Simply Better Brands Corp

XTSX:SBBC

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, everyone. Thank you for participating in today's conference call to discuss Simply Better Brands Financial Results for Year-end 2022.

Before we begin, let me remind everyone of the company's safe harbor disclaimer. Certain portions of our comments today will concern future expectations, plans and prospects of the company that constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include all statements containing verbs such as aims, anticipates, estimates, expects, believes, intends, plans, predicts, will, may, continue, projects or targets and negatives of these words and similar words or expressions. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated by the forward-looking statements.

Factors that could affect our actual results include, among others, those that are discussed under the heading Risk Factors in our most recently filed reports with the SEC, including our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K.

In addition, this call includes discussions of certain non-GAAP financial measures, including adjusted EBITDA. The most directly comparable GAAP measures and reconciliations for non-GAAP measures are available in the earnings release and other documents posted on the company's website at simplybetterbrands.com under Investor Relations.

I would like to remind everyone that this call will be available for replay through May 16, 2023, starting at 7:30 p.m. Eastern Time tonight. Executing the conference call today is Kathy Casey, CEO; and Brian Meadows, CFO of Simply Better Brands Corporation.

Subsequent to the formal presentation, we will not be executing a live Q&A session, but answering questions submitted in advance of the call. Could you have additional unresolved questions, we encourage you to reach out to our Investor Relations website.

Now I would like to turn the call over to CEO of Simply Better Brands, Kathy Casey.

[Kathy Casey, executive]

Thank you, Liera. I really appreciate it. And thank you, everyone, that's joining us today.

During the call, we plan to cover 3 topics: first, an overview of Simply Better Brands; second, a review of our Q4 '22 and year-end financials; and finally, some insight into the outlook and growth drivers of the company in 2023.

After taking Simply Better Brands public back in December of 2020, we are laserly focused on growth, both organically and through an aggressive acquisition strategy to diversify our portfolio, expand our capability and, of course, to acquire top talent.

Now as we sit here less than 3 years later, we've completed 6 acquisitions. We operate in 3 core verticals: plant-based, clean ingredient food and next-generation Beauty. Our mandate is to drive growth by relentlessly following the consumer and innovating to solve new problems.

As a result, we source our growth through consumer-centric innovation, acquisition and expansion both in the category and also in channel. The business model is fueled by buying, building and if and when it makes sense, selectively selling brands, both in a direct-to-consumer and B2B environment.

The key focus for us is our rapidly growing TRUBAR brand, which we'll spend some time on today, driven by expanded distribution, the brand delivered $10 million in 2022 and it's forecasted to accelerate to a whopping $25 million during the year of 2023.

One of the drivers of Simply's success is the access to strong and experienced talent from companies like Procter & Gamble, Kellogg and RD Reynolds that we have in our leadership team and on our Board of Directors. Essentially, building brands is in our DNA.

In 2022, I'm pleased to say that we delivered a breakout year with net sales of USD 65.4 million, compared to $5.6 million in 2021, and we achieved positive adjusted EBITDA f $1.2 million. If you recall last year, we actually did not achieve positive EBITDA. And we did this all while executing an accretive gross margin of 68%.

I do want to pause here and thank everyone from our team, our Board of Directors and many, many key stakeholders for their dedication and discipline to enable these stellar results.

As we look out to 2023, we reaffirm our guidance. We plan to exceed $80 million in revenue on top of, of course, $65 million in 2022 to achieve adjusted EBITDA in the range of $3 million to $4 million or 3 or 4x this year or 3 or 4x 2022, and we're forecasting really the following growth drivers: distribution expansion of TRUBAR, customer acquisition on PureKana, No B.S. entering Walgreens nationally this fall, and the portfolio expansion of our new wellness brand Vibez. Net, we are seeing momentum across what we call the Fab 4 or our top 4 strategic growth brands.

