Mr. David Kohler reports
MIMI'S ROCK CORP. ANNOUNCES 2019 YEAR END RESULTS; PROVIDES Q1 2020 UPDATE
Mimi's Rock Corp. has released its financial results for the year ended Dec. 31, 2019.
On Feb. 24, 2020, the company announced that its common shares were approved for trading on the OTCQB Venture Market under the ticker symbol MIMNF. The company also received clearance from The Depositary Trust Company for transfer eligibility. The company expects that the U.S. listing will increase the company's exposure and accessibility to the U.S. market, providing additional liquidity for shareholders and raising the awareness of the company's brands to a much larger audience.
On April 7, 2020, the company provided an operational update regarding COVID-19 and its impact on the business. While the proliferation of the coronavirus has forced the world to adapt, the company has so far been able to navigate the consequential operational challenges. The company has increased inventory levels on hand with its e-commerce channel partners to help protect against the possibility of future supply chain disruptions. The company has been able to maintain growth in its vitamins and supplements business. As well, the newly acquired skin care business has performed as expected, with no material decline in demand. At this time, management does not foresee any major disruptions to the company's business.
On April 22, 2020, the company announced it would be relying on the 45-day extension period provided under the blanket relief from the Canadian Securities Administrators for the filing of its annual financial report for the year ended Dec. 31, 2019, and the related management's discussion and analysis.
"The latter half of 2019 was challenging, as Amazon sellers met with significant changes within the platform. Frankly, we hit some 'speed bumps' in Q3 and Q4, although I am pleased to announce that our team was responsive and effective in rapidly adapting and instituting a new approach. By Q1 2020, we began seeing the benefit of our operational adjustments. Further, the team's impressive performance in integrating the All Natural Advice and Maritime Naturals lines, as well as reacting to the increased demands resulting from the COVID-19 pandemic, resulted in a strong Q1 and an improved financial outlook for 2020, of which we are very proud. We continue to launch new products and enter into new geographic jurisdictions each and every quarter, with improved efficiencies and operational performance. Our belief in the building of an on-line-focused health products platform is well aligned with the current and future purchasing practices in the global marketplace. We see these recent events as driving even more consumers away from 'bricks-and-mortar' retail and towards e-commerce, and we believe that our positioning and deeper understanding of the e-commerce world will allow us to continue to develop as a leader in the new economy," said David Kohler, chief executive officer.
Outlook for the first quarter of 2020
The company is establishing its initial outlook for fiscal 2020 and anticipates reported first quarter 2020 results to be in the following range:
Expected first quarter 2020 revenue of $10.3-million to $10.6-million;
Expected first quarter 2020 adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $1.2-million to $1.4-million.
Results in this range would represent an increase in revenue of 33 per cent to 37 per cent over the fourth quarter of 2019 and would represent the highest quarterly revenue level to date. While approximately half of this increase is from the newly acquired skin care businesses, the Dr. Tobias brand also experienced a strong recovery in the first quarter of 2020. Management has implemented a new advertising strategy and streamlined processes and is focused on new market growth for the balance of 2020.
On May 29, 2020, the company provided an update on the status of its 2019 annual financials and indicated that it would provide guidance on the timing to file its 2020 first quarter interim financial statements and related management's discussion and analysis for the three months ended March 31, 2020, at the time of filing the 2019 annual financials. The company continues to rely on the exemption under Ontario Instrument 51-502 (Temporary Exemption from Certain Corporate Finance Requirements), which became effective as of March 23, 2020, in postponing the filing of its first quarter 2020 financials, and expects to issue the first quarter financials on or before June 30, 2020. Until such time as the first quarter financials are filed, management and other insiders of the company will be subject to an insider trading blackout consistent with the principles in Section 9 of National Policy 11-207 (Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdictions). The company confirms that, except as disclosed by the company, there have been no material business developments since May 29, 2020.
The company is generally well positioned as a business to sustain through the disruption as a result of the pandemic, as its product sales are all on-line. As the company sells health and wellness products, the demand during the current outbreak has remained strong, particularly for certain immunity products. The initial outbreak and requests to self-isolate caused a brief but significant uptick in sales as consumers stocked up on essentials. While the initial surge was not long lasting, sales have continued to remain at levels at or above those seen prior to the outbreak.
Based on current information, the company remains confident that it can continue to operate as the economy attempts to resume to normalcy. For precautionary reasons, over the past 10 weeks the company has taken the opportunity to increase its finished goods inventory on hand from the normal 25 days to approximately 75 days on average. While this requires an additional investment in working capital, increased inventory in the fulfilment centres reduces the risk of delivery disruption. While the nature of the pandemic is such that it is difficult to predict how long it will last, there is so far no indication that the COVID-19 outbreak will have a negative impact on the company's business.
Results of operations for the year ended Dec. 31, 2019
For the year ended Dec. 31, 2019, the company incurred a net loss of $3,551,010 (10 cents per share), compared with a net loss of $945,101 (six cents per share) for the year ended Dec. 31, 2018. EBITDA for the year ended Dec. 31, 2019, was $828,758, compared with $897,042 for the year ended 2018. Adjusted EBITDA, which adds back (deducts) non-cash stock-based compensation, investment income, acquisition costs and listing expenses, was $2,382,898 for the year ended Dec. 31, 2019, compared with adjusted EBITDA of $2,736,093 for the year ended Dec. 31, 2018.
Revenues and gross margin
Revenues were $35,409,072 for the year ended Dec. 31, 2019, compared with revenues of $17,754,166 for the year ended Dec. 31, 2018. Revenues reported in the current and prior year primarily represent revenues from the DTI business, which was acquired on July 13, 2018. While the company's sales do not experience significant seasonality, there is some fluctuation on a quarterly basis due to natural demand fluctuation as well as promotional impacts. Results of operations of the All Natural and Maritime Naturals businesses were included from the date of acquisition, but had minimal impact due to their acquisition in mid-December, 2019. The company continues to adapt its brand strategy, advertising spend and execution strategies as conditions in the on-line dietary supplements market dictate. Beginning in the second quarter of 2019, the company began to see considerable shifts in the marketplace; however, advertising spend was adjusted and sales remained strong through the middle of the third quarter. Despite increasing advertising spend, sales continued to decline through the fourth quarter of 2019.
Fourth quarter 2019 results reflected the full impact of the decline, as revenues were $7,716,827 for the three months ended Dec. 31, 2019, compared with revenues of $9,231,216 for the three months ended Dec. 31, 2018.
Management has made significant changes to its marketing strategy. While customer loyalty remained strong throughout 2019, new customer acquisition became increasingly difficult. The Dr. Tobias brand began to see many new competitors emerge in mid- to late 2019. As a result, costs to direct customer traffic began to get more expensive and less effective. Simultaneous with this market activity increase, changes in the way that products were displayed on the company's primary marketplace had the impact of reducing the importance of rankings and reviews with a preference for paid advertisements. Despite increasing advertising spend and making investments in customer engagement, results did not show sufficient improvement, such that management made a decision to terminate its relationship with its advertising partner. These changes seem to have made an impact in the period since year-end.
As a result, sales and revenues have recovered in the period since Dec. 31, 2019, to levels similar to those in the second quarter of 2019 and prior. Sales from the company's own e-commerce site, the Dr. Tobias website, as well through additional on-line retail outlets continued to grow; however, a majority of sales of Dr. Tobias products are generated through the Amazon sales channel in the United States.
Gross margin for the year ended Dec. 31, 2019, was $24,759,327 (70 per cent), compared with $11,963,253 (67 per cent) for the year ended Dec. 31, 2018. Since the acquisition of DTI, the company has been able to improve efficiency and obtain better pricing from its supplier. Gross margin ratios have improved over the comparative period as a result.
Selling and marketing expense
The company incurred selling and marketing expenses of $16,908,419, or 47.8 per cent of revenue, for the year ended Dec. 31, 2019, compared with $7,314,329, or approximately 41.2 per cent of revenue, for the year ended Dec. 31, 2018. Sales and marketing expenses for the period consist primarily of fulfilment costs related to delivering products to customers, direct on-line advertising placements, costs related to marketing the Dr. Tobias brand, and other promotional and awareness initiatives. In the fourth quarter of 2019, the company incurred selling and marketing expenses of $4,867,462, or 63.1 per cent of revenue, compared with $4,013,384, or approximately 41.2 per cent of revenue, for the fourth quarter of 2018. Advertising spend levels were considerably higher than originally anticipated due to strategies implemented to ensure protection of the brand and customer retention. Going forward, the company expects selling and marketing expenses to return to more normal levels in the mid-40-per-cent range compared with revenue.
As the company acquired the Dr. Tobias brand in mid-2018, the first two quarters of 2019 involved understanding the dynamics of the Dr. Tobias customer base as well as launching a new brand. Advertising spend in the third quarter of 2019 was increased with a deliberate focus on attracting longer-term repeat customers. While the brand continues to generate strong repeat sales, investments are also being made attract new-to-brand customers. Despite consistent investment, returns in the form of revenue growth did not materialize. Organic growth began to decline until very late in 2019 as new strategies began to show results. The company is confident it has appropriately adapted its advertising strategies in the near term as both efficiency and effectiveness of advertising has improved in the period since Dec. 31, 2019. The company will continue to actively monitor its selling and marketing expenses, particularly those directly related to advertising, and expects that these will vary in relation to sales revenues going forward as advertising spend is optimized relative to competitive conditions.
General and administrative expense
General and administrative expenses for the year ended Dec. 31, 2019, were $5,468,010, or 15.4 per cent of revenue, compared with $1,912,831, for the year ended 2018, representing 10.8 per cent of revenue. General and administrative expenses consist primarily of salaries and benefits, professional fees, occupancy costs, and insurance. General and administrative expenses in the 2019 period are higher than the same period in 2018, primarily due to due a full year of operations of the Dr. Tobias business, as well as higher overall staff levels due to considerably more operational activity. General and administrative expenses were higher than considered typical in 2019, primarily due to certain one-time legal costs, as well as some employee relocation expenses.
Share-based compensation expense relates to awards under the company's incentive stock option plan and is based on the estimated number of awards that will eventually vest using the Black-Scholes option pricing model. Share-based compensation expense for the year ended Dec. 31, 2019, was $617,461, compared with $549,744 for the year ended Dec. 31, 2018.
Listing expenses of $786,138 in the year ended Dec. 31, 2019, are related to the acquisition and reverse takeover transaction in connection with the company's public listing in May, 2019, and are nil for the same period in the prior year. Listing expenses include legal and professional fees, as well as $385,487 in non-cash charges related to the reverse takeover. Acquisition costs in the year ended Dec. 31, 2019, were $99,788, incurred in connection with the acquisitions of All Natural and Maritime Naturals in December, 2019. Acquisition costs of $1,267,590 were incurred in the year ended Dec. 31, 2018, in connection with the acquisition of DTI.
Foreign exchange losses of $64,332 were recorded in the year ended Dec. 31, 2019, compared with $48,379 for the year ended Dec. 31, 2018, primarily due to the movements in the value of the U.S. dollar relative to the euro between the time that expenses were incurred and the time that they were settled.
Interest and financing costs of $2,735,815 were incurred during the year ended Dec. 31, 2019, compared with $919,142 for the year ended Dec. 31, 2018. Interest and financing expenses in the 2019 period include approximately $1,629,633 (2018 -- $354,755) in non-cash charges related to amortization of expenses incurred in securing the company's senior secured loan. Both the non-cash and the total amounts of expense were higher in 2019, due to the recognition of all unamortized costs incurred on the company's original senior secured debt upon refinancing in December, 2019.
About Mimi's Rock Corp.
Mimi's Rock is an on-line dietary supplement and wellness company operating under the Dr. Tobias brand. The brand features over 30 products, including the top-selling colon cleansing product and the No. 1 selling omega-3 fish oil on Amazon. Mimi's Rock currently serves customers in the United States and has rapid growth plans to expand into other markets.
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