Hempfusion Wellness Inc.
Q3 2021 Earnings Call Transcript

Published: 15 Nov 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the HempFusion Wellness Inc. Q3 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Dr. Jason Mitchell, Co-Founder and CEO of HempFusion. Sir, the floor is yours.

[Dr. Jason Mitchell:]

Thank you, operator. Good morning everyone and welcome to HempFusion's quarter three earnings call. As you mentioned, I am Dr. Jason Mitchell, I'm the Co-Founder and CEO of HempFusion. I would like to remind you that, today's remarks contain forward-looking statements within the meaning of applicable securities laws. Actual results could differ materially. The risks, uncertainties and other factors that could influence actual results are described in HempFusion’s third quarter 2021 financial results press release and third quarter 2021 MD&A filed with Canadian securities regulators, a copy of each of which is available under the Company's SEDAR profile at sedar.com. Please read the disclosure carefully as these assumptions could change throughout the year. I'm excited to share with you our third quarter financial results. It is important to mention that HempFusion third quarter results now include the acquisitions of both Sagely Naturals and Apothecanna. On the call today, we will also discuss insights regarding our continued retail expansion and successes, updates on the current regulatory landscape and provide updates on our current compliance strategy. Towards the end of the call, we will provide an update on the progress we have made towards achieving our 2022 revenue guidance and the steps that we are taking through profitability and reduce our cash burn. With Q3 in the books, we are showing real growth and momentum with the base business of HempFusion and Probulin growing at 31% year-over-year in Q3 2021, as well as an impressive growth sequentially of 30%. Including the recently closed acquisitions of Sagely Naturals and Apothecanna growth in net revenue during the quarter was 155% year-over-year and 154% over the last quarter. The consolidated growth for the first nine months of the year now sits at 84% over the same period in 2020. I'm really happy with the growth in our online sales, which were up 692% from a year ago period. While growth in the quarter included significant contributions from the recent acquisitions, our baseline business still managed to grow 38% during the quarter versus the same quarter last year. Going forward, we expect to continue to focus on growing our online channel, which is approaching a level from a scale perspective that will start to drive improvements that in our total company margin profile. Just a couple of months ago, we provided guidance to the market of 20 to 25 million in net revenue for 2022, as well as the guidance suggesting that we would open an additional 2,000 retail doors before the end of 2021. I’m proud to say that we have already opened over 3,000 new retail doors, which exceeds our guidance and there is still a month and a half to go in 2021. These moves are currently estimated number of retail doors to approximately 1,800 distinct locations as an enterprise. I would also like to provide insight into the fourth quarter of this year, which began October 1st. I'm proud to mention that as an enterprise, during the month of October, we finished preliminary net revenue of just over 1.4 million for the month. This would put us on a yearly pace of close to 17 million of revenue before accounting and recent risk retail, distribution wins and further expansion plans we have in 2022. We expect this momentum to continue and anticipate strong holiday sales through Black Friday and the month of December. We have a lot more work to do as a company, but our significant efforts to this point are starting to pay off. To support our ongoing work, our balance sheet ending Q3 2021, we had 5.4 million in cash, no debt and 3.2 million in working capital. And we will remain well capitalized to execute our plan. Although our name is Hempfusion Wellness, it is important to mention that we are very diversified health and wellness company that also has products beyond Hemp-based CBD. According to SPINs, which tracks revenue data from the wellness industry, our probiotics business Probulin is the fastest growing probiotic company among the top 12 brands, this three years running. Having such a strong probiotics brand that continues to grow provides us with diversification, and as an asset, it remains uniquely valuable within our portfolio. When you combine this with our focus on the development and distribution of non-CBD products, we now have the ability to grow our retail and e-com reach, while others have to wait on regulations. We continue to see significant growth ahead for our CBD products and are now leveraging our brands, strengths and points of distribution to become a true health and wellness powerhouse. We're also leveraging our team's extensive regulatory experience to navigate the evolving hemp CBD and wellness legal environments. We stand ready for the potential coming regulations in the U.S. and as well as pending novel food regulations in the UK and EU. The following are the brief highlights related to our regulatory preparedness that we often talk about. We are pending publishing of our novel manuscript, which will ultimately lead to the announcement of Self-GRAS affirmation. For those of you that are not familiar with GRAS, it is status achieved through a very involved process of performing toxicology studies and raw material evaluation in accordance with the FDA Redbook 2000 guidelines, but ultimately designate to raw material in this case are organic hemp extract CBD as safe for human consumption. If our organic hemp extract is being GRAS, it would be eligible to be legally added to food, beverages and added to dietary supplements as a food additive. This is key because recently a federal court deemed GRAS as a viable path forward for products that contain CBD. We stand ready to submit our fully offered NDIN, which stands for new dietary ingredient notification