Hempfusion Wellness Inc.
Q2 2021 Earnings Call Transcript

Published: 16 Aug 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the HempFusion Wellness Inc. Q2 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.

[Jason Mitchell:]

Thank you, operator. Good afternoon, everybody and welcome to HempFusion's Q2earnings call. Again, I'm Dr. Jason Mitchell, 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 second quarter 2021 financial results press release and second quarter 2021 MD&A filed with Canadian securities regulators, a copy 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 second quarter financial results and then talk about the two acquisitions we've made and how they fit into our business strategy as well as discuss our growing retail and digital footprints. It is important to mention that the second quarter results that I will share today do not include these acquisitions, both of which were completed in July, but I am excited to share their inclusion for Q3. We will also provide some insight with the current regulatory landscape and provide updates on our current compliance strategy and status related to the pending and future guidance. With Q2 in the books we're showing real growth and momentum with an 84% year-over-year growth in revenue comparing Q2 2020 to Q2 2021 and a 25% growth over Q1 2021. The consolidated growth for Q1 and Q2 2021 is a net 31% growth over the same period in 2020. Our online sales growth rate in Q2 2021 over Q2 2020 is 268%. Additionally we have positioned ourselves perfectly with the pending legislation that will effectively add CBD to the definition of dietary supplements. This has been done by creating a second to none regulatory portfolio, including our NDIN fully ready for submission, NOAEL manuscript and publishing a final review now and self GRAS soon to be announced. I remain excited and optimistic about our future's every element required for success. Our regulatory readiness, our family of brands, our exclusive supply chain and strategic production relationships, our industry-leading proprietary products, and our over 15,000 points of distribution in 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. The growth in Q2 was primarily driven by continuing to execute on our five-channel strategy, as well as staying focused on international expansion. Now in channel #1, our natural products industry, we have continued to expand and grow even though it is highly saturated market. Our most notable success is the channel - in this channel, excuse me, is our continued and rapid growth of our non-CBD product line Probulin Probiotics, that according to SPINs syndicated data, period ending July 11, 2021 has maintained itself as the fastest growing probiotic company #11 in the top-12 companies now three years running. During quarter 2, Probulin has made its first jump into FDM channel and is already seeing early success. Channel #2, the FDM, Food, Drug and Mass market channel, we are pleased to share that in the fifth largest FDM grocery retail in the U.S. we've according to NielsenIQ Q2 data, excuse me, been able to maintain the #1 spot for both dollars and units sold against our peers for the entire inaugural year related to the launch of their set of products that contained CBD. This is primarily attributable to having the right products, simple messaging matched with the right pricing strategy. It is this success that is driving several new launches that are happening right now as we speak. I look forward to sharing more about the continued expansion soon. Due to the launch of our highly anticipated new gummy product offerings, in channel #3, the convenience channel, we have captured a great deal of early interest that we believe will drive significant growth in the near future. Our fourth channel, the doctor practitioner channel, we continue to support and grow with our brands HF Labs and Biome Research, but there are more opportunities to explore in this channel. Channel #5, our direct-to-consumer online channel remains as a primary focus of driving revenue growth for the enterprise. As a reminder, our Q1, 2021 e-commerce revenue grew 59.3% over Q4, 2020. Due to the ongoing implementation of our new digital strategy our e-commerce revenue has continued to grow rapidly in Q2, 2021 by 37% over the significant growth already experienced in Q1, 2021. The increase includes all website based e-commerce sales, as well as platform direct-to-consumer sales, including but not limited to, Amazon.com, Walmart.com and in Tmall and so on. To breakdown the 37% increase in e-commerce sales based on the same period, our branded and hosted website sales increased by 54% and our platform direct-to-consumer, including Amazon and Walmart and Tmall in Q2 increased 23%. Now as a percent of our total company sales our online sales for Q2, 2021 were estimated at 27% versus an estimated 14% in Q2, 2020 or a growth rate of 268% for total online sales. And this illustrates that what we are implementing is pushing us closer to our goal of 50% of our sales to come from direct-to-consumer online sales while still growing the overall enterprise. New customer acquisition increased online by 69.7% over Q1, 2021 and not only did online increase for both Probulin and HempFusion, but traffic increased by 46% over Q1, 2021. Probulin's