Q1 2019, the company reported in excess of $20 million in sales and we are targeting $80-85 million in annual revenue for 2019.
Third Initiative – Finance and Accounting
We prepare our financial statements in accordance with generally accepted accounting principles (GAAP); however, like many companies, we do an additional financial analysis using non-GAAP methods as a supplemental measure to review and assess the operating performance of our company. This analysis renders additional measures such as non-GAAP adjusted EBITDA. For an explanation of this and breakdown of this financial measure, please see the disclosures attached to this letter titled, “Use of Non-GAAP Financial Measures Disclosure”.
In addition to our revenue growth, we have achieved a new level of profitability and margin on our sales. In the first quarter of 2019, we experienced our first profitable quarter, with net revenues in excess of $20 million, gross profit of nearly $16 million and net ordinary income of $1.5 million. We also showed an adjusted EBITDA of $0.420 million.
We implemented a strategic financial plan at the start of the year and it is my pleasure to share with you, for the first time, some of the financial metrics that we believe are key indicators of our successful financial performance.
1 – Sales Growth
Our plan calls for continued sales growth in 2019 in the range of 39% to 47%. We have seen rapid growth over the last two years. Sales for 2018 and 2017 increased in excess of 125% and 230%, respectively. We anticipate continued but more moderate growth through 2019. Our ability to exceed our targets will be highly dependent upon our ability and the timing with which we enter the market in Japan. Our Kannaway™ business will launch in Japan before the close of 2019. If we execute this launch successfully, we expect the growth from Japan to have a similar impact that the launch of Kannaway Europe™ had on our business in 2018.
2 – Improvements to Gross Margins
Our plan calls for an improvement in gross margins to 70%, a 260 basis point improvement over 2018. However, note that gross margins for the second half of 2018 were just under 71%. Our gross margins for the first quarter (adjusted for a favorable inventory adjustment of $414,000) greatly exceeded our target at 76.2%. We anticipate that we will continue to meet or exceed our targets for gross margins. We have implemented several key initiatives in our supply chain to improve our material costs. However, we do anticipate some regression from the Q1 2019 performance given certain new product launches and focused growth on our wholesale businesses.
3 – Improvements to Operating Expenses
Our plan calls for non-GAAP operating expenses (exclusive of Stock Based Compensation Expenses) to decrease as a percentage of sales to 30%. Non-GAAP operating expenses as a percent of sales for fiscal years 2018 and 2017 (adjusted for Goodwill Impairment and Stock Based Compensation Expenses) were 41.1% and 64.8%, respectively. Our non-GAAP operating expenses for the first quarter of 2019 (adjusted for Stock Based Compensation) were 34.3% of sales. While our first quarter 2019 non-GAAP operating expenses exceed our full year target as a percentage of sales, we expect that our continued sales growth and key internal focus on cost containment will result in meeting our full year target of 30% for non-GAAP operating expenses as a percent of sales.
Per our strategic financial plan that we implemented at the beginning of the year, we are on-track to reach the target goals laid out in the plan and we are on-track to reach annual adjusted EBITDA of between $4.8 million and $5.1 million. These financial results, if borne out, are a testament to the management team’s performance and drive.
Looking Forward
As we look to continue to build our company, we understand the importance of building value for our shareholders.
We are working daily to put the appropriate procedures in place to meet the standards and transparency required of a NASDAQ listed company. We pledge that transparency will be a major focus for us moving forward. We hope to be fully GAAP-compliant with audited financials starting in year 2020. We continue to consult with financial experts on improving our debt position, limiting dilutive financings and improving our level of financial reporting.
We are developing an investment presentation for our shareholders who seek greater insight into our business initiatives, product offerings and operational fundamentals. We will announce the release of this investor deck in the near future and encourage shareholders to review it and provide feedback as they see fit. We hope to begin hosting quarterly investor earnings calls by year end, where we will welcome the opportunity to address investor questions about our operational and financial health.
All of these initiatives and items we have addressed are a part of our overall plan to build greater transparency and further shareholder value.
Conclusion
In closing, we continue to invite shareholders to join with us in creating a company that continues to break barriers, reach untapped markets and revolutionize our world through the reintroduction of America’s first agricultural industry – industrial hemp. We are a part of a fundamental shift in how the world thinks of cannabis and how the world thinks about health and wellness. We could not be more appreciative of the support we have had to date. We look forward to providing Medical Marijuana, Inc. shareholders with ongoing developments in regards to our three core company initiatives and how we will continue to lead the industry into the future.