I wanted to pause and highlight a couple of critical milestones that we accomplished here in 2022. Our small revenue growth of 4x a year ago. Margin expansion of 6 points, 68% gross margin, adjusted EBITDA, $1.2 million versus a loss of the previous year, all while working to buy down our debt. So promissory and convertible debt reduction of $4.5 million.

PureKana that's been in the top 20 over the last couple of years now ranks as the #2 CBD company in the U.S., when we compare and look at revenue and revenue size of publicly traded companies. TRUBAR, 10x a year ago; No B.S. Skincare, primarily a direct-to-consumer brand entered CVS into brick-and-mortar last year. We'll see more of that happening again in 2023. And then of course, we launched our new wellness brand called Vibez.

We are pleased with our financial progress and commercial progress in 2022, and we're confident in our talent, our strategy and our execution going forward.

Let me now transition to the overview of our mission. Our highest order is to democratize wellness. We believe that wellness should be accessible to all. And we accomplished this mission by building disruptive brands in emerging plant-based and holistic wellness space.

Our focus remains to emotionally connect with millennials and Gen Xers on their wellness and active lifestyle journey. To accomplish these results and assist us here. We have an extremely talented Board of Directors and leadership team. I'm going to highlight the talent here from right to left.

Jeff Yauck, Board member, Co-Founder of the PureKana brand, an innovator and a serial entrepreneur. Michael Galloro, Board Member, Principal at ALOE Finance, and CPA with extensive experience in M&A. Kingsley Ward, a new Board member, Chairman and Managing Partner of VRG Capital and the Chairman of Clarus Securities. Brian Meadows, our talented CFO, with strong operational experience in both public market and start-up background.

Paul Norman, our Board Chairman, with over 30 years of experience at Kellogg, running a $9 billion P&L. And then lastly, myself, 30 years of experience at P&G and at Kellogg, in sales, marketing, general management across every class of trade. My last role at Kellogg is leading a $2 billion portfolio.

Simply Better Brands participates in 3 large and growing categories. Cosmetics at $77 billion, factor category at $7 billion, and the CBD hub market, that's roughly around $12 billion. Not yet on this page are 3 additional categories that we'll be entering here in 2023 via category expansion.

The $6 billion protein powder category with our TRUBAR brand, the $40 billion supplement category with Vibez, and the hemp pet category with PureKana. Enabling this mission to date our 3 core brands: PureKana, TRUBAR and No B.S. Skincare.

PureKana is our largest plant-based wellness branded today in a category of roughly 4,000 brands that performs, as I said earlier, in the top 2. This is due to effective ingredients, it's transparency and most importantly, it's efficacy.

TRUBAR they're absolutely delicious, gluten-free, vegan bar with 12 grams of protein and only 190 calories. It consistently exceeds category hurdles once placed at retail.

No B.S. Skincare bands 1,600 ingredients to garner the reputation as one of the cleanest skin care brands in the category. No B.S. sources volume from the lapsed consumers of large category players that no longer meet the consumers' demand for no bad stuff. Essentially, these 3 brands aligned with an informed consumer who's extremely mindful of what they put in on and around their body.

This past year, we also integrated and activated another plant-based wellness brand of Seventh Sense and launched a new brand called Vibez. Seventh Sense is currently sold exclusively online and primarily targets boomers focused on proactive solutions in the need state of pain and sleep.

Vibez just launched this past November with a keto gummy offering and will be a non-CBD grant, targets millennials in the preventative wellness space via subscription model and direct-to-consumer. Due to our extensive experience in affiliate marketing and subscription models, Vibez did $1.4 million in its first 60 days in late last year.

While simply originally started with only the PureKana brand, we have by design and through strong intention involved in a disruptive innovation-centric consumer products company, focusing on millennials and Gen Xers on their journey for wellness. This mandate is enabled us to now access more categories and consumers, but also diversify our revenue sources.

So as you can see here, the rapid expansion of TRUBAR has primarily -- or initially evolved in almost half of our revenue here in this past Q1. Net for our shareholders and our investors, we are not a cannabis company, but a disruptive and growing brand incubator of consumer goods.