average conversion rate has remained very strong and consistent at 3.21% and HempFusion has demonstrated a dramatic increase now at 4.37%, with an ad conversion rate holding above 1%, we are profitable as it relates to our ad spend. Now moving on to international sales, our international sales during 2020 were very challenging due to COVID, however the resurrection, expansion and growth during 2021 has been very exciting to see especially given the past year. As previously mentioned, we have successfully launched both HempFusion and Probulin in Ireland and the UK. This launch included Probulin going live in May 2021in Boots Pharmacy and is experiencing early success with further expansion soon. We currently distribute our products in China, Mexico, Ireland, UK, United Arab Emirates, South Korea, as well as Canada and several other countries launching soon during the balance of 2021. Brand new to the company this year is our newly established Private Label or White Label Division. Right out of the gate we secured 10 products in a topically traded national grocery retailer with the official award granted during quarter 2 and other -- and orders first shipping just a few short weeks ago in July. The revenue from just the first significant partner is anticipated to represent more than a $0.5 million this year and anticipated to be seven-figure revenue number in 2022. We expect significant growth in new items in revenue from this partner for many years to come. We believe this division could represent a multimillion dollar division within the next two years for both CBD and non-CBD products. To further drive success within all of our revenue generating divisions it is with great excitement that we have launched our new gummy CBD line of products. These new products have been a net sum collection of more than a year and a half of development work to make sure that they taste delicious, they are manufactured to the highest quality standards, and have been properly evaluated for stability. The first gummy CBD product is delicious Summer Cherry flavor that melts in your mouth. Our second gummy innovation incorporates our fusion concept here at HempFusion. We fuse together with our organic hemp extract CBD, a powerful immune supporting ingredient called elderberry that has been studied and validated to provide immune support as well as an amazing berry flavor. We are proud to also share that we are launching flavor extensions to our already successful USDA certified organic tincture line up. These flavors will include citrus with a hint of ginger and unflavored for those that want to add hemp extract CBD to their coffee shaker or whatever they choose. More exciting products will be announced soon. Turning our attention for just a few minutes to matters that are regulatory in nature are important, especially based on the most recent actions taken by the FDA. As I'm sure you may have already been made aware, two of our peers in the CBD space have recently had their NDIN, which stands for New Dietary Ingredient Notification rejected by the FDA. An NDIN is a submission instrument that a company submits to the FDA containing fundamental data and research that aims at substantiating the safety of a particular substance, in this case hemp extract CBD, and that it does not pose a potential hazard to a consumer. The FDA made their rejections based on a primary issue surrounding the fact that what substance or compound has been approved to be sold as a drug may not also be sold or added to a food or beverage or may not be sold as a dietary supplement. This is known as the IND or Investigative New Drug preclusion. This is outlined with a long-standing law known as the Food and Drug Cosmetic Act. In order to sell something new as a dietary supplement, new meaning post 1994, a company must submit without rejection and NDIN or they must have gone through the process to validate that the substance is GRAS or otherwise known as Generally Recognized As Safe. Both of these instruments requires substantial research and toxicology verification before either of them can substantiate a position to lawfully sell a substance to be added to food or beverage or sold as a supplement. A lack of clarity from the FDA has been a long enduring challenge for the CBD industry due to the fact that larger retailers like Walmart, Target or online platforms like Amazon or Facebook prohibit the sale or marketing of products that contain CBD. However, these two rejections clearly illustrate that the FDA has primarily held back from issuing clarity by the fact that CBD has been approved as a drug. Now sitting in front of Congress are two bills that aim their sights on correcting this issue. Both H.R.841 and Senate Bill 1698 are focused on legally adding CBD to the definition of dietary supplement in accordance with the Food and Drug Cosmetic Act. The passage of one of these laws is critical as it will open the door to having an NDIN accepted provided there are no other issues. Now these recent rejections were also based on other issues related to what the FDA considered a lack of evidence to prove safety. It is important to also mention that HempFusion Wellness is an executive board member of the U.S. Hemp Roundtable and our Chief Marketing Officer, Ola Lessard is the President, and I sit on the Legal