Abacus Health Products Inc (OTCQB:ABAHF) Q4 2019 Earnings Conference Call April 29, 2020 10:00 AM ET
Jonathan Conforti - Vice President Corporate Development
Perry Antelman - Chief Executive Officer
Hank Hague - Chief Financial Officer
Conference Call Participants
Brian Lee - Eight Capital
Max Jacobs - Edison Group
Scott Fortune - Roth Capital
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Abacus Health Products Fourth Quarter and 2019 Year-end Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue for question. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today April 29, at 10 a.m. Eastern Time.
I will now turn the conference over to Jonathan Conforti, Vice President Corporate Development. Please go ahead.
Thank you, Lauren. Good morning, everybody and welcome to Abacus' 2019 Fourth Quarter and Year-end Results Conference Call. The earnings press release was issued this morning. The MD&A and financial statements for the quarter or year-end can be found in the Investor Relations section of our website are also being filed on sedar.com.
Our presenter today is Perry Antelman, Abacus' Chief Executive Officer. Accompanying Perry for the Q&A portion of the call in addition to myself will be Hank Hague, our Chief Financial Officer.
Please note that certain subjects discussed in the call including answers we may provide to certain questions, may include content that is forward-looking in nature, and therefore subject to risks and uncertainties and other factors, which could cause actual future results or performance to differ materially from any implied expectations.
Such risks surrounding forward-looking statements are all outlined in detail in the company's regulatory filings, again, which can be found on sedar.com. As a reminder, all amounts discussed on today's call are in U.S. dollars unless otherwise noted.
And now, I'll pass the call over to Perry Antelman. Perry?
Thanks, Jonathan. Good morning, everyone from Boston Massachusetts and welcome to Abacus' investor conference call. A lot has transpired since our last conference call as it relates to Abacus our sector and the world in general. My remarks today will address both our Q4 and 2019 results and achievements, as well as an update on the key developments year-to-date.
In the fourth quarter of 2019, we continue to develop and expand our presence in the food, drug and mass channel, which has been the key focus for our company in 2019. We secured one of the largest drug chain during the quarter, which placed our products in approximately 2,500 additional stores, which rolled out during January and February of this year.
Our strong position with topicals became even stronger in the current environment of regulatory uncertainty that's holding back ingestible sales in the food, drug and mass channel. This has resulted in many retailers focusing on the deployment of topicals in the near term.
Overall interest in the food drug and mass channel to introduce CBD products continue to be high during the fourth quarter, even if the pace of adoption was slowed by the legal departments of large chains with the process to review and give the merchandisers the green light to launch was and in many cases continue to be slow.
Additionally, increasing state level legislative activity has also had the effect of somewhat slowing down retail chain deployment as brands and chains need to accommodate unique labeling and other requirements in order to sell in certain states.
Abacus substantially increased its lobbying activity at the state level, during Q4 to ensure that our interest would be considered in any legislation that was being developed relating to hemp or hep extract products. This was and continues to be important given our strategy of bringing to market unique topical OTC products, which have in most cases the ability to contain explicit medical claims.
We've had a very good experience with our involvement on the legislative field and consider ourselves, I would say, well, positioned for upcoming legislation across key states. This is also evident in our collaboration with retail chains, who have confidence in our ability to meet state-by-state requirements.
Our marketing efforts continued to build during the fourth quarter, although we dialed back actual marketing spend, which decreased by over $1 million from the $4 million in Q3 and leans more heavily on leveraging our partnership with Rob Gronkowski both to earn media opportunities, as well as enabling retailers to utilize Gronk-related imagery and in-store promotions.
As an example, one of our key customers who increased their store rollout from 200 to 1,000 stores right before the December holiday period introduced countertop shelf displays, many of which prominently featured a picture of Gronkowski
For 2019, we recorded revenue of $15.5 million, which represented a strong year-over-year growth of 82%. We posted sequential quarterly growth of 8% in Q4, which is driven by the 29% quarterly sequential growth in the CBDMEDIC business. While we were aiming higher for Q4 as we shared in our guidance on our last call, the difference was driven in part by promotional sales discount that we extended to secure one of the largest retail pharmacy chains in the country. The discounts have the effect of reducing both net revenue and gross profit and were the main reason that we reported a Q4 gross margin of 37%.
