Hempfusion Wellness Inc.
Q1 2021 Earnings Call Transcript

Published: 18 May 2021

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the HempFusion First Quarter Earnings Call. At this time, all participants have been placed on a listen-only mode. And the floor will be open for your questions and comments, following the presentation. [Operator Instructions]. 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 the HempFusionQ1earnings call. My name is Dr. Jason Mitchell co-founder and CEO of HempFusion. I'd 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 first quarter 2021 financial results, press release and first 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. Now I'm going to highlight a number of financial results and then dive into the business strategy for company and discuss what's taken place in Q1 2020 with our Company, our industry, and more importantly, where we're going in 2021 and beyond. The numbers I'm about to share are focused on helping illustrate the momentum that is being created through the activation and deployment of our annual operating strategy. We're still a Company in early stage of revenue generation. I think you'll find it most helpful to see that we are making significant progress. Q1 2021 saw revenue increase of 8% over Q4 2020, showing that we are picking up momentum due to strategic changes of the Company and comparing year-on-year, Q1 2021 we realized a 1% growth over Q1 2020, even though there were, was a sense of panic buying last year in March Q1 2020 at the onset of the COVID lockdowns, where this illustrates that we're we were successful, it's still maintaining and even growing for an important time period whereby we implemented several pivots that have ultimately landed the company on the correct trajectory for 2021 and beyond. So in this call, I think it's helpful to illustrate the impact our changes to our e-commerce strategy are having on the Company as a whole and to provide color on international versus domestic revenue. Direct to consumer has been a significant topic of discussion with the company over the past 18 months. With COVID it forced us to accelerate our plans online, completely revamp our entire digital strategy and hire an entirely new, incredibly experienced digital team to help build out a more robust e-commerce platform, attract traffic and ultimately convert the consumer. With our recent shift to bolster our e-commerce strategy, we've seen a dramatic rise in traffic conversion and ultimately sales of Q1 e-commerce revenue increasing 59.3% over Q4 2020. This increase includes all website based direct to consumer sales, as well as platform based direct to consumer sales, including, but not limited to amazon.com, walmart.com and Tmall and so on. To break this down the 59.3% increase in direct to consumer sales based on the same period, our branded and hosted website based sales increased 27% and our platform direct to consumer, including Amazon and Walmart increased 96%. So we're very excited to continue to shift towards a more even spread of traditional sales taking place in brick-and-mortar and the cost-effective direct to consumer e-commerce model. In Q1, we successfully established Probulin on the largest global e-commerce platform Alibaba's Tmall and early indications are that we are experiencing early traction with an acceleration of market efforts in live streaming, leading into the 6.18 Festival promotion in June. Alibaba's Tmall, which is similar to Amazon has access to over 750 million consumers and we're excited to see how Probulin performs on this platform. In the further subsequent event we announced that HempFusions products containing CBD were conditionally approved on the platform pending regulations released by the Chinese government. Once officially allowed we’ll be one of the first publicly traded companies to offer probiotics that contain, excuse me, products that contain CBD in China through Alibaba's Tmall. Now further, we had a significant expansion on Amazon with the launch of the Probulin store and saw exponential growth shown by our 96% increase in sales over Q4 2020.Now, as a percentage of our total company sales,our online sales for Q1 2021 were estimated at 24.6% versus an estimated 6% to 8% in Q1 2020, or a growth rate of 3 to 4X for our total online sales. Now this illustrates that we are implementing - 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. So the increase in online sales is primarily attributed to the launch of our new digital program leadership change within the division and the hiring of additional industry leading experts to help build and deploy this winning strategy. New customer acquisition online has increased by 119.8% over Q4 2020. And not only did the online - excuse me, did online increase for both Probulin and Hempfusion, but traffic increased by 62% over Q4 2020.Probulin saw an increase in its average conversion rate, moving from 2.05% up to 3.21, and Hempfusion showed a dramatic increase all the way up to 3.4 3%. And we are more than doubled our ad conversion rate from 0.75 to 1.67 in Q1. Now moving to our domestic sales, we saw our first successful expansion into SDM through the fifth largest Food/Drug/Mass grocery retailer in America, Publix, boasting the number one ranking in this retailer