Abacus Health Products Reports Fourth Quarter and Year-End 2019 Financial Results

Abacus Health Products Reports Fourth Quarter and Year-End 2019 Financial Results

TORONTO–(BUSINESS WIRE)–Abacus Health Products, Inc. (CSE:ABCS)(OTCQB:ABAHF) (“Abacus” or the “Company”) reported its financial results today for the fourth quarter and year ended December 31, 2019. All amounts are in U.S. dollars unless indicated otherwise.

On March 22, 2020, the Company entered into a definitive arrangement agreement pursuant to which Charlotte’s Web Holdings, Inc. (“Charlotte’s Web”) proposes to acquire all the issued and outstanding subordinate voting shares of the Company (“Subordinate Voting Shares”) after conversion of all outstanding proportionate voting shares of Abacus into Subordinate Voting Shares. Under the terms of the agreement, Abacus shareholders will receive 0.85 of a common share of Charlotte’s Web for each Subordinate Voting Share held (the “Transaction”). The Transaction is subject to the approval of the Company’s shareholders, receipt of required regulatory and court approvals and other customary conditions of closing. The Transaction is expected to close in the second quarter of 2020. Additional details of the Transaction will be provided to Abacus shareholders in an information circular to be mailed in connection with the special meeting of Abacus shareholders to be held on June 4, 2020.

“This transaction provides a unique opportunity for our shareholders and employees to participate in the compelling potential of the combined businesses,” said Perry Antelman, Chief Executive Officer of Abacus. “Abacus is one of the largest suppliers and distributors in the United States of topical products infused with hemp extract to the Food/Drug/Mass (“F/D/M”) and healthcare practitioner markets. By joining with Charlotte’s Web, we have the opportunity to maximize our growth by leveraging the Company’s leading brand, vertical integration, infrastructure, expertise, financial position and capital markets presence, and position the combined company to deliver benefits for our stakeholders over the long-term.”

2019 12 Month Financial Highlights

  • Revenue increased 82% YoY from $8.5 million to $15.5 million
  • Gross profit increased 68% YoY from $5.1 million to $8.5 million
  • Gross margin reduced YoY to 54.5% from 59.2%
  • CBD CLINIC™ revenue increased 40% YoY, from $8.4 million to $11.7 million
  • CBDMEDIC™ revenue increased 2,469% YoY from $0.1 million to $3.7 million

2019 Fourth Quarter Financial Highlights

  • Revenue increased 49% YoY from $3.0 million to $4.4 million and sequentially 8% from Q3 2019
  • Gross profit decreased 9% YoY from $1.8 million to $1.6 million and sequentially 34% from Q3 2019
  • Gross margin reduced YoY to 36.8% from 59.9%
  • CBD CLINIC revenue remained flat YoY at $2.9 million as well as sequentially from Q3 2019. Total number of health care practitioners in the CBD CLINIC network grew sequentially from 14,500 to 16,500
  • CBDMEDIC revenue increased 2,047% YoY, from $0.07 million to $1.5 million and sequentially 29% from Q3 2019. Purchase orders received in the fourth quarter increased the number of retail locations carrying CBDMEDIC products to over 8,000 (excludes retail locations where Harmony Hemp products are carried)

2019 Business Highlights

  • Company completed its reverse takeover transaction on January 29, 2019 (the “RTO”).
  • Subordinate Voting Shares began trading on the Canadian Securities Exchange (CSE) under the symbol “ABCS” on January 30, 2019 and later in the year commenced trading on the OTCQX under the symbol “ABAHF”.
  • CBD CLINIC, a line of topical pain relief medications sold only to professional practitioners, maintained its leading market position and experienced strong growth in 2019 in the number of distributors and health care practitioners carrying the product.
  • CBDMEDIC, sold to consumers via retail chains and an e-commerce platform, substantially increased distribution through major retail chains in the F/D/M market and has established itself as one of the leading brands with a uniquely differentiated medical and scientific branding.
  • CBDMEDIC added advanced skincare and treatment products in February 2019. CBDMEDIC products can now be found in several locations in major drug stores, including the analgesic, first aid, footcare and beauty departments.
  • Company raised in aggregate US$40 million of equity under its RTO concurrent financing and its bought deal public offering in May 2019.
  • Established partnership with Rob Gronkowski (Gronk), a three-time football world champion, to increase CBDMEDIC brand awareness. Subsequently also partnered with Gillette Stadium and Patriot Place, to promote the CBDMEDIC brand.

Highlights Subsequent to December 31, 2019

  • On February 10, 2020 announced the acquisition of the principal assets of the companies owning the Harmony Hemp™ brand for an aggregate consideration of US$5.5 million, payable in cash and shares of Abacus. Harmony Hemp is a leading brand in CBD infused personal care products with national distribution to more than 4,000 locations in major grocery and drugstores. Through the acquisition, Abacus expanded its retail footprint by approximately 50% to over 12,000 retail locations and expanded its product offering to include a range of beauty and bath products.
  • On March 22, 2020, entered into the definitive agreement with Charlotte’s Web in respect of the Transaction. The Transaction is expected to close in the second quarter of 2020, subject to the satisfaction of the closing conditions.
  • Further developed its pipeline of retail chains expected to launch or expand CBDMEDIC and Harmony Hemp products in the next 6 months, including significant growth in grocery chains, expansion in the drug channel and entry into the convenience store channel.
  • Launched the CBD CLINIC Massage Therapy Series, a line of eight new massage oils and creams. The new line was developed specifically for massage therapists and introduces aromatic botanicals, a newly formulated massage cream and for the first-time, unscented versions of massage oil and cream.
  • Completed the development of a proprietary line of ingestible products focused on specific health indications and based on leading nutraceutical science and formulation expertise. Company has onboarded contract manufacturers and plans to launch the new line in early Q3 2020.
  • Partnered with the Arthritis Foundation to launch the “Survive & Thrive: COVID-19 LIVE Celebrity Challenge” fundraising campaign. The campaign succeeded in promoting a strategic relationship between Abacus and the Arthritis Foundation to a large and important audience of potential consumers of the Company’s products.

Fourth Quarter Business Review

“Abacus continued to focus on the expansion of distribution of its CBDMEDIC products in major retail chains during the fourth quarter, adding one of the largest drug chains and further developing its pipeline of potential opportunities with new chains. A clear bias emerged in the second half of 2019 within F/D/M towards topical CBD products and this aligns perfectly with Abacus’ competitive strength, evident in its broad portfolio of high quality, effective topical products,” said Perry Antelman, CEO. The increase in revenue attributable to CBDMEDIC was a function of the increased number of retail stores carrying the Company’s products during the quarter.

The Company achieved important milestones in the development of its CBD CLINIC brand, adding distribution of its products by one of the largest distributors of medical supplies to health and wellness professionals in the United States during the fourth quarter. The Company added 2,500 health care practitioner offices to its network during the quarter ending the year with a total of 16,500. Revenue attributable to CBD CLINIC remained flat both relative to the fourth quarter of the prior year period as well as sequentially. The Company continues to view the health care practitioner market as representing a significant growth opportunity and expects that its planned launch of ingestible products, which also include products for the healthcare practitioner market, will benefit from the leading position the CBD CLINIC brand holds in this market.

Mr. Antelman added, “Abacus posted revenue growth during a quarter in which most of our competitors reported sequential declines in revenue. We attribute this to our strength in the F/D/M channel, in which the threshold for entry is substantially higher, and has fewer competitors, than the online channel, and which results in a more stable growth environment. We are encouraged by plans for additional roll-outs with both existing and new partners during 2020 and expect significant growth in the next few quarters from this channel. Additionally, as previously announced, we are well advanced in our launch plans for our ingestible line, currently planned for Q3 2020. The line reflects a significant R&D effort and we are confident that it will be highly differentiated and well received relative to the currently available products on the market.”

Financial Review

All figures in US$

Three Months Ended
December 31,

   Chg.   

Twelve Months Ended
December 31,

   Chg.   

 

2019

2018

 

2019

2018

 

Revenue

$4,404,986

$2,958,024

49%

$15,523,464

$8,537,024

82%

Gross profit

1,620,716

1,773,325

(9)%

8,467,904

5,053,371

68%

Gross margin

36.8%

59.9%

 

54.5%

59.2%

 

Income (loss) before other expenses and income taxes

(5,814,865)

(270,118)

 

(17,417,664)

970,486

 

Net and comprehensive income (loss)

(4,639,443)

(1,423,046)

 

(16,646,749)

(378,333)

 

Earnings Per Share – Basic

$(0.21)

N/A

 

$(0.85)

$(0.03)

 

Earnings Per Share – Diluted

$(0.19)

N/A

 

$(0.75)

$(0.03)

 

Fourth Quarter Financial Review

Revenue for the fourth quarter of 2019 of $4.4 million represents an increase of $1.4 million year-over-year (“YoY”), or 49%. Sales attributable to CBD CLINIC were $2.9 million during the fourth quarter of 2019, representing approximately 65% of total sales. Abacus recognized $1.5 million of revenues for CBDMEDIC in the fourth quarter of 2019 representing approximately 35% of total sales and reflecting a sequential increase of approximately 29% from the third quarter of 2019.

Gross profit for the fourth quarter of 2019 was $1.6 million representing a gross margin of 36.8%, a decrease from 59.9% for the YoY period. The gross margin decreased in the fourth quarter due to higher cost of sales driven by packaging revision changes, additional freight incurred to meet a customer’s accelerated delivery timeline, retailer trade promotions, and one‐time introductory pricing incentives for a new major retail chain. The Company does not expect the main items negatively impacting gross profit in the fourth quarter to recur at the same levels going forward and expects its gross margin to return to levels closer to those seen in the first three quarters of 2019 over the coming quarters.

Net cash flows used for operating activities was $(5.5) million for the three months ended December 31, 2019, an increase of $(5.0) million compared to $(0.5) million the three months ended December 31, 2018. The increase in cash used for operating activities was primarily due to the fair value change of the derivative liability, deferred income taxes, trade receivables, trade payables, and prepaid expenses, offset by increases in share‐based compensation, advances to supplier, income tax receivable, and inventory.

2019 Financial Review

Revenue for the year ended December 31, 2019 was $15.5 million representing an increase of $7.0 million YoY, or 82%. Sales attributable to CBD CLINIC were $11.7 million during the year, representing approximately 75% of total sales and reflecting an increase of approximately 40% YoY. Sales attributable to CBDMEDIC were $3.7 million during the year, representing approximately 24% of total sales and reflecting an increase of approximately 2,469% YoY. Additionally, Abacus recognized $0.09 million of revenues for products sold under a customer brand.

Gross profit for the year ended December 31, 2019 was $8.4 million, an increase of $3.4 million YoY, or 68%. Gross margin for the year ended December 31, 2019 was 54.5%, a decrease from 59.2% for the prior year. The gross margin decreased in 2019 due to higher cost of sales driven by packaging revision changes, additional freight incurred to accelerated delivery timelines and increased levels of trade promotions and pricing incentives for retailers and large distributors.

Net cash flows used for operating activities was $(20.3) million for the year ended December 31, 2019, an increase of $(21.1) million compared to $0.8 million for the year ended December 31, 2018. The decrease in cash provided by operating activities was primarily due to an increase in marketing, advertising, and other expenses as well as an increase in trade receivables, deferred income taxes, prepaid services and expenses, taxes and inventories, offset by increases in sales volume, inventories, trade payables and share-based compensation.

The Company continues to have a strong liquidity position with over $22.2 million of cash and no debt as of December 31, 2019.

COVID-19

During the first quarter of 2020, the global emergence of coronavirus (“COVID‐19”) occurred and has since become an ongoing pandemic, including in the United States. The repercussions of COVID-19 on the Company’s business are presently unknown. The Company continues to monitor the situation and take measures that it deems are in the best interests of its employees, customers, partners, suppliers, shareholders, and stakeholders. The Company’s employees are working well and effectively performing their responsibilities given the challenge of remote work. As a result of the pandemic, the Company began the process of evaluating and changing spending priorities as well as taking direct action to reduce operating expenses to conserve cash.

The Company’s management discussion and analysis for the period and the accompanying financial statements and notes are available under the Company’s profile on SEDAR at www.sedar.com and on its website at https://abacushp.com/investors/financial-information/.

Conference Call and Webcast

Management will host a conference call to discuss the Company’s fourth quarter and 2019 year-end results as detailed below:

Date:

Wednesday, April 29, 2020

Time:

10 a.m. ET

Dial in:

1.844.260.4846 or 1.270.833.1296

Conference ID:

8374589

Replay:

1.855.859.2056 or 1.404.537.3406

Reference Number:

8374589

The conference call replay will be available until May 6, 2020.

Forward-Looking Statements

This news release contains forward-looking statements or information (collectively, “forward-looking statements”) within the meaning of applicable securities legislation. Forward-looking statements are based on a number of assumptions and are subject to a number of risks and uncertainties, many of which are beyond the Company’s control, that could cause actual results and events to differ materially from those that are disclosed in or implied by such forward-looking statements.

The forward-looking statements contained in this news release include, without limitation, statements relating to the expansion of the offering of the Company’s products, including in the market of CBD ingestible products, the execution of the Company’s growth strategy, the Transaction and the timing thereof, the intended use by the Company of its cash on hand, the impact of COVID-19 on the Company’s business, and the future cash position and financial results of the Company. Forward-looking statements are based on management’s current expectations and are subject to a number of risks, uncertainties and assumptions, including assumptions regarding the Company’s ability to efficiently operate its business, market and economic conditions, business prospects or opportunities, future plans and strategies, anticipated events and trends, and regulatory changes that may affect the Company and its customers and industry. There can be no assurance that actual results will not differ materially from those expressed or implied in forward looking statements. Undue reliance should not be placed on forward-looking statements. Additional information about these risks, uncertainties and assumptions is contained under “Risk Factors and Uncertainties” in the Company’s annual information form dated April 12, 2019, which is available under the Company’s SEDAR profile at www.sedar.com. Each forward-looking statement speaks only as of the date hereof, and the Company undertakes no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law.

About Abacus Health Products, Inc.

Abacus is engaged in the development and commercialization of over-the-counter (OTC) topical medications with active pharmaceutical ingredients and which contain organic and natural ingredients, including a cannabinoid-rich hemp extract containing CBD from the Cannabis sativa L plant. Abacus’ products are aimed at the rapidly growing markets for topical pain relief and therapeutic skincare and are based on proprietary patent-pending technologies developed by Abacus. Abacus’ formulations combine advanced science with organic and natural ingredients to provide safe relief. Abacus currently offers three lines of products: CBD CLINIC™, marketed to the professional practitioner market, and CBDMEDIC™ and Harmony Hemp™, marketed to the consumer market. CBDMEDIC and CBD CLINIC products are produced by a contract manufacturer in an FDA registered and audited manufacturing facility.

To learn more about Abacus, visit www.abacushp.com.

Contacts

For further information:
Hank Hague, CFO, 416-848-1457
[email protected]
or
Bill Mitoulas, Investor Relations, 416.479.9547
[email protected]

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