and Finance Committee. Through our involvement in the U.S. Hemp Roundtable, we are actively involved and engage directly in the activities surrounding the introduction of these bills. At HempFusion Wellness we have long been focused on these issues. We have spent the last three years and significant resources planning for such a time as this. We have completed all safety studies, both animal and human, as well as all required validations and studies to properly validate our exclusive hemp extract material. Also we have fully authored our NDIN and stand ready to submit when CBD is added to the definition of dietary supplement, at the hands of one of the current highly supported, bills in front of Congress today. We believe that one of these laws will pass this year. We too, have also made ready our self GRAS dossier. We will soon publish our NOAEL, No Observed Adverse Effect Level manuscript and from there we will be able to announce self GRAS. This is yet one more level of substantiation, that we stand ready and compliant for the next evolution of CBD industry that we are affectionately calling, CBD 2.0. Now, we believe that out of the some 3000 or more companies selling CBD product, that less than a dozen are partially and less than a handful are fully prepared for this coming regulatory clarity. We stand as one of the select few that are currently totally fully prepared for this move. Upon achieving regulatory clarity, the company must be fully prepared to scale rapidly. At HempFusion we have orchestrated a significant plan to ensure that we can scale with nearly no boundaries. This scale can be reached through our exclusive supply chain agreements controlling our raw materials from soil to oil, and through our strategic relationships for production combined with an investment in infrastructure to meet demand in the future. We will be able to supply top quality products within the family of brands and we will also be able to supply USDA organic, and fully compliant raw material to other brands that find themselves too far behind the preparation curve, for the quickly approaching regulatory clarity. It is this preparedness that will allow us to become a commanding leader in the CBD industry, both in the U.S. and internationally. Now one last regulatory note is that we have also submitted our novel food application, a similar process as the NDIN process to APSA in the EU and to the SSA in the UK, and have already begun the process of fielding questions leading to validation and ultimately approval. Now for our most exciting topic, the HempFusion family of brands has grown significantly larger as we have officially closed both acquisitions of Sagely Naturals and APCNA Holdings, better known as Apothecanna, both of which are completed following the end of the second quarter and will be reflected in the company's third quarter financial results. Based on a 2020 pro forma revenue basis, this about triples the size of HempFusion Wellness to over $11 million in revenue. With the closing of these two acquisitions HempFusion Wellness, now has over 15000 points of distribution and retail locations making us one of the most widely distributed CBD companies in the industry, if not perhaps, the widest. Both acquisitions are topical companies and have not yet developed a significant ingestible CBD program. Due to our extensive in regulatory preparedness, we are already installing a full ingestible program for both, Apothecanna and Sagely Naturals that will provide significant revenue growth in the coming months. Data suggests that sales of ingestible CBD may be roughly 5 to 10x of topical products. We are very excited to build this program out near immediately. Now, our ability to scale and wide distribution sets the stage for HempFusion Wellness to be the most successful CBD company in the industry, especially such as the time where regulatory clarity will be officially provided. Now founded by two extremely smart and amazing entrepreneurs; Kerri and Kaley, their company Sagely Naturals, into the largest founded CBD company in America, with a focus on revolutionizing the medicine cabinet in order to make women feel their best. Now, a highly respected brand, Sagely Naturals, consistently maintains the number one position in CBD topicals with a 23% market share in the drug channel and 13.8% market share in the multiple outlet channel, otherwise known as MULO according to IRI. Available from top national drug retailers including CVS, Rite Aid, Albertsons and Walgreens, Sagely Naturals also brings in very important demo, the women's market, especially the luxury women's market with retailers including Ultra at Nordstrom, as well as women's luxury e-commerce sites, Standard Dose, Poshmark and Fleur Marché'. Sagely Naturals has built this brand to appeal primarily to women. While women represent about 50% of CBD purchases now, it is believed that they will ultimately make up closer to 80% soon. This is consistent purchasing data in other supplemental or supplement and topical categories. They are smart decision makers. They do their research and as a result, loyally buy mainly those brands they trust. When you combine quality ingredients, the removal of topical impurities, used commonly in topical products, and an intense focus on testing and compliance, you develop trust with this consumer. Women typically shop for their families, and tend to read labels. Daughters tend to make many of the purchasing decisions and recommendations for their mature boomer parents, a tough demographic with regards to education and trust, but a huge underdeveloped market. Boomers these days are active. 