for both revenue and units sold against our peer group, excluding a $2 lip balm. Hempfusion is commanding about a roughly 27% market share related to the sales in this category with this crucial retailer. So this data is third-party independent data from Nielsen IQ, February 2021 following the first advertised promotion. This success shows that we have successfully launched the right products at the right price with the right messaging as compared to our peer group. This significant validation has provided the necessary confirmation on how to proceed with our other FDM relationships. Now that we understand the roadmap, we are leaning in and further building out our FDM revenue stream during 2021 with other key national retailers. Due to this initial FDM success, we are pleased to report we have accelerated our discussions and negotiations with every major FDM retailer in America and planning to further penetrate into the channel very shortly. The purchase cycle is typically north of a year,however, we have already been in discussions with these retailers for much longer than that. We are anticipating that this success will provide the roadmap for this strategic expansion, which includes [2] (ph) key retailers even this quarter. I would like to shift to our expansion Internationally.In Q1 2021. International revenue increased 12% over Q1, 2020, and due to COVID related challenges, international sales in Q4, 2020, were zero. In fact, the loss of international sales in 2020 was one of the biggest challenges last year. The good news is, is that we are now seeing a resurgence of our revenue from our largest international partners at this quarter more in line with the normal business routine. We anticipate a very healthy increase in our international business in 2021. Now we're pleased to report we have successfully launched both Probulin and Hempfusion in Ireland with full EU compliant labeling and with the full acknowledgement of the FSAI, which is the Food Safety Authority of Ireland. During Q1, as laid out in our strategic annual operations plan, both Probulin and Hempfusionare already on store shelves in Ireland and in the UK. And we look forward to sharing the success of this expansion and what is happening already in Q2 in the near future. Early indications are extremely positive. In order to properly expand in the UKand EU, you must consider the necessary regulatory hurdles to participate where appropriate. I am proud to share that we have successfully completed and submitted our novel food application, including all necessary genotoxicity studies and supporting documentation to the FSA, the Food Standards Agency of the UK, and we're immediately submitted to EFSA for the European union. These are two major regulatory bodies that approve the applications within the UK and Europe to sell CBD products legally. While validation is soon forthcoming, we anticipate official approvals later in 2021 or early 2022. I would like to switch my focus to new product highlights. We've successfully launched our USDA certified organic tinctures for Hempfusionin the beginning of Q1 2021 and due to the success of these tinctures, we're already launching two new flavors during Q2. We're very excited about the highly anticipated launch of our delicious new vegan gummies infused with CBD and following a similar path as our best-sellers Hempfusion sleep and stress capsules we are launching one gummy with organic elderberry for immune support, which makes it easier for the consumer to understand why they should use the product. Please look for more exciting product launches slated for Q2 2021. On the regulatory compliance and R&D front,I'm very proud to share that we are well prepared for the upcoming, highly anticipated,more strict guidelines from the FDA regarding the sale of dietary supplements that contain CBD. Now, we have a fully offered our N D I N, which stands for New Dietary Ingredient Notification ready for submission to the FDA, which is a regulatory instrument that will likely be required by the FDA, following the passing of the HR 8.41 bill or the better known as the Hemp and Hemp-Derived CBD Consumer Protection and Marketing, excuse me, Market Stabilization Act of 2021, currently with Congress. It is crucial that any Company, the desire to sell products that contain CBD in the future must have completed the necessary safety studies to be ready for such legal requirements. Now, additionally, we've submitted for publishing our NOAEL, which stands for No Observed Adverse Effect Level manuscript that ultimately once published leads to the announcement of our self graph affirmation, graph standing for generally recognized as safe, status for our CBD material used in all HempFusion products. This status means that we've completed and had therapiedall of our toxicology studies necessary to confirm that our products are safe and fit for human use.To take this even one step forward, we're pleased to have participated in Validcare's human observational liver toxicology study. It is what is believed to be the largest of its kind to date. This study capturing the interest of the FDA reported its initial findings in Q1 2020 and indicated that there was no evidence of liver toxicity in any of the 839 participants as associated with Hemp-derived