submitted to the FDA inclusive of all required elements related to toxicology and observational reproductive data. In parallel, we are closely monitoring the two bills that the U.S. Congress is considering that would officially add the CBD to the definition of dietary supplement in accordance with the Food and Drug Cosmetic Act. We are an active consideration for validation by the FSA in the UK for novel food, while 650 of the over 800 applications submitted by others have already been rejected. We are actively in communication with the FSA answering common additional questions that we are optimistic will lead to full validation. We are also actively addressing all of the follow-up questions posed by FSA in the EU for EU novel food. Similar to GRAS, novel food is essentially the UK and EU equivalent of validating human safety for consumption, thereby allowing that ingredient to be added to foods, supplements, and so on. Novel food applications for the UK and EU are important because this instrument similar to GRAS affirmation or NDIN is the passport that makes products that contain CBD legal for sale as food or food supplement in Europe and in the UK. I remain excited and optimistic about our future. Every element required for success, our regulatory readiness, our a family of brands, and the unique and underserved markets for address, our exclusive supply chain and strategic production relationships, our industry leading proprietary products, and our now estimated 18,000 points of distribution and retail across America make HempFusion the right company at the right time to lead this new category into the future. We are growing, becoming more efficient and stronger every day. Q3's growth was primarily driven by continued execution of our five-channel strategy, as well as staying focused on internal or international expansion. I will take a few minutes now to take everyone through the progress we have made in each channel. Channel one, our natural products industry, we have continued to expand and grow, even though it remains a highly saturated market. Our most notable success is in this channel is our continued and rapid growth of our non-CBD product line Probulin probiotics. Now Channel two, the Food, Drug and Mass or otherwise known as FDM channel, I am pleased to share that we have during Q3 and thus far in early Q4, October, 2021, experienced the significant expansion with our family of brands. We have landed on shelf with both our HempFusion and Sagely Naturals brand at a regional retailer in Arizona Grocer including 20 different items. HempFusion is now one of the only CBD brands added to be part of this category refresh with STG Southeastern grocers most notably Winn-Dixie and will now be included in 400 stores, including the first OTC product featuring menthol as the active ingredient, but does also contain CBD as part of our exclusive skin nourishing blend to be added in the inline pain relief section merchandise between other known brands Voltaren and Biofreeze. Additionally, HempFusion has expanded with Brookshire Grocery and Probulin has expanded with distribution into Weis Markets, also very exciting -- Sagely Naturals has expanded into roughly 1,200 locations with Kroger and over 1,100 locations in Target. Target took in the first four items from Sagely Naturals that are non CBD OTC pain relief focused products. We expect to see further distribution wins for this product set in 2022. These are just the highlights and there are more upcoming expansion announcements we look forward to sharing in the near future. Channel three, our convenience channel, due to the launch of our new gummy product offerings. We've captured a great deal of early interest that we believe will drive significant growth in the near future. Channel four, the doctor practitioner channel, we continue to report our brands, HF Labs and Biome Research, but we see more opportunities to explore in this channel. We will continue to update our investing community as progress is made in the future. And finally, Channel five, our direct-to-consumer, our online channel remains a focus for driving revenue growth for the enterprise. As I mentioned earlier, we're making very strong progress with this channel, which was up 693% year-over-year and 190% sequentially, this after seeing significant growth already last quarter. This increase includes all website based e-commerce sales as well as platform direct-to-consumer sales including but not limited to Amazon, Walmart and Alibaba's Group Tmall. And while Sagely and Tropicana contributed meaningfully to our online growth in this quarter, we still manage to see strong growth rates in both our branded websites sales for HempFusion and Probulin, which were up 38% versus last year, and we experienced very strong growth in our platform D2C business including Amazon, Walmart and Tmall and more which increased 145% versus the same period last year. As a percentage of our total company sales, our online sales for Q3 2021 grew roughly 31% versus 10% in Q3 2020. What we have been implementing is pushing us closer to our goal of 50% of our sales coming from D2C or direct-to-consumer while continuing our growth by growing the overall enterprise. These online sales bring higher margins and more direct communications with our consumers driving a higher level of repeat consumers in the future. Now turning to international sales. As I mentioned earlier on this call, we continue to move forward on our two novel food applications. Recently, we were notified that, five key products from Probulin have been approved by UAE's Ministry of Health. This is significant because it's been approximately 60 to 90 days that approval, these products may have Dubai drug code numbers, effectively making them drugs in the UAE. What this does is, it provides doctors the ability to prescribe these products alongside prescription drugs like antibiotics because they would be considered drugs, they would be eligible for coverage by their health insurance provider. This is a very significant situation as it could lead to the meaningful growth