Having a bit of color to the TRUBAR revenue we just reviewed. TRUBAR had a breakout year in 2022 in a very, very competitive category of snack or protein bars. Our great pace and nutritional credibility has the by recognized by Healthline as a top 10 protein bar in the category. New distribution with retailers like Costco and 7-Eleven drove sales to 10x a year ago.

Costco's sales velocities performed so consistently above hurdle that we are today in distribution in every U.S.-based Costco Club. And it is that momentum that drives the $25 million forecast for TRUBAR coming up here in 2023.

Our brands, which primarily started online, now enjoy an omni-channel footprint in virtually every class of trade in the U.S. and in Canada. As you can see here, some notable retailers include Amazon, CVS, 7-Eleven, Whole Foods and since our last discussion, TRUBAR has signed a national distribution agreement with Sodexo, one of the largest food service retailers in the world.

We will be entering 510 college and universities coming up this fall with TRUBAR in the United States market. No B.S. has added T.J.Maxx and BJ's Wholesale.com and is slated to enter Walgreens later this year nationally. While our PureKana offline expansion continues to enter C-stores and distributors regionally here in the United States.

Enabling this expansion on the previous page is innovation. Through extensive research, we follow consumers on their wellness journey. We innovate to solve problems in the following consumer need states, calm, sleep, pain, immunity, weight loss, focal acuity, energy and recreation. And we'll be adding a new need state here in 2023 of healthy hair or hair loss maintenance.

We activated those consumer insights with innovation across our portfolio. These expansion plans are fortified with not just line extensions, but also incremental categories. To ensure that we maximize the growth of the brands, and we follow where the brands can ultimately stretch.

Vibez will translate the new states of calm, weight loss, immunity, healthy hair and focal acuity. TRUBAR expands into protein powder and additional flavor extensions throughout 2023, while No B.S. Launches all-natural deodorant and a set of broader and more powerful skin care packages.

Seventh Sense strengthens their pain offering and expands more broadly into sleep, while PureKana doubles down on this expansion in the pet. Insight-driven innovation drives incrementality and its core to securing consumer loyalty to our brands. That's a bit of a background of where we've been and where we're going.

And I'd like to turn it over now to Brian, our CFO. We think he can share some light on how these strategies come to life financially. Brian?

[Brian Meadows, executive]

Thank you, Kathy, and good morning, everyone. Looking at the first slide, revenue progression over a number of quarters. This graph tells a Simply Better Brands major growth story that really took off starting in the fourth quarter of 2021.

Quarterly sales in 2021 were single digits and were based on PureKana and No B.S. for most of the year. In August, we acquired TRU Brands, and they began to contribute materially to SBBC's sales growth starting in Q1 2022. PureKana's new marketing program started to produce tremendous top line results in the fourth quarter of 2021 and has been delivering solid numbers ever since. No B.S. Skincare also launched the 3,200 CVS locations in 2022, had a further diversified growth.

The fourth quarter of 2022 again demonstrated continued quarterly growth led by PureKana and TRUBAR. Preliminary sales for Q1 2023 are higher by approximately $1.8 million over the fourth quarter of 2022. As a slide revenue by brand, which was presented by Kathy earlier, we're starting to see growth is spread across more of the brand true representing 41% of Q1 preliminary revenues compared to only 15% a quarter earlier in the fourth quarter of 2022.

Moving to the next slide, looking at the fourth quarter results for 2022. Revenue for Q4 2022 was $23 million, an increase of $16.5 million or 254% growth compared to $6.5 million in Q4 2021. PureKana's fourth quarter revenue was $17.7 million compared to $6.1 million in Q4 2021, which is an increase of $11.6 million or 290%. PureKana's revenue increase was driven by growth of new customers as well from subscription revenues.

Through Q4 2022, revenue was $3.4 million compared to $0.2 million in Q4 2021. Through strong sales performance in the fourth quarter was driven primarily by orders from Costco and U.S. and from major retailers in Canada.