80-year-olds are enjoying active lifestyles and they have pain, stress and sleep issues. They've heard a lot about the benefits of CBD, but don't have the education that their younger generation does. So typically their adult daughters advise them on safe and effective brands of CBD and our brands bring the safety and efficacy they need. Sagely Naturals has always offered high quality topicals and now after joining the HempFusion family of brands, we are using our expertise to expand their product line with USDA organic certified tinctures, a product we believe their loyal consumer base is looking for and a product that Sagely, now has the expertise to deliver. Those products are in production. It is a mutually beneficial exchange of expertise that grows both our brands, product lines, demographics, footprints and of course revenues. Now, Apothecanna is a company who pioneered hemp based topicals, building a loyal audience of daily use boomers. Today Apothecanna is sold at more than 2000 locations, including more than 1000 CVS locations across the U.S. and at Canadian dispensaries. Now 50% of their brand sales last year came from direct-to-consumer and we know how important strong e-commerce results are in the new day of pandemic uncertainty. Apothecanna’s, high quality topicals are highly respected, yet Apothecanna does not offer ingestibles. So again, it's a perfect partnership. HempFusion gains market share and access to boomers, while we produce our proprietary tinctures, capsules and gummies for Apothecanna to introduce to their loyal consumer base. Now, this trilogy not only makes up the HempFusion Wellness Inc. family of brands, it provides access to what we believe is the widest demographic that exists within one company in the CBD and probiotic industry. With Sagely Naturals, we have developed access to the highly informed female buyer. With Apothecanna we have access to the loyal baby boomer consumer, and with HempFusion we have access to what we call the active Xennial, it's a mash up word which is the Gen X and Millennial crossover consumer that is highly active and engaged. We are incredibly excited about these two acquisitions. While this does represent our second and third acquisition, we most certainly don't anticipate it to be our last. M&A remains a focus of HempFusion now and in the future. As things change and mature with the CBD industry, HempFusion continues to forge forward building an enterprise built on a foundation of solid regulatory preparedness, developed supply chain ready to scale, and amazing corporate values all leading to continuous revenue growth. Please stay tuned for more and keep an eye on our company as we accelerate our five-channel strategy, deploy resources to international jurisdictions, accelerate our sales organically and pursue additional M&A opportunities. We remain encouraged with our cash position and balance sheet and are excited for the next quarter and beyond. Now let's turn attention just a quick look at our financials, and then we'll turn it over to questions. Now, the statement of loss and comprehensive loss, revenue in quarter 2, 2021, was over $1.2 million, 84% above 671,000 in the year ago quarter 2, 2020, resulting from an increase in organic sales through retail channels expansion of our FDM channel, as well as significant growth in our direct-to-consumer online efforts. Gross profit was 19% of net revenue versus negative 19% in the prior year quarter, representing a 38% improvement reflective of more effective inventory management, and improvements in managing production costs. This was accomplished by rebuilding our entire supply chain team that happened earlier this year in January. There is still a lot of work to be done, but continuous improvements are being made as a result of their efforts, and I'm already looking forward to sharing further improvements in this area on our next earnings call in Quarter 3, 2021. General and Administrative expense was $2.9 million was compared to $1.9 million. This increase was driven by non-cash stock-based compensation expense, professional fees primarily reflective of being public and activities related to the two acquisitions. Sales and marketing expense increased by $2.2 million, primarily driven by advertising expense including, PR, digital marketing and content creation. Net loss of operations were $6.3 million versus $3.5 million a year ago the quarter. The net loss and comprehensive loss for the quarter was $6.5 or $0.06 per share compared to $3.7 million or $0.04 per share a year ago. Balance sheet and cash flow, we finished the quarter with $13 million in working capital versus a negative $3.9 million at the end of last year. Cash used in operations was $13.6 million, primarily attributed to the net loss during the period with an increase of 15.7 in cash provided by the financing activities due to the IPO we finished the quarter with $11.3 million in cash at the end of the period. Thank you, and operator we're ready for questions.