opportunity for Probulin in 2022 and beyond. This was a product of three years of work. We have also signed a distribution agreement for Probulin with a key pharmacy chain in the Middle East, notably Saudi Arabia that currently has over 1,200 locations. In the coming months, we will provide more detail about these efforts. Brand new to the Company this year is our newly established private label division. As we have previously mentioned, we launched our new private label provisions procuring 10 items with significant national retailer. Due to the success thus far, they have requested an expansion of 10 more items. We anticipate these additional items would be on shelves during Q2 2022. There remain other significant opportunities that are currently in discussion, and we anticipate this division for drive significant revenue growth next year, and for years to come. I'd also like to turn our attention to product development for just a couple minutes. As we have previously mentioned, under the Sagely Naturals brand, we have successfully launched four OTC pain relief products, and they have already landed on the shelf at target. These items represent the first of many items that are non-CBD items, but that meet the need of the consumer related to pain relief and allow us to tap into the brand strength within our portfolio. Now that the acquisitions are complete and integration has begun, both Apothecanna and Sagely Naturals have tapped into the in-house expertise of HempFusion to launch several ingestible items including CBD capsules for stress and sleep, USDA-certified organic tinctures, and eventually gummies that contain CBD. We expect these items will be ready as early as this month. This expansion will drive significant success in the future, especially as we move to the other side of regulatory clarity and position HempFusion to be a leading -- in a leading position within the CBD industry. I would now like to provide a more detailed overview of the financials for the quarter. Revenue in the quarter, Q3 2021 was 3.1 million, a 155% above 1.2 million in the year ago quarter three 2020 due to the contributions from our recently closed acquisitions increases in organic sales through our retail channels, expansion of our FDM channel, as well as significant growth in our direct to consumer online efforts. Gross profit was 43% of net revenue versus 33% in the prior year quarter representing an improvement of 1000 basis points due to the addition of higher margin e-com sales with our acquisitions along with more effective inventory management and improvements in managing production costs. This is accomplished by rebuilding our entire supply chain team that was implemented January, 2021. We anticipate the continued optimization of the enterprise and integrating Sagely Naturals and the Tropicana that our gross profit margin will exceed 50% in future quarters. General and administrative expenses were 3.6 million as compared to 5.4 million in the same period prior year 2020. The decrease was driven primarily by improved deficiencies throughout the enterprise and continued focus on organizational structure and expenses. Sales and marketing expenses increased by 2.3 million, primarily driven by advertising expense including PR, digital marketing and content creation. Net loss of operations is 5.8 million versus 16.7 million in the year ago quarter. The net loss and comprehensive loss of the quarter was 5.8 million or $0.04 per share versus 16.7 million or $0.17 per share in a year ago quarter. Balance sheet and cash flow, we finished the quarter with a positive 3.2 million in working capital versus a negative 3.9 at the end of the last year, with a net change over the last year improving by 7.1 million. The Company used 4.8 million in cash and operations during the third quarter of 2021, compared to 7 million in cash in operations during the third quarter 2020. Cash expenses during the quarter were negatively impacted by several one-time costs associated with our recent acquisitions that we do not expect to continue going forward. We exited the quarter with approximately 5.4 million of cash on our balance sheet and 3.2 million in net working capital. The quarter included two large one-time payments to complete the purchase as Probulin and Sagely Naturals totaling approximately 4 million. Before, we turn to the Q&A portion of the call, I just wanted to take a minute to touch on our current trajectory and the efforts we are making to improve profitability and reduce our cash burn. During 2020 and so far this year in tangible levels. We remain intensely focused on continuing to decrease operational costs, while increasing our revenue growth in an effort to bring our cash burn down even further. With the future integration efficiencies, we are currently working through the streamlined supply chain efforts along with continued progress towards our 2022 revenue guidance, we are in our cash flow will continue to come down each month. As things continue to change and mature within the CBD industry, HempFusion remains focused on building an enterprise with a foundation of solid regulatory preparedness backed by decades of experience, navigating regulatory environments, a developed supply chain ready to scale, and amazing corporate values all leading to continuous revenue growth. Our portfolio of brands is stronger than ever, leading to significant retail wins and recognition within the industry. And its most recent quarter report Brightfield Group, the leading research for emerging markets including CBD, cannabis and wellness moved HempFusion Wellness into the top-20 of all CBD brands interacts. Please stay tuned for more and keeps an eye on our company as we accelerate our five channel strategy, deploy resources, international jurisdictions, accelerate our sales organically and potentially pursue additional M&A opportunities that adhere to a strict return on capital framework. We're remaining encouraged with our cash position and balance sheet and are excited for the next quarter and beyond. Thank you, and operator, we're ready for questions.

