Veritas Farms Inc. (VFRM) Q4 2020 Earnings Call Transcript

Veritas Farms Inc.  (OTCMKTS : VFRM) Q4 2020 earnings call dated Sep. 17, 2020

Corporate Participants:

Derek Thomas — Vice President Of Business Development

Alexander Salgado — Chief Executive Officer

Dave Smith — Chief Operating Officer

Mike Pelletier — Chief Financial Officer

Dale Bergman — Securities and Exchange Council

Analysts:

Chelsea Groton — — Analyst

Harvey Bergman — — Analyst

Henry Geisel — — Analyst

Steve — — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to your Veritas Farms Investor Call. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to Derek Thomas, Vice President of Business Development. Sir, the floor is yours.

Derek Thomas — Vice President Of Business Development

Thank you very much. Good afternoon, everyone. Before management begins, please note that the presentation, which will be made on the shareholder conference call contains forward-looking statements. The statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be material — materially different from any future results, performance or achievements expressed or implied by our forward-looking statements.

Examples of forward-looking statements include projected financial information, statements of our plans and objectives for future operations, and statements concerning proposed new products and services, and in some cases, you can identify forward-looking statements by the use of terminology, such as, may, will, should, could, expect, plans, intends, anticipates, believes, estimates, predicts, potential and other comparable terminology. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements.

Actual events or results may differ materially. We undertake no obligation to update any of the forward-looking statements after today to conform them to actual results.

I would now like to turn the conference over to our CEO and Co-Founder of Veritas Farms, Alexander Salgado. Alexander, the floor is yours.

Alexander Salgado — Chief Executive Officer

Thank you, Derek. Good afternoon, everyone. And I first want to thank you all shareholders for being on this call and hope since you and your family have stayed safe during these unprecedented times during — in the world.

I would like to introduce to you some of my team members that are part of this call, I have Dave Smith, my Chief Operating Officer; Mike Pelletier, our Chief Financial Officer; and Dale Bergman, our Securities and Exchange Counsel.

I want to say how much we appreciate your support of the Company and we are excited on the progress we have done. Our number one concern has been to keep our employees first of all, safe and sending proper protocols for safety throughout the company. Since mid-March, we have had the team members from our Colorado headquarters working remotely while our production and farm operation in Aurora and Pueblo Colorado have remain opened operating under safety protocols outlined by the CDC and the State of Colorado. I can fully applaud our team for their ability to thrive in the face of considerable adversity over these past many months. We, as management and as a shareholder should be very proud of what we’ve accomplished thus far under these circumstances.

As you know, we continue to work very hard to be a trusted brand for our consumers and retailers. As such, I’m proud to say that we positioned ourselves as an industry leader among the top four or five companies in big retail and are now currently in over 8,000 stores from 5,000 stores, which we were at the end of last year. That is 3,000 more stores increase even during these pandemic times, and we announced in Q2, our expanded partnership with a large drug chain, which reported us access to additional 1200 retail outlets.

In addition, we announced in the Q2, we have secured a 900 store expansion with a major grocery chain in the Southeast part of the United States, which again very, very proud of. So as an addition, some of the stores that we are currently in are Krogers, Winn-Dixie, CVS, Wegmans, Weiss, Bi-Lo, Bartell Drugs, Supervalu, Kinney Drugs and then the list goes on. In addition to our continued retail distribution goes about to 8,000 stores, we’ve continued to rise in IRI data and are proud to say, based on IRI reports, Veritas’ Lip Balm is the number one top-selling CBD product in mass retail and drug chains in the country. As such, we believe we are well-positioned to maximize our opportunity, our exponential growth once chain retailers return to their pre-COVID plans for expanding product selection and the FDA provides a much-needed guidance on hemp products, particularly in edibles which alone potentially represent about 80% in sales of all the categories.

In addition, I’m proud to announce that we signed a major deal with one of the largest spirits and wine distributors in the country, with over $20 billion in revenues and over 200,000 point-of-sale throughout the United States. They selected us to launch their first CBD program in selective states throughout the country. And we are more than honored and look forward to working with them in the months ahead.

