Abacus Health Products Reports Third Quarter 2019 Financial Results

Abacus Health Products, Inc. (CSE: ABCS, OTCQX: ABAHF) (“Abacus” or the “Company”) reported its financial results today for the third quarter ended September 30, 2019. All amounts are in U.S. dollars unless indicated otherwise.

Q3 2019 Financial Summary

• Revenue increased 97.4% YoY to $4.1 million and sequentially 26.4% from Q2 2019
• Gross profit increased 100% YoY to $2.4 million and sequentially 24.0% from Q2 2019
• Gross margin increased YoY to 60.1% from 59.3%

Third Quarter and Recent Operational Highlights

• CBD CLINIC™ revenue increased 42.7% YoY, from $2.0 million to $2.9 million with sequential growth of 18.2% from Q2 2019. Total number of health care practitioners in the CBD CLINIC network grew from 12,000 to 14,500.
• CBDMEDIC™ revenue increased 71.9% to $1.2 million from Q2 2019. Purchase orders received to date represent over 7,000 retail locations, more than doubling from the 3,000 locations in Q2.
• CBDMEDIC will now be carried by the 3 largest U.S. national retail pharmacy chains, collectively representing over 22,000 locations across America.
• CBDMEDIC brand continues to generate the highest revenue per store per month in the largest US pharmacy chain in stores where it is carried compared to other CBD brands.
• Abacus partnered with Gillette Stadium and Patriot Place to further leverage its previously announced partnership with Rob Gronkowski (Gronk), three-time football world champion, to promote the CBDMEDIC brand.

“Abacus recently achieved a major milestone in securing the second and third largest national retail pharmacy chains for the distribution of CBDMEDIC products. This marks a major achievement and demonstrates our leadership within the topical CBD market. This milestone marks the beginning of an inflection point and the accelerated adoption of our products by the food, drug and mass (“F/D/M”) channel,” said Perry Antelman, CEO. “Since announcing our first purchase order in the first quarter of 2019, we have to-date received purchase orders reflecting over 7,000 retail locations across 31 states. Based on the strength of our brand and innovation pipeline, we expect to continue to add both new retail chains as well as deepen our penetration of existing chains over the coming quarters. Our investment in brand awareness, including our partnerships with Rob Gronkowski, Gillette Stadium and Patriot Place have provided a powerful platform to further develop the CBDMEDIC brand and launch a new nutrition & wellness brand, which will mark our entry into the larger market of ingestible CBD products in the first half of 2020. We have also achieved important milestones with the growth of our CBD CLINIC brand. In Q3, we added an additional 2,500 health care practitioner offices to our network as well as having added significant scale with the addition of a large national distributor to the chiropractic market. With both accelerating consumer and retail adoption of CBD products we expect strong growth in 2020 and beyond for both our CBDMEDIC and CBD CLINIC brands.”

Mr. Antelman provided the following guidance: “Based on existing and anticipated purchase orders we expect Q4 2019 revenue to result in quarterly sequential growth of 20-25%, and in particular driven by CBDMEDIC in the F/D/M channel.”

Financial Results

Revenue for the third quarter of 2019 of $4.1 million represents an increase of $2.0 million year-over-year (“YoY”), or 97%. Sales attributable to CBD CLINIC™ were $2.9 million during the third quarter of 2019, representing approximately 71% of total sales and reflecting a YoY increase of approximately 43%. Abacus recognized $1.2 million of revenues for CBDMEDIC™ in the third quarter of 2019 representing approximately 29% of total sales and reflecting a sequential increase of approximately 72% from Q2 2019.

Gross profit for the third quarter of 2019 was $2.4 million representing a gross margin of 60.1%, an increase from 59.3% for the YoY period. The gross margin improved as the Company benefitted from economies of scale as well as reduction in the purchase price of its products.

Net cash flows used for operating activities was $(4.0) million for the three months ended September 30, 2019, a decrease of $4.2 million compared to the three months ended September 30, 2018. The decrease in cash provided by operating activities was primarily due to the fair value change of the derivative liability, deferred income taxes, advances to supplier, and prepaid services, offset by increases in trade payables and decreases in inventory and prepaid expenses.

Net cash flows used for operating activities was $(14.8) million for the nine months ended September 30, 2019, a decrease of $16.1 million from the nine months ended September 30, 2018. The decrease in cash provided by operating activities was primarily due to an increase in sales volume, marketing, advertising, and other expenses as well as an increase in trade receivables, advances to supplier, prepaid services and inventories, offset by increases in trade payables.

Year-to Date Business Review

The third quarter saw a continuation of new purchase orders and shipments to pharmacy and supermarket retailers, including national chains, across select states. Purchase orders received to date, including the Company’s announcement today of an additional 2,400 stores where CBDMEDIC will be rolled-out in January 2020, represent approximately 7,000 retail pharmacy and supermarket locations across 31 states, an increase of 133% and 29%, respectively from the 3,000 locations and 24 states reported at the end of the second quarter of 2019 and reflecting strong momentum of retailer adoption.

The 7,000 locations that will carry CBDMEDIC products represent approximately 20 chains and reflects only 20% penetration of the approximately 34,500 retail location operated by these chains. The Company expects that these chains will continue to roll-out their CBD offerings over the coming quarters to additional states and stores at a faster rate than they have done so during 2019. The Company views the F/D/M channel as being in the early stages of its adoption of CBD products and that this adoption is accelerating.