[Operator:]

Ladies and gentlemen, the floor is now open for questions. Your first question for today is coming from an email from . It looked like trading volume picked up quite significantly in the last week or so. Is that just all cannabis related? Can you give any color around the type of cost has been removed from Sagely and Apothecanna acquisitions? Is there still more room to achieve cost synergies? We often hear about how impactful they change in the regulatory side could be for CBD business, but given you already selling into thousands of retailers, how much more room is there to go?

[Dr. Jason Mitchell:]

So those are three uniquely different questions. So I'm going to cover the first one first. As it relates to volumes in the stock, I believe to some extent, it would have to have something to do with a renewed excitement in the cannabis space, which of course, hemp and CBD plays a part in for sure. But it's more specifically as it relates to HempFusion Wellness, a leading U.S. ETF MSOS has a strong holding in HempFusion Wellness. And I think as a result of the excitement around all the things MSOS is doing, I belief that had a very positive impact with nearly 1.4 million in volume on Friday alone. So, we remain very excited about this renewed excitement in cannabis in general, but more specifically hemp and CBD. Now, when you talk about costs related to our most recent acquisitions, we've already begun the integration process obviously, and the integration process takes a relatively short period of time and we're already making some move forward to integrate individuals into enterprise focused where we as a company can draw closer together and have a much more streamlined strategy. There is a tremendous amount of room left from a cost reduction strategy on how to integrate these companies together, and we are from -- I am chipping away at that rather rapidly. Now, the real opportunity though, the integration of these companies is more related to the fact that when we integrate and reduce costs, it's the increased stability to drive revenue in a very significant way, especially in the area of adding ingestible products. Two companies that largely didn't have any ingestible program and Hempfusion has a unique expertise in ingestible products, more specifically, even the regulatory framework behind them. So, creating an enterprise of all sorts of different ingestible options, I think, are going to be probably one of the biggest driving forces there. Now, when you talk about the, I think the third question was in relationship to, we hear about a lot of the regulatory changes and how meaningful should that be. And I want to make sure I got that question, that third part of the question proper. What's really important to know here is that, there has been a lot of talk about the regulatory framework in and around CBD, and I know that to some degree, people are a bit fatigued when hearing about that, but you shouldn't be because we are on the cusp of a major change right now, and you can see that in a couple of things that I'll share in just a second. But this change in the regulatory side of things still effectively make ingestible products legal to sell as a dietary supplement and potentially even as an additive to food and beverages, and why that's significant is, currently right now the majority of the market is selling topical products that contain CBD. Now, while topical products are very interesting, their primary driver in most of these retail locations on CBD. However, the revenue generated per location is not as large, right, because most people are looking for those ingestible products because they believe them to be more impactful and so on. When we are on the other side of a regulatory shift, take retailers like Target or Walmart or direct-to-consumer platforms like Amazon, will then be able to have a proper legal framework for their allowance to allow selling of these types of products in their locations, and these are the largest platforms in the world. The estimates for a comparison between topical to ingestible is that ingestible sells at a 5x to 10x volume over that of topicals. Ingestible products will be so much more significant, so if people think what sales are happening today is significant. When ingestible becomes a much more uniform regulatory framework that allows them to be sell unilaterally across all retail channels and direct-to-consumer over Amazon and so on, the revenue will be exponentially larger. This will be single-handedly in my humble opinion, the largest move forward in revenue that you'll see in CBD. And so, we remain extremely excited, not only because we are already prepared for that shift, but these two new bills that sit in front of Congress right now at House of Representative Schrader's Bill called H.R.841 or Senator Wyden's Bill Senate Bill 1698, both contemplate the ideology of adding CBD to the definition of dietary supplements, and in one of the bills is talking about adding CBD to foods and beverages. If either one of those bills pass, the door would essentially be open for the submission of an NDIN. And that is so incredibly significant, because when that door opens, the companies that are prepared are going to be able to capitalize on that exponentially.

[Operator:]

Your next question is another email question coming from . The FDA rejected NDIN for hemp supplements that some of your competitors submitted. What gives you the confidence that the FDA will accept HempFusion's future NDIN?