This should really reemphasize to all of us, as shareholders of the truly incredible team and Company we have really built. In addition, we also moved in, in the first quarter of 2020 into our 35,000 square foot facility — distribution and production facility in Aurora, Colorado. As you many — as you may know, we have all of our farming operations in Pueblo, but we need to expand our growth in the traditional facility which we have.

Some of the highlights of going to financial highlights as of June 30th of this past year is our total revenues through June 30th was $3.3 million compared to $4.4 million in 2019, the decrease was really due to the COVID impact in B2B channels, sales, where there’s less foot traffic in the stores. Our total revenues in the first — second quarter of 2020 were $2.2 million versus $2.9 million in Q2 of 2019.

What I think that we’ve been proud of we tripled our e-commerce revenues during this period of time from Q2 2019 to Q2 2020. While stay-at-home orders were implemented during these times, we began implementing marketing campaigns designed to take advantage of the significant increase in online customers. And intend to continue to dedicate resources to growing our e-commerce platform. Our efforts have resulted in significant growth in our e-commerce sales. As notified before, we’re tripling our revenues from last year to this year.

Our e-commerce revenue growth combined with the cost-saving steps we implemented have shown marked improvements in our gross margins when the same period of times of last year. While our inventory levels have remained consistent around $6.5 million from Q2 versus $6.6 million in Q2, 2019. The Company has also adjusted significantly during these times. And we reduced costs and expenses and reallocated dollars to e-commerce, which was very important. We’ve also launched Veritas Beauty and Pet lines in Kinney Drugs. We’ve also introduced an 8oz and 1-gallon hand sanitizer line that was launched in May and it has done phenomenally well with our consumers.

We also during this period of time, we hosted the first annual Virtual Wellness Summit. Our planting season, which started in May 2020 this year, has improved and we’re getting significant amount of great information on that and yields as well.

In addition to that, I’m excited to announce that we added Robert Schweitzer as a new member to our Board, Robert brings a wealth of experience in serving boards of public companies. And we are truly, truly lucky to have him on Board.

Some of the additional things that we worked on during these past six, seven months has been new product lines. As you are aware, where our product lines include a Beauty line which we launched late last year, our Pet lines, our sports creams and lotions, lip balms that we have, gummies and we also launched in this year, and our first quarter, we’ve launched our Zen roll-ons, which is doing very well.

In addition to that, we’ve all been working on a functional fleet and support product line that we will be looking at launching in the fourth quarter, which is basically — it’s an amazing product and we’ve been certainly doing a lot of R&D in that.

Another product line that we’re looking to work on and launch is an immune-boosting in few CBD product lines. Certainly, during these times and health — as always we’ve been a health and wellness Company, we are looking in into all possible enter CBD can we — can fuse with to help our customers and our clients.

Another important fact is that, as I said, as I signed — sent out a letter on second quarter, we signed an MOU, a Memorandum of Understanding with a internationally technology conglomerate to exclusively license and bring a proprietary extraction technique to the domestic US hemp market.

The proprietary patent-pending extraction process utilizes water-soluble technology to extract the natural full-spectrum essence of the hemp plant, including all of its cannabinoids, terpenes, and flavonoids. Additionally, water-based extraction will improve the bottom line by reducing the steps and components were required to extract. I am personally and our team I know that we’re in the process right now of validating the technology and this could potentially result in a paradigm shift in extraction and formulation of all whole hemp plants sold in the US. So this is something that we’ve been working on for many months and we were fortunate to sign this deal with our partners — with our Canadian partners.

From a branding perspective, we still keep working on social — our social media efforts, we do influencers, Facebook, Instagram and again made a significant focus towards e-commerce during these trying times.

Testing again for us is huge. We basically — as I said before many times, we do three rounds of testing of our products. We strive to be the trusted brand and many retailers already feel of that and that’s a huge success for our organization.

So we keep increasing influencer programs, our Facebook ads and posts that you probably have all have seen. As you can imagine, e-commerce has significantly increased during COVID as most retail foot traffic has decreased and we’re continuing to build out that social media presence.