No B.S. revenue in Q4 2022 was $0.3 million compared to $0.2 million in Q4 2021, which is an increase of $0.1 million or 150%. Revenue from SBBC’s other subs was $1.6 million in Q4 2022 compared to nil in the prior period as these businesses were acquired in 2022.

Gross profit in the fourth quarter of 2022 was $16.1 million or 70% of revenue compared to $4.3 million or 66% of revenue in Q4 2021. Gross profit margin was up 4 percentage points in Q4 2022 over Q4 2021, and this improvement was driven by lower product costs as well as higher average order values at PureKana and No B.S.

I'd like to highlight here that the gross margin is much higher with our online sales than our B2B margins. In 2022, 83% of our sales came from online. Online sales gross margins can be in the mid- to high 70s compared to our B2B margins that range 30% to 50%. It is important to note as we look at our 2023 guidance that we expect gross margin to be reduced in 2023, as we expect to have a higher proportion of our sales generated in the B2B sector with such retailers at Costco and CVS.

Also, as we discussed next, marketing expenses are much higher to generate online sales compared to marketing required to support our B2B sales.

Looking at operating costs in the fourth quarter of 2022, it came in at $19.9 million, an increase of $13 million compared to $6.9 million in Q4 2021. Majority of the operating cost increase incurred in the fourth quarter for marketing expenses and increased $9.2 million over the fourth quarter in 2021.

The increase in marketing is directly related to the increase in PureKana sales, which increased from $13.8 million in 2021 compared to $50.3 million in 2022. Again, PureKana come from the majority of the marketing expenses in the fourth quarter at 85% of Q4 marketing expenses.

Noncash items of $4.1 million within operating expenses consisted of share-based payments of $0.8 million and amortization expenses of $3.3 million. These 2 noncash expenses represented 21% of Q4 operating expenses.

Customer service support represented 5% of operating expenses in the fourth quarter and increased $0.8 million over the prior year. These expenses are also directly related to the increase in sales of PureKana. Salaries and wages represented 7% of our total expenses in the fourth quarter and increased $0.5 million from Q4 2021.

Salaries and wages increased mainly due to the additional hiring of salespeople and the staff that were added as part of the 2 acquisitions completed in 2022.

Other expenses for Q4 2022 were $2.7 million compared to $1.7 million in the fourth quarter of 2021. The main components in the fourth quarter of 2022 for other expenses were finance costs, the amount of $0.5 million and impairment of intangibles in the amount of $1.6 million. The company recorded a net loss of $5.4 million in the fourth quarter compared to a net loss of $4.2 million in the fourth quarter of 2021.

Importantly, the company generated positive adjusted EBITDA of $0.6 million in the fourth quarter of 2022, an increase of $1.7 million over the adjusted EBITDA loss incurred in the fourth quarter of 2021. The company has achieved 3 consecutive quarters of positive adjusted EBITDA in 2022.

Moving to Slide 16, the year-end results for 2022. Revenue for the year 2022 was $65.4 million, an increase of $49.8 million or 319% compared to $15.6 million in the prior year. The company outperformed its revenue guidance of $55 million to $60 million by 13%.

PureKana's revenue for the full year of 2022 was $50.3 million compared to $13.8 million in 2021, which is an increase of $36.5 million or 264%. TRU’s revenue for 2022 was $10.6 million compared to $0.5 million in 2021. TRU’s strong sales performance in the year was driven primarily by orders from Costco in the U.S. and major retailers in Canada. No B.S. revenue for 2022 was $2.1 million compared to $1.3 million in 2021, which is an increase of 62%. Revenue from the SBBC’s other subs was $2.4 million in 2022 compared to nil in the prior period of these businesses were acquired in 2022.

Gross profit for 2022 was $44.6 million or 68% of revenue compared to $9.7 million or 62% in 2021. The company outperformed its latest guidance, which was to achieve gross profit in the range of 63% to 65%.

