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Certain companies are destined to usher their industries into the future through innovation and the continual improvement of their customers’ lives.

The Market Herald Canada’s Leading Edge introduces you to those companies with a focus on how business is evolving toward the interests of society.

Next up: Else Nutrition (BABY).

Origins

CEO Hamutal Yitzhak, COO Uriel Kesler and CTO Michael Azar co-founded Else Nutrition in 2012 because their own children exhibited allergies and intolerances that dairy-based baby formulas only seemed to worsen.

Motivated by the success of initial recipes at home – and driven by a desire to bring relief to other families with similar struggles – the trio spent the next seven years developing a line of nutritional formulas that is free from soy, dairy, harsh chemicals and overprocessing with over 92 per cent of ingredients made up of only three whole foods: almonds, buckwheat and tapioca.

Uriel Kesler, next to his granddaughter, Roni, whose life-threatening sensitivity to cow’s milk and soy formulas inspired Else’s founding. Source: Else Nutrition.

Else began online sales on its official website in August 2020, with Amazon following the month after, combining for initial growth of 20 per cent month-over-month. iHerb, which serves over 180 international markets, was another important driver of early online success.

In terms of brick-and-mortar distribution, the company has assembled a growing cohort of U.S. grocers and health food stores highlighted by Raley’s, Roche Bros., Big Y, Sprouts Farmers Markets and a handful of major players we’ll discuss later on.

Wider attention among investors came in early 2020, when Else stock rose 9x in the span off just 11 months as its Plant-Based Complete Nutrition formula hit stores and began to command market share.

The company graduated from the TSXV to the TSX in January 2022 to facilitate global growth and hasn’t looked back since, continuing to gain traction in the U.S. with Canadian, European, Australian and Chinese placements planned over the next 1-2 years.

Differentiator

Else is the first company to offer a globally patented plant-based, dairy-free and soy-free formula for children. Branded as Else Toddler Complete Nutrition, the product is intended for children older than 12 months.

Source: Else Nutrition.

The company is developing an infant version of the formula for FDA approval, which would allow it to sell the product in the U.S., China and Europe. In Q4 2021, it concluded a successful preclinical safety study on the formula as part of the pathway to bring it to market, demonstrating proper growth similar to dairy-based formulas in a neonatal preclinical model.

To supplement gaps in a child’s diet, Else also offers nutritional shakes in vanilla, cocoa, mango and chia, and banana and chia.

Source: Else Nutrition.

The company has positioned itself in an enviable niche within the US$80B infant formula market (MarketWatch) and US$15B organic baby food market (by 2025), considering that 50 per cent of U.S. infants with food allergies are allergic to cow’s milk and 50 per cent of those allergic to cow’s milk are also allergic to soy.

Additionally, 40 per cent of infant formulas sold in the U.S. are specialty cow’s milk formulas catering to allergies and intolerances (Euromonitor). These specialty brands represent Else’s direct competition, which it separates itself from in a variety of ways.

First, almonds, buckwheat and tapioca, which are highly unlikely to cause allergies in themselves, naturally carry dietary essentials for growing babies, including Vitamin E, copper, manganese, Vitamin B2, magnesium, molybdenum, phosphorus, antioxidants, fiber, heart-healthy monounsaturated fat and all 8 essential amino acids.

Second, Else’s limited ingredient list is free from antibiotics, hormones, pesticides and GMOs, which major brands include in their products and can interfere with a child’s mental and physical development. For added measure, all of Else’s offerings are Clean Label Project Certified, meaning they’ve been tested for industrial and environmental toxins and contaminants (heavy metals, plasticizers and more) that can adversely affect health and wellbeing over the long term.

Third, the company uses only enzymes and mechanical processes to keep ingredients in their natural composition. This improves digestion, nutrient concentration and nutrient absorption while maintaining a profile comparable to human breast milk.

Finally, Else products contain 50 per cent less sugar per serving compared to market leaders, which means more quality calories contributing to a child’s diet.

These qualities combine into peace of mind for parents who want nothing more than a reliably delicious, nutritious and easily digestible dairy and soy alternative to calm their little ones’ sensitive stomachs. And with numerous scientific studies completed or underway, which we’ll cover in the final section, Else has been demonstrating how its products are beneficial not just anecdotally but in medically validated settings.

Milk and soy allergies – including food protein-induced enterocolitis syndrome and IgE-mediated food allergies – can cause a child’s immune system to react abnormally when exposed to these foods. Common reactions include hives, wheezing, decreased blood pressure and anaphylaxis, all of them nightmares for parents well aware of how essential early childhood nutrition is to subsequent development.

According to the Children’s Hospital of Philadelphia, 5 per cent of children under the age of five have a food allergy and approximately 4 per cent of adolescents and adults have one too.

Another study from Nutrition Today found that IgE-mediated food allergies affect an estimated 3-10 per cent of adults and 8 per cent of children worldwide.

Though these percentages seem small, they represent hundreds of millions of suffering families, all of whom Else is well-positioned to serve as it rolls out new products and pursues international expansion. We’ll examine how the company plans on spreading its wings after a brief survey of its financial health.

Finances

As a small but rapidly expanding brand, Else is focused on establishing itself in strategic markets in a manner accretive to shareholder value. To this end, it practices conservative cash management with C$19.8M on hand as of March 31, 2022. It has also achieved its considerable growth with liabilities covered 7.6x by cash reserves.

Else’s revenue for fiscal 2021 was C$4.7M, a 219-per-cent increase from C$1.5M in fiscal 2020, driven by toddler product expansion across all channels and the introduction of its line of kids’ shakes.

The company’s revenue for Q4 2021 was C$1.3M, an 8-per-cent increase from C$1.2M in Q3 2021, driven by continued expansion into retail stores and steady online sales growth.

Its revenue for Q1 2022 was C$1.6M, a 26-per-cent increase from C$1.3M in Q4 2021, driven by strong performance in both online and retail channels, the expansion of its toddler products and the release of its line of kids’ shakes.

Amazon sales increased 40 per cent versus Q4 2021 and are up over 60x from September 2020 to early 2022. Else has been outperforming similar brands in its category since March 2021.

The company expects Q2 2022 revenue to be between C$2M and C$2.2M, a 25 to 38 per cent increase over Q1 2022, due to the ongoing U.S. baby formula shortage.

It is seeing robust preliminary results with strong performance in both online and retail channels. This includes the doubling of daily Amazon sales over the third week of May. Amazon subscribers have also grown by 20 per cent over the past four weeks to over 1,200.

This growth trajectory is backed up by a sales network of over 1,300 stores, e-commerce placements with Kroger and Walmart, and ongoing discussions with the U.S.’s two largest distributors, KeHe and UNFI, each servicing approximately 30,000 locations.

With its footprint set to increase to four continents by 2023, Else is determined to become a global player in plant-based nutrition. And while its share performance may disagree with these prospects, having reversed its 9x rise back down to 2x through 2021 and early 2022, Yitzhak views the move as profit-taking from early investors, which offers a potential value proposition for those with a longer-term view.

On the horizon

The company is wasting no time putting its global patents for infant, toddler and adult applications to use.

Amazon will integrate Else products into Europe’s seven largest markets in 2022, opening it up to 300M potential customers in the U.K., France, Germany, Spain, Italy, Sweden and the Netherlands.

Products will reach Canada both online and in physical stores by Q2 2022 with Australia not far behind in the second half of the year.

The company is also in discussions to offer its entire product line through China’s largest e-commerce distributor in Q3 2022, with brick-and-mortar placements arriving by the end of 2022 or beginning of 2023. China represents 45 per cent of the world’s infant formula market.

Else plans to sustain this expansion by growing to 8-10 products and over 20 SKUs in the U.S. alone, publishing clinical studies about its products’ effectiveness, and engaging in targeted marketing campaigns like last year’s U.S. initiative to reach more than 80,000 pediatricians.

Upcoming products include liquid offerings for kids and adults later this year, adding to momentum from the recently released Super Cereals for babies over 6 months old and its Toddler Omega 3 and 6 Complete Nutrition mix.

Else’s Super Cereal is the first baby cereal in the U.S. to be granted the Clean Label Project Purity Award, which tests for over 400 impurities, including heavy metals like arsenic, lead and cadmium. Source: Else Nutrition.

Ongoing clinical studies are headlined by the company’s infant formula, which it plans to submit to the FDA by the end of 2023.

Source: Else Nutrition.

By the end of 2022, Else expects to triple its door count to approximately 4,000, while remaining open to the possibility of a Nasdaq listing if growth expectations merit exposure to a wider pool of investors.

The prospects for this C$140M microcap are undoubtedly bright from a financial perspective, but they shine even brighter when one considers the familial values that lie at its heart. Quality nutrition is a basic right, one that hundreds of millions of dairy and soy-sensitive children struggle to exercise due to a lack of options catering to their specific dietary needs. With the advent of Else, this no longer has to be so, because its products place full-potential development affordably within reach under the most stringent health and safety standards.

Sources

Recent Surveys on Food Allergy Prevalence. Messina and Venter. Nutrition Today. 2020.

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