And another subject that I would like to bring and this was last week, we heard of and we’ve been working on is two major developments have happened in the hemp industry. Number one is two months ago, the FDA submitted proposals to the OMB or its called the Office of Management and Budget, which reports to the executive branch and we’re looking really much hopeful to see what that entails as to legislation coming in from the OMB.

But even as important or more important is finally as a bill that was basically introduced to Congress, which is Bill 8179, which we’ve indicated to pass out to — to our social media emails and to all of our investors, which is really Congress finally being active or initiative on legislation instead of just waiting for the FDA to implement regulation. This is a significant step, as you can imagine, we’ve all been waiting this for almost five years now.

So I please — I ask that all of our investors and all of our friends reach out to what we sent out to your congressmen, so they can move forward on passing this bill. It’s fair to assume, and I will tell you that both from a marketing banking chain retail and online sales, the current restrictions in the close to the full spectrum hemp oil probably will open because of all this, so that’s a significant, significant piece of legislation that we’re looking to move forward and support as we can.

One thing I would like to address and certainly and it’s just a concern and frustration for all of us is stock price okay. First of all, let me just say that if you all have been following. I’m sure you all follow cannabis, the whole sector from the past year to this year and in some cases have been down to 80% in share prices, including all the major players, including us, okay? There’s a reason for this. There is various reasons. Number one is the FDA uncertainty on CBD, everyone’s been waiting on FDA to come out with regulations, which has slowed the retail growth in stores and ingestibles. A challenge with the FDA, regarding the lack of regulatory guidelines is the edible — the ingestibles, we might have said earlier, it represents 80% all the revenues in the category right now. And that is something that is not yet in the big retail, while we’re only selling topicals.

Another challenge has been the slow-moving of states, and we see more and more states opening up, other states are also following what the FDA has — is recommending.

One of the other factors have been is the pandemic. The pandemic that has occurred and delayed retail orders, but we expect those orders to begin coming in the fourth quarter of this year and in the first quarter of 2021. Again, the retail stores have been concentrating on the main necessities of human life during this pandemic.

I want to say and be very clear that I understand fully your frustrations, as they are my frustrations as well. As a shareholder like you are, we have accomplished a lot and my dear investors and friends, our industry has been faced with unpredictable challenges from FDA uncertainties to now the pandemic. But let me just say to you that while hundreds and hundreds of CBD companies have fought for a seat at the table, Veritas Farms has proven itself the brand trusted by retailers time and time again.

And again, this is something that we all of us should be very proud, and it’s what all of our team working hard every day.

We currently order — like I said to you earlier 8,000 big box drug and mass retail chains, out of a possible 40,000 total locations which these stores currently have, which clearly affords us with the opportunity for additional distribution in these channels. That means Veritas Farms your company is in a strong position to penetrate the remaining 30,000 orders with edibles as well as topicals in CBD stores once the FDA issues as much anticipated and needed guidance or Congress passed this new hemp bill.

We believe still and continue that our Company’s success is — as how it goes from our original plan is to re-emphasize the increasing of shelf space in the retailers. We’re only one of four or five companies out there while giving continued importance to our e-commerce.

Ladies and gentlemen, just imagine what we could be today. We’re so close and have positioned ourselves to be ready for the exciting future and growth that will be very soon in the later part of this year and in 2021. Again, I appreciate your support, I thank you for your support and we will continue to work very hard for the success of Veritas Farms and the shareholder value.

With that, I would like to put Dave Smith on the line. Dave, if you can please talk about the operations, and what we’re working on that side of it. Thank you.

Dave Smith — Chief Operating Officer

Yes. Thank you, Alexander, and good afternoon to all. Alexander has hit on a couple of points. But from an operational point of view, just kind of wanted to give everybody on the call an understanding of where we are, as you know, we are vertically integrated so we’re in a pretty critical time in a year for us. This year, we got in a little bit early in the ground. So first week of June, we were in last year we had an early snow right at the end of harvest.

So we’ve done a couple of things from a technology point of view to improve our predictability of flowering and that’s already it’s — seeing that yet to fruition because we’re already starting to harvest and the product that were taken out of the ground now has a higher CBD content or cannabinoid content than we had last year, but a significant build the plants are really healthy. So we’re going to be good for inventory. We still have existing inventory crude oil and start.