[Operator:]

Thank you. Our first question today is coming from Eric . Your line is live, you may begin.

[Unidentified Analyst:]

Hey Jason, congrats on the strong quarter.

[Jason Mitchell:]

Thank you, Eric.

[Unidentified Analyst:]

So, I just had a quick question on the revenue side. When we look at the deals now closed and we kind of put it all together, pro forma revenue run rate would be kind of that $12 million or so, just help us better understand how we should be thinking about kind of organic growth across the individual brands, like what's your perspective on how the three of them kind of work together and drive the business forward? Thanks.

[Jason Mitchell:]

Absolutely, okay, thank you. Well, the primary differences in the strategy behind these two acquisitions was, as we have mentioned before in our press release, this is not a backfill or lack of revenue, what it was, it was very strategic. Started the relationships last October or beginning of November right around that time frame to where strategically we wanted to assemble access to the largest demographic that we could and by accessing the female buyer, the baby boomer buyer, the xennials as I call it, or the Gen X-Millennial crossover, we estimate that to be somewhere about 80% of the demographic of people purchasing CBD. So it gives us the largest opportunity both, direct-to-consumer and through distribution wholesale, the extent of distribution footprint of over 15,000 locations to be able to expand and grow and capitalize not only on further organic growth of the topicals, but also to consider what ingestible represents once regulatory clarity is finally here, of which we are completely prepared for. Now, as you mention, the pro forma revenue, Pro forma 2020 revenue had we all been an assembled company at that time for the year 2020, it would have been just south of $12 million. If you were to look at our first six months of operations at HempFusion Wellness and you would see that we grew against the prior year at about 31%, you could probably take some of that data and make some assumptions on what might be the go forward or what might be the grow. Now, I will tell you that internally we are working on projections and estimates for guidance to the industry. Having just closed the acquisitions officially in the month of July, we want to make sure we're highly focused on making sure we’re accurate. So looking at this from a growth strategy, you have to look at it from the strategy, not just from three different companies operating independently, the crossover element of being able to install ingestible into companies that previously haven't had a developed ingestible program provides benefit that obviously will drive organic growth. Even before regulatory guidance this will drive growth, because both brands, Sagely Naturals and Apothecanna, have what we believe to be significant online revenue direct-to-consumer having not really explored what it means to have ingestibles or fully developed program. So, that's how I would guide people to look at this, and until we have guidance officially that we put in numbers on it, I would say that's the way I would look at it for now. But I assure you, internally we've already begun working on guidance that I hope to share sooner than later.

[Operator:]

Thank you. Our next question today is coming from Derek Dley at Canaccord Genuity. Your line is live, you may begin.

[Unidentified Analyst:]

Hi good morning, actually I am filling in for Derek his associate. Just a couple of questions. First of all, congrats on the quarter again. Couple of questions from our side. On the OpEx and cash burn side are there opportunities to take costs out of the business with those two assets being consolidated and would it be fair to assume that there's some overlap and things like marketing, manufacturing, and administration?

