Elixinol Wellness Ltd (ASX:EXL, OTCQB:ELLXF) has more than 18 months of funding in hand to take advantage of an improving outlook in the US and Australia.
With a steadily reducing cost base and with more optimisation initiatives on foot, the leading player in the hemp-derived food and CBD industry, is well-funded with A$16.1 million in cash and an additional A$1.9 million expected from US Employee Retention Credits.
Its new US e-commerce site launched post quarter is improving user experience and sales conversion.
Further, California’s passing of Assembly Bill 45 signals significant regulatory progress and opens new market opportunities.
Elixinol Americas
Global CEO Oliver Horn said: “While we were down on revenue this quarter due to COVID-19 impacts on Hemp Foods Australia and now resolved supply chain issues in the US, we are pleased by the fact that Elixinol Americas finished the quarter with a strong September and Hemp Foods Australia continued its upwards trajectory, finishing 2% up on the prior quarter despite COVID-19 impacts.
“Elixinol Americas experienced temporary out of stock issues worth A$0.2 million in revenue as we move towards a completely outsourced model to further optimise our cost base, though pleasingly, there is a strong sense of progress as we come to the end of our supply chain transition period."
Digital-first strategy
“We are now forging ahead with our digital-first strategy, led by an experienced team and supported by an expanding product portfolio," he said.
“We are also continuing to see the regulatory environment in the US improving, with the state of California having just passed Assembly Bill 45, formally permitting sale of hemp-derived CBD products.
“California is Elixinol's number one e-commerce sales market and is the largest CBD market in the US, which means the passage of this bill will create a clear and stable regulatory environment and, in turn, this is expected to result in new business opportunities for Elixinol.
“We have also just upgraded our US online shop to improve user experience and sales conversion and have also appointed a new exclusive national sales representative, Market Performance Group, to access new customers across the US.
Australian operations
Horn continued: “Hemp Foods Australia's continued growth this quarter is testament to our focus on driving the e-commerce channel, with online orders up by 38% on prior quarter.
“Strategically we have also focused on consolidating our distributors to focus on bigger partners and were delighted to have secured a national distribution deal with Australia’s largest supermarket chain, Woolworths.
“With very solid fundamentals in place for both our Elixinol and Hemp Foods Australia businesses, we will concentrate our focus on key growth drivers in these markets in order to improve profitability.”
Results
Elixinol reported revenue of A$2.3 million for the third quarter, down 9% decline on the second quarter due to now resolved supply chain disruptions in the US.
Operating cash used during the third quarter, excluding non-recurring items, was A$2.9 million, a 12% improvement on the previous quarter and a 14% improvement compared with the third quarter of FY20.
CBD Pet Collection launch
In the quarter, Elixinol launched its first products in the CBD Pet Collection - specifically designed for dogs.
It includes a bacon-flavored tincture and two functionally focused CBD dog chews targeting specific benefits such as promoting calm and relaxation and supporting mobility and joint health for adult dogs.
The new pet range allows Elixinol to access new growth in the US$432 million pet CBD market.
Tax credits
During the quarter, Elixinol lodged an application for refundable tax credits, which were made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
The value of the credits calculated through to June 30, 2021 totals around A$1.4 million (US$1.0 million) and further applications for the third quarter and fourth quarter of FY21 will be filed in due course with an expected additional value of A$0.5 million (US$0.4 million).
Due to an extensive processing backlog at the Internal Revenue Service (IRS), only A$0.3 million is expected to be received in the fourth quarter of FY21 with the remaining A$1.6 million expected in the first half of FY22.
Licensing partner in UK/EU
Given the strategic focus for Elixinol on driving profitability and with no certainty of regulatory clarity in the near term, the company decided to move to an indirect route to market model and is seeking a licensing partner in the UK/EU.
There has been strong interest in the Elixinol brand and the company is currently in discussions with three potential licensing partners.
The cessation of trading of Elixinol’s European and UK operations is expected to be fully complete by December 31, 2021, and is expected to yield cost savings of around A$0.8 million per quarter.
Given the loss-making nature of the business and the current European macro and regulatory environment and outlook, the board determined retaining brand presence via a licensing partner is currently the best and most prudent operating model.
During the third quarter of its FY21, Europe and UK contributed A$56,000 to group revenue, down from A$117,000 in the second quarter.