[Dr. Jason Mitchell:]

So, that's a really good question. I think in with respects to sort of rejections around the NDIN that were submitted. The two that are the most notable that were submitted that were rejected. The challenge is that the FDA has a specific framework in accordance with the Food and Drug Cosmetic Act. Anything that is currently being sold as a drug most notably in this situation GW Pharma's at the dialects may not also be sold as a dietary supplement or be added to a food or beverage. And this is what's known affectionately is called the IND Preclusion or the Investigative New Drug Preclusion. That means it precludes you from selling something other than as a drug, if it's being investigated or granted as a drug. Until that IND Preclusion is removed, in NDIN or a New Dietary Ingredient Notification is going to almost automatically be rejected. And there isn't any real room move around that unless of course, these two bills that sit in front of Congress, if one of them pass or something similar like H.R.841 or Senate Bill 1698, which effectively adds CBD to the definition of dietary supplements. Now I will tell you that we believe even as early as next month, we could see changes in regards to those things, and that could be a massive move forward for us. And if not next month, early next year, for sure, but this is right on the cusp of happening. And so, I think that once one of those moves happen the NDIN door will effectively be open. And that's a really, really key move forward. Now, other things related to why those rejections happened or simple challenges with the data and focusing on reproductive toxicology data, we stand very proud of the Company knowing that we have reproductive toxicology data, we've done the taking the necessary steps to making sure that all of these aspects are untied closely enough together so that when submitting an NDIN, you have the greatest level of success. And so, we're very excited about that because we've been preparing for that for years.

[Operator:]

Your final question is also coming from Aaron. You mentioned the Ministry of Health Registration in Dubai. Has the Company's business they are recovered since the pandemic? And how do we expect to see Dubai scale over time?

[Dr. Jason Mitchell:]

So, while Dubai is the part of the United Arab Emirates and a relatively small country, but a very significant one as a part of the GC countries, hasn't fully recovered yet after the pandemic. As it stands right now, it's certainly about 50% to 60% of what it was. I mean, what's really exciting and renewing tourism and excitement to Dubai right now is the World Expo 2020, that's currently happening right now. And I know that I said 2020, because there it was supposed to be planned during the year of 2020, and they only started it this year, because of the pandemic. So I would say there's still more tremendous amount of recovery that needs to happen there, because they were definitely hit hard by the pandemic and the organization Aster Pharmacy that we work with was on the front lines of doing a lot of that work to save the lives and care for those that were affected. So, we feel very proud to be involved with them. Now, we know that their business is coming back very rapidly, and I'm very excited to see that happen, and because they've been such a significant partner with our company Probulin probiotics that we see a lot of future there. Now, the most recent Ministry of Health Registration is extremely significant. I like it to compare that to, if you were to get an NDA by the FDA here in the U.S. on something to be sold as a drug, a new drug application, we essentially by being qualified and registered under the Ministry of Health makes it for Probulin, five products of Probulin are now registered under the MoH. And once the drug -- the Dubai drug code numbers are granted, five products sequentially have become drugs. And what does that do from revenue is enormous. You can go from hundreds of thousands to millions in scale, because as I mentioned earlier in the call, we only have about 1% of the business currently, which we're in several hundred thousands of dollars in revenue they're heading towards a million. We have only 1% of the prescribed patients for antibiotics being prescribed a probiotic of ours because it's the one not covered under health insurance at the moment of the consumer has to come out of pocket as opposed to something that would be covered. Now that we're registered with the Ministry of Health and also subsequently we'll have our Dubai drug code numbers eventually, that gives us an ability to be able to be covered under insurance and consumers will have more choice. And so, we're very excited. That could be multi-millions in scale in a very, very short period of time, simply because in Dubai, it is estimated that roughly about 60% of the prescriptions given daily are antibiotics, and almost always does a doctor prescribe a probiotic alongside of that. And so, it's a very significant piece of business and you'd consider a small country, but very influential country. We have about 250 pharmacies that we currently do business in the UAE. The contract that we are in active proceeding towards registering for MoH in Saudi Arabia now with a distribution deal we signed over 1,200 pharmacies. Just to give you an idea of the expansion, we're starting to take things through in the Middle Eeast. Hopefully, that clarifies that.

[Operator:]

There are no more questions in queue. I would now like to turn the floor back over to you for any closing comments.

[Dr. Jason Mitchell:]

Thank you, operator. I just want to thank you everyone for attending our Q3 earnings call. Hopefully, this clarified a lot of information and we stand extremely excited about the future of Hempfusion Wellness. Thank you and have a great day.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.