This is going to definitely prepare us for what we think is the ingestibles entering in the market and we will have adequate inventory to support that. The other thing we have is a charge on the operation side is to bring new products to market and we brought on a PhD that we did a long search for and he started the company right before the COVID in the lockdown but that hasn’t stopped us from the new product development programs as Alex had mentioned. So we’re very bullish on new products. And how that’s going to help us move the Company forward.

From a sales point of view, As Alex said, we’ve done a great job at chain retail that continues to be a work in progress as the customers weighed on the FDA. We see a general uptick in the number of stores and I think that’s preparing us to have a very strong close of the year.

So this concludes the presentation part and now we’ll open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] We’ll take our first question from Chelsea Groton [Phonetic]. Please go ahead.

Chelsea Groton — — Analyst

Yes, I had a question. Specific about the cash flow of the Company and how you’re managing with your accounts payable?

Alexander Salgado — Chief Executive Officer

Chelsea, thank you for your call, everything — we file everything from a cash flow perspective on our filings on our second quarter. That’s what the public record and regarding our accounts payable, we keep working with our vendors and moving forward, but again all information is public record and is filed in the second quarter. Thank you.

Operator

We’ll take our next question from Harvey Bergman [Phonetic]. Please go ahead.

Harvey Bergman — — Analyst

Yeah, hi. Hi Alex. Hi, Dave, you mentioned which you mentioned the e-commerce portion. Then you talk you talk about, we increased sales 300% or whatever number you threw out, the question is how many dollars is that per quarter what is the where did you start the first quarter and how do you finish in the second quarter and are we expanding right now?

Alexander Salgado — Chief Executive Officer

So, very good question. Harvey, I know David or Mike. If you can please answer that question at the exact numbers.

Mike Pelletier — Chief Financial Officer

In the second quarter. Does that your question?

Harvey Bergman — — Analyst

I think you’re on mute. I didn’t hear the answer. I’m sorry.

Dave Smith — Chief Operating Officer

Okay. Here we go. The first quarter, we had sales of 667,000 and the second quarter $1,288 million [Phonetic] so then in the second quarter that represented 50% of our sales. Correct.

Harvey Bergman — — Analyst

Okay. And the next question, Alex referred to the large liquor distributor. I think we all know who that is, there is only one large one. And are we shipping to any other stores or locations yet, and how many products are we shipping? How many different items?

Alexander Salgado — Chief Executive Officer

Sure. Harvey. good question. We are, yes, we are distributing and we’re shipping to them right now for shipping our lip balms, that’s our first product that they obtain and we shipped to their distribution centers and then from there distributed to the individual stores across the whole country. They started with five states right now and we’re growing from there. But we have additional product lines that they’re going to as well, but the first one that you started was with the lip balms.

Harvey Bergman — — Analyst

Okay I’ll open the floor to somebody else. Thank you.

Alexander Salgado — Chief Executive Officer

Thank you.

Operator

We’ll take our next question from Henry Geisel. Please go ahead.

Henry Geisel — — Analyst

Do you have any feel for how quickly the HAMP legislation is going to move through Congress and second part of the question is once that bill passes, do you think that that’s going to free up the marketability of our shares in terms of our brokerage companies accepting them?

Alexander Salgado — Chief Executive Officer

A very good question. Henry, pleasure, pleasure speaking with you. Regarding how fast it goes to Congress, certainly this is a first time it’s been built in place. And if you were to recall, the intent of Congress back in 2018 when it passed the form bill, was exactly to open up the CBD markets. Unfortunately, the FDA has been slow moving in getting regulation out there. So Congress is now acting and creating legislation. And again Henry, this is the intent of Congress in 2018 and after the President signed, so we are hopefully expecting to move on this thing, very quickly.

Also, as I mentioned to you before, there is also the OMB, the Office Management and Budget which has also presented two months ago to the executive branch their recommendations for regulation from the FDA. So we see there is a lot of movement on both sides and we are very optimistic about that. As to — moving forward to stock prices, I mean I believe — going back to what I said earlier, Henry, we position ourselves as a company among the top leaders, okay. And certainly the whole back has been across all the retail chain has been — [Indecipherable] with FDA. So naturally you would expect that once these opened up that — and the chains are opening up and [Indecipherable] are going up that is going to be a much easier transition into the stock prices into revenues and other opportunities. Moving forward thank you for your question on that.