CBD in this clinical trial or in this study. HempFusionwas the co-sponsorer of this study and HempFusion products were among those used in the study. But due to the safety profile of our products, we have attracted medical professionals seeking to study the effects that CBD has on the human body. We've already completed one pilot trial from the effects that CBD has on inflammatory markers most recently, Dr. HarnickAssistant Professor of Medicine and Cardiology at Mount Sinai Hospital has chosen to exclusively use HempFusion products in his study through his private cardiology practice, assessing the effects that CBD has on specific cardiologic markers. Now, I've saved the best news for last.We've announced earlier today that we have signed the definitive agreement to acquire Apothecanna to become a wholly owned subsidiary of HempFusion Wellness, Inc. This acquisition represents our second after the successful purchase of Probulinand Probiotics in 2019. With the addition of Apothecanna,HempFusion's, total revenue would more than double and it would also create six strategic advantages. Number one, revenue of over $4 million in 2020 doubles HempFusion'shistorical revenue with six, excuse me, with significant expansion planned for 2021 and beyond making it immediately accretive to the company at closing. Immediate distribution to an additional 1800 stores, including CVS materially increases HempFusion'senterprise retail distribution footprint. In addition to FDM andE-commerce, this transaction provides an added distribution channels to other strategic partners, increasing HempFusion's five-channel strategy to six-channels and bolstering topical product distribution sales even within Canada.Robust e-commerce platform drivers over, excuse me, drives over 17,000 average monthly sessions and nearly $2 million in gross sales per year with 76% gross margin, historically. Product efficiencies across topicals line while providing a near term opportunity to expand into ingestible products, supported HempFusion's proprietary formulations.HempFusion'ssubstantial investment into regulatory compliance will help solidify Apothecanna's leadership position in the CBD industry. Now I will mention one more thing is that due to all the work for ingestible products, HempFusion will be able to also support Tropicana in the expansion of their first-time introduce ingestible products that contain CBD.Now we are incredibly excited about this acquisition.Well, this is our second acquisition. It most certainly won't be our last. M&A remains a focus of HempFusion, now and in the future. So momentum is growing for HempFusion and the industry and smaller players are weeded out and a shift to the largest most scientifically validated companies will with proven products, take place. Consumers want to know the products they are consuming are safe and that is our goal at HempFusion. We cannot wait to share our Q2 results as Q2 has already started with strong momentum. We remained very encouraged about 2021 and beyond.We have been planning for this success for well over a year now. And our hard work and dedication is finally starting to move it in the right direction, a direction that we are deeply excited about. Please stay tuned for more and keep an eye on our Company as we accelerate our five, now six-channels 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. And now a quick walkthrough through the financials, the statement of loss and comprehensive loss, revenue in Q1 2021 was $984,000; 1% over $977,000 a year ago, Q1 2020.Gross profit margin at 28.5% in net revenue versus 3.3% in the prior year quarter, reflected in improved inventory management. General and administrative expenses was $2.7 million,with compared to $2.2 million.This increase is driven by non-cash stock based compensation expense, professional fees primarily reflective of being public and filing fees associated with the IPO and incremented D&O insurance expense incurred as a result of the IPO. Sales and marketing expense increased by $1.4 million, primarily driven by advertising expense, including content creation, other advertising and most importantly our digital focus spending.Net loss of the operations $6 million versus $4.4million in the year ago quarter and net loss and comprehensive loss of the quarter was $5.8 million or $0.05 per share versus $4.4 million or$0.0 4 per share in the year ago quarter. Balance sheet and cashflow,we finished the quarter with $19.9 million in working capital versus negative $3.9 million at the end of last year.Cash used in the operations was $7.9 million primarily attributed to the net loss in the quarter with the increase of $15.7 million in cash provided by financing activities due to the IPO; we finished the quarter with $17.1 million in cash at the end of the period. Then what I would love to say is that, again, while we are still in that early revenue generating part of our Company's history, we remain incredibly excited about that, the strides that we've made to the pivots based on our annual operating plan of 2020and we forward to every step we take now in 2021, as it is continually moving forward and can't wait to share more future guidance to what's happening. Operator, I'm going to turn it back over to you. And I am ready for the questions.

