Abacus Health Products Reports Second Quarter 2019 Financial Results

Q2 2019 Financial Summary

• Revenue increased 55.2% YoY to $3.2 million
• Gross profit increased 64% YoY to $2.0 million
• Gross margin increased YoY to 61.3% from 58.0%

Second Quarter and Recent Operational Highlights

• CBD CLINIC™ continued to perform well with revenue increasing 18.1% YoY, from $2.1 million to $2.4 million.
• CBDMEDIC™ revenue increased to $0.7 million, a 160% increase from the first quarter of 2019. Purchase orders received to date represent over 3,000 retail locations across 24 states. Most retail chains are taking 8 to 13 unique CBDMEDIC™ SKUs.
• The CBDMEDIC brand continues to generate the highest revenue per store in CVS stores where it is carried. In-store product placement which has recently moved from “end-cap” to “in-line” (where products are placed on shelf in the respective categories) is a significant achievement and expected to positively impact sales velocity.
• Significant increase in retail channel marketing activities has recently been initiated and will continue to expand in second half of year to support brand equity.
• Commenced trading on the OTCQX under the symbol “ABAHF”.
• Partnership with Rob Gronkowski (Gronk), a three-time football world champion, announced today, expected to increase CBDMEDIC brand awareness and will be the basis for the planned launch in 2020 of a nutrition & wellness brand, expanding Abacus’ offering to the larger CBD ingestible market.

“In the second quarter we continued to build the foundational blocks that will allow us to maintain our leadership in topical CBD products and benefit from the inflection point that we expect to occur over the next few quarters across the food, drug and mass (“F/D/M”) channel,” said Perry Antelman, CEO. “Since announcing our first purchase order on February 28, 2019 we have to-date received purchase orders reflecting 3,000 retail locations across 24 states. Additionally, we have a strong pipeline of retailers expressing interest in our products; in particular, retailers appreciate the breadth and quality of our products, which are the result of over a decade of R&D. Our new partnership with Gronk offers us a unique position from which to communicate the value of our pain relief products to consumers and his health conscious lifestyle is an excellent fit for the planned launch of a new nutrition & wellness brand which will mark our entry into the larger market of ingestible CBD products in 2020.”

Financial Results

Revenue for the second quarter of 2019 of $3.2 million represents an increase of approximately $1.1 million year-over-year (“YoY”), or 55%. Sales attributable to CBD CLINIC™ were $2.4 million during the second quarter of 2019, representing approximately 75% of total sales and reflecting a YoY increase of 18%. Abacus recognized approximately $0.7 million of revenues for CBDMEDIC™ in the second quarter of 2019 (there were no material CBDMEDIC related revenues in the second quarter of 2018) reflecting a 160% increase over the first quarter of 2019. For the most part CBDMEDIC revenues reflect initial purchase orders received during the quarter as well as some restocking by existing customers. Revenues for CBDMEDIC™ are expected to increase in the second half of the year as a result of both new retail chains placing initial orders as well as existing customers placing restocking orders. Approximately $0.1 million in other product sales were recognized in the second quarter.

Gross profit for the second quarter of 2019 was approximately $2.0 million representing a gross margin of 61.3%, an increase from 58.0% for the YoY period. The gross margin improved as the Company benefitted from economies of scale as well as reduction in price of certain raw materials.

Net cash flows used in operating activities was $(5.2) million for the second quarter of 2019, a decrease of $(5.5) million compared to cash flows provided of $0.25 million for the second quarter of 2018. The increase in cash used by operating activities was primarily due to an increase in sales volume, marketing, advertising and other expenses as well as increase in trade receivables and inventories.

Year-to-Date Business Review

The second 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 represent approximately 3,000 retail pharmacy and supermarket locations across 24 states, an increase of 50% and 118%, respectively from the 2,000 locations and 11 states reported at the end of the first quarter of 2019 and reflecting strong momentum of retailer adoption.

The 3,000 locations carrying CBDMEDIC products represent approximately 18 chains and reflects an approximate 14% penetration of the total number of stores operated by these chains. The Company expects that these chains will continue a staged roll-out over the coming quarters to additional states and stores. Additionally, the Company is confident that based on discussions it is having with over ten new chains that it will increase the number of retail doors that carry CBDMEDIC™ products to between 5,000-6,000 by the end of the year. The Company expects that meaningful growth in store locations will continue during 2020 and beyond and views the F/D/M channel as being in the early stages of its adoption of CBD products.

During the second quarter Abacus received its first purchase orders for its skincare line products for the treatment of acne, eczema, and itch and rash. Abacus’ topical product line continues to be among the broadest in the industry and retailers are generally stocking between 8-13 unique SKUs.

Based on IRI industry data¹ for the 13-week period ending August 11, 2019, CBDMEDIC™ is the leading selling CBD brand in CVS (NYSE:CVS) based on revenue generated per store per month where CBDMEDIC™ is sold. Furthermore, CBDMEDIC™ holds 4 out of the top 10 CBD SKUs, as represented by dollar sales per store where CBDMEDIC™ products are carried. Management is confident that the increased investment in consumer marketing that the Company is making will increase sales velocity over the coming quarters.

Abacus continues to invest in the development of additional channels and recently signed a partnership with a major distributor to the convenience store channel and expects to launch an offering for this segment in the fourth quarter of 2019 with appropriate product sizes and packaging.

Sales of CBD CLINIC™ in the second quarter continue to reflect a leading position that the Company’s topical products have with health care practitioners. The Company did however experience a headwind during the quarter as certain credit card processers with which it worked decided to exit the CBD market. This resulted in the Company’s inability to process some orders for a period of time while it identified and began working with alternative credit card merchants. Furthermore, the Company received a large pipeline fill order from a distributor at the end of the first quarter which would otherwise have landed in the second quarter, accounting for some of the sequential decline in CBD CLINIC revenue in the second quarter. Abacus plans to introduce a new line of massage creams, as well as different product sizes into the healthcare practitioner segment in the second half of 2019 and continues to believe that this segment represents a significant opportunity.

During the second quarter Abacus continued to pursue opportunities for international expansion. In particular, the Company has received positive feedback from several groups in Europe who believe the Company’s products will be well received. The Company is advancing discussion with several potential partners so as to be in position to offer its products in certain European countries in the first half of 2020. The Company also has ongoing discussions with partners in other territories regarding the sale of its products.

The Company today announced an exciting agreement with Rob Gronkowski. The agreement with Gronkowski and related agreements include payment of an upfront fee, royalties to be derived from a new sports-oriented nutrition & wellness brand that is planned to be launched, and an issuance of 302, 302,835 subordinate voting shares in the Company and warrants to acquire 35,666 subordinate voting shares at a price of $15.00 per share. Additional warrants are issuable on an annual basis during the term of the agreement. The partnership includes a commitment by Gronkowski to collaborate with the Company in the development and marketing of new and innovative products as well as support the Company’s existing products in a manner that Abacus believes will meaningfully increase awareness with consumers and retail buyers. Additionally, as part of the new brand planned to be launched in 2020 Abacus intends to pursue the larger market of CBD ingestible products.

The Company continues to have a strong liquidity position with over US$32 million of cash and no debt as of June 30, 2019. While the Company expects to make meaningful investments in sales and 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’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 second quarter 2019 results as detailed below:

The conference call replay will be available until September 26, 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

1 https://www.iriworldwide.com/en-CA/

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