Henry Geisel — — Analyst

Great. One follow-up to that one. Alexander, two is..

Alexander Salgado — Chief Executive Officer

Yes.

Henry Geisel — — Analyst

There are, there are retailers that have as we have met with and presented ingest too so, as Alex mentioned earlier on the call. Only 20%. And I think this is, I don’t think I know this is across the board, that the topicals which the FDA has kind of less of on it at this point only represent 20% of our total revenue. And I think if you read the the reports from other major companies. It’s about the same thing. So there is a heightened interest in the adjustables because that’s where the multiples are to get this category, the fuel for the category to get moving. So I would anticipate from in the last few weeks, we’ve had several calls with Zoom calls with customers that are doing category reviews and we’ve discussed ingestible. I think that’s what’s going to pump the energy into the category again because that’s where the volume is.

Alexander Salgado — Chief Executive Officer

Thank you for your call Henry.

Operator

[Operator Instructions] We’ll take our next question from Steve [Indecipherable]. Please go ahead.

Steve — — Analyst

Hi Alexander. Good to speak with you again, and thank you for this call. I, have been watching some of our competitors in this category and some of them for some relationships with some of the essential oils companies who can have a different method of distribution. We looked into those categories to see if there’s any partnerships to be had, there?

Alexander Salgado — Chief Executive Officer

Great question, Stephen. Good to talking to you again. Yes, we’ve been looking into those possible partnership as we speak, our steel companies we are looking into right now in that area. And we’re, hopefully, soon. We’ll be able to make some announcements in that. Dale, I know you’ve been working on that for us, if you want to expand on that please.

Dale Bergman — Securities and Exchange Council

Yeah, we, as far as research and development of new products, I think we’re pretty good at that. So we’re combining some products were coming up with the, we’re going to be launching a functional line because as we look for consumer voids in the marketplace and particularly with basically it’s been, it’s been pain and sleep. If you can solve one of those two are help somebody with that if you can help with the pain. They’re going to sleep better. So, but now I think with a pandemic. We’re going to add anxiety at the end of that because it’s just, definitely we incurred from our consumers during this and particularly in a couple of age groups, where there is higher anxiety. So we’ll come out of the — functional kind of product that we’re working on now internally, we’re doing this, all this development internally and we see that as a way for us to get into some different channels with the product that’s not only going to be made with our product, but also with ingredients that have efficacy and within themselves that we can actually uses call-outs on these new products. So that innovation is coming on our side, we’re always as Alexander said, we’re always looking for opportunities for assistance in this to grow, but that’s something we’re very focused on internally.

Steve — — Analyst

Thank you.

Dave Smith — Chief Operating Officer

Thank you, Steven. Thank you.

Operator

We’ll take our next question from Chelsea Groton. Please go ahead.

Chelsea Groton — — Analyst

Yes. So, you spoke about how you guys were working with vendors to make sure that you are managing your cash flow directly, but as a representative from one of the testing companies. I guess the question is, you say that that’s the most important. But as a testing company. We don’t feel that it is, are you going to make improvements in Q3 for that?

Alexander Salgado — Chief Executive Officer

Well, we work with various testing. We work with various testing companies across the country. We work on 4 or 5 different testing companies are top in the nation. There have been approved by recognize a scientist and leaders. So we work with them, we work with the also with other testing facilities that work with our big retail and change so we’re always looking for improvement. And to be able to expand those relationships with our testing partners, thank you.

Operator

And we’ll go next to Harvey Bergman. Please go ahead.

Harvey Bergman — — Analyst

Yeah. Back again. Alex, You mentioned that Winn-Dixie is handling our ingestible gummies and they are the only chain that we have, let’s call big box chain that’s doing that.

Alexander Salgado — Chief Executive Officer

That is correct. Harvey there they are. they are the only big retail chain grocery chain that had accepted in adjustable.