Sincerely yours,
Stuart W. Titus, PhD
CEO Medical Marijuana Inc. (OTC: MJNA)
FORWARD LOOKING STATEMENTS DISCLAIMER:
Certain statements in this letter including, but not limited to, statements as to: MJNA’s financial outlook for fiscal 2019, including sales, gross margins and operating expenses; MJNA’s actions for growth and its growth drivers; our view of the estimated time it will take for or financial results to be achieved; the demand for MJNA products; the results of our investments in Kannalife, Inc. and AXIM Biotechnologies, Inc.; MJNA’s growth opportunities; the benefits, performance, features and abilities of MJNA’s products; the availability of MJNA’s products; the qualities and capabilities of the management team; the size of the market; our excellent strategic position; and our ability to avoid dilutive financings and improve our debt position, are forward-looking statements that are subject to risks and uncertainties that could cause results to be materially different than expectations. Important factors that could cause actual results to differ materially include: global economic conditions; our reliance on third parties to manufacture and distribute our products; the impact of competition; market acceptance of our products; changes in consumer preferences or demands; changes in industry standards; unexpected loss of performance of our products; as well as other factors detailed from time to time in the most recent reports MJNA files with OTCmarkets.com, including but not limited to, its annual and quarterly reports. Copies of these reports are posted on the company’s website and are available from MJNA without charge. These forward-looking statements are not guarantees of future performance and speak only as of the date hereof, and, except as required by law, MJNA disclaims any obligation to update these forward-looking statements to reflect future events or circumstances.
Use of Non-GAAP Financial Measures Disclosure
We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles for (GAAP). In evaluating the business, the Company considers and uses non-GAAP measures, such as non-GAAP net income/(loss) and adjusted EBITDA, as supplemental measures to review and assess the operating performance of the company. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). We use non-GAAP measures internally to evaluate our performance and make financial and operational decisions that are presented in a manner that adjusts from their equivalent GAAP measures or that supplement the information provided by our GAAP measures. The non-GAAP financial measures exclude non-cash stock-based compensation and other non-recurring items. When evaluating the performance of our business and developing short and long-term plans, we do not consider share-based compensation charges. The non-GAAP financial measures such as Non-GAAP net income and Adjusted EBITDA included in this press release are different from those otherwise presented under GAAP.
Non-GAAP Net Income/(Loss) is defined as net income/(loss) excluding share-based compensation expenses. Although share-based compensation is necessary to attract and retain quality employees, our consideration of share-based compensation places its primary emphasis on overall shareholder dilution rather than the accounting charges associated with such grants. Because of the varying availability of valuation methodologies and subjective assumptions, we believe that the exclusion of share-based compensation allows for more accurate comparison of our financial results to previous periods. In addition, we believe it useful to investors to understand the specific impact of the application of the fair value method of accounting for share-based compensation on our operating results.
Adjusted EBITDA is defined by the company as EBITDA (net income (loss) adjusted for interest income/(expense), income taxes, depreciation and amortization), further adjusted to exclude certain non-cash expenses and other adjustments as set forth below (share based compensation, litigation expenses, deferred revenues* and gains/(losses) on investments). We use Adjusted EBITDA because we believe it more clearly highlights trends in our business that may not otherwise be apparent when relying solely on GAAP financial measures, since Adjusted EBITDA eliminates from our results specific financial items that have less bearing on our core operating performance.
We use Adjusted EBITDA in communicating certain aspects of our results and performance, including in this press release, and believe that Adjusted EBITDA, when viewed in conjunction with our GAAP results and the accompanying reconciliation, can provide investors with greater transparency and a greater understanding of factors affecting our financial condition and results of operations than GAAP measures alone. In addition, we believe the presentation of Adjusted EBITDA is useful to investors in making period-to-period comparison of results because the adjustments to GAAP are not reflective of our core business performance.
* The company believes that certain deferments for gift card programs that were primarily terminated after Q1 2018 that were deferred in 2018 and recognized in 2019 should be excluded from our non-GAAP adjusted EBITDA.
| Q1 2019 | 2018 | |||||
| (in thousands) | ||||||
| Net Income (loss) | $ 9,538 | $ (134,592) | ||||
| Depreciation | 41 | (43) | ||||
| Interest expense | 140 | 380 | ||||
| EBITDA | 9,718 | (134,255) | ||||
| Stock-based compensation | 689 | 715 | ||||
| Gain (loss) on investments | (8,950) | 132,500 | ||||
| Litigation expense | 837 | 315 | ||||
| Inventory adjustments | (414) | |||||
| Deferred revenue | (1,459) | |||||
| Adjusted EBITDA | $ 420 | $ (724) | ||||
