Synergy CHC - Earnings Call - Q3 2024

Transcript

Operator (participant)

Good morning, everyone, and thank you for participating in today's conference call to discuss Synergy CHC Corporation's financial results for the third quarter ended September 30th, 2024. Joining us today are Synergy CEO Jack Ross, CFO Stacey Bieber, and Greg Robles with Investor Relations. Following their remarks, we'll open the call for analyst questions. Before we go further, I'd like to turn the call over to Mr. Robles as he reads the company's safe harbor statement. Greg, please go ahead.

Greg Robles (Head of Investor Relations)

Thank you, Operator. Good afternoon, and thanks for joining our conference call to discuss our third quarter 2024 financial results. I'd like to remind everyone that this call is available for replay and via a live webcast that will be posted on our Investor Relations website at investors.synergychc.com. The information on this call contains forward-looking statements. These statements are often characterized by terminologies such as believe, hope, may, anticipate, expect, will, and other similar expressions. Forward-looking statements are not guarantees of future performance, and the actual results may be materially different from the results implied by forward-looking statements. Factors that could cause results to differ materially from those implied herein include, but are not limited to, those factors disclosed in the company's SEC filings under the captioned Risk Factors.

The information on this call speaks only as of today's date, and the company disclaims any duty to update the information provided here. Now, I would like to turn the call over to the CEO of Synergy, Jack Ross. Jack?

Jack Ross (CEO)

Thank you, Greg. Thank you and good morning, everyone. Thank you for joining us for Synergy's first public earnings call. I'm excited to discuss the quarter and how Synergy is poised for future growth and success. As you know, we completed our IPO in late October, raising approximately $6.2 million in net proceeds, and began trading on the NASDAQ under the symbol SNYR. This is a significant milestone for our team, and we are excited about the opportunity to further enhance our strategy and accelerate our growth. Before I cover the results, I'd like to address the 8-K filing we made in conjunction with our earnings released this morning. We announced that Stacey Bieber, who served as our Chief Financial Officer since April of 2024, is moving on to pursue a new opportunity.

On behalf of the entire Synergy team, I want to extend our sincere gratitude to Stacey for her leadership, particularly throughout the IPO process, and we are deeply appreciative of her contributions and wish her the very best in her future endeavors. To ensure a seamless transition, I am pleased to announce that Jaime Fickett, our current Senior Vice President of Finance and Operations, will step into the role of Interim CFO. Jaime has been with Synergy for nearly 10 years and has previously been the CFO of Focus Factor since 2006, which we acquired in 2015. With her extensive financial expertise and deep knowledge of our business, we are confident that Jaime will provide strong leadership and contribute immediately as an Interim CFO. I will now cover the quarter, and then Stacey will take us through the financials in greater detail.

Although I am pleased to share, Synergy enjoyed its seventh straight quarter of profitable results. For those of you that are new to the story, Synergy began in 2014 with a vision to build a portfolio of consumer brands focused on providing innovative consumer healthcare and lifestyle products. Today, our portfolio includes two brands in distribution: Focus Factor, a clinically tested brain health supplement, and Flat Tummy, a lifestyle brand offering suite of nutritional products designed to support women's weight management goals. Let me take a moment to dive deeper into each of these brands, starting with Focus Factor. Focus Factor is our flagship product, or as we call it, our hero brand, with 24 years of history in the brain health space and comprises the majority of our revenue. Since we acquired the brand in 2015, we have seen impressive growth, achieving CAGR of 17.2% from 2015 to 2023.

The brand is backed by a solid clinical study and a full portfolio of products with a strong reputation in the category. Focus Factor is strategically positioned for robust growth both domestically and internationally. The brand is already established in key markets such as the U.S., the U.K., and Canada. We are excited to further expand into key international markets, including Australia, Taiwan, and Mexico in mid to late 2025. Importantly, we have registered 22 Focus Factor trademarks globally, paving the way for future growth and sustained global market leadership. In terms of the retail presence, Focus Factor has long-term strategic relationships with retailers, including Costco, Walmart, CVS, Amazon, Walgreens, Publix, BJ's, just to name a few. These partnerships provide us with robust distribution channels, significant long-term growth potential. Focus Factor is a leader in the brain health category.

Some of the supplements include vitamins, gummies, nootropics, and ready-to-drink beverages, which we'll talk about later. We intentionally designed a differentiated product portfolio to reach a broad customer base, from children to older adults, in order to capture the growing number of consumers looking to enhance their brain health. As we look to the future, the functional beverage market, which is projected to grow to $176 billion with a CAGR of 8.6% over the next seven years, represents an exciting opportunity for Focus Factor. In late 2023 and early 2024, we piloted and tested our ready-to-drink beverages across various retailers, and the results from the pilot were extremely robust. We are excited to be entering that market in early 2025. We're seeing growing demand for beverages that offer dual benefits, such as hydration or cognitive function, alongside the energy.

We're well-positioned to capitalize on these trends as we expand our ready-to-drink offerings in 2025. Next, let's talk about our Flat Tummy brand. We acquired Flat Tummy in 2015 as an online-only brand. Since then, we focused on growing its presence in the digital space and believe now it is prime for retail expansion. The brand has strong recognition with significant social media following, with 1.6 million Instagram followers and 500,000 Facebook followers. Additionally, we've built a network of 75,000 bloggers that we have worked with and social media influencers ranging from the entire Kardashian family to microbloggers to promote the brand. We've spent the majority of our resources to date growing our Focus Factor brand, but Flat Tummy also offers a tremendous potential for growth, both online and now in physical stores.

As we look ahead, we are excited to leverage our growing awareness of the brand and the strength of its social media community and our long-standing relationships with retail partners to drive further expansion for the brand. Now, on to the results. During the third quarter, we delivered revenue of $7.1 million, down from $10.8 million in the third quarter of 2023. The EBITDA was $1.3 million, down from $2.2 million in the third quarter of 2023. As mentioned to many investors on our IPO roadshow, we were in the middle of a rebranding of our Focus Factor brand. Our third-quarter results were impacted by that rebranding and retailer de-inventoring related to the rollout of their new packaging from the Focus Factor products.

We worked closely with our retail partners to redesign the packaging to better appeal to our target customers while ensuring our product offerings had a cohesive new brand look, including our ready-to-drinks, which hasn't been updated since 2015. There is rarely a good time to initiate a brand refresh, but we felt it was the right thing to do as we position ourselves for the next phase of our growth, both domestically and internationally. The rebranding did impact our third quarter, as many of our retail partners chose to sell through their older inventory to ensure that it sold through before accepting the new packaging, which drove quarter-over-quarter sales decline during the quarter. It's a normal course of business for retailers to sell down their old inventory prior to ordering new products with the new packaging. This impacted our third quarter by approximately $3 million in sales.

Although this was painful in the quarter, it is largely one-time in nature and the right thing to do for the business at the right time. Most importantly, we have not lost any customers or any SKUs during the transition and are receiving positive feedback on our rebranding. As we move through the fourth quarter, we have seen some continuation of this dynamic, but to a much lesser extent. We remain confident that we'll return to year-over-year growth in the first quarter of 2025. During the quarter, we've experienced several notable wins as well, and that will help us scale in 2025. Specifically, we continue to build new partnerships with blue-chip retailers, resulting in increased distribution points across key markets. Notably, we expanded our retail relationship with BJ's Wholesale Club, now offering our products in all 267 locations with two new SKUs of Focus Factor.

The partnership significantly enhances our visibility and reach into an important retail channel, positioning us well for future growth. Additionally, we are thrilled to announce our launch in Publix grocery stores, which our products are now available in all 1,200 Publix grocery stores with two SKUs as well. This expansion provides synergy with access to a highly loyal customer base and further solidifies our presence in the grocery sector. Before passing the call over to Stacey, I'd like to briefly discuss our near-term initiatives. First, we are focused on organic growth of our current product lines by developing and launching new products, as well as expanding into new geographical markets. Since the IPO, we've strategically utilized a portion of the $10.3 million in gross proceeds to reduce our debt further by $3.1 million.

This not only strengthens our financial position, but it also increases our financial flexibility, enabling us to make targeted investments that will support our execution for these growth initiatives. Specifically for Focus Factor, we are working on increasing our distribution of our recently launched ready-to-drink beverages and shots and rolling them out to our vast retailer network. We purchased during the quarter and printed over two million cans and are in the process of filling them for shipment in early 2025. Additionally, next year, we plan to introduce the Flat Tummy brand with seven new SKUs products that we develop for our network of retail partners, capitalizing on the growing attention surrounding GLP-1 medications and other weight loss support products. With that, I would like to turn the call over to our Chief Financial Officer, Stacey Bieber. Stacey.

Stacey Bieber (CFO)

Thank you, Jack. Moving to our third-quarter results. Revenue in the third quarter was $7.1 million compared to $10.8 million in the year-ago quarter, a decrease of 34% versus the prior year. Excuse me. As Jack discussed, the approximately $3 million decline was driven by new packaging for our Focus Factor products that led to a de-inventorying dynamic at our retail partners, causing them to pause ordering while they sell through their existing inventory to acceptable reorder levels. Gross margin in the third quarter decreased 476 basis points to 67.2% compared to 72% a year ago. The decrease was primarily driven by the product mix sold within the quarter. Margins fluctuate from time to time due to the product mix being sold. Operating expenses during the third quarter were $3.7 million compared to $5.6 million in the year-ago quarter.

The lower operating expenses were a result of the improved management of our operating costs and the decrease in our net revenue. Income from operations decreased to $1.1 million compared to $2.1 million in the year-ago quarter. Net income for the quarter was $784,000 or $0.10 per diluted share compared to $1.3 million or $0.17 per diluted share in the year-ago quarter. EBITDA was $1.3 million compared to $2.2 million in the year-ago quarter, representing a decline of 38%. Moving to our balance sheet. As of September 30th, 2024, we had cash and cash equivalents of $259,400 compared to $632,500 as of December 31st, 2023. Inventory was $1.9 million at the end of the third quarter compared to $3.7 million at the end of 2023.

As of September 30th, 2024, we had $37.3 million in total liabilities, which compares to $39.5 million in total liabilities as of December 31st, 2023, a decrease of $2.2 million. Subsequent to the IPO, we paid down $3.1 million of debt and increased our cash position by $6.2 million. Our cash used in operating activities decreased from $2.8 million as of September 30th, 2023, to $1.4 million as of September 30th, 2024. The decrease of $1.4 million was primarily attributable to reductions in our accounts payable and accrued expenses. In summary, while our third-quarter results were impacted by the de-inventorying dynamic at our retail partners, we firmly believe there are significant near-term growth opportunities ahead. With our expanded retail partnerships and strength of our brand, we are confident that we are well-positioned for sustained growth in 2025 and beyond.

Finally, as Jack mentioned, I will be departing Synergy today to pursue a new opportunity. I want to thank Jack and the entire team for a great experience leading the company's financial strategy over the past year, and I believe they are well-positioned for growth and future success. Now, I will turn the call back over to the operator.

Operator (participant)

Thank you. We'll now begin the question and answer session. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from Sean McGowan with Roth Capital Partners.

Sean McGowan (Analyst)

Good morning. Sorry to hear you going, Stacey. It would have been nice to have actually met in person. But I have a couple of questions about the results here.Can you talk a little bit about what ready-to-drink sales were recognized in the quarter?

Stacey Bieber (CFO)

Yeah. They were very minimal in the quarter. All the pilots were done that we had previously discussed in Texas and in Costco. So we just had small ready-to-drink RTD sales in the quarter to some of the convenience stores. I would say they were, we'll say, less than $5 million. Okay. That's helpful. And you talked about the rebranding on Focus Factor, but were the revenues from Flat Tummy up year over year? The revenue for Flat Tummy was not up. We did sell through a lot of products that we had previously had. And then that was prior to the launch of the seven new products that Jack had mentioned on the call.

Sean McGowan (Analyst)

Okay. My last question then is, this G&A level of spending in the quarter, I would imagine there might be some stuff in there that's maybe not recurring related to the IPO. So would you call this level of spending indicative of what we should expect ongoing?

Stacey Bieber (CFO)

I would, Sean. A lot of the IPO-related costs don't go through the income statement. They go through equity. And I would say this is indicative because we're also now picking up public company costs that we didn't have previously when it comes to boards, counsel, NASDAQ costs, all those things that we did not previously have in prior years.

Sean McGowan (Analyst)

Okay. All right. Thank you very much. Appreciate it.

Stacey Bieber (CFO)

Thanks, Sean.

Operator (participant)

At this time, this concludes our question and answer session. I would now like to turn the call back over to Mr. Ross for closing remarks.

Jack Ross (CEO)

Thank you, Liz. We'd like to thank everybody for joining our first earnings call, and we look forward to speaking with you when we report our fourth quarter and full year 2024 results in 2025. Thank you for being a shareholder and your interest in Synergy, and I want all shareholders to know that the complete Synergy team is committed to growing the top line and the bottom line in 2025. We'll talk to you next year, and happy holidays.

Operator (participant)

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.