Operating costs for year 2022 were $54.3 million, an increase of $34.8 million compared to $19.5 million in 2021. Again, the majority of the operating costs increased in 2022 was due to marketing expenses and increased $27 million over 2021 and are directly related to the increase in PureKana revenue in 2022, which we covered earlier.

Noncash items of $9 million included 2 expenses, share-based payments of $4.3 million and amortization expenses of $4.7 million. These noncash operating expenses represented 17% of total OpEx. Other expenses for the year, December 31, 2022, were $3.6 million compared to other expenses of $3.1 million in 2021 for an increase of $0.5 million. Other expenses mainly consists of finance costs of $1.4 million and impairment of intangibles of $1.6 million.

During the 12 months -- for the 12 months ended December 31, 2022, the company recorded a net loss of $12.3 million, compared to a net loss of $12.8 million in 2021 or an improvement of $0.5 million.

The company achieved positive adjusted EBITDA of $1.2 million for 2022, which is an increase of $4.5 million over the adjusted EBITDA loss incurred in 2021. Again, the company achieved its guidance of obtaining positive adjusted EBITDA for 2022.

Moving to Slide 17, debt reduction. Kathy highlighted earlier, we made tremendous progress to reduce our short-term promissory notes, convertible debentures since the start of from 2022. We've been able to reduce short-term promissory notes by $3.5 million and convertible debentures by a net $1 million for a total debt reduction of $4.5 million.

Subsequent to year-end, we paid down an additional $1.7 million convertible debentures that came due in February 2023. We had 2 successful capital raises in 2022 and in February 2023, which has facilitated the repayment of this debt. In the third quarter of 2022, we raised approximately CAD 4 million and in February 23, we released an additional CAD 7 million.

We have also been increasing our use of short-term lines of credit for a number of our subsidiaries, including TRU Brands and No B.S. These credit lines are typically tied to large customer purchase orders and the average life of these credit facilities is approximately 3 to 5 months in length. We're going to see these short-term loans fluctuate on our balance sheet as we finance large customer POs. These credit lines are being used to support our rapid growth with customers such as CVS and Costco.

A very recent important use of these facilities was to finance the national Costco order for TRU, which provided up to $6 million in our revolving line of credit to finance these POs. We also have AR factoring with C2FO, which provides us quick access to cash and large customer receivables at a lower rate than our PO financing. We're thus able to factor large customer receivables and pay down our higher cost PO financing lines of credit.

Moving to Slide 18, the balance sheet. Cash on hand was $2.3 million at year-end 2022 and a more recent number April 30, 2023, cash on hand was $7.1 million. Total assets at year-end were $36.6 million with liabilities and $24.5 million. And again, highlighting we did reduce our convertible ventures by $1.7 million in February 2023.

Looking at our shares outstanding, currently sitting at 71.6 million, fully diluted shares outstanding of 95.9 million.

Moving to our outlook, Slide 19. Kathy covered earlier, our revenue outlook is to exceed $80 million; gross margins between 58% and 60%, achieving adjusted EBITDA in the range of $3 million to $4 million. Our preliminary revenue for Q1 2023 came in strong at $24.8 million with preliminary gross margins of 55%. As I discussed earlier on the call, we do expect average gross margin to be lower in 2023, as we get a higher proportion of revenues from B2B customers compared to online sales in 2023.

The revenue distribution by brand slide that Kathy spoke to earlier, shows, for example, TRU account 41% of preliminary Q1 sales compared to 15% in Q4 2022. TRU's gross margins are primarily from B2B, which range in the low 30s to high 40s compared to PureKana, which is mainly online, which averages low to mid 70s and it's almost 100% online sales.

Now I'll turn it back over to Kathy to wrap up.

[Kathy Casey, executive]

Thank you, Brian. I appreciate you covering those outstanding results.

As we wrap up, we will continue to source our growth through incremental categories, expanded channels and disruptive innovation. As you can see here that rate of growth has grown at a rate faster than our market cap suggests. I think today, the slide is a little bit a few days old, that says 27.9%. I believe our market cap today is in $33 million to $34 million or significantly less than our projected onetime annual sales.