Without these discounts revenue would have been in line with the guidance we provided in Q3 and our gross margin would have been closer to what we reported prior quarters. The wins that we secured with the discount is already paying dividends, as this chain is rapidly increasing the rollout of our products to more stores within their chain.
While I cannot say, sales discounts are tools that we will not continue to use, we generally try to limit their use and scope and we don't expect to use them to the same extent in the coming quarters the way we did in the fourth quarter.
Overall our margin for 2019 came in at 54.5% down from the 59.2% in 2018. I will add that with increased sales volume, we have been able to negotiate better pricing from our principal contract manufacture for 2020 and combined with lower hemp extract costs. We expect that this will provide for gross margin improvement.
Purchase orders received in the fourth quarter increased the number of retail locations carrying CBDMEDIC products to over 8,000. This figure still represents only about 25% penetration of those chains that carry us. So there is a lot of room to grow in our existing base.
In addition, we had and continue to have a healthy pipeline of chains in various stages of the decision-making and approval process as far as bringing us on to shelf. From a competitor's perspective, we continue to see the larger chains working with a relatively small group of vendors of which we are one of the leading brands.
Our primary efforts in 2019 were focused on the drug channel, in which we have done exceptionally well in penetrating. CBDMEDIC consistently ranks within the top three or four of the top topical CBD brands in this segment. In the fourth quarter, we began to increase our focus on penetration of the grocery channel and the success of these efforts will be decided and play out over the next several months as grocery chains go through their regular category resell plan.
We feel good about our position on this front. And while I will talk about it separately in a few minutes a key reason for our acquisition of Harmony Hemp was to substantially increase our presence in the grocery segment.
Turning to CBD CLINIC and our health care practitioner business, fourth quarter revenue was little changed from the prior quarter. For the year, the business delivered a strong 40% year-over-year growth. Our distributor business continued 2/3 of sales and our direct practitioner business approximately 1/3.
On the distributor side our five largest distributors delivered over 90% of our sales by distributors and further underscore that distributors with wide reach are key to growth in this channel. At the end of Q4, we established a distribution relationship with one of the largest distributors to chiropractic in the U.S. with onboarding at the beginning of this year.
Our two largest markets being chiropractics and massage therapists collectively accounted for over 70% of revenue. We expect the new distributor to be a newly full contributor to the growth of the CBD CLINIC business in 2020. While some competition has come into this market, we are retaining our leadership position in the health care practitioner market and continue to view the opportunity ahead of us at very large.
Turning to the Harmony Hemp acquisition. We acquired the Harmony Hemp business on February 10 for $5.5 million of which half is being paid in cash and half in shares. The shares being issued over a 20-month period and being subject to markup.
There were three main reasons that attracted us to Harmony Hemp. The first was the distribution they had achieved in the two largest grocery chains in the country which combined with other retailers had achieved a footprint with their products being carried in over 4,000 locations.
The second was that a majority of the sales were in personal care and beauty the areas that we did not have a presence. Personal care and beauty are two of the fastest-growing segments within hemp-infused products that are being carried by retail. The third reason was the strength of their relationships within food drug and mass which provides us with an important competitive advantage.
The challenging situation in the capital markets allowed us to acquire this business at a price that we consider attractive given the strategic benefits that it brought to our business. The integration of Harmony Hemp has been going well. Although as with any acquisition it has taken a lot of efforts.
We are very pleased with both the performance of this business as well as the cross-selling opportunities that are being realized between Harmony Hemp and CBDMEDIC brands. On a combined basis the CBDMEDIC and Harmony Hemp have products are now carried in over 12,000 non overlapping stores.