[Operator:]

Certainly,Ladies and Gentlemen, the floor is now open for questions. [Operator Instructions] Your first question is coming from [Brendan Caldwell] [ph]. Your line is live.

[Unidentified Analyst:]

Hi Jason. With today's acquisition, you get access to a company that put up revenues of over $4 million in 2020, and the addition of a six sales channel as well. What can investors expect from this combined entity in terms of revenue potential moving forward?

[Jason Mitchell:]

Absolutely. You know while we don't typically provide future guidance, I'm going to share some here because I think it's really important to understand what's the acquisition means to the Company because it is very strategic and something we've been working on for quite some time, but the combined entities more than doubled the size of the company currently based on the 2020 revenues for both companies. Now what's most interesting about this is that this deal was set on the performance target. In fact, at the lowest threshold performance target of hitting $6 million in revenue, if they just hit that, that means they would have increased their business $2 million in a 12 month period of time. And we as a company would have actually traded less than 10% of the stock of the Company to acquire -- to make this acquisition. However, if they hit their upper threshold of revenue, the revenue target of $8 million, that means that we would be using up to 20% of the stock of the company. Now, what makes this really amazing is that while it doubles our revenue, just based on the 2020 revenue results, holding everything else constant, then hitting their upper threshold goal would nearly triple the size of the Company. Now, what's also very special is that we have contemplated and have implemented as part of this deal, a budget to invest in Apothecanna to make absolutely sure they have every opportunity of hitting these goals in the future, because it is absolutely the success of the enterprise, the council is making sure we do this. So we are investing into their success as well.

[Operator:]

[Operator Instructions] Your next question is coming from [ph] Anthony Worrall Anthony your line is open

[Unidentified Analyst:]

Thank you, Hey Jason Congratulations on the acquisition this morning. I am very touched on the digital metrics booming month over month. And the breakdown is pretty much towards 75, 25 of a brick and mortar versus e-com. I guess what's the Company doing to go more into, I guess, the digital transformation and get closer to a 50-50 split. And I mean, in the event of that, that does happen. How will how things work from a margin expansion perspective?

[Jason Mitchell:]

Absolutely.Really good question. Thank you. First of all, when we were public, the most significant piece of the funding that came as a result of the IPO was we invested into our digital expansion, because realizing through 2020, not only because of COVID just because that was the trend that according to Brightfield data, roughly about 51% of the purchases are happening online. So it was clearly evident that we need to make a much better more intense focus on that. However, bricks and mortar gives you depth and longevity in an industry. Online business gives you immediate access to consumers and revenue and it is also far more profitable on a gross profit margin standpoint. So, while we are investing to make sure that we, it is our single largest investment, to be honest we want to get to more of that 50-50% breakdown, but what's also important to understand is that we are incrementally and strongly increasing our bricks and mortar revenue, but at the same time leaning much more heavily into our digital. And so expanding that and getting ourselves to that 50-50 breakdown is absolutely the goal. Andthe team that we have are already experts on marketing products that contain CBD online, which comes with no small difficulty whatsoever. But the fact that we were able to move from Q1 last year, 2020 from a six to a, roughly six to 8% to the Q1 this year only starting these efforts most significantly in November of 2020 toalmost 25% of our business shows that what we're implementing is already working and the conversion is happening too. So we expect that that's going to have a dramatic impact on gross profit margin, but it's also going to help build more access to consumers enjoying our product.

[Operator:]

Your next question is coming from [ph][Hunter Junkin]. Your line is live

[Unidentified Analyst:]

Hi there. Congrats again, Jason. And thanks for taking the time today. So kind of a two part question for you. First, do you need to finance and second, when do you think the FDA will provide a regulatory framework and what's that process going to look like?

[Jason Mitchell:]

Well, thanks for your question, Hunter. First of all, to be very blunt and short, at this time we are not looking for additional financing at the moment, in fact, through internal exercises of capital expenditure efficiencies, as we stand today and some of the things that we're implementing now, actually gives us more than a 12 month runway with our current cash. Now, we are well capitalized and feel very strong about our position today. And so at this moment, we're not looking to raise additional capital. Now as it comes to the FDA. This is an important piece.I believe that we will hear more about what guidance we're going to get from the FDA this year. Now, I don't have a crystal bottle that anybody does, but I do believe that it'll come at the hands of HR 8.41, which is that current bill sitting in front of Congress right now with 16 Democrat and 10 Republican sponsors, seemingly very strong bipartisan support and it will help push the FDA to give their guidance. However, I do not think it will be easy. I think it's going to be very strict guidance and it's going to be very much based on strong dietary supplement, rooted legs that already exist and have always existed such as an N D I N, which is a new dietary ingredient notification. In fact, if you want to look at the bill itself, HR 8.41, you can go to congress.gov and look up HR eigh8.41 and look under taxed and it'll give you the bill. It'll show you that it's nothing new. It's pretty strict. And I would say that they're only going to be the select few companies that can actually adhere to these types of regulations that are already prepared that are going to be able to move forward in my humble opinion. But I believe we're going to hear this year.

[Operator:]

We have no further questions from the lines of, at this time. I would like to turn it back to Jason Mitchell for closing remarks.

[Jason Mitchell:]

Well, thank you very much. I thank everybody for joining us today. I hope you found this information helpful. And if there are any questions from investors, shareholders and the like, they can reach us at, [e-mail]. And I just thank you very much for your time, and I hope you 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.