Our focus is to remain vigilant on delivering sustainable growth and profit improvement until our stock price recognizes those results.

To summarize where we started today, we're very, very proud of what the team accomplished in 2022. It was a year of significant financial and commercial success. From key metrics, of course, of revenue to margin to EBITDA to debt, but then also the commercial success of the brands like PureKana, TRUBAR, No B.S. and the exciting -- really exciting launch of Vibez, which we envision will do in the $7 million to $10 million this range -- range this year from roughly $1.4 million in 2022.

As we wrap up today's call, we delivered strong top line growth, gross margin expansion, all while achieving positive adjusted EBITDA and continuing to reduce our debt. We are confident in our talent, our strategy and equally as important, our execution to deliver the 2023 outlook.

I will now turn it back to Liera, and we can address some questions that were submitted in advance of the call. Liera?

Liera had checking and said she's having some technical difficulties on her side, so I can just address these 2 questions.

[Kathy Casey, executive]

We are not doing live Q&A, but we are doing some submitted questions. And for anybody on the phone that ever has any questions, please feel free to submit them in advance of our quarterly earnings. And then also, certainly, as subsequent to this call, feel free to submit anything into the Investor Relations line. We'll be sure to answer them.

We had 2 -- we had 2 questions come in from Noel Atkinson, who works for and with Clarus Securities. He is now the analyst following our stock.

And the question from Noel asked about PureKana and the rapid growth of your comment in 2022? And what do we see about the potential of that brand as we look at 2023?

PureKana did indeed experienced a growth of over 250% in 2022, and it was primarily driven by what Brian referenced earlier, which is our customer acquisition strategy. In 2023, we do see that PureKana still has room to grow. We envision actually is going to grow double digit. However, we believe it is strategically important to diversify the portfolio.

Again, as I said earlier, we're not a cannabis company, we're a consumer products of the company. And we see both TRUBAR and Vibez actually growing at a rate faster than PureKana in 2023, as we continue to diversify the portfolio. And we'd like the company to be able to grow agnostic of FDA regulations by having a portfolio of both CBD brands and non-CBD brands.

The second question from Noel was about marketing spend. And I do know that there are questions that come in from investors, shareholders around our marketing spend as a significant percentage of our sales. And that's driven by the life cycle of the company right now.

If you look at all spend, all spend Simply Better Brands is made with significant rigor. I mean we consistently look for opportunities to be able to drive marketing efficiencies and we'll continue to do so. However, our brands are in nascent and emerging brands in the categories they're in, and we believe we need to invest to scale and grow those to drive trial, awareness and ultimately, value to the company to shareholders. The brands have to get bigger and growth cost money.

We do, however, though, see marketing spend as a percentage of revenue reduced as our product and our marketing mix changes. For example, our Q1 preliminary data suggests that as a percent of sale, our marketing expenses will be down 24 points. A lot of that, of course, driven by the marketing mix of TRU coming in. And as Brian had referenced earlier, the amount of marketing spend against TRU and No B. is a significantly lower rate than attracting new customers online.

The biggest portion of the marketing expense is on our PureKana brand, and PureKana spend against the customer acquisition initiative adds 20,000 customers to the brand each month. And a portion of those customers then enter into a subscription cycle. We pay to acquire the customer the first time. And then we do not pay after the first acquisition charge.

It has been an investment of spend, but that's also why we are now the second largest brand in the CBD category among 4,000 brands because of that investment of acquiring these customers, and then taking care of these customers in the sales funnel and keeping them in.

So -- and I will then -- we will return it back to you because that's the answer for both of those questions.

Yes. I don't hear Liera coming back in, she may be on the other line, but let me just wrap up by saying thank you for everyone that joined today. As I said, we remain confident about the outlook for 2023 and our talent and ability and strategy to execute it. Thank you.

[Operator]

Thank you. Ladies and gentlemen. This concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.