As previously announced we've been working hard on the development of a line of ingestible products containing hemp extract. In addition to our own R&D efforts we engaged two companies to support our product development efforts one with unique cannabinoid expertise and the other with future cynical expertise.
We recently completed the development of a proposed line of unique ingestible products covering several different health indications. Our products are based on both leading nutraceutical and cannabinoid science and we believe we have best-in-class products that are going to be very well received by consumers.
We're also in the process together with one of our commercial partners to apply for patent protection for a technology using some of these products. Our agreements with the contract manufacturers are in place and we had planned a launch in June. Although with the unfortunate arrival of COVID-19 pandemic, we have decided to push the launch back to Q3. While I appreciate this activity is largely away from the market's eye and difficult to gauge, I can tell you that the work that has been put into the development of this line and the preparations for the launch, a very significant achievement and a testament to the strength and innovative the spirit of our team. We are very excited about this launch.
Which brings me to the next and almost final topic of my remarks today a proposed acquisition by Charlotte's Web. As some of you know, Abacus has a long history with Charlotte's Web, dating back to 2016 and even earlier, when an agreement was entered into which allowed Abacus to purchase and formulate its products with Charlotte's Web hemp extract.
Over time both companies matured and grew and throughout these years the strategic merits of bringing the two companies together became clearer. We consider Charlotte's Web to be the most successful company within the CBD sector, setting standards for product quality and developing the most highly recognized plan in the industry.
Over the last few months I have gotten to know the senior team of Charlotte's Web and gave insight into their future plans and I have been highly impressed by both. They are building a platform which I believe will be the global leader in the industry which is still in its very early days of development.
Abacus has succeeded in building a leading brand a unique topical product that has achieved impressive penetration of the food drug mass channel and this is highly synergistic the Charlottes's Web business. For our shareholders, the acquisition represents the opportunity to continue to participate in an exciting industry with this leading platform with a share price premium reflective of the unique position and opportunity that Abacus holds.
While the acquisition process preceded the arrival of COVID-19, the strength of the capital base of the combined companies is a very real advantage and we expect the company will emerge even stronger once the pandemic passes relative to other players in the sector.
We look forward to Abacus becoming part of the largest vertically integrated Hemp extract produce company in the world doing our part in ensuring its continued growth and success and having our shareholders participate and benefit from this joint.
We have confidence that the acquisition will close, however until such time, we continue to operate as an independent company and are not slowing down in any respect with any of our plans. As far as the time line goes for the acquisition, we expect to mail out our circular next week with a shareholder vote scheduled for June 4.
Assuming that our shareholders vote in favor of the acquisition and subject to the receipt of required regulatory and court approvals and status satisfaction of other customary conditions of closing, we expect to close the transaction in the second quarter.
A few words about how COVID-19 is impacting us is in order. During the first quarter of 2020, the global emergence of coronavirus occurred and has since become an ongoing pandemic, including since March 2020 in the United States. The full repercussions of COVID-19 on our business are difficult to assess. We continue to monitor the situation and we are and we do take measures to alter our operations as required by federal, state or local authorities or that we deem are in the best interest of our employees, our customers partners, suppliers, shareholders and stakeholders.
On March 15 this year we directed all of our employees to work from home, canceled scheduled business travels, refrain from scheduling future travel and follow guidelines from the CDC. Many U.S. states, Canadian provinces and other jurisdictions have since given stay-at-home orders. Our employees are working well and effectively performing their responsibilities, given the challenge of remote work. And really – goes off to them phenomenal work ethics and very efficient.
As a result of the pandemic, we began evaluating and changing spending priorities as well by taking direct actions to reduce operating expenses to conserve cash. These efforts include stopping or phasing certain service provider, contracts as well as reducing marketing spend.
We expect that the pandemic will have some negative impact on the sale of our products due to the lower level of economic activities experienced in the U.S. over the last two months and which may continue. We expect that our healthcare practitioner business will be impacted due to the likelihood that many practices may be closed or have scaled back their level of activity.