Harvey Bergman — — Analyst

And yeah, I mean is one of the products that we have with them. Yeah. As a follow-up by spoken with Dave the other day on another matter and he said something that I should have question then, but he said that in the State of Florida ingestible is not a problem. Is that what I heard, Dave?

Dave Smith — Chief Operating Officer

Yes. If you look at they have bill that was passed in, you came in July 1 of last year. They– I’m not going to speak on behalf of Florida why they chose that decision, but they are one of the few. We see a states that has declared in the food and as long as you have food handlers license and we have a food manufacturing license and you get a permit in the State of Florida. That you — it’s safe to sell ingestible, yes.

Harvey Bergman — — Analyst

So again it’s a follow-up. So why can’t we sell them other product?

Dave Smith — Chief Operating Officer

Why I can’t we sell who? Winn-Dixie?

Harvey Bergman — — Analyst

No, I’m saying because Winn-Dixie apparently is the only client you have who is buying ingestible. Why can’t you sell them other ingestible product that we have?

Dave Smith — Chief Operating Officer

Well, we’re selling tinctures in Winn-Dixie as well, not just coming gummies.

Harvey Bergman — — Analyst

I didn’t know that. I thought it was only gummies, is what I’d heard. All uses though.

Dave Smith — Chief Operating Officer

Yeah. They were very bold and went out and they waited on — they’re actually on the Florida Hemp Council as well and they waited to get the green light and you go forward. The only thing that we had a challenge was on the THC call out with the State of Florida in the sense of finished line of goods.

Yeah I think it’s already it’s more over — most of the grocery stores also have a pharmacy and one of the things that we’ve heard from customers is there is figure from the federal side, that is something, if they were to lose their pharmacy license, then that’s something that they don’t have the — I guess maybe to — they’re not going to push there.

But Winn-Dixie is — they’ve done it in 100 and I think 60 stores.

Harvey Bergman — — Analyst

So well, already in how many stores?

Dave Smith — Chief Operating Officer

I think the 160 already because they have stores in Louisiana right now. And Louisiana is one of the most honorous states to get to the product in general —

Harvey Bergman — — Analyst

I thought they had 500 or 600 stores in Florida.

Dave Smith — Chief Operating Officer

No. They’ve got a lot, that’s what they have all at total, including bylaws in South Carolina. So we’re in some — Winn-Dixie is in Florida and we’re bylaws [Phonetic] in stores in South Carolina.

Harvey Bergman — — Analyst

And one other states is this is not an issue, beside.

Dave Smith — Chief Operating Officer

Yeah, that’s true. For adjustables, they’re about the only one that I know of that has taken this tax.

Harvey Bergman — — Analyst

So, there is only two states, you’re saying?

Alexander Salgado — Chief Executive Officer

Yes.

Harvey Bergman — — Analyst

Okay, got it. Thank you.

Alexander Salgado — Chief Executive Officer

Thank you, Harvey for your attention.

Harvey Bergman — — Analyst

But as a follow-up to Harvey, there are some — there are [Indecipherable] drugs out in Washington State, which is a drug, a smaller regional drug chain they’ve taken in ingestibles, well keep supermarkets has had ingestible therefore for a period of time, we’ve no sanctions or letters.

Operator

That concludes our question and answer session for today. I will turn the floor back over to Alexander Salgado.

Alexander Salgado — Chief Executive Officer

Well, thank you. And again, it’s a pleasure to be able to speak with all of you and give you an update as to where we’re at this organization. And looking at keep on working very, very hard as we are to keep moving forward with this company. I feel very bullish of where we’re at and where we’re headed. And again like I said earlier, we put ourselves in a position to succeed. I have hundreds and hundreds of companies, CBD companies out there who tried and we’re there. By what we’ve done, the vertical integration which is a key component to be able to be transparent and control the whole process. That [Indecipherable] key components to our success.

And our team members, I could be more prouder. And let me say it again to our team members and to our investors, who are — who know who supported us through everything. And again, whoa are working very hard. We’re going to get to the finish by [Indecipherable] when we get to our goals. And again very proud as [Indecipherable] should be.

Thank you and have a wonderful day. And please stay safe. Thank you, everyone.

Operator

[Operator Closing Remarks]