[Jason Mitchell:]

So, absolutely, great question. When you close two companies like them and it’s hard enough to close one and integrate, to consider closing two and integrating an existing entity with two other existing entities into one is a challenge for sure. And being that we've just close these two acquisitions, we've already begun the integration process. We even started it prior to the closings, because we’re very confident and knew that these closings were going to take place. So yes, there are efficiencies that are being explored and incrementally implemented as we speak, to drive cost efficiency in the organization, absolutely. And as it relates to overlap from marketing, production, distribution, those overlaps are already being evaluated as we speak. Production overlaps have already been discussed rather in-depth. Extensive partnerships that we've had on the production side, especially because we've developed such a strong regulatory portfolio, which includes our production facilities, we are going to be combining some of the efforts into larger production capacity for this, for our current manufacturing relationships that will offer cost savings and efficiencies throughout the entire enterprise with these other acquisitions. Now, from a distribution standpoint, we are making investments into our distribution network, but which is our main facility, which is centrally located in the United States in Topeka, Kansas. It gives us an ability to have a low cost footprint for distribution, while being the largest customer for FedEx within our region allows us incredible savings for shipping that allows us also to be able to ship anywhere in the U.S. very cost effectively within two days. So that's very important, in most cases, two days. It's very important when it comes to direct-to-consumer sales and efficiencies and trust. And so by that virtue, we are working on right now, the consolidation of distribution efforts will no doubt be savings to the company because the cost per square foot and labor is also less expensive in that particular region as opposed to the areas of where these companies operate. And as it relates to marketing efforts and so on, yes, there is overlap to where we are exploiting both to where all companies benefit from similar activities. So the net sum of this is that there will be cost savings. There will be efficiencies implemented in the weeks and months to come and we're already working on that integration now. So yes.

[Unidentified Analyst:]

That's perfect. Thank you for that. And then secondly, could you help us to better understand the whole gross margin for ingestible products at retail, how does it compare to both topical and B2C ingestibles? And what about, on an EBITDA basis, is it fair to assume the level of line there versus B2C?

[Jason Mitchell:]

Okay, so when it comes to understanding margin breakdowns from direct-to-consumer focus versus wholesale focus to retail channels, obviously having a distribution footprint of greater than 15,000 retail locations in the U.S. pitting us as one of the strongest brands out there from a he distribution footprint. Typically ingestible product will outsell that of topical, no question. Gross profit margins direct-to-consumer are typically higher than what you would consider or what you would find in gross margins for wholesale, meaning to retail locations. However, the big interesting fact that comes in as an anomaly with regards to the CBD industry specifically, is that the net margins are greater with wholesale than they are direct-to-consumer and that is primarily driven right now by the fact that due to the lack of regulatory clarity, certain traditional platforms that you would use to market products online to a consumer, like let's say, Amazon as a platform or Facebook as a social media, or even just the normal organic way to market your products directly from your website, you are prohibited from doing some of this. And so as a result, you have to use alternate tactics, which drives a lot of focus on SEO and content and backlinks and different things that will drive attraction, conversion and so forth from your website and it creates an expense that's far greater than what would be expected. And so it's for that reason the net margins for sure are greater at wholesale currently. Now, we hope that the net margins will, improve on direct-to-consumer, but that's going to come at the hands of regulatory clarity. But the beauty of it is, is that topicals typically have a higher gross profit margin than ingestibles, but ingestibles have a higher sell-through rate at what is believed to be somewhere between 5 to 10x that of topicals, simply because the perception or actual net effect when consumed is something that is directly responsive. And so, while it remains a complicated market, the interesting fact about our business is that we have a large portion of our business that is non-CBD being on the probiotic side. So we have the express ability to prepare ourselves for regulatory clarity by AB testing effective manners of regular -- of marketing what you would consider a standard product without these hindrances. And so we have a very good framework as to what we can do on all of these different platforms, including Alibaba's Tmall in China. So, we're understanding what works and what doesn't, building out the wireframe so that when that time comes, we'll be able to expand and exploit the increase -- potential increase in net profit margins and be able to have the sales that we want. So hopefully that answers.

[Unidentified Analyst:]

Yes, that's very helpful. Thanks a lot.

[Operator:]

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

[Jason Mitchell:]

Thank you, everybody, and we really appreciate the opportunity to be able to share the quarter two earnings. And again, we remain very optimistic about our future. For any questions related to anything to do with our company, please contact [e-mail]. And, again, we're very grateful and hope you all have a wonderful day.

[Operator:]

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