Looking past the challenging periods, which we hope and pray more incessantly, we are very confident in our ability to execute on a significant growth opportunity that still lies ahead for CBD CLINIC.
With regards to our consumer business, the CBDMEDIC and Harmony Hemp brand, our internal assessment at the beginning of the year was that we would finish the year with our products carried in over 20,000 stores. Despite the pandemic causing some retail chains in our pipeline to reschedule the reset dates by one to two quarters, others are expanding their store rollout and we are still confident that we will hit 20,000 stores by the end of this year.
In conclusion, it was only last year that the food drug and mass market opened up to our products. 2019 was the year we established ourselves as one of the market leaders in the topical space and succeeded in having CBDMEDIC products carried by the largest retail chains in the country. We had good growth in our health care practitioner business and believe that with increased attention, this business has the potential to grow much faster.
At the beginning of 2020, we acquired Harmony Hemp, which provided us with expanded distribution and product breadth. Notwithstanding the curveball that we've been thrown with COVID-19, we've been hard at work preparing for our next stage of growth with the launch of our ingestible lines, which we are very excited about.
Our proposed acquisition by Charlotte’s Web is testament to the hard work of every -- our very capable team. Abacus is one of the largest suppliers and distributors in the United States of topical products infused with hemp extract to the food, drug and mass and health care practitioner market.
By joining the Charlotte’s Web, we are bringing together unique and complementary strengths that will have unmatched product breadth, distribution presence, innovation, management talent and will benefit from vertical integration and financial strength. The proposed transaction provides a unique opportunity for our shareholders and employees to participate in the compelling potential and growth of the combined businesses.
I'd like to take the opportunity to thank our shareholders those who have been with us from the beginning and those that have joined along the way. We appreciate your confidence and support of Abacus and look forward to continuing our exciting journey with you.
With that, I'd be pleased to take your questions.
Thank you. [Operator Instructions] Our first question comes from [Indiscernible] with Eight Capital. Your line is now open.
Good morning. This is Brian Lee on the call for Jenny Wang. My first question is what kind of impacts to sales and supply chain are you seeing recently due to COVID-19?
Hank, do you want to answer that?
Sure. In terms of the supply chain I can tell you that our contract manufacturer is continuing to operate and practicing the best CDC measures in a careful way. Our third-party logistics partners are continuing to operate and ship to customers.
Got it. Thanks. My next question is the Charlotte’s Web proposed acquisition of Abacus subject to HSR review?
No. That is not.
Okay. That’s it from me. Thank you.
Sure. Thank you.
Thank you. Our next question comes from Max Jacobs with Edison Group. Your line is open.
Hi, guys. And congrats on the great quarter. I was just wondering though on CBD CLINIC. So it was flat in Q4. Can you just talk about like maybe what might have been
driving that? Because otherwise it had a pretty good year.
Sure. Well, I will tell you that the – essentially, the industry as a whole had actually a slight downturn in Q4. So we were now bullet proof to that. And sometimes that is also cyclical. I can tell you from my former position in my former career in the pharmaceutical industry. Q4 tends to be lower in general. So the fact that we actually stayed flat I'm okay with that. That is -- I would say that is -- that's secondly expected. .
And so what was driving the industry-wide flatness in Q4? And just which industry are you referring to?
I'm really I'm talking about health care.
Okay. And so just expanding a little bit on the HSR review question. So you don't expect any antitrust concern with the Charlotte’s Web acquisition?
Max, it's Jonathan. Sure let me take that one. So the HSR Act has a threshold which this deal does not reach yet from a dollar perspective. So currently we do not expect to require the HSR approval.
Okay great. And then just one last question on the acquisition, which is just so there's going to be a shareholder vote, I think you mentioned in early June. So I was just wondering, how confident are you that the vote will be, yes?
Sure. Let me take that one. So, first of all, in terms of the process, we expect to obtain interim court approval this week. We'll be extending out our circular probably in the next 10 days or so. We will have a shareholder vote that's scheduled for the beginning of June 4 and expecting -- in terms of that activity, we had 20% of our votes that are already locked up and committed to those in favor of the agreement.
In terms of the actual shareholder vote itself, two-thirds of the votes present at that vote are required. And so, we feel very good about the transaction being approved by our shareholders. Both those -- obviously, that have committed already to the transaction, as well as the feedback that we've gotten from other major shareholders, which has been very positive.
So we are very confident that the transaction will be approved at the shareholder vote. And after that, Max, it's a couple of days after that that we get final board approval and then would file the articles of arrangement shortly thereafter. So, our view is kind of a mid-June time frame is probably when we would expect the transaction to completely close.
That’s everything for me. Thanks for taking my questions.
Thank you. Our next question comes from Scott Fortune with Roth Capital. Your line is open.
Good morning and thanks for the questions. Real quick, just kind of want to see the response from -- you had some upcoming product launches potentially in the convenience stores, specialty channels going forward? Kind of, what's the response for these product launches now and kind of timing with COVID here? And then, just kind of touch base on next innovation or project innovation lines that you guys are targeting going forward here?
Yes, sure. So, we are still in the process of launching these new lines. The cstore line, which is the convenience store line, is -- we had a little bit of delay in having final product delivered -- finished product delivered to us. COVID-19 did play a role in that. But we're really looking forward to this launch and that launch is actually happening now, as we speak.
And some of the -- it's interesting, yes, it's incredible to see whether it's a silver lining or not, but certain channels doing -- performing not a little bit better, but much better because of COVID-19, of course, online sales. But the grocery sector and even small convenience stores, the traffic has increased substantially. And I don't think we could have had better timing to be able to launch our convenience store lines than now. So we're really looking forward to that. And again that is happening as we speak. So convenience store line is being launched now and will continue, of course, through the next three quarters.
The Gronk-inspired ingestible line, which we are super excited about, as I just described on our call, we'll be launching within a few months. And, of course, a lot of preparation for that launch, in marketing in advertising. There's still a lot to do with that. But we are really right on target, right on plan.
The schedule was delayed a couple of months, because throwing marketing dollars in advertising during this pandemic really isn't the great ROI. So we are waiting it out a little bit. But we have rescheduled that for a few months from now and we expect that to be a very successful launch.
As far as -- we also have -- not only do we have our market side ingestible line, we also have an ingestible line going forward into the health care practitioner space. That too, we put a little bit of cards on that being that health care practitioner practicing and at this point in time of course going through a difficult period difficult time. And so we are assessing that literally if not every week every day and making sure that we will be able to launch outline instinct with the opening of many practices and making sure that we can see the best ROI for our investment in marketing.
Okay. And then a little bit on the FDA side obviously with COVID-19 there's probably a little bit more delays from that side. But any information on kind of the FDA where they're leaning kind of continuing to build out ingestible and toxicology studies from that standpoint any color from the FDA side from your side of things? Thanks.
That is a great question. Well now with COVID-19 I think FDA has their hands full. As far as ingestible, it is not a matter of if it's more a matter of really when. I think the FDA is -- continues -- like they really care about safety for the consumer. And that is really critical. Those guardrails are important for everybody in the industry for the manufacturers, the suppliers the distributors, the sellers and the consumers. So we are looking forward for additional guidance from the FDA.
They have given some additional guidance. We believe that ingestibles and allowance of ingestibles for the proper guardrails and safety considerations for the consumer that those are coming hopefully sooner than later. But as we all know the FDA number one again our concern is safety for the consumer. And as more data continually now faster rolling I know that they are effectively and efficiently reviewing that data so that safe products can be released and can be sold to the consumers sooner than later.
Okay. Thank you.
Thank you. [Operator Instructions] And I'm showing no further questions at this time. I would like to turn the call back to Jonathan Conforti for any concluding remarks.
Thanks Lauren and thank you everybody for participating. This concludes our earnings call for today. Please feel free to reach out to our Investor Relations team if you have any further questions.
Ladies and gentlemen this concludes the conference call for today. Thank you for participating. Please disconnect your lines.