During the third quarter, the Company began marketing to the convenience store channel, representing over 150,000 locations across the United States. The Company has partnered with a large distributor to this channel and has developed a number of unique CBDMEDIC SKUs, with smaller sizes and lower price points. The Company views this segment as a natural extension in its efforts to achieve wide distribution of CBDMEDIC products to consumers and anticipates initial sales to this segment in the first quarter of 2020.

The CBDMEDIC brand continues to offer what the Company believes to be the widest portfolio of topical CBD SKUs to its retail partners, across its pain relief and skincare lines. While there is still limited data available to accurately evaluate sell-through rates, based on IRI industry data* for the 4 and 13-week period ending October 6, 2019, to the best of the Company’s knowledge the CBDMEDIC brand continues to generate the highest revenue per store in the largest retail pharmacy chain, in stores where it is carried, relative to other topical CBD brands. (*Source: https://www.iriworldwide.com/en-CA/)

The Company undertook significant marketing efforts in the third quarter to build brand awareness, including a partnership with Gillette Stadium and Patriot Place, announced in October 2019, which leverages the partnership with Gronkowski which was announced in August 2019. The CBDMEDIC brand has received significant coverage in both traditional and digital media platforms as a result of Gronkowski’s advocacy efforts to allow CBD to be used in professional sports. The Company believes its agreement with Gronkowski will result in increased consumer awareness of the CBDMEDIC brand and it has experienced strong retailer interest in marketing programs involving Gronkowski, which the Company has begun to roll-out.

Sales of CBD CLINIC in the third quarter continue to reflect a leading position that the Company’s topical products have in the health care practitioner market. The Company continues to grow its distribution into the segment and recently announced an agreement with WBC Group, LLC (“WBC”). WBC is one of the largest distributors of medical supplies to chiropractors, physical therapists, massage therapists and other health and wellness professionals in the United States. Under the agreement, WBC, through its wholly owned subsidiary MeyerDC™, will market and distribute CBD CLINIC products to its customers. MeyerDC is the official distributor of the American Chiropractic Association and operates distribution centers in California, Ohio and Florida. The Company believes that there is significant potential for further penetration of this market and will continue to seek additional distribution partners as well as build out its internal sales team to service this market. The Company plans to introduce new lines of products targeting specific segments within the health care practitioner market in 2020. The Company is also increasing its digital marketing efforts to both target new customers as well as improve engagement with its existing customers.

The Company continues to pursue international expansion with Europe and Canada as its principal focus. Recent regulatory changes in Canada offer the opportunity for the Company to potentially have its products introduced into the market and the Company expects to hold discussions with several Canadian parties in this regard. With regards to Europe, where the regulatory environment continues to evolve, the Company continues to evaluate entry strategies and is advancing discussion with potential partners. The Company also has ongoing discussions with potential partners in other smaller but attractive territories regarding the sale of its products.

The Company previously announced its intention to launch a new health and wellness brand of ingestible products as part of its partnership with Rob Gronkowski and is actively preparing for this launch which is expected in Q2 2020. The Company plans to initially launch the new brand online and into a limited number of retail locations until such time as the FDA provides a regulatory framework which will allow major national retailers to bring ingestible CBD products onto shelf. When this occurs, the Company believes that it will be in strong position to have its brand of ingestibles widely distributed across the chains carrying its topical products.

The Company continues to have a strong liquidity position with over US$28.2 million of cash and no debt as of September 30, 2019. While the Company expects to make meaningful investments in sales, marketing and product development over the coming quarters, it expects the growth in revenue and cash on hand to meet its funding needs.

The Company further advises that it is in the process of securing the extension of lock-up agreements of key shareholders which were entered into at the time of the Company’s reverse-take-over in January 2019. The Company expects to announce in the next few weeks that certain shareholders holding proportionate voting shares, which are convertible into approximately 8 million subordinate voting shares, representing approximately 37% of the Company’s total basic shares outstanding (assuming conversion of all proportionate voting shares) will voluntarily agree to an extended lock-up release schedule, which will limit the sale of these shares to the following schedule: 60% shall be released from trade restriction on June 30, 2020, 15% on July 29, 2020 and 25% on January 29, 2021. Perry Antelman, CEO, commented, "The extension of the lock up agreements by these shareholders signals their ongoing support for the Company. We expect the new lock-up release schedule to reduce uncertainty regarding the release of currently locked-up shares over the coming quarters.”

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 third quarter 2019 results as detailed below:

The conference call replay will be available until November 28, 2019.

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 intended use by the Company of its cash on hand, and the future cash position and financial results of the Company 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 a company engaged in the development and commercialization of over-the-counter (OTC) topical medications with active pharmaceutical ingredients. Abacus’ products contain organic and natural ingredients, including hemp extract or oil containing CBD from 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 formulations to provide safe and effective relief. Abacus currently offers two lines of products: (i) CBD CLINIC™, marketed to the professional practitioner market, and (ii) CBDMEDIC™, marketed to the consumer market. Abacus’ products are offered across the United States and are produced by a contract manufacturer in a cGMP compliant and audited manufacturing facility.

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

View source version on businesswire.com: https://www.businesswire.